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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1997, 7,392,698 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. Condensed Statement of Operations -
Three months ended March 31, 1997 and 1996 3
Condensed Balance Sheet -
March 31, 1997 and December 31, 1996 4
Condensed Statement of Cash Flows -
Three months ended March 31, 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
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Item 1. Financial Statements
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Synbiotics Corporation
Condensed Statement of Operations (unaudited)
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
Revenues:
Product sales $6,940,000 $5,750,000
License fees and other 79,000 171,000
Interest 60,000 11,000
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7,079,000 5,932,000
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Cost and expenses:
Cost of sales 3,382,000 2,779,000
Research and development 307,000 216,000
Selling and marketing 1,300,000 1,229,000
General and administrative 664,000 385,000
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5,653,000 4,609,000
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Income before gain on sale of securities
available for sale 1,426,000 1,323,000
Gain on sale of securities available for sale 385,000
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Income before income taxes 1,426,000 1,708,000
Provision for income taxes 596,000 57,000
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Net income $ 830,000 $1,651,000
========== ==========
Net income per share $ .11 $ .28
========== ==========
Weighted average shares outstanding 7,485,000 5,911,000
========== ==========
Net income per share was computed based upon
the weighted average number of shares
outstanding, including common stock
equivalents.
See accompanying notes to condensed financial statements.
-3-
Item 1. Financial Statements (continued)
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Synbiotics Corporation
Condensed Balance Sheet
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March 31, December 31,
1997 1996
------------ -------------
(unaudited) (audited)
Assets
Current assets:
Cash and equivalents $ 1,751,000 $ 3,050,000
Securities available for sale 2,214,000 2,872,000
Accounts receivable 4,929,000 1,363,000
Inventories 4,723,000 5,213,000
Deferred tax assets 460,000 1,045,000
Other current assets 818,000 1,353,000
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Total current assets 14,895,000 14,896,000
Property and equipment, net 668,000 656,000
Goodwill 5,257,000 5,347,000
Deferred tax assets 6,144,000 6,113,000
Other assets 1,699,000 1,555,000
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$28,663,000 $28,567,000
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,197,000 $ 2,241,000
Other current liabilities 650,000
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Total current liabilities 2,197,000 2,891,000
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Shareholders' equity:
Common stock, no par value, 24,800,000
shares authorized, 7,393,000 and
7,392,000 shares issued and outstanding
at March 31, 1997 and December 31, 1996 35,526,000 35,566,000
Accumulated deficit (9,060,000) (9,890,000)
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Total shareholders' equity 26,466,000 25,676,000
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$28,663,000 $28,567,000
=========== ===========
See accompanying notes to condensed financial statements.
-4-
Item 1. Financial Statements (continued)
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Synbiotics Corporation
Condensed Statement of Cash Flows (unaudited)
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Three Months Ended
March 31,
-----------------------
1997 1996
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Cash flows from operating activities:
Net income $ 830,000 $ 1,651,000
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 264,000 231,000
Gain on sale of securities available for sale (385,000)
Changes in assets and liabilities:
Accounts receivable (3,566,000) (2,142,000)
Inventories 490,000 (643,000)
Deferred taxes 554,000
Other assets 273,000 16,000
Accounts payable and accrued expenses (44,000) 450,000
Other liabilities (650,000) (11,000)
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Net cash (used for) operating activities (1,849,000) (833,000)
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Cash flows from investing activities:
Acquisition of property and equipment (68,000) (16,000)
Investment in securities available for sale (715,000)
Proceeds from sale of securities available for sale 658,000 2,167,000
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Net cash provided by investing activities 590,000 1,436,000
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Cash flows from financing activities:
Proceeds from issuance of common stock, net (40,000)
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Net cash (used for) financing activities (40,000)
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Net (decrease) increase in cash and equivalents (1,299,000) 603,000
Cash and equivalents - beginning of year 3,050,000 1,017,000
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Cash and equivalents - end of period $ 1,751,000 $ 1,620,000
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See accompanying notes to condensed financial statements.
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Item 1. Financial Statements (continued)
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SYNBIOTICS CORPORATION
Notes to Condensed Financial Statements (unaudited)
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Note 1 - Interim Financial Statements:
The accompanying balance sheet as of March 31, 1997 and the statements of
operations and of cash flows for the three month periods ended March 31, 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.
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 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:
March 31, December 31,
1997 1996
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Raw materials $2,209,000 $1,970,000
Work in process 43,000 8,000
Finished goods 2,471,000 3,235,000
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$4,723,000 $5,213,000
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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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Item 1. Financial Statements (continued)
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SYNBIOTICS CORPORATION
Notes to Condensed Financial Statements (unaudited)
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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 months ended March 31,
1997 and 1996 assuming that SFAS 128 were in effect as of January 1, 1996:
Three Months Ended March 31,
----------------------------
1997 1996
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(unaudited) (unaudited)
As reported:
Primary EPS $ .11 $ .28
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Pro forma:
Basic and diluted EPS $ .11 $ .28
========= =========
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Item 2. Management's Discussion and Analysis or Plan of Operation
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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 an 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:
Competition
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Competition in the animal health care industry is intense. Many competitors,
such as Pfizer Animal Health, Mallinckrodt Veterinary and IDEXX Laboratories,
have substantially greater financial, manufacturing, marketing and product
research resources than the Company. Large companies in particular have
extensive expertise in conducting pre-clinical and clinical testing of new
products and in obtaining the necessary regulatory approvals to market products.
Competition is based on test sensitivity, accuracy and speed; product price; and
similar factors. IDEXX Laboratories requires its distributors not to carry the
products of competitors such as 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
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Although the Company's operations were profitable in the first quarters of 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 $9,060,000 at
March 31, 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.
No Assurance that Acquired Businesses Can Be Successfully Combined
- ------------------------------------------------------------------
There can be no assurance that the anticipated benefits of the acquisition of
the business of International Canine Genetics, Inc. ("ICG") or any other future
acquisitions, including without limitation the proposed acquisition of the
veterinary diagnostics business of Rhone Merieux now being negotiated
(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, 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.
Reliance on Third Party Manufacturers
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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
-8-
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
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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.
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.
-9-
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
(such as the contemplated Rhone Merieux diagnostics 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. 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 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.
-10-
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
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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
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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 first quarter of 1997 increased by $1,147,000 or 19% over
the first quarter of 1996. Product sales during the first quarter of 1997
increased $1,190,000 or 21%. The increase is due to increase in diagnostic
sales of $1,384,000 or 37%, offset by a decrease of $193,000 or 10% in vaccine
sales. Diagnostic sales increased due to increased sales of canine heartworm
diagnostic products, resulting from a combination of price increases and
promotional programs, and canine breeding diagnostic products acquired from ICG
in October 1996, 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). The decreased
vaccine sales are due to decreased shipments of bulk feline leukemia vaccine
(related to the timing of shipments as requested by OEM customers) and a
decrease in average selling prices related to certain potentially short-dated
vaccines, offset by an increase in sales of vaccines to private label partners.
-11-
Interest, license fees and other revenue during the first quarter of 1997
decreased $43,000 or 24% from the first quarter of 1996 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 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 in the resulted in a $385,000
gain in the first quarter of 1996.
The cost of sales as a percentage of product revenue was 48% during the first
quarter of 1997 and 1996. Although product sales increased by 21% during the
first quarter, the cost of sales as a percentage of product revenue was
unchanged due to the fact that a larger percentage of product sales during 1997
being 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 margins during the first quarter 1997 were
also affected by the decrease in average selling prices related to certain
potentially short-dated vaccines discussed above.
Research and development expenses during the first quarter of 1997 increased
$91,000 or 42% over the first quarter of 1996. The increase is 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 4% during the first quarters of 1997 and 1996.
Selling and marketing expenses during the first quarter of 1997 increased by
$71,000 or 6% over the first quarter of 1996. The increase is due primarily to
increased salaries and consulting expenses related to the acquisition of the
operations of ICG, offset by a reduction in advertising and promotional
expenses. Selling and marketing expenses as a percentage of revenue were 18%
during the first quarter of 1997 as compared to 21% during the first quarter of
1996.
General and administrative expenses during the first quarter of 1997 increased
by $279,000 or 72% over the first quarter of 1996. The increase is primarily
due 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 9% during the first quarter of 1997 as compared to 6%
during the first quarter of 1996.
The provision for income taxes during the first quarter of 1997 increased
$539,000 or 946% over the first quarter of 1996. The combined Federal and state
effective tax rate was 42% during the first quarter of 1997 as compared to 3%
during the first quarter of 1996. The income tax provision during the first
quarter of 1997 comprises a current income tax provision of $44,000 and a
deferred income tax provision of $552,000. The income tax provision during the
first quarter of 1996 comprises only a current income tax provision of $57,000.
The current provision for income taxes during the first quarters of 1997 and
1996 represent 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 March 31, 1996 the Company provided a deferred tax
asset valuation allowance for deferred tax assets which management determined
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, although a provision for deferred income taxes was recognized during the
first quarter of 1997 and 1996 relating to the utilization of net operating loss
carryforwards, a benefit from deferred income taxes was recognized during the
first quarter of 1996 as a portion of the valuation allowance, equal to the tax
effected net operating loss carryforwards utilized, was released. There was
-12-
no such benefit during the first quarter of 1997 as the valuation allowance had
been fully released as of December 31, 1996. The deferred tax provision during
the first quarter of 1997 resulted in a reduction in deferred tax assets, rather
than a current tax liability.
Financial Condition
Management believes that the Company's present capital resources, which included
working capital of $12,698,000 at March 31, 1997, are sufficient to meet its
current working capital needs.
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.
Other
On February 3, 1997, the Company announced that it had entered into a non-
binding letter of intent to acquire the world-wide veterinary diagnostics
business unit, including the research and development, production and marketing
personnel, of Rhone Merieux S.A. ("RM"), a wholly-owned subsidiary of the Rhone
Poulenc Group. In addition, Synbiotics and RM intend to enter at the time of
the closing, (which is scheduled for the second quarter of 1997), into
collaborative agreements whereby RM would provide technology and/or reagents
needed by Synbiotics to continue the RM veterinary diagnostics business without
interruption, and Synbiotics would have a right of first refusal to license RM
technology in the field of veterinary diagnostics.
RM, based in Lyon, France, is the fourth largest animal health group in the
world. RM develops, produces and markets vaccines and innovative medication for
the prevention and treatment of animal diseases. In 1996, RM's consolidated
revenue was approximately $900,000,000. RM's veterinary diagnostic business
unit approximated $12,000,000 in revenue during 1996.
Negotiations relating to the transaction are ongoing, and the Company is
currently engaged in negotiations to obtain the necessary financing. There can
be no assurance that the Company will enter into a definitive agreement or that
the Company will be able to obtain the necessary financing.
There can be no assurance that the anticipated benefits of the acquisition will
be realized. The acquisition would involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the RM veterinary diagnostic unit ("RMD"), potentially dilutive issuances of
equity and/or debt securities, accounting charges, operating companies in
different geographic locations with different cultures, the potential loss of
key employees of RMD, 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 (e.g., large-animal diagnostics and the
European market). In addition, there can be no assurance that the acquisition
would 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 RMD and Synbiotics.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings:
------------------
None.
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Item 2. Changes in Securities:
----------------------
None.
Item 3. Defaults Upon Senior Securities:
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
None.
Item 5. Other Information:
------------------
None.
Item 6. Exhibits and Reports on Form 8-K:
---------------------------------
(a) Exhibits
--------
10.7 Employment Agreement between the Registrant and Paul A. Rosinack,
dated October 25, 1996.
10.61 Patent and Know-How License Agreement Amdex A/S and the Registrant,
dated August 29, 1996./(1)/
10.62 License Agreement between American Home Products Corporation and the
Registrant, dated August 16, 1996./(1)/
10.63 Supply Agreement between the Registrant and American Home Products
Corporation, dated August 16, 1996./(1)/
11.1 Computation of Earnings 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.
(b) Reports on Form 8-K
-------------------
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SYNBIOTICS CORPORATION
Date: May 12, 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)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-QSB
UNDER
SECURITIES EXCHANGE ACT OF 1934
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
10.7 Employment Agreement between the Registrant and Paul A. Rosinack,
dated October 25, 1996.
10.61 Patent and Know-How License Agreement Amdex A/S and the Registrant,
dated August 29, 1996./(1)/
10.62 License Agreement between American Home Products Corporation and the
Registrant, dated August 16, 1996./(1)/
10.63 Supply Agreement between the Registrant and American Home Products
Corporation, dated August 16, 1996./(1)/
11.1 Computation of 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.