<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
[_] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM APRIL 1, 1994 TO DECEMBER 31, 1994
COMMISSION FILE NUMBER 0-11303
SYNBIOTICS CORPORATION
(Name of small business issuer 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
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK
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 [_]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, 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-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the nine months ending December 31, 1994 were
$6,542,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1995 was approximately $10,881,000, based on the
closing sale price in the over-the-counter market as reported by NASDAQ.
As of February 28, 1995, 5,803,376 shares of Common Stock were outstanding.
The registrant's definitive proxy statement to be prepared pursuant to
Regulation 14A and filed in connection with solicitation of proxies for its July
12, 1995 Annual Meeting of Shareholders is incorporated by reference into Part
III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
================================================================================
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
GENERAL
Since commencing operations in 1982, Synbiotics Corporation (the "Company") has
evolved from a research and development company into a developer, manufacturer
and marketer of monoclonal antibody based diagnostic products and biological
products for use in the animal health care field. The Company currently markets
twenty diagnostic test kits and devices for detection of infectious and other
diseases in animals, two veterinary immunotherapeutic products and ten vaccines.
The Company's primary emphasis is on the companion animal market (i.e., dogs,
cats and horses).
In addition, the Company founded two biotechnology companies, UniSyn
Technologies, Inc. (of which the Company is now a 6% shareholder) and
ImmunoPharmaceutics, Inc. (which was acquired by Texas Biotechnology Corporation
during 1994).
The Company had an equity investment in ImmunoPharmaceutics, Inc. ("IPI") which
is engaged in human drug discovery utilizing proprietary rational drug design
technology. On July 25, 1994, IPI, of which the Company was a 41% shareholder,
was acquired by Texas Biotechnology Corporation ("TBC") in a triangular merger
transaction whereby unregistered shares of TBC common stock were issued in
exchange for all of the outstanding stock of IPI. As of December 31, 1994, the
Company owned 6% of TBC's outstanding common stock (including 2% subject to the
satisfaction of certain contingencies).
The Company also has an equity investment in UniSyn Technologies, Inc.
("UniSyn") which operates in a different segment of the biomedical industry.
UniSyn, of which the Company was a 23% shareholder at March 31, 1994, provides
research, pilot and production scale bioreactors and disposables, and contract
production, for the manufacture and purification of mammalian cell-derived
products. In December 1994, UniSyn issued additional shares of voting stock
through a private placement, reducing the Company's effective ownership to 6% at
December 31, 1994. Since that date the Company's interest in UniSyn has been
diluted further.
TECHNOLOGY
Antibodies are proteins produced by humans and animals as part of the immune
response to the introduction of antigens (foreign substances), such as viruses
or bacteria, into the body. Antibodies detect and bind to antigens by virtue of
their specific structural features. Monoclonal antibodies are antibodies of
uniform chemical structure formed synthetically by fusing an antibody producing
cell with a tumor cell in the laboratory. One application of monoclonal antibody
technology is in diagnostic tests and animal therapeutic drugs. The Company
also sells animal vaccines which are conventionally derived. In 1992, the
Company obtained the right to market eight of such diagnostic products and nine
of such vaccine products from certain companies.
BUSINESS STRATEGY
The core of Synbiotics' development since inception has been monoclonal antibody
technology. The Company's near-term strategy is to develop its business through
sales of its animal health products and through in-licensing and co-marketing of
third parties' animal health products wherever possible. This strategy is
intended to provide a base of revenue, build the Company's presence in the
marketplace and provide a foundation from which to develop the next generation
of animal health products.
1
<PAGE>
MARKET AND PRODUCT OVERVIEW
The Company sells its products both in the United States and in foreign
countries. The total number of family owned dogs and cats is estimated to
exceed 100 million in the United States alone. The Company believes that the
market for sales of diagnostic, therapeutic and vaccine products to United
States veterinarians for dogs and cats was approximately $160,000,000 in 1994.
The Company believes that its current and intended future products will offer
veterinarians an opportunity to improve the quality and expand the scope of
veterinary health care services.
Synbiotics Products Marketed as of December 31, 1994:
-----------------------------------------------------
<TABLE>
<CAPTION>
DIAGNOSTICS:
------------
<S> <C>
ASSURE/(R)//CH - Heartworm antigen test kit (canine and feline)
ASSURE/(R)//FeLV - Feline leukemia virus antigen test kit
CRF/(R)/ - Canine rheumatoid factor test kit
DiroCHEK/(R)/ - Heartworm antigen test kit (canine and feline)
D-TEC/(R)/ BRUCELLA A. - Brucella abortus antibody test kit (bovine and bison)
D-TEC/(R)/ CB - Canine brucellosis antibody test kit
D-TEC/(R)/ EIA - Equine infectious anemia test kit
EstruCHEK/(R)/ - Progesterone test kit (bovine, canine and equine)
FUNGASSAY/(R)/ - Dermatophyte test medium
ICT GOLD/TM/ HW * - Canine heartworm antigen test kit
LEUKASSAY/(R)/ B - Bovine leukemia virus antigen test kit
LymeCHEK/TM/ - Canine borrelia burgdorferi antibody test kit
MIP/(R)/ COLOR-CHEK - Pregnant mare gonadotropin test kit
OVASSAY/(R)/ - Fecal diagnostic system
TUBERCULIN/TM/ OT - Mammalian intradermic skin test
TUBERCULIN/TM/ PPD - Bovine intradermic skin test
UNI-TEC/(R)/ CHW - Heartworm antibody test kit (canine and feline)
UNI-TEC/(R)/ FeLV - Feline leukemia virus antigen test kit
ViraCHEK/(R)//FeLV - Feline leukemia virus antigen test kit
ViraCHEK/(R)//FIV - Feline immunodeficiency virus antigen test kit (not
marketed in the United States)
BIOLOGICALS:
------------
CL/MAb 231 - Canine lymphoma monoclonal antibody 231 therapeutic
KoliIMMUNE/(R)/ - Escherichia coli K-99 antiserum
VacSYN/TM/FeLV - Feline leukemia virus (killed) vaccine
PANACINE/(R)/ RC - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (MLV) vaccine
PANACINE/(R)/-5 - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (MLV),
chlamydia (MLV), leukemia (killed) vaccine
PANAVAC/(R)/ RC - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (killed) vaccine
SENTRYRAB-1/TM/ - Rabies (killed) vaccine (canine and feline)
SENTRYPAR/(R)/ - Canine parvovirus (MLV) vaccine
SENTRYPAR/(R)/ DHP - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), parvovirus
(MLV) vaccine
SENTRYPAR/(R)/ DHP/L - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), parvovirus
(MLV), lepto (killed) vaccine
SENTRYVAC/TM/ DHP - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV) vaccine
SENTRYVAC/TM/ DHP/L - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), lepto (killed)
vaccine
</TABLE>
* Introduced in March 1995.
2
<PAGE>
Currently, the Company's most commercially successful products are its canine
heartworm diagnostic products. This has caused some seasonality in the
Company's business, with sales highest in the December to April time period as
distributors purchase these products to sell to veterinarians for the heartworm
season.
MARKETING
The Company markets its products to veterinarians, primarily through independent
distributors. The Company's United States distributors have approximately 90
outlets and a total sales force of approximately 500 field sales representatives
and approximately 200 telemarketing sales representatives. This allows the
Company to focus its major emphasis on developing and manufacturing products.
However, this strategy results in a large percentage of sales being to only a
few customers. During the nine months ended December 31, 1994, sales to two
distributors totalled 35% of the Company's gross revenues.
While the Company currently does not maintain a direct marketing sales force,
its internal marketing staff and regional field representatives service the
external sales network by training distributor sales representatives, responding
to customer technical inquiries, advertising and promoting the Company's
products through journals, magazines and direct mail, and organizing training
workshops and symposia presentations at trade and professional association
meetings.
The Company has established its own telemarketing operation to sell its products
to market segments not reached by its marketing partners and to gather critical
field marketing data.
PATENTS AND TRADE SECRETS
The Company believes that its proprietary technology is an important competitive
factor in its business, and that protection of its intellectual property rights
is a high priority. Despite the existence of patent litigation in the
monoclonal antibody industry, not involving the Company, the Company believes
that the basic hybridoma (the cell that produces the monoclonal antibody)
technology is in the public domain and is therefore not patentable. The complex
biological and chemical process, however, is subject to numerous improvements,
variations and applications of hybridoma technology which may prove to be
patentable. Considering the difficulty of enforcing any patent rights to such
improvements, and the rapid advancements in the field, the Company 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. The Company 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, the Company has been granted eight U.S. patents and has
applied for an additional three U.S. patents. There can be no assurance that
any such patents will be granted.
GOVERNMENT REGULATION
Most diagnostic test kits for animal health applications require approval by the
United States Department of Agriculture ("USDA"). In addition, the Company
manufactures and sells one product which does not require USDA licensing but has
been registered with the Center for Veterinary Medicine of the United States
Food and Drug Administration ("FDA").
The Company's manufacturing facility has been registered with the FDA and is
licensed by the USDA. The Company adheres to Good Manufacturing Practices (GMP)
standards.
In addition to the foregoing, the Company's operations may be subject to future
legislation and/or rules issued by governmental agencies with regulatory
authority relating to the Company's business. The Company has no reason to
believe that any such future legislation and/or rules would be materially
adverse to its business.
3
<PAGE>
COMPETITION
Competition in the animal health care industry is intense. Many competitors,
such as SmithKline Beecham, Mallinckrodt Veterinary 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 the Company. The Company believes that it is the second-
leading competitor in the dog and cat veterinary diagnostic market.
RESEARCH AND DEVELOPMENT
The Company spent approximately $833,000 and $611,000 on research and
development activities during the nine months ended December 31, 1994 and the
year ended March 31, 1994, respectively. During the nine months ended December
31, 1994 and the year ended March 31, 1994, the Company contracted for research
and development activities with outside parties relating to certain companion
animal diagnostic products which utilize licensed technology.
EMPLOYEES
As of December 31, 1994, the Company had a total of 63 employees, all of whom
were full-time.
RAW MATERIALS
The manufacturing of diagnostics, therapeutics and vaccines requires raw
materials which are, and have been, readily available from several sources.
Certain of the Company's products are manufactured by third parties under the
terms of distribution and/or manufacturing agreements. In the event that these
third parties are unable to supply the Company with sufficient finished product,
the Company has the right under the agreements to use alternate manufacturing
sources.
ITEM 2. PROPERTIES
----------
The Company leases two buildings in San Diego, California. The buildings
contain approximately 49,000 square feet of space, and house the Company's
corporate and sales headquarters, executive offices, research and development
laboratories and manufacturing facilities. The Company subleases approximately
19,000 square feet of this space to ImmunoPharmaceutics, Inc. Management
believes that the remaining 30,000 square feet are adequate for the Company's
current level of operations. The Company also leases a telemarketing facility
in Kansas City, Missouri.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The previously reported patent litigation by the Regents of the University of
California and IDEXX Laboratories, Inc. against the Company was settled in
December 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
4
<PAGE>
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
The Company's common stock is traded in the over-the-counter market and quoted
in the NASDAQ National Market System under the symbol SBIO. Price ranges
reported are based on inter-dealer sale quotations, as reported by NASDAQ,
without adjustments for markups, markdowns, or commissions typically paid by
retail investors, and may not represent actual transactions. No cash dividends
have ever been paid, and the Company does not currently anticipate paying cash
dividends in the foreseeable future. As of February 28, 1995, there were
approximately 564 shareholders of record of the Company's common stock.
<TABLE>
<CAPTION>
Fiscal Year* Fiscal Quarter High Low
------------ -------------- ---- ---
<S> <C> <C> <C>
1993 First Quarter $4.63 $3.00
Second Quarter $4.00 $3.13
Third Quarter $5.75 $3.13
Fourth Quarter $6.00 $3.63
1994 First Quarter $5.13 $3.13
Second Quarter $4.50 $3.25
Third Quarter $3.63 $2.38
Fourth Quarter $2.75 $1.63
</TABLE>
*On October 20, 1994, the Company changed its fiscal year end
from March 31 to December 31. The quarterly stock price information
is presented as if the change in the Company's year end was effective
December 31, 1992.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
OVERVIEW
The Company's animal health business markets nineteen diagnostic products, two
veterinary immunotherapeutic products and ten vaccines.
The following table summarizes certain selected financial data for the nine
months ended December 31, 1994 and the fiscal years ended March 31, 1994, 1993,
1992 and 1991. The information presented is qualified in its entirety as to the
nine months ended December 31, 1994 and the years ended March 31, 1994 and 1993
by the more detailed financial statements included elsewhere in this Form 10-
KSB.
5
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------------------------------------------------------
1994 1994 1993 1992 1991
----------------- ------------- ------------- ------------- ------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
-----------------------------
Total Revenues $ 6,542 $14,633 $10,009 $ 7,577 $ 6,940
Operating (loss) income (3,094) 357 (1,848) (507) (3,936)
Equity in earnings (losses)
of affiliates - - 220 (1,302) (2,315)
Gain on disposition of
investment in affiliate 2,036 - - - -
Net (loss) income (1,058) 357 (1,628) (1,809) (6,251)
Net (loss) income per share (.18) .06 (.32) (.36) (1.25)
Dividends - - - - -
MARCH 31,
DECEMBER 31, ---------------------------------------------------------------------
1994 1994 1993 1992 1991
---------------- ------------- -------------- ------------ -----------
(000'S OMITTED)
Balance Sheet Data:
-------------------
Total assets $10,311 $13,450 $11,544 $10,158 $12,661
Long-term liabilities - 486 446 8 42
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended December 31, 1994 Compared to Nine Months Ended December 31,
------------------------------------------------------------------------------
1993
----
Total revenue for the nine months ended December 31, 1994 decreased $2,525,000
or 28% from the nine months ended December 31, 1993. The decrease comprises a
$2,425,000 or 28% decrease in product sales and a decrease in interest, license
fees and other revenue of $100,000 or 24%.
The decrease in product sales was primarily the result of timing of shipments to
distributors. The timing of shipments to distributors is dependent upon, among
other things, distributor inventory levels, anticipated seasonal inventory
requirements and the timing of both the Company's and its competitors'
promotional programs. In the quarter ended March 31, 1993 the Company's
manufacturing facility was on back order for several products (particularly
canine heartworm diagnostics) which resulted in those products being shipped in
the quarter ended June 30, 1993, whereas there was no back order situation in
the quarter ended March 31, 1994 and no corresponding benefit to the quarter
ended June 30, 1994. Also, the Company strove to make all possible shipments
before the end of the March 31, 1994 fiscal year, even if doing so reduced
reportable sales for the quarter ended June 30, 1994. Therefore, the period-to-
period comparison favors the nine months ended December 31, 1993 over the nine
months ended December 31, 1994. In addition, the Company believes that the
December 1994 introduction by a competitor of a revised canine heartworm
diagnostic kit caused distributors to wait until January 1995 to purchase the
Company's heartworm diagnostic products, which they would ordinarily have
purchased in December 1994, in order to evaluate the new kit and evaluate
Synbiotics' response. The Company believes that its products can maintain their
position and that in any event the Company introduced in March 1995 an improved
canine heartworm diagnostic product that will have great appeal to the market.
6
<PAGE>
Also, international shipments of bulk feline leukemia vaccine to Rhone-Merieux,
which bottles and markets the Company's feline leukemia vaccine under its own
brand name in certain parts of Europe, decreased by $850,000 from the nine
months ended December 31, 1993. Rhone-Merieux had made unusually large
purchases in 1993 in anticipation of launching its product in the United
Kingdom, and that launch has since been delayed.
The Company's sales of its own feline leukemia virus products declined in the
1994 period, primarily because of product maturation and because the Company was
preliminarily enjoined in 1993 from selling a feline immunodeficiancy virus
diagnostic which had been sold in combination with the feline leukemia virus
diagnostic. That injunction has now become permanent.
As a partial counterpart to these decreases, there was an increase in domestic
shipments of bulk feline leukemia vaccine to Rhone Merieux, Inc. (located in
Athens, Georgia) of $454,000.
The decrease in license fees and other revenue of $53,000 or 18% during the nine
months ended December 31, 1994 is primarily due to the receipt in the 1993 time
period of a final license fee payment related to the Japanese distribution
agreement with Kyoritsu Shoji Co., Ltd., which was terminated in January 1994.
This factor was partially offset by an increase in royalties earned on certain
of the Company's products which were cross-licensed to Rhone Merieux, Inc. in
fiscal 1993.
Interest income decreased $47,000 or 39% from the nine months ended December 31,
1993 due to less cash being available for investment as the Company made cash
withdrawals to meet its operating cash flow requirements.
Cost of sales as a percentage of product revenue increased to 62% during the
nine months ending December 31, 1994 as compared to 45% for the nine months
ended December 31, 1993. The increase is primarily due to the decrease in
product sales, as the majority of the Company's manufacturing costs are fixed in
nature. The increase is also due to the increase in domestic shipments of bulk
feline leukemia vaccine to Rhone Merieux, Inc. (located in Athens, Georgia)
during the nine months ended December 31, 1994. The Company has contracted to
sell bulk vaccine to Rhone Merieux, Inc. at cost because the Company receives a
royalty on Rhone Merieux, Inc.'s resulting product sales in the United States.
By contrast, the Company's international sales of bulk feline leukemia vaccine
to Rhone-Merieux of France are at a profit, not at cost. Cost of sales as a
percentage of product revenue would have been 54% and 43% during the nine months
ended December 31, 1994 and 1993, respectively, if the zero margin bulk sales
were not taken into consideration.
Research and development expenses increased $471,000 or 130% over the nine
months ended December 31, 1993. The increase is due primarily to the continuing
outsourced development of certain companion animal diagnostics utilizing
immunochromatographic technology ("ICT") licensed from Binax, Inc. ("Binax"),
which began in the quarter ended December 31, 1993, the addition of a research
and development manager during the quarter ended December 31, 1993 and increased
overhead related to moving the research and development group into larger
laboratory facilities. The Company has high hopes for the first product
resulting from the Binax ICT research and development effort, a canine heartworm
diagnostic product which was introduced in March 1995.
Selling and marketing expenses increased $463,000 or 16% over the nine months
ended December 31, 1993 and is due primarily to sales promotional programs.
Marketing competition from large competitors in the biologicals area was
particularly heavy in 1994, and the Company was forced to incur substantial
expenses to try to respond. Despite its response, the Company experienced
disappointing sales of biologicals in the nine-month 1994 period.
General and administrative expenses decreased $344,000 or 17% from the nine
months ended December 31, 1993. The decrease is due primarily to a decrease in
legal expenses. Legal expenses were unusually high in both the 1994 and 1993
periods, but are expected to decrease in 1995 due to the settlement in December
1994 of patent litigation brought by IDEXX Laboratories, Inc., the Company's
primary competitor.
7
<PAGE>
On July 25, 1994, IPI, of which the Company was a 41% shareholder, was acquired
by TBC in a triangular merger transaction whereby unregistered shares of TBC
common stock were issued in exchange for all of the outstanding stock of IPI.
The Company received approximately 655,000 shares of TBC common stock, and may
receive an additional 982,000 shares of TBC common stock if certain
contingencies are met by IPI. In fact, approximately 409,000 of the
approximately 982,000 shares have been formally issued to the Company, and are
being held in escrow pending the outcome of the contingencies. As a result of
the merger transaction, the Company recognized a gain for financial reporting
purposes of approximately $2,036,000. The Company believes that the contingency
related to the additional 409,000 shares of TBC common stock will be met during
1995 and, if the contingency is met, the Company will recognize additional
income.
Year Ended March 31, 1994 Compared to Year Ended March 31, 1993
---------------------------------------------------------------
Total revenue for fiscal 1994 increased by $4,624,000 or 46% over fiscal 1993.
Product sales for fiscal 1994 increased $4,364,000 or 45%. The increase is a
result of increased sales of the Company's canine diagnostic products,
particularly canine heartworm products, the introduction of the SmithKline
Beecham and Rhone-Merieux vaccine products acquired in fiscal 1993, which
represented $1,084,000 of this increase, special promotional pricing on certain
products, and increased international sales.
Fiscal 1994 sales of the acquired vaccine products were below expectations due
to a delayed launch and the effects of a competitor's sales promotion. Domestic
sales of the Company's VacSYN feline leukemia virus vaccine declined in fiscal
1994 due to product maturation and the introduction of combination feline
leukemia virus vaccines by the Company and its competitors.
The Company expanded its international marketing effort in fiscal 1994,
enlisting ten new distributors for foreign markets. During the third quarter of
fiscal 1994, the non-exclusive distribution agreement between the Company and
Burns Veterinary Supply, one of its domestic distributors, was terminated.
Sales to Burns represented approximately 8% and 17% of gross revenues during
fiscal 1994 and 1993, respectively.
The increase in license fees and other revenue of $342,000 or 3,420% over fiscal
1993 is due primarily to royalties earned on certain of the Company's products
which were cross-licensed to Rhone-Merieux in fiscal 1993 and a final license
fee payment related to the Japanese distribution agreement with Kyoritsu Shoji
Co., Ltd. entered into in fiscal 1991 and terminated in January 1994. Interest
income decreased $82,000 or 37% due to a decrease in interest rates during
fiscal 1994.
Cost of sales as a percentage of product revenue decreased to 47% during fiscal
1994 as compared to 51% in fiscal 1993. The decrease is due to an increase in
the sales of products produced by the Company with an increase in the
utilization of plant capacity.
Research and development expenses increased $263,000 or 76% over fiscal 1993.
The increase is due primarily to costs related to the continuing development of
certain companion animal diagnostics utilizing licensed technology, the
development of a whole blood format for the Company's UNI-TEC/(R)/ canine
heartworm diagnostic test and the addition of a senior manager of research and
development in the third quarter of fiscal 1994.
Selling and marketing expenses increased $915,000 or 27% over fiscal 1993. The
increase is due primarily to sales promotional programs implemented in fiscal
1994 in preparation for the introduction of the small animal biological products
acquired from SmithKline Beecham in fiscal 1993, increased business development
efforts to obtain additional products through acquisition and/or in-licensing,
and recognition of an entire year (compared to a partial year) of amortization
of license fees related to the fiscal 1993 product acquisitions, as well as the
accelerated write-off of certain product license fees based upon a re-evaluation
of the products' estimated sales lives.
8
<PAGE>
General and administrative expenses increased $948,000 or 54% over fiscal 1993.
The increase is due primarily to increased legal expenses, primarily relating to
a lawsuit brought by IDEXX Laboratories, Inc., the Company's primary competitor.
FINANCIAL CONDITION
Liquidity and Capital Resources
-------------------------------
Cash used by operations during the nine months ended December 31, 1994 was
$2,112,000 as compared to cash used by operations during the nine months ended
December 31, 1993 of $165,000. The decrease in cash is directly related to the
decrease in revenues, the net operating loss during the nine months ended
December 31, 1994 and approximately $569,000 of legal fees related to the patent
litigation brought by IDEXX Laboratories, Inc. which was settled in December
1994.
Management believes that the Company's present capital resources, which included
working capital of $3,762,000 at December 31, 1994, are sufficient to meet its
working capital needs through 1995. If successful, the new ICT-format canine
heartworm diagnostic product is expected to materially improve the Company's
liquidity.
On March 31, 1994, the Company had large percentage ownership positions in two
affiliated companies operating outside the animal health business (42% of IPI
and 23% of UniSyn). By December 31, 1994, IPI had been sold to TBC and the
Company held 6% of TBC's common stock (including 2% subject to the satisfaction
of certain contingencies), and the Company's interest in UniSyn had been diluted
to 6%. In 1995, the Company's interest in UniSyn has been diluted still
further.
Although TBC is a publicly traded company, the TBC stock received by the Company
is subject to certain securities-law and contractual restrictions against
resale. The Company's present intention is to hold its TBC and UniSyn stock for
investment.
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 veterinarians prepare for the heartworm
season.
Capital Expenditures
--------------------
During the nine months ended December 31, 1994 capital expenditures totalled
$424,000, of which $242,000 was related to building improvements in the
Company's manufacturing facility for biological production laboratories.
Capital expenditures for the year ended March 31, 1994 were not significant.
The Company has no material commitments for capital expenditures in 1995.
9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants 11
Balance Sheet as of December 31, 1994 and March 31, 1994 12
Statement of Operations for the nine months ended December 31, 1994
and the years ended March 31, 1994 and 1993 13
Statement of Cash Flows for the nine months ended December 31, 1994
and the years ended March 31, 1994 and 1993 14
Statement of Shareholders' Equity for the nine months ended December 31, 1994
and the years ended March 31, 1994 and 1993 15
Notes to Financial Statements 17
</TABLE>
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders
of Synbiotics Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Synbiotics
Corporation at December 31, 1994 and March 31, 1994, and the results of its
operations and its cash flows for the nine months ended December 31, 1994 and
each of the two years in the period ended March 31, 1994, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 17, 1995
11
<PAGE>
SYNBIOTICS CORPORATION
BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 447,000 $ 3,635,000
Accounts receivable (net of allowance for doubtful
accounts of $82,000 at December 31, 1994
and March 31, 1994) 1,444,000 3,135,000
Receivables from affiliates 88,000
Note receivable from affiliate 600,000
Inventories 2,763,000 2,148,000
Securities available for sale 502,000
Other current assets 963,000 517,000
------------ ------------
Total current assets 6,119,000 10,123,000
Property and equipment, net 1,329,000 1,286,000
Securities available for sale 942,000
Other assets 1,921,000 2,041,000
------------ ------------
$10,311,000 $ 13,450,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,662,000 $ 2,041,000
Other current liabilities 695,000 217,000
------------ -------------
Total current liabilities 2,357,000 2,258,000
------------ -------------
Other liabilities 486,000
------------ -------------
Commitments and contingency (Note 10)
Shareholders' equity:
Common stock, no par value, 24,800,000 shares authorized,
5,803,000 shares issued and outstanding at December 31, 1994
and March 31, 1994 29,318,000 29,317,000
Unrealized holding losses from securities available for sale (1,695,000)
Accumulated deficit (19,669,000) (18,611,000)
------------ -------------
Total shareholders' equity 7,954,000 10,706,000
------------ -------------
$10,311,000 $13,450,000
============ =============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
SYNBIOTICS CORPORATION
STATEMENT OF OPERATIONS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended March 31,
December 31, -------------------------
1994 1994 1993
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Products $ 6,233,000 $14,144,000 $ 9,780,000
Interest 75,000 137,000 219,000
License fees and other 234,000 352,000 10,000
----------------- ----------- -----------
6,542,000 14,633,000 10,009,000
----------------- ----------- -----------
Cost and expenses:
Cost of products 3,835,000 6,700,000 4,994,000
Research and development 833,000 611,000 348,000
Selling and marketing 3,338,000 4,264,000 3,349,000
General and administrative 1,630,000 2,701,000 1,753,000
Purchased research and development 1,413,000
----------------- ----------- -----------
9,636,000 14,276,000 11,857,000
----------------- ----------- -----------
(Loss) income before equity in earnings of affiliates
and gain on disposition of investment in affiliate (3,094,000) 357,000 (1,848,000)
Equity in earnings of affiliates 220,000
Gain on disposition of investment in affiliate 2,036,000
----------------- ----------- -----------
Net (loss) income $(1,058,000) $ 357,000 $(1,628,000)
================= =========== ===========
Net (loss) income per share $ (.18) $ .06 $ (.32)
================= =========== ===========
Weighted average shares outstanding 5,803,000 5,859,000 5,148,000
================= =========== ===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SYNBIOTICS CORPORATION
STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended March 31,
December 31, ---------------------------
1994 1994 1993
------------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,058,000) $ 357,000 $(1,628,000)
Adjustments to reconcile net (loss) income to net cash
used for operating activities:
Depreciation and amortization 677,000 1,003,000 671,000
Gain on disposition of investment in affiliate (2,036,000)
Equity in (earnings) of affiliates (220,000)
Purchased research and development 1,413,000
Changes in assets and liabilities:
Accounts receivable 1,691,000 (1,297,000) (515,000)
Receivables from affiliates 88,000 (58,000) 261,000
Inventories (615,000) (504,000) (314,000)
Other assets (472,000) (172,000) (1,437,000)
Accounts payable and accrued expenses (379,000) 878,000 295,000
Other liabilities (8,000) 40,000 663,000
--------------- ----------- -----------
Net cash (used for) provided by operating activities (2,112,000) 247,000 (811,000)
--------------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (424,000) (295,000) (215,000)
Investment in securities available for sale (502,000)
Loans to affiliate (150,000) (1,200,000)
Payment received on loans to affiliate 600,000
--------------- ----------- -----------
Net cash used for investing activities (1,076,000) (895,000) (215,000)
--------------- ----------- -----------
Cash flows from financing activities:
Principal payments of long-term debt (3,000) (38,000)
Proceeds from issuance of common stock, net 634,000 (19,000)
--------------- ----------- -----------
Net cash provided by (used for) financing activities 631,000 (57,000)
--------------- ----------- -----------
Net decrease in cash (3,188,000) (17,000) (1,083,000)
Cash and equivalents - beginning 3,635,000 3,652,000 4,735,000
--------------- ----------- -----------
Cash and equivalents - ending $ 447,000 $ 3,635,000 $ 3,652,000
=============== =========== ===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
SYNBIOTICS CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
LOSSES FROM
COMMON STOCK SERIES B COMMON STOCK SECURITIES
----------------------- --------------------- PAID IN AVAILABLE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL FOR SALE DEFICIT TOTAL
--------- ----------- --------- --------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1992 5,076,000 $26,085,000 2,000 $1,000 $365,000 $(17,340,000) $ 9,111,000
Issuance of common stock
related to acquisition
of product line, net of
issuance costs (Note 4) 165,000 660,000 660,000
Issuance of common stock
pursuant to exercise of
stock options 7,000 24,000 24,000
Cancellation of stock
options 7,000 7,000
Subscription of common stock
in conjunction with
termination of research
and development agreement
(Note 5) 2,100,000 2,100,000
Receivable for subscribed
common stock (Note 5) (570,000) (570,000)
Cancellation of common stock
warrants in conjunction
with termination of
research and development
agreement (Note 5) 365,000 (365,000)
Net loss for the year (1,628,000) (1,628,000)
--------- ----------- ------- ------ -------- ------------ ------------ -----------
Balance at March 31, 1993 5,248,000 28,671,000 2,000 1,000 (18,968,000) 9,704,000
</TABLE>
15
<PAGE>
SYNBIOTICS CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
LOSSES FROM
COMMON STOCK SERIES B COMMON STOCK SECURITIES
----------------------- --------------------- PAID IN AVAILABLE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL FOR SALE DEFICIT TOTAL
--------- ----------- --------- --------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of subscribed
common stock 530,000
Collection of receivable for
subscribed common stock 570,000 570,000
Issuance of common stock
pursuant to exercise of
stock options 23,000 73,000 73,000
Cancellation of stock
options 2,000 2,000
Conversion of Series B
common stock to common
stock 2,000 1,000 (2,000) (1,000)
Net income for the year 357,000 357,000
--------- ----------- ------- ------ -------- ------------ ------------ -----------
Balance at March 31, 1994 5,803,000 29,317,000 (18,611,000) 10,706,000
Cancellation of stock
options 1,000 1,000
Unrealized holding losses
from securities available
for sale $ (1,695,000) (1,695,000)
Net loss for the period (1,058,000) (1,058,000)
--------- ----------- ------- ------ -------- ------------ ------------ -----------
Balance at December 31, 1994 5,803,000 $29,318,000 - $ - $ - $ (1,695,000) $(19,669,000) $ 7,954,000
========= =========== ======= ====== ======== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO 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 biological products and
monoclonal antibody based diagnostic products for use in the animal health care
field.
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.
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective April 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") on a prospective basis. In accordance with SFAS 115,
the Company determines the appropriate classification of its U.S. Government and
equity 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 as it has designated them as "available for sale". Unrealized
holding losses on these investments, which are classified as a separate
component of shareholders' equity, totalled $1,695,000 at December 31, 1994.
PATENTS AND LICENSES
Patent and license costs are amortized ratably over the life of the respective
patent or license.
INVESTMENTS IN FORMER AFFILIATES
UniSyn Technologies, Inc. ("UniSyn"), of which the Company was a 23% shareholder
at March 31, 1994, provides research, pilot and production scale bioreactors and
disposables, and contract production, for the manufacture and purification of
mammalian cell-derived products. In June 1994, the Company entered into a bridge
loan agreement whereby $150,000 was loaned to UniSyn. In December 1994, UniSyn
issued additional shares of voting stock through a private placement offering,
which reduced the Company's effective ownership to 6%. In connection with this
private placement, the Company converted into common stock all of its shares of
convertible preferred stock, and converted the $150,000 note receivable into
convertible preferred stock. The conversion of the note receivable is
considered to be a non-cash investing activity for the purposes of the statement
of cash flows. As a result, the Company utilizes the cost method to account for
its investment in UniSyn, which is included in other assets at December 31,
1994.
17
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
ImmunoPharmaceutics, Inc. ("IPI"), of which the Company was a 41% shareholder at
March 31, 1994, is engaged in human drug discovery utilizing proprietary
rational drug design technology. In July 1994, IPI was acquired by Texas
Biotechnology Corporation (Note 3).
REVENUE RECOGNITION
Revenue from products is recognized when the products are shipped.
INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). The adoption of
SFAS 109 changes the Company's method of accounting for income taxes from the
deferred method to an asset and liability approach. Previously the Company
deferred the past tax effects of timing differences between financial reporting
and taxable income. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. The adjustment to the April 1, 1993 balance sheet was
not significant.
NET (LOSS) INCOME PER SHARE
Computations of net (loss) income per share are based on the weighted average
number of common shares outstanding during each year. The common shares issued
in conjunction with the termination of a research and development agreement
(Note 5) are considered to be outstanding as of March 31, 1993 for purposes of
the net loss per share calculation. Shares issuable upon the exercise of
outstanding stock options, stock warrants and conversion of Series B common
stock have not been considered in the computations for the nine months ended
December 31, 1994 and the year ended March 31, 1993 because their effect is
anti-dilutive.
STATEMENT OF CASH FLOWS
For purposes of this statement, cash includes cash investments which are highly
liquid and, generally, have an original maturity of three months or less.
Included in cash are funds, which the Company may demand at any time, on deposit
with a liquid asset manager. The carrying amount of the cash investments
approximates fair value due to the short maturities and/or demand nature of
those instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements as of and
for the years ended March 31, 1994 and 1993 to conform with the presentation
used as of and for the nine months ended December 31, 1994.
NOTE 2 - CHANGE IN FISCAL YEAR:
During 1994, the Company changed its fiscal year from March 31 to December 31.
Accordingly, the Company's transition period, which ended on December 31, 1994,
includes the nine months from April 1 to December 31, 1994. The Company's full
fiscal years ending March 31, 1994 and 1993 include twelve months.
18
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following unaudited results of operations for the nine months ending
December 31, 1993 include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for that period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31,
1993
------------
(unaudited)
<S> <C>
Revenues:
Products $8,658,000
Interest 122,000
License fees and other 287,000
------------
9,067,000
------------
Cost and expenses:
Cost of products 3,918,000
Research and development 362,000
Selling and marketing 2,875,000
General and administrative 1,974,000
------------
9,129,000
------------
Net loss $ (62,000)
============
Net loss per share $ (.01)
============
</TABLE>
NOTE 3 - DISPOSITION OF INVESTMENT IN AFFILIATED COMPANY:
In February 1994, the Company entered into a bridge loan agreement whereby
$600,000 was loaned to IPI. The note was due on March 31, 1994, bore interest
at the rate of prime plus 1% and was secured by substantially all of the assets
of IPI. On July 25, 1994, IPI, of which the Company was a 41% shareholder, was
acquired by Texas Biotechnology Corporation ("TBC") in a triangular merger
transaction whereby unregistered shares of TBC common stock were issued in
exchange for all of the outstanding stock of IPI.
The carrying value of the Company's investment in IPI had previously been
reduced to zero due to the application of the equity method of accounting for
the investment in IPI. In conjunction with the acquisition by TBC, the Company
converted its $600,000 note receivable from IPI into voting stock of IPI, which
is considered to be a non-cash investing activity for purposes of the statement
of cash flows.
As a result of the transaction, the Company received approximately 655,000
shares of TBC common stock, and may receive an additional 982,000 shares of TBC
common stock (the "Contingent Shares") if certain contingencies are met by IPI.
In fact, approximately 409,000 of the Contingent Shares have been formally
issued to the Company and are being held in escrow pending the outcome of the
contingencies. The Company valued its investment in TBC,
19
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
which is accounted for utilizing the cost method, at $4.025 per share, and, as a
result, recognized a gain for financial reporting purposes of approximately
$2,036,000. No amounts have been recorded related to the Contingent Shares of
TBC common stock, and no amounts will be recorded until such time as the
contingencies are satisfied.
NOTE 4 - PRODUCT AGREEMENTS:
In June 1992, the Company entered into an agreement with Pitman-Moore, Inc. (now
known as Mallinckrodt Veterinary, Inc.) whereby the Company acquired certain
distribution, manufacturing and licensing rights to eight animal diagnostic
products in exchange for $1,000,000. In conjunction with the agreement, the
Company issued to IMCERA Group, Inc., the parent of Pitman-Moore, in October
1992, 165,000 shares of common stock totalling approximately $700,000, which is
a non-cash financing activity for purposes of the statement of cash flows.
Sales of the related products totalled $571,000, $803,000 and $481,000 during
the nine months ended December 31, 1994 and the years ended March 31, 1994 and
1993, respectively.
In July 1992, the Company entered into a cross-licensing and co-marketing
agreement with Rhone Merieux, Inc. for certain feline biological products. The
Company's sales of the related products, which commenced in November 1993,
totalled $89,000 and $465,000 during the nine months ended December 31, 1994 and
the year ended March 31, 1994, respectively.
In December 1992, the Company entered into an agreement with SmithKline Beecham
Animal Health, a division of SmithKline Beecham Corporation, whereby the Company
acquired certain distribution, manufacturing and licensing rights to ten
companion animal biological products in exchange for $1,000,000. As of December
31, 1994, $405,000 had been paid, and the remaining $595,000, which is included
in other liabilities, will be paid based on sales of the acquired products. Any
remaining balance, plus interest in the amount of $150,000, shall be due and
payable on December 10, 1995. Sales of the related products, which commenced in
November 1993, totalled $258,000 and $618,000 during the nine months ended
December 31, 1994 and the year ended March 31, 1994, respectively.
NOTE 5 - RESEARCH AND DEVELOPMENT AGREEMENTS:
PRUTECH AGREEMENT
The Company had entered into a series of agreements (the "Agreement") with
PruTech Research and Development Partnership II ("PruTech"). On March 31, 1993,
the Agreement was mutually terminated by the Company and PruTech. In accordance
with the agreement, the Company received all of PruTech's product and technology
rights, was released from any future royalty obligations and received $687,000,
of which $117,000 had been received prior to March 31, 1993, in exchange for
530,000 shares of the Company's common stock valued at $2,100,000. As a result,
the Company incurred a one time charge of $1,413,000 related to the purchased
research and development. Additionally, the $687,000 is considered to be a non-
cash financing activity for purposes of the statement of cash flows.
A representative of the general partner of PruTech has served as a director of
the Company since the inception of the Agreement.
20
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
----------- -------------
<S> <C> <C>
Inventories:
Raw materials $ 576,000 $ 469,000
Work in process 756,000 907,000
Finished goods 1,431,000 772,000
----------- -----------
$ 2,763,000 2,148,000
=========== ===========
Property and equipment:
Laboratory equipment $ 1,968,000 $ 1,820,000
Leasehold improvements 1,826,000 1,584,000
Office equipment 529,000 532,000
----------- -----------
4,323,000 3,936,000
Less accumulated depreciation and amortization (2,994,000) (2,650,000)
----------- -----------
$ 1,329,000 $ 1,286,000
=========== ===========
</TABLE>
Depreciation expense was $381,000, $426,000 and $377,000 during the nine months
ended December 31, 1994 and the years ended March 31, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ ------------
<S> <C> <C>
Other assets:
Patents $ 142,000 $ 190,000
Licenses 1,825,000 2,045,000
Other 917,000 323,000
----------- -----------
2,884,000 2,558,000
Less current portion (963,000) (517,000)
----------- -----------
$ 1,921,000 $ 2,041,000
=========== ===========
</TABLE>
Accumulated amortization of patents and licenses was $1,016,000 and $733,000 at
December 31, 1994 and March 31, 1994, respectively.
21
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ ------------
<S> <C> <C>
Accounts payable and accrued liabilities:
Accounts payable $ 1,235,000 $ 1,318,000
Accrued vacation 109,000 110,000
Accrued compensation 78,000 150,000
Other 240,000 463,000
------------ -----------
$ 1,662,000 $ 2,041,000
============ ===========
</TABLE>
NOTE 7 - RELATED PARTY TRANSACTIONS:
The Company charged its former affiliates, UniSyn and IPI, and currently charges
IPI, now a wholly-owned subsidiary of TBC (Note 3), for shared costs including,
but not limited to, rent, utilities, property taxes, employee benefits and
insurance. In addition, the Company charged IPI for certain administrative
services. Such charges to UniSyn, which terminated in June 1993, totalled
$51,000 and $164,000 during the years ended March 31, 1994 and 1993,
respectively. IPI was charged $388,000, $624,000 and $440,000 during the nine
months ended December 31, 1994 and the years ended March 31, 1994 and 1993,
respectively.
In June 1991, the Company entered into a three year agreement with IPI whereby
IPI provided certain raw materials and/or services to the Company. The
agreement called for guaranteed quarterly payments of $50,000, totalling
$200,000 per year. Raw materials received by the Company were not significant
in fiscal 1994, 1993 and 1992. During the nine months ended December 31, 1994
and the years ended March 31, 1994 and 1993, the Company charged $33,000,
$200,000 and $200,000, respectively, to income relating to the agreement, and
$33,000 is included in other current assets at March 31, 1994. The agreement
was terminated in May 1994.
NOTE 8 - SHAREHOLDERS' EQUITY:
SERIES B COMMON STOCK
In March 1994, all outstanding shares of Series B common stock were converted
into shares of common stock.
STOCK OPTION PLANS
The Company has adopted a series of non-qualified and incentive stock option
plans whereby an aggregate of 1,167,000 shares of the Company's common stock
were reserved for issuance. The plans are administered by the Board of
Directors and provide 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. 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. At
December 31, 1994 options to purchase 473,000 shares are exercisable and 301,000
shares are available for future grant under the plans.
22
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following is a summary of the stock option plans' activity:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
OPTION PRICES UNDERLYING
PER SHARE OPTIONS
------------- ------------
<S> <C> <C>
March 31, 1992 $2.45-$9.25 390,000
Options granted $3.50-$5.63 151,000
Options canceled $2.45-$7.44 (17,000)
Options exercised $2.45-$3.72 (5,000)
-----------
March 31, 1993 $2.45-$9.25 519,000
Options granted $3.25-$4.88 92,000
Options canceled $2.55-$5.50 (20,000)
Options exercised $2.45-$3.72 (23,000)
-----------
March 31, 1994 $2.45-$9.25 568,000
Options granted $2.38-$3.88 193,000
Options canceled $2.45-$7.87 (45,000)
-----------
December 31, 1994 $2.45-$9.25 716,000
===========
</TABLE>
NOTE 9 - INCOME TAXES:
The Company did not record a provision for Federal income taxes during the nine
months ended December 31, 1994 due to a net operating loss. The Company did not
record a provision for Federal income taxes during the year ended March 31, 1994
due to the utilization of net operating loss carryforwards. The Company did not
record a provision for Federal income taxes during the year ended March 31, 1993
due to net operating losses for both financial and tax reporting purposes. The
provisions for state income taxes were $2,000 during the nine months ended
December 31, 1994 and the years ended March 31, 1994 and 1993, which represent
minimum franchise taxes and are included in general and administrative expenses.
23
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Deferred tax assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1994
----------- ----------
<S> <C> <C>
Federal:
Net operating loss carryforwards $ 5,487,000 $ 4,628,000
Equity in losses of investees 1,031,000 1,723,000
Investment tax and research and development credit carryforwards 848,000 848,000
----------- -----------
7,366,000 7,199,000
Less valuation allowance (7,366,000) (7,199,000)
----------- -----------
$ - $ -
=========== ===========
State:
Net operating loss carryforwards $ 721,000 $ 596,000
Equity in losses of investees 282,000 471,000
Investment tax and research and development credit carryforwards 215,000 215,000
----------- -----------
1,218,000 1,282,000
Less valuation allowance (1,218,000) (1,282,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1994 1994
------------ ----------
<S> <C> <C>
Amounts computed at statutory Federal rate $ (360,000) $ 121,000
State income taxes, net of Federal benefit (98,000) 33,000
Deductions for financial reporting purposes for which
no current tax benefit is available 458,000
Utilization of Federal net operating loss carryforwards (121,000)
Utilization of state net operating loss carryforwards (33,000)
State minimum franchise tax 2,000 2,000
----------- ----------
$ 2,000 $ 2,000
=========== ==========
</TABLE>
24
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The net changes in the valuation allowances for the nine months ended December
31, 1994 for Federal and state deferred tax assets were an increase of $167,000
and a decrease of $64,000 for Federal and state tax purposes, respectively. The
changes are due to the net operating loss incurred during the nine months ended
December 31, 1994, offset by the realization of a portion of the equity in
losses of IPI due to the acquisition by TBC (Note 3). The net changes in the
valuation allowances for the year ended March 31, 1994 for Federal and state
deferred tax assets were a decrease of $121,000 and $33,000 for Federal and
state tax purposes, respectively, and are due to the utilization of net
operating loss carryforwards.
The Company has available Federal net operating loss carryforwards at December
31, 1994 of approximately $16,139,000, which expire between 2000 and 2009.
Available state net operating loss carryforwards at December 31, 1994 total
approximately $7,747,000, which expire between 1995 and 1999. 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 credits at December 31, 1994
aggregate approximately $1,063,000 and expire between 1998 and 2007.
NOTE 10 - COMMITMENTS AND CONTINGENCY:
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, 1994 are as follows:
1995 $ 541,000
1996 395,000
---------
$ 936,000
=========
Total rent expense under noncancelable operating leases was $282,000, $351,000
and $418,000 during the nine months ended December 31, 1994 and the years ended
March 31, 1994 and 1993, respectively.
NOTE 11 - SIGNIFICANT CUSTOMERS:
The Company had sales to two customers totalling 35% of gross revenues during
the nine months ended December 31, 1994. During the year ended March 31, 1994,
sales to two customers totalled 40% of gross revenues. Sales totalling 38% of
gross revenues during the year ended March 31, 1993 were made to two customers.
Sales to foreign customers totalled 13%, 15% and 12% of product revenues during
the nine months ended December 31, 1994 and the years ended March 31, 1994 and
1993, respectively. The Company grants credit to all of its customers,
substantially all of whom are in the animal health products industry.
25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
--------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
----------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required under Part III, Items 9, 10, 11, and 12, has been
omitted from this report since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement prepared pursuant to Regulation 14A, which
information is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit Index
-------------
Exhibits marked with an asterisk have not been included with this
Annual Report on Form 10-KSB, but instead have been incorporated by
reference to other documents filed by the Company with the Securities
and Exchange Commission. The Company will furnish a copy of any one
or more of these exhibits, except for Exhibit 27.1 which is for
electronic filing purposes only, to a shareholder who so requests upon
receipt of payment for the cost of duplicating and mailing the
requested items.
<TABLE>
<CAPTION>
EXHIBIT TITLE METHOD OF FILING
------ ------------------------------------------ -----------------------------------------
<C> <S> <C>
2.1* Plan and Agreement of Merger of Texas Incorporated herein by reference to
Biotechnology Corporation, TBC Acquisition Exhibit 2.1 to the Registrant's Current
Company No. 1 and ImmunoPharmaceutics, Report on Form 8-K dated July 25, 1994.
Inc. dated as of June 17, 1994.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT TITLE METHOD OF FILING
------ ------------------------------------------ -----------------------------------------
<C> <S> <C>
3.1* Articles of Incorporation, as amended. Incorporated herein by reference to Exhibit
3.1 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-13495,
dated June 3, 1987.
3.2* Bylaws, as amended. Incorporated herein by reference to Exhibit
3.2 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-13495,
dated June 3, 1987.
10.1* Lease of Premises by Registrant located at Incorporated herein by reference to Exhibit
11011 Via Frontera, San Diego, California, 10.1 to the Registrant's Annual Report on
dated November 28, 1989. Form 10-K for its fiscal year ended March 31,
1991.
10.4*+ 1983 Stock Option Plan. Incorporated herein by reference to the
Registrant's Registration Statement on Form
S-18, Registration No. 2-83602, dated August
25, 1983.
10.4.1*+ First Amendment to 1983 Stock Option Plan. Incorporated herein by reference to Exhibit
10.4.1 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31,
1988.
10.5*+ 1984 Stock Option Plan. Incorporated herein by reference to Exhibit
10.5 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-5292, dated
July 16, 1986.
10.5.1*+ First and Second Amendments to 1984 Stock Incorporated herein by reference to Exhibit
Option Plan. 10.5.1 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31,
1988.
10.6*+ 1986 Stock Option Plan. Incorporated herein by reference to Exhibit
10.6 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-5292, dated
July 16, 1986.
10.6.1*+ First Amendment to 1986 Stock Option Plan. Incorporated herein by reference to Exhibit
10.6.1 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31,
1988.
10.21* Distribution Agreement between Vedco, Inc. Incorporated herein by reference to Exhibit
and the Registrant, dated October 15, 1986. 10.21 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-
5292, dated July 16, 1986.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT TITLE METHOD OF FILING
------ ------------------------------------------ -----------------------------------------
<C> <S> <C>
10.26*+ 1987 Stock Option Plan. Incorporated herein by reference to Exhibit 28
to the Registrant's Registration Statement on
Form S-8, Registration No. 33-15712, dated
July 9, 1987.
10.26.1*+ First Amendment to 1987 Stock Option Plan. Incorporated herein by reference to Exhibit
10.26.1 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31,
1988.
10.33* Lease of Premises (expansion) by the Incorporated herein by reference to Exhibit
Registrant located at 16410 Via Esprillo, San 10.33 to the Registrant's Annual Report on
Diego, California, dated February 25, 1988. Form 10-K for its fiscal year ended March 31,
1988.
10.33.1* First Amendment to Lease of Premises by the Incorporated herein by reference to Exhibit
Registrant located at 16410 Via Esprillo, San 10.33.1 to the Registrant's Annual Report on
Diego, California, dated August 9, 1988. Form 10-K for its fiscal year ended March 31,
1989.
10.34*+ 1988 Stock Option Plan. Incorporated herein by reference to Exhibit 28
to the Registrant's Registration Statement on
Form S-8, Registration No. 33-24444, dated
September 30, 1988.
10.36* Marketing Agreement between the Registrant Incorporated herein by reference to Exhibit
and Bio-Trends International, Inc., dated May 10.36 to the Registrant's Annual Report on
10, 1989. Form 10-K for its fiscal year ended March 31,
1989.
10.36.1* Distribution Agreement between the Incorporated herein by reference to Exhibit
Registrant and Bio-Trends International, Inc., 10.36.1 to the Registrant's Annual Report on
dated February 7, 1990. Form 10-K for its fiscal year ended March 31,
1990.
10.39* Distribution Agreement between the Incorporated herein by reference to Exhibit
Registrant and Bio-Trends International, Inc., 10.39 to the Registrant's Annual Report on
dated August 1, 1990. Form 10-K for its fiscal year ended March 31,
1991.
10.40* Framework Agreement between Pitman- Incorporated herein by reference to Exhibit
Moore, Inc. and the Registrant, dated June 26, 7.01 to the Registrant's Current Report on
1992. Form 8-K dated July 13, 1992, as amended
Form 8 on November 4, 1992 and December
10, 1992.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT TITLE METHOD OF FILING
------ ------------------------------------------ -----------------------------------------
<C> <S> <C>
10.41* Agreement between the Registrant and Rhone Incorporated herein by reference to Exhibit
Merieux, dated July 9, 1992. 7.01 to the Registrant's Current Report on
Form 8-K dated July 23, 1992.
10.43*+ 1991 Stock Option Plan, as amended Incorporated herein by reference to Exhibit
4.1 to the Registrant's Registration Statement
on Form S-8, Registration No. 33-55992,
dated December 21, 1992.
10.44* Purchase Agreement between SmithKline Incorporated herein by reference to Exhibit
Beecham Animal Health and the Registrant, 7.01 to the Registrant's Current Report on
dated December 10, 1992. Form 8-K dated December 30, 1992.
10.45* Settlement Agreement and Mutual Release Incorporated herein by reference to Exhibit
between the Registrant and PruTech Research 10.45 to the Registrant's Annual Report on
and Development Partnership II, effective Form 10-KSB for its fiscal year ended March
March 31, 1993. 31, 1993.
10.46* Agreement Regarding Licensing, Incorporated herein by reference to Exhibit
Development, Marketing and Manufacturing, 10.46 to the Registrant's Quarterly Report on
dated as of June 30, 1993. Form 10-QSB for the quarter ended
December 31, 1993.
10.47* Amendment No. One to Agreement Regarding Incorporated herein by reference to Exhibit
Licensing, Development, Marketing and 10.47 to the Registrant's Quarterly Report on
Manufacturing, dated December 9, 1993. Form 10-QSB for the quarter ended
December 31, 1993.
10.48* Termination and Release Agreement between Incorporated herein by reference to Exhibit
the Registrant and Kyoritsu Shoji Co., Ltd., 10.48 to the Registrant's Quarterly Report on
dated January 4, 1994. Form 10-QSB for the quarter ended
December 31, 1993.
10.49*+ 1994 Stock Option Plan Incorporated herein by reference to Exhibit
99.1 to the Registrant's Registration Statement
on Form S-8, Registration No. 33-85908,
dated October 31, 1994.
11.1 Computation of Loss Per Share. Filed herewith.
23.1 Consent of Independent Accountants Filed herewith.
27 Financial Data Schedule Filed herewith for electronic filing purposes
only.
</TABLE>
-----------------------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement.
29
<PAGE>
(b) Reports on Form 8-K
-------------------
The Company filed a report on Form 8-K dated October 20, 1994
reflecting a change in its year end from March 31 to December 31.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 24, 1995 SYNBIOTICS CORPORATION
By /s/ Michael K. Green
-------------------------------
Michael K. Green
Vice President - Finance
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Widerkehr Chief Executive Officer, President and Director March 24, 1995
---------------------------
Robert L. Widerkehr
/s/ Michael K. Green Chief Financial Officer March 24, 1995
---------------------------
Michael K. Green
/s/ Keith A. Butler Chief Accounting Officer and Corporate Controller March 24, 1995
---------------------------
Keith A. Butler
/s/ Patrick Owen Burns Director March 24, 1995
---------------------------
Patrick Owen Burns
/s/ James C. DeCesare Director March 24, 1995
---------------------------
James C. DeCesare
/s/ Theodor H. Heinrichs Director March 24, 1995
---------------------------
Theodor H. Heinrichs
/s/ M. Blake Ingle Director March 24, 1995
---------------------------
M. Blake Ingle
/s/ Donald E. Phillips Director March 24, 1995
---------------------------
Donald E. Phillips
</TABLE>
30
<PAGE>
EXHIBIT 11.1
------------
SYNBIOTICS CORPORATION
COMPUTATION OF (LOSS) EARNINGS PER SHARE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, --------------------------
1994 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
PRIMARY (LOSS) EARNINGS PER SHARE:
Net (loss) income per statement of operations $(1,058,000) $ 357,000 $(1,628,000)
=========== ========== ===========
Weighted average number of shares outstanding 5,803,000 5,859,000 5,148,000
=========== ========== ===========
Primary net (loss) income per share $ (.18) $ .06 $ (.32)
=========== ========== ===========
FULLY DILUTED (LOSS) EARNINGS PER SHARE:/(1)/
Net (loss) income per statement of operations $(1,058,000) $ 357,000 $(1,628,000)
=========== ========== ===========
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 5,803,000 5,859,000 5,148,000
Add - effect of outstanding options and warrants (as
determined by the application of the treasury method) 27,000 - 59,000
----------- ---------- -----------
Weighted average number of shares, as adjusted 5,830,000 5,859,000 5,207,000
=========== ========== ===========
Fully diluted net (loss) income per share $ (.18) $ .06 $ (.31)
=========== ========== ===========
</TABLE>
/(1)/ This calculation is submitted, for the nine months ended December 31, 1994
and the year ended March 31, 1993, in accordance with Regulation S-B Item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No.'s 33-55990 and
33-68250) and in the Registration Statements on Form S-8 (No.'s 33-10742, 33-
15712, 33-24444, 33-55992 and 33-85908) of Synbiotics Corporation of our report
dated March 17, 1995 appearing on page 11 of this Form 10-KSB.
PRICE WATERHOUSE LLP
San Diego, California
March 24, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE BALANCE SHEET AS OF DECEMBER 31, 1994 AND THE STATEMENTS OF
OPERATIONS, CASH FLOWS AND SHAREHOLDERS' EQUITY FOR THE NINE MONTH FISCAL YEAR
ENDED DECEMBER 31, 1994 INCLUDED IN ITEM 7 OF THIS FORM 10-KSB
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 447
<SECURITIES> 502
<RECEIVABLES> 1,526
<ALLOWANCES> 82
<INVENTORY> 2,763
<CURRENT-ASSETS> 6,119
<PP&E> 4,323
<DEPRECIATION> 2,994
<TOTAL-ASSETS> 10,311
<CURRENT-LIABILITIES> 2,357
<BONDS> 0
<COMMON> 29,318
0
0
<OTHER-SE> (21,364)
<TOTAL-LIABILITY-AND-EQUITY> 10,311
<SALES> 6,233
<TOTAL-REVENUES> 6,542
<CGS> 3,835
<TOTAL-COSTS> 9,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,058)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
</TABLE>
