<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 June 30, 1996
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:
(541) 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 August 9, 1996 was 13,547,736.
Transitional Small Business Disclosure Format (check):
Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNTHETECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
June 30, March 31,
1996 1996
-------- ---------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 6,292,00 $ 5,049,000
Securities available for sale 410,000 395,000
Accounts receivable, less allowance for
doubtful accounts of $15,000 for both
periods 1,469,000 1,355,000
Inventories 2,160,000 1,924,000
Prepaid expenses 112,000 71,000
Income tax receivable - 152,000
Deferred income taxes 59,000 59,000
Other current assets 1,000 1,000
__________ _________
TOTAL CURRENT ASSETS 10,503,000 9,006,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 1,819,000 1,311,000
SECURITIES AVAILABLE FOR SALE 620,000 626,000
OTHER ASSETS 16,000 16,000
___________ ___________
TOTAL ASSETS $12,958,000 $10,959,000
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
June 30, March 31,
1996 1996
LIABILITIES AND SHAREHOLDERS'EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 534,000 $ 271,000 000 00
Accrued compensation 160,000 479,000
Income taxes payable 651,000 -
Other accrued liabilities 6,000 1,000
Deferred revenue 44,000 98,000
_________ _______
TOTAL CURRENT LIABILITIES 1,395,000 849,000
DEFERRED INCOME TAXES 8,000 10,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding
13,548,000 and 13,475,000 shares 13,000 13,000
Paid-in capital 6,722,000 6,589,000
Employee notes receivable and deferred
compensation (122,000) (130,000)
Unrealized gain on securities available
for sale 25,000 30,000
Retained earnings 4,917,000 3,598,000
__________ __________
TOTAL SHAREHOLDERS' EQUITY 11,555,000 10,100,000
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $12,958,000 $10,959,000
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Month Period Ended June 30 1996 1995
- ---------------------------------------- ---- ----
REVENUES $ 3,521,000 $ 2,214,000
COST OF SALES 1,128,000 747,000
_________ _________
GROSS PROFIT 2,393,000 1,467,000
_________ _________
RESEARCH AND DEVELOPMENT 69,000 59,000
SELLING, GENERAL AND ADMINISTRATIVE 279,000 236,000
_________ _________
OPERATING EXPENSES 348,000 295,000
_________ _________
OPERATING INCOME 2,045,000 1,172,000
OTHER INCOME, net 83,000 59,000
_________ _________
INCOME BEFORE INCOME TAXES 2,128,000 1,231,000
PROVISION FOR INCOME TAXES 809,000 473,000
__________ ________
NET INCOME $1,319,000 $758,000
========== ========
NET INCOME PER COMMON SHARE $0.09 $0.06
===== =====
SHARES USED IN PER SHARE CALCULATION 14,204,911 13,115,735
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Month Period Ended June 30 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,319,000 $758,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and other 55,000 47,000
Amortization of deferred compensation 8,000 -
Accrued interest on securities available for sale (16,000) (28,000)
Realized gain on securities available for sale - (8,000)
(Increase) decrease in assets:
Accounts receivable, net (114,000) (96,000)
Inventories (236,000) (74,000)
Prepaid expenses (41,000) 23,000
Income tax receivable 152,000 -
Other assets - 8,000
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and
income taxes payable 600,000 503,000
Deferred revenue (54,000) -
_________ _________
Net cash provided by operating activities 1,673,000 1,133,000
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (563,000) (82,000)
Proceeds from sale of securities available
for sale - 148,000
________ _______
Net cash (used by) provided by investing activities (563,000) 66,000
________ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercises and
disqualifying dispositions 151,000 16,000
Payments related to the registration of stock (18,000) -
_______ ______
Net cash provided by financing activities 133,000 16,000
_________ _________
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,243,000 1,215,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,049,000 1,199,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,292,000 $2,414,000
========== ==========
NON-CASH INVESTING ACTIVITIES:
Unrealized (loss) gain on securities ($5,000) $25,000
available for sale
Issuance of stock options at below fair value - $21,000
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 1996 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 the three month period
ended June 30:
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<CAPTION>
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Cash Paid
---------
1996 1995
---- ----
Income Taxes $5,000 $ 40,000
</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 represented by each item included in the Statements of Income.
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<CAPTION>
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Percentage of Revenues
----------------------
For the Three Month Period Ended June 30 1996 1995
---- ----
Revenues 100.0% 100.0%
Cost of Sales 32.0 33.7
_____ _____
Gross Profit 68.0 66.3
Research and Development 2.0 2.7
Selling, General and Administrative 7.9 10.7
_____ _____
Operating Income 58.1 52.9
Other Income 2.4 2.7
_____ _____
Income Before Income Taxes 60.5 55.6
Provision for Income Taxes 21.4 23.0
_____ _____
Net Income 37.5% 34.2%
===== =====
</TABLE>
Revenues
Revenues increased by 59% to $3.52 million in the first quarter of
fiscal 1997 from $2.21 million in the first quarter of fiscal 1996.
Peptide Building Blocks (PBBs) represented 100% of revenues for the first
quarter of fiscal 1997 and 98% of revenues for the first quarter of fiscal
1996. International sales, mainly to Japan and Western Europe, were
$516,000 in the first quarter of fiscal 1997 as compared to $629,000 for
the first quarter of fiscal 1996.
Revenues for the first quarter of fiscal 1997 included sales
associated with PBB orders for use in late stage clinical trials by two
customers of $1.35 million and $1.3 million, respectively, representing 75%
of revenues for the quarter. Revenues from these customers in the first
quarter of fiscal 1996 were only $279,000 and $49,000, respectively, or 15%
of revenues for that quarter. These results demonstrate the continuing
potential for period to period fluctuations in sales of products. Moreover,
as a supplier of PBBs for drugs in various stages of development, the
Company's orders are always subject to curtailment or cancellation. For
example, one of the customers referenced above, who has purchased a total of
$3.4 million of a PBB from February 1995 through June 1996, has advised the
Company that it is pursuing an alternative lower-cost manufacturing process
and seriously considering discontinuing additional purchases after August
1996. The Company expects to sell additional amounts of this PBB to this
customer during the second quarter of fiscal 1997 at a similar level to that
of the first quarter of fiscal 1997.
<PAGE>
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 PBBs
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 was $2.39 million or 68% of revenues in the first quarter
of fiscal 1997 as compared to $1.47 million or 66% of revenues in the first
quarter of fiscal 1996. 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.
Operating Expenses
Research and development (R&D) and selling, general and administrative
(SG&A) expenses were $348,000 in the first quarter of fiscal 1997 compared
to $295,000 in the first quarter of fiscal 1996. As a percentage of
revenues, R&D and SG&A expenses decreased to 10% in the first quarter of
fiscal 1997 from 13% in the same period of fiscal 1996 due to the increased
level of revenues.
Operating Income
Operating income increased to $2.05 million or 58% of revenues in the
first quarter of fiscal year 1997 compared with $1.17 million or 53% of
revenues in the first quarter of fiscal year 1996.
Other Income
The net other income of $83,000 in the first quarter of fiscal 1997
and $59,000 in the first quarter of fiscal 1996 came primarily from
interest earnings.
Net Income
For the first quarter of fiscal 1997 the Company earned $2.13 million
before income taxes. A provision for income taxes of $809,000 resulted in
net income of $1.32 million. The Company's effective tax rate was 38% for
the first quarter of fiscal 1997 and the first quarter of fiscal 1996.
<PAGE>
Industry Factors
The market for PBBs 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 earlier stages of research and development and clinical trials.
Developments of new biological information, based on rational drug design
and combinatorial chemistry, 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. Cost pressures in the pharmaceutical industry can
also cause pharmaceutical companies to investigate alternative drug
manufacturing processes which may not include the Company's products as an
intermediate.
As a supplier of building blocks for peptide-based drugs,
Synthetech's revenue 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" PBB sales for
any particular drug development program. Since Synthetech's revenue comes
predominantly from PBBs used in drug development programs, the overall
impact on Synthetech's business from the cancellation rate will depend, to
a large extent, on the rate of new drug development efforts being
commenced.
The advancement of a drug for which Synthetech is providing PBBs from
a drug development program into an "approved" status by the FDA could also
significantly affect Synthetech's business if Synthetech is able to
continue to supply the PBBs for the approved drug. With the increased
volume typically associated with "approved" drugs, the Company, however,
expects to face increased competition for this business.
These industry factors combined with timing of customer and
regulatory decisions and other unanticipated events may produce substantial
fluctuations in Synthetech's revenues for the foreseeable future.
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of $9.11 million
compared to $8.16 million at March 31, 1996. The Company's cash, cash
equivalents and short term securities available for sale at June 30, 1996
totaled $6.7 million. In addition, the Company had a $1 million bank line
of credit of which there was no amount outstanding at June 30, 1996.
The increase in accounts receivable to $1.47 million at June 30, 1996
from $1.36 million at March 31, 1996 reflected the higher level of sales in
the quarter. The increase of inventory to $2.16 million at June 30, 1996
from $1.92 million at March 31, 1996 primarily resulted from higher levels
of raw materials and work-in-process inventory partially offset by lower
levels of finished products inventory.
The Company had approximately $563,000 of capital expenditures during
the first three months of fiscal 1997 for equipment and equipment upgrades
in the existing plant and for the new plant expansion. The Company
anticipates total capital expenditures for fiscal 1997 for the existing
plant to be $500,000 and for the new plant expansion to be $6 million for a
total of $6.5 million. The Company continues to expect to finance a
majority of these capital expenditures from internal cash flow, but is also
exploring bank financing and other outside funding sources.
Groundbreaking for the new plant began during the first quarter of
fiscal 1997 and the expected completion date continues to be in the spring
of 1997. The Company is currently running round-the-clock production in
response to order demand.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Articles of Incorporation
3.2* Bylaws
27 Financial Data Schedule
__________________
*Incorporated by reference herein from the Company's Form 10-K for
the year ended March 31, 1991.
(b) Reports
No reports on Form 8-K were filed during the quarter.
<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: August 12, 1996 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: August 12, 1996 /s/ Charles B. Williams
Charles B. Williams
Vice President, Finance
and Administration, C.F.O,
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1996 10-QSB 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-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 6292000
<SECURITIES> 410000
<RECEIVABLES> 1469000
<ALLOWANCES> 15000
<INVENTORY> 2160000
<CURRENT-ASSETS> 10503000
<PP&E> 1819000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12958000
<CURRENT-LIABILITIES> 1395000
<BONDS> 0
<COMMON> 13000
0
0
<OTHER-SE> 11555000
<TOTAL-LIABILITY-AND-EQUITY> 12958000
<SALES> 3521000
<TOTAL-REVENUES> 3521000
<CGS> 1128000
<TOTAL-COSTS> 1476000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2128000
<INCOME-TAX> 809000
<INCOME-CONTINUING> 1319000
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<NET-INCOME> 1319000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
