<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(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, 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 November 6, 1998 was
14,203,383.
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In connection with Synthetech, Inc.'s Form 10Q for the
quarter ended September 30, 1998, "Part I, Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations Business" is hereby amended and
restated in its entirety as follows:
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.
Percentage of Revenues
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ---------------------- ------ ------ ------ ------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 56.4 57.7 58.6 53.3
----- ----- ----- -----
Gross Profit 43.6 42.3 41.4 46.7
Research and Development 1.4 3.5 1.7 3.8
Selling, General and
Administration 7.2 21.5 7.8 20.5
----- ----- ----- -----
Operating Expense 8.6 25.0 9.5 24.3
Operating Income 35.0 17.3 31.9 22.4
Other Income 1.2 5.0 1.3 5.3
----- ----- ----- -----
Income Before Income Taxes 36.2 22.3 33.2 27.7
Provision For Income Taxes 13.7 7.7 12.6 10.1
----- ----- ----- -----
Net Income 22.5 % 14.6 % 20.6 % 17.6 %
===== ===== ===== =====
Revenues
- --------
Revenues increased by 257% to $5.33 million in the second
quarter of fiscal 1999 from $1.49 million in the second
quarter of fiscal 1998. Revenues were $9.46 million for the
first half of fiscal 1999, a 218% increase from revenues of
$2.97 million in the first half of fiscal 1998.
International sales, mainly to Western Europe, were $799,000
and $2.06 million for the second quarter and first half of
fiscal 1999 as compared to $417,000 million and $1.19
million for the second quarter and first half of fiscal
1998.
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The increase in revenues for the second quarter and first
half of fiscal 1999 over the same periods of fiscal 1998
principally reflected the $3.08 million and $5.31 million
revenue contribution, respectively, of shipments from large-
scale Peptide Building Block ("PBB") orders to be used in
two marketed drugs. The Company has recently received
additional orders for these two PBBs of nearly $10 million.
With these additional orders, the Company has orders for
these two large-scale PBBs totaling $11.8 million for
periodic deliveries expected to be completed by the Summer
of 1999. Accordingly, the Company expects large-scale
orders to continue to provide a substantial contribution to
revenue for the balance of fiscal 1999.
Although PBB sales associated with marketed drugs are more
likely to provide a longer term, ongoing revenue stream than
sales associated with drugs at the discovery or clinical
stage, continuation of customer demand for these PBBs
associated with marketed drugs remains subject to various
market conditions, including potential use of alternative
manufacturing routes, competition from other suppliers of
PBBs and continued market demand for the drug. For example,
one of the large-scale PBB customers referenced above has
advised the Company that it is researching the feasibility
of an alternative lower-cost manufacturing route involving a
different PBB than the one currently being sold to it. At
this time, the Company does not know whether this
alternative manufacturing route will be feasible. The
Company's customer has advised the Company that, even if the
alternative route is selected, the customer will continue to
purchase and take delivery of the $9.2 million of orders
that it has already placed with Synthetech. Accordingly,
while large-scale orders for marketed drugs can provide
significant and predictable revenues for the duration of the
orders, there continues to be a significant risk that
revenues can fluctuate from period to period. (See
"Industry Factors" below.)
Gross Profit
- ------------
Gross profit increased to $2.32 million in the second
quarter of fiscal 1999 from $630,000 in the second quarter
of fiscal 1998. As a percent of sales, gross profit
increased to 44% in the second quarter of fiscal 1999 from
42% for the same period last year. Gross profit increased
to $3.91 million or 41% of revenues in the first half of
fiscal 1999 from $1.39 million or 47% of revenues for the
same period of fiscal 1998.
The gross profit margins for the second quarter and the
first half of fiscal 1999 resulted primarily from the mix of
products. Revenues from large-scale PBB orders during the
second quarter and the first half of fiscal 1999 represented
58% and 56%, respectively, of total revenue for the periods.
While large-scale orders for marketed drugs can provide
significant revenues for the duration of the orders, they
typically generate a lower gross profit margin than the sale
of smaller quantities of the same PBB product during the
drug discovery and clinical stages. The Company, however,
continuously seeks to improve the gross profit margins of
large-scale orders through process improvements and
operating efficiencies.
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While there were no significant large-scale PBB sales during
the second quarter or first half of fiscal 1998, the
relatively low gross profit margins during these periods
resulted principally from a low level of revenues occasioned
by the timing of orders. To a lesser extent, the mix of
products also affected gross profit margins during these
periods.
Operating Expenses
- ------------------
Research and development (R&D) and selling, general and
administrative (SG&A) expenses were $459,000 in the second
quarter of fiscal 1999 compared to $373,000 in the second
quarter of fiscal 1998. As a percentage of sales, R&D and
SG&A expenses decreased to 9% in the second quarter of
fiscal 1999 from 25% in the same period of fiscal 1998 due
to the higher level of revenues. R&D and SG&A expenses
increased to $895,000 in the first half of fiscal 1999 from
$723,000 in fiscal 1998. As a percentage of sales, R&D and
SG&A expenses decreased to 10% in the first half of fiscal
1999 from 24% in the same period of fiscal 1998 due to the
higher level of revenues. The increases in R&D expense for
the second quarter and first half of fiscal 1999 reflected
increases in staffing and staffing compensation. The
increases in SG&A expense for the second quarter and first
half of fiscal 1999 principally reflected increases in
staffing compensation and related payments.
Operating Income
- ----------------
Operating income increased to $1.86 million or 35% of
revenues in the second quarter of fiscal 1999 from $257,000
or 17% for the same period last year. For the first half of
fiscal 1999 operating income increased to $3.02 million or
32% of revenues compared with $664,000 or 22% for the first
half of fiscal 1998. The significant increase in operating
income for the second quarter and first half of fiscal 1999
reflected the substantial increase in revenues over prior
periods.
Other Income
- ------------
The net other income of $63,000 for the second quarter of
fiscal 1999 included $68,000 of interest earnings and $4,000
of interest expense. The net other income of $122,000 for
the second half of fiscal 1999 included $132,000 of interest
earnings and $8,000 of interest expense. The $75,000 and
$158,000 net other income in the second quarter and first
half of fiscal 1998, respectively, came primarily from
interest earnings.
Net Income
- ----------
For the second quarter and first half of fiscal 1999, the
Company earned $1.92 million, and $3.14 million before
income taxes, respectively. A provision for income taxes of
$731,000 resulted in net income of $1.19 million for the
second quarter and a provision for income taxes of $1.19
million resulted in net income of $1.95 million for the
first half of fiscal 1999. The Company's effective tax rate
for the first half of fiscal 1999 was 38% and for the first
half of fiscal 1998 was 36.5% reflecting a one time tax
credit legislated by the State of Oregon.
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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 manufacturing
processes which may not include PBBs as an intermediate.
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
<PAGE>
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 September 30, 1998, the Company had working capital of
$10.18 million compared to $8.24 million at March 31, 1998.
The Company's cash and cash equivalents at September 30,
1998 totaled $6.30 million. In addition, the Company had a
$1 million bank line of credit of which there was no amount
outstanding at September 30, 1998.
The increase in cash and cash equivalents to $6.30 million
at September 30, 1998 from $4.98 million at March 31, 1998
reflected the higher level of sales for the period. The
increase in accounts receivable to $1.88 million at
September 30, 1998 from $1.47 million at March 31, 1998
reflected the timing of shipments during the quarter. The
increase of inventory to $3.63 million at September 30, 1998
from $3.18 million at March 31, 1998 primarily resulted from
restocking raw materials.
The Company had approximately $641,000 of capital
expenditures during the first half of fiscal 1999.
Approximately $279,000 was spent for equipment and equipment
upgrades in the existing plant and $362,000 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. Although the Company expects to be able to
finance these capital expenditures from internal cash flow,
it is also considering whether bank or similar financing
would be preferable.
YEAR 2000
The Year 2000 ("Y2K") issue arose as the result of existing
computer programs that use only the last two digits to refer
to a year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected,
many computer applications could fail or create erroneous
results.
The Company has established a Y2K team consisting of its
Chief Financial Officer and an associate from the Finance
and Administration Group. The team has completed its
assessment of the Company's information systems which
support business applications. The Company utilizes packaged
application strategies for these information systems
functions. The Company believes that these information
system components are current with all Y2K updates and
changes recommended by the vendors, except for its
manufacturing/accounting software package. The Company
intends to install a Y2K compliant upgrade for this
manufacturing/accounting software package no later than the
end of fiscal 1999. These information systems include
enterprise software, operating systems, networking
components, application and data servers, PC hardware and
core office automation software. The Company's assessment
of research and development, manufacturing processes and
facility management systems is underway and is expected to
be substantially completed by the end of fiscal 1999. The
Company has no reason to
<PAGE>
believe that it would not be able to complete any Y2K
compliant upgrades or replacements associated with research
and development, manufacturing processes or facility
management systems by the Summer of 1999.
The Company has begun a Y2K supplier and customer assessment
program. It is in the process of contacting key suppliers
and customers by questionnaire to determine the level of
their Y2K readiness. This assessment program is in its
early stages and does not have a return rate useful for
determining their level of Y2K readiness.
The Company's information technology budget for fiscal 1999
is $82,000, of which approximately 40% is allocated for the
Company's Y2K program. These expenses will be paid out of
revenues from operations. In fiscal 1999, the Company has
already spent $9,000 and anticipates spending an additional
$10,000 for computer hardware and software Y2K compliant
upgrades or replacements. In addition, the Company is
currently considering hiring a consultant to assist the
Company in running Y2K compliance tests and the Company has
budgeted $15,000 for this effort.
Like all businesses, the Company will be at risk from
external infrastructure failures that could arise from Y2K
failures. It is not clear that electrical power, telephone
and computer networks, for example, will be fully functional
across the nation in the year 2000. Investigation and
assessment of infrastructures, like the nations' power grid,
is beyond the scope and resources of the Company. Investors
should use their own awareness of the issues in the nations'
infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's
performance.
It should also be noted that there have been predictions of
failures of key components in the transportation
infrastructure due to the Y2K problem. It is possible that
there could be delays in rail, over-the-road and air
shipments due to failure in transportation control systems.
Investigation and validation of the world's transportation
infrastructure is beyond the scope and the resources of the
Company. Investors should use their own awareness of the
issues in the nations' infrastructure to make ongoing
infrastructure risk assessments and their potential impact
to a company's performance.
The failure to correct a material Y2K problem could result
in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could
materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Y2K problem, resulting
in part from the uncertainty of the Y2K readiness of third-
party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Y2K
failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company's efforts to help ensure Y2K preparedness are
expected to significantly reduce the Company's level of
uncertainty about the Y2K problem. The Company believes
that, with completion of the above-mentioned system upgrades
and testing, the possibility of significant interruptions of
normal operations should be reduced.
The Company has not developed any worst-case scenarios or
contingency plans in regard to its internal systems,
supplier/customer issues or any of the more global
infrastructure issues. The Company is considering whether,
and to what extent, to develop such scenarios or plans and
expects to have made a decision no later than the end of
fiscal 1999.
<PAGE>
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>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned thereunto duly
authorized.
SYNTHETECH, INC.
(Registrant)
Date: December 23, 1998 /s/Charles B. Williams
Charles B. Williams
Vice President of Finance
and Administration, C.F.O.,
Chief Accounting Officer,
Secretary and Treasurer
