<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, 2000
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 9, 2000 was
14,276,641.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
(unaudited)
June 30, March 31,
2000 2000
--------------------- ----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 7,362,000 $ 6,404,000
Accounts receivable, less allowance
for doubtful accounts of $15,000
for both periods 1,800,000 2,433,000
Income tax receivable 2,000 137,000
Inventories 4,112,000 4,112,000
Prepaid expenses 280,000 285,000
Deferred income taxes 140,000 140,000
Other current assets 8,000 31,000
------------ -----------
TOTAL CURRENT ASSETS 13,704,000 13,542,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 12,983,000 13,375,000
----------- -----------
TOTAL ASSETS $26,687,000 $26,917,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
(continued)
(unaudited)
June 30, March 31,
2000 2000
-------------------------------------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 15,000 $ 17,000
Accounts payable 263,000 547,000
Accrued compensation 114,000 109,000
Deferred revenue 294,000 544,000
Other accrued liabilities 15,000 25,000
----------- -----------
TOTAL CURRENT LIABILITIES 701,000 1,242,000
DEFERRED INCOME TAXES 482,000 482,000
NOTE PAYABLE, net of current portion 132,000 135,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
14,277,000 shares for both periods 14,000 14,000
Paid-in capital 8,784,000 8,793,000
Deferred compensation (26,000) (40,000)
Retained earnings 16,600,000 16,291,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,372,000 25,058,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,687,000 $26,917,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>4
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------
(unaudited)
For The Three Month Period Ended June 30, 2000 1999
----------------------------------------- --------- ---------
REVENUES $ 2,698,000 $ 4,636,000
COST OF SALES 1,737,000 2,629,000
----------- -----------
GROSS PROFIT 961,000 2,007,000
Research and development 95,000 127,000
Selling, general and administrative 357,000 343,000
----------- -----------
OPERATING EXPENSE 452,000 470,000
----------- -----------
OPERATING INCOME 509,000 1,537,000
OTHER INCOME (LOSS), net (8,000) 87,000
INTEREST EXPENSE (3,000) (3,000)
----------- -----------
INCOME BEFORE INCOME TAXES 498,000 1,621,000
PROVISION FOR INCOME TAXES 189,000 616,000
----------- -----------
NET INCOME $ 309,000 $ 1,005,000
=========== ===========
BASIC EARNINGS PER SHARE $0.02 $0.07
===== =====
DILUTED EARNINGS PER SHARE $0.02 $0.07
===== =====
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
------------------------
(unaudited)
For The Three Month Period Ended June 30, 2000 1999
----------------------------------------- ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 309,000 $ 1,005,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and other 714,000 386,000
Amortization of deferred compensation 5,000 13,000
Proceeds from stock option exercises and
disqualifying dispositions - 7,000
(Increase) decrease in assets:
Accounts receivable, net 633,000 944,000
Inventories - (17,000)
Prepaid expenses 5,000 (3,000)
Income tax receivable 135,000 -
Other assets 23,000 (12,000)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (289,000) (1,218,000)
Deferred revenue (250,000) -
----------- -----------
Net cash provided by operating activities 1,285,000 1,105,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases, net (322,000) (835,000)
----------- -----------
Net cash used in investing activities (322,000) (835,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
obligations (5,000) (4,000)
----------- -----------
Net cash provided by (used in) financing
activities (5,000) (4,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 958,000 266,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,404,000 7,470,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,362,000 $ 7,736,000
=========== ===========
NON-CASH INVESTING ACTIVITIES:
Issuance of stock options at below fair value $ (9,000) $ 4,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
<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 fiscal 2000 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
inventory items are cycle counted during each quarter. For
those inventories not counted during 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
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental cash flow disclosures for the three
month period ended June 30:
Cash Paid
---------
2000 1999
---- ----
Income Taxes $ 54,000 $ 490,000
Interest $ 3,000 $ 4,000
</TABLE>
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE C. EARNINGS PER SHARE
Basic earnings per share (EPS) 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 No. 128. 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, 2000 1999
----------------------------------- ---- ----
Weighted average shares
outstanding for basic EPS 14,276,641 14,252,108
Dilutive effect of common
stock options issuable
under treasury stock method 24,970 67,494
---------- ----------
Weighted average common and
common equivalent shares
outstanding for diluted EPS 14,301,611 14,319,602
========== ==========
</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, 2000 1999
----------------------------------- ---- ----
Common stock options outstanding 764,875 523,800
</TABLE>
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (continued)
NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is
an amendment to Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 137 establishes accounting and reporting
standards for all derivative instruments. SFAS 137 is
effective for fiscal years beginning after June 15, 2000. The
Company does not currently have any derivative instruments
and, accordingly, does not expect the adoption of SFAS 137 to
have an impact on its financial position or results of
operations.
<PAGE> 9
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, 2000 1999
----------------------------------------- ---- ----
Revenues 100.0 % 100.0 %
Cost of Sales 64.4 56.7
------- -------
Gross Profit 35.6 43.3
Research and development 3.5 2.7
Selling, general and administration 13.2 7.4
------- -------
Operating Expense 16.7 10.1
------- -------
Operating Income 18.9 33.2
Other Income (Loss), net (0.3) 1.9
Interest Expense (0.1) (0.1)
------- -------
Income Before Income Taxes 18.5 35.0
Provision For Income Taxes 7.0 13.3
------- -------
Net Income 11.5 % 21.7 %
======= =======
</TABLE>
Revenues
--------
Revenues decreased by 42% to $2.70 million in the first
quarter of fiscal 2001 from $4.64 million in the first quarter
of fiscal 2000. International sales in the first quarter of
fiscal 2001 were $328,000, compared to $3.00 million in the
first quarter of fiscal 2000 representing an 89% decrease.
International sales, like all Company revenues, are subject to
significant quarterly fluctuations. These sales were mainly
to Europe in the first quarter of fiscal 2001 and mainly to
Europe and Mexico for the comparable quarter of fiscal 2000.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The decrease in revenues for the first quarter of fiscal 2001
from the first quarter of fiscal 2000 reflected the absence of
revenue from large-scale orders and the unpredictable ordering
cycles inherent in drug development projects. The Company
expects that these dynamics, which also affected Synthetech's
results during the second half of fiscal 2000, will continue
in the second quarter of fiscal 2001 causing the first half
results for fiscal 2001 to be similar to those for the second
half of fiscal 2000. Looking beyond the second quarter of
fiscal 2001, the industry environment in which the Company
operates makes it difficult to predict with certainty the
level of future business. The Company, however, continues to
be a supplier of Peptide Building Blocks (PBBs) for several
pharmaceutical development projects advancing through clinical
trials and these projects could have substantial future
business potential. There are, however, many factors
affecting the success of these drug projects and Synthetech's
involvement. (See "Industry Factors" below.)
The Company's strong balance sheet has allowed it to weather
the current downturn without hindering long-term strategic
direction. Synthetech continues to invest in the necessary
infrastructure and organizational resources. (See "Liquidity
and Capital Resources" below.)
Gross Profit
------------
Gross profit was $961,000 or 36% of revenues in the first
quarter of fiscal 2001 as compared to $2.01 million or 43% of
revenues in the first quarter of fiscal 2000. The decrease in
gross profit margin for the first quarter of fiscal 2001
primarily reflected the downward pressure caused by a lower
level of revenues and the increased manufacturing overhead
costs associated with the second phase expansion of the new
plant.
Operating Expenses
------------------
Research and development (R&D) expense decreased to $95,000 in
the first quarter of fiscal 2001 from $127,000 in the first
quarter of fiscal 2000. As a percentage of revenues, the
first quarter of fiscal 2001 was 4% compared to 3% for the
first quarter of fiscal 2000. The decrease in R&D expense
primarily reflected reduced costs related to the acquisition
of staff and reduced compensation expenses related to the
granting of a non-qualified stock option. Selling, general
and administrative (SG&A) expense was $357,000 in the first
quarter of fiscal 2001 compared to $343,000 in the first
quarter of fiscal 2000, or 13% and 7% as a percentage of
revenues, respectively. Operating expenses as a percentage of
revenues were approximately 17% in the first quarter of fiscal
2001 and 10% in the first quarter of fiscal 2000.
Operating Income
----------------
Operating income decreased to $509,000 in the first quarter of
fiscal 2001 compared with $1.54 million in the first quarter
of fiscal 2000. As a percent of revenues, the first quarter
of fiscal 2001 was 19% compared to 33% of revenues for the
same period of fiscal 2000.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Other Income (Loss)
-------------------
The net other loss of $8,000 in the first quarter of fiscal
2001 included $99,000 in interest earnings offset by a
$107,000 equipment write down. The $87,000 of income in the
first quarter of fiscal 2000 primarily reflected interest
earnings.
Net Income
----------
For the first quarter of fiscal 2001 the Company earned
$498,000 before income taxes. A provision for income taxes of
$189,000 resulted in net income of $309,000. For the first
quarter of fiscal 2000 the Company earned $1.62 million before
income taxes. A provision for income taxes of $616,000
resulted in net income of $1.01 million. The Company's
effective tax rate was 38% for the first quarter of fiscal
2001 and the first quarter of fiscal 2000.
INDUSTRY FACTORS
The market for PBBs is driven by the market for synthetically
manufactured peptide, peptidomimetic small molecule and other
drugs in which they are incorporated. The drug development
process for these drugs is dictated by the marketplace, drug
companies and the regulatory environment. The Company has no
control over the pace of these drug development efforts, 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. The market for peptide and peptidomimetic small
molecule drugs is still very early in 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.
The size of the PBB orders for marketed drugs can be
substantially larger than those for the discovery or clinical
trial stages. Sales of PBBs for marketed drugs can also
provide an opportunity for continuing longer-term sales. 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, however, remains subject to
many uncertainties, including, without limitation, the drug
price, the drug side effects and the existence of other
competing drugs. These factors,
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
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, industry cost pressures can cause
pharmaceutical companies to explore and, as was the case with
one of the large-scale orders, ultimately adopt alternative
manufacturing processes which do not include the Company's
PBBs as an intermediate. Finally, with the longer-term, larger-
scale orders, the Company expects increased competition to
supply these PBBs.
Accordingly, these industry factors create an inability for
the Company to predict future demand beyond its current order
base. Until the Company develops a stable baseload of demand,
the Company is likely to continue to experience significant
fluctuations in its quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $13.00
million compared to $12.30 million at March 31, 2000. The
Company's cash and cash equivalents at June 30, 2000 totaled
$7.36 million. The Company does not invest in derivative
securities. In addition, the Company had a $1 million
unsecured bank line of credit of which there was no amount
outstanding at June 30, 2000.
The decrease in accounts receivable to $1.80 million at June
30, 2000 from $2.43 million at March 31, 2000 reflected the
timing of shipments and collections during the quarter. The
decrease in income tax receivable to $2,000 at June 30, 2000
from $137,000 at March 31, 2000 reflected the increase in tax
liability for the quarter. The decrease in accounts payable
to $263,000 at June 30, 2000 from $547,000 at March 31, 2000
primarily reflected the reduction of expenditure commitments
related to the second phase of the plant expansion and timing
of raw material purchases. The decrease in deferred revenue
to $294,000 at June 30, 2000 from $544,000 at March 31, 2000
resulted from the recognition of revenue associated with a
$250,000 customer advance payment.
The Company had approximately $322,000 of capital expenditures
during the first quarter of fiscal 2001 which included
$127,000 for equipment and equipment upgrades in the existing
plant and $195,000 for the second-phase of the new plant
expansion. The Company anticipates fiscal 2001 capital
expenditures for the existing plant and the completion of the
second-phase of the new plant expansion to be $700,000 and
$300,000, respectively. The Company is also considering
investing roughly $2.25 million in on-site wastewater
treatment capabilities and in an upgrade to the R&D labs. The
Company expects to finance all capital expenditures from
internal cash flow and does not anticipate the need for any
new debt or equity financing.
_____________________________
<PAGE> 13
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 risks and uncertainties include, but
are not limited to, the following: the uncertain market for
products, customer concentration, potential quarterly revenue
fluctuations, industry cost factors, competition, government
regulation, product liability risks, technological change,
increased costs associated with the Company's facility
expansions, international business risks, and Y2K risks.
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, 2000, 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> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i)* Articles of Incorporation of Synthetech, Inc., as amended.
3(ii) Bylaws of Synthetech, Inc., as amended.
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> 15
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 10, 2000 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: August 10, 2000 /s/ Charles B. Williams
Charles B. Williams
Vice President, Finance
and Administration, C.F.O.,
Chief Accounting Officer
<PAGE>
INDEX TO EXHIBITS
Sequential Page No.
3(ii) Bylaws of Synthetech, Inc., as amended.
27 Financial Data Schedule for the Three Months
Ended June 30, 2000
