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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 SEPTEMBER 30, 1996
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 November 7, 1996, 7,351,925 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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SYNBIOTICS CORPORATION
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations - Three and nine months
ended September 30, 1996 and 1995 2
Condensed Balance Sheet - September 30, 1996 and December 31,
1995 3
Condensed Statement of Cash Flows - Nine months ended
September 30, 1996 and 1995 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 7
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
-1-
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
SYNBIOTICS CORPORATION
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
Revenues:
Product sales $3,747,000 $2,284,000 $14,598,000 $10,921,000
License fees and other 77,000 92,000 307,000 239,000
Interest 77,000 17,000 132,000 35,000
---------- ---------- ----------- -----------
3,901,000 2,393,000 15,037,000 11,195,000
---------- ---------- ----------- -----------
Cost and expenses:
Cost of sales 2,285,000 1,651,000 7,620,000 6,138,000
Research and development 261,000 274,000 721,000 692,000
Selling and marketing 961,000 965,000 3,320,000 3,324,000
General and administrative 794,000 377,000 1,649,000 1,090,000
---------- ---------- ----------- -----------
4,301,000 3,267,000 13,310,000 11,244,000
---------- ---------- ----------- -----------
Income (loss) before gain on sale
of securities available for sale
and gain on disposition of
investment in affiliated company (400,000) (874,000) 1,727,000 (49,000)
Gain on sale of securities
available for sale 1,159,000
Gain on disposition of investment
in affiliate 931,000
---------- ---------- ----------- -----------
Income (loss) before income taxes (400,000) (874,000) 2,886,000 882,000
Provision (benefit) for income
taxes (5,000) (20,000) 113,000 2,000
---------- ---------- ----------- -----------
Net income (loss) $ (395,000) $ (854,000) $ 2,773,000 $ 880,000
========== ========== =========== ===========
Net income (loss) per share $ (.07) $ (.15) $ .46 $ .15
========== ========== =========== ===========
Weighted average shares
outstanding 6,000,000 5,809,000 6,013,000 5,827,000
========== ========== =========== ===========
Net income (loss) per share was computed based upon the weighted average number
of shares outstanding, including common stock equivalents.
See accompanying notes to condensed financial statements.
-2-
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and equivalents $ 1,889,000 $ 1,017,000
Securities available for sale 3,940,000
Accounts receivable 2,063,000 1,430,000
Inventories 5,097,000 3,439,000
Other current assets 767,000 578,000
------------ ------------
Total current assets 13,756,000 6,464,000
Property and equipment, net 702,000 879,000
Securities available for sale 2,533,000
Other assets 1,658,000 1,582,000
------------ ------------
$ 16,116,000 $ 11,458,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 2,127,000 $ 1,613,000
Other current liabilities 659,000 697,000
------------ ------------
Total current liabilities 2,786,000 2,310,000
------------ ------------
Shareholders' equity:
Common stock, no par value,
24,800,000 shares authorized,
6,001,000 and 5,816,000 shares
issued and outstanding at
September 30, 1996 and
December 31, 1995, respectively 29,725,000 29,351,000
Unrealized holding losses from
securities available for sale (1,035,000)
Accumulated deficit (16,395,000) (19,168,000)
------------ ------------
Total shareholders' equity 13,330,000 9,148,000
------------ ------------
$ 16,116,000 $ 11,458,000
============ ============
See accompanying notes to condensed financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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SYNBIOTICS CORPORATION
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 2,773,000 $ 880,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 599,000 761,000
Inventory reserve 243,000
Gain on sale of securities available for sale (1,159,000)
Gain on disposition of investment in affiliate (931,000)
Changes in assets and liabilities:
Accounts receivable (633,000) 595,000
Inventories (1,658,000) (208,000)
Other assets (192,000) 243,000
Accounts payable and accrued expenses 514,000 (494,000)
Other liabilities (38,000) 2,000
----------- ----------
Net cash provided by operating activities 206,000 1,091,000
----------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (96,000) (125,000)
Investment in securities available for sale (3,940,000)
Proceeds from sale of securities available for sale 4,727,000
----------- ----------
Net cash provided by (used for) investing activities 691,000 (125,000)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net (25,000) 23,000
----------- ----------
Net cash (used for) provided by financing activities (25,000) 23,000
----------- ----------
Net increase in cash and equivalents 872,000 989,000
Cash and equivalents - beginning of year 1,017,000 447,000
----------- ----------
Cash and equivalents - end of period $ 1,889,000 $1,436,000
=========== ==========
See accompanying notes to condensed financial statements.
-4-
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying balance sheet as of September 30, 1996 and the statements of
operations and of cash flows for the nine month periods ended September 30, 1996
and 1995 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,
1995. 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 and U.S. Government Treasury
securities.
NOTE 3 - INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Raw materials $1,764,000 $ 665,000
Work in process 4,000 633,000
Finished goods 3,329,000 2,141,000
---------- ----------
$5,097,000 $3,439,000
========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
RESULTS OF OPERATIONS
Total revenue for the third quarter of 1996 increased by $1,508,000 or 63% over
the quarter ended September 30, 1995, and increased for the nine months ended
September 30, 1996 by $3,842,000 or 34% over the nine months ended September 30,
1995. The increases are primarily due to an increase in product sales of
$1,463,000 or 64% during the third quarter of 1996, and an increase in product
sales of $3,667,000 or 34% during the nine months ended September 30, 1996,
respectively.
The increase in product sales during the third quarter of 1996 comprises an
increase in diagnostic sales of $238,000 or 11% and a $1,226,000 or 161%
increase in the sales of vaccines. The increased diagnostic sales are primarily
due to increased average selling prices and the introduction of
Assure/(R)//Parvo, for the detection of canine parvovirus, and ICT GOLD/TM/
FeLV, the Company's new feline leukemia diagnostic. The increased average
selling prices of the Company's existing diagnostic products resulted from a
general price increase during the third quarter of 1996, as well as the non-
recurrence of promotional pricing which was in effect during the third quarter
of 1995. Vaccine sales increased due to sales to private label partners and
increased international and domestic shipments of bulk feline leukemia vaccine.
The nine months ended September 30, 1996 saw an increase in diagnostic sales of
$1,701,000 or 23% and a $1,976,000 or 52% increase in vaccine sales, both
explained by the respective factors discussed above, as well as the introduction
of the Company's DiroCHEK TF/(R)/ canine heartworm diagnostic product, in
January 1996, to regain unit sales and price points eroded in 1995 due to a
major competitor's improved microwell canine heartworm product. Also, in 1996
the Company was able to market its ICT GOLD/TM/ HW canine heartworm diagnostic
for the full nine months (the product was introduced in March 1995).
The cost of sales as a percentage of product revenue decreased to 61% during the
third quarter of 1996 as compared to 72% for the quarter ended September 30,
1995. The improvement is due to the increase in average selling prices
discussed above and the non-recurrence of a $243,000 write-off of vaccine
inventory during the third quarter of 1995. These factors were partially offset
by extra costs in connection with the 1996 transition of vaccine manufacturing
from one third party to another and by the increased domestic shipments of bulk
feline leukemia vaccine to Rhone Merieux, Inc. (located in Athens, Georgia)
during the third quarter of 1996. The Company has contracted to sell bulk
vaccine to Rhone Merieux, Inc. at cost because the Company receives a royalty on
Rhone Merieux, Inc.'s resulting product sales in the United States. By
contrast, the Company's international sales of bulk feline leukemia vaccine to
Rhone-Merieux of France are at a profit, not at cost. Cost of sales as a
percentage of product revenue would have been 57% and 66% during the quarters
ended September 30, 1996 and 1995, respectively, if the zero margin bulk sales
and inventory write-off were not taken into consideration. The cost of sales as
a percentage of product revenue decreased to 52% for the nine months ended
September 30, 1996 as compared to 56% for the nine months ended September 30,
1995. The improvement is primarily due to factors similar to those discussed in
the quarterly comparison.
Research and development expenses and selling and marketing expenses fluctuated
insignificantly during the third quarter of 1996 and during the nine months
ended September 30, 1996. Each declined, during the 1996 periods, as a
percentage of sales.
General and administrative expenses during the third quarter of 1996 increased
by $417,000 or 111% over the quarter ended September 30, 1995, and increased
during the nine months ended September 30, 1996 by $559,000 or 51% over the nine
months ended September 30, 1995. The increases are due to the retirement of the
Company's President on July 31, 1996, the addition of a new Chief Executive
Officer in May 1996 and an increase in certain patent-related legal expenses.
-6-
The Company's business is seasonal, and is concentrated within the canine
heartworm selling season, which falls mainly in the quarters ending March 31 and
June 30 of each year. Sales and results from operations in the quarters ending
September 30 and December 31 of each year are expected to be less favorable than
in the heartworm selling season.
In October 1996, the Company was notified by two of its important distributors
that they had terminated their distribution agreements with the Company. While
the Company believes that its remaining distributors will be able to absorb the
business of these two distributors, it is not known how long such absorption
will take. As a result, the loss of these two distributors may have a
significant impact on the Company's fourth quarter 1996 sales.
On February 27, 1996 and February 28, 1996, the Company sold a total of 614,000
shares of Texas Biotechnology Corporation ("TBC") common stock on the American
Stock Exchange at an average selling price of $3.573 per share. As a result of
the transactions, the Company recognized a gain of $385,00 during the first
quarter of 1996. As a result of the sale of the shares, the Company's ownership
of TBC was reduced to approximately 3%. During the period April 25, 1996 to May
2, 1996, the Company sold its remaining 614,000 shares of TBC common stock on
the American Stock Exchange at an average selling price of $4.205 per share. As
a result of the transactions, the Company recognized a gain of $774,000 during
the second quarter of 1996. The net proceeds received from the sales, which
totalled $4,727,000, will be used primarily for working capital requirements and
to fund business opportunities such as acquisitions. On June 30, 1995, the
Company received 573,000 shares of TBC common stock resulting from the
satisfaction of a certain contingency on May 31, 1995 related to the acquisition
of ImmunoPharmaceutics, Inc. ("IPI") by TBC in July 1994. The Company had been
a major shareholder of IPI, and in 1994 had recognized a $2,036,000 gain on the
transaction for financial reporting purposes. In the second quarter of 1995,
the Company recognized an additional gain for financial reporting purposes in
the amount of $931,000.
FINANCIAL CONDITION
Management believes that the Company's present capital resources, which included
working capital of $10,970,000 at September 30, 1996, are sufficient to meet its
current working capital needs and also the working capital needs associated with
the acquisition of International Canine Genetics, Inc. ("ICG") (see Part II,
Item 5). ICG has had operating losses to date and the Company expects that
business's losses to continue through at least 1997. Included in working
capital at September 30, 1996 is inventory in the amount of $5,097,000 as
compared to $3,439,000 at December 31, 1995. The increase is due to the
building of inventory in order to meet anticipated demand for the upcoming
canine heartworm season, as well as inventory for the Company's OTC biological
products which did not exist at December 31, 1995.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
No material developments.
ITEM 2. CHANGES IN SECURITIES
---------------------
None.
-7-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
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 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
2.2 Purchase Agreement dated July 23, 1996 by and among the
Registrant, International Canine Genetics, Inc. and S.R.
One, Limited/(2)/.
2.3 Amendment to Purchase Agreement dated September 7, 1996 by
and among the Registrant, International Canine Genetics,
Inc. and S.R. One, Limited/(3)/.
-8-
10.36.2 Amendment to FeLV Distribution Agreement between the
Registrant and Bio-Trends International, Inc., dated as of
August 22, 1996/(1)/.
10.38.1 Addendum to Distribution Agreement between the Registrant
and Rhone-Merieux, dated April 11, 1996/(1)/.
10.38.2 Second Addendum to Distribution Agreement between the
Registrant and Rhone-Merieux, dated August 27, 1996.
10.41.1 Addendum to Agreement between the Registrant and Rhone
Merieux, Inc., dated August 22, 1996/(1)/.
11.1 Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule (for electronic filing purposes
only).
- -----------------------------
(1) Certain confidential portions of this exhibit have been omitted by means of
blacking out the text (the "Mark"). This exhibit has been filed separately with
the Secretary of the Commission without the Mark pursuant to the Company's
Application Requesting Confidential Treatment under Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(2) 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.
(3) 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.
(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: November 13, 1996 /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)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-QSB
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
2.2 Purchase Agreement dated July 23, 1996 by and among the Registrant,
International Canine Genetics, Inc. and S.R. One, Limited/(2)/.
2.3 Amendment to Purchase Agreement dated September 7, 1996 by and
among the Registrant, International Canine Genetics, Inc. and S.R.
One, Limited/(3)/.
10.36.2 Amendment to FeLV Distribution Agreement between the Registrant and
Bio-Trends International, Inc., dated as of August 22, 1996/(1)/.
10.38.1 Addendum to Distribution Agreement between the Registrant and
Rhone-Merieux, dated April 11, 1996/(1)/.
10.38.2 Second Addendum to Distribution Agreement between the Registrant
and Rhone-Merieux, dated August 27, 1996.
10.41.1 Addendum to Agreement between the Registrant and Rhone Merieux,
Inc., dated August 22, 1996/(1)/.
11.1 Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule (for electronic filing purposes only).
- ---------------------------
(1) Certain confidential portions of this exhibit have been omitted by means of
blacking out the text (the "Mark"). This exhibit has been filed separately with
the Secretary of the Commission without the Mark pursuant to the Company's
Application Requesting Confidential Treatment under Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(2) 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.
(3) 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.