<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 December 31, 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 February 5, 1996 was 12,302,411.
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)
December 31, March 31,
1995 1995
----------------------------------------- ----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $3,107,000 $1,199,000
Securities available for sale 261,000 250,000
Accounts receivable, less allowance for
doubtful accounts of $15,000 for December
and $13,000 for March 1,539,000 840,000
Inventories 1,766,000 1,581,000
Prepaid expenses 95,000 54,000
Deferred income taxes 39,000 39,000
Other current assets 1,000 7,000
--------- --------
TOTAL CURRENT ASSETS 6,808,000 3,970,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 1,150,000 1,052,000
SECURITIES AVAILABLE FOR SALE 1,021,000 1,619,000
OTHER ASSETS 16,000 20,000
--------- --------
TOTAL ASSETS $8,995,000 $6,661,000
========== ==========
</TABLE>
See notes to financial statements.
<Page
SYNTHETECH, INC.
BALANCE SHEETS
--------------
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
December 31, March 31,
1995 1995
----------------------------------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 228,000 $ 179,000
Accrued compensation 266,000 160,000
Deferred Revenue 98,000 -
Income taxes payable 14,000 47,000
Other accrued liabilities 6,000 10,000
--------- ----------
TOTAL CURRENT LIABILITIES 612,000 396,000
DEFERRED INCOME TAXES 11,000 6,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
12,284,000 and 12,054,000 shares 12,000 12,000
Paid-in capital 5,392,000 5,196,000
Employee notes receivable and deferred
compensation (87,000) -
Unrealized gain on securities
available for sale 36,000 27,000
Retained earnings 3,019,000 1,024,000
--------- ----------
TOTAL SHAREHOLDERS' EQUITY 8,372,000 6,259,000
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,995,000 $6,661,000
========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------
(unaudited)
<TABLE>
<CAPTION> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
--------------------- ---------- ---------- ---------- ----------
REVENUES $2,039,000 $1,578,000 $6,229,000 $3,774,000
COST OF SALES 862,000 625,000 2,548,000 1,786,000
--------- --------- --------- ---------
GROSS PROFIT 1,177,000 953,000 3,681,000 1,988,000
RESEARCH AND DEVELOPMENT 41,000 31,000 162,000 108,000
SELLING, GENERAL AND
ADMINISTRATIVE 186,000 181,000 620,000 538,000
--------- --------- --------- --------
OPERATING EXPENSE 227,000 212,000 782,000 646,000
--------- --------- --------- --------
OPERATING INCOME 950,000 741,000 2,899,000 1,342,000
OTHER INCOME 101,000 10,000 223,000 19,000
INTEREST EXPENSE - 9,000 - 23,000
--------- --------- --------- --------
INCOME BEFORE INCOME TAXES 1,051,000 742,000 3,122,000 1,338,000
PROVISION FOR INCOME TAXES 331,000 222,000 1,126,000 401,000
---------- --------- --------- --------
NET INCOME $ 720,000 $ 520,000 $1,996,000 $ 937,000
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $0.05 $0.04 $0.15 $0.07
===== ===== ===== =====
SHARES USED IN PER SHARE
CALCULATION 13,814,185 12,895,037 13,731,711 12,964,542
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For The Nine Month Period Ended December 31 1995 1994
------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,996,000 $ 937,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and other 147,000 111,000
Amortization of deferred compensation 14,000 -
Gain on sales of property, plant and equipment - (15,000)
Loss on marketable trading securities - 95,000
Purchases of marketable trading securities - (988,000)
Proceeds from sale of marketable trading securities - 906,000
Accrued interest on securities available for sale (11,000) -
Realized gain on sale of securities available for
sale (44,000) -
(Increase) decrease in assets:
Accounts receivable, net (699,000) (367,000)
Inventories (185,000) 159,000
Prepaid expenses (41,000) (25,000)
Other assets 7,000 -
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and
income taxes payable 118,000 182,000
Deferred revenue 98,000 -
---------- --------
Net cash provided by operating activities 1,400,000 995,000
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (245,000) (190,000)
Proceeds from sales of property, plant and equipment - 15,000
Proceeds from sale of securities available for sale 658,000 -
Employee notes receivable (80,000) -
---------- ----------
Net cash provided by (used by) investing activities 333,000 (175,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt obligations - (22,000)
Proceeds from stock option exercises 175,000 37,000
---------- ---------
Net cash provided by financing activities 175,000 15,000
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,908,000 835,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,199,000 580,000
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,107,000 $1,415,000
NON-CASH INVESTING ACTIVITIES: ========== ==========
Unrealized gain on securities available for sale,
net of deferred taxes of $5,000 $ 9,000 -
</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 December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash Paid
Three Months Nine Months
1995 1994 1995 1994
Income Taxes $ 351,000 $ 65,000 $ 1,160,000 $ 99,000
Interest $ - $ 9,000 $ - $ 25,000
</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
Income.
<TABLE>
<CAPTION>
Percentage of Revenues
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Sales 42.3 39.6 40.9 47.3
----- ----- ----- -----
Gross Profit 57.7 60.4 59.1 52.7
Research and Development 2.0 2.0 2.6 2.9
Selling, General
and Administrative 9.1 11.5 10.0 14.3
----- ----- ----- -----
Operating Expense 11.1 13.5 12.6 17.2
Operating Income 46.6 46.9 46.5 35.5
Other Income 5.0 0.6 3.6 0.5
Interest Expense - 0.6 - 0.6
----- ----- ----- -----
Income Before Income Taxes 51.6 46.9 50.1 35.4
Provision For Income Taxes 16.2 14.1 18.1 10.6
----- ----- ----- -----
Net Income 35.4% 32.8% 32.0% 24.8%
====== ====== ====== ======
</TABLE>
<PAGE>
Revenues
Synthetech revenues grew by 29% to $2.04 million in the third
quarter of fiscal 1996 from $1.58 million in the third quarter of fiscal
1995. Revenues were $6.23 million for the nine months of fiscal 1996,
a 65% increase from revenues of $3.77 million for the nine months of fiscal
1995. Sales of peptide building blocks (PBBs), the Company's primary
product line, were up 34% for the third quarter of fiscal 1996 over the
third quarter of fiscal 1995, and were up 82% in the current nine months
compared to the nine months of fiscal 1995.
International revenues, mainly to Japan and Western Europe, were
$383,000 in the third quarter of fiscal 1996 as compared to $249,000
for the third quarter of fiscal 1995. International revenues for the nine
months of fiscal 1996 were $1.54 million compared to $796,000 for the nine
months of fiscal 1995.
Revenues for the third quarter and the nine months of fiscal 1996
included sales of a particular PBB of $295,000 and $1.06 million,
respectively. This PBB is being used in late stage clinical trials by a
pharmaceutical company and, in January 1996, this company increased its
calendar year 1996 commitment to purchase the PBB to $2.7 million. Sales
of this magnitude relative to the Company's aggregate revenues demonstrate
the continuing potential for fluctuations in revenues from period to period.
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 increased to $1.18 million in the third quarter of
fiscal 1996 from $953,000 in the third quarter of fiscal 1995. As a
percent of sales, gross profit declined to 58% in the third quarter of
fiscal 1996 from 60% for the same period last fiscal year. Gross profit
increased to $3.68 million or 59% of revenues for the nine months of fiscal
1996 from $1.99 million or 53% of revenues for the same period of fiscal
1995. Increased revenues positively affect gross profit margins since a
portion of the Company's manufacturing overhead costs are relatively fixed.
The mix of products sold during any period can also significantly affect
gross profit margins either positively or negatively. Thus, the slight
decline in gross profit margin in the third quarter of fiscal 1996 from
the same quarter of fiscal 1995 resulted from variations in product mix.
The increase in the gross profit margins for the nine months of fiscal 1996
over the same period in fiscal 1995 resulted from the increased level of
revenues combined with the mix of products. The Company expects these
factors to continue to fluctuate from period to period and cause variation
in gross profit margins.
<PAGE>
Operating Expenses
Research and development (R&D) and selling, general and
administrative (SG&A) expenses were $227,000 in the third quarter of
fiscal 1996 compared to $212,000 in the third quarter of fiscal 1995.
As a percentage of sales, R&D and SG&A expenses decreased to 11% in the
third quarter of fiscal 1996 from 14% in the same period of fiscal 1995.
R&D and SG&A expenses increased to $782,000 in the nine months of fiscal
1996 from $646,000 in fiscal 1995. The percentage of sales for R&D and
SG&A expenses decreased to 13% in the nine months of fiscal 1996 from 17%
in the same period of fiscal 1995. While operating expenses have
grown 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 $950,000 or 47% of revenues in the
third quarter of fiscal 1996 from $741,000 or 47% for the same period
last year. For the nine months of fiscal 1996 operating income increased
to $2.9 million or 47% of revenues compared with $1.34 million or 36% for
the nine months of fiscal 1995.
Other Income
The $101,000 net other income in the third quarter of fiscal 1996
resulted from $65,000 of interest earnings and a $36,000 recognized gain
on the sale of securities available for sale. The $10,000 net other
income in the third quarter of fiscal 1995 primarily included $40,000 of
interest earnings reduced by a $34,000 write down to market of marketable
trading securities. The $222,000 net other income for the nine months of
fiscal 1996 primarily included $179,000 of interest earnings and $44,000 of
recognized gain on the sales of securities available for sale. The $19,000
net other income in the nine months of fiscal 1995 primarily included
$114,000 of interest earnings, reduced by a $38,000 in realized losses from
the sale of marketable trading securities, and a $56,000 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 third quarter and nine months of fiscal 1996, the Company
earned $1.05 million and $3.12 million before income taxes, respectively.
A provision for income taxes of $331,000 resulted in net income of $720,000
for the third quarter and a provision for income taxes of $1.13 million
resulted in net income of $2.0 million for the nine month period of fiscal
1996. The Company's effective tax rate for the third quarter was 31% and
for the nine months was 36% compared to 30% for the third quarter and nine
months of fiscal 1995. The current fiscal year tax rates include a one
time tax credit legislated by the State of Oregon. The increase in tax
rates from fiscal year 1996 over fiscal year 1995 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 PBBs and other pharmaceutical
intermediates. Until the new facility construction is completed, the
Company expects to address capacity and scheduling constraints by adding a
third production shift as necessary. 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 in the spring of 1997.
The Company had approximately $245,000 of capital expenditures during
the nine months of fiscal 1996 primarily for equipment, equipment upgrades
and design work on the plant expansion. The Company now anticipates total
capital expenditures for fiscal 1996 to be approximately $500,000 which
includes expenditures associated with the plant expansion. The majority of
expenditures on the plant expansion will occur during fiscal year 1997.
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 December 31, 1995, the Company had working capital of $6.2
million compared to $3.57 million at March 31, 1995. The Company's cash
and cash equivalents, and marketable securities at December 31, 1995
totaled $3.37 million. In addition, the Company had a $1 million bank
line of credit of which there was no amount outstanding at December 31,
1995.
The increase in accounts receivable to $1.54 million at December 31,
1995 from $840,000 at March 31, 1995 primarily reflected the higher level
of sales in the quarter. The increase in inventory levels primarily
reflected the increased level of revenues.
<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: February 9, 1996 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: February 9, 1996 /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
December 31, 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> DEC-31-1995
<CASH> 3107000
<SECURITIES> 261000
<RECEIVABLES> 1554000
<ALLOWANCES> 15000
<INVENTORY> 1766000
<CURRENT-ASSETS> 6808000
<PP&E> 1150000
<DEPRECIATION> 0
<TOTAL-ASSETS> 8995000
<CURRENT-LIABILITIES> 612000
<BONDS> 0
<COMMON> 12000
0
0
<OTHER-SE> 8372000
<TOTAL-LIABILITY-AND-EQUITY> 8995000
<SALES> 2039000
<TOTAL-REVENUES> 2039000
<CGS> 862000
<TOTAL-COSTS> 1089000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1051000
<INCOME-TAX> 331000
<INCOME-CONTINUING> 720000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 720000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
