-----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, Srs/2eyzoppMmsP6LBFNfekw2GOHeq8WNv20D9AC78FJCiKAlDibDBoOilrgOBN+ 1CE5OW6qTRhiarbI2BkJ7w== 0001017062-97-001527.txt : 19970815 0001017062-97-001527.hdr.sgml : 19970815 ACCESSION NUMBER: 0001017062-97-001527 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11303 FILM NUMBER: 97660002 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10QSB 1 QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 1997 =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11303 SYNBIOTICS CORPORATION (Exact name of small business issuer as specified in its charter) California 95-3737816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11011 Via Frontera San Diego, California 92127 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (619) 451-3771 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of July 31, 1997, 8,153,590 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format: Yes [_] No [X] =============================================================================== SYNBIOTICS CORPORATION INDEX
Page ---- Part I. Condensed Statement of Operations - Three and six months ended June 30, 1997 and 1996 3 Condensed Balance Sheet - June 30, 1997 and December 31, 1996 4 Condensed Statement of Cash Flows - Six months ended June 30, 1997 and 1996 5 Notes to Condensed Financial Statements 6 Management's Discussion and Analysis or Plan of Operation 8 Part II. Other Information 14
-2- PART 1. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements -------------------- Synbiotics Corporation Condensed Staement of Operations (unaudited) - -------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Product sales $ 4,840,000 $ 5,101,000 $11,781,000 $10,851,000 License fees and other 76,000 59,000 154,000 230,000 Interest 47,000 44,000 106,000 54,000 ----------- ----------- ----------- ----------- 4,963,000 5,204,000 12,041,000 11,135,000 ----------- ----------- ----------- ----------- Cost and expenses: Cost of sales 2,877,000 2,556,000 6,259,000 5,334,000 Research and development 306,000 244,000 613,000 461,000 Selling and marketing 1,025,000 1,130,000 2,324,000 2,358,000 General and administrative 700,000 469,000 1,364,000 854,000 ----------- ---------- ----------- ---------- 4,908,000 4,399,000 10,560,000 9,007,000 ----------- ---------- ----------- ---------- Income before gain on sale of securities available for sale 55,000 805,000 1,481,000 2,128,000 Gain on sale of securities available for sale 774,000 1,159,000 ----------- ---------- ----------- ----------- Income before income taxes 55,000 1,579,000 1,481,000 3,287,000 Provision for income taxes 41,000 60,000 637,000 118,000 ----------- ---------- ----------- ----------- Net income $ 14,000 $1,519,000 $ 844,000 $ 3,169,000 =========== ========== =========== =========== Net income per share $ .00 $ .25 $ .11 $ .53 =========== ========== =========== =========== Weighted average shares outstanding 7,505,000 6,028,000 7,499,000 5,968,000 =========== ========== =========== ===========
Net income per share was computed based upon the weighted average number of shares outstanding, including common stock equivalents. See accompanying notes to condensed financial statements. -3- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Balance Sheet - ------------------------------------------------------------------------------
June 30, December 31, 1997 1996 ------------ ------------- (unaudited) (audited) Assets Current assets: Cash and equivalents $ 3,652,000 $ 3,050,000 Securities available for sale 2,181,000 2,872,000 Accounts receivable 3,123,000 1,363,000 Inventories 4,212,000 5,213,000 Deferred tax assets 421,000 1,045,000 Other current assets 825,000 1,353,000 ----------- ----------- Total current assets 14,414,000 14,896,000 Property and equipment, net 641,000 656,000 Goodwill 5,358,000 5,347,000 Deferred tax assets 6,142,000 6,113,000 Other assets 1,592,000 1,555,000 ----------- ----------- $28,147,000 $28,567,000 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 1,761,000 $ 2,241,000 Other current liabilities 650,000 ----------- ----------- Total current liabilities 1,761,000 2,891,000 ----------- ----------- Shareholders' equity: Common stock, no par value, 24,800,000 shares authorized, 7,395,000 and 7,392,000 shares issued and outstanding at June 30, 1997 and December 31, 1996 35,432,000 35,566,000 Accumulated deficit (9,046,000) (9,890,000) ----------- ----------- Total shareholders' equity 26,386,000 25,676,000 ----------- ----------- $28,147,000 $28,567,000 =========== ===========
See accompanying notes to condensed financial statements. -4- Item 1. Financial Statements (conticued) -------------------- Synbiotics Corporation Condensed Statement of Cash Flows (unaudited) - -------------------------------------------------------------------------------
Six Months Ended June 30, ------- 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 844,000 $ 3,169,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 527,000 417,000 Gain on sale of securities available for sale (1,159,000) Changes in assets and liabilities: Accounts receivable (1,760,000) (694,000) Inventories 1,001,000 (1,385,000) Deferred taxes 595,000 Other assets 64,000 Accounts payable and accrued expenses (480,000) (23,000) Other liabilities (650,000) (26,000) ----------- ----------- Net cash provided by operating activities 141,000 299,000 ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (96,000) (37,000) Investment in securities available for sale (3,087,000) Proceeds from sale of securities available for sale 691,000 4,727,000 ----------- ----------- Net cash provided by investing activities 595,000 1,603,000 ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock, net (134,000) 51,000 ----------- ----------- Net cash (used for) provided by financing activities (134,000) 51,000 ----------- ----------- Net increase in cash and equivalents 602,000 1,953,000 Cash and equivalents - beginning of year 3,050,000 1,017,000 ----------- ----------- Cash and equivalents - end of period $ 3,652,000 $ 2,970,000 =========== ===========
See accompanying notes to condensed financial statements. -5- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Notes to Condensed Financial Statements (unaudited) - ------------------------------------------------------------------------------ Note 1 - Interim Financial Statements:Note 1 - Interim Financial Statements: The accompanying balance sheet as of June 30, 1997 and the statements of operations and of cash flows for the six month periods ended June 30, 1997 and 1996 have been prepared by Synbiotics Corporation (the "Company") and have not been audited. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB filed for the year ended December 31, 1996. Interim operating results are not necessarily indicative of operating results for the full year. Note 2 - Securities Available for Sale: Included in current assets are securities available for sale which consist primarily of short-term commercial paper. Note 3 - Inventories: Inventories consist of the following:
June 30, December 31, 1997 1996 ---------- ------------ Raw materials $2,533,000 $1,970,000 Work in process 7,000 8,000 Finished goods 1,672,000 3,235,000 ---------- ------------ $4,212,000 $5,213,000 ========== ============
Note 4 - Earnings per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128, which applies to entities with publicly held common stock or potential common stock, establishes standards for computing and presenting earnings per share ("EPS"), simplifies the standards for computing EPS previously found in Accounting Principles Board ("APB") Opinion No. 15 and -6- Item 1.Financial Statements (continued) -------------------- SYNBIOTICS CORPORATION Notes to Condensed Financial Statements (unaudited) - ------------------------------------------------------------------------------- makes EPS comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB 15. The following are unaudited pro forma EPS for the three and six month periods ended June 30, 1997 and 1996 assuming that SFAS 128 were in effect as of January 1, 1996:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 ------------- ------------ ---------- ---------- (unaudited) (unaudited) (unaudited) (unaudited) As reported: Primary EPS $ .00 $ .25 $ .11 $ .53 =========== =========== ========== ========== Pro forma: Basic and diluted EPS $ .00 $ .25 $ .11 $ .53 =========== =========== ========== ==========
-7- Item 2. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- The information contained in this Management's Discussion and Analysis or Plan of Operation contains both historical financial information and forward-looking statements. Synbiotics does not provide forecasts of future financial performance. While management is optimistic about the Company's long-term prospects, the historical financial information may not be indicative of future financial performance. In fact, future financial performance may be materially different than the historical financial information presented herein. Moreover, the forward-looking statements about future business or future results of operations are subject to significant uncertainties and risks, which could cause actual future results to differ materially from what is suggested by the forward-looking information. The following risk factors should be considered in evaluating the Company's future financial performance: No Assurance that Acquired Businesses Can Be Successfully Combined - ------------------------------------------------------------------ There can be no assurance that the anticipated benefits of the acquisition of the veterinary diagnostics business of Rhone Merieux S.A.S. (completed in July 1997), the 1996 acquisition of the business of International Canine Genetics, Inc. ("ICG"), 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 Synbiotics has no or limited direct prior experience. In addition, there can be no assurance that the acquisitions will not have a material adverse effect upon Synbiotics' business, results of operations or financial condition, 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 Synbiotics. Competition - ----------- Competition in the animal health care industry is intense. Many competitors, such as Pfizer Animal Health, Merial Limited (formerly known as Rhone Merieux) and IDEXX Laboratories, have substantially greater financial, manufacturing, marketing and product research resources than the Company. 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 is based on test sensitivity, accuracy and speed; product price; and similar factors. IDEXX Laboratories requires its distributors not to carry the products of competitors such as Synbiotics. There can be no assurance that such competition will not adversely affect Synbiotics' results of operations or ability to maintain or increase sales and market share. History of Operating Losses; Accumulated Deficit - ------------------------------------------------ Although the Company's operations were profitable in the three and six month periods ended June 30, 1997 and 1996 and for the year ended December 31, 1996, the Company has had a history of losses. Synbiotics has incurred an accumulated deficit of $9,046,000 at June 30, 1997, even after the release in 1996 of a $7,158,000 valuation allowance related to deferred tax assets. There can be no assurance that Synbiotics can generate sufficient revenue to sustain profitability. -8- Reliance on Third Party Manufacturers - ------------------------------------- Certain of Synbiotics' products (including its ICT Gold (TM) diagnostic kits and all of its vaccines) are, and certain anticipated new products are expected to be, manufactured by third parties under the terms of distribution and/or manufacturing agreements. The ICT Gold (TM) products and feline leukemia virus vaccine are licensed to Synbiotics by their respective outside manufacturers. In the event that these third parties are unable (due to operational, licensing, financial or other reasons) to supply Synbiotics with sufficient finished products, Synbiotics would suffer significant disruption of its business. Synbiotics has the right, under certain circumstances, pursuant to the agreements to use alternate manufacturing sources. In some circumstances, however, the Company would lack such a right. If Synbiotics should encounter delays or difficulties in its relationships with manufacturers, the resulting problems could have a material adverse effect on Synbiotics. Sales and Marketing - ------------------- The Company's product distribution strategy results in a large percentage of sales being to only a few customers. During the year ended December 31, 1996, sales to two distributors totalled 37% of the Company's gross revenues. There can be no assurance that Synbiotics will be able to establish an adequate sales and marketing capability in any or all targeted markets or that it will be successful in gaining market acceptance of its products. To the extent Synbiotics enters into distributor arrangements, any revenues received by Synbiotics will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. IDEXX Laboratories' requirement that its distributors not carry the products of competitors such as Synbiotics has induced certain distributors to stop doing business with Synbiotics in order to carry IDEXX products instead. In addition, Synbiotics' sales of products, on a private-label basis, toward the over-the-counter market may cause an adverse reaction among Synbiotics' regular distributor and veterinarian customers. Attraction of Key Employees - --------------------------- The success of Synbiotics is highly dependent, in part, on its ability to retain highly qualified personnel, including senior management and scientific personnel. Competition for such personnel is intense and the inability to retain additional key employees or the loss of one or more current key employees could adversely affect Synbiotics. Although Synbiotics has been successful in retaining required personnel to date, there can be no assurance that Synbiotics will be successful in the future. Reliance on New and Recent Products - ----------------------------------- Synbiotics relies on new and recently developed products. There can be no assurance that Synbiotics will obtain and maintain market acceptance of its products. With respect to future products, there can be no assurance that such 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 Synbiotics were unable to produce internally, or to contract for, a sufficient supply of its new products on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the introduction of new products would be delayed, which could have a material adverse effect on Synbiotics. -9- Future Capital Needs; Uncertainty of Additional Funding - ------------------------------------------------------- The development and commercialization of Synbiotics' products requires substantial funds. Synbiotics' future capital requirements will depend on many factors, including cash flow from operations, the need to finance further acquisitions, if any, continued scientific progress in its products and development programs, the cost of manufacturing scale-up, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, and the cost of establishing effective sales and marketing arrangements. Synbiotics anticipates that its existing, available cash, cash equivalents and short-term investments will be adequate to satisfy its current capital requirements and fund its current operations, although any large acquisition would require additional capital resources. There can be no assurance that additional financing, if required, will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to then existing shareholders may result. Debt financing would result in increased leverage and risk. In July 1997 the Company obtained $15,000,000 of debt financing from Banque Paribas, of which $11,493,000 was used in connection with the acquisition of Rhone Merieux S.A.S.'s veterinary diagnostics business. The $15,000,000 included a $5,000,000 revolving line of credit. However, draws on the line of credit are subject to certain requirements and can be used only for certain purposes. If adequate funds are not available, Synbiotics may be required to delay, scale back or eliminate one or more of its research and development programs or seek to obtain funds through arrangements with collaborative partners or others even if the arrangements would require Synbiotics to relinquish certain rights to certain of its technologies, product candidates or products that Synbiotics would not otherwise relinquish. Seasonality - ----------- Synbiotics has experienced some seasonality in its business, with sales highest in December to April, the time period in which distributors purchase canine heartworm diagnostic products to sell to veterinarians for the heartworm season. There can be no assurance that such seasonality will not have a material adverse impact on Synbiotics' operations. Patents and Proprietary Technology - ---------------------------------- Synbiotics generally has sought and will continue to seek to protect its interests by treating its particular variations in the production of monoclonal antibodies as trade secrets. Synbiotics also has pursued and intends to continue aggressively to pursue protection for new products, new methodological concepts, and compositions of matter through the use of patents and trademarks where obtainable. At present, Synbiotics has been granted eleven U.S. patents. There can be no assurance that Synbiotics will be issued any additional patents or that, if any patents are issued, they will provide Synbiotics with significant protection or will not be challenged. Even if such patents are enforceable, Synbiotics anticipates that any attempt to enforce its patents would be time consuming and costly. Moreover, the laws of some foreign countries do not protect Synbiotics' proprietary rights in its products to the same extent as do the laws of the United States. The patent positions of biotechnology companies, including Synbiotics, are uncertain and involve complex legal and factual issues. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a consequence, there can be no assurance that any of Synbiotics' future patent applications will result in the issuance of patents or, if any patents issue, that they will provide significant proprietary protection or will not be circumvented or invalidated. Because patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, Synbiotics cannot be certain that it was the first inventor of inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Moreover, Synbiotics may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention that could result in substantial cost to Synbiotics, even if the eventual outcome is favorable to Synbiotics. There can be no assurance that Synbiotics' patents would be held valid by a court of competent jurisdiction. An adverse outcome of any patent litigation could subject Synbiotics to significant liabilities to third parties, require -10- disputed rights to be licensed from or to third parties or require Synbiotics to cease using the technology in dispute. A patentholder has asserted that the Company's key canine heartworm diagnostic tests infringe its patent. There can be no assurance that such patentholder or other third parties will not assert infringement claims against Synbiotics in the future or that any such assertions will not result in costly litigation or require Synbiotics to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to Synbiotics, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block Synbiotics' ability to further develop, or commercialize, its products in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could have a material adverse effect on Synbiotics. Finally, litigation, regardless of outcome, could result in substantial cost to, and a diversion of efforts by, Synbiotics. Government Regulation - --------------------- Synbiotics' business is subject to substantial regulation by the United States government. See "Business--Government Regulation" in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996, which is hereby incorporated by reference. In addition, Synbiotics' operations may be subject to future legislation and/or rules issued by domestic or foreign governmental agencies with regulatory authority relating to Synbiotics' business. There can be no assurance that Synbiotics will be found in compliance with any of the various regulations to which it is subject. For marketing outside the United States, Synbiotics will be subject to foreign regulatory requirements in such foreign jurisdictions, which vary widely from country to country and there can be no assurance that Synbiotics will meet and sustain any such requirements. Product Liability and Insurance - ------------------------------- The design, development and manufacture of Synbiotics' products involve an inherent risk of product liability claims and associated adverse publicity. Synbiotics has obtained liability insurance for potential product liability associated with the commercial sale of its products. There can be no assurance, however, that Synbiotics will be able to obtain or maintain such insurance. Although Synbiotics currently maintains general liability insurance, there can be no assurance that the coverage limits of Synbiotics' insurance policies will be adequate. Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. A successful claim brought against Synbiotics in excess of Synbiotics' insurance coverage would have a material adverse effect upon Synbiotics. Hazardous Materials - ------------------- Synbiotics' research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although Synbiotics believes that its safety procedures for handling and disposing of such 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. In the event of such an accident, Synbiotics could be held liable for any damages that result and any such liability could exceed the resources of Synbiotics. Synbiotics may incur substantial costs to comply with environmental regulations. Results of Operations Total revenue for the second quarter of 1997 decreased by $241,000 or 5% from the quarter ended June 30, 1996, and increased for the six months ended June 30, 1997 by $906,000 or 8% over the six months ended June 30, 1996. The decrease in the second quarter of 1997 is primarily due to a decrease in product sales of $261,000 or 5%, and -11- the increase during the six months ended June 30, 1997 is due primarily to an increase in product sales of $930,000 or 9%. The decrease in product sales during the second quarter of 1997 comprises a decrease in diagnostic sales of $558,000 or 16% offset by a $306,000 or 18% increase in the sales of vaccines. The decreased diagnostic sales were primarily due to a decrease in canine heartworm product sales of $954,000 or 38%. The Company's sales of its canine heartworm diagnostic products are seasonal, and sales tend to be concentrated in the December to April time period as distributors prepare for the heartworm season by purchasing diagnostic products for resale to veterinarians. The sales of the products are directly impacted by the timing of the Company's promotional programs, as well as those of the Company's competitors. It should be noted that, although the Company's canine heartworm diagnostic product sales during the second quarter of 1997 decreased 38% compared to the second quarter of 1996, such sales increased by 6% during the first quarter of 1997 compared to the first quarter of 1996. Additionally, sales of the products were also impacted by severe price competition from IDEXX Laboratories, the Company's main diagnostic competitor. In order to respond to the price competition, the Company's average selling prices of its canine heartworm diagnostic products decreased by 10% during the second quarter of 1997 compared to the second quarter of 1996. The decrease in canine heartworm diagnostic product sales was offset by $326,000 in sales of the canine breeding diagnostic products acquired from ICG in October 1996. Vaccine sales increased during the second quarter due to increased shipments of bulk feline leukemia vaccine (related to the timing of shipments as requested by OEM customers) and an increase in sales of vaccines to private label partners. The increase in product sales during the six months ended June 30, 1997 comprises an increase in diagnostic sales of $894,000 or 12% and an increase in vaccine sales of $106,000 or 3%. The increase in diagnostic sales was primarily due to $649,000 in sales of the canine breeding diagnostic products acquired from ICG in October 1996. While the sales of the Company's diagnostic products, excluding those acquired from ICG, increased 3% compared to the six months ended June 30, 1996, it should be noted that unit sales of the Company's canine heartworm diagnostic products increased 11%. However, operations were significantly impacted by the severe price competition noted above, which resulted in a 5% reduction in the average selling price for canine heartworm diagnostic products during the six months ended June 30, 1997 compared to the six months ended June 30, 1996. In addition, the increase in canine heartworm diagnostic product sales were offset by a decrease in the sales of D-TEC/(R)/ CB (canine brucellosis) which has been on back order since April 1996 as a result of third-party manufacturer production problems (the Company is currently in the process of transferring the manufacturing of this product in-house). Vaccine sales increased during the six months ended June 30, 1997 due to increased sales of vaccines to private label partners, offset by a decrease in shipments of bulk feline leukemia vaccine (related to the timing of shipments as requested by OEM customers). Interest, license fees and other revenue during the second quarter of 1997 increased $20,000 or 19% over the second quarter of 1996 due to increased royalties earned on products licensed to third parties. Interest, license fees and other revenue during the six months ended June 30, 1997 decreased $24,000 or 8% from the six months ended June 30, 1996. The decrease was due to the non- recurrence of license fees received in conjunction with an exclusive distribution agreement with Daiichi Pharmaceutical Co., Ltd. for the distribution of the Company's vaccine and diagnostic products in Japan. The Daiichi arrangement is not expected to generate significant product sales revenues until 1998 at the earliest. The decrease in license fee revenue was offset by an increase in interest revenue due to an increased level of invested cash resulting from the sale of the Company's investment in Texas Biotechnology Corporation ("TBC") in the first and second quarters of 1996. The total proceeds received from the sale were $4,727,000 ($2,167,000 in the first quarter of 1996 and $2,560,000 in the second quarter of 1996). Sales of TBC stock resulted in a $774,000 gain in the second quarter of 1996 and a $1,159,000 gain during the six months ended June 30, 1996. The cost of sales as a percentage of product revenue increased to 59% during the second quarter of 1997 compared to 50% for the quarter ended June 30, 1996. The increase is due to the decrease in average selling prices related to the Company's canine heartworm diagnostic products discussed above, as well as increased domestic shipments -12- of bulk feline leukemia vaccine to Merial Limited (formerly known as Rhone Merieux, Inc.) located in Athens, Georgia ("Merial US") during the second quarter of 1997. The Company has contracted to sell bulk vaccine to Merial US at cost because the Company receives a royalty on Merial US's resulting product sales in the United States. By contrast, the Company's international sales of bulk feline leukemia vaccine to Merial Limited (formerly known as Rhone Merieux S.A.S.) located in France ("Merial France") are at a profit, not at cost. Cost of sales as a percentage of product revenue would have been 53% and 47% during the quarters ended June 30, 1997 and 1996, respectively, if the bulk sales to Merial US were not taken into consideration. The cost of sales as a percentage of sales also increased due to the fact that a larger percentage of product sales during 1997 were generated from products which are manufactured for the Company by third parties. The Company's manufacturing costs are predominantly fixed costs. Among the Company's major products, DiroCHEK(R) canine heartworm diagnostic products are manufactured at Company facilities, whereas ICT GOLD (TM) HW and all vaccines are manufactured by third parties. In addition to affecting gross margins, this shift in product mix renders the Company relatively more dependent on the third-party manufacturers. The cost of sales as a percentage of product revenue increased to 53% for the six months ended June 30, 1997 compared to 49% for the six months ended June 30, 1996. The increase is primarily due to factors similar to those discussed in the quarterly comparison, as well as being affected by a decrease in average selling prices for certain potentially short-dated vaccines during the first quarter of 1997. Cost of sales as a percentage of product revenue would have been 49% and 45% during the six months ended June 30, 1997 and 1996, respectively, if the bulk sales to Merial US were not taken into consideration. Research and development expenses during the second quarter of 1997 increased by $62,000 or 25% over the quarter ended June 30, 1996, and increased during the six months ended June 30, 1997 by $152,000 or 33% over the six months ended June 30, 1996. The increases are primarily due to increased contracted research and development expenses and legal expenses related to patent filings. Research and development expenses as a percentage of revenue were 6% and 5% during the quarter ended June 30, 1997 and 1996, respectively, and were 5% and 4% during the six months ended June 30, 1997 and 1996, respectively. Selling and marketing expenses during the second quarter of 1997 decreased by $105,000 or 9% from the quarter ended June 30, 1996, and remained relatively unchanged during the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. The decrease during the second quarter is due primarily to the non-recurrence of advertising and sales promotion expenses related to the 1996 launch of the Company's Assure(R)/Parvo and ICT GOLD (TM) FeLV diagnostic products, which was offset by an increase in salaries and consulting expenses related to the acquisition of the operations of ICG. Selling and marketing expenses as a percentage of revenue were 21% and 22% during the quarter ended June 30, 1997 and 1996, respectively, and were 19% and 21% during the six months ended June 30, 1997 and 1996, respectively. General and administrative expenses during the second quarter of 1997 increased by $231,000 or 49% over the quarter ended June 30, 1996, and increased during the six months ended June 30, 1997 by $510,000 or 60% over the six months ended June 30, 1996. The increases are due primarily to amortization of goodwill and additional payroll costs related to the acquisition of the operations of ICG. General and administrative expenses as a percentage of revenue were 14% and 9% during the quarter ended June 30, 1997 and 1996, respectively, and were 11% and 8% during the six months ended June 30, 1997 and 1996, respectively. The provision for income taxes during the six months ended June 30, 1997 increased by $519,000 or 440% over the six months ended June 30, 1996. The combined Federal and state effective tax rate was 43% during the six months ended June 30, 1997 as compared to 4% during the six months ended June 30, 1996. The income tax provision during the six months ended June 30, 1997 comprises a current income tax provision of $42,000 and a deferred income tax provision of $595,000. The income tax provision during the six months ended June 30, 1996 comprises only a current income tax provision of $118,000. The current provision for income taxes during the six months ended June 30, 1997 and 1996 arose from alternative minimum taxes due to the utilization of net operating loss carryforwards. The increase in the deferred provision for income taxes is due to the fact that as of June 30, 1996 the Company provided a deferred tax asset valuation allowance for deferred tax assets which management determined -13- were "more likely than not" to be unrealizable based on recent trends in operating results. At the end of 1996, the Company released the valuation allowance related to its deferred tax assets based on management's assessment that it was "more likely than not" that the Company would realize those assets in future periods due to improvements in the Company's operating results. As a result, $595,000 (representing the tax effect of the change in the carrying amount of the deferred tax assets) was included in the 1997 statement of operations because, unlike in 1996, there was no longer any valuation allowance left to release it from. The deferred tax provision reduces the Company's deferred tax assets, but the amount of the deferred tax provision does not actually have to be paid to the Government. Financial Condition Management believes that the Company's present capital resources, which included working capital of $12,653,000 at June 30, 1997, are sufficient to meet its current working capital needs before considering the acquisition of the worldwide veterinary diagnostic business of Rhone Merieux S.A.S. (see Part II, Item 5). Management also believes that such working capital, together with the debt financing obtained in July 1997 from Banque Paribas in connection with such acquisition, will enable the Company to meet the current working capital needs of such acquired business as well as to pay the cash portion of the acquisition price. Banque Paribas made term loans of $10,000,000 to the Company and also issued a $5,000,000 revolving line of credit to the Company. The Company used the $10,000,000, and drew $1,493,000 on the revolving line of credit, in July 1997 to pay the cash portion of the acquisition price and certain related expenses. The Company's operations have become seasonal due to the success of its canine heartworm diagnostic products. Sales and profits tend to be concentrated in the December to April time period, as distributors prepare for the heartworm season by purchasing diagnostic products for resale to veterinarians. This seasonality may be somewhat reduced by the acquisition of the veterinary diagnostic business of Rhone Merieux S.A.S., which is relatively less seasonal. Because the veterinary diagnostic business acquired from Rhone Merieux S.A.S. is such a large part of the post-acquisition Company, and because of the significant amount of long-term debt the Company incurred in connection with the acquisition, historical results of operations will not necessarily be fairly comparable to results of operations in the near-term future. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings: ------------------ No material developments. Item 2. Changes in Securities: ---------------------- None. Item 3. Defaults Upon Senior Securities: -------------------------------- None. -14- Item 4. Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- None. Item 5. Other Information: ------------------ On July 9, 1997 the Company acquired the worldwide veterinary diagnostic business of Rhone Merieux S.A.S. pursuant to purchase agreements dated May 14, 1997. The consideration paid to Rhone Merieux was $10,659,000 in cash and plus 759,000 shares of newly issued, unregistered Synbiotics common stock valued at $3,178,000 (based upon the closing price of Synbiotics' Common Stock on July 9, 1997 which was $4.1875 per share). The shares issued by the Company include 230,000 shares which have been placed in escrow pending certain U.S. regulatory approvals and subsequent sales of related products. The 759,000 shares will be subject to certain registration rights as well as put and call provisions. Depending on performance of the combined business in the three years following the acquisition, Synbiotics may also pay up to $3,600,000 in contingent cash payments. The cash portion of the consideration was provided by a series of loans obtained from Banque Paribas. Rhone Merieux and Synbiotics also entered into related agreements covering the supply of various products and services, collaborative research and development, licenses of Rhone Merieux patents, and the distribution of certain of the acquired products by Rhone Merieux. The collaborative research agreement gives Synbiotics a right of first refusal to acquire technology or products emanating from Rhone Merieux's future research efforts that have potential veterinary diagnostic applications. In addition, the Company acquired Rhone Merieux's veterinary diagnostic research, manufacturing and European laboratory marketing organization based in Lyon, France. Item 6. Exhibits and Reports on Form 8-K: --------------------------------- (a) Exhibits -------- 10.64 Asset Purchase Agreement between Rhone Merieux, Inc. and the Registrant, dated May 14, 1997./(1)/ 10.65 Stock Purchase Agreement between Rhone Merieux S.A., Institut De Selection Animale S.A., Rhone Merieux Diagnostics S.A.S. and the Registrant, dated May 14, 1997./(2)/ 11.1 Computation of Earnings Per Share. 27 Financial Data Schedule (for electronic filing purposes only). ----------------------- (1) Incorporated herein by reference to Exhibit 2.4 to the Registrant's Current Report on Form 8-K dated July 9, 1997. (2) Incorporated herein by reference to Exhibit 2.5 to the Registrant's Current Report on Form 8-K dated July 9, 1997. -15- (b) Reports on Form 8-K ------------------- None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYNBIOTICS CORPORATION Date: August 14, 1997 /s/ MICHAEL K. GREEN -------------------- Michael K. Green Vice President of Finance and Chief Financial Officer (signing both as a duly authorized officer and as principal financial officer) -16- EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE Synbiotics Corporation EXHIBIT 11.1 ------------ Computation of Earnings Per Share - -----------------------------------------------------------------------------
Three Months Ended Six months Ended June 30, June 30, -------- -------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Primary Earnings Per Share: Net income per statement of operations $ 14,000 $1,519,000 $ 844,000 $3,169,000 ========== ========== ========== ========== Weighted average number of shares outstanding 7,505,000 6,028,000 7,499,000 5,968,000 ========== ========== ========== ========== Primary earnings per share $ .00 $ .25 $ .11 $ .53 ========== ========== ========== ========== Fully Diluted Earnings Per Share: Net income per statement of operations $ 14,000 $1,519,000 $ 844,000 $3,169,000 ========== ========== ========== ========== Reconciliation of weighted average number of shares per primary computation above, to amount used for fully diluted computation: Weighted average number of shares outstanding, per primary computation 7,505,000 6,028,000 7,499,000 5,968,000 Add-effect of outstanding options (as determined by the application of the treasury method) 19,000 38,000 13,000 26,000 ---------- ---------- ---------- ----------- Weighted average number of shares, as adjusted 7,524,000 6,066,000 7,512,000 5,994,000 ========== ========== ========== =========== Fully diluted earnings per share $ .00 $ .25 $ .11 $ .53 ========== ========== ========== ===========
-17- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEET AS OF JUNE 30, 1997 AND THE RELATED CONDENSED STATEMENTS OF OPERATIONS AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 INCLUDED ELSEWHERE IN THIS FORM 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 3,652 2,181 3,180 57 4,212 14,414 4,413 3,772 28,147 1,761 0 0 0 35,432 (9,046) 28,147 11,781 12,041 6,259 6,259 4,301 0 0 1,481 637 844 0 0 0 844 .11 .11
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