<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1998
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)
(541) 967-6575
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 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 7, 1998 was
14,199,383.
<PAGE> 2
SYNTHETECH, INC.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
June 30, March 31,
1998 1998
------ ------------ -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 5,540,000 $ 4,976,000
Accounts receivable, less allowance
for doubtful accounts of $15,000 for
both periods 1,766,000 1,470,000
Inventories 3,872,000 3,184,000
Prepaid expenses 116,000 196,000
Deferred income taxes 70,000 70,000
Other current assets 5,000 24,000
------------ ------------
TOTAL CURRENT ASSETS 11,369,000 9,920,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 9,638,000 9,439,000
OTHER ASSETS 5,000 5,000
------------ ------------
TOTAL ASSETS $ 21,012,000 $ 19,364,000
============ ============
</TABLE>
See Notes To Financial Statements.
<PAGE> 3
SYNTHETECH, INC.
BALANCE SHEETS
--------------
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
June 30, March 31,
1998 1998
------------------------------------ ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 14,000 $ 14,000
Accounts payable 969,000 672,000
Accrued compensation 216,000 221,000
Deferred revenue 381,000 247,000
Accrued income tax 961,000 514,000
Other accrued liabilities 10,000 15,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,551,000 1,683,000
DEFERRED INCOME TAXES 209,000 209,000
NOTE PAYABLE, net of current portion 163,000 166,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized 100,000,000 shares; issued
and outstanding, 14,199,000 and
14,143,000 shares 14,000 14,000
Paid-in capital 8,506,000 8,467,000
Employee notes receivable and deferred
compensation (116,000) (106,000)
Retained earnings 9,685,000 8,931,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,089,000 17,306,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 21,012,000 $ 19,364,000
============ ============
</TABLE>
See Notes To Financial Statements.
<PAGE> 4
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For The Three Month Period Ended June 30 1998 1997
- ---------------------------------------- ----------- -----------
REVENUES $ 4,128,000 $ 1,480,000
COST OF SALES 2,535,000 723,000
----------- -----------
GROSS PROFIT 1,593,000 757,000
RESEARCH AND DEVELOPMENT 81,000 61,000
SELLING, GENERAL AND ADMINISTRATIVE 355,000 289,000
----------- -----------
OPERATING EXPENSE 436,000 350,000
----------- -----------
OPERATING INCOME 1,157,000 407,000
OTHER INCOME 59,000 83,000
----------- -----------
INCOME BEFORE INCOME TAXES 1,216,000 490,000
PROVISION FOR INCOME TAXES 462,000 186,000
----------- -----------
NET INCOME $ 754,000 $ 304,000
=========== ===========
BASIC NET INCOME PER SHARE $0.05 $0.02
===== =====
DILUTED NET INCOME PER SHARE $0.05 $0.02
===== =====
</TABLE>
See Notes To Financial Statements.
<PAGE> 5
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For The Three Month Period Ended June 30 1998 1997
- ---------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 754,000 $ 304,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation, amortization and other 219,000 85,000
Amortization of deferred compensation 29,000 27,000
Accrued interest on securities available
for sale - (10,000)
Loss on sale of property, plant and
equipment - 1,000
(Increase) decrease in assets:
Accounts receivable, net (296,000) (286,000)
Inventories (688,000) (325,000)
Prepaid expenses 80,000 54,000
Income tax receivable - 68,000
Other assets 19,000 3,000
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 734,000 (552,000)
Deferred revenue 134,000 -
------------ ------------
Net cash provided by (used in)
operating activities 985,000 (631,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (419,000) (1,248,000)
Proceeds from sale of property, plant and
equipment - 1,000
------------ ------------
Net cash used in investing activities (419,000) (1,247,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
obligations (3,000) (3,000)
Proceeds from stock option exercises and
disqualifying dispositions 1,000 99,000
------------ ------------
Net cash (used in) provided by
financing activities (2,000) 96,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 564,000 (1,782,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,976,000 6,740,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,540,000 $ 4,958,000
============ ============
NON-CASH INVESTING ACTIVITIES:
Unrealized gain on securities available for
sale - $ 1,000
Issuance of stock options at below fair value $ 38,000 $ 21,000
</TABLE>
See Notes To Financial Statements.
<PAGE> 6
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 1998 Form 10-K.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
Cash Paid
---------
1998 1997
---- ----
Income Taxes $ 15,000 $ 79,000
Interest $ 4,000 $ 5,000
</TABLE>
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE C. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" (SFAS 128) in the
quarter ended December 31, 1997. Under the new
requirements, the Company reports basic and diluted earnings
per share. Basic earnings per share are computed by
dividing net income by the weighted average number of shares
of common stock outstanding during the period. Diluted
earnings per share are computed by dividing net income by
the weighted average number of shares of common stock and
common stock equivalents outstanding during the period,
calculated using the treasury stock method as defined in
SFAS 128. Where necessary, prior year amounts have been
restated. The following is a reconciliation of the shares
used to calculate basic earnings per share and diluted
earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C>
For The Three Months Ended June 30 1998 1997
---------------------------------- ---- ----
Weighted average shares
outstanding for basic EPS 14,159,981 13,866,373
Dilutive effect of Common stock
options issuable under
treasurey stock method 108,781 413,846
---------- ----------
Weighted average common and common
equivalent shares outstanding for
for diluted EPS 14,268,762 14,280,219
========== ==========
</TABLE>
The following common stock equivalents were excluded from
the earnings per share computation because their effect
would have been anti-dilutive:
<TABLE>
<CAPTION>
<S> <C> <C>
For The Three Months Ended June 30 1998 1997
---------------------------------- ---- ----
Common stock options outstanding 466,800 276,000
</TABLE>
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Percentage of Revenues
----------------------
For The Three Month Period Ended June 30 1998 1997
- ---------------------------------------- ---- ----
Revenues 100.0 % 100.0 %
Cost of sales 61.4 % 48.9 %
--------- ---------
Gross Profit 38.6 % 51.1 %
Research and Development 2.0 % 4.1 %
Selling, General and Administrative 8.6 % 19.5 %
--------- ---------
Operating Income 28.0 % 27.5 %
Other Income 1.4 % 5.6 %
--------- ---------
Income Before Income Taxes 29.4 % 33.1 %
Provision For Income Taxes 11.2 % 12.6 %
--------- ---------
Net Income 18.2 % 20.5 %
========= =========
</TABLE>
Revenues
- --------
Revenues increased by 179% to $4.13 million in the first
quarter of fiscal 1999 from $1.48 million in the first
quarter of fiscal 1998. International sales, mainly to
Europe, were $1.26 million in the first quarter of fiscal
1999 as compared to $767,000 for the first quarter of fiscal
1998.
<PAGE> 9
The increase in revenues for the first quarter of fiscal
1999 over the same period of fiscal 1998 principally
reflected the $2.22 million revenue contribution from large-
scale orders for marketed drugs. The Company expects large-
scale orders to continue to provide a substantial
contribution to revenue for the balance of fiscal 1999. PBB
sales associated with marketed drugs are more likely to
provide a longer term, ongoing revenue stream. However,
continuation of customer demand for these PBBs remains
subject to various market conditions, including continued
market demand for the drug, competition from other suppliers
of PBBs and potential use of alternative drug manufacturing
routes not involving PBBs. (See "Industry Factors" below.)
Gross Profit
- ------------
Gross profit was $1.59 million or 39% of revenues in the
first quarter of fiscal 1999 as compared to $757,000 or 51%
of revenues in the first quarter of fiscal 1998. The
decrease in gross profit margin for the first quarter of
fiscal 1999 resulted primarily from the mix of products
which included nearly 54% of revenues from large-scale
orders, and increased fixed manufacturing overhead
associated with the new plant expansion completed in
November of 1997. While large-scale orders provide a level
of revenue predictability for the duration of the orders,
their impact on the Company's mix of business generates a
lower gross profit margin than the levels experienced in
fiscal years 1996 and 1997.
Operating Expenses
- ------------------
Research and development (R&D) and selling, general and
administrative (SG&A) expenses were $436,000 in the first
quarter of fiscal 1999 compared to $350,000 in the first
quarter of fiscal 1998. The increases in R&D expense
reflected increases in staffing and staffing compensation.
The increases in SG&A expense reflected increases in
staffing compensation and higher professional fees
associated with increased disclosure requirements as the
Company transitioned out of "small business" status and
related matters. As a percentage of revenues, R&D and SG&A
expenses decreased to nearly 11% in the first quarter of
fiscal 1998 from nearly 24% in the same period of fiscal
1998 due to the higher level of revenues.
Operating Income
- ----------------
Operating income increased to $1.16 million in the first
quarter of fiscal 1999 compared with $407,000 in the first
quarter of fiscal 1998. Both periods were approximately 28%
as a percentage of revenues.
Other Income
- ------------
The net other income of $59,000 in the first quarter of
fiscal 1999 included $64,000 of interest earnings and $4,000
of interest expense. The net other income of $83,000 in the
first quarter of fiscal 1998 primarily reflected interest
earnings.
<PAGE> 10
Net Income
- ----------
For the first quarter of fiscal 1999 the Company earned
$1.22 million before income taxes. A provision for income
taxes of $462,000 resulted in net income of $754,000. The
Company's effective tax rate was 38% for the first quarter
of fiscal 1999 and the first quarter of fiscal 1998.
INDUSTRY FACTORS
The market for PBBs is driven by the market for
synthetically manufactured peptide-based drugs in which they
are incorporated. The drug development process for these
peptide-based drugs is dictated by the marketplace, drug
companies and the regulatory environment. The Company has
no control over the pace of peptide-based drug development,
which drugs get selected for clinical trials, which drugs
are approved by the FDA and, even if approved, the ultimate
market potential of such drugs.
The three stages of the drug development process include:
R&D or discovery stage, clinical trial stage and marketed
drug stage. Synthetech's customers can spend years
researching and developing new drugs, taking only a small
percentage to clinical trials and fewer yet to commercial
market. A substantial amount of the activity continues to
occur at the earlier stages of research and development and
clinical trials. In spite of the two large-scale orders
received by the Company in fiscal 1998, the market for
peptide-based drugs is still very early in development.
While the Company has recorded substantial annual sales of
PBBs for discovery and clinical trial stage development,
recurring sales of PBBs for development programs is sporadic
at best. 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. Accordingly, the level of
purchasing by the Company's customers for specific drug
development programs varies substantially from quarter to
quarter and the Company cannot rely on any one customer as a
constant source of revenue.
While the Company has been selling PBBs for marketed drugs
for several years, these sales represented a relatively
small portion of total revenue. With the two large-scale
orders received in fiscal 1998 for PBBs to be used in
marketed drugs, revenues of PBBs for marketed drugs
represent a significant portion of total revenue for the
first time in the Company's history. Sales of PBBs for
marketed drugs provide an opportunity for continuing longer-
term sales. Moreover, the size of the PBB orders for
marketed drugs can be substantially larger than those for
the discovery or clinical trial stages. While not subject
to the same high cancellation rate faced by discovery and
clinical trial stage drug development programs, the demand
for the approved drugs remains subject to many
uncertainties, including, without limitation, the drug
price, the drug side effects and the existence of other
competing drugs. These factors, which are outside of the
control of the Company, will affect the level of demand for
the drug itself and, therefore, the demand for PBBs. Also,
with the longer-term, larger-scale orders, the Company
expects increased competition to supply these PBBs, and
industry cost pressures can also cause pharmaceutical
companies to investigate alternative drug manufacturing
processes which may not include PBBs as an intermediate.
<PAGE> 11
Large-scale PBB orders for use in marketed drugs
significantly increases the size and the term of the
Company's current order base. Also, the likelihood of
recurring revenue from reorders is significantly higher for
PBBs used in marketed drugs. Nevertheless, since the
Company's revenues are composed of PBB sales in all three
drug development stages, and since even sales of PBBs for
marketed drugs are subject to cancellation or reduction, the
Company is likely to continue to experience significant
fluctuations in its quarterly results. Accordingly, the
Company continues to lack a stable baseload of demand and an
ability to predict future demand beyond its current order
base.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $8.82
million compared to $8.24 million at March 31, 1998. The
Company's cash and cash equivalents at June 30, 1998 totaled
$5.54 million. In addition, the Company had a $1 million
bank line of credit of which there was no amount outstanding
at June 30, 1998.
The increase in accounts receivable to $1.77 million at June
30, 1998 from $1.47 million at March 31, 1998 reflected the
timing of shipments during the quarter. The increase of
inventory to $3.87 million at June 30, 1998 from $3.18
million at March 31, 1998 primarily resulted from restocking
raw materials.
The Company had approximately $419,000 of capital
expenditures during the first three months of fiscal 1999.
Approximately $188,000 was spent for equipment and equipment
upgrades in the existing plant and $231,000 was spent for
the second phase of the new plant expansion. The Company
anticipates total capital expenditures for fiscal 1999 for
the existing plant to be $1 million and for the second phase
of the new plant expansion to be $3.2 million for a total of
$4.2 million. The Company expects to finance these
capital expenditures from internal cash flow.
______________________
This Form 10-Q includes "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934).
Investors are cautioned that forward-looking statements
involve risks and uncertainties, and various factors
could cause actual results to differ materially from
those in the forward-looking statements. Forward-looking
statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will likely result" or words
or phrases of similar meanings. The following factors,
among others, could cause actual results to differ from
those indicated in the forward-looking statements: the uncertain
market for products, customer concentration, potential
quarterly revenue fluctuations, the impact of competitive
products and pricing, the impact of government regulation,
product liability risks, technological change and increased
costs associated with the Company's facility expansions.
Investors are directed to the Company's filings with the
Securities and Exchange Commission, including the Company's
Form 10-K for the fiscal year ended March 31, 1998,
which are available from the Company without charge, for
a further description of the risks and uncertainties related
to forward-looking statements made by the Company as well as
to other aspects of the Company's business.
<PAGE> 12
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-KSB for the year ended March 31, 1997.
(b) Reports
No reports on Form 8-K were filed during the quarter.
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
SYNTHETECH, INC.
(Registrant)
Date: August 12, 1998 /s/M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: August 12, 1998 /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, 1998 10-Q 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-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 5540000
<SECURITIES> 0
<RECEIVABLES> 1781000
<ALLOWANCES> 15000
<INVENTORY> 3872000
<CURRENT-ASSETS> 11369000
<PP&E> 9638000
<DEPRECIATION> 0
<TOTAL-ASSETS> 21012000
<CURRENT-LIABILITIES> 2551000
<BONDS> 0
<COMMON> 14000
0
0
<OTHER-SE> 18089000
<TOTAL-LIABILITY-AND-EQUITY> 21012000
<SALES> 4128000
<TOTAL-REVENUES> 4128000
<CGS> 2535000
<TOTAL-COSTS> 2971000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1216000
<INCOME-TAX> 462000
<INCOME-CONTINUING> 754000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 754000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
