<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 25, 1996
SYNBIOTICS CORPORATION
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER 0-11303
CALIFORNIA 95-3737816
(State or other jurisdiction (I.R.S. Employer
of incorporation ) Identification No.)
11011 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 451-3771
================================================================================
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
On October 25, 1996 the Company acquired substantially all of the assets of
International Canine Genetics, Inc. ("ICG") pursuant to a purchase agreement
dated July 23, 1996 and amended September 7, 1996. The consideration paid to
ICG was $1.00 plus 1,113,205 shares of Synbiotics Common Stock valued at
$4,689,000 (based upon the average closing price of Synbiotics' Common Stock,
for the period October 18, 1996 through October 24, 1996, which was $4.2125 per
share). The Company also assumed approximately $238,000 of outstanding ICG
liabilities which were due and payable as of the closing date. In addition, all
of ICG's outstanding warrants and stock options were made exercisable for an
adjusted number of shares of Synbiotics Common Stock. Prior to the acquisition,
S.R. One, Limited, ICG's largest shareholder, purchased 237,389 shares of newly
issued Synbiotics Common Stock for $1,000,000 (based upon the average closing
price of Synbiotics' Common Stock, for the period October 18, 1996 through
October 24, 1996, which was $4.2125 per share).
ICG, based in Malvern, PA, is a publicly held company which until the
acquisition manufactured and marketed canine reproduction diagnostic products
and services, PennHIP(R) (a diagnostic test for canine hip dysplasia),
nutritional supplements and a line of coat and skin care products to breeders
and owners of purebred dogs and their veterinarians. Recently, ICG began
marketing the first at-home diagnostic ovulation test for dogs in the U.S. and
announced a sponsored research agreement with New York University, New Jersey
Medical School and Cornell University for the co-development of a diagnostic
product for early canine pregnancy detection.
All of the assets acquired by Synbiotics were used and will continue to be used
to operate the activities described above.
Paul A. Rosinack, ICG's former President and CEO, became Vice President and
General Manager, Animal Health of Synbiotics. On October 24, 1996, Brenda D.
Gavin, D.V.M., a Vice President of S.R. One, Limited, was elected a Director of
the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
a) Financial statements of business acquired:
------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants 2
Balance Sheets as of June 30, 1995 and 1996 3
Statements of Operations for the years ended June 30, 1994, 1995 and 1996 4
Statements of Cash Flows for the years ended June 30, 1994, 1995 and 1996 5
Statements of Stockholders' Equity (Deficit) for the years ended June 30,
1994, 1995 and 1996 7
Notes to Financial Statements for the years ended June 30, 1994, 1995
and 1996 8
</TABLE>
-1-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of International Canine Genetics, Inc.
We have audited the accompanying balance sheets of International Canine
Genetics, Inc. as of June 30, 1995 and 1996, and the related statements of
operations, stockholders equity (deficit) and cash flows for each of the three
years in the period ended June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Canine Genetics,
Inc. as of June 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 7, 1996, except for Note 4, as to which the date is October 25, 1996, and
Note 14, as to which the date is November 4, 1996
-2-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 247,559 $ 26,104
Accounts receivable, less allowance for doubtful accounts of $47,792
and $47,226 at June 30, 1995 and June 30, 1996, respectively 97,018 93,986
Inventories 64,864 92,357
Prepaid expenses 17,768 37,342
Other current assets 18,167 12,316
------------ ------------
Total current assets 445,376 262,105
Property and equipment, net 236,156 235,841
Intangible assets, net 65,882 96,961
Security deposits 36,209 48,664
Other assets 21,838 29,920
------------ ------------
Total assets $ 805,461 $ 673,491
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 400,000 $ 500,000
Notes payable-funding agreements 107,162 128,955
Capital leases-current portion 44,877 50,843
Accounts payable 165,087 283,536
Accrued expenses 89,940 135,106
------------ ------------
Total current liabilities 807,066 1,098,440
Notes payable-funding agreements 362,769 327,886
Capital leases-long term 102,747 89,891
Notes payable-shareholder 8,880 9,471
Deferred compensation 168,851 193,068
------------ ------------
Total liabilities 1,450,313 1,718,756
------------ ------------
Stockholders' deficit:
Common stock, par value $.00006, authorized 10,000,000 shares,
issued 1,835,000 and 2,843,115 shares at June 30, 1995 and
June 30, 1996, respectively 109 169
Additional paid-in capital 10,341,478 11,551,560
Treasury stock, at cost, 23,960 shares (8,439) (8,439)
Accumulated deficit (10,978,000) (12,588,555)
------------ ------------
Total stockholders' deficit (644,852) (1,045,265)
------------ ------------
Total liabilities and stockholders' deficit $ 805,461 $ 673,491
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 1,114,676 $ 1,501,864 $ 1,651,220
Cost of revenues 645,516 814,038 889,240
----------- ----------- -----------
Gross profit 469,160 687,826 761,980
----------- ----------- -----------
Operating expenses:
Research and development expenditures 380,893 548,852 554,807
Selling, general and administrative 1,557,658 1,587,902 1,478,634
Advertising and promotional expense 348,318 282,254 278,764
----------- ----------- -----------
2,286,869 2,419,008 2,312,205
----------- ----------- -----------
Loss from operations (1,817,709) (1,731,182) (1,550,225)
Interest expense (27,562) (52,023) (73,808)
Other income, net 78,788 43,044 13,478
----------- ----------- -----------
Net loss $(1,766,483) $(1,740,161) $(1,610,555)
=========== =========== ===========
Net loss per share of common stock $ (0.96) $ (0.96) $ (0.60)
=========== =========== ===========
Shares of common stock outstanding (weighted average) 1,844,974 1,811,040 2,689,343
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1994 1995 1996
---------- --------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $(1,766,483) $(1,740,161) $(1,610,555)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 40,169 47,096 50,818
Deferred compensation 48,440 48,448 24,217
Provision for uncollectible accounts 13,615 5,039
Loss (gain) on sale of property and equipment 851 (17,500)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (23,137) (26,300) 3,032
Increase in prepaid expenses (4,317) (2,131) (19,574)
Increase in inventories (30,273) (4,398) (27,493)
Decrease in other current assets 5,851
Increase in accounts payable 48,589 44,412 118,449
Increase (decrease) in accrued expenses 16,390 (30,494) 55,308
Increase in accrued interest payable on
note payable-shareholder 591 591 591
Increase in accrued interest payable on
funding agreements 16,570 25,378 21,495
----------- ----------- -----------
Net cash used in operating activities (1,638,995) (1,650,020) (1,377,861)
----------- ----------- -----------
Cash flow from investing activities:
Capital expenditures (27,772) (33,810) (2,644)
Purchase of technology license and trademark (76,381) (40,938)
Proceeds from notes receivable 811
Proceeds from sale of property and equipment 1,750
----------- ----------- -----------
Net cash (used in) investing activities (104,513) (31,249) (43,582)
----------- ----------- -----------
Cash flow from financing activities:
Net proceeds from issuance of common stock 800,000
Borrowings under note payable 400,000 500,000
Payments under notes payable-funding agreements (30,665) (15,209) (34,585)
Payments under notes payable-shareholder (591) (295)
(Increase) decrease in security deposits and other assets (23,477) 4,492 (20,537)
Payment of obligations under capital leases (21,217) (35,833) (44,890)
----------- ----------- -----------
Net cash (used in) provided by financing activities (75,950) 353,155 1,199,988
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,819,098) (1,328,114) (221,455)
Cash and cash equivalents at beginning of period 3,394,771 1,575,673 247,559
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,575,673 $ 247,559 $ 26,104
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Cash used in operating activities include:
Cash paid for interest $47,743 $36,682 $ 52,820
Noncash investing and financing activities:
Sale of asset in exchange for note $17,500
Conversion of note payable and accrued interest into
common stock $410,142
Capital lease obligation $ 38,000
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID IN ------------------ ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT TOTAL
--------- ------ ----------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993 1,835,000 $ 109 $10,341,478 23,960 $(8,439) $ (7,471,356) $ 2,861,792
Net Loss (1,766,483) (1,766,483)
--------- ------ ----------- ------ ------- ------------ -----------
Balances at June 30, 1994 1,835,000 109 10,341,478 23,960 (8,439) (9,237,839) 1,095,309
Net Loss (1,740,161) (1,740,161)
--------- ------ ----------- ------ ------- ------------ -----------
Balances at June 30, 1995 1,835,000 109 10,341,478 23,960 (8,439) (10,978,000) (644,852)
Net proceeds from issuance of common stock 680,000 41 799,959 800,000
Conversion of bridge notes and accrued interest 328,115 19 410,123 410,142
Net Loss (1,610,555) (1,610,555)
--------- ------ ----------- ------ ------- ------------ -----------
Balances at June 30, 1996 2,843,115 $ 169 $11,551,560 23,960 $(8,439) $(12,588,555) $(1,045,265)
========= ====== =========== ====== ======= ============ ===========
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BACKGROUND OF THE COMPANY:
International Canine Genetics, Inc. (the Company) was formed on July 14, 1986.
The Company is primarily engaged in the business of developing, manufacturing
and marketing products and services which address the needs of owners and
breeders of purebred dogs and the veterinarians providing services to them. The
Company currently markets artificial insemination products and services and in-
clinic ovulation and laboratory timing diagnostic tests, pregnancy and DNA
paternity testing services, which collectively comprise the majority of the
Company's sales, the PennHIP/(R)/ diagnostic technology for the early detection
of Canine Hip Dysplasia to breeders and owners of purebred dogs and their
veterinarians, nutritional supplements and grooming products. All product and
service revenues are shipped from or performed at the Company's Malvern, PA
facility and sold to end users and distributors throughout the world, with the
vast majority of the sales made throughout the United States.
NOTE 2 - LIQUIDITY:
The Company has incurred losses from operations since inception as it has been
developing its products and marketing channels and has a net capital deficiency
which raises substantial doubt about the entity's ability to continue as a going
concern. The Company's ability to support its operations with product sales is
dependent on the Company's ability to raise additional funds to finance further
product development and marketing as well as the successful completion of such
activities.
Management believes that the Company will be able to attract new sources of
funds to enable the Company to continue the development and marketing of its
products and services until completion of the acquisition by and integration
into Synbiotics Corporation (see Note 4). However, no assurance can be given
that such funds will be available or that the funds will be available on terms
which are satisfactory or advantageous to the Company or its shareholders.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment acquired under capital
leases is stated at the lesser of the present value of the minimum lease
payments or the fair value of the equipment at the inception of the lease.
Depreciation and amortization, which includes the amortization of assets
recorded under capital leases, are computed using both the straight line and
accelerated methods over the estimated useful lives of the related assets
ranging from three to ten years. Leasehold improvements are amortized over the
lives of the respective leases or the lives of the improvements, whichever is
shorter.
-8-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
TECHNOLOGY AND TRADEMARK LICENSE
Purchased technology and licenses are capitalized at cost and are amortized on a
straight-line basis over the remaining life of the license agreement and the
patent (10 and 15 years, respectively).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred.
ADVERTISING AND PROMOTIONAL
Advertising and promotional costs are expensed in the period incurred.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents, which are maintained in a
high quality credit institution, and accounts receivable.
The Company markets its products and services primarily to two specific classes
of customers, namely dog breeders and veterinarians, which may subject the
Company to credit risk. Such risk is mitigated, however, because the Company's
markets are geographically dispersed. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's short-term financial instruments, such as
receivables and payables, approximate their fair values, based on the short-term
maturities of these instruments. As of June 30, 1996, the fair value of the
Company's demand notes payable, notes payable funding agreements and capital
lease obligations, using rates currently available to the Company for such
financial instruments with similar terms and remaining maturities, approximate
their carrying amounts.
NET LOSS PER SHARE OF COMMON STOCK AND PRO FORMA NET LOSS PER SHARE OF COMMON
STOCK
The net loss per share of Common Stock is computed using the weighted average
number of shares of Common Stock outstanding during the period.
The effect of stock options and warrants are excluded from the computation as
their effect is anti-dilutive, except that, pursuant to Securities and Exchange
Commission staff accounting bulletins, Common Stock options issued during the 12
month period prior to the initial public offering at prices below the public
offering price of $7.00 per unit have been included in the 1994 computation as
if they were outstanding for the period presented (using the treasury stock
method).
-9-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which is effective for years beginning after December 15, 1995.
SFAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and including pro forma disclosures of net income and earnings per
share as if the fair value method had been applied. The Company has elected to
continue to measure its stock-based compensation in accordance with APB 25 and,
accordingly, does not expect the adoption of SFAS 123 to have a significant
effect on its financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 4 - ACQUISITION:
On October 25, 1996 Synbiotics Corporation acquired substantially all of the
assets of International Canine Genetics, Inc. pursuant to a purchase agreement
dated July 23, 1996 and amended September 7, 1996. The consideration paid to
the Company was $1.00 plus 1,113,205 shares of Synbiotics Common Stock valued at
$4,689,000 (based upon the average closing price of Synbiotics' Common Stock,
for the period October 18, 1996 through October 24, 1996, which was $4.2125 per
share). Synbiotics Corporation also assumed approximately $238,000 of the
Company's outstanding liabilities which were due and payable as of the closing
date. A portion of the 1,113,205 shares of Synbiotics Common Stock will be used
to satisfy the Company's debt and the balance will be distributed to the holders
of the Company's Common Stock. In addition, all of the Company's outstanding
warrants and stock options were made exercisable for an adjusted number of
shares of Synbiotics Common Stock. Prior to the acquisition, S.R. One, Limited,
the Company's largest shareholder, purchased 237,389 shares of newly issued
Synbiotics Common Stock for $1,000,000 (based upon the average closing price of
Synbiotics' Common Stock, for the period October 18, 1996 through October 24,
1996, which was $4.2125 per share).
NOTE 5 - INVENTORIES:
At June 30, 1995 and 1996, inventories were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Components $34,747 $61,345
Finished Goods 30,117 31,012
------- -------
$64,864 $92,357
======= =======
</TABLE>
-10-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - TECHNOLOGY AND TRADEMARK LICENSE:
On December 21, 1993, the Company finalized an agreement with the University of
Pennsylvania for the exclusive worldwide rights to commercialize a new
proprietary technology for the diagnosis of Canine Hip Dysplasia. Under the
agreement, the Company also obtained the exclusive worldwide rights to use the
University of Pennsylvania trademark PennHIP/(R)/. At June 30, 1996, the
Company has capitalized costs and accumulated amortization of $76,381 and
$18,405, respectively, related to the licensing and transfer to the Company of
this technology and trademark.
On November 6, 1995, the Company concluded an agreement with the Cornell
Research Foundation, the University of Medicine and Dentistry of New Jersey-New
Jersey Medical School and New York University for the exclusive rights to a U.S.
patent entitled "Relaxin Testing for Early Detection of Pregnancy in Dogs." At
June 30, 1996, the Company has capitalized costs and accumulated amortization of
$40,938 and $1,952, respectively, related to the licensing and transfer to the
Company of this technology.
NOTE 7 - PROPERTY AND EQUIPMENT:
At June 30, property and equipment were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Lab equipment $214,045 $214,045
Marketing equipment 44,740 44,740
Furniture and fixtures 197,991 238,634
Warehouse equipment 16,218 16,218
Leasehold improvements 8,464 8,464
-------- --------
481,458 522,101
Less accumulated depreciation and amortization 245,302 286,260
-------- --------
$236,156 $235,841
======== ========
</TABLE>
At June 30, 1996, assets recorded under capital leases and related accumulated
amortization are $204,674 and $49,377, respectively.
NOTE 8 - NOTES PAYABLE:
During fiscal 1995, the Company borrowed $400,000 from S. R. One, Limited, a
majority stockholder, under the terms of two demand note agreements bearing
interest at the prime rate plus two points. On August 17, 1995, S. R. One,
Limited invested cash of $850,000 and converted the $400,000 of demand notes and
accrued interest of $10,142 into 1,008,115 newly issued shares of common stock
at $1.25 per share.
On December 22, 1995, the Company borrowed $500,000 from S. R. One, Limited
under the terms of a demand note agreement bearing interest at the prime rate
plus two points.
-11-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE - FUNDING AGREEMENTS:
During fiscal years 1988 through 1991, the Company received $145,090 and $51,578
under three separate funding agreements (the "first and second" and "third"
agreements, respectively) from the Ben Franklin Technology Center of
Southeastern Pennsylvania (BFTC).
Under the first and second agreements, the Company is required to repay three
times the disbursed funds in quarterly installments of 1% of total Company
revenues. The full amount of the obligation under the first and second
agreements, $435,270, has been accrued by charges to interest expense during
fiscal years 1988 through 1991.
Under the third agreement, the Company is required to repay up to a maximum of
three times the disbursed funds in quarterly installments of 3% of total Company
revenues subject to annual dollar caps as set forth below.
<TABLE>
<CAPTION>
ANNUAL
YEAR ENDING DOLLAR
SEPTEMBER 30, CAP
------------- ---
<S> <C>
1996 37,136
1997 46,422
</TABLE>
Under the third agreement, the Company is accruing interest using the effective
interest method over the anticipated repayment period. Interest expense related
to the agreement amounted to $16,570, $24,768 and $21,060 for the years ended
June 30, 1994, 1995 and 1996, respectively, and is included in the statement of
operations.
On February 27, 1995, the Company entered into a supplemental agreement with
BFTC to temporarily modify the repayment requirements until the Company has
obtained additional funding. Under the terms of this supplemental agreement,
the Company's quarterly repayments under the first, second and third agreements
are not to exceed $3,000. The unpaid balance accrues interest at the prime rate.
All amounts in arrears, including accrued interest, under this agreement are
payable within seven days following completion of the Company obtaining
additional funding as defined by the supplemental agreement. At June 30, 1995,
the unpaid balance under this agreement was $30,557 and accrued interest
amounted to $610. Interest expense on the supplemental agreement incurred in
fiscal 1996 was $435.
The amounts outstanding under these agreements, including accrued interest, are
as follow:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
First and Second Agreements $ 435,270 $ 435,270
Third Agreement 120,525 141,585
Interest on Supplemental Agreement 610 1,045
Less payments (86,474) (121,059)
--------- ----------
469,931 456,841
Less current portion (107,162) (128,955)
--------- ----------
$ 362,769 $ 327,886
========= ==========
</TABLE>
-12-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION PLAN:
The Company maintains a stock option plan whereby employees, consultants and
advisors may be granted incentive stock options ("ISO") or non-qualified stock
options to purchase up to 275,000 shares of the Company's Common Stock. The ISO
exercise price is determined by the Compensation and Stock Option Committee
subject to a minimum exercise price equal to the fair market value of the
Company's Common Stock on the date of the grant. The exercise price of non-
qualified options is determined by the Compensation and Stock Option Committee.
The options vest over a four year period and expire 10 years from the date of
grant.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding as of June 30, 1993 42,042 $1.35
Granted 82,332 $7.00
Granted 99,250 $2.00
--------
Outstanding as of June 30, 1994 223,624 $1.35-$7.00
Canceled 5,510 $2.00-$7.00
--------
Outstanding as of June 30, 1995 218,114 $1.35-$7.00
Granted 152,950 $1.25
Canceled 11,465 $1.25-$7.00
--------
Outstanding as of June 30, 1996 359,599 $1.25-$7.00
========
</TABLE>
At June 30, 1996, options for 218,218 shares were exercisable and 130,401 shares
were available for future grants under the plan.
During the twelve months ended June 30, 1995 and 1996, the Company recognized
$48,448 and $24,217, respectively, as compensation expense in connection with
options granted prior to the Company's initial public offering.
NOTE 11 - STOCK WARRANTS:
In January, 1993, in accordance with a Recapitalization Agreement, 62,075 shares
of Preferred-B warrants were exchanged for 10,346 common stock warrants
exercisable at $8.40 per share over five years, and 300,000 common share
warrants were exchanged for 50,000 common stock warrants exercisable at $8.40
per share over five years.
-13-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In March 1993, 715,000 warrants ("Public Warrants") to purchase common stock
were issued as part of the Company's initial public offering. In this offering,
the Company sold 715,000 Units, each consisting of one share of common stock and
one common stock warrant. The warrants are exercisable over a five year period
at an initial exercise price of $10.00 per warrant. However, as the Company did
not generate revenues of $7 million during the fiscal year ended June 30, 1995,
the exercise price was reduced to $5.00 per warrant in accordance with the terms
of the offering document.
In addition, the underwriter of the Company's initial public offering received,
as part of its compensation, warrants ("Underwriters' Warrants") to purchase
71,500 Units (each unit consisting of one share of common stock and one
redeemable common stock warrant.). The Underwriters' Warrants are exercisable
over five years at a price of $8.40 per warrant. The common stock warrants
contained in the Unit warrant have the same terms and characteristics as the
public warrants issued as part of the initial public offering.
The terms of the Public Warrant and Underwriters' Warrant agreements provide the
holders of the warrants with anti-dilution protection if the Company issues
common stock or equivalents, including stock options, at a price below the
original exercise prices per warrant of $10.00 and $8.40, respectively. During
the year ended June 30, 1994, the Company issued stock options under its 1992
Stock Option Plan at $7.00 per share and $2.00 per share (see Note 10). As a
result, the Public Warrants have an adjusted exercise price of $9.66 per warrant
and may be redeemed for 740,166 shares of common stock. The Underwriters'
Warrant have an adjusted exercise price of $1.76 and can be redeemed for 341,250
shares of Common Stock and 341,250 redeemable warrants. The redeemable warrants
have an adjusted exercise price of $9.66 and can be redeemed for 353,538 shares
of Common Stock.
On August 16, 1995, the Board of Directors approved modifications to the 715,000
Public Warrants. The exercise price of the Public Warrants was reduced from
$5.00 per warrant to $1.25 per warrant and the term of each Public Warrant was
extended from March 24, 1998 to March 24, 2000.
In addition, in order to simplify the Company's capital structure and eliminate
certain onerous anti-dilution provisions which have had and would have an
adverse impact on the shareholders, the holders of 60,346 warrants to purchase
common stock at an exercise price of $8.40 per warrant agreed to exchange their
warrants for 245,692 warrants to purchase common stock with the same terms and
conditions as the Public Warrants. Also, the underwriter of the Company's
initial public offering agreed to exchange 71,500 unit warrants (each unit
consisting of one share of common stock and one redeemable common stock warrant)
for 71,500 warrants to purchase Common Stock on the same terms and conditions as
the Public Warrants. Warrants outstanding as of June 30, 1996 total 1,032,192
(exercisable for 1,067,525 shares of Common Stock) at an exercise price of $1.25
per share.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company leases equipment and office, research, manufacturing/warehouse space
under various non-cancelable leases with third parties. The leases range from
three to five years and require the Company to pay all insurance, taxes and
operating expenses.
The Company entered into a 5-year lease agreement and expanded its Malvern, PA
facility from 4,725 square feet to 9,240 square feet. Payments under this lease
commenced on September 20, 1993, upon substantial completion of improvements to
the facility. For the years ended June 30, 1994 and 1995, the Company acquired
office, product development, manufacturing and warehouse equipment under non-
cancelable capital lease agreements.
-14-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Future minimum obligations under non-cancelable lease agreements at June 30,
1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1997 $ 63,163 $ 121,201
1998 44,498 119,104
1999 11,497 39,440
---------- -----------
Total Minimum Payments 119,158 $ 279,745
===========
Less amount representing interest 16,424
----------
Present value of net minimum
lease payments under capital
leases $ 102,734/(1)/
==========
</TABLE>
- ------------------------
(1) Does not include a $38,000 capital lease obligation.
Rent expense under operating leases for the years ended June 30, 1994, 1995 and
1996 was $83,504, $115,319 and $159,825 respectively.
At June 30, 1996, the Company has a letter of credit outstanding in the amount
of $19,800 which guarantees a telephone equipment lease. The contract amount of
the letter of credit was for approximately 40% of the fair value of the lease at
its inception and decreases annually over the life of the lease.
NOTE 13 - INCOME TAXES:
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). There was no cumulative effect of the accounting change and prior periods
were not restated.
At June 30, 1995 and 1996, the Company had a deferred tax asset comprised of the
following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 3,917,000 $ 4,418,000
Receivables 31,000 19,000
Inventory 4,000 4,000
----------- ----------
Deferred tax asset $ 3,952,000 $ 4,441,000
=========== ===========
</TABLE>
The Company has recorded a valuation allowance for the full amount of the
deferred tax asset at June 30, 1995 and 1996, since the likelihood of the
realization of the tax benefits cannot be established.
At June 30, 1996, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $11.7 million, which expire in varying
amounts through 2011.
-15-
<PAGE>
INTERNATIONAL CANINE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - SUBSEQUENT EVENT:
On August 28, 1996, the Company borrowed $400,000 from S.R. One, Limited, which
included a $42,497 placement fee payable to S.R. One, Limited, pursuant to a
demand note bearing interest at prime plus two points.
On November 4, 1996, the Company filed Form 15 with the Securities and Exchange
Commission. Accordingly, the Company will no longer be filing reports under
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.
-16-
<PAGE>
b) Pro forma financial information
-------------------------------
The following unaudited pro forma condensed balance sheet as of June
30, 1996 and the unaudited pro forma condensed statements of
operations for the year ended December 31, 1995 and the six months
ended June 30, 1996 give effect to the acquisition of substantially
all of the assets of ICG as of June 30, 1996 for the condensed balance
sheet and as of January 1, 1995 for the condensed statements of
operations. The pro forma condensed financial statements are based on
historical financial statements of Synbiotics Corporation and
International Canine Genetics, Inc., giving effect to the acquisition
applying the purchase method of accounting and the assumptions and
adjustments as discussed in the accompanying notes to the pro forma
condensed financial statements. The unaudited pro forma condensed
financial statements do not include any consolidation savings which
Synbiotics Corporation may expect to achieve from the merger of
Synbiotics Corporation and International Canine Genetics, Inc. as any
such savings are not estimable at this time.
These pro forma condensed financial statements have been
prepared by the management of Synbiotics Corporation based upon the
audited statement of operations of Synbiotics Corporation for the year
ended December 31, 1995, the unaudited condensed balance sheet as of
June 30, 1996 and the related unaudited condensed statement of
operations for the six months then ended of Synbiotics Corporation,
the audited balance sheet of International Canine Genetics, Inc. as of
June 30, 1996 and the unaudited condensed statements of operations for
the year ended December 31, 1995 and the six months ended June 30,
1996 of International Canine Genetics, Inc. The unaudited pro forma
condensed financial statements should be read in conjunction with the
historical financial statements and notes thereto and narrative
sections included elsewhere herein. The pro forma condensed financial
statements are not necessarily indicative of what actual results of
operations would have been for the periods had the transaction
occurred on the dates indicated and do not purport to indicate future
financial position nor the results of future operations.
-17-
<PAGE>
SYNBIOTICS CORPORATION
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------------------
INTERNATIONAL
SYNBIOTICS CANINE PRO FORMA PRO FORMA
CORPORATION GENETICS, INC. ADJUSTMENTS COMBINED
------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 2,970,000 $ 26,000 $ 1,000,000 (1) $ 3,996,000
Securities available for
sale 3,087,000 3,087,000
Accounts receivable 2,124,000 94,000 2,218,000
Inventories 4,824,000 92,000 4,916,000
Other current assets 565,000 50,000 615,000
------------ ----------- ------------ -----------
Total current assets 13,570,000 262,000 1,000,000 14,832,000
Property and equipment, net 715,000 236,000 951,000
Other assets 1,778,000 175,000 4,396,000 (2) 6,349,000
------------ ------------ ------------ -----------
$ 16,063,000 $ 673,000 $ 5,396,000 $ 22,132,000
============ ============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,590,000 $ 418,000 $ (180,000)(3) $ 1,828,000
Capital lease obligations 51,000 51,000
Other current liabilities 671,000 629,000 (629,000)(3) 671,000
------------ ------------ ------------ ------------
Total current liabilities 2,261,000 1,098,000 (809,000) 2,550,000
------------ ------------ ------------ ------------
Other liabilities 620,000 (530,000)(3) 90,000
------------ ------------ ------------ ------------
Shareholders' equity:
Common stock 29,801,000 11,544,000 1,000,000 (1) 35,491,000
(11,544,000)(3)
4,690,000 (4)
Accumulated deficit (15,999,000) (12,589,000) 12,589,000 (3) (15,999,000)
------------ ------------ ------------ ------------
Total shareholders' equity 13,802,000 (1,045,000) 6,735,000 19,492,000
------------ ------------ ------------ ------------
$ 16,063,000 $ 673,000 $ 5,396,000 $ 22,132,000
============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed financial statements.
-18-
<PAGE>
SYNBIOTICS CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------
INTERNATIONAL
SYNBIOTICS CANINE PRO FORMA PRO FORMA
CORPORATION GENETICS, INC. ADJUSTMENTS COMBINED
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 13,676,000 $ 751,000 $ (2,000)(5) $14,425,000
Service revenues 815,000 (11,000)(5) 804,000
License fees and other 396,000 13,000 (13,000)(5) 62,000
Interest 46,000 16,000 62,000
------------ ----------- ----------- -----------
14,118,000 1,595,000 (26,000) 15,687,000
------------ ----------- ----------- -----------
Cost and expenses:
Cost of sales 8,009,000 859,000 (7,000)(5) 8,861,000
Research and development 906,000 549,000 1,455,000
Selling and marketing 4,147,000 1,316,000 5,463,000
General and administrative 1,486,000 707,000 293,000 (6) 2,452,000
(34,000)(7)
------------ ----------- ----------- -----------
14,548,000 3,431,000 252,000 18,231,000
------------ ----------- ----------- -----------
Loss before gain on disposition of
investment in affiliated company (430,000) (1,836,000) (278,000) (2,544,000)
Gain on disposition of investment
in affiliate 931,000 931,000
------------ ----------- ----------- -----------
Net income (loss) $ 501,000 $(1,836,000) $ (278,000) $(1,613,000)
============ =========== =========== ===========
Net income (loss) per share $ .09 $ n/a $ n/a $ (.23)
============ =========== =========== ===========
Weighted average shares outstanding 5,832,000 n/a 1,327,000 (9) 7,159,000
============ =========== =========== ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
-19-
<PAGE>
SYNBIOTICS CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
INTERNATIONAL
SYNBIOTICS CANINE PRO FORMA PRO FORMA
CORPORATION GENETICS, INC. ADJUSTMENTS COMBINED
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 10,851,000 $ 438,000 $ $11,289,000
Service revenues 456,000 (1,000)(5) 455,000
License fees and other 230,000 230,000
Interest 54,000 5,000 59,000
------------ ---------- ------------ -----------
11,135,000 899,000 (1,000) 12,033,000
------------ ---------- ------------ -----------
Cost and expenses:
Cost of sales 5,334,000 464,000 (1,000)(5) 5,797,000
Research and development 461,000 282,000 743,000
Selling and marketing 2,358,000 498,000 2,856,000
General and administrative 854,000 340,000 147,000 (6) 1,302,000
(39,000)(7)
------------ ---------- ------------ -----------
9,007,000 1,584,000 107,000 10,698,000
------------ ---------- ------------ -----------
Income (loss) before gain on sale of
securities available for sale 2,128,000 (685,000) (108,000) 1,335,000
Gain on sale of securities available
for sale 1,159,000 1,159,000
------------ ---------- ------------ -----------
Income (loss) before income taxes 3,287,000 (685,000) (108,000) 2,492,000
Provision for income taxes 118,000 (28,000)(8) 90,000
------------ ---------- ------------ -----------
Net income (loss) $ 3,169,000 $ (685,000) $ (80,000) $ 2,404,000
============ ========== ============ ===========
Net income (loss) per share $ .53 $ n/a $ n/a $ .33
============ ========== ============ ===========
Weighted average shares outstanding 5,968,000 n/a 1,351,000 (9) 7,319,000
============ ========== ============ ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
-20-
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE (1)
Adjustment to record the sale of 237,000 shares of Synbiotics Corporation common
stock, at $4.2125 per share, to the S.R. One, Limited, the major shareholder of
International Canine Genetics, Inc. as a condition of the acquisition agreement.
NOTE (2)
Adjustment to record the fair value of patents, licenses, customer lists and
other intangible assets to be acquired from International Canine Genetics, Inc.,
as well as the purchase price in excess of the fair values assigned to the
assets acquired and liabilities assumed from International Canine Genetics, Inc.
NOTE (3)
Adjustment to eliminate the assets, liabilities and shareholders' equity of
International Canine Genetics, Inc. not acquired or assumed by Synbiotics
Corporation.
NOTE (4)
Adjustment to record the issuance of 1,113,000 shares of Synbiotics Corporation
common stock, at $4.2125 per share, for certain of the assets of International
Canine Genetics, Inc.
NOTE (5)
Adjustment to eliminate product revenues and service revenues, and their
associated costs, related to certain discontinued products and services of
International Canine Genetics, Inc.
NOTE (6)
Adjustment to record amortization of the fair value of intangibles acquired from
International Canine Genetics, Inc. based on a 15 year amortization period.
NOTE (7)
Adjustment to eliminate interest expense related to certain International Canine
Genetics, Inc. debt obligations not assumed by Synbiotics Corporation.
NOTE (8)
Adjustment to record reduced income tax provision due to pre-tax loss sustained
by International Canine Genetics, Inc.
NOTE (9)
Adjustment to reflect increase in weighted average shares outstanding due to the
issuance of Synbiotics Corporation common stock (Notes (1) and (4)).
-21-
<PAGE>
c) Exhibits
--------
2.2 Purchase Agreement dated July 23, 1996 by and among the
Registrant, International Canine Genetics, Inc. and S.R. One,
Limited/(1)/.
2.3 Amendment to Purchase Agreement dated September 7, 1996 by and
among the Registrant, International Canine Genetics, Inc. and
S.R. One, Limited/(2)/.
- -----------------
(1) Incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4, as amended, Registration No. 333-
10343, dated September 16, 1996.
(2) Incorporated by reference to Exhibit 2.3 to the Registrant's
Registration Statement on Form S-4, as amended, Registration No. 333-
10343, dated September 16, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SYNBIOTICS CORPORATION
Date: November 8, 1996 /s/ MICHAEL K. GREEN
--------------------------------------
Michael K. Green
Vice President of Finance and
Chief Financial Officer
-22-
