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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 451-3771
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of May 4, 2001, 9,624,588 shares of Common Stock were outstanding.
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SYNBIOTICS CORPORATION
INDEX
Page
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Part I Item 1. Financial Statements:
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) -
Three months ended March 31, 2001 and 2000 1
Condensed Consolidated Balance Sheet -
March 31, 2001 and December 31, 2000 2
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)
------------------------------------------------------------------------------
(unaudited)
-----------
Three Months Ended March 31,
------------------------------
2001 2000
---------- ---------
Revenues:
Net sales $ 7,962,000 $ 9,172,000
License fees 61,000 61,000
Royalties 3,000 2,000
------------ ------------
8,026,000 9,235,000
------------ ------------
Operating expenses:
Cost of sales 3,208,000 4,979,000
Research and development 507,000 547,000
Selling and marketing 1,564,000 2,507,000
General and administrative 1,597,000 1,726,000
------------ ------------
6,876,000 9,759,000
------------ ------------
Income (loss) from operations 1,150,000 (524,000)
Other income (expense):
Interest, net (294,000) (332,000)
------------ ------------
Income (loss) before income taxes 856,000 (856,000)
Provision for (benefit from) income taxes 27,000 (22,000)
------------ ------------
Net income (loss) 829,000 (834,000)
Cumulative translation adjustment (484,000) (108,000)
------------ ------------
Comprehensive income (loss) $ 345,000 $ (942,000)
============ ============
Basic and diluted net income (loss) per share $ 0.08 $ (0.09)
============ ============
See accompanying notes to condensed consolidated financial statements.
-1-
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
------------------------------------
March 31, December 31,
2001 2000
---------------- ----------------
(unaudited) (audited)
Assets
Current assets:
Cash and equivalents $ 1,446,000 $ 951,000
Accounts receivable 4,098,000 3,490,000
Inventories 5,750,000 5,273,000
Other current assets 865,000 911,000
---------- ----------
Total current assets 12,159,000 10,625,000
Property and equipment, net 1,877,000 1,983,000
Goodwill 12,885,000 13,161,000
Deferred tax assets 122,000 122,000
Deferred debt issuance costs 27,000 33,000
Investment in W3 held for sale 2,713,000
Other assets 3,187,000 3,565,000
-------------- --------------
$ 30,257,000 $ 32,202,000
============== ==============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 7,033,000 $ 6,296,000
Current portion of long-term debt 8,132,000 8,432,000
Deferred revenue 242,000 242,000
Other current liabilities 1,000,000 1,000,000
-------------- --------------
Total current liabilities 16,407,000 15,970,000
-------------- --------------
Long-term debt 2,813,000
Deferred revenue 666,000 727,000
Other liabilities 1,699,000 1,668,000
-------------- --------------
2,365,000 5,208,000
-------------- --------------
Mandatorily redeemable common stock 3,061,000 3,027,000
-------------- --------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
9,003,000 and 8,752,000 shares issued and outstanding at
March 31, 2001 and December 31, 2000 40,281,000 40,164,000
Common stock warrants 1,035,000 1,035,000
Accumulated other comprehensive loss (1,570,000) (1,085,000)
Accumulated deficit (31,322,000) (32,117,000)
-------------- --------------
Total non-mandatorily redeemable common stock and other shareholders' equity 8,424,000 7,997,000
-------------- --------------
$ 30,257,000 $ 32,202,000
============== ==============
See accompanying notes to condensed consolidated financial statements.
-2-
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
----------------------------------------------------------
Three Months Ended March 31,
------------------------------
2001 2000
------------ -----------
Cash flows from operating activities:
Net income (loss) $ 829,000 $ (834,000)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization 684,000 602,000
Changes in assets and liabilities:
Accounts receivable (726,000) (1,053,000)
Inventories (564,000) (48,000)
Deferred taxes (40,000)
Other assets 22,000 57,000
Accounts payable and accrued expenses 691,000 374,000
Deferred revenue (61,000) (60,000)
Other liabilities 33,000 27,000
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Net cash provided by (used for) operating activities 908,000 (975,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (79,000) (238,000)
Proceeds from sale of investment in W3 held for sale 9,000
Proceeds from sale of securities available for sale 1,927,000
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Net cash (used for) provided by investing activities (70,000) 1,689,000
----------- -----------
Cash flows from financing activities:
Payments of long-term debt (300,000) (250,000)
Proceeds from issuance of common stock, net 110,000
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Net cash used for financing activities (300,000) (140,000)
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Net increase in cash and equivalents 538,000 574,000
Effect of exchange rates on cash (43,000) (108,000)
Cash and equivalents - beginning of period 951,000 2,260,000
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Cash and equivalents - end of period $ 1,446,000 $ 2,726,000
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See accompanying notes to condensed consolidated financial statements.
-3-
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
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Note 1 - Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of March 31, 2001 and
the condensed consolidated statements of operations and comprehensive income
(loss) and of cash flows for the three months ended March 31, 2001 and 2000 have
been prepared by Synbiotics Corporation (the "Company") and have not been
audited. The condensed consolidated financial statements of the Company include
the accounts of its wholly-owned subsidiary Synbiotics Europe SAS. All
significant intercompany transactions and accounts have been eliminated in
consolidation. These financial statements, in the opinion of management,
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial position, results of operations and
cash flows for all periods presented. The financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 2000.
Interim operating results are not necessarily indicative of operating results
for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Inventories:
Inventories consist of the following:
March 31, December 31,
2001 2000
----------- ------------
(unaudited) (audited)
Inventories:
Raw materials $2,635,000 $2,293,000
Work in process 332,000 409,000
Finished goods 2,783,000 2,571,000
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$5,750,000 $5,273,000
========== ==========
Note 3 - Income (Loss) per Share:
The following is a reconciliation of net income (loss) and share amounts used in
the computations of income (loss) per share:
Three Months Ended March 31,
----------------------------------
2001 2000
-------------- ---------------
Basic and diluted net income (loss) used:
Income (loss) from continuing operations $829,000 $(834,000)
Less accretion of mandatorily redeemable common stock (34,000) (32,000)
-------- ---------
Net income (loss) used in computing basic and diluted net income
(loss) per share $795,000 $(866,000)
======== =========
-4-
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
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Three Months Ended March 31,
----------------------------
2001 2000
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Shares used:
Weighted average common shares outstanding used in computing basic
income (loss) per share 9,499,000 9,281,000
Weighted average options and warrants to purchase common stock as
determined by the treasury method 237,000
----------- ----------
Shares used in computing diluted income (loss) per share 9,736,000 9,281,000
=========== ==========
Weighted average options and warrants to purchase common stock as determined by
the application of the treasury method and weighted average shares of common
stock issuable upon assumed conversion of debt totalling 1,337,000 shares have
been excluded from the shares used in computing diluted net (loss) per share for
the three months ended March 31, 2000 as their effect is anti-dilutive. In
addition, warrants to purchase 250,000 shares of common stock at $2.00 per share
and 265,000 shares of common stock at $4.54 per share have been excluded from
the shares used in computing diluted net income (loss) per share for the three
months ended March 31, 2001 and 2000, respectively, as their exercise price is
higher than the weighted average market price for those periods. In addition,
the effect of the warrants to purchase 265,000 shares of common stock at $4.54
per share was anti-dilutive for the three months ended March 31, 2000.
Note 4 - Segment Information and Significant Customers:
The Company has determined that it has only one reportable segment based on the
fact that all of its products are animal health products. Although the Company
sells diagnostic, vaccine and instrument products, it does not base its business
decision making on a product category basis.
The following are revenues for the Company's diagnostic, vaccine and instrument
products:
Three Months Ended March 31,
------------------------------------------
2001 2000
---------------- -------------------
(unaudited) (unaudited)
Diagnostics $7,286,000 $6,554,000
Vaccines 242,000 2,039,000
Instruments 434,000 579,000
Other revenues 64,000 63,000
---------------- -------------------
$8,026,000 $9,235,000
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-5-
The following are revenues and long-lived assets information by geographic area:
Three Months Ended March 31,
-------------------------------------
2001 2000
---------------- --------------
(unaudited) (unaudited)
Revenues:
United States $ 5,549,000 $ 6,510,000
France 691,000 1,292,000
Other foreign countries 1,786,000 1,433,000
---------------- --------------
$ 8,026,000 $ 9,235,000
================ ==============
March 31, December 31,
2001 2000
---------------- --------------
(unaudited) (audited)
Long-lived assets:
United States $13,130,000 $12,921,000
France 4,846,000 5,337,000
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$17,976,000 $18,258,000
================ ==============
There were no sales to any one customer that totalled 10% or more of total
revenues during the three months ended March 31, 2001. The Company had sales to
one customer totalling $1,053,000 during the three months ended March 31, 2000.
-6-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q contains both historical financial information and forward-
looking statements. Forward-looking statements are characterized by words such
as "intend", "plan", "believe", "will", "would", etc. Historical financial
information may not be indicative of future financial performance. In fact,
future financial performance may be materially different than the historical
financial information presented herein. Moreover, the forward-looking
statements about future business or future results of operations are subject to
significant uncertainties and risks, including those detailed under the caption
"Future Operating Results", which could cause actual future results to differ
materially from what is suggested by the forward-looking information.
Results of Operations
Our net sales for the first quarter of 2001 decreased by $1,210,000 or 13% from
the first quarter of 2000. The decrease reflects a decrease in our sales of
vaccine products of $1,797,000, an increase in our diagnostic product sales of
$732,000 and a decrease in our instrument product sales of $145,000. The
decrease in our vaccine sales is due solely to Intervet's inability to supply us
with FeLV vaccine. Our increase in diagnostic sales is primarily due to sales
of our poultry diagnostic products which we acquired from KPL in April 2000.
Our instrument product sales decreased primarily due to our decision in the
fourth quarter of 2000 to scale back our instrument manufacturing operations.
Our cost of sales as a percentage of our net sales was 40% during the first
quarter of 2001 compared to 54% during the first quarter of 2000 (i.e., our
gross margin increased to 60% from 46%). The higher gross margin is a direct
result of three factors:
. the decreased vaccine sales which have historically had low-margins;
. sales of the newly acquired poultry diagnostic products which have
significantly higher margins; and
. an offset due to the fact that a significant portion of our
manufacturing costs are fixed costs.
Among our major products, our DiroCHEK(R) canine heartworm diagnostic products
and the ProChem(R) consumables are manufactured at our facilities, whereas our
WITNESS(R), VetRED(R), all vaccines and the SCA 2000(TM) are manufactured by
third parties. In addition to affecting our gross margins, outsourcing of
manufacturing renders us relatively more dependent on the third-party
manufacturers, which risk is currently being realized with Intervet's inability
to satisfactorily supply us with FeLV vaccine.
We are currently in the process of transferring the manufacturing of our poultry
diagnostic products to our manufacturing facilities in San Diego, and we expect
the transfer to be completed by the end of the third quarter of 2001. We
believe that our gross margins on these products will improve as we will have
more products to absorb our fixed manufacturing costs.
Our research and development expenses during the first quarter of 2001 decreased
by $40,000 or 7% from the first quarter of 2000. The decrease is due primarily
to the decrease in our instrument research and development effort in conjunction
with the scaling back of our instrument manufacturing operations. Our research
and development expenses as a percentage of our net sales were 6% during the
first quarters of 2001 and 2000.
Our selling and marketing expenses during the first quarter of 2001 decreased by
$943,000 or 38% from the first quarter of 2000. The decrease is due primarily
to the disposition of W3COMMERCE during the fourth quarter of 2000, the
termination of our direct-to-veterinarian telemarketing group during the third
quarter of 2000 and a concerted effort to reduce our print media advertising.
Our selling and marketing expenses as a percentage of our net sales were 20% and
27% during the first quarter of 2001 and 2000, respectively.
Our general and administrative expenses during the first quarter of 2001
decreased by $129,000 or 7% from the first quarter of 2000. The decrease is due
primarily to a decrease in legal expenses related to a decrease in the level of
activity of our patent litigation with Heska. Our general and administrative
expenses as a percentage of our net sales were 20% and 19% during the first
quarter of 2001 and 2000, respectively.
-7-
Our net interest expense decreased $38,000 or 11% from the first quarter of 2000
due to a decrease in the prime rate during the first quarter of 2001.
Our effect tax rate was 3% for the first quarter of 2001 and 2000. As of
December 31, 2000, we had established a deferred tax asset valuation allowance
for all of our U.S. deferred tax assets. During the first quarter of 2001, we
realized certain U.S deferred tax assets (primarily net operating loss
carryforwards) and we released a corresponding portion of our deferred tax
valuation allowance, resulting in no deferred tax expense. In addition, due to
our utilization of net operating loss carryforwards, our current tax expense
represents alternative minimum taxes.
Financial Condition and Liquidity
We believe that our present capital resources, which included negative working
capital of $4,248,000 at March 31, 2001 are insufficient to meet our working
capital needs and service our debt for the next twelve months. Additionally,
pursuant to our debt agreement with Imperial Bank, we are required to maintain
certain financial ratios and levels of tangible net worth and we are also
restricted in our ability to make capital expenditures or investments without
Imperial Bank's consent. As of March 31, 2001, we had outstanding principal
balances on our Imperial Bank debt of $8,132,000. As of March 31, 2001, we were
not in compliance with some of our financial covenants, and we had not obtained
a waiver from Imperial Bank.
We will need to raise additional capital. We are currently exploring our
options which include the sale of our animal health business, a merger or
acquisition, debt restructuring, and the sale of additional equity. In
addition, we are taking steps to eliminate cash drains; for example, in the
fourth quarter of 2000 we divested W3COMMERCE and scaled back our instrument
manufacturing operations, and we terminated our direct selling initiative in the
third quarter of 2000.
We restructured a $1,000,000 payment due to KPL in conjunction with our April
2000 acquisition of their poultry diagnostic product line by agreeing to
$200,000 in April 2001 and to make eight monthly payments of $100,000 beginning
in May 2001.
Additionally, the 621,000 shares of our common stock which we issued to Merial
in conjunction with the 1997 acquisition of SBIO-E are subject to a put
provision. The put option gives Merial the right, beginning on July 9, 2001, to
sell all or any portion of its shares to us at a price of $5 per share, for a
total of $3,105,000. We would not be required to pay this money as long as we
have senior debt outstanding.
Our operations are seasonal due to the success of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year, as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations of
SBIO-E have reduced our seasonality as sales of their large animal diagnostic
products tend to occur evenly throughout the year. We believe that increased
sales of our SCA 2000 instruments and supplies and our newly acquired poultry
diagnostic products would also reduce our seasonality.
Future Operating Results
Our future operating results are subject to a number of factors, including:
We will need additional capital in the near future
We will need to raise additional capital. We are currently exploring our
options which include the sale of our animal health business, a merger or
acquisition, debt restructuring, and the sale of additional equity.
As of March 31, 2001, we were not in compliance with covenants on $8,132,000 of
indebtedness to Imperial Bank (see below). If Imperial Bank declares the loans
to be in default, we will be unable to repay the loans. Also, we do not have
the resources to repay the loans on their March 29, 2002 maturity date.
We owed $1,000,000 to Kirkegaard & Perry Laboratories, Inc. ("KPL"), in
conjunction with our April 2000 acquisition of their poultry diagnostic product
line. We have restructured the payment schedule. Under the new schedule we
paid $200,000 in April 2001, and we will make eight monthly payments of $100,000
beginning in May 2001.
-8-
Additionally, the 621,000 shares of our common stock which we issued to Merial
in conjunction with the 1997 acquisition of Synbiotics Europe ("SBIO-E") are
subject to a put provision. The put option gives Merial the right, beginning
on July 9, 2001, to sell all or any portion of its shares to us at a price of $5
per share, for a total of $3,105,000. We would not be required to pay this
money as long as we have senior debt outstanding.
In addition, we believe that we would need additional funds to finance us later
in the fiscal year, during our traditional slow season and during the time for
building inventory in anticipation of next year's heartworm diagnostics selling
season.
We may also need to raise additional funds if our estimates of revenues, working
capital and/or capital expenditure requirements change or prove inaccurate or in
order for us to respond to unforeseen technological or marketing hurdles or to
take advantage of unanticipated opportunities. Further, our future capital
requirements will depend on many factors beyond our control or ability to
accurately estimate, including continued scientific progress in our product and
development programs, the cost of manufacturing scale-up, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims, the
cost involved in patent infringement litigation, competing technological and
market developments, and the cost of establishing effective sales and marketing
arrangements. Such funds may not be available at the time or times needed, or
available on terms acceptable to us.
Our independent auditors' report, related to our financial statements as of and
for the year ended December 31, 2000, has indicated that they have substantial
doubt about our ability to continue as a going concern.
We are not in compliance with our bank loan covenants
As of March 31, 2001, we were not in compliance with some of the financial
covenants in our agreement with Imperial Bank, and we have not obtained waivers
from the bank. We cannot assure you that we will be in compliance with the
covenants in the future. Failure to be in compliance with the covenants places
us in technical default of the debt agreement, and Imperial could demand
repayment of the loans. We do not have and would not have the funds to repay
the loans on short notice.
We may sell our primary business
We have announced that we have engaged investment bankers to consider means of
enhancing shareholder value, including the possible sale of our animal health
business. There can be no assurance that our animal health business can be sold
for a favorable price, and we have not decided what we would do with the
proceeds of any sale. Also, the uncertainties caused by this process may
undermine our relationships with our customers, employees and suppliers.
The market in which we operate is intensely competitive, even with regard to our
key canine heartworm diagnostic products, and many of our competitors are larger
and more established
The market for animal health care products is extremely competitive. Companies
in the animal health care market compete to develop new products, to market and
manufacture products efficiently, to implement effective research strategies,
and to obtain regulatory approval. Our current competitors include
significantly larger companies such as Pfizer Animal Health, Merial S.A.S. and
IDEXX Laboratories. These companies are substantially larger and have greater
financial, manufacturing, marketing, and research resources than we do. In
addition, IDEXX Laboratories prohibits its distributors from selling
competitors' products, including ours. Further, additional competition could
come from new entrants to the animal health care market. We cannot assure you
that we will be able to compete successfully in the future or that competition
will not harm our business.
Our canine heartworm diagnostic products constitute 47% of our sales for the
three months ended March 31, 2000. In addition to our historic competition with
IDEXX Laboratories, the sales leader in this product category, our sales were
substantially affected in 1999 and 2000 by a new heartworm product from Heska
Corporation. We have filed a lawsuit against Heska, claiming that its heartworm
product infringes our patent.
-9-
We have a history of losses and an accumulated deficit
We did not achieve profitability for the years ended December 31, 1998, 1999 and
2000, and we have had a history of losses. We have incurred a consolidated
accumulated deficit of $31,322,000 at March 31, 2001. We may not achieve annual
profitability again and if we are profitable in the future there can be no
assurance that profitability can be sustained.
We rely on third party distributors for a substantial portion of our sales, but
we recently have experienced difficulties with the distribution channel
We have historically depended upon distributors for a large portion of our
sales, and our ability to establish and maintain an adequate independent sales
and marketing capability in any or all of our targeted markets is unclear.
Distributor agreements render our sales exposed to the efforts of third parties
who are not employees of Synbiotics and over whom we have no control. Their
failure to generate significant sales of our products could materially harm our
business. Reduction by these distributors of the quantity of our products which
they distribute would materially harm our business. In addition, IDEXX
Laboratories' prohibition against its distributors carrying competitors'
products, including ours, has made, and could continue to make, some
distributors unavailable to us. We adopted a similar policy in the second
quarter of 1999, which caused some of our distributors to abandon our product
line. We have rescinded this policy, and all but one of our former distributors
are again selling our products. We are also exposed to the risk that any sales
by us directly to veterinarians could alienate our current distributors.
Our direct selling strategy has been scaled back
We are inexperienced in large-scale direct selling. Also, veterinarians have
traditionally relied on distributors, and the number of veterinarians willing to
purchase directly from manufacturers is apparently smaller than we once
believed. At the end of the third quarter of 2000, we refocused our sales and
marketing efforts towards traditional animal health distribution and, as a
result, we significantly reduced the headcount of our telesales force. Our 1999
foray toward direct selling to veterinarians, and our subsequent scale-back of
that effort, may have created confusion in the market. Some effects of that
confusion may persist.
Our profitable vaccine sales in Europe are halted due to a supply problem and in
any event may decline soon
Merial distributes our feline leukemia virus ("FeLV") vaccine, which we obtain
from Intervet Inc. (formerly Bio-Trends International, Inc.) ("Intervet"), in
Europe. Our gross profit in 2000, 1999 and 1998 on these sales of FeLV vaccine
to Merial in Europe was $750,000, $570,000 and $520,000, respectively. Merial
has exercised a contractual right which will enable it, in 2002, to introduce
its own FeLV vaccine product in Europe. If Merial does so, our sales to Merial
in Europe would probably decline sharply.
Intervet has been unable to supply us with FeLV vaccine which meets Merial's
specifications for European sales since August 2000. As a result, we have been
unable to fill Merial's orders for Europe totalling $1,600,000. This is costing
us sales and profits, and Merial has sent us a notice of breach.
There is an epidemic of foot-and-mouth disease in the United Kingdom
Foot-and-mouth is a viral based disease that affects cloven-hoofed animals
including cows, sheep and pigs. There is currently an epidemic of foot-and-
mouth disease in the United Kingdom, with isolated outbreaks in France and the
Netherlands. The virus is spread from animal to animal through direct contact,
and can be carried through the air as well. There is no cure for this disease,
and the only way to prevent the disease from spreading is to isolate and destroy
the infected herds. We do not have a diagnostic test for foot-and-mouth
disease, as the symptoms that the animal has the disease are readily evident.
If the disease were to become significantly more wide spread, and the total
number of animals and number of transactions in animals were to decrease, our
sales of diagnostic products for bovine and swine diseases (primarily sold
outside of the United States), which totalled $4,130,000 and $5,200,000 in 2000
and 1999, respectively, could be adversely affected. In addition, shipments of
canine diagnostic products that are made in our French facility that are
imported, or will be imported, into the United States (diagnostic tests for
canine Leishmania, canine Ehrlichia and canine pregnancy) have been delayed, and
may be delayed in the future, as they are subject to regulatory inspection and
release at the port of entry.
-10-
There is no assurance that acquired businesses can be successfully combined
There can be no assurance that the anticipated benefits of the April 2000
acquisition of the poultry product line from KPL, or any other future
acquisitions (collectively, the "Acquired Business") will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which we have no or limited direct
prior experience. In addition, there can be no assurance that the acquisitions
will not have a material adverse effect upon our business, results of
operations, financial condition or cash flows, particularly in the quarters
immediately following the consummation of the acquisition, due to operational
disruptions, unexpected expenses and accounting charges which may be associated
with the integration of the Acquired Business and us, as well as operating and
development expenses inherent in the Acquired Business itself as opposed to
integration of the Acquired Business. We did not achieve the hoped-for benefits
from some of our past acquisitions, such as W3COMMERCE (2000) and Prisma (1998).
We depend on key executives and personnel
Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group.
Competition for qualified personnel in the animal health care products industry
is intense, and we may not be successful in attracting and retaining such
personnel. There are only a limited number of persons with the requisite skills
to serve in those positions and it may become increasingly difficult to hire
such persons. The loss of the services of any of our key personnel or the
inability to attract or retain qualified personnel could harm our business.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including our vaccines,
our Witness(R) and VetRED(R) diagnostic products, our poultry diagnostic
products and our SCA 2000(TM) blood coagulation timing instrument. We also
expect that some of our anticipated new products will be manufactured by third
parties. In addition, some of the products manufactured for us by third
parties, including Witness(R) and VetRED(R), are licensed to us by their
manufacturers. There are a number of risks associated with our dependence on
third-party manufacturers including:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on products supplied to us; and
. increases in prices and the potential misappropriation of our
intellectual property.
If our third party manufacturers fail to supply us with an adequate number of
finished products, our business would be significantly harmed. We have no long-
term contracts or arrangements with any of our vendors that guarantee product
availability, the continuation of particular payment terms or the extension of
credit limits.
In addition, sales of our FeLV vaccine to Merial and other distributors for
resale in Europe will be at risk unless our manufacturer, Intervet Inc.
(formerly Bio-Trends International, Inc.) obtains European Union regulatory
approvals for its manufacturing facilities which make this product. Aside from
this regulatory issue, Intervet has been unable to supply us with satisfactory
FeLV vaccine for delivery to Merial in Europe, as noted above.
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If we encounter delays or difficulties in our relationships with our
manufacturers, the resulting problems could have a material adverse effect on
us.
We rely on new and recent products
We rely to a significant extent on new and recently developed products, and
expect that we will need to continue to introduce new products to be successful
in the future. There can be no assurance that we will obtain and maintain
market acceptance of our products. There can be no assurance that future
products will meet applicable regulatory standards, be capable of being produced
in commercial quantities at acceptable cost or be successfully commercialized.
There can be no assurance that new products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If we are unable to
produce internally, or to contract for, a sufficient supply of our new products
on acceptable terms, or if we should encounter delays or difficulties in our
relationships with manufacturers, the introduction of new products would be
delayed, which could have a material adverse effect on our business.
Our canine heartworm business is seasonal
Our operations are seasonal due to the timing of sales of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. Our European
operations have reduced our seasonality as sales of their large animal
diagnostic products tend to occur evenly throughout the year. We believe that
increased sales of our SCA 2000 instrument products and our newly acquired
poultry diagnostic products will also reduce our seasonality.
Any failure to adequately establish or protect our proprietary rights may
adversely affect us
We rely on a combination of patent, copyright, and trademark laws, trade
secrets, and confidentiality and other contractual provisions to protect our
proprietary rights. These measures afford only limited protection. We
currently have 11 issued U.S. patents and two pending patent applications. Our
means of protecting our proprietary rights in the U.S. or abroad may not be
adequate and competitors may independently develop similar technologies. Our
future success will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use trade secrets or other information
that we regard as proprietary. In addition, the laws of some foreign countries
do not protect our proprietary rights as fully as do the laws of the United
States. Issued patents may not preserve our proprietary position. Even if they
do, competitors or others may develop technologies similar to or superior to our
own. If we do not enforce and protect our intellectual property, our business
will be harmed. From time to time, third parties, including our competitors,
have asserted patent, copyright, and other intellectual property rights to
technologies that are important to us. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in the
animal health care market increases.
The results of any litigated matter are inherently uncertain. In the event of
an adverse result in any litigation with third parties that could arise in the
future, we could be required to:
. pay substantial damages, including treble damages if we are held to have
willfully infringed;
. cease the manufacture, use and sale of infringing products;
. expend significant resources to develop non-infringing technology; or
. obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us on commercially reasonable terms, or at all.
Also, litigation is costly regardless of its outcome and can require significant
management attention. For example, in 1997, Barnes-Jewish Hospital (the
"Hospital") filed an action against us claiming that our canine heartworm
diagnostic products infringe
-12-
their patent. We settled this lawsuit, but there can be no assurance that we
would be able to resolve similar incidents in the future. Our patent
infringement litigation against Heska's use of heartworm diagnostic technology
is also expensive.
Also, because our patents and patent applications cover novel diagnostic
approaches,
. the patent coverage which we receive could be significantly narrower
than the patent coverage we seek in our patent applications; and
. our patent positions involve complex legal and factual issues which can
be hard for patent examiners or lawyers asserting patent coverage to
successfully resolve .
Because of this, our patent position could be vulnerable and our business could
be materially harmed.
The U.S. patent application system also exposes us to risks. In the United
States, the first party to make a discovery is granted the right to patent it
and patent applications are maintained in secrecy until the underlying patents
issue. For these reasons, we can never know if we are the first to discover
particular technologies. Therefore, we can never be certain that our
technologies will be patented and we could become involved in lengthy,
expensive, and distracting disputes concerning whether we were the first to make
the disputed discovery. Any of these events would materially harm our business.
Our business is regulated by the United States and various foreign governments
Our business is subject to substantial regulation by the United States
government, most notably the United States Department of Agriculture, and the
French government. In addition, our operations may be subject to future
legislation and/or rules issued by domestic or foreign governmental agencies
with regulatory authority relating to our business. There can be no assurance
that we will continue to be in compliance with any of these regulations.
For marketing outside the United States, we and our suppliers are subject to
foreign regulatory requirements, which vary widely from country to country.
There can be no assurance that we and our suppliers will meet and sustain
compliance with any such requirements. In particular, our sales of FeLV vaccine
to Merial or other distributors for resale in Europe will be at risk unless
Intervet, our supplier, obtains European Union regulatory approvals for its
manufacturing facilities which make this product.
We use hazardous materials
Our business requires that we store and use hazardous materials and chemicals,
including radioactive compounds. Although we believe that our procedures for
storing, handling, and disposing of these materials comply with the standards
prescribed by local, state, and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. If
any of these materials were mishandled, or if an accident with them occurred,
the consequences could be extremely damaging and we could be held liable for
them. Our liability for such an event would materially harm our business and
could exceed all of our available resources for satisfying it.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Our market risk consists primarily of the potential for changes in interest
rates and foreign currency exchange rates.
Interest Rate Risk
The fair value of our debt at March 31, 2001 was approximately $8,132,000, which
has a variable interest rate based on the prime rate.
A change in interest rates of five percentage points would have a material
impact on our financial condition, results of operations and cash flows as it
relates to our variable rate debt.
-13-
Foreign Currency Exchange Rate Risk
Our foreign currency exchange rate risk relates to the operations of SBIO-E as
it transacts business in Euros, its local currency. However, this risk is
limited to our intercompany receivable from SBIO-E and the conversion of its
financial statements into the U.S. dollar for consolidation. There is no
foreign currency exchange rate risk related to SBIO-E's transactions outside of
the European Union as those transactions are denominated in Euros. Similarly,
all of the foreign transactions of our U.S. operations are denominated in U.S.
dollars. We do not hedge our cash flows on intercompany transactions, nor do we
hold any other derivative securities or hedging instruments based on currency
exchange rates. As a result, the effects of a 5% change in exchange rates would
have a material impact on our financial condition, results of operations and
cash flows, but only to the extent that it relates to the conversion of SBIO-E's
financial statements, including its intercompany payable to us, into the U.S.
dollar for consolidation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes.
Item 2. Changes in Securities and Use of Proceeds
On January 1, 2001, in conjunction with the disposition of 84% of our investment
in W3COMMERCE, and the elimination of a $2,813,000 convertible note payable
which we had issued to the original owners of W3COMMERCE when we acquired it, we
issued 250,000 shares of our common stock to those original owners. This was a
Section 3(a)(9) exchange with existing security holders, involving no
underwriters. In this transaction, we also forgave $1,913,000 of intercompany
loans which we had made to W3COMMERCE.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On April 2, 2001, we announced that Kenneth M. Cohen had resigned as President,
Chief Executive Officer and Director, and that Paul A. Rosinack had been named
as President, Chief Executive Officer and a member of the Board of Directors.
In addition, we announced that Rigdon Currie had replaced Donald E. Phillips as
Chairman of the Board of Directors.
On April 11, 2001, we announced that on April 4, 2001 we received notification
from Nasdaq that our common stock was subject to delisting from the Nasdaq
National Market for failure to comply with Marketplace Rule 4450(a)(5),
requiring maintenance of a minimum bid price of $1 per share. We also announced
that we had filed a appeal with Nasdaq to rescind its decision to delist our
common stock.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
10.34.1 Renewal and Amendment of Lease of Premises located at 16420
Via Esprillo, San Diego, California, dated as of November 1,
2000.
99.1 Press release dated April 2, 2001 entitled "Synbiotics Names
New Management".
99.2 Press release dated April 11, 2001 entitled "Synbiotics
Corporation Receives Nasdaq Notification - Company files
Request for Hearing on Nasdaq Decision; Delisting Action
Halted Pending Panel Decision on Appeal".
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNBIOTICS CORPORATION
Date: May 4, 2001 /s/ Michael K. Green
--------------------------------------------------
Michael K. Green
Senior Vice President and Chief Financial Officer
(signing both as a duly authorized officer and as
principal financial officer)
-15-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-Q
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
10.34.1 Renewal and Amendment of Lease of Premises located at 16420 Via
Esprillo, San Diego, California, dated as of November 1, 2000.
99.1 Press release dated April 2, 2001 entitled "Synbiotics Names New
Management".
99.2 Press release dated April 11, 2001 entitled "Synbiotics
Corporation Receives Nasdaq Notification - Company files Request
for Hearing on Nasdaq Decision; Delisting Action Halted Pending
Panel Decision on Appeal".