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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, 2002
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.
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(Exact name of registrant as specified in its charter)
OREGON 84-0845771
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1290 INDUSTRIAL WAY, ALBANY, OREGON 97322
- ---------------------------------------- ----------
(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 12, 2002 was 14,307,468.
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SYNTHETECH, INC
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets ....................................... 3
Statements of Operations ............................. 5
Statements of Cash Flows ............................. 6
Notes to Unaudited Condensed Financial Statements .... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk ........................................ 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................... 17
SIGNATURES ................................................................ 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNTHETECH, INC.
BALANCE SHEETS
==============================================================================
(unaudited)
June 30, March 31,
2002 2002
------------ ------------
ASSETS
- ------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,157,000 $ 4,214,000
Accounts receivable, less allowance
for doubtful accounts of $15,000 for
both periods 2,607,000 2,167,000
Inventories 4,612,000 4,398,000
Income tax receivable 581,000 672,000
Prepaid expenses 375,000 426,000
Deferred income taxes 116,000 116,000
Other current assets 7,000 7,000
------------ ------------
TOTAL CURRENT ASSETS 12,455,000 12,000,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 12,274,000 12,229,000
------------ ------------
TOTAL ASSETS $ 24,729,000 $ 24,229,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
SYNTHETECH, INC.
BALANCE SHEETS
(continued)
==============================================================================
(unaudited)
June 30, March 31,
2002 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term obligations $ 20,000 $ 20,000
Accounts payable 319,000 465,000
Accrued compensation 142,000 138,000
Deferred revenue 400,000 --
Other accrued liabilities 155,000 61,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,036,000 684,000
DEFERRED INCOME TAXES 463,000 463,000
LONG TERM OBLIGATIONS, net of current portion 92,000 97,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
14,307,000 shares for both periods 14,000 14,000
Paid-in capital 8,956,000 8,933,000
Deferred compensation (78,000) (61,000)
Retained earnings 14,246,000 14,099,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 23,138,000 22,985,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,729,000 $ 24,229,000
============ ============
The accompanying notes are an integral part of these financial statements.
4
SYNTHETECH, INC.
STATEMENTS OF OPERATIONS
==============================================================================
(unaudited)
For The Three Month Period Ended June 30, 2002 2001
- ----------------------------------------- ------------ ------------
REVENUES $ 2,851,000 $ 2,322,000
COST OF SALES 1,873,000 2,310,000
------------ ------------
GROSS PROFIT 978,000 12,000
RESEARCH AND DEVELOPMENT 156,000 123,000
SELLING, GENERAL AND ADMINISTRATIVE 577,000 468,000
------------ ------------
OPERATING EXPENSE 733,000 591,000
------------ ------------
OPERATING INCOME (LOSS) 245,000 (579,000)
OTHER INCOME (EXPENSE), net (5,000) 55,000
INTEREST EXPENSE (2,000) (4,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 238,000 (528,000)
PROVISION (BENEFIT) FOR INCOME TAXES 91,000 (201,000)
------------ ------------
NET INCOME (LOSS) $ 147,000 $ (327,000)
============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.01 $ (0.02)
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.01 $ (0.02)
============ ============
The accompanying notes are an integral part of these financial statements
5
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
==============================================================================
(unaudited)
For The Three Month Period Ended June 30, 2002 2001
- ----------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 147,000 $ (327,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation, amortization and other 248,000 709,000
Loss on retirement of equipment 24,000 --
Amortization of deferred compensation 6,000 6,000
(Increase) decrease in assets:
Accounts receivable, net (440,000) (583,000)
Inventories (214,000) (123,000)
Income tax receivable 91,000 (202,000)
Prepaid expenses 51,000 87,000
Other assets -- (1,000)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (48,000) (265,000)
Deferred revenue 400,000 (17,000)
------------ ------------
Net cash provided by (used in)
operating activities 265,000 (716,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (317,000) (796,000)
------------ ------------
Net cash used in investing activities (317,000) (796,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term
debt obligations (5,000) (31,000)
------------ ------------
Net cash used in financing activities (5,000) (31,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (57,000) (1,543,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,214,000 5,389,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,157,000 $ 3,846,000
============ ============
NON-CASH INVESTING ACTIVITIES:
Issuance of stock options at below fair value $ 23,000 $ --
The accompanying notes are an integral part of these financial statements.
6
SYNTHETECH, INC.
----------------
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE A. GENERAL AND BUSINESS
--------------------
Synthetech, Inc., (Company) an Oregon corporation, specializes in
developing and producing Peptide Building Blocks (PBBs), which are
chemically modified forms of natural amino acids, and synthetic
non-natural amino acids (Specialty Amino Acids) using a combination of
organic chemistry and biocatalysis. The Company's PBBs are used
predominantly by pharmaceutical companies to make a wide range of
peptide-based drugs under development and on the market for the
treatment of AIDS, cancer, cardiovascular and other diseases. The
Company has established a worldwide reputation in a unique product and
technology area as a leading supplier for all phases of the drug
development cycle from discovery through market launch.
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 are read in conjunction with the
financial statements and the notes thereto included in Synthetech's
Annual Report on Form 10-K for the year ended March 31, 2002.
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 that 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.
7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B. PROPERTY, PLANT AND EQUIPMENT LIVES
-----------------------------------
Based upon the results of an independent review of the estimated lives
of certain categories of its machinery and equipment and laboratory
equipment, the Company extended the useful lives of certain of these
assets as of the beginning of the first quarter of fiscal 2003. The
Company initiated the review as it became evident after several years
of use that certain Company equipment may have longer usefulness, both
functionally and from a technology perspective, than originally
anticipated. The recent changes in estimated useful lives, which are
indicated in the table below, reduced total depreciation expense and
resulted in an after-tax increase to net income of approximately
$186,000, or $0.01 per diluted share, for the quarter ended June 30,
2002.
Estimated Useful Lives:
(in years) 2003 2002
---------------------------- ---------- ----------
Machinery and equipment 5 - 17 5
Laboratory equipment 5 - 7 5
------------------------------------------------------------
NOTE C. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses the financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs.
In October 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and the accounting and reporting
provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business. SFAS No.
144 retains many of the fundamental provisions of SFAS No. 121, but
resolves certain implementation issues associated with that Statement.
SFAS Nos. 143 and 144 are effective for the Company beginning in
fiscal 2003. The adoption of SFAS Nos. 143 and 144 have not had a
significant impact on the Company's financial condition or results of
operations.
In July 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the financial accounting and reporting for obligations associated with
an exit activity, including restructuring, or with a disposal of
long-lived assets. Exit activities include, but are not limited to,
eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. SFAS No. 146
specifies that a company will record a liability for a cost associated
with an exit or disposal activity only when that liability is incurred
and can be measured at fair value. Therefore, commitment to an exit
plan or a plan of disposal expresses only management's intended future
actions and, therefore, does not meet the requirement for recognizing
a liability and the related expense. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December
31, 2002, with earlier adoption encouraged. The Company does not
anticipate that the adoption of SFAS No. 146 will have a material
effect on its financial position or results of operations.
8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D. 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:
For The Three Months Ended June 30, 2002 2001
------------ ------------
Weighted average shares outstanding
for Basic EPS 14,307,468 14,279,641
------------ ------------
Dilutive effect of common stock
options issuable under treasury
stock method 95,434 --
------------ ------------
Weighted average common and common
equivalent shares outstanding for
Diluted EPS 14,402,902 14,279,641
============ ============
The following common stock equivalents were excluded from the earnings
per share computation because their effect would have been
anti-dilutive:
For The Three Months Ended June 30, 2002 2001
------------ ------------
Common stock options outstanding 451,800 746,550
NOTE E. COMPREHENSIVE INCOME OR LOSS
----------------------------
The Company has no material components of comprehensive income or loss
other than net income or loss. Accordingly, comprehensive income/loss
was equal to net income/loss for all periods presented.
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F. STATEMENTS OF CASH FLOWS
------------------------
Supplemental cash flow disclosures:
Cash Paid
-----------------------------------
For The Three Months Ended June 30, 2002 2001
------------ ------------
Income Taxes $ -- $ 1,000
Interest $ 2,000 $ 4,000
NOTE G. INVENTORIES
-----------
The major components of inventories are as follows:
June 30, March 31,
2002 2001
------------ ------------
Raw materials $ 1,147,000 $ 1,126,000
Work in process 1,392,000 1,281,000
Finished products 2,073,000 1,991,000
------------ ------------
$ 4,612,000 $ 4,398,000
============ ============
NOTE H. SUBSEQUENT EVENT
----------------
During July 2002, the Company purchased property adjacent to its
present manufacturing facilities in Albany, Oregon. The adjacent
property includes office and warehouse space into which the Company
plans to expand. The purchase price was $325,000.
10
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 Operations.
PERCENTAGE OF REVENUES
==========================================================================
For The Three Month Period Ended June 30, 2002 2001
========================================= ========== ==========
REVENUES 100.0% 100.0%
COST OF SALES 65.7% 99.5%
---------- ----------
GROSS PROFIT 34.3% 0.5%
RESEARCH AND DEVELOPMENT 5.5% 5.3%
SELLING, GENERAL AND ADMINISTRATIVE 20.2% 20.2%
---------- ----------
OPERATING EXPENSE 25.7% 25.5%
---------- ----------
OPERATING INCOME (LOSS) 8.6% (25.0)%
OTHER INCOME (EXPENSE), net (0.2)% 2.4%
INTEREST EXPENSE (0.1)% (0.2)%
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 8.4% (22.8)%
PROVISION (BENEFIT) FOR INCOME TAXES 3.2% (8.7)%
---------- ----------
NET INCOME (LOSS) 5.2% (14.1)%
========== ==========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenues
- --------
Revenues of $2.85 million in the first quarter of fiscal 2003 increased by
$529,000, or 22.8%, compared to $2.32 million in the first quarter of fiscal
2002. Revenues in the first quarter of fiscal 2003 included $2.25 million of
shipments of Peptide Building Blocks (PBBs) to support production of two large
scale drug projects in clinical development. Shipments to these same two
customers totaled $573,000 for the first quarter of fiscal 2002. Shipments into
the cosmeceutical sector totaled $146,000 in the first quarter of 2003, compared
to $705,000 in the comparable period of fiscal 2002. A cosmeceutical is a
product that makes no therapeutic claims but is intended for topical use by
humans. A substantial portion of revenues for any given quarter is typically
comprised of orders relating to a few projects, and the delay or loss of any key
project would have a significant negative impact on the Company's results of
operations.
International sales, mainly to Europe, were $410,000 and $828,000 in the first
quarter of fiscal 2003 and 2002, respectively. International sales, like all
Company revenues, are subject to significant quarterly fluctuations.
Gross Profit (Loss)
- -------------------
Gross Profit for the first quarter of fiscal 2003 was $978,000, or 34% of
revenues, compared to a gross profit of $12,000 for the first quarter of fiscal
2002. The improvement in gross profit in the first quarter of fiscal 2003 was
primarily a result of a more favorable product mix. In addition, as further
discussed in Note B to the attached financial statements, the Company extended
the useful lives of certain of its machinery and equipment. The extension in
asset lives decreased depreciation expense which improved gross profit for the
first quarter of fiscal 2003 by approximately $294,000, or 10% of revenues. The
extension in asset lives will decrease depreciation expense and improve gross
profit or reduce gross loss for the remaining periods of the originally
estimated useful lives of the applicable machinery and equipment.
Property taxes and insurance costs increased $64,000, or 110%, during the first
quarter of fiscal 2003 compared to the comparable period of fiscal 2002. The
increases are the result of the Company's plant expansions, the expiration of a
property tax deferral, and general increases in the cost of insurance. Property
taxes and insurance costs for the first quarter of fiscal 2003 were consistent
with the fourth quarter of fiscal 2002.
The mix of products shipped in the first quarter of fiscal 2003 had an unusually
high gross profit. In future periods, the Company does not expect to achieve the
level of profitability experienced in the first quarter at this level of
revenues.
Cost of sales includes raw materials consumed, all labor, facility and similar
expenses incurred by the Company's manufacturing department during the period,
including expenses not directly allocated to manufacturing the products sold
during the period, and adjustments to inventory.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses
- ------------------
Research and development (R&D) expense of $156,000 in the first quarter of
fiscal 2003 increased by $33,000, or 27%, compared to $123,000 in the first
quarter of fiscal 2002. As a percentage of sales, R&D expenses were 5% for both
periods. The increase in R&D expense in the first quarter of fiscal 2003,
compared to the first quarter of fiscal 2002, primarily reflected the hiring of
additional R&D staff in connection with the expanded capacity arising from the
completion of the R&D lab remodel completed in May, 2001. R&D labor and related
costs for the first quarter of fiscal 2003 were comparable to the fourth quarter
of fiscal 2002.
Selling, general and administrative (SG&A) expense of $577,000 in the first
quarter of fiscal 2003 increased by $109,000, or 23%, compared to $468,000 in
the first quarter of fiscal 2002. As a percentage of sales, SG&A expense was 20%
for both periods. The increase in SG&A expense primarily reflects one time costs
relating to the retirement of a Company officer.
Operating Income (Loss)
- -----------------------
Operating income in the first quarter of fiscal 2003 was $245,000, compared to
an operating loss in the first quarter of fiscal 2002 of $579,000.
Other Income (Expense), net
- ---------------------------
Other expense, net in the first quarter of fiscal 2003 declined to $5,000,
compared to other income, net of $55,000 in the first quarter of fiscal 2002,
primarily as a result in the recent quarter of lower average interest rates
applicable to investments by the Company and a $21,000 loss on the retirement of
machinery and equipment. The Company earned $16,000 of interest on its cash
equivalents in the first quarter of fiscal 2003. Other income in the first
quarter of fiscal 2002 primarily reflected interest earnings on the Company's
cash equivalents.
Interest Expense
- ----------------
Interest expense was $2,000 for the first quarter of fiscal 2003 and $4,000 for
the first quarter of fiscal 2002.
Provision (Benefit) for Income Taxes:
- -------------------------------------
For the first quarter of fiscal 2003 and 2002, the Company recorded an income
tax provision (benefit) at the statutory combined federal and state rate of 38%.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Income (Loss)
- -----------------
Net income for the first quarter of fiscal 2003 was $147,000, or 5% of sales.
The net loss for the first quarter of fiscal 2002 was $327,000, or 14% of sales.
The effect on net income for the recent quarter of the extension of the useful
lives of certain of the Company's machinery and equipment, as discussed in Note
B to the attached financial statements, was to increase net income by
approximately $186,000, or $0.01 per diluted share. Absent this change, the
Company would have incurred a net loss for the quarter. The extension in asset
lives will decrease depreciation expense and improve net income or reduce net
loss for the remaining periods of the originally estimated useful lives of the
applicable machinery and equipment.
INDUSTRY FACTORS
Market Factors
- --------------
The Company manufactures PBBs for use in synthetically manufactured peptide,
peptidomimetic small molecule and other drugs. The market for PBBs is driven by
the market for the drugs in which they are incorporated. The drug development
process 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 or, even if approved, the ultimate market potential of the drugs. The
Company also manufactures PBBs for use in a cosmeceutical, and faces similar
factors in that market.
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 developing.
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 and timing of orders
by the Company's customers relating to specific drug development programs varies
substantially from period to period 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, 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 ultimately adopt alternative manufacturing processes which may 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Similar dynamics affect the cosmeceutical development process and market, except
that the regulatory oversight and, consequently, the typical length of a
product's "time to market" is reduced. Cosmeceutical products make no
therapeutic claims and, accordingly, the more extensive and time-consuming
clinical trials to establish efficacy are not required.
The foregoing 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 periodic results.
Production factors
- ------------------
Synthetech has a full cycle "grams to tons" production capability and has made
over 400 products. With over 14 years of experience, Synthetech has developed
extensive PBB process technology and is recognized as one of the leaders in this
area. Nevertheless, initial batches of new products and scaling up production
processes of existing products may result in significantly lower than expected
yields, extended processing time and may require substantial rework to meet the
required specification. These factors could cause increased costs and delay
shipments and, thus, affect periodic operating results.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had working capital of $11.42 million, compared to
$11.32 million at March 31, 2002. The Company's cash and cash equivalents at
June 30, 2002 totaled $4.16 million, compared to $4.21 million at March 31,
2002. The Company has a $1 million unsecured bank line of credit, of which there
was no amount outstanding at June 30, 2002. The line of credit is renewable on
September 1, 2002. Net cash provided by operating activities was $265,000 for
the first quarter of fiscal 2003. Purchases of property plant and equipment
totaled $317,000 and principal payments on long-term debt totaled $5,000 for the
first quarter of fiscal 2003. The Company believes that its existing cash and
cash equivalents, its bank line of credit and funds generated from operations
will be sufficient to support operations for the next twelve months.
The increase in accounts receivable to $2.61 million at June 30, 2002 from $2.17
million at March 31, 2002 primarily reflected differences in the timing of
shipments between the periods. The increase in inventory to $4.61 million at
June 30, 2002, from $4.40 million at March 31, 2002, reflected nominal increases
in raw materials, work in process and finished products. Deferred revenue of
$400,000 at June 30, 2002, represents a customer advance for product to be
shipped in the second quarter of fiscal 2003.
The Company incurred $317,000 of capital expenditures during the first quarter
of fiscal 2003, of which $243,000 was expended on an automated process control
system which became functional in July 2002. During July 2002, the Company also
purchased property adjacent to its present manufacturing facilities in Albany,
Oregon. The adjacent property includes office and warehouse space into which the
Company plans to expand. The purchase price was $325,000. The Company's capital
budget for fiscal 2003 is $1.45 million. The Company expects to finance all
capital expenditures from internal cash flow and financial resources and does
not anticipate the need for any new debt or equity financing.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary financial market risk exposure is the impact of interest
rate fluctuations on interest income earned on our cash deposits and cash
equivalents. The risks associated with market, liquidity and principal are
mitigated by investing in high-credit quality securities and limiting
concentrations of issuers and maturity dates. Derivative financial instruments
are not part of the Company's investments.
Substantially all of the Company's purchases and sales are denominated in U.S.
dollars, and as a result, it has relatively little exposure to foreign currency
exchange risk with respect to any of its purchases and sales. The Company does
not currently hedge against foreign currency rate fluctuations. Management
believes the effect of an immediate 10 percent change in exchange rates would
not have a material impact on the Company's operating results or cash flows.
-----------------------------
This Report on 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), including, without limitation, statements regarding:
future performance, growth and operating results of the Company; the sufficiency
of existing and anticipated funds to support future operations; the Company's
anticipated capital expenditures and financing thereof; and the effect any
change in foreign currency exchange rates would have on the Company's operating
results. 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 our products, customer concentration,
potential period to period revenue fluctuations, production factors, industry
cost factors, competition, government regulation, product liability risks,
technological change, increased costs associated with the Company's facility
expansions, exchange rate fluctuations and international business 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, 2002, for a further description of risks and uncertainties related to
forward-looking statements made by the Company as well as to other aspects of
the Company's business.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 99.1 Chief Executive Officer Certification Pursuant to
the Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Chief Financial Officer Certification Pursuant to
the Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None
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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, 2002 /s/ M. Sreenivasan
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M. Sreenivasan
President & C.E.O.
Date: August 12, 2002 /s/ Gary A. Weber
-----------------------
Gary A. Weber
Vice President, Finance,
Chief Financial Officer
18