<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________to_______________
Commission file number 0-12992
SYNTHETECH, INC.
(Exact name of registrant as specified in its charter)
Oregon 84-0845771
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1290 Industrial Way, Albany, Oregon 97321
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(503) 967-6575
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_____
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of November 9, 1995 was 12,278,672.
Transitional Small Business Disclosure Format (check):
Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNTHETECH, INC.
BALANCE SHEETS
--------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1995 1995
----------------------------------------- ----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $2,371,000 $1,199,000
Securities available for sale 248,000 250,000
Accounts receivable, less allowance for
doubtful accounts of $15,000 for September
and $13,000 for March 1,252,000 840,000
Inventories 1,574,000 1,581,000
Prepaid expenses 89,000 54,000
Deferred income taxes 39,000 39,000
Other current assets 1,000 7,000
---------- --------
TOTAL CURRENT ASSETS 5,574,000 3,970,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 1,119,000 1,052,000
SECURITIES AVAILABLE FOR SALE 1,514,000 1,619,000
OTHER ASSETS 16,000 20,000
---------- --------
TOTAL ASSETS $8,223,000 $6,661,000
========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
BALANCE SHEETS
--------------
(unaudited)
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1995 1995
----------------------------------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 315,000 $ 179,000
Accrued compensation 195,000 160,000
Income taxes payable 33,000 47,000
Other accrued liabilities 4,000 10,000
----------- -----------
TOTAL CURRENT LIABILITIES 547,000 396,000
DEFERRED INCOME TAXES 19,000 6,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
12,279,000 and 12,054,000 shares 12,000 12,000
Paid-in capital 5,387,000 5,196,000
Employee notes receivable and deferred
compensation (91,000) -
Unrealized gain on securities
available for sale 49,000 27,000
Retained earnings 2,300,000 1,024,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,657,000 6,259,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,223,000 $6,661,000
=========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF OPERATIONS
------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
--------------------- --------- --------- --------- ---------
REVENUES $1,976,000 $1,230,000 $4,190,000 $2,196,000
COST OF SALES 939,000 623,000 1,686,000 1,161,000
--------- --------- --------- ---------
GROSS PROFIT 1,037,000 607,000 2,504,000 1,035,000
RESEARCH AND DEVELOPMENT 62,000 44,000 121,000 76,000
SELLING, GENERAL AND
ADMINISTRATIVE 198,000 191,000 434,000 358,000
--------- --------- --------- --------
OPERATING EXPENSE 260,000 235,000 555,000 434,000
--------- --------- --------- --------
OPERATING INCOME 777,000 372,000 1,949,000 601,000
OTHER INCOME 63,000 17,000 122,000 9,000
INTEREST EXPENSE - 9,000 - 14,000
--------- --------- --------- --------
INCOME BEFORE INCOME TAXES 840,000 380,000 2,071,000 596,000
PROVISION FOR INCOME TAXES 322,000 114,000 795,000 179,000
---------- --------- -------- --------
NET INCOME $ 518,000 $ 266,000 $1,276,000 $ 417,000
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $0.04 $0.02 $0.09 $0.03
===== ===== ===== =====
SHARES USED IN PER SHARE
CALCULATION 13,754,285 13,057,053 13,658,262 13,020,416
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For The Six Month Period Ended September 30 1995 1994
------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,276,000 $ 417,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and other 97,000 72,000
Amortization of deferred compensation 11,000 -
Gain on sales of property, plant and equipment - (6,000)
Loss on marketable trading securities - 58,000
Purchases of marketable trading securities - (925,000)
Proceeds from sale of marketable trading securities - 870,000
Accrued interest on securities available for sale (2,000) -
Accrued interest on employee notes receivable (1,000) -
Realized gain on sale of securities available for
sale (8,000) -
(Increase) decrease in assets:
Accounts receivable, net (412,000) (435,000)
Inventories 7,000 113,000
Prepaid expenses (35,000) (14,000)
Other assets 10,000 -
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and
income taxes payable 151,000 55,000
---------- ---------
Net cash provided by operating activities 1,094,000 205,000
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (161,000) (79,000)
Proceeds from sales of property, plant and equipment - 6,000
Proceeds from sale of securities available for sale 148,000 -
Employee notes receivable (80,000) -
---------- ---------
Net cash used by investing activities (93,000) (73,000)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt obligations - (15,000)
Proceeds from stock option exercises 171,000 10,000
---------- ---------
Net cash provided by (used by) financing activities 171,000 (5,000)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,172,000 127,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,199,000 580,000
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,371,000 $ 707,000
========== ==========
NON-CASH INVESTING ACTIVITIES:
Unrealized gain on securities available for sale,
net of deferred taxes of $13,000 22,000 -
</TABLE>
See notes to financial statements.
<PAGE>
NOTE A. GENERAL AND BUSINESS
The summary financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although Synthetech management believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these summary financial statements be read in conjunction
with the financial statements and the notes thereto included in Synthetech's
1995 Form 10-KSB.
Interim financial statements are by necessity somewhat tentative;
judgments are used to estimate quarterly amounts for items that are normally
determinable only on an annual basis. For example, provision for income
taxes is an estimate of the annual liability pro-rated over the quarters of
the fiscal year based on estimates of annual income. Further, all inventory
quantities are verified by physically counting the units on hand at least
once a year. Normally, selected inventories are counted at the end of each
quarter. For those inventories not counted at the end of the quarter,
quantities are determined using measured sales and production data for the
period.
The interim period information included herein reflects all adjustments
which are, in the opinion of Synthetech management, necessary for a fair
statement of the results of the respective interim periods. Results of
operations for interim periods are not necessarily indicative of results to
be expected for an entire year.
NOTE B. STATEMENTS OF CASH FLOWS
Supplemental cash flow disclosures for periods ended September 30:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash Paid
--------- Three Months Six Months
1995 1994 1995 1994
Income Taxes $ 769,000 $ 34,000 $ 809,000 $ 34,000
Interest $ - $ 9,000 $ - $ 16,000
</TABLE>
NOTE C. EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of common
shares and common stock equivalents (stock options and warrants) outstanding
during the applicable period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
revenues by each item included in the Statements of Operations.
<TABLE>
<CAPTION>
Percentage of Revenues
<S> <C> <C> <C> <C>
Three Months Six Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Sales 47.5 50.7 40.2 52.9
----- ----- ----- -----
Gross Profit 52.5 49.3 59.8 47.1
Research and Development 3.2 3.6 2.9 3.5
Selling, General
and Administrative 10.0 15.5 10.4 16.3
----- ----- ----- -----
Operating Expense 13.2 19.1 13.3 19.8
Operating Income 39.3 30.2 46.5 27.3
Other Income 3.2 1.4 2.9 0.4
Interest Expense - 0.7 - 0.6
----- ----- ----- -----
Income Before Income Taxes 42.5 30.9 49.4 27.1
Provision For Income Taxes 16.3 9.3 19.0 8.2
----- ----- ----- -----
Net Income 26.2% 21.6% 30.4% 18.9%
====== ====== ====== ======
</TABLE>
<PAGE>
Revenues
- --------
Synthetech revenues grew by 61% to $1.98 million in the second quarter of
fiscal 1996 from $1.23 million in the second quarter of fiscal 1995.
Revenues were $4.19 million in the first half of fiscal 1996, a 91% increase
from revenues of $2.20 million in the first half of fiscal 1995. Sales of
peptide building blocks, the Company's primary product line, were up 84% for
the second quarter of fiscal 1996 over the second quarter of fiscal 1995, and
were up 122% in the current first half compared to the first half of fiscal
1995.
International revenues, mainly to Japan and Western Europe, were $523,000 in
the second quarter of fiscal 1996 as compared to $163,000 for the second
quarter of fiscal 1995. First half international revenues for fiscal 1996
were $1.15 million compared to $547,000 for the first half of fiscal 1995.
The substantial increase in revenues during the second quarter and first
half of fiscal 1996 again demonstrated the continuing potential for
fluctuations in sales of products. The Company has not yet established a
stable baseload of demand for its products. The Company's products are part
of a new and emerging market with sizable fluctuations in orders between
periods. In most instances, order or reorder cycles for products are not
predictable. Demand for peptide building blocks is extremely variable since
individual clinical trial programs are always subject to significant risk of
suspension or early cancellation and only a small percentage of drugs in
clinical trial programs are ultimately approved for market use. As a result,
the Company expects to continue to see fluctuations in its revenue from
period to period. (See "Industry Factors" below.)
Gross Profit
- ------------
Gross profit increased to $1.04 million in the second quarter of fiscal 1996
from $607,000 in the second quarter of fiscal 1995. As a percent of sales,
gross profit increased to 53% in the second quarter of fiscal 1996 from 49%
for the same period last year. Gross profit increased to $2.5 million or
60% of revenues in the first half of fiscal 1996 from $1.04 million or 47%
of revenues for the same period of fiscal 1995. The increase in gross profit
as a percentage of revenue resulted from the increased level of revenue
combined with the mix of products. The Company expects these factors to
continue to fluctuate from period to period and cause variations in gross
profit margins. Increased revenues positively affect gross profit margins
since a portion of the Company's manufacturing overhead costs are relatively
fixed.
<PAGE>
Operating Expenses
- ------------------
Research and development (R&D) and selling, general and administrative
(SG&A) expenses were $260,000 in the second quarter of fiscal 1996 compared
to $235,000 in the second quarter of fiscal 1995. As a percentage of sales,
R&D and SG&A expenses decreased to 13% in the second quarter of fiscal 1996
from 19% in the same period of fiscal 1995. R&D and SG&A expenses increased
to $555,000 in the first half of fiscal 1996 from $434,000 in fiscal 1995.
The percentage of sales for R&D and SG&A expenses decreased to 13% in the
first half of fiscal 1996 from 20% in the same period of fiscal 1995. While
operating expenses have increased reflecting increased staffing and other
costs associated with the Company's growth, operating expenses as a percent
of revenues have decreased significantly.
Operating Income
- ----------------
Operating income increased to $777,000 or 39% of revenues in the second
quarter of fiscal 1996 from $372,000 or 30% for the same period last year.
For the first half of fiscal 1996 operating income increased to $1.95 million
or 47% of revenues compared with $601,000 or 27% for the first half of
fiscal 1995.
Other Income
- ------------
The $63,000 net other income in the second quarter of fiscal 1996 came from
interest earnings. The $17,000 net other income in the second quarter of
fiscal 1995 primarily included $37,000 of interest earnings and $16,000 in
realized losses from the sale of marketable trading securities. The $122,000
net other income for the first half of fiscal 1996 primarily included
$115,000 of interest earnings and an $8,000 recognized gain on the sale of
securities available for sale. The $9,000 net other income in the first
half of fiscal 1995 primarily included $74,000 of interest earnings, $44,000
in realized losses from the sale of marketable trading securities, and a
$22,000 write down of the Company's holdings of marketable trading
securities. In January, 1995, the Company discontinued its active trading
policy with respect to its marketable securities and instead will hold them
until maturity unless the Company's cash flow needs or changes in investment
markets dictate otherwise.
<PAGE>
Net Income
- ----------
For the second quarter and first half of fiscal 1996, the Company earned
$840,000 and $2.07 million before income taxes, respectively. A provision
for income taxes of $322,000 resulted in net income of $518,000 for the
second quarter and a provision for income taxes of $795,000 resulted in net
income of $1.28 million for the six month period. The Company's effective
tax rate for the second quarter and six months was 38% compared to 30% for
the second quarter and six months of fiscal 1995. This increase is primarily
attributable to utilization of all remaining federal net operating loss
carryforwards in fiscal year 1995.
Industry Factors
- ----------------
The market for peptide building blocks is driven by the market for the
peptide-based drugs in which they are incorporated. Since there are only a
handful of approved peptide-based drugs on the market today, this market is
still very early in development and a substantial amount of the activity is
occurring at the research level. Developments of new biological information
are creating additional peptide-based drug candidates. Cost pressures in the
pharmaceutical industry, however, have tightened the criteria used to assess
drug prospects at all phases of drug development programs.
As a supplier of building blocks for peptide-based drugs, Synthetech's
revenues will be affected by these industry factors. The high cancellation
rate for drug development programs results in a significant likelihood that
there will be no subsequent or "follow-on" peptide building block sales for
any particular drug development program. Since the majority of Synthetech's
revenue historically has been from peptide building blocks used in drug
development programs, the overall impact on Synthetech's business from this
cancellation rate will depend, to a large extent, on the rate of new drug
development efforts being commenced.
These industry factors combined with timing of customer and regulatory
decisions and other unanticipated events may produce substantial fluctuations
in Synthetech's revenue for the foreseeable future.
<PAGE>
Capital Resources and Liquidity
- -------------------------------
With the Company approaching manufacturing capacity constraints in its
existing facility, the Company has announced plans to construct a new plant
to increase its capacity to produce pharmaceutical intermediates. The
Company is currently developing the plant design and expects overall
engineering, construction and equipment costs to be approximately $5 million.
The new plant is expected to be completed around the end of fiscal 1997.
The Company had approximately $161,000 of capital expenditures primarily
for equipment and equipment upgrades during the first half of fiscal 1996.
The Company now anticipates total capital expenditures for fiscal 1996 to be
approximately $1 million which includes expenditures associated with the
plant expansion. The Company believes that its existing funds, together
with cash flow from operations and proceeds from banking relationships,
should be sufficient to meet anticipated funding requirements over the near
term.
At September 30, 1995, the Company had working capital of $5.03 million
compared to $3.57 million at March 31, 1995. The Company's cash and cash
equivalents, and marketable securities at September 30, 1995 totaled
$2.62 million. In addition, the Company had a $1 million bank line of credit
of which there was no amount outstanding at September 30, 1995.
The increase in accounts receivable to $1.25 million at September 30, 1995
from $840,000 at March 31, 1995 primarily reflected the higher level of sales
in the quarter.
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company held its Annual Meeting of Shareholders on July 18, 1995. At
that meeting, the following proposals were approved by the shareholders:
<TABLE>
<CAPTION>
Proposal #1: Election Of Directors
<S> <C> <C>
Name For Withheld
---------- --------
Paul C. Ahrens 10,747,949 66,626
Howard L. Farkas 10,747,484 67,091
Page E. Golsan III 10,748,289 66,286
M. ("Sreeni") Sreenivasan 10,747,089 67,486
</TABLE>
<TABLE>
<CAPTION>
Proposal #2 1995 Incentive Compensation Plan
<S> <C> <C> <C> <C>
For Against Abstain Not Voted
--------- ------- ------- ---------
7,091,074 558,253 75,214 3,090,034
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On September 19, 1995, the Company filed with the Commission a Current Report
on Form 8-K to report plans to construct a new plant.
<PAGE>
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.
SYNTHETECH, INC.
(Registrant)
Date: November 9, 1995 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: November 9, 1995 /s/ Charles B. Williams
Charles B. Williams
Vice President, Finance
and Administration,
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1995 10QSB Balance Sheets, Income Statements, and Cash Flow
Statements, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 2371000
<SECURITIES> 248000
<RECEIVABLES> 1267000
<ALLOWANCES> 15000
<INVENTORY> 1574000
<CURRENT-ASSETS> 5574000
<PP&E> 1119000
<DEPRECIATION> 0
<TOTAL-ASSETS> 8223000
<CURRENT-LIABILITIES> 547000
<BONDS> 0
<COMMON> 12000
0
0
<OTHER-SE> 7657000
<TOTAL-LIABILITY-AND-EQUITY> 8223000
<SALES> 1976000
<TOTAL-REVENUES> 1976000
<CGS> 939000
<TOTAL-COSTS> 1199000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 840000
<INCOME-TAX> 322000
<INCOME-CONTINUING> 518000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
