-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnpZU61oJz+rFpeUw2fv2ALO8J70ThA9/oWtq6yNTElwYVlun5y6xNa2ARK2jU5R DZSjlWIaO6jeX95Iva5AkA== 0001072993-01-000001.txt : 20010409 0001072993-01-000001.hdr.sgml : 20010409 ACCESSION NUMBER: 0001072993-01-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNBIOTICS CORP CENTRAL INDEX KEY: 0000719483 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 953737816 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11303 FILM NUMBER: 1591012 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10-K405 1 0001.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2000 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11303 ---------------- SYNBIOTICS CORPORATION (Exact name of registrant as specified in its charter) 95-3737816 California (I.R.S. Employer (State or other jurisdiction Identification No.) of incorporation or organization) 92127 11011 Via Frontera (Zip Code) San Diego, California (Address of principal executive offices) Registrant's telephone number, including area code: (858) 451-3771 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 16, 2001 was approximately $2,783,000 based on the closing sale price as reported by the Nasdaq National Market. As of March 16, 2001, 9,624,558 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement to be prepared pursuant to Regulation 14A and filed in connection with the solicitation of proxies for its June 14, 2001 Annual Meeting of Shareholders is incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SYNBIOTICS CORPORATION INDEX
Page ---- Part I Item 1. Business............................................. 1 Item 2. Properties........................................... 3 Item 3. Legal Proceedings.................................... 3 Item 4. Submission of Matters to a Vote of Security Holders.. 4 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 5 Item 6. Selected Financial Data.............................. 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 5 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................. 15 Item 8. Financial Statements and Supplementary Data.......... 16 Part III Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................. 38 Item 10. Directors and Executive Officers of the Registrant... 38 Item 11. Executive Compensation............................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 38 Item 13. Certain Relationships and Related Transactions....... 38 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 38
i PART I 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. 1 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. 2 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. 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. 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. 3 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 4 PART II 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.
Year Quarter High Low ---- ------- ----- ----- 1999..................................................... 1 $5.38 $2.25 2 $4.63 $3.31 3 $3.94 $2.50 4 $2.81 $2.00 2000..................................................... 1 $7.13 $2.44 2 $3.50 $2.00 3 $3.28 $2.00 4 $2.09 $0.25
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ------------------------------------------- 2000 1999 1998 1997 1996 -------- ------- ------- ------- ------- (In Thousands, Except Per Share Data) Consolidated Statement of Operations Data: Total revenues................... $ 31,329 $30,696 $31,534 $23,618 $17,217 (Loss) income before extraordinary item.............. (17,920) (1,694) (1,911) 207 9,278 Net (loss) income................ (18,518) (1,566) (1,911) 207 9,278 Basic (loss) income per share: (Loss) income before extraordinary item............ (1.93) (0.20) (0.23) 0.02 1.49 Net (loss) income.............. (2.00) (0.19) (0.23) 0.02 1.49 Diluted (loss) income per share: (Loss) income before extraordinary item............ (1.93) (0.20) (0.23) 0.02 1.46 Net (loss) income.............. (2.00) (0.19) (0.23) 0.02 1.46 December 31, ------------------------------------------- 2000 1999 1998 1997 1996 -------- ------- ------- ------- ------- (In Thousands) Consolidated Balance Sheet Data: Total assets..................... $32,202 $44,531 $45,930 $42,111 $28,567 Long-term obligations............ 7,508 10,356 10,856 10,783 --
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 5 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 6 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. 7 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 8 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 9 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. 10 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 11 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. 12 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 13 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. 14 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. 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. 15 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants......................................... 17 Consolidated Balance Sheet as of December 31, 2000 and 1999............... 18 Consolidated Statement of Operations and Comprehensive Loss for the years ended December 31, 2000, 1999 and 1998................................... 19 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998...................................................... 20 Consolidated Statement of Non-Mandatorily Redeemable Common Stock and Other Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998................................................................. 21 Notes to Consolidated Financial Statements................................ 22
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements and notes thereto. 16 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 17 SYNBIOTICS CORPORATION CONSOLIDATED BALANCE SHEET
December 31, -------------------------- 2000 1999 ------------ ------------ ASSETS ------ Current assets: Cash and cash equivalents........................ $ 951,000 $ 2,260,000 Securities available for sale.................... 3,443,000 Accounts receivable (net of allowance for doubtful accounts of $270,000 and $395,000 in 2000 and 1999).................................. 3,490,000 4,517,000 Inventories...................................... 5,273,000 5,178,000 Deferred tax assets.............................. 505,000 Other current assets............................. 911,000 1,570,000 ------------ ------------ Total current assets........................... 10,625,000 17,473,000 Property and equipment, net........................ 1,983,000 1,744,000 Goodwill, net...................................... 13,161,000 12,621,000 Deferred tax assets................................ 122,000 8,055,000 Deferred debt issuance costs....................... 33,000 447,000 Investment in W3 held for sale..................... 2,713,000 Other assets....................................... 3,565,000 4,191,000 ------------ ------------ $ 32,202,000 $ 44,531,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses............ $ 6,296,000 $ 5,921,000 Current portion of long-term debt................ 8,432,000 1,000,000 Deferred revenue................................. 242,000 242,000 Other current liabilities........................ 1,000,000 ------------ ------------ Total current liabilities...................... 15,970,000 7,163,000 ------------ ------------ Long-term debt..................................... 2,813,000 5,914,000 Deferred revenue................................... 727,000 969,000 Other liabilities.................................. 1,668,000 1,546,000 ------------ ------------ 5,208,000 8,429,000 ------------ ------------ Mandatorily redeemable common stock................ 3,027,000 2,896,000 ------------ ------------ Commitments and contingencies (Note 12) Non-mandatorily redeemable common stock and other shareholders' equity: Common stock, no par value, 24,800,000 shares authorized, 8,752,000 and 8,576,000 shares issued and outstanding at December 31, 2000 and 1999............................................ 40,164,000 39,424,000 Common stock warrants............................ 1,035,000 1,003,000 Accumulated other comprehensive loss............. (1,085,000) (916,000) Accumulated deficit.............................. (32,117,000) (13,468,000) ------------ ------------ Total non-mandatorily redeemable common stock and other shareholders' equity................ 7,997,000 26,043,000 ------------ ------------ $ 32,202,000 $ 44,531,000 ============ ============
See accompanying notes to consolidated financial statements. 18 SYNBIOTICS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Revenues: Net sales............................ $ 31,073,000 $30,437,000 $31,217,000 License fees......................... 242,000 247,000 Royalties............................ 14,000 12,000 317,000 ------------ ----------- ----------- 31,329,000 30,696,000 31,534,000 ------------ ----------- ----------- Operating expenses: Cost of sales........................ 17,002,000 15,694,000 15,426,000 Research and development............. 2,210,000 2,201,000 2,386,000 Selling and marketing................ 9,520,000 7,138,000 5,951,000 General and administrative........... 6,397,000 6,138,000 5,374,000 Impairment losses.................... 3,985,000 Patent litigation settlement......... 479,000 4,600,000 ------------ ----------- ----------- 39,114,000 31,650,000 33,737,000 ------------ ----------- ----------- Loss from operations................... (7,785,000) (954,000) (2,203,000) Other expense: Interest, net........................ (1,344,000) (1,152,000) (1,130,000) ------------ ----------- ----------- Loss before income taxes............... (9,129,000) (2,106,000) (3,333,000) Provision for (benefit from) income taxes................................. 8,791,000 (412,000) (1,422,000) ------------ ----------- ----------- Loss before extraordinary item......... (17,920,000) (1,694,000) (1,911,000) Early extinguishment of debt, net of tax................................... (598,000) 128,000 ------------ ----------- ----------- Net loss............................... (18,518,000) (1,566,000) (1,911,000) Cumulative translation adjustment...... (169,000) (1,412,000) 647,000 ------------ ----------- ----------- Comprehensive loss..................... $(18,687,000) $(2,978,000) $(1,264,000) ============ =========== =========== Basic and diluted loss per share: Loss before extraordinary item....... $ (1.93) $ (0.20) $ (0.23) Early extinguishment of debt, net of tax................................. (0.07) 0.01 ------------ ----------- ----------- Net loss........................... $ (2.00) $ (0.19) $ (0.23) ============ =========== ===========
See accompanying notes to consolidated financial statements. 19 SYNBIOTICS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Cash flows from operating activities: Net loss.............................. $(18,518,000) $(1,566,000) $(1,911,000) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization....... 2,206,000 2,504,000 1,897,000 Stock compensation.................. 132,000 Impairment losses................... 3,985,000 Loss (gain) on early extinguishment of debt............................ 937,000 (200,000) Changes in assets and liabilities, net of effects of acquisitions: Account receivable................ 1,027,000 (382,000) 261,000 Inventories....................... 72,000 1,000 8,000 Deferred tax assets............... 8,438,000 (346,000) (1,494,000) Other assets...................... 159,000 104,000 236,000 Accounts payable and accrued expenses......................... 249,000 1,594,000 1,037,000 Deferred revenue.................. (242,000) 1,211,000 Other liabilities................. 122,000 177,000 1,369,000 ------------ ----------- ----------- Net cash (used for) provided by operating activities................. (1,433,000) 3,097,000 1,403,000 ------------ ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment.......................... (640,000) (383,000) (499,000) Proceeds from sale of securities available for sale................. 3,443,000 1,781,000 Acquisiton of KPL poultry product line............................... (3,554,000) Investment in securities available for sale........................... (1,830,000) Investment in W3Commerce LLC........ (168,000) ------------ ----------- ----------- Net cash (used for) provided by investing activities................. (751,000) (2,381,000) 1,282,000 ------------ ----------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt............................... 10,000,000 Payments of long-term debt.......... (9,068,000) (1,800,000) (1,133,000) Debt issuance costs................. (40,000) Proceeds from exercise of common stock options and warrants......... 152,000 Mandatorily redeemable stock issuance costs..................... (17,000) Proceeds from issuance of non- mandatorily redeemable common stock, net......................... 399,000 (15,000) ------------ ----------- ----------- Net cash provided by (used for) financing activities................. 1,044,000 (1,401,000) (1,165,000) ------------ ----------- ----------- Net (decrease) increase in cash and equivalents.......................... (1,140,000) (685,000) 1,520,000 Effect of exchange rates.............. (169,000) (1,412,000) 647,000 Cash and cash equivalents--beginning of year.............................. 2,260,000 4,357,000 2,190,000 ------------ ----------- ----------- Cash and cash equivalents--end of year................................. $ 951,000 $ 2,260,000 $ 4,357,000 ============ =========== ===========
See accompanying notes to consolidated financial statements. 20 SYNBIOTICS CORPORATION CONSOLIDATED STATEMENT OF NON-MANDATORILY REDEEMABLE COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
Accumulated Common Stock Common Other ---------------------- Stock Comprehensive Accumulated Shares Amount Warrrants Income (Loss) Deficit Total --------- ----------- ---------- ------------- ------------ ------------ Balance, December 31, 1997................... 7,426,000 $35,659,000 $1,003,000 $ (151,000) $ (9,754,000) $ 26,757,000 Issuance of common stock in conjunction with the acquisition of Prisma Acquisition Corp. (Note 3)..................... 458,000 1,423,000 1,423,000 Issuance of common stock in conjunction with the settlement of patent litigation (Note 5).... 333,000 1,000,000 1,000,000 Issuance of common stock pursuant to exercise of stock options.......... 4,000 12,000 12,000 Issuance of common stock pursuant to employee bonus plan............. 25,000 40,000 40,000 Cumulative translation adjustment............. 647,000 647,000 Accretion of mandatorily redeemable common stock.................. (111,000) (111,000) Net loss................ (1,911,000) (1,911,000) --------- ----------- ---------- ----------- ------------ ------------ Balance, December 31, 1998................... 8,246,000 38,134,000 1,003,000 496,000 (11,776,000) 27,857,000 Issuance of common stock pursuant to exercise of stock options.......... 278,000 1,081,000 1,081,000 Expiration of stock options................ 69,000 69,000 Issuance of common stock pursuant to employee bonus plan............. 52,000 140,000 140,000 Cumulative translation adjustment............. (1,412,000) (1,412,000) Accretion of mandatorily redeemable common stock.................. (126,000) (126,000) Net loss................ (1,566,000) (1,566,000) --------- ----------- ---------- ----------- ------------ ------------ Balance, December 31, 1999................... 8,576,000 39,424,000 1,003,000 (916,000) (13,468,000) 26,043,000 Issuance of common stock pursuant to exercise of stock options.......... 24,000 75,000 75,000 Issuance of common stock pursuant to employee bonus plan, net of forfeitures............ (2,000) 100,000 100,000 Issuance of common stock in conjunction with the settlement of patent litigation (Note 5).... 135,000 479,000 479,000 Issuance of common stock warrants (Note 9)...... 32,000 32,000 Exercise of common stock warrants (Note 9)...... 19,000 86,000 86,000 Cumulative translation adjustment............. (169,000) (169,000) Accretion of mandatorily redeemable common stock.................. (131,000) (131,000) Net loss................ (18,518,000) (18,518,000) --------- ----------- ---------- ----------- ------------ ------------ Balance, December 31, 2000................... 8,752,000 $40,164,000 $1,035,000 $(1,085,000) $(32,117,000) $ 7,997,000 ========= =========== ========== =========== ============ ============
See accompanying notes to consolidated financial statements. 21 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). 22 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). 23 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 24 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. 25 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:
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ----------- ----------- (unaudited) (unaudited) (unaudited) Revenues: As Reported...................... $ 31,329,000 $30,696,000 $31,534,000 ============ =========== =========== Pro forma........................ $ 32,113,000 $33,274,000 $31,601,000 ============ =========== =========== Loss before extraordinary item: As Reported...................... $(17,920,000) $(1,694,000) $(1,911,000) ============ =========== =========== Pro forma........................ $(17,717,000) $(1,028,000) $(1,997,000) ============ =========== =========== Net loss: As reported...................... $(18,518,000) $(1,566,000) $(1,911,000) ============ =========== =========== Pro forma........................ $(18,315,000) $ (900,000) $(1,997,000) ============ =========== =========== Basic and diluted net loss per share: As reported...................... $ (2.00) $ (0.19) $ (0.23) ============ =========== =========== Pro forma........................ $ (1.98) $ (0.11) $ (0.23) ============ =========== ===========
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 26 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:
December 31, ---------------------- 2000 1999 ----------- ---------- Inventories: Raw materials..................................... $ 2,293,000 $2,320,000 Work in process................................... 409,000 589,000 Finished goods.................................... 2,571,000 2,269,000 ----------- ---------- $ 5,273,000 $5,178,000 =========== ==========
December 31, ------------------------ 2000 1999 ----------- ----------- Property and equipment: Laboratory equipment............................ $ 1,830,000 $ 1,868,000 Leasehold improvements.......................... 381,000 309,000 Office and computer equipment................... 1,183,000 698,000 Construction in progress........................ 6,000 13,000 ----------- ----------- 3,400,000 2,888,000 Less accumulated depreciation and amortization.. (1,417,000) (1,144,000) ----------- ----------- $ 1,983,000 $ 1,744,000 =========== ===========
27 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).
December 31, --------------------- 2000 1999 ---------- ---------- Other assets: Patents, net......................................... $2,969,000 $3,110,000 Licenses, net........................................ 422,000 805,000 Other................................................ 174,000 276,000 ---------- ---------- $3,565,000 $4,191,000 ========== ==========
Accumulated amortization of patents, licenses and goodwill was $5,869,000, and $4,491,000 at December 31, 2000 and 1999, respectively.
December 31, --------------------- 2000 1999 ---------- ---------- Accounts payable and accrued expenses: Accounts payable.................................... $3,413,000 $2,661,000 Accrued vacation.................................... 420,000 460,000 Accrued compensation................................ 494,000 137,000 Accrued royalties................................... 854,000 484,000 Accrued patent litigation settlement................ 479,000 Accrued professional fees........................... 183,000 218,000 Other............................................... 932,000 1,482,000 ---------- ---------- $6,296,000 $5,921,000 ========== ==========
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 28 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 29 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. 30 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:
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Net loss: As reported...................... $(18,518,000) $(1,566,000) $(1,911,000) ============ =========== =========== Pro forma........................ $(18,751,000) $(1,843,000) $(2,100,000) ============ =========== =========== Basic and diluted net loss per share: As reported...................... $ (2.00) $ (0.19) $ (0.23) ============ =========== =========== Pro forma........................ $ (2.01) $ (0.20) $ (0.24) ============ =========== ===========
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. 31 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:
Weighted- Average Exercise Shares Price --------- --------- Outstanding at December 31, 1997........................ 1,554,000 $3.67 Granted................................................. 366,000 $3.08 Exercised............................................... (4,000) $2.57 Forfeited............................................... (32,000) $3.57 --------- Outstanding at December 31, 1998........................ 1,884,000 $3.56 Granted................................................. 281,000 $3.86 Exercised............................................... (128,000) $3.11 Forfeited............................................... (362,000) $3.79 --------- Outstanding at December 31, 1999........................ 1,675,000 $3.59 Granted................................................. 346,000 $3.06 Exercised............................................... (23,000) $2.94 Forfeited............................................... (78,000) $3.65 --------- Outstanding at December 31, 2000........................ 1,920,000 $3.50 =========
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:
Options Outstanding Options Exercisable ------------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Exercise Contractual Exercise Exercise Price Range Number Life (Years) Price Number Price ------------ --------- ----------- --------- --------- --------- $1.63--$2.54 196,000 6.5 $2.43 102,000 $2.43 $2.55--$3.81 855,000 6.3 $3.21 638,000 $3.24 $3.82--$5.63 869,000 5.5 $4.03 653,000 $4.03 --------- --------- $1.63--$5.63 1,920,000 6.0 $3.50 1,393,000 $3.55 ========= =========
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. 32 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:
Year Ended December 31, ---------------------------------- 2000 1999 1998 ---------- --------- ----------- Current income tax expense: State................................. $ 14,000 $ 5,000 $ 62,000 Foreign............................... 6,000 7,000 ---------- --------- ----------- 14,000 11,000 69,000 ========== ========= =========== Deferred income tax expense (benefit): Federal............................... 7,933,000 (418,000) (1,149,000) State................................. 947,000 (26,000) (322,000) Foreign............................... (103,000) 21,000 (20,000) ---------- --------- ----------- 8,777,000 (423,000) (1,491,000) ---------- --------- ----------- Net income tax expense (benefit)........ $8,791,000 $(412,000) $(1,422,000) ========== ========= ===========
33 SYNBIOTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Federal and state deferred tax assets comprise the following:
December 31, ----------------------- 2000 1999 ----------- ---------- Federal: Net operating loss carryforwards.................. $ 5,932,000 $4,961,000 Tax credit carryforwards.......................... 725,000 813,000 Patent litigation settlement...................... 699,000 828,000 Deferred revenue.................................. 329,000 412,000 Equity losses of investee......................... 334,000 313,000 Accrued compensation.............................. 109,000 61,000 Other reserves and accruals....................... 634,000 315,000 ----------- ---------- 8,762,000 7,703,000 Less valuation allowance.......................... (8,762,000) (89,000) ----------- ---------- $ $7,614,000 =========== ========== State: Net operating loss carryforwards.................. $ 88,000 $ 47,000 Tax credit carryforwards.......................... 170,000 258,000 Patent litigation settlement...................... 120,000 215,000 Deferred revenue.................................. 57,000 107,000 Equity losses of investee......................... 103,000 150,000 Accrued compensation.............................. 19,000 16,000 Other reserves and accruals....................... 142,000 133,000 ----------- ---------- 699,000 926,000 Less valuation allowance.......................... (699,000) ----------- ---------- $ $ 926,000 =========== ==========
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. 34 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:
Year Ended December 31, ----------------------------------- 2000 1999 1998 ----------- --------- ----------- Amounts computed at statutory Federal rate.................................. $(3,104,000) $(716,000) $(1,133,000) State income taxes..................... 52,000 (21,000) (226,000) Foreign income taxes................... 112,000 148,000 (13,000) Income (deductions) for financial reporting purposes for which there is no current tax (benefit) provision.... 2,257,000 35,000 (72,000) Expiration of Federal general business tax credits........................... 88,000 53,000 Expiration of state net operating loss carryforwards......................... 14,000 Expiration of state general business tax credits........................... 22,000 Increase in valuation allowance........ 9,372,000 89,000 ----------- --------- ----------- $ 8,791,000 $(412,000) $(1,422,000) =========== ========= ===========
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:
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Basic and diluted net loss used: Loss before extraordinary item........ $(17,920,000) $(1,694,000) $(1,911,000) Less accretion of mandatorily redeemable common stock.............. (131,000) (126,000) (111,000) ------------ ----------- ----------- Loss before extraordinary item used in computing basic loss before extraordinary item per share......... (18,051,000) (1,820,000) (2,022,000) Early extinguishment of debt, net of tax.................................. (598,000) 128,000 ------------ ----------- ----------- Net loss used in computing basic and diluted net loss per share......... $(18,649,000) $(1,692,000) $(2,022,000) ============ =========== =========== Shares used: Weighted average common shares outstanding used in computing basic and diluted loss per share........... 9,336,000 9,079,000 8,679,000 ============ =========== ===========
Weighted average options and warrants to purchase common stock as determined by the application of the treasury method and weighted average shares of common stock issuable upon assumed conversion of debt totalling 1,310,000, 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 35 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: 2001.......................................................... $1,096,000 2002.......................................................... 791,000 2003.......................................................... 574,000 2004.......................................................... 582,000 2005.......................................................... 591,000 Thereafter.................................................... 2,930,000 ---------- $6,564,000 ==========
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:
Year Ended December 31, ----------------------------------- 2000 1999 1998 ----------- ----------- ----------- Diagnostics.............................. $23,511,000 $23,091,000 $23,778,000 Vaccines................................. 4,968,000 6,013,000 7,106,000 Instruments.............................. 2,594,000 1,333,000 333,000 Other revenues........................... 256,000 259,000 317,000 ----------- ----------- ----------- $31,329,000 $30,696,000 $31,534,000 =========== =========== ===========
36 SYNBIOTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following are revenues and long-lived assets information by geographic area:
Year Ended December 31, ----------------------------------- 2000 1999 1998 ----------- ----------- ----------- Revenues: United States............................ $21,511,000 $21,796,000 $21,360,000 France................................... 4,466,000 4,518,000 4,961,000 Other foreign countries.................. 5,352,000 4,382,000 5,213,000 ----------- ----------- ----------- $31,329,000 $30,696,000 $31,534,000 =========== =========== ===========
December 31, ----------------------- 2000 1999 ----------- ----------- Long-lived assets: United States..................................... $12,921,000 $12,079,000 France............................................ 5,337,000 6,440,000 ----------- ----------- $18,258,000 $18,519,000 =========== ===========
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:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ---------- ----------- ----------- ------------ Net sales............... 2000 $9,158,000 $ 8,646,000 $ 7,451,000 $ 5,818,000 1999 9,390,000 8,336,000 6,016,000 6,695,000 Gross profit............ 2000 4,225,000 5,023,000 3,670,000 1,153,000 1999 5,310,000 4,927,000 2,083,000 2,423,000 Income (loss) before extraordinary item..... 2000 (834,000) (791,000) (808,000) (15,487,000) 1999 590,000 473,000 (1,299,000) (1,458,000) Basic and diluted income (loss) before extraordinary item per share.................. 2000 (0.09) (0.09) (0.09) (1.66) 1999 0.06 0.05 (0.15) (0.16) Net income (loss)....... 2000 (834,000) (1,374,000) (808,000) (15,502,000) 1999 706,000 473,000 (1,299,000) (1,446,000) Basic and diluted net income (loss) per share.................. 2000 (0.09) (0.15) (0.09) (1.67) 1999 0.07 0.05 (0.15) (0.16)
37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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. 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.
Exhibit Title Method of Filing ------- ----- ---------------- 2.8* Exchange Agreement between the Incorporated herein by reference to Registrant and the Individual Members Exhibit 2.8 to the Registrant's of W3COMMERCE LLC, dated January 12, Quarterly Report on Form 10-Q for the 2000. quarter ended March 31, 2000. 2.9* Asset Purchase Agreement by and Incorporated herein by reference to between the Registrant and Kirkegaard Exhibit 2.8 to the Registrant's & Perry Laboratories, Inc., dated Quarterly Report on Form 10-Q for the April 18, 2000. quarter ended September 30, 2000.
38
Exhibit Title Method of Filing ------- ----- ---------------- 2.10* Stock Purchase Agreement Among the Incorporated herein by reference to Registrant, W3COMMERCE inc., and Colin Exhibit 2.10 to the Registrant's Lucas-Mudd, Donna Lucas-Mudd, Edward Current Report on Form 8-K dated Brunel-Cohen, Regan Carey, Mark December 31, 2000. Brunel-Cohen, Tim Mudd, Steven Usrey, Drew Keen and Kimberley Lind, dated as of December 31, 2000. 3.1* Articles of Incorporation, as amended. Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996. 3.1.1* Certificate of Amendment of Articles Incorporated herein by reference to of Incorporation, filed August 4, Exhibit 3.1 to the Registrant's 1998. Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998. 3.2* Bylaws, as amended. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998. 4.1* Certificate of Determination of Series Incorporated herein by reference to A Junior Participating Preferred Stock Exhibit 4.1 to the Registrant's Annual filed October 13, 1998. Report on Form 10-KSB for the year ended December 31, 1998. 4.2* Rights Agreement, dated as of October Incorporated herein by reference to 1, 1998, between the Company and the Registrant's Form 8-A dated ChaseMellon Shareholder Services, October 7, 1998. L.L.C., which includes the form of Certificate of Determination for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C. 4.4* Credit Agreement by and between the Incorporated herein by reference to Registrant and Imperial Bank, dated Exhibit 4.4 to the Registrant's April 12, 2000. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 4.4.1* First Amendment to Credit Agreement by Incorporated herein by reference to and between the Registrant and Exhibit 4.4.1 to the Registrant's Imperial Bank, dated April 18, 2000. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 4.4.2 Second Amendment to Credit Agreement Filed herewith. by and between the Registrant and Imperial Bank, dated November 14, 2000. 10.1* Lease of Premises by Registrant Incorporated herein by reference to located at 11011 Via Frontera, San Exhibit 10.1 to the Registrant's Diego, California, dated November 20, Quarterly Report on Form 10-Q for the 1996. quarter ended September 30, 2000.
39
Exhibit Title Method of Filing ------- ----- ---------------- 10.1.1* First Amendment to Lease of Premises Incorporated herein by reference to by Registrant located at 11011 Via Exhibit 10.1.1 to the Registrant's Frontera, San Diego, California. Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 10.2*+ Employment Agreement between the Incorporated herein by reference to Registrant and Kenneth M. Cohen, dated Exhibit 10.2 to the Registrant's May 7, 1996. Registration Statement on Form S-4, Registration No. 333-10343, dated September 12, 1996. 10.7*+ Employment Agreement between the Incorporated herein by reference to Registrant and Paul A. Rosinack, dated Exhibit 10.7 to the Registrant's October 25, 1996. Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997. 10.9*+ Employment Contract between Synbiotics Incorporated herein by reference to Europe, SAS and Francois Guillemin, Exhibit 10.9 to the Registrant's dated as of July 22, 1999. Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999. 10.70* Non-Competition Agreement between the Incorporated herein by reference to Registrant and Colin Lucas-Mudd, dated Exhibit 10.70 to the Registrant's January 12, 2000. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 10.71*+ Employment Agreement between Incorporated herein by reference to W3COMMERCE LLC and Colin Lucas-Mudd, Exhibit 10.71 to the Registrant's dated January 12, 2000. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 10.72* Convertible Promissory Note from the Incorporated herein by reference to Registrant to Colin Lucas-Mudd, dated Exhibit 10.72 to the Registrant's January 12, 2000. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 10.73* Convertible Promissory Note from the Incorporated herein by reference to Registrant to Rigdon Currie, dated Exhibit 10.73 to the Registrant's January 12, 2000. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 10.74* Secured Promissory Note from the Incorporated herein by reference to Registrant to Kirkegaard & Perry Exhibit 10.74 to the Registrant's Laboratories, Inc., dated April 18, Quarterly Report on Form 10-Q for the 2000. quarter ended September 30, 2000. 10.74.1* Security Agreement by and between the Incorporated herein by reference to Registrant and Kirkegaard & Perry Exhibit 10.74.1 to the Registrant's Laboratories, Inc., dated April 18, Quarterly Report on Form 10-Q for the 2000. quarter ended September 30, 2000. 10.74.2* Intercreditor Agreement by and among Incorporated herein by reference to the Registrant, Imperial Bank and Exhibit 10.74.2 to the Registrant's Kirkegaard & Perry Laboratories, Inc., Quarterly Report on Form 10-Q for the dated April 18, 2000. quarter ended September 30, 2000. 10.75 Warrant Agreement between the Filed herewith. Registrant and Imperial Bank, dated as of December 1, 2000.
40
Exhibit Title Method of Filing ------- ----- ---------------- 21 List of Subsidiaries. Filed herewith. 23 Consent of Independent Accountants. Filed herewith.
- -------- *Incorporated by reference. +Management contract or compensatory plan or arrangement. 41 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.
Signature Title Date --------- ----- ---- /s/ Kenneth M. Cohen Chief Executive Officer, March 31, 2001 ______________________________________ President and Director Kenneth M. Cohen (Principal Executive Officer) /s/ Michael K. Green Chief Financial Officer March 31, 2001 ______________________________________ (Principal Financial Michael K. Green Officer) /s/ Keith A. Butler Corporate Controller March 31, 2001 ______________________________________ (Principal Accounting Keith A. Butler Officer) /s/ Patrick Owen Director March 31, 2001 ______________________________________ Patrick Owen /s/ Rigdon Currie Director March 31, 2001 ______________________________________ Rigdon Currie /s/ James C. DeCesare Director March 31, 2001 ______________________________________ James C. DeCesare /s/ Joseph Klein III Director March 31, 2001 ______________________________________ Joseph Klein III /s/ Donald E. Phillips Director March 31, 2001 ______________________________________ Donald E. Phillips
42 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. EXHIBITS TO FORM 10-K UNDER SECURITIES EXCHANGE ACT OF 1934 SYNBIOTICS CORPORATION EXHIBIT INDEX
Exhibit No. Exhibit ----------- ------- 2.8* Exchange Agreement between the Registrant and the Individual Members of W3COMMERCE LLC, dated January 12, 2000. 2.9* Asset Purchase Agreement by and between the Registrant and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 2.10* Stock Purchase Agreement Among the Registrant, W3COMMERCE inc., and Colin Lucas-Mudd, Donna Lucas-Mudd, Edward Brunel-Cohen, Regan Carey, Mark Brunel-Cohen, Tim Mudd, Steven Usrey, Drew Keen and Kimberley Lind, dated as of December 31, 2000. 3.1* Articles of Incorporation, as amended. 3.1.1* Certificate of Amendment of Articles of Incorporation, filed August 4, 1998. 3.2* Bylaws, as amended. 4.1* Certificate of Determination of Series A Junior Participating Preferred Stock filed October 13, 1998. 4.2* Rights Agreement, dated as of October 1, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., which includes the form of Certificate of Determination for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C. 4.4* Credit Agreement by and between the Registrant and Imperial Bank, dated April 12, 2000. 4.4.1* First Amendment to Credit Agreement by and between the Registrant and Imperial Bank, dated April 18, 2000. 4.4.2 Second Amendment to Credit Agreement by and between the Registrant and Imperial Bank, dated November 14, 2000. 10.1* Lease of Premises by Registrant located at 11011 Via Frontera, San Diego, California, dated November 20, 1996. 10.1.1* First Amendment to Lease of Premises by Registrant located at 11011 Via Frontera, San Diego, California. 10.2*+ Employment Agreement between the Registrant and Kenneth M. Cohen, dated May 7, 1996. 10.7*+ Employment Agreement between the Registrant and Paul A. Rosinack, dated October 25, 1996. 10.9*+ Employment Contract between Synbiotics Europe, SAS and Francois Guillemin, dated as of July 22, 1999. 10.70* Non-Competition Agreement between the Registrant and Colin Lucas- Mudd, dated January 12, 2000. 10.71*+ Employment Agreement between W3COMMERCE LLC and Colin Lucas-Mudd, dated January 12, 2000. 10.72* Convertible Promissory Note from the Registrant to Colin Lucas- Mudd, dated January 12, 2000. 10.73* Convertible Promissory Note from the Registrant to Rigdon Currie, dated January 12, 2000. 10.74* Secured Promissory Note from the Registrant to Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 10.74.1* Security Agreement by and between the Registrant and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 10.74.2* Intercreditor Agreement by and among the Registrant, Imperial Bank and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000.
Exhibit No. Exhibit - ----------- ------- 10.75 Warrant Agreement between the Registrant and Imperial Bank, dated as of December 1, 2000. 21 List of Subsidiaries. 23 Consent of Independent Accountants.
- -------- *Incorporated by reference. +Management contract or compensatory plan or arrangement. EX-4.4.2 2 0002.txt SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 4.4.2 ------------- SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement ("Amendment") is entered into as of November 14, 2000, by and between Imperial Bank ("Bank") and Synbiotics Corporation ("Borrower"). RECITALS -------- This Amendment is being entered into in reference to the following facts: (a) The Borrower and the Bank entered into that certain Credit Agreement, dated as of April 12, 2000, as amended by that certain First Amendment to Credit Agreement, dated as of April 18, 2000 (as otherwise amended, restated, modified, supplemented or revised from time to time prior to the date hereof, the "Credit Agreement"). Capitalized terms used herein without definition have the meaning assigned thereto in the Credit Agreement. (b) The Bank and the Borrower desire to amend the Credit Agreement in certain respects subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows. ARTICLE 1 - AMENDMENTS ---------------------- 1.1 Amendment of Section 1.01 Term Loan Commitment. Section 1.01 of the Credit ---------------------------------------------- Agreement is hereby amended and restated in its entirety as follows: 1.01 Term Loan Commitment. (a) Term Loan. Subject to the terms and conditions of this Agreement, Bank shall make available to Borrower a term loan (the "Term Loan") in the amount of Six Million Three Hundred Thousand Dollars ($6,300,000) the proceeds of which shall be used only for refinancing of Borrower"s existing senior debt. Borrower promises to pay to Bank, on or before the first (1st) day of each month the outstanding principal balance of the Term Loan in sixteen (16) equal monthly installments of One Hundred Thousand Dollars ($100,000) plus interest, commencing December 1, 2000 and continuing until March 29, 2002 ("Term Loan Maturity Date") at which time all principal outstanding on the Term Loan and all accrued but unpaid interest thereon shall be due and payable in full. (b) Term Loan Interest. Borrower further promises to pay, together with each payment of principal under the Term Loan payable in accordance with Section 1.1(a) on the (1st) day of each month through the Term Loan Maturity Date interest on the average daily unpaid balance for the Term Loan during the immediately preceding month at a rate of interest equal to a rate per annum which Bank has announced as its prime lending rate ("Prime Rate"), which shall vary concurrently with any change in such Prime Rate, plus the Applicable Prime Margin. The Applicable Prime Margin means the margin set forth in the table in Section 1.07. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the Term Loan is outstanding divided by 360, which shall for interest computation purposes be considered one (1) year. (c) Term Loan Note. The terms of the Term Loan shall be contained in a promissory note, dated the date of this Agreement, evidencing Borrower"s obligation to repay the Term Loan, substantially in the form of Exhibit A attached hereto. 1.2 Amendment of Section 1.02 Asset Based Line of Credit Commitment. Section --------------------------------------------------------------- 1.02 of the Credit Agreement is hereby amended and restated in its entirety as follows: 1.02 Asset Based Line of Credit Commitment (a) Line of Credit " Accounts Receivable and Inventory Borrowing Base Constrained. Subject to all the terms and conditions of this Agreement, provided that no event of default then has occurred and is continuing, Bank shall upon Borrower"s request, make advances ("ABL Loans") to Borrower, from time to time and in such amounts as Borrower shall request up to an aggregate principal amount outstanding at any one time not to exceed the lesser of (i) Two Million Five Hundred Thousand Dollars ($2,500,000) (the "ABL Line of Credit") or (ii) the Borrowing Base. For the purposes of this Agreement, the "Borrowing Base," as of any date of determination, shall mean the result of: (1) Eighty percent (80%) of Eligible Accounts, plus (2) Twenty-five percent (25%) of Eligible Inventory, not to exceed One Million Five Hundred Thousand Dollars ($1,500,000); provided, -------- however, that at any time during the effectiveness of this ------- Agreement, the aggregate amount of all ABL Loans outstanding on the basis of Eligible Inventory shall not exceed the aggregate amount of all ABL Loans outstanding on the basis of Eligible Accounts, as such Eligible Accounts and such Eligible Inventory may be adjusted from time to time as provided for under Section 4.15 hereof . If at any time or for any reason, the outstanding principal amount of the ABL Loan Account (as defined below) is greater than the lesser of: (x) the Borrowing Base or (y) the ABL Line of Credit, Borrower shall immediately pay to Bank, in cash, the amount of such excess. Any commitment of Bank, pursuant to the terms of this Agreement, to make ABL Loans shall expire on the ABL Maturity Date (as hereinafter defined), subject to Bank's right to renew said commitment in its sole and absolute discretion at Borrower's request. Any such renewal of said commitment shall not be binding upon Bank unless it is in writing and signed by an officer of Bank. Provided that no Event of Default (as hereinafter defined) has occurred and is continuing, all or any portion of the ABL Loans advanced by Bank which are repaid by Borrower shall be available for reborrowing in accordance with the terms hereof. Borrower promises to pay to Bank the entire outstanding unpaid principal balance (and all accrued unpaid interest thereon) of the ABL Loan Account on the earlier of demand by Bank or March 29, 2002 ("ABL Maturity Date"). -2- (b) Limitation on Advance of any ABL Loans. Notwithstanding any of the provisions contained in Section 1.02 (a) hereof, prior to any advance of an ABL Loan, a representative of Bank shall have conducted an audit of Borrower's books and records relating to the Accounts and Inventory and any other Collateral for the ABL Loans and made extracts therefrom, and arranged for verification of the Accounts, directly with the account debtors or otherwise, and of the Inventory all with results satisfactory to Bank, the cost of such audit shall be at Borrower's sole expense. Based on Bank's review of such audit, and prior to the advance of an ABL Loan in accordance with the terms hereof, Bank may adjust the Borrowing Base percentage, in its sole and reasonable discretion, as provided for under Section 4.15 hereof. (c) Loan Ledger Account; Use of Proceeds. The amount of each ABL Loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank for the ABL Loans (herein called the "ABL Loan Account") and Bank shall credit the ABL Loan Account with all loan repayments in respect thereof made by Borrower. ABL Loans may only be used for supporting growth in working capital and the issuance of letters of credit. (d) ABL Loans Interest. Borrower further promises to pay to Bank from the date of the advance of the initial ABL Loan through the ABL Maturity Date, on or before the first (1st) day of each month, interest on the unpaid balance of the ABL Loan Account at a rate of interest equal to the Prime Rate, which shall vary concurrently with any change in such Prime Rate, plus the Applicable Margin. The Applicable Margin means the margin set forth in the table in Section 1.07. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the ABL Loans are outstanding divided by 360, which shall for interest computation purposes be considered one (1) year. (e) Certain Definitions. As used herein the following terms shall have the following meanings: "Accounts" means any right to payment for goods sold or leased, or rented, or to be sold or to be leased, or to be rented, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. "Collateral" means any and all property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. "Eligible Accounts" Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. "Eligible Accounts" shall also NOT include any of the following: (1) All Accounts under which payment is not received within ninety (90) days from any invoice date; -3- (2) All Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account; (3) Any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. (4) Account balances over ninety (90) days from invoice date . (5) Credit balances. (6) Accounts due from a debtor if twenty five (25%) or more of the aggregate amount of accounts of such debtor have at that time remained unpaid for more than ninety (90) days from invoice date. (7) For accounts representing more than ten (10%) of Borrower"s total accounts receivable, the balance in excess of (10%) is not eligible. However, the Bank may deem, in its sole discretion, the entire amount, or any portion thereof, ineligible. (8) Accounts with respect to international transactions unless insured by an insurance company acceptable to the Bank or covered by letters of credit issued or confirmed by a bank acceptable to the Bank. Bank, in its sole discretion, may deem as eligible amounts due from major, publicly owned foreign companies. Amounts due from Merial SAS shall be included in Eligible Accounts, unless Borrower is notified by Bank that the balance or any portions is ineligible. (9) Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. (10) Accounts where the account debtor is a seller to Borrower, whereby a potential offset (contra) exists. (11) Consignment or guaranteed sales. (12) Contract receivables; bill and hold accounts. (13) Collection accounts. (14) C.O.D. accounts. (15) Salesmen"s accounts for promotional purposes. (16) All United States Government receivables, unless formally assigned to the Bank. (17) Accounts representing billings for service or maintenance contracts or for inventory or equipment on rent to the account debtor. (18) Any open account requiring future performance or for which there may be any offsetting claims or return privileges (Deferred revenues). (19) Accounts invoiced for goods or merchandise not shipped to or services not rendered for the account debtor (Pre-billings). "Inventory" means all of the Borrower"s goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower"s business, and shall include all property rights, patents, copyrights, trademarks, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. "Eligible Inventory" means Inventory eligible for advances hereunder and shall be that Inventory deemed acceptable by Bank, and shall NOT include the following: (1) Supplies (e.g. packaging). (2) Raw materials / purchased parts raw materials not in saleable form. (3) Work in process. (4) Inventory consigned to sales representatives. (5) Obsolete inventory. (6) Inventory reserve amounts. (7) Finished goods with no/low liquidation value. (8) Inventory in private warehouses (unless proper UCC-1 filing and a warehouse bailment agreement are in place). (9) Defective or inventory under repair. (10) Inventory not insured naming Bank as Loss Payee. (11) All other Inventory deemed ineligible by Bank. (f) Requests for ABL Loans. Requests for ABL Loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting -5- forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of Loan being requested. (g) Letter of Credit Usage and Sublimit. Subject to availability under the Borrowing Base, at any time and from time to time from the date hereof through the banking day immediately prior to the ABL Maturity Date, Bank shall issue for the account of Borrower such standby and commercial letters of credit ("Letters of Credit") as Borrower may request, which requests shall be made by delivering to Bank a duly executed letter of credit application on Bank's standard form; provided, however, that the outstanding and undrawn amounts under -------- ------- all such Letters of Credit (i) shall not at any time exceed One Million Dollars ($1,000,000) ("Letter of Credit Sublimit") and (ii) shall be deemed to constitute ABL Loans for the purpose of calculating availability under the Borrowing Base. Unless agreed to in writing by Bank, no Letter of Credit shall have an expiration date that is later than the ABL Maturity Date. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form application and letter of credit agreement and other agreements required by Bank. Borrower will pay all usual issuance and other fees that Bank notifies Borrower it will be charged for issuing and processing Letters of Credit for Borrower. (h) Late Charge. If any installment payment, interest payment, principal payment or principal balance due under the ABL Loans is delinquent ten (10) or more days, Borrower agrees to pay Bank a late charge in the amount of five percent (5%) of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept any past due payment or less than the total unpaid principal balance after maturity. All payments, at Bank"s sole discretion, shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. (i) Default Rate. If an Event of Default occurs hereunder, then during the continuance thereof at the Bank's option, the interest rate shall be five percent (5%) per year in excess of the rate otherwise applicable. 1.3 New Section 1.07 Applicable Margin. A new Section 1.07 of the Credit ---------------------------------- Agreement is inserted as follows: 1.07 Applicable Margin. The Applicable Prime Rate Margin (as set forth below) will be determined by the Bank after review of the Funded Senior Debt to EBITDA of the Borrower as follows: Senior Funded Debt to EBITDA Interest Rate ---------------------------- ------------- Level III: Greater than or equal to 4.0x P+ 2.50% Level II: 3.0x but less than 4.0x P+ 2.00% Level I: Less than 3.0x P+ 1.50% The Bank will determine the Applicable Prime Rate Margin for each fiscal quarter on the forty-fifth (45th) day following the last day of the immediately preceding fiscal quarter by reference to the Compliance Certificate delivered to Bank by the Borrower pursuant to -6- Section 4.05 (d) of the Agreement, beginning with the quarter ending December 31, 2000. The Senior Debt to EBITDA Ratio for the immediately preceding quarter must meet the above-referenced thresholds for any decrease in the Applicable Prime Rate Margin to occur. The initial Applicable Prime Rate Margin will be 2.50%. 1.4 Amendment of Section 4.06 Working Capital. Section 4.06 of the Credit ----------------------------------------- Agreement is hereby amended and restated in its entirety as follows: 4.06 Working Capital. Maintain at all times working capital, meaning current assets (excluding all amounts due from stockholders, officers and affiliates) minus total current liabilities (including all amounts due to stockholders, officers and affiliates; and One Million Two Hundred Thousand Dollars ($1,200,000) representing (twelve) 12 months of scheduled principal payments due pursuant to Section 1.01(a)) of not less than Five Million Dollars ($5,000,000). 1.5 Amendment of Section 4.07 Tangible Net Worth. Section 4.07 of the Credit -------------------------------------------- Agreement is hereby amended and restated in its entirety as follows: 4.07 Tangible Net Worth. Maintain at all times a consolidated Tangible Net Worth (defined as stockholder's equity less any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, and any amounts due from stockholders, officers and affiliates) plus Subordinated Debt, meaning debt subordinated to the obligations of Borrower to Bank, in form and substance satisfactory to Bank, of not less than Five Million Dollars ($5,000,000), calculated in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower. The calculation of Tangible Net Worth shall exclude non-cash cumulative translation adjustments related to foreign currency exchange rates. 1.6 Amendment of Section 4.08 Fixed Charge Coverage Ratio. Section 4.08 of the ----------------------------------------------------- Credit Agreement is hereby amended and restated in its entirety as follows: 4.08 Fixed Charge Coverage Ratio. Maintain at all times on a consolidated basis a Fixed Charge Coverage Ratio of not less than 0.50 to 1.0 as of September 30, 2000; of not less than 0.65 to 1.0 as of December 31, 2000; of not less than 1.0 to 1.0 as of March 31, 2001; of not less than 1.15 to 1.0 as of June 30, 2001; and of not less than 1.50 to 1.0 beginning with September 30, 2001 through maturity. Fixed Charge Coverage Ratio is defined as the ratio of EBITDA divided by the sum of (a) One Million Two Hundred Thousand Dollars ($1,200,000) of Term Debt provided for in Section 1.01 herein, plus (b) capital lease expense, (c) plus interest expense, (d) plus cash state and federal income taxes actually paid. EBITDA shall mean the sum of (a) net income after taxes, plus (b) interest expense, plus (c) consolidated income tax expense, plus (d) depreciation and amortization expense. EBITDA shall exclude non-cash cumulative translation adjustments related to foreign currency exchange rates -7- 1.7 Amendment of Section 4.09 Funded Senior Debt to EBITDA. Section 4.08 of -------------------------------------------------------- the Credit Agreement is hereby amended and restated in its entirety as follows: 4.09 Funded Senior Debt to EBITDA. Maintain at all times on a consolidated basis a ratio of Funded Senior Debt to EBITDA of not more than 6.75 to 1.0 as of September 30, 2000; of not more than 5.0 to 1.0 as of December 31, 2000; of not more than 3.75 to 1.0 as of March 31, 2001; of not more than 3.0 to 1.0 as of June 30, 2001; and of not more than 2.5 to 1.0 beginning with September 30, 2001 through maturity. Funded Senior Debt shall mean all liabilities of whatever nature or duration consisting of indebtedness for borrowed money or indebtedness (including obligations under capital leases but excluding debt subordinated to the obligations of Borrower to Bank) incurred to finance the purchase of any asset (including letter of credit obligations). For purposes of determining the Funded Senior Debt to EBITDA Ratio and the Fixed Charge Coverage Ratio, EBITDA shall be calculated as set forth in the table below opposite the applicable Test Date: Test Date EBITDA Calculation --------- ------------------ 9/30/00 EBITDA for the prior two fiscal quarters ended on the test date multiplied by 2. 12/31/00 EBITDA for the prior three fiscal quarters ended on the test date multiplied by 4 then divided by 3. 3/31/00 EBITDA for the prior three fiscal quarters ended on the test date divided by 3 then multiplied by 4. 3/31/01 and EBITDA for the prior four fiscal each quarter quarters ended on the test date thereafter 1.8 New Section 4.05 (h) Accounts Receivable and Accounts Payable Agings; -------------------------------------------------------------------- Inventory Activity. A new Section 4.05 (h) of the Credit Agreement is inserted as follows: (h) Accounts Receivable And Accounts Payable Agings; Inventory Activity. Within fifteen (15) days from each month-end, deliver to Bank a detailed accounts receivable aging reconciled to the general ledger of Borrower; a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent; and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in a form and with such detail as Bank may request from time to time. -8- 1.9 New Section 4.05 (i) Transaction Reports. A new Section 4.05 (i) of ---------------------------------------- the Credit Agreement is inserted as follows: (i) Transaction Reports. Deliver to Bank monthly transaction reports, together with payments in kind, including Collateral activity and appropriate loan activity, certified by an authorized signer of Borrower. The monthly reports delivered to Bank include the following Bank forms: AC-1 Accounts Receivable And Inventory Transaction Report and AC-11 Computation of Ineligible Accounts Receivable. 1.10 New Section 4.05 (j) List of Customers. A new Section 4.05 (j) of the -------------------------------------- Credit Agreement is inserted as follows: (j) List of Customers. On a quarterly basis or more frequently if requested by Bank, provide Bank with an alphabetized list of customers including addresses. 1.11 New Section 4.15 Audits. A new Section 4.15 of the Credit Agreement is ----------------------- inserted as follows: 4.15 Audits. Permit representatives of Bank to conduct audits of Borrower's books and records relating to the Accounts, Inventory and other Collateral and make extracts therefrom, with results satisfactory to Bank, provided that Bank shall use its best efforts to not interfere with the conduct of Borrower's business, and to the extent possible to arrange for verification of the Accounts directly with the account debtors obligated thereon or otherwise, all under reasonable procedures acceptable to Bank and at Borrower's sole expense; provided further that, prior to an Event of Default, Borrower shall not be responsible for the expense of more than two (2) such audits, in any fiscal year. Notwithstanding any of the provisions contained in Section 1.02 hereof, Borrower hereby acknowledges and agrees that upon completion of any such audit Bank shall have the right to adjust the Borrowing Base percentage, in its sole and reasonable discretion, based on its review of the results of such collateral audit. 1.12 New Section 4.16 Asset Sales. A new Section 4.16 of the Credit Agreement ---------------------------- is inserted as follows: 4.16 Asset Sales. Borrower shall pay to Bank, on the first Business Day following Borrower's receipt thereof, one hundred percent (100%) of the net cash proceeds derived from each and all of its asset sales occurring outside of the ordinary course of business; provided, however, in accordance with Section 5.05, Borrower shall not conduct or consummate any asset sales unless and until the prior written consent of Bank has been obtained. Bank shall apply such net cash proceeds FIRST toward the remaining scheduled principal reduction payments on the Term Loans required by Section 1.01(a) in inverse order of their maturity, and SECOND toward outstanding ABL Loans; provided, that upon the occurrence and during the continuance of an Event of Default, Agent shall apply such net cash proceeds against the obligations outstanding under Sections 1.01 and 1.02 on a pro rata basis. -9- 1.13 New Section 4.17 Covenants Relating to Collateral. A new Section 4.17 ------------------------------------------------- of the Credit Agreement is inserted as follows: 4.17 Covenants Relating to Collateral. In addition to any covenants in any Loan Document relating to any Collateral the Borrower agrees: (a) To execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. (b) Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to Section 4.17 (e), Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower"s Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank"s option may be charged to Borrower"s general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. (c) That until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to Section 4.17 (e), Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall, within 10 days of the end of each month notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower"s Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. (d) To promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the -10- Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto (e) That Bank may at any time upon the occurrence and continuance of an Event of Default hereunder, , without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. (f) To do all acts necessary to maintain, preserve, and protect the Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof. (g) In the event any unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding Loans to which the Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank for credit to Borrower"s Loan Account the amount of such excess. 1.14 New Section 6.12 Warrant Agreement. A new Section 6.12 of the Credit ---------------------------------- Agreement is inserted as follows: 6.12 Warrant Agreement. Failure of Borrower to execute documents granting Bank warrants to purchase up to 250,000 shares of Borrower's common stock at an exercise price of $2.00 per share on or before December 8, 2000. Warrants will be issued using Bank's standard form documentation, which shall include, without limitation, a net exercise provision, anti- dilution protection, piggy-back registration rights, and a seven year maturity. ARTICLE 2 - CONDITIONS ---------------------- 2.1 Conditions Precedent. This Amendment shall be effective upon -------------------- satisfaction of all of the following conditions precedent, as determined by the Bank in its sole discretion: (a) the Bank shall have received the following documents, duly executed and delivered by each of the parties specified therein: (i) this Amendment; (ii) a new promissory note reflecting the revised Term Loan amount set forth in Section 1.01 of the Credit Agreement; UCC-1 financing statements for the state of New York and each other jurisdiction that Bank shall reasonably require; (b) the Borrower shall have paid the Bank an amendment fee of Thirty Five Thousand Dollars ($35,000) and a documentation fee of Three Hundred Dollars ($300); and -11- (c) the Borrower shall have delivered to the Bank such other documents and taken such actions as the Bank may request to evidence and effectuate the transactions evidenced hereby. ARTICLE 3 - REPRESENTATIONS AND WARRANTIES ------------------------------------------ 3.1 Borrower's Representations and Warranties. In order to induce the Bank ----------------------------------------- to enter into this Amendment, the Borrower represents and warrants to the Bank that: (a) this Amendment and all other agreements and instruments executed or delivered to be executed or delivered in connection herewith constitute the valid, binding and enforceable obligations of the Borrower. (b) the Borrower's representations and warranties contained in the Credit Agreement are true and correct in all respects on and as of the date hereof as though made on and as of the date hereof and that except as expressly disclosed by the Borrower to the Bank in writing, no Event of Default has occurred and is continuing as of the date hereof. 3.2 Acknowledgment of Borrower. The Borrower expressly acknowledges and agrees -------------------------- that as of the date of this Amendment, it has no offsets, claims or defenses whatsoever against any of the indebtedness owing by the Borrower to the Bank under the Credit Agreement. ARTICLE 4 - GENERAL PROVISIONS ------------------------------ 4.1 Full Force and Effect. The Credit Agreement, as amended hereby, shall be --------------------- and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Credit Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Credit Agreement. 4.2. Counterparts. This Amendment may be executed in any number of ------------ counterparts, each of which when so executed and delivered shall be deemed to be an original and that all of which taken together shall constitute one and the same instrument, respectively. Delivery of an executed counterpart of this Amendment by facsimile shall be equally effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart by facsimile shall also deliver a manually executed counterpart of this Amendment, but failure to do so shall not effect the validity, enforceability, of binding effect of this Amendment. -12- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first above written. "BANK" "BORROWER" Imperial Bank Synbiotics Corporation By: /s/ Jamie Harney By: /s/ Michael K. Green ---------------- -------------------- Jamie Harney Michael K. Green, VP-Finance/CFO Vice President -13- EX-10.75 3 0003.txt WARRANT TO PURCHASE STOCK Exhibit 10.75 ------------- THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Synbiotics Corporation, a California Corporation Number of Shares: 250,000 Class of Stock: Common Initial Exercise Price: $2.00 per share Issue Date: December 1, 2000 Expiration Date: November 30, 2007 (Subject to Article 4.1) THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and for other good and valuable consideration, IMPERIAL BANK or its assignee ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this warrant, subject to the provisions and upon the terms and conditions set forth in this warrant. ARTICLE 1. EXERCISE. -------- 1.1 Method of Exercise. Holder may exercise this warrant by delivering ------------------ this warrant and a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this warrant as specified ---------------- in Section 1.1, Holder may from time to time convert this warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.3.4 1.3 Fair Market Value. If the Shares are traded regularly in a public ----------------- market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company"s stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder --------------------------------------- exercises or converts this warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this warrant has not been fully exercised or converted and has not expired, a new warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this warrant, the Company at its expense shall execute and deliver, in lieu of this warrant, a new warrant of like tenor. 1.6 Repurchase on Sale, Merger, or Consolidation of the Company. ----------------------------------------------------------- 1.6.1 "Acquisition." For the purpose of this warrant, -------------- "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company"s securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 Assumption of Warrant. If upon the closing of any --------------------- Acquisition the successor entity assumes the obligations of this warrant, then this warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The warrant Price shall be adjusted accordingly. The Company shall use reasonable efforts to cause the surviving corporation to assume the obligations of this warrant. 1.6.3 Nonassumption. If upon the closing of any Acquisition the ------------- successor entity does not assume the obligations of this warrant (or if the form of the Acquisition is a reverse triangular merger) and Holder has not otherwise exercised this warrant in full, then this warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the Acquisition on the same terms as other holders of the same class of securities of the Company. ARTICLE 2. ADJUSTMENTS TO THE SHARES. ------------------------- 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a ---------------------------- dividend on its common stock payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any ------------------------------------------ reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this warrant, Holder shall be entitled to receive, upon exercise or conversion of this warrant, the number and kind of securities and property that Holder would have received for the Shares if this warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company"s Articles of Incorporation upon the closing of a registered public offering of the Company"s common stock. The Company or its successor shall promptly issue to -2- Holder a new warrant for such new securities or other property. The new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are --------------------------------- combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the ---------------------------------- number of Shares issuable upon exercise of this warrant shall be subject to adjustment, from time to time, in the manner set forth on Exhibit A, if --------- attached, in the event of Diluting Issuances (as defined on Exhibit A). --------- 2.5 No Impairment. The Company shall not, by amendment of its Articles ------------- of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder"s rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder"s rights under this warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this warrant is unchanged. 2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant ----------------------------- Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. -------------------------------------------- 3.1 Representations and Warranties. The Company hereby represents and ------------------------------ warrants to the Holder as follows: (a) All Shares which may be issued upon the exercise of the purchase right represented by this warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (b) The Company's capitalization table attached to this warrant is true and complete as of the Issue Date. 3.2 Notice of Certain Events. If the Company proposes at any time (a) ------------------------ to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; or (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or -3- wind up, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above; and (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event). 3.3 Information Rights. So long as the Holder holds this warrant ------------------ and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all communiques to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company"s quarterly, unaudited financial statements. ARTICLE 4. MISCELLANEOUS. ------------- 4.1 Term: Notice of Expiration. This warrant is exercisable in whole -------------------------- or in part, at any time and from time to time on or before the Expiration Date set forth above; provided, however, that if the Company completes its initial public offering within the three-year period immediately prior to the Expiration Date, the Expiration Date shall automatically be extended until the third anniversary of the effective date of the Company's initial public offering. If this warrant has not been exercised prior to the Expiration Date, this warrant shall be deemed to have been automatically exercised on the Expiration Date by "cashless" conversion pursuant to Section 1.2. 4.2 Legends. This warrant and the Shares (and the securities issuable, ------- directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This warrant and the ------------------------------------------- Shares issuable upon exercise of this warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder"s notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.3, ------------------ Holder may transfer all or part of this warrant or the Shares issuable upon exercise of this warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the warrant being transferred setting forth the name, address and taxpayer identification number of the -4- transferee and surrendering this warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable); provided, however, that Holder may -------- ------- transfer all or part of this warrant to its affiliates, including, without limitation, Imperial Bancorp, at any time without notice to the Company, and such affiliate shall then be entitled to all the rights of Holder under this warrant and any related agreements, and the Company shall cooperate fully in ensuring that any stock issued upon exercise of this warrant is issued in the name of the affiliate that exercises the warrant. The terms and conditions of this warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective permitted successors and assigns. Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to ------- the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time. All notices to the Holder shall be addressed as follows: Until changed in accordance with the foregoing, notices shall be sent to the following addresses: If to the Company: Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127 Attention: Mr. Michael Green Chief Financial Officer with a copy to: Brobeck, Phelger & Harrison 12390 El Camino Real San Diego, CA 92130 Attention: Hayden J. Trubitt If to the Holder: Imperial Bank Attention: Controllers Department 9920 S. La Cienega Blvd., 14/th/ Floor Inglewood, CA 90301 with a copy to: Imperial Bank 9920 South La Cienega Blvd. Inglewood, CA 90301 Attention: Legal Department FAX: (310) 417-5695 4.6 Waiver. This warrant and any term hereof may be changed, waived, ------ discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. -5- 4.7 Attorneys" Fees. In the event of any dispute between the parties --------------- concerning the terms and provisions of this warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys" fees. 4.8 Governing Law. This warrant shall be governed by and construed in ------------- accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. SYNBIOTICS CORPORATION By: /s/ Michael K. Green -------------------- Name: Michael K. Green Title: VP Finance By: /s/ Kenneth M. Cohen -------------------- Name: Kenneth M. Cohen Title: President & CEO Authorized signatories under Corporate Resolutions to Borrow or an authorized signer(s) under a resolution covering warrants must sign the warrant. -6- APPENDIX 1 NOTICE OF EXERCISE ------------------ 1. The undersigned hereby elects to purchase ______________ shares of the ______________ stock of Synbiotics Corporation pursuant to the terms of the attached warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached warrant into shares in the manner specified in the warrant. This conversion is exercised with respect to ______________ of the shares covered by the warrant. 2. Please issue a certificate or certificates representing said shares in the name of Imperial Bancorp and send such certificates to: Imperial Bank Attn: Controllers Department P.O. Box 92991 Los Angeles, CA 90009 Or Registered Assignee 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. IMPERIAL BANCORP or Registered Assignee _____________________________ Name: Title: _____________________________ (Date) -7- EX-21 4 0004.txt LIST OF SUBSIDIARIES EXHIBIT 21 ---------- LIST OF SUBSIDIARIES -------------------- Synbiotics Europe SAS Incorporated under the laws of France EX-23 5 0005.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No.'s 333-42763, 333-35552,333-63341, 333-90465 and 333- 90493) and in the Registration Statements on Form S-8 (No.'s 33-24444, 33-55992, 33-85908, 33-61103, 333-18363, 333-42723 and 333-90471) of Synbiotics Corporation of our report dated March 23, 2001 relating to the financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP San Diego, California March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----