ITEM 1. BUSINESS
General
Synbiotics Corporation is a leading provider of rapid diagnostic and laboratory diagnostic products for the animal health care industry. We are one of a small number of companies that focuses exclusively on animal health and we are the second largest provider of diagnostic products to the animal health market. We also market certain feline vaccine products.
Our strategy in the animal health business is to grow from our established position in the market through new products and technologies, expanded distribution, enhanced marketing and acquisitions and licensing. We are combining our ability to generate products through research and development, acquisitions, and licensing agreements with our ability to distribute products through established global channels. Our product portfolio consists of ninety- six diagnostic test kits and detection devices and two vaccines. Many of our products hold strong positions in their specific markets.
In January 2000, we acquired W3COMMERCE, LLC, and Internet marketing services company operating in both the animal health industry and in other industries. After making a substantial investment in W3COMMERCE, we decided to exit the Internet services business and sold 84% of W3COMMERCE back to its original owners at the end of 2000.
Market and Product Overview
We sell our products both in the United States and in foreign countries. The total number of family owned dogs and cats is estimated to exceed 120 million in the United States alone. We believe that our current and intended future products will offer veterinarians an opportunity to improve the quality and expand the scope of veterinary health care services.
Our most commercially successful products are our canine heartworm diagnostics (representing 28% of 2000 sales). We estimate that we have a 30% share of the estimated $30 million U.S. heartworm diagnostics market. Sales of these products have historically been strongest during the first half of the year when distributors purchase merchandise to sell to veterinarians for the heartworm season.
Marketing
We sell our products in the United States, Canada, Europe, Asia and, to a limited extent, Latin America. In the United States, we market our line both directly and through independent distributors which, taken together, have approximately 90 outlets, 600 field sales representatives, and 200 telemarketing representatives covering the 25,000 veterinary clinics throughout the country. In the second half of 2000, we began an initiative to refocus on marketing through U.S. distributors and curtailed some of our efforts to market directly to veterinarians. In addition, we sell our vaccine products to distributors and on a private label basis. Sales to laboratories and other centralized facilities (approximately 50 in the U.S.) are handled directly. Outside the United States, we sell our small-animal products through distributors and on an original equipment manufacturer ("OEM") basis, and our large-animal products directly to laboratories. We maintain a marketing and sales force, which trains distributor representatives, responds to technical inquiries, promotes products directly to veterinarians, advertises and promotes products through direct mail and journal advertisements, and provides other marketing support functions.
Manufacturing
We manufacture most of our products at our facilities located in San Diego, California, Rome, New York and Lyons, France. However, we rely on outside manufacturers for our VetRED(R) and six of our nine WITNESS(R) diagnostic products, our vaccine products and our SCA 2000(TM) products. Our WITNESS(R) and VetRED(R) products and our feline leukemia virus vaccine are licensed to us by their respective outside manufacturers.
Patents and Trade Secrets
We believe that our proprietary technology is an important competitive factor in our business, and that protection of our intellectual property rights is a high priority. The basic hybridoma (the cell that produces the monoclonal antibody) technology is in the public domain and is therefore not patentable. However, numerous improvements, variations and applications of hybridoma technology may prove to be patentable. Considering the difficulty of enforcing any patent rights to such improvements, and the rapid advancements in the field, we generally seek, and will continue to seek, to protect our interests by treating our particular variations in the production of monoclonal antibodies as trade secrets. We also pursue, and intend to continue to aggressively pursue, protection for new products, new methodological concepts, and compositions of matter through the use of patents where obtainable. We currently are in litigation to enforce our important canine heartworm patent against a competitor. At present, we have been granted eleven U.S. patents and we have two U.S. patents pending.
Government Regulation
Most diagnostic test kits and vaccines for animal health applications marketed in the U.S. require approval by the United States Department of Agriculture ("USDA"). Animal vaccines also require governmental approval in foreign countries, but Germany and Japan are the only foreign countries in which we market our diagnostic products that require governmental approval for animal diagnostic products. Our instrumentation products are not subject to USDA regulation. Our canine semen freezing products and canine ovulation timing diagnostic products fall within the definition of devices as that term is defined in the Federal Food, Drug, and Cosmetic Act and, therefore, may be subject to regulation by the FDA.
Our manufacturing facilities in San Diego and Lyons, France are licensed by the USDA and adhere to Good Manufacturing Practices ("GMP") standards. The instrumentation manufacturing facility located in Rome, New York is not licensed by the USDA as the manufactured products are not subject to USDA regulation. Our French manufacturing facility is not licensed by any foreign regulatory agency as there is no licensing requirement. The manufacturing facilities of our important suppliers are subject to licensing and regulatory approval in both the United States and Europe.
In addition to the foregoing, 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.
Competition
We believe that we are the second-leading competitor in the animal health diagnostic market. Most of our competitors are either small divisions of larger human health and chemical companies or smaller companies that sell veterinary products while trying to diversify into the higher profile, and more regulated, human health field. The principal competitor in the industry is IDEXX Laboratories, Inc., a publicly traded company with annual revenues of $356,000,000 (for 1999) that develops, manufactures, and distributes detection and diagnostic products for animal health, food, and environmental testing applications.
Competition in the animal health care industry is intense, and is particularly intense in vaccines. Many competitors, such as Pfizer Animal Health, Merial S.A.S. and IDEXX Laboratories, have substantially greater financial, manufacturing, marketing and product research resources than we do. Large companies in particular have extensive expertise in conducting pre- clinical and clinical testing of new products and in obtaining the necessary regulatory approvals to market products. Competition in animal diagnostics is based on test sensitivity, accuracy and speed, product price and similar factors. IDEXX Laboratories requires its distributors not to carry the products of its competitors.
Research and Development
The Company spent approximately $2,210,000 and $2,201,000 on research and development activities during the years ended December 31, 2000 and 1999, respectively. These figures include both internal research and development and expenditures under contracts for research and development activities with outside parties relating to certain veterinary diagnostic products which utilize licensed technology.
Employees
As of December 31, 2000, we had a total of 155 employees worldwide, 150 of whom were full-time.
Raw Materials
The manufacturing of diagnostics, diagnostic instruments, therapeutics and vaccines requires raw materials which generally are, and have been, readily available from several sources. All of our vaccine products (other than our feline leukemia virus vaccine products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred in the third quarter of 1999. Sales of the affected products totalled $1,645,000 and $2,073,000 during 1999 and 1998, respectively.
Financial Information About Industry Segments and Financial Information About Foreign and Domestic Operations and Export Sales
See Note 13 to our financials statements in Item 8 of Part II of this Form 10-K.
ITEM 2.
ITEM 2. PROPERTIES
We lease two buildings in San Diego, California. The buildings contain approximately 49,000 square feet of space, and house our corporate and sales headquarters, executive offices, U.S. research and development laboratories and manufacturing facilities. In addition, the manufacturing and research and development facilities related to our instrumentation products are housed in a 6,000 square foot building located in Rome, New York. We also lease an approximately 25,000 square foot building in Lyons, France which houses Synbiotics Europe's ("SBIO-E") corporate and sales headquarters, executive offices, research and development laboratories and manufacturing facilities. We also lease a Malvern, Pennsylvania facility for operating our PennHIP(R) business and a sales office in Kansas City, Missouri.
We believe that these facilities are adequate for our current level of operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Synbiotics Corporation v. Heska Corporation--United States District Court for the Southern District of California
On November 12, 1998, we filed a lawsuit against Heska Corporation ("Heska") claiming that Heska infringes a patent owned by us, which covers both our and Heska's heartworm diagnostic products. On January 14, 1999, Heska filed a counterclaim against us seeking a declaratory judgment that our patent is invalid and unenforceable. We deny Heska's allegations that our patent is invalid and unenforceable, and plan to vigorously defend our patent against the allegations. In the event that we were to lose our lawsuit against Heska, we believe our only direct liability would be our out-of-pocket legal expenses. Although Heska's counterclaim does not include a claim for damages, if we were to lose on Heska's counterclaim, we could face additional competition for our canine heartworm diagnostic products as other third parties would be able to manufacture products incorporating our patented technology.
SE Technologies, Inc. vs. Synbiotics Corporation--San Diego County Superior Court
On July 13, 2000, SE Technologies, Inc. ("SE") filed a lawsuit against us alleging a breach of contract related to consulting services performed by SE in conjunction with the 1999 implementation of our enterprise resource planning system. We paid $430,000 for the implementation, of which $266,000 was for the base implementation (which we believe was to be capped at $266,000) and $164,000 for certain modifications to the software. SE has billed us an additional $188,000 which we have not paid. We have repeatedly requested details of the services performed for the amount billed, and we have not received a response which justifies the additional billed amount. We plan to vigorously defend ourselves against the allegations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted in the Nasdaq National Market under the symbol SBIO. Price ranges reported are the high and low bid price information as reported by the Nasdaq National Market. Such market quotations reflect inter- dealer prices, without retail mark-up, mark-down or commission, and may not represent actual prices. No cash dividends have ever been paid, and we do not anticipate paying cash dividends in the foreseeable future. As of March 16, 2001, there were approximately 604 shareholders of record of our common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Management's Discussion and Analysis or Plan of Operation and elsewhere in this Annual Report on Form 10-K 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, which could cause actual future results to differ materially from what is suggested by the forward-looking information. The following risk factors should be considered in evaluating our forward-looking statements and assessing our future financial condition, results of operations and cash flows:
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.
We have a $1,000,000 payment due to KPL, in conjunction with our April 2000 acquisition of their poultry diagnostic product line, which we are currently unable to pay. 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. The put option cannot be exercised as long as we have senior debt outstanding; however, if Merial were to exercise its put option, we would be unable to pay for the shares.
As of December 31, 2000, we were not in compliance with covenants on $8,432,000 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 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. In addition, we expect to review potential acquisitions that would complement our existing product offerings or enhance our technical capabilities. Any future transaction of this nature could require potentially significant amounts of capital. Such funds may not be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities, to develop new products, or to otherwise respond to competitive pressures, or we may need to delay, reduce, or eliminate one or more of our operational activities or research and development programs. Any of these events would impair our competitive position and harm our business.
Our independent auditors' report 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 December 31, 2000, 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 products constitute 28% of our sales. 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.
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 $32,117,000 at December 31, 2000. We may not achieve 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 may be smaller than we believe. In fact, 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 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.
The FeLV vaccine which we supply to Merial is supplied to us by Bio-Trends International, Inc. In 2000, Intervet, Inc. acquired Bio-Trends. 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 $1,200,000. 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 are readily evident that the animal has the disease. If the disease were to become significantly more wide spread, 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.
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 Kirkegaard & Perry Laboratories, Inc. ("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 feline leukemia virus ("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 Loss of these sales, which totalled $1,500,000, $1,140,000 and $1,040,000 in 2000, 1999 and 1998, respectively, has had and would have a material adverse effect on our profitability and our cash flows.
If we encounter delays or difficulties in our relationships with our manufacturers, the resulting problems could have a material adverse effect on us. For example, all of our vaccine products (other than our FeLV vaccine products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred during the third quarter of 1999. Sales of the affected products totaled $1,645,000 and $2,073,000 during 1999 and 1998, respectively.
We rely on new and recent products
In our animal health business 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.
Our 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 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.
Our liability insurance may prove inadequate
Our products carry an inherent risk of product liability claims and associated adverse publicity. While we have maintained product liability insurance for such claims to date, we cannot be certain that this type of insurance will continue to be available to us or, if it is available, that it can be obtained on acceptable terms. Also, our current coverage limits may not be adequate. Any claim against us which results in our having to pay damages in excess of our coverage limits will materially harm our business. Even if such a claim is covered by our existing insurance, the resulting increase in insurance premiums or other charges would increase our expenses and harm our business.
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.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Our net sales for the year ended December 31, 2000 increased $636,000 or 2% over the year ended December 31, 1999. The increase reflects an increase in our diagnostic product sales of $420,000 and an increase in our instrument product sales of $1,261,000, while sales of our vaccine products decreased $1,045,000. The increase in our sales of diagnostic products is primarily due to sales of the KPL poultry diagnostic products which we acquired in April 2000, offset by the effect of overaggressive promotional discounts in the United States during the first quarter of 2000 which attempted to respond to increased
competition in the canine heartworm diagnostic market. While our canine heartworm diagnostic sales in units increased, these sales were at reduced average selling prices. Our U.S. heartworm sales in units during the first half of 2000 increased by 6% over the first half of 1999, yet our sales in dollars for these products decreased by 17%. In Europe, sales of our large animal diagnostic products decreased due to increased competition, and a change in the timing of mandated disease eradication testing required by certain European governmental authorities. Tests that used to be required annually are now only required to be performed every other year. The weakening of the French franc against the U.S. dollar also negatively impacted our reported European diagnostic sales. Our instrument product sales increased due to sales in the U.S. and in Europe (as these instruments have obtained the European CE mark), increased sales of reagents resulting from increased placements of instruments, and a full year's worth of sales of our SCA 2000(TM) blood coagulation timing instrument, which we introduced during the second quarter of 1999. Our decreased vaccine sales reflects the absence of sales of vaccines to private label partners which we discontinued during the third quarter of 1999 because we were unable to obtain a supply of a crucial manufacturing material., as well as Intervet's inability to manufacture FeLV vaccine at the end of 2000 with which we could have filled Merial's orders. At the end of 2000 there were backorders of $1,200,000 for FeLV vaccine for shipment to Merial in Europe.
All of our vaccine products (exclusive of our FeLV vaccine products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred during the third quarter of 1999. Sales of the affected products totaled $1,645,000 and $2,073,000 during 1999 and 1998, respectively. Our cost of sales as a percentage of our net sales was 55% during the year ended December 31, 2000 compared to 52% during the year ended December 31, 1999 (i.e., our gross margin decreased to 45% from 48%). Although we had an overall increase in our sales during 2000, and although the poultry diagnostic products have relatively high margins, our lower gross margins are a result of the effect of the promotional discounts in the first quarter of 2000 discussed above. Our gross margins are restrained by 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) analyzer are manufactured at our facilities, whereas our WITNESS(R), VetRED(R), all poultry diagnostic, all vaccines and the SCA 2000(TM) products 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 within the next six months. 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 year ended December 31, 2000 did not change significantly from the year ended December 31, 1999. Our research and development expenses as a percentage of our net sales were 7% during the years ended December 31, 2000 and 1999, respectively.
Our selling and marketing expenses during the year ended December 31, 2000 increased by $2,382,000 or 33% over the year ended December 31, 1999. The increase is due primarily to the results of our internet marketing efforts through W3COMMERCE (which we acquired in January 2000) and an increase in our direct-to-veterinarian telemarketing group. The disappointing results related to W3COMMERCE were due to delays in execution of the business plan, a slowdown in e-business and our lack of resources to fully fund W3COMMERCE's efforts. Our selling and marketing expenses as a percentage of our net sales were 31% and 23% year ended December 31, 2000 and 1999, respectively. 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. In addition, at the end of December 2000, we agreed to sell 84% of our investment in W3COMMERCE back to its original owners.
Our general and administrative expenses during the year ended December 31, 2000 increased by $259,000 or 4% over the year ended December 31, 1999. The increase is due primarily to legal expenses related to our patent litigation with Heska, increased goodwill amortization related to our KPL acquisition, and foreign currency losses related to our intercompany receivable from Synbiotics Europe. Our general and administrative expenses as a percentage of our net sales were 21% and 20% during the years ended December 31, 2000 and 1999, respectively.
Our net interest expense during 2000 increased $192,000 or 17% over 1999 due to an increase in our borrowings.
During 2000, we recognized impairment losses totalling $3,985,000. $2,999,000 relates to the goodwill and equipment utilized in our instrument manufacturing facility located in Rome, NY. We are planning to dispose of this line of business within the next twelve months. The remaining $986,000 of impairment losses relates to our investment in W3COMMERCE, which we sold 84% of back to its original owners at the end of 2000.
We recognized a provision for income taxes of $8,791,000 during 2000 as compared to a benefit from income taxes of $412,000 during 1999. The change is primarily due to permanent differences between income for financial reporting purposes and tax reporting purposes related to the impairment losses discussed above, and an increase in our deferred tax asset valuation allowance of $9,372,000. As a result of our liquidity concerns, continuing net losses and alternative strategies for the business, we now believe that it is more likely than not that our deferred tax assets will not be realized in the future.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Our net sales for the year ended December 31, 1999 decreased by $780,000 or 2% from the year ended December 31, 1998. The decrease reflects a decrease in our sales of diagnostic products of $687,000, a decrease in our vaccine product sales of $1,093,000, and an increase in our instrument sales of $1,000,000. The decrease in our sales of diagnostic products is due primarily to a decrease in our canine heartworm diagnostics sales of 3% which resulted from increased competition, both from former Synbiotics distributors who now carry competitors' products and from a new Heska product. We are suing Heska for patent infringement with respect to this product. The decreased vaccine sales were due to a decrease of 15% in sales of our vaccines to private label partners resulting from the phase-out of sales of most of our Synbiotics- labeled vaccines, offset by an increase of 20% in sales of bulk FeLV vaccine (related to the timing of shipments as requested by Merial, our OEM customer).
All of our vaccine products (other than our FeLV vaccine products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred during the third quarter of 1999. Sales of the affected products totalled $1,645,000 and $2,073,000 during 1999 and 1998, respectively.
The increase in our instrument product sales was due to sales of our SCA 2000(TM) blood coagulation timing instrument, which we introduced in the second quarter of 1999, and an increase in sales of our ProChem(R) instrument products, which we acquired in conjunction with our 1998 acquisition of Prisma Acquisition Corp. ("Prisma").
Although veterinary products manufacturers, including us, have traditionally relied on distributors, we increased in 1999 our direct sales of products to veterinarians via telesales and the Internet as part of a focused strategy. In addition, we stopped selling to several distributors and to Vedco, Inc., a distributor co-op, in the second quarter of 1999.
Our cost of sales as a percentage of net sales was 52% during the year ended December 31, 1999 compared to 49% during the year ended December 31, 1998 (i.e., our gross margin decreased to 48% from
51%). The lower gross margin was a direct result of two factors: i) the decrease in our sales and ii) the fact that a significant portion of our manufacturing costs are fixed costs. Among our major products, DiroCHEK(R) canine heartworm diagnostic products and the ProChem(R) analyzer are manufactured at our facilities, whereas WITNESS(R), all vaccines and the SCA 2000(TM) are manufactured by third parties.
In March 1999, we amended (effective July 1, 1998) our U.S. FeLV vaccine supply agreement with Merial. Since 1992, we have supplied FeLV vaccine to Merial in the United States. This has included shipments to Merial at our cost, while Merial has paid a royalty to us on their sales of Merial-labeled FeLV vaccine. In exchange for $1,500,000 in cash ($1,453,000 of which we are recognizing ratably over the remaining term of the supply agreement, and the remainder was applied to royalties receivable from Merial), the revised supply agreement broadens Merial's U.S. distribution rights (which were an area of ongoing discussions) and eliminates the royalty. In addition, we will work with Merial to try to have Intervet supply FeLV vaccine directly to Merial for U.S. distribution. Our FeLV vaccine sales to Merial in the U.S. totalled $2,431,000 and $2,029,000 during 1999 and 1998, respectively. In the meantime, we will continue to resell Intervet-supplied FeLV vaccine to Merial at cost for the U.S. Sales of our own VacSyn FeLV vaccine product, our sales to Merial in France, which are at a profit rather than at cost, and the collaborative research relationship between Merial and us were not affected by this amendment.
Our research and development expenses decreased during the year ended December 31, 1999 by $185,000 or 8% from the year ended December 31, 1998. The decrease was primarily due to decreases in our contracted research and development expenses. Our research and development expenses as a percentage of our net sales were 7% and 8% during the years ended December 31, 1999 and 1998, respectively.
Our selling and marketing expenses increased during the year ended December 31, 1999 by $1,187,000 or 20% over the year ended December 31, 1998. The increase was due primarily to the addition of our outbound direct-to- veterinarian telemarketing group in the third quarter of 1998, with additional new hires for the group in 1999, expenses for increasing our Internet selling capabilities and an increase in our field sales force during the fourth quarter of 1998. Our selling and marketing expenses as a percentage of our net sales were 23% and 19% during the years ended December 31, 1999 and 1998, respectively.
Our general and administrative expenses increased during the year ended December 31, 1999 by $764,000 or 14% over the year ended December 31, 1998. The increase was due primarily to legal expenses related to our patent litigation with Heska. Our general and administrative expenses as a percentage of our net sales were 20% and 17% during the years ended December 31, 1999 and 1998, respectively.
On July 28, 1998, we entered into a settlement agreement with Barnes-Jewish Hospital resolving the Hospital's patent infringement lawsuit. We paid the Hospital $1,600,000 in cash, 333,000 shares of the our common stock, and agreed to pay undisclosed future payments and royalties. We recorded a pre-tax charge of approximately $3,922,000 and we reclassified $678,000 of legal expenses related to the patent litigation from general and administrative expenses. In January 2000, we issued an additional 135,000 shares of common stock to the Hospital upon the resolution of a contingency contained in the settlement agreement. We recorded a pre-tax charge of $479,000 in the fourth quarter of 1999 to accrue the liability for the issuance of the common stock.
In February 1999, we repaid the $1,000,000 note issued in conjunction with the acquisition of Prisma for $800,000, and recognized a $128,000 extraordinary gain on the early extinguishment of debt, net of income tax, in the first quarter of 1999.
Our royalty income during the year ended December 31, 1999 decreased by $305,000 or 96% from the year ended December 31,1998. As a result of the amended supply agreement with Merial (see above), we no longer receive royalties from Merial. Our net interest expense during 1999 increased by $22,000 over 1998 due to an increase in the LIBOR interest rate.
We recognized a benefit from income taxes of $412,000 during 1999, as compared to a benefit from income taxes of $1,422,000 during 1998. The decrease in the benefit from income taxes in 1999 is primarily due to a smaller net operating loss in 1999, and the expiration of approximately $1,342,000 of state net operating loss carryforwards.
Financial Condition and Liquidity
We believe that our present capital resources, which included negative working capital of $5,345,000 at December 31, 2000, are insufficient to meet our working capital needs and service our debt through 2001. 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 December 31, 2000, we had outstanding principal balances on our Imperial Bank debt of $8,432,000.
As of December 31, 2000, we were not in compliance with some of our financial covenants, and we had not obtained a waiver from Imperial Bank. As a result, we are in technical default and we have classified the debt as a current liability on our balance sheet as of December 31, 2000.
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, we divested W3COMMERCE and scaled back our direct selling initiative and our instrument manufacturing operations.
We have a $1,000,000 payment due in the second quarter of 2001 to KPL, in conjunction with our April 2000 acquisition of their poultry diagnostic product line, which we are currently unable to pay. 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. The put option cannot be exercised as long as we have senior debt outstanding; however, if Merial were to exercise its put option, we would be unable to pay for the shares.
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.
ITEM 7A.
ITEM 7A. 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 December 31, 2000 was approximately $11,245,000, of which $2,813,000 has a fixed interest rate of 6.21%, and the remaining $8,432,000 has a variable interest rate based on the prime rate.
A 5% change in interest rates would have a material impact on our financial condition, results of operations and cash flows as it relates to our variable rate debt.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Synbiotics Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive loss, of cash flows and of non-mandatorily redeemable common stock and other shareholders' equity present fairly, in all material respects, the financial position of Synbiotics Corporation and its subsidiary at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Diego, California March 23, 2001
SYNBIOTICS CORPORATION
CONSOLIDATED BALANCE SHEET
See accompanying notes to consolidated financial statements.
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements.
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to consolidated financial statements.
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF NON-MANDATORILY REDEEMABLE COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
The Company
Synbiotics Corporation (the "Company"), incorporated in 1982, is an animal health business which develops, manufactures and markets diagnostic products and biological products for animals. In addition, the Company also develops and manufactures specialty products which are marketed to veterinarians and purebred dog enthusiasts. The Company's principal markets are veterinarians and veterinary clinical laboratories in the United States and Europe. The Company's products are sold primarily to wholesale distributors and direct to veterinarians and veterinary clinical laboratories.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary Synbiotics Europe SAS ("SBIO-E"). All significant intercompany transactions and accounts have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market; cost is determined using the first-in, first-out method.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost. Maintenance costs are charged to operations as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of five to eight years or the lease terms, if shorter.
Investments in Debt and Equity Securities
The Company determines the appropriate classification of its U.S. Government and debt securities at the time of acquisition and reevaluates such designation as of each balance sheet date. The Company has recorded these investments at fair market value and it has designated them as available for sale. There were no significant unrealized gains or losses related to these securities as of December 31, 1999.
Patents and Licenses
Patents and licenses are recorded at cost and are amortized ratably over the life of the respective patents or licenses.
Long-Lived Assets
The Company assesses potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss is recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset, and the asset is written down to its fair value based on its discounted cash flows. Impairment losses related to long-lived assets recognized during 2000 totalled $3,985,000 (Notes 3, 4 and 6).
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents at December 31, 2000 and 1999 approximate their fair values. The carrying amount of the debt approximates fair value at December 31, 2000 and 1999 as the variable interest rate on the debt approximates current market rates of interest.
Translation of Financial Statements
The financial statements for subsidiaries whose functional currency is not the U.S. dollar are translated in the following manner: assets and liabilities at the year end rates; shareholders' equity at historical rates; and results of operations at the monthly average exchange rates. The effects of exchange rate changes are reflected as a separate component of shareholders' equity.
Revenue Recognition
Revenue from products is recognized when title and risk of loss transfers to the customer. License fee revenue is recognized ratably over the license term when the Company has a further performance obligation to the licensee. In the event that the Company has no further performance obligation to the licensee, license fee revenue is recognized upon receipt. Amounts charged to customers for shipping and handling are included in net sales.
Advertising Costs
The Company recognizes the production costs of advertising at the time such charges are incurred. Advertising expense totalled $1,019,000, $775,000 and $605,000 during the years ended December 31, 2000, 1999 and 1998, respectively.
Stock-Based Compensation
The Company measures its stock-based employee compensation using the intrinsic value method and provides pro forma disclosures of net income and earnings per share as if the fair value method had been applied in measuring compensation expense.
Income Taxes
The Company's current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized in future tax returns. The effect of tax rate changes are reflected in income during the period such changes are enacted.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed as net income less accretion of mandatorily redeemable common stock divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed as net income less accretion of mandatorily redeemable common stock divided by the weighted average number of common shares and potential common shares, using the treasury stock method, outstanding during the period (Note 11).
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash investments which are highly liquid and have an original maturity of three months or less.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company reports in the financial statements, in addition to net income (loss), comprehensive income (loss) and its components including foreign currency items and unrealized gains and losses on certain investments in debt and equity securities.
Segment Reporting
Operating segments are determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company operates in one segment.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements as of and for the years ended December 31, 1999 and 1998 to conform with the presentation used as of and for the year ended December 31, 2000.
NOTE 2--GOING CONCERN:
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during 2000, 1999 and 1998 the Company incurred net losses of $18,518,000 $1,566,000 and $1,911,000, respectively, and had a working capital deficiency of $5,345,000 and an accumulated deficit of $32,117,000 as of December 31, 2000.
As of December 31, 2000, the Company was not in compliance with certain financial covenants contained in its debt agreement (Note 7), and has not obtained a waiver from the bank. Accordingly, the Company has classified all of the outstanding principal of its bank debt, which is due in March 2002, as a current liability as of December 31, 2000. In addition, the Company has a $1,000,000 payment due in April 2001 to Kirkegaard & Perry Laboratories, Inc. ("KPL") in conjunction with the April 2000 acquisition of the Company's poultry diagnostic product line (Note 3). The Company believes that its cash flow from operations will be insufficient to meet these obligations without obtaining additional capital. These factors raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. The consolidated financial
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company is currently exploring additional sources of capital, which include the possible sale of its animal health business, a merger or acquisition, debt restructuring and/or the sale of additional equity. However, no assurance can be given that the Company will be successful in these efforts.
NOTE 3--ACQUISITIONS:
On April 21, 2000, the Company acquired the poultry diagnostic product line from KPL. The consideration paid was $3,500,000 in cash upon closing, and an additional $1,000,000 due upon the earlier of the transfer of manufacturing or one year from the date of closing. In addition, the Company will be required to pay up to $1,500,000, during the three years from closing, based upon sales of the acquired products, which will be recorded as additional purchase price as the related sales are recognized.
The transaction was accounted for as a purchase. Goodwill arising from the transaction totalled $3,987,000 which is being amortized over an estimated useful life of 10 years utilizing the straight-line method. The $1,000,000 manufacturing transfer liability portion of the purchase price is considered a non-cash investing activity for purposes of the statement of cash flows.
On March 6, 1998, the Company acquired by merger Prisma Acquisition Corp. ("Prisma"), a privately-held company located in Rome, NY, which develops, manufactures and markets instruments and reagents used by veterinarians to measure blood chemistry information at the point-of-care. The consideration paid to the stockholders of Prisma was a $1,000,000 convertible note (Note 7), 458,000 newly issued, unregistered shares of the Company's common stock valued at $1,490,000 (based on the average closing price of Synbiotics' common stock for the thirty trading days prior to March 6, 1998, which was $3.25) and the issuance of options to purchase 157,000 shares of the Company's common stock for $.0016 per share in replacement of Prisma's outstanding stock options. The 157,000 stock options were valued at $609,000 using the Black-Scholes option pricing model.
The transaction was accounted for as a purchase. Goodwill arising from the transaction totalled $2,848,000 which is being amortized over an estimated useful life of 15 years utilizing the straight-line method. The convertible debt, common stock and common stock option portion of the of the purchase price and liabilities assumed totalling $3,632,000 is considered a non-cash financing activity for purposes of the statement of cash flows. In December 2000, as a result of continuing losses, the Company recorded an impairment loss totalling $2,999,000 representing $2,341,000 of unamortized goodwill and $658,000 of equipment. The Company is planning to dispose of this line of business in the next 12 months.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's statement of operations includes the results of operations of KPL for the period April 21, 2000 to December 31, 2000, and the results of operations of Prisma for the period March 6, 1998 to December 31, 1998 and for the years ended December 31, 2000 and 1999. The following are unaudited pro forma results of operations as if the KPL transaction had been consummated on January 1, 1999 and as if the Prisma transaction had been consummated on January 1, 1998:
NOTE 4--INVESTMENT IN W3 HELD FOR SALE:
On January 12, 2000, the Company acquired W3COMMERCE LLC, now W3COMMERCE inc. ("W3"), a privately-held e-commerce and Internet solutions company based in San Diego, CA. The consideration paid was $2,913,000, which consisted of $100,000 in cash and a 5 year, $2,813,000 note payable, which bore interest at 6.21% and was convertible into 1,000,000 shares of the Company's common stock beginning January 12, 2002. Upon conversion, any accrued interest was to be subsumed. The former members of W3 were entitled to receive up to an additional 800,000 shares of the Company's common stock if certain per share stock price targets for the Company's common stock were reached prior to January 12, 2003.
The transaction was accounted for as a purchase. Goodwill arising from the transaction totalled $3,064,000 and was being amortized over an estimated useful life of 10 years utilizing the straight-line method. The convertible debt portion of the purchase price and liabilities assumed totalling $2,893,000 is considered a non-cash financing activity for purposes of the statement of cash flows.
During 2000, W3 incurred a loss from operations totalling $1,054,000 which is included in selling and marketing expenses in the statement of operations.
On December 31, 2000, the Company agreed to sell 84% of the outstanding common stock of W3 back to the original owners of W3 (the "Buyers"), and the transaction was completed on January 1, 2001. In exchange for the Buyers rescinding the $2,813,000 convertible note payable, the Company: 1) contributed $1,931,000 to the capital of W3, representing all of the Company's outstanding cash advances to W3 as of December 31, 2000, net of the cash on hand held by W3 as of December 31, 2000; 2) transferred 840 shares of common stock of W3, representing 84% of the common stock interests, to the Buyers; and 3) issued to the Buyers
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
250,000 unregistered shares of the Company's common stock totalling $109,000 (valued at $0.4375 per share). In addition, the contingent rights for an additional 800,000 shares of the Company's common stock were cancelled.
In December 2000, the Company recorded an impairment loss of $986,000, including the write-off of the remaining 16% investment in W3 as the Company estimates its fair value is zero. As of December 31, 2000 the Company's investment in W3 was valued at $2,713,000, representing the net consideration to be received from the Buyers, and is shown as investment held for sale on the balance sheet.
NOTE 5--PATENT LITIGATION SETTLEMENT:
In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a lawsuit against the Company claiming that the Company infringed a patent owned by the Hospital which covers the Company's canine heartworm diagnostic products. On July 28, 1998, the Company entered into a settlement agreement with the Hospital calling for the Company to pay the Hospital or its affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock, and undisclosed future payments and royalties. The Company recorded a pre-tax charge of approximately $3,922,000 and reclassified $678,000 of legal expenses related to the patent litigation from general and administrative expenses. The common stock portion of the settlement of $1,000,000 is considered a non-cash financing activity for purposes of the statement of cash flows.
In January 2000, the Company issued an additional 135,000 shares of common stock to the Hospital upon the resolution of a contingency contained in the settlement agreement. The Company recorded a pre-tax charge of $479,000 in the fourth quarter of 1999 to accrue the liability for the issuance of the common stock, which is considered a non-cash financing activity for purposes of the statement of cash flows for the year ending December 31, 2000.
NOTE 6--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense was $531,000, $465,000 and $364,000 during the years ended December 31, 2000, 1999 and 1998, respectively. In addition, in December 2000 the Company recorded a $658,000 impairment loss related to the equipment utilized in its instrument manufacturing facility in Rome, NY (Note 3).
Accumulated amortization of patents, licenses and goodwill was $5,869,000, and $4,491,000 at December 31, 2000 and 1999, respectively.
NOTE 7--NOTE PAYABLE AND LONG-TERM DEBT:
In April 2000, the Company refinanced its outstanding Banque Paribas debt with Imperial Bank ("Imperial"). The new Imperial debt agreement included a $6,000,000 term loan and a $4,000,000 revolving line of credit.
The term loan was due in April 2005, bore interest at the rate of prime plus 0.50%, was payable beginning in May 2000 in monthly installments of $100,000 of principal plus accrued interest and is secured by substantially all the Company's assets. The line of credit, of which the Company had drawn the entire $4,000,000, bore interest at the rate of prime plus 0.50%, with interest only payments to be made monthly beginning in May 2000. Any outstanding principal under the line of credit is due in March 2002. The Company is required to pay a quarterly commitment fee equal to 0.50% per annum on the average unused portion of the line of credit facility.
Imperial requires the Company to maintain certain financial ratios and levels of tangible net worth and also restricts the Company's ability to pay dividends and make loans, capital expenditures or investments without Imperial's consent. As of June 30, 2000 and September 30, 2000, the Company was not in compliance with certain Imperial financial covenants, and obtained waivers from Imperial. In exchange for the waivers, the Company: 1) paid Imperial waiver fees totalling $70,000 and 2) made a one time principal payment on its term loan of $500,000. In November 2000 the Company amended the Imperial agreement to: 1) convert $1,500,000 from the line of credit to the term loan; 2) reduce the line of credit to a maximum of $2,500,000, subject to a
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrowing base calculation; 3) change the due date of the term debt to March 29, 2002; 4) revise the calculation of certain financial ratios and the required levels of tangible net worth and 5) increase the interest rate on both the term debt and the line of credit to prime plus 1.50% to 2.50% (dependent upon the Company's ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization), which was effectively 12.00% at December 31, 2000. As of December 31, 2000, the Company had $2,232,000 outstanding under the line of credit.
As of December 31, 2000, the Company was not in compliance with certain Imperial financial covenants and had not obtained a waiver from Imperial. Accordingly, all of outstanding principal under both the term loan and the line of credit have been classified as a current liability on the balance sheet at December 31, 2000.
In addition to amending the Imperial agreement, the Company also agreed to issue to Imperial warrants to purchase 250,000 unregistered shares of the Company's common stock at $2.00 per share (Note 9).
The Company recorded an extraordinary loss on early extinguishment of debt of $598,000, net of income tax benefit of $339,000, in the second quarter of 2000, which represents the write-off of the remaining unamortized debt issuance costs and debt discount on the Banque Paribas debt.
In conjunction with the acquisition of Prisma (Note 3), the Company issued a $1,000,000 convertible note which was due March 5, 1999. In February 1999, the Company repaid the note prior to its original due date for $800,000 and recognized an extraordinary gain of $128,000, net of $72,000 of income tax.
Scheduled principal payments during the next five years are as follows: 2001--$1,200,000 and 2002--$7,232,000, respectively. Interest paid during 2000, 1999 and 1998 totalled $1,119,000, $710,000 and $880,000, respectively.
NOTE 8--MANDATORILY REDEEMABLE COMMON STOCK:
The 621,000 shares issued in conjunction with the 1997 acquisition of SBIO-E are subject to certain registration rights as well as put and call provisions. The put option, which cannot be exercised as long as the Company has senior debt outstanding, gives Merial the right, beginning on July 9, 2001, to sell all or any portion of its shares to the Company at a price of $5 per share. The call option gives the Company the right to acquire, at any time, all or any portion of the shares then owned by Merial at a per share price of the greater of the average closing sale price of the Company's common stock for the 30 day period prior to the call or $5. Should the Company exercise its call option prior to July 9, 2001 at a call option price greater than $5 per share, the agreement requires the difference between the per share call option price and $5 to be shared by the Company and Merial on a sliding scale basis. In addition, should Merial sell all or any portion of the shares to a third party prior to July 9, 2001 at a price greater than $5 per share, the agreement requires the difference between the per share sales price and $5 to be shared by the Company and Merial on a sliding scale basis. The Company has classified the shares on the balance sheet as mandatorily redeemable and is accreting the value of the shares to the put option price, using the interest method, with the accretion being charged directly to retained earnings.
NOTE 9--SHAREHOLDERS' EQUITY:
In March and June 1999, the Company issued to its employees, under the 1995 Stock Option/Stock Issuance Plan, 47,000 shares and 5,000 shares of common stock, respectively. The stock vested quarterly over two years beginning January 1, 1999. The Company recognized compensation expense, as the shares vested, at the rate of $4.25 and $3.75 per share (based upon the closing price of the stock on the date of grant), respectively. In February 1998, the Company issued to its employees, under the 1995 Stock Option/Stock
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Issuance Plan, 25,000 shares of common stock. The stock vested quarterly over two years beginning January 1, 1998. The Company recognized compensation expense, as the shares vested, at the rate of $3.19 per share (based upon the closing price of the stock on the date of grant). Compensation expense related to these shares totalled $100,000, $140,000 and $40,000 during 2000, 1999 and 1998, respectively.
Preferred Stock
In August 1998, the Company amended its Articles of Incorporation to authorize the issuance of up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series. The Board of Directors is authorized to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of preferred stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.
In September 1998, the Company created the Series A Junior Participating Preferred Stock (the "Series A Preferred") consisting of 200,000 shares. Each share of Series A Preferred is entitled to 1,000 votes. Each Series A Preferred share is entitled to dividends, payable in cash quarterly, in an amount equal to 1,000 times the aggregate per share amount of dividends declared on the common stock. In the event that no common stock dividends are declared, each share of Series A Preferred is entitled to $.001 per share. The Series A Preferred is entitled to a liquidation preference of $1,000 per share, plus accrued and unpaid dividends; provided, however, that each Series A Preferred share is entitled to receive an aggregate amount per share equal to 10,000 times the aggregate amount per share distributed to the holders of common stock. In the event of a consolidation, merger, combination, etc., each share of Series A Preferred shall be exchanged into 1,000 times the aggregate per share consideration of the common stock.
There were no shares of Series A Preferred issued and outstanding as of December 31, 2000 and 1999.
Preferred Stock Purchase Rights
In September 1998, Synbiotics declared a dividend on each share of common stock outstanding on October 7, 1998. The per-share dividend consisted of one preferred share purchase right (the "Rights") to purchase, for $10.00 (the "Purchase Price"), 1/1000th of a share of Synbiotics' Series A Preferred (the "Unit"). The dividend was paid on October 7, 1998 and was part of Synbiotics' implementation of a "poison pill" shareholder rights plan. The Rights are not exercisable until the earlier to occur of (i) a public announcement that beneficial ownership of 20% or more of the Company's outstanding common stock has been acquired or (ii) 10 business days (or a later date as determined by the Board of Directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer to acquire beneficial ownership of 20% or more of the outstanding common stock of the Company.
At any time after the beneficial ownership of 20% or more of the outstanding shares of the Company's common stock has been acquired (but before the acquiring party has acquired 50% of the outstanding common stock) the Company may exchange all or part of the Rights for Units at an exchange ratio equal to (subject to adjustment to reflect stock splits, stock dividends and similar transactions) the Purchase Price divided by the then current per share market price per Unit on the Distribution Date.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At any time prior to the public announcement that the beneficial ownership of 20% or more of the outstanding common stock of the Company has been acquired, the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). The redemption of the rights will be effective at such time as the Board of Directors in its sole discretion may establish.
The Rights will expire on October 7, 2008, unless the expiration date is extended or unless the Rights are earlier redeemed or exchanged by the Company.
Stock Warrants
In conjunction with the November 2000 amendment to the Imperial debt agreement (Note 7) , the Company issued to Imperial a warrant to purchase 250,000 shares of the Company's common stock at an exercise price of $2.00 per share. The warrant is exercisable at any time through November 30, 2007. The Company has valued the warrant at $32,000 using the Black-Scholes option pricing model, which is considered a non-cash financing activity for purposes of the statement of cash flows.
In conjunction with the 1997 acquisition of SBIO-E , the Company issued to Banque Paribas a warrant to purchase 240,000 shares of the Company's common stock at an exercise price of $.01 per share. The warrant is exercisable at any time through May 31, 2007 and contains certain anti-dilution provisions and registration rights. The Company has valued the warrant at $1,003,000 using the Black-Scholes option pricing model.
In conjunction with the 1996 acquisition of International Canine Genetics, Inc. ("ICG"), the Company assumed all of the outstanding ICG stock warrants, which expired March 24, 2000, after giving effect to the exchange ratio inherent in the transaction. As a result, 284,000 shares of the Company's common stock were reserved for issuance with an exercise price of $4.54 per share. In March 2000, 19,000 shares of the Company's common stock were issued upon exercise of the warrants, and the remaining unexercised warrants, representing 265,000 shares of the Company's common stock, expired.
Stock Option Plans
The Company recognizes compensation expense related to its stock option plans using the intrinsic value method. Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant dates, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
The Company has adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") whereby an aggregate of 2,000,000 shares of the Company's common stock were reserved for issuance. The 1995 Plan is administered by the Board of Directors and provides that exercise prices shall not be less than 85 percent (non-qualified options) and 100 percent (incentive options) of the fair market value of the shares at the date of grant.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options will generally vest at the rate of 1/16th of the granted shares in each continuous quarter of employment and have an exercise period not more than ten years from date of grant.
In November 1999, the 1995 Plan was amended to add an additional 600,000 shares to the maximum authorized for issuance. Under the 1995 Plan, an aggregate of 2,600,000 shares of the Company's common stock were reserved for issuance.
The following is a summary of the stock option plan's activity:
Options to purchase an aggregate of 1,393,000 shares and 1,063,000 shares were exercisable under the 1995 Plan as of December 31, 2000 and 1999, respectively. The weighted-average fair value of options granted under the 1995 Plan during the years ended December 31, 2000, 1999 and 1998 was $1.20 per share, $1.62 per share and $1.22 per share, respectively. There was no compensation expense during 2000 and 1999, and the Company recognized compensation expense of $36,000 during the year ended December 31, 1998.
The following is a summary of stock options outstanding at December 31, 2000:
For disclosure purposes, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2000, 1999 and 1998, respectively: dividend yield of 0% for all years; expected volatility of 65.5%, 54.3% and 54.8%; risk-free interest rates of 6.2%, 5.5% and 5.1%; and expected lives of 3.1 years, 3.1 years and 2.7 years.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with the acquisition of Prisma (Note 3), the Company assumed all of the outstanding Prisma stock options (the "1998 Plan"), after giving effect to the exchange ratio inherent in the transaction. As a result, 157,000 shares of the Company's common stock were reserved for issuance with an exercise price of $.0016 per share. As of December 31, 2000, there were options to purchase 1,000 shares outstanding and exercisable under the 1998 Plan with a weighted-average exercise price of $.0016 per share and a weighted-average remaining contractual life of 4.8 years. No compensation expense was recognized by the Company related to the 1998 Plan during the years ended December 31, 2000, 1999 and 1998.
In conjunction with the acquisition of ICG, the Company assumed all of the outstanding ICG stock options (the "ICG Plan"), after giving effect to the exchange ratio inherent in the transaction. As a result, 93,000 shares of the Company's common stock were reserved for issuance with exercise prices ranging from $4.54 to $25.42 per share. As of December 31, 2000, there were options to purchase 44,000 shares outstanding and exercisable under the ICG Plan with a weighted-average exercise price of $9.74 per share and a weighted-average remaining contractual life of 1.7 years. No compensation expense was recognized by the Company related to the ICG Plan during the years ended December 31, 2000, 1999 and 1998.
During 2000, 1999 and 1998, respectively, $9,000, $682,000 and $3,000 of accrued stock compensation expense was transferred to common stock upon the exercise of stock options, and is considered a non-cash financing activity for purposes of the statement of cash flows.
NOTE 10--INCOME TAXES:
The Company recorded a net provision for (benefit from) income taxes for the years ended December 31, 2000, 1999 and 1998 as follows:
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal and state deferred tax assets comprise the following:
As of December 31, 2000 and 1999, the Company had foreign deferred tax assets of $122,000 and $20,000, respectively.
The valuation allowance for Federal deferred tax assets at December 31, 2000 is due to management's determination that, as a result of the Company's liquidity concerns, continuing net losses and alternative strategies for the business, it is more likely than not that the deferred tax assets will not be realized in the future.
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the provision (benefit from) for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
The Company has available Federal net operating loss carryforwards at December 31, 2000 of approximately $17,447,000, which expire from 2003 to 2020. Available state net operating loss carryforwards at December 31, 2000 total approximately $1,501,000, which expire from 2003 to 2005. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards which can be utilized. Unused investment tax and research and development and alternative minimum tax credits at December 31, 2000 aggregate approximately $985,000 and expire from 2001 to 2007.
NOTE 11--LOSS PER SHARE:
The following is a reconciliation of net loss and share amounts used in the computations of loss per share:
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 1,310,000, 309,000 and 694,000 shares have been excluded from the shares used in computing diluted net loss per share for the years ended December 31, 2000, 1999 and 1998, respectively, as their effect is anti-dilutive. In addition, warrants to purchase 284,000 shares of common stock at $4.54 per share have been
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
excluded from the shares used in computing diluted net loss per share for the years December 31, 1999 and 1998 as their exercise price is higher than the weighted average market price for those periods, and in addition their effect is anti-dilutive for the years ended December 31, 1999 and 1998.
NOTE 12--COMMITMENTS AND CONTINGENCIES:
The Company leases office, laboratory and manufacturing facilities and equipment under operating leases. The facilities leases provide for escalating rental payments. Future minimum rentals under noncancelable operating leases as of December 31, 2000 are as follows:
Total rent expense under noncancelable operating leases was $1,438,000, $1,150,000 and $542,000 during the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has filed a lawsuit against Heska Corporation ("Heska") claiming that Heska infringes a patent owned by the Company and is seeking unspecified damages. Heska has filed a counterclaim against the Company seeking a declaratory judgment that the Company's patent is invalid and unenforceable. The Company denies Heska's allegations that its patent is invalid and unenforceable, and plans to vigorously defend its patent against the allegations.
SE Technologies, Inc. ("SE") has filed a lawsuit against the Company claiming a breach of a consulting contract related to the 1999 implementation of the Company's enterprise resource planning system. The Company denies SE's allegations and plans to vigorously defend itself against the allegations.
NOTE 13--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:
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following are revenues and long-lived assets information by geographic area:
There were no sales to any one customer that totalled 10% or more of total revenues during the years ended December 31, 2000 and 1999. During the year ended December 31, 1998, sales to two customers totalled $10,201,000.
NOTE 14--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data for 2000 and 1999 is as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Part III, Items 10, 11, 12 and 13, has been omitted from this report since we intend to file with the Securities and Exchange Commission, not later than 120 days after the close of our fiscal year, a definitive proxy statement prepared pursuant to Regulation 14A containing such information, which information is hereby incorporated by reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8 in Part II hereof where these documents are listed.
2. Financial Statement Schedules
Reference is made to the Index to Financial Statements under Item 8 in Part II hereof where these documents are listed. All schedules not listed in the Index to Financial Statements under item 8 in Part II are inapplicable or the required information is included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibit Index
Exhibits marked with an asterisk have not been included with this Annual Report on Form 10-K, but instead have been incorporated by reference to other documents filed by us with the Securities and Exchange Commission. We will furnish a copy of any one or more of these exhibits to any shareholder who so requests.
- -------- *Incorporated by reference.
+Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 2001 Synbiotics Corporation
/s/ Michael K. Green By __________________________________ Michael K. Green Senior Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.
EXHIBITS TO FORM 10-K UNDER SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
EXHIBIT INDEX
- -------- *Incorporated by reference.
+Management contract or compensatory plan or arrangement.