<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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 1 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 February 5, 1997 was 13,761,271.
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,
1996 1996
------------ ----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $6,725,000 $5,049,000
Securities available for sale 409,000 395,000
Accounts receivable, less allowance for
doubtful accounts of $15,000 for both periods 1,582,000 1,355,000
Inventories 1,640,000 1,924,000
Prepaid expenses 212,000 71,000
Income tax receivable 0 152,000
Deferred income taxes 59,000 59,000
Other current assets 1,000 1,000
---------- ---------
TOTAL CURRENT ASSETS 10,628,000 9,006,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 4,303,000 1,311,000
SECURITIES AVAILABLE FOR SALE 622,000 626,000
OTHER ASSETS 14,000 16,000
----------- -----------
TOTAL ASSETS $15,567,000 $10,959,000
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
BALANCE SHEETS
----------------
(continued)
<TABLE>
<CAPTION>
<S>
<C> <C>
(unaudited)
December 31, March 31,
1996 1996
------------- ---------
- ------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $455,000 $271,000
Accrued compensation 373,000 479,000
Income taxes payable 10,000 -
Other accrued liabilities 9,000 1,000
Deferred revenue 44,000 98,000
------- -------
TOTAL CURRENT LIABILITIES 891,000 849,000
DEFERRED INCOME TAXES 8,000 10,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
13,761,000 and 13,475,000 shares 14,000 13,000
Paid-in capital 7,260,000 6,589,000
Employee notes receivable and deferred
compensation (55,000) (130,000)
Unrealized gain on securities available for sale 26,000 30,000
Retained earnings 7,423,000 3,598,000
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 14,668,000 10,100,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,567,000 $10,959,000
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
SYNTHETECH, INC.
STATEMENTS OF OPERATIONS
------------------------
(unauditied)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1996 1995 1996 1995
- --------------------- -------- ------- ------- -------
REVENUES $3,022,000 $2,039,000 $11,097,000 $6,229,000
COST OF SALES 1,281,000 862,000 4,177,000 2,548,000
---------- ---------- ----------- ----------
GROSS PROFIT 1,741,000 1,177,000 6,920,000 3,681,000
RESEARCH AND DEVELOPMENT 52,000 41,000 156,000 162,000
SELLING, GENERAL AND
ADMINISTRATIVE 283,000 186,000 873,000 620,000
---------- ---------- ---------- ---------
OPERATING EXPENSE 335,000 227,000 1,029,000 782,000
---------- ---------- ---------- ---------
OPERATING INCOME 1,406,000 950,000 5,891,000 2,899,000
OTHER INCOME, net 104,000 101,000 279,000 223,000
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES 1,510,000 1,051,000 6,170,000 3,122,000
PROVISION FOR INCOME TAXES 574,000 331,000 2,345,000 1,126,000
---------- ---------- ---------- ----------
NET INCOME $936,000 $720,000 $3,825,000 $1,996,000
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $0.06 $0.05 $0.26 $0.15
========= ========= ========= =========
SHARES USED IN PER SHARE
CALCULATION 14,480,689 13,814,185 14,457,616 13,731,711
========== ========== ========== ==========
</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 1996 1995
- ------------------------------------------- ------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,825,000 $1,996,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and other 182,000 147,000
Amortization of deferred compensation 61,000 14,000
Accrued interest on securities available for sale (16,000) (11,000)
Realized gain on sale of securities available
for sale - (44,000)
(Increase) decrease in assets:
Accounts receivable, net (227,000) (699,000)
Inventories 284,000 (185,000)
Prepaid expenses (141,000) (41,000)
Income tax receivable 152,000 -
Other assets 2,000 7,000
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and income
taxes payable 96,000 118,000
Deferred revenue (54,000) 98,000
---------- ----------
Net cash provided by operating activites 4,164,000 1,400,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (3,172,000) (245,000)
Proceeds from sale of securities available
for sale - 658,000
Employee notes receivable 50,000 (80,000)
----------- ----------
Net cash (used by) provided by
investing activities (3,122,000) 333,000
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercises and
disqualifying dispositions 190,000 175,000
Proceeds from stock warrant exercises, including
tax benefit 444,000 -
---------- ---------
Net cash provided by financing activities 634,000 175,000
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,676,000 1,908,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 5,049,000 1,199,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,725,000 $3,107,000
=========== ===========
NON-CASH INVESTING ACTIVITIES:
Unrealized (loss) gain on securities
available for sale (4,000) 9,000
Issuance of stock options at below fair
value - 34,000
</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 periods ended December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash Paid
Three Months Nine Months
1996 1995 1996 1995
---- ---- ---- ----
Income Taxes $ 570,000 $ 351,000 $ 1,973,000 $ 1,160,000
</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.
Percentage of Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months December 31, Nine Months December 31,
1996 1995 1996 1995
---- ---- ---- ----
- --------------------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 42.4 42.3 37.6 40.9
----- ----- ----- -----
Gross Profit 57.6 57.7 62.4 59.1
Research and Development 1.7 2.0 1.4 2.6
Selling, General and
Administration 9.4 9.1 7.9 10.0
----- ----- ----- -----
Operating Expense 11.1 11.1 9.3 12.6
Operating Income 46.5 46.6 53.1 46.5
Other Income 3.4 5.0 2.5 3.6
Income Before Income Taxes 49.9 51.6 55.6 50.1
Provision For Income Taxes 19.0 16.2 21.1 18.1
----- ----- ----- -----
Net Income 30.9 % 35.4 % 34.5 % 32.0 %
==== ==== ==== ====
</TABLE>
Revenues
- --------
Revenues increased by 48% to $3.02 million in the third quarter of
fiscal 1997 from $2.04 million in the third quarter of fiscal 1996. Revenues
were $11.10 million for the nine months of fiscal 1997, a 78% increase from
revenues of $6.23 million for the nine months of fiscal 1996. Peptide
Building Blocks (PBBs) represented nearly 100% of revenues for the third
quarter and nine months of fiscal 1997 and fiscal 1996. International sales,
mainly to Japan and Western Europe, were $980,000 and $3.75 million for the
third quarter and nine months of fiscal 1997 as compared to $383,000 and
$1.54 million for the third quarter and nine months of fiscal 1996.
Revenues for the third quarter of fiscal 1997 included sales associated
with PBB orders for use in late stage clinical trials by two customers of
$398,000 and $985,000, respectively, representing 46% of revenues for the
third quarter. The revenues associated with these two customers for the nine
months of fiscal 1997 were $3.65 million and $3.49 million, respectively,
representing 64% of revenues for the nine months. Revenues from these
customers in the third quarter of fiscal 1996 were only $295,000 and
$189,000, respectively, or 24% of revenues for that quarter, and in the nine
months of fiscal 1996 were only $1.06 million and $271,000, respectively, or
21% of revenues. The results for these products demonstrate the continuing
potential for fluctuation in sales of products.
<PAGE>
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, the customer with purchases of $398,000 in the third quarter of
fiscal 1997, and a total of nearly $5.67 million from February 1995 through
October 1996, has advised the Company that it is pursuing an alternative,
lower-cost manufacturing process and discontinuing additional purchases. The
final shipment of product to this customer was in October 1996. While the
customer with purchases of $985,000 in the third quarter of fiscal 1997
continues to be an important customer, the Company expects a significant
reduction in revenue from this customer during the fourth quarter of fiscal
1997. This customer has indicated that its future requirements will be based
on the project moving to the next phase of clinical development. With the
reductions in the purchases by these two customers, the Company believes that
the revenues for the second half of fiscal 1997 will be lower than those for
the first half, and that revenues for the fourth quarter of fiscal 1997 will
be lower than the third quarter of fiscal 1997. Nevertheless, the Company
expects to have another solid growth year and continue to be active with PBB
sales related to ongoing and new business. The exact extent of its future
business, however, is difficult to predict.
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 $1.74 million in the third quarter of fiscal
1997 from $1.18 million in the third quarter of fiscal 1996. As a percent of
sales, gross profit was about 58% in the third quarter of fiscal 1997 and
the third quarter of fiscal 1996. Gross profit increased to $6.92 million or
62% of revenues for the nine months of fiscal 1997 from $3.68 million or 59%
of revenues for the same period of fiscal 1996. The increase in gross profit
as a percentage of revenues for the nine months resulted from the increased
level of revenues combined with a change in 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 $335,000 in the third quarter of fiscal 1997 compared to
$227,000 in the third quarter of fiscal 1996. As a percentage of sales, R&D
and SG&A expenses were 11% in the third quarter of fiscal 1997 and third
quarter of fiscal 1996. R&D and SG&A expenses increased to $1.03 million for
the nine months of fiscal 1997 from $782,000 in fiscal 1996. As a percentage
of sales, R&D and SG&A expenses decreased to 9% for the nine months of
fiscal 1997 from 13% in the same period of fiscal 1996. While operating
expenses have increased reflecting increased staffing and other costs
associated with the Company's growth, operating expenses as a percent of
revenues for the nine months have decreased significantly.
<PAGE>
Operating Income
- ----------------
Operating income increased to $1.41 million or 47% of revenues in the
third quarter of fiscal 1997 from $950,000 or 47% for the same period last
year. For the nine months of fiscal 1997 operating income increased to $5.89
million or 53% of revenues compared with $2.90 million or 47% for the nine
months of fiscal 1996.
Other Income
- ------------
The net other income of $104,000, and $279,000 in the third quarter and
for the nine months of fiscal 1997, respectively, and the $101,000 and
$223,000 net other income in the third quarter and for the nine months
of fiscal 1996, respectively, came primarily from interest earnings.
Net Income
- ----------
For the third quarter and for the nine months of fiscal 1997, the
Company earned $1.51 million, and $6.17 million before income taxes,
respectively. A provision for income taxes of $574,000 resulted in net income
of $936,000 million for the third quarter and a provision for income taxes of
$2.35 million resulted in net income of $3.83 million for the nine months of
fiscal 1997. The Company's effective tax rate for the third quarter and nine
months of fiscal 1997 was 38% compared to 31% and 36% for the third quarter
and nine months of fiscal 1996, respectively, reflecting a one time tax
credit legislated by the State of Oregon for fiscal 1996.
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
<PAGE>
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.
Capital Resources and Liquidity
- -------------------------------
At December 31, 1996, the Company had working capital of $9.74 million
compared to $8.16 million at March 31, 1996. The Company's cash, cash
equivalents and short term securities available for sale at December 31, 1996
totaled $7.13 million. In addition, the Company had a $1 million bank line
of credit of which there was no amount outstanding at December 31, 1996.
The increase in accounts receivable to $1.58 million at December 31,
1996 from $1.36 million at March 31, 1996 reflected the higher level of sales
in the quarter. The decrease of inventory to $1.64 million at December 31,
1996 from $1.92 million at March 31, 1996 primarily resulted from lower
levels of raw material inventory and work-in-process inventory.
The Company had approximately $3.17 million of capital expenditures for
the nine months of fiscal 1997, of which $585,000 was for equipment and
equipment upgrades in the existing plant and $2.59 million for the new plant
expansion. The Company now anticipates total capital expenditures for fiscal
1997 for the existing plant to be $700,000 and for the new plant expansion to
be $4.03 million for a total of $4.7 million. The Company has revised its
total estimated capital expenditure for the new plant expansion to $6.7
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 despite some weather related delays in November and December
of 1996, the expected completion date continues to be in the spring of 1997.
In response to the conclusion of the order for the PBB customer discussed
earlier, the Company reduced its production from a 7-day to a 5-day per week,
round-the-clock production schedule in late September of 1996.
-----------------------------
Certain statements in the Company's Form 10-QSB contain
"forward-looking" information (as defined in Section 27A of the Securities
Act of 1933, as amended) that involve risks and uncertainties, including, but
not limited to, potential quarterly revenue fluctuations, uncertain market
for products, technological change, customer concentration, impact of
competitive products and pricing, and other risks detailed in the Company's
Securities and Exchange Commission Filings, including the Company's Form
10-KSB for the fiscal year ended March 31, 1996.
<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: February 10, 1997 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: February 10, 1997 /s/ Charles B. Williams
Charles B. Williams
Vice President, Finance
and Administration, C.F.O.,
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1996 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-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 6725000
<SECURITIES> 409000
<RECEIVABLES> 1582000
<ALLOWANCES> 15000
<INVENTORY> 1640000
<CURRENT-ASSETS> 10628000
<PP&E> 4303000
<DEPRECIATION> 0
<TOTAL-ASSETS> 15567000
<CURRENT-LIABILITIES> 891000
<BONDS> 0
<COMMON> 14000
0
0
<OTHER-SE> 14654000
<TOTAL-LIABILITY-AND-EQUITY> 15567000
<SALES> 3022000
<TOTAL-REVENUES> 3022000
<CGS> 1281000
<TOTAL-COSTS> 1616000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1510000
<INCOME-TAX> 574000
<INCOME-CONTINUING> 936000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 936000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
