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