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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
[_] 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
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(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
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). YES [_] NO [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the last sales price ($1.25) as
reported by the Nasdaq National Market System, as of the last business day of
the Registrant's most recently completed second fiscal quarter (September 30,
2002), was $13,134,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement are incorporated by reference into
Part III of this Form 10-K.
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TABLE OF CONTENTS
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Page
PART I
Item 1 - Business ................................................... 1
Item 2 - Properties.................................................. 10
Item 3 - Legal Proceedings........................................... 10
Item 4 - Submission of Matters To a Vote of Security Holders......... 10
Executive Officers of the Registrant........................ 10
PART II
Item 5 - Market for Registrant's Common Stock and Related
Shareholder Matters......................................... 12
Item 6 - Selected Financial Data..................................... 13
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 7A - Quantitative and Qualitative Disclosure About Market Risk... 23
Item 8 - Financial Statements and Supplementary Data................. 24
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure......................... 43
PART III
Item 10 - Directors and Executive Officers of the Registrant ......... 43
Item 11 - Executive Compensation...................................... 43
Item 12 - Security Ownership of Certain Beneficial Owners
and Management.............................................. 43
Item 13 - Certain Relationships and Related Transactions.............. 44
PART IV
Item 14 - Controls and Procedures..................................... 44
Item 15 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 45
Signatures................................................................ 47
Certifications............................................................ 48
Page ii
PART I
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FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THIS ACT PROVIDES A "SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS TO ENCOURAGE COMPANIES TO PROVIDE
PROSPECTIVE INFORMATION ABOUT THEMSELVES SO LONG AS THEY IDENTIFY THESE
STATEMENTS AS FORWARD-LOOKING AND PROVIDE MEANINGFUL CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE
PROJECTED RESULTS. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT,
INCLUDING STATEMENTS REGARDING INDUSTRY PROSPECTS AND FUTURE RESULTS OF
OPERATIONS OR FINANCIAL POSITION, MADE IN THIS ANNUAL REPORT ARE FORWARD
LOOKING. WORDS SUCH AS "ANTICIPATES," "BELIEVES," "EXPECTS," "FUTURE` AND
"INTENDS" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. IN
PARTICULAR, STATEMENTS REGARDING: ANTICIPATED REVENUES; FINANCING CURRENT AND
FUTURE CAPITAL EXPENDITURES WITH CASH AND CASH EQUIVALENTS; AND COSTS OF
COMPLYING WITH GOVERNMENTAL REGULATION ARE FORWARD-LOOKING. FORWARD-LOOKING
STATEMENTS REFLECT MANAGEMENT'S CURRENT EXPECTATIONS, PLANS OR PROJECTIONS AND
ARE INHERENTLY UNCERTAIN. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
management's EXPECTATIONS, PLANS OR PROJECTIONS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE OF THIS REPORT. CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER SIGNIFICANTLY FROM MANAGEMENT'S EXPECTATIONS ARE DESCRIBED IN
THE SECTION ENTITLED "FACTORS AFFECTING FUTURE RESULTS." THIS SECTION, ALONG
WITH OTHER SECTIONS OF THIS ANNUAL REPORT, DESCRIBES SOME, BUT NOT ALL, OF THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM
MANAGEMENT'S EXPECTATIONS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE URGED, HOWEVER, TO REVIEW THE
FACTORS SET FORTH IN REPORTS THAT THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ITEM 1. BUSINESS
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GENERAL
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Synthetech, Inc., an Oregon corporation (the "Company" or "Synthetech"),
produces chemically modified naturally occurring and synthetic amino acids that
it refers to as "Peptide Building Blocks" ("PBBs"). These PBBs are purchased by
major pharmaceutical companies, emerging biopharmaceutical companies and
contract drug synthesis companies as starting materials in the manufacture of
peptide, peptidomimetic small molecule and other drugs. Using organic chemistry
and biocatalysis techniques, the Company has the expertise and capacity to
produce PBBs on a full cycle "grams to tons" production basis for use in all
stages of drug development from initial discovery through approved, marketed
drugs. Synthetech's PBBs are used in peptide, peptidomimetic small molecule and
other drugs under development or on the market for the treatment of AIDS,
cancer, cardiovascular and other diseases.
The Company also is manufacturing PBBs for use in a cosmeceutical, a cosmetic
product that makes no therapeutic claims, but being intended for human use, is
regulated by the Food and Drug Administration ("FDA") for safety.
1
MARKET OVERVIEW
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The demand for PBBs is driven by the market for the peptide, peptidomimetic
small molecule and other drugs in which they are incorporated. Peptide drugs are
chains of generally three to 50 amino acids and retain their peptide structure
after completion of drug manufacturing. Since naturally occurring peptides in
the human body regulate many of its complex biochemical systems, researchers
have been investigating peptide drug candidates to determine their ability to
regulate these systems to either promote health or hinder disease. With
structures and characteristics similar to the body's own peptides and enzymes,
peptide drugs generally are quite potent. Peptide drugs also tend to be
administered through intravenous or other non-oral delivery paths. During
clinical trials, PBB orders for these candidates are typically multi-kilogram
("multi-kilo") in size. At the marketed drug stage, orders for PBBs for these
drugs can reach the tens of kilograms ("kilos") to hundreds of kilos size.
Researchers have also been investigating combining one or more amino acids with
other chemicals that are not amino acids to create drug candidates. These drug
candidates are commonly referred to as peptidomimetic small molecule drugs since
they exhibit peptide-like qualities in a smaller molecule that is not a defined
sequence of amino acids. Peptidomimetic small molecule drugs typically are less
potent than peptide drugs. They also often are able to be administered orally.
During clinical trials, PBB orders for these candidates can be in the hundreds
of kilos to low tons size. At the marketed drug stage, orders for these drugs
can reach the tons to tens of tons size.
The size of the peptide and peptidomimetic small molecule drug market is a
function of the number of these drugs which are initially screened for
therapeutic attributes, progress down the clinical trial path toward regulatory
approval and, ultimately, are approved and marketed. The market size for any
individual approved drug is affected by many factors, including, without
limitation, size of the patient population addressed, efficacy level, level and
frequency of side effects, method of drug delivery, cost and competing drugs.
The size of the PBB market for peptide, peptidomimetic small molecule and other
drugs is also a function of the quantities and varieties of PBBs necessary to
produce these drugs.
The Company is also producing PBBs for a cosmeceutical and 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.
(See also "Industry Factors" set forth in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations).
STRATEGY
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Synthetech's strategy is to emphasize a commitment to its customers from the
early phases of discovery through clinical development in order to develop
larger orders to the extent that the products receive regulatory approval.
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PRODUCT OVERVIEW
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Peptide Building Blocks. PBBs are amino acids that have been chemically modified
through organic chemistry and biocatalysis techniques to enable them to link
with other amino acids or chemicals in a particular defined sequence. These PBBs
are used as starting materials in the manufacture of peptide, peptidomimetic
small molecule and other drugs, and for the cosmeceutical product. The amino
acids that are transformed into PBBs may be either natural amino acids (that is,
amino acids that occur in nature, including their chiral or "mirror image" form)
or synthetic amino acids (that is, amino acids that have a side chain that does
not occur in nature). Synthetech refers to the synthetic amino acids as
"Specialty Amino Acids."
Since 1987, the Company has produced a wide range of natural amino acid PBB
products. The Company has also developed and manufactures over three dozen
Specialty Amino Acids. The Company uses a wide array of raw materials to produce
PBBs. These materials generally are in adequate supply from multiple suppliers.
The Company has developed and scaled up process technology to produce this wide
range of PBB products in a "grams to tons" scale. The Company continues to
produce most bulk orders on an as-ordered basis. The Company also maintains
small inventory quantities of many PBBs, permitting immediate deliveries.
At March 31, 2003, the Company's order backlog was $4.6 million, with shipments
extending into fiscal 2005. At March 31, 2002 and 2001 the Company's order
backlog was $6.2 million and $3.9 million, respectively.
MARKETING
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The Company markets its products and capabilities through attendance at trade
shows, listings in biotechnology and chemical industry directories,
advertisements in chemical trade periodicals and a website. In addition, the
Company maintains ongoing direct relationships with major pharmaceutical,
emerging biopharmaceutical, contract drug synthesis and other firms that it
believes might have a need for its products. The Company typically sells its
products directly to its customers, although it uses independent sales
representatives for some European sales in Switzerland and France, and has
usually sold products to Japanese customers through chemical trading firms.
CUSTOMERS
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Although the Company has customers in various countries, the Company expects
that a few customers will continue to account for a significant portion of
revenues each year. During fiscal 2003, the top 10 customers represented over
90% of the Company's revenues. Of these ten customers, four were major
pharmaceutical companies, two were emerging biopharmaceutical companies, three
were contract drug synthesis companies, and one was a cosmeceutical company. The
Company had two customers each accounting for over 10% of fiscal 2003 revenues
- -- Telik, Inc. and F. Hoffman-La Roche, Ltd. which individually accounted for
approximately 39% and 21%, respectively, of the Company's fiscal 2003 revenues.
For the fiscal years ended March 31, 2003, 2002 and 2001, sales to international
customers were $1.9 million, $1.4 million, and $1.7 million, respectively,
accounting for approximately 17%, 13%, and 23%, of the Company's total revenues.
The Company's international sales were principally to Europe. See Note K to
Financial Statements.
3
COMPETITION
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Because peptide and peptidomimetic small molecule drugs are relatively new, the
market in the past for PBBs has been quite small, with sales typically in the
hundreds of kilos or smaller size. As a result, the PBB market has not attracted
a significant amount of direct competition. As the market continues to grow with
larger order sizes becoming more prevalent, the Company has begun to see more
competition.
Current competition in multi-kilo quantities of natural amino acid based PBBs
comes primarily from several European fine chemical companies. Multi-ton order
sizes of these natural PBBs have begun to attract a wider group of domestic and
international chemical companies. In the area of Specialty Amino Acids, the
Company has competition on a selected product basis at the multi-kilo scale from
fine chemical producers in Europe, Japan and the United States. Competition from
companies in developing countries, such as India, China and Korea, is also
starting to emerge. Additionally, there is some competition from internal
production departments of pharmaceutical companies. Competition also increases
for supplying PBBs for drug development programs that reach late clinical trials
and move into approved status as a result of the increased quantities typically
required at these stages and pharmaceutical company requirements to have second
sources of material available. Many of the Company's competitors have technical,
financial, selling and other resources available to them that are significantly
greater than those available to the Company.
The principal methods of competition in the market for PBBs and other fine
chemicals are price, quality, customer service and delivery responsiveness. The
Company believes that it competes effectively in each of these areas. The
Company also believes that its production of a wide range of products and
quantities gives it a competitive advantage in the marketplace. In addition, the
Company believes that pharmaceutical companies generally view internal
production of PBBs as a misallocation of resources and, given a reliable source
of a quality product, would rather obtain them from an outside supplier.
RESEARCH AND DEVELOPMENT
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The Company's Research and Development Group is composed of nine degreed
chemists, of whom four have advanced degrees in chemistry. The Company's
research and development efforts focus on process development to support the
Company's PBB product lines. In addition, the group explores alternative
scaleable routes for PBB production, especially for its Specialty Amino Acids.
The Company has expanded its research staff in both fiscal 2003 and 2002 to
place additional emphasis on developing novel technologies to seek to address
identifiable market trends and business opportunities.
During the fiscal years ended March 31, 2003, 2002 and 2001, the Company's
research and development expenses were $765,000, $651,000, and $458,000,
respectively.
EMPLOYEES
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As of May 30, 2003, the Company employed 64 individuals.
REGULATORY MATTERS
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Because the Company's products are intermediates sold to drug manufacturers, the
Company has been generally unaffected directly by FDA regulation which is
directed at the drug manufacturers. The Company's customers do, however,
typically conduct periodic reviews and audits of the Company's
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operations, including its inspection and quality assurance programs. These
programs involve materials tracking, record keeping and other documentation.
Because some customers have begun to request the Company to manufacture and
supply PBBs with additional processing that complies with the FDA's Good
Manufacturing Practice guidelines, the Company expects these programs will often
include more extensive quality assurance systems and documentation. The Company
anticipates that the expenses of implementing these programs will increase.
The Company's business is also subject to substantial regulation in the areas of
safety, environmental control and hazardous waste management. Although the
Company believes that it is in material compliance with these laws, rules and
regulations, the failure to comply with present or future regulations could
result in fines being imposed on the Company, suspension of production or
cessation of operations. As additional and more extensive regulations are being
added in these areas at the federal, state and local levels, the compliance
costs likely will continue to increase. The operation of fine chemical
manufacturing plants involves a risk of environmental damage or personal injury
due to the potentially harmful substances used. There can be no assurance that
material costs and liabilities will not be incurred in the future because of an
accident or other event resulting in personal injury or an unauthorized release
of such substances to the environment. The Company also generates hazardous and
other wastes that are disposed at various off-site facilities. The Company may
be liable, irrespective of fault, for material cleanup costs or other
liabilities incurred at these disposal facilities due to releases of such
substances into the environment.
Expenditures for capital equipment related to maintaining compliance with
government regulatory matters were insignificant in fiscal 2003 and are
anticipated to be insignificant in fiscal 2004.
The Company maintains property damage insurance, liability insurance,
environmental risk insurance, and product liability insurance. However, coverage
may be inadequate to cover potential environmental liabilities.
PRODUCT LIABILITY
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Use of the Company's products in pharmaceuticals and cosmeceuticals and the
subsequent testing, marketing and sale of such products involves a risk of
product liability. Claims for product liability may be asserted against the
Company. The Company may not be able to successfully defend any claim that may
be asserted. A product liability claim could have a material adverse effect on
the business and/or financial condition of the Company. The Company maintains
product liability insurance with a $1 million limit per occurrence and a $2
million aggregate limit. The Company also maintains an umbrella liability
insurance policy with an additional $9 million of coverage, which may be
inadequate to cover its liabilities.
COMPANY BACKGROUND
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The Company was formed in 1981 to develop novel chemical process technology by
combining classical organic chemistry with enzyme-based biocatalysis. For the
first several years, it operated mainly as a research and development group
focused on process development of pharmaceuticals and other fine chemicals.
After its initial public offering in 1984, the Company's research efforts were
concentrated on the development of a proprietary process for aspartame and
L-phenylalanine. Although the Company has entered into one license for this
technology, the Company discontinued marketing this technology in 1991 and does
not expect additional licensing revenue for this technology.
Throughout its development during the 1980s, the Company also offered contract
research services.
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These research services were typically provided to pharmaceutical clients and
generally involved the development of biocatalytic processes (that is, chemical
processes which are affected by the use of enzymes or micro-organisms). Since
the end of fiscal 1990, the Company has phased out contract research services
and does not anticipate receiving any significant revenue from research services
in the future. By the end of the 1980s, the Company, building on prior
experience, began to focus on the production of PBBs and other fine chemicals
for customers. With the successful completion of large-scale orders, the Company
has demonstrated its capability as a full-cycle "grams to tons" PBB producer.
FACTORS AFFECTING FUTURE RESULTS
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READERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS THAT MAY AFFECT THE
COMPANY'S BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL CONDITION, AS WELL AS
OTHER INFORMATION INCLUDED IN THIS ANNUAL REPORT. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY ONES THE COMPANY FACES. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO THE COMPANY OR THAT THE COMPANY CURRENTLY
DEEMS IMMATERIAL ALSO MAY IMPAIR ITS BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
UNCERTAIN MARKET FOR PRODUCTS; CUSTOMER CONCENTRATION; AND POTENTIAL
QUARTERLY REVENUE FLUCTUATIONS. Historically, the Company has experienced
substantial period-to-period revenue fluctuations reflecting the industry
environment in which the Company has operated. The market for PBBs is driven by
the market for the synthetically manufactured peptide, peptidomimetic small
molecule and other drugs, and cosmeceuticals into 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 peptide,
peptidomimetic small molecule and other drug development, which drugs get
selected for clinical trials, which drugs are approved by the FDA, and, even if
approved, the ultimate potential of such drugs. Recurring sales of PBBs for
discovery or clinical trial stage 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 year to year and the Company cannot rely on any one customer as a constant
source of revenue.
Sales of PBBs for marketed drugs provide an opportunity for continuing
longer-term sales and 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 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. 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 periodic results. The Company faces similar challenges in
any sales in the cosmeceutical market.
DOWNWARD PRICE PRESSURE. As successful customer projects develop into
larger volume orders, either during late-stage clinical trials, product
pre-launch or for marketed products, the Company's per unit price may decline.
Additionally, the international fine chemicals industry, in which the Company is
a niche participant, has been marked by overcapacity, resulting in downward
pressure on pricing.
6
Downward price pressure and resulting price declines could significantly
decrease the Company's absolute gross margin if not offset by a substantial
increase in customer requirements.
KEY PERSONNEL. The Company's success depends largely on its President
and CEO, its Vice President of Finance and CFO, its Vice President of
Operations, its Director of Business Development, its Technical Director and
other key employees. The Company does not have key-man life insurance on any of
these employees. If one or more of these key employees were to resign, the loss
could result in delays to production, loss of sales, and diversion of management
resources. Synthetech's success also depends on its ability to attract and
retain qualified, experienced employees. There is substantial competition for
experienced technical, sales and marketing personnel in the industry. If
Synthetech is unable to retain its existing personnel, or attract and retain
additional qualified personnel, it may from time to time experience inadequate
levels of staffing which could have a material adverse effect on the Company.
The Company's growth could be limited due to its lack of capacity to produce and
market products to customers or it could experience deterioration in service or
decreased customer satisfaction.
COMPETITION. In the past, the Company has not had a significant amount
of direct competition for discovery and clinical trial stage drug development
projects. The Company believes that this resulted from peptide and
peptidomimetic small molecule drugs, particularly those that utilize synthetic
amino acids, being relatively new and the market for PBBs relatively small. As
the market has continued to grow with multi-ton order sizes becoming more
prevalent, the Company has begun to see more competition. Current competition in
the multi-kilo or smaller quantities of natural amino acid based PBBs comes
primarily from several European fine chemical companies. Multi-ton order sizes
of these natural PBBs have begun to attract a wider group of domestic and
international chemical companies. In the area of synthetic amino acid based
PBBs, the Company has competition on a selective product basis from fine
chemical producers in Europe and Japan. Competition from companies in developing
countries, such as India, China and Korea, is also starting to emerge.
Competition has also increased for supplying PBBs for drug development
programs that reach late clinical trials and move into an approved status as a
result of increased quantities typically required at these stages and
pharmaceutical company requirements to have second sources of material
available. The Company's competitors have technical, financial, selling and
other resources available to them that are significantly greater than those
available to the Company.
RISKS OF TECHNOLOGICAL CHANGE. The market for the Company's products is
characterized by rapid changes in both product and process technologies. The
Company's future results of operations will depend upon its ability to improve
and market its existing products and to successfully develop, manufacture and
market new products. The Company may not be able to continue to improve and
market its existing products or develop and market new products and
technological developments could cause the Company's products and technology to
become obsolete or noncompetitive.
INDUSTRY COST FACTORS. The market for PBBs used by pharmaceutical
companies is dependent on the market for pharmaceutical products. The levels of
revenues and profitability of pharmaceutical companies may be affected by the
continuing efforts of governmental and third party payers to contain or reduce
the cost of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government controls. In addition, in the United States and
elsewhere, sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the
7
consumer from third party payers such as government and private insurance plans.
Third party payers are increasingly challenging the prices charged for medical
products and services. Peptide and peptidomimetic small molecule drugs may not
be considered cost effective, and reimbursement may not be available or
sufficient to allow these drugs to be sold on a profitable basis. In addition,
as cost pressures in the pharmaceutical industry have tightened, the
cancellation rate for drug development programs has increased. Industry cost
pressures can also cause pharmaceutical companies to investigate alternative
drug manufacturing processes that may not include PBBs.
PRODUCTION FACTORS. Synthetech has a full cycle "grams to tons"
production capability and has made over 400 products. With over 15 years of
experience, Synthetech has developed extensive peptide and peptidomimetic small
molecule process technology. Nevertheless, initial batches of new products and
scaling up production of existing products may result in significantly lower
than expected yields or may require substantial rework to meet the required
specification. Production of new products may even result in total write-offs.
Such write-offs would reduce the Company's gross margin.
REGULATORY MATTERS. The Company is subject to a variety of federal,
state and local laws, rules and regulations related to the discharge or disposal
of toxic, volatile or other hazardous chemicals. Although the Company believes
that it is in compliance with these laws, rules and regulations in all material
respects, the failure to comply with present or future regulations could result
in fines being imposed on the Company, suspension of production or cessation of
operations. Third parties may also have the right to sue to enforce compliance.
Moreover, it is possible that increasingly strict requirements imposed by
environmental laws and enforcement policies thereunder could require the Company
to make significant capital expenditures. The operation of a chemical
manufacturing plant entails the inherent risk of environmental damage or
personal injury due to the handling of potentially harmful substances, and there
can be no assurance that material costs and liabilities will not be incurred in
the future because of an accident or other event resulting in personal injury or
unauthorized release of such substances to the environment. In addition, the
Company generates hazardous materials and other wastes that are disposed at
various offsite facilities. The Company may be liable, irrespective of fault,
for material cleanup costs or other liabilities incurred at these disposal
facilities in the event of a release of hazardous substances by such facilities
into the environment. Although, the Company has obtained environmental risk
insurance, it may be inadequate to cover the Company's potential environmental
liabilities.
POTENTIAL REGULATION. The PBBs produced by the Company are intermediate
ingredients that are then processed by the companies to which they are sold, and
are therefore currently not subject to the requirements of the FDA. The
Company's customers do, however, typically conduct periodic reviews and audits
of the Company's operations, including its inspection and quality assurance
programs. These programs involve materials tracking, record keeping and other
documentation. As some customers have begun to request the Company to
manufacture and supply PBBs with additional processing, the Company believes
that these programs will often become more extensive. Accordingly, the Company
expects its compliance documentation efforts will continue to increase and
anticipates that the expenses of implementing such programs will increase in the
future. In the future, the Company may not be able to comply with the applicable
documentation or such documentation may require substantial incremental expense
for additional labor and capital.
RISKS OF INTERNATIONAL BUSINESS. Sales to customers outside the United
States accounted for approximately 17% of the Company's net sales during fiscal
year 2003 and 13% and 23% for fiscal years 2002 and 2001, respectively. The
Company expects that international sales will continue to account for a
significant percentage of net sales. The Company's business is and will be
subject to the risks generally
8
associated with doing business internationally, including changes in demand
resulting from fluctuations in exchange rates, foreign governmental regulation
and changes in economic conditions. These factors, among others, could influence
the Company's ability to sell its products in international markets. In
addition, the Company's sale of its products is subject to the risks associated
with legislation and regulation relating to imports, including quotas, duties or
taxes and other charges, restrictions and retaliatory actions on imports into
other countries in which the Company's products may be sold. The Company is also
subject to similar risks with respect to the importation of raw materials from
foreign countries. Changes in these regulations could increase costs or prevent
the Company from accessing materials necessary for its products.
MANUFACTURING CAPACITY. As a manufacturer of PBBs, the Company will
continually face risks regarding the availability and costs of raw materials and
labor, the potential need for additional capital equipment, increased
maintenance costs, plant and equipment obsolescence and quality control. The
Company has constructed additional manufacturing and related facilities on its
site in Albany, Oregon. Nevertheless, existing facilities may not have
sufficient capacity to meet the future demand for the Company's products. The
Company utilizes a single facility. A disruption in the Company's production or
distribution or damage or destruction of the Company's facility could have a
material adverse effect on the Company's financial results. Conversely, the
Company may not have sufficient demand to utilize the additional capacity, which
could also have a material adverse effect on the Company's financial results.
PRODUCT LIABILITY. Use of the Company's products in pharmaceuticals and
cosmeceuticals and the subsequent testing, marketing and sale of such products
involves an inherent risk of product liability. Claims for product liability
could be asserted against the Company and the Company may not be able to
successfully defend any claim that may be asserted. Even if the Company is
successful, the costs of defense could materially affect its business. A product
liability claim could have a material adverse effect on the business and/or
financial condition of the Company. The Company has purchased product liability
insurance with a $1 million limit per occurrence and a $2 million aggregate
limit. Also, the Company maintains an umbrella liability insurance policy with
an additional $9 million of coverage, which may be inadequate to cover its
potential liabilities.
CHANGE IN INDEPENDENT AUDITORS. In May 2002, the Company dismissed
Arthur Andersen LLP, which had audited the Company's financial statements since
1989, and engaged KPMG LLP to audit the Company's financial statements for the
fiscal year ended March 31, 2003 and the fiscal year ended March 31, 2002. The
Company has not been able to obtain Arthur Andersen's consent to incorporate by
reference their report on the audited financial statements for the fiscal year
ended March 31, 2001 into the Company's existing or future registration
statements or periodic reports. Because the Company has not been able to obtain
such consent, recovery of damages by investors in the Company's common stock
sold pursuant to those registration statements may be limited.
9
ITEM 2. PROPERTIES
------------------
Synthetech's headquarters and production facility are located in Albany, Oregon.
The Company purchased this property in 1987. Since then, it has undergone a
number of plant and building expansions on site. At present, the Company's
operating facilities aggregate 47,700 square feet and are comprised of
production, pilot plant, laboratory, warehouse and office space. These
facilities include a separate 20,000 square foot production facility.
In May 2001, the Company remodeled its Research and Development ("R&D") lab at a
cost of $1.2 million. In November 2001, the Company completed a wastewater
treatment system at a total cost of $1.6 million. In July 2002, the Company
purchased and added improvements to an office and warehouse facility adjacent to
its production facilities at a total cost of $453,000. The new building contains
1,700 square feet of office space and approximately 3,000 square feet of
warehouse space. In March 2003, the Company completed the remodel of its 1,300
square foot Quality Control Department at a cost of $0.2 million.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
As of March 31, 2003, the Company was not involved in any material litigation.
From time to time the Company may be involved in litigation arising in the
normal course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
The Company did not submit any matters to a vote of its shareholders during the
fourth quarter of fiscal 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers and key employees of the Company:
Name Age Position
---- --- --------
M. ("Sreeni") Sreenivasan 54 President, Chief Executive Officer and
member of the Board of Directors
Gary A. Weber 45 Vice President of Finance and
Administration, Chief Financial Officer,
Secretary, Treasurer
Joel D. Melka 48 Vice President of Operations
Michael J. Cannarsa 46 Director of Business Development
Michael C. Standen 42 Technical Director
- ------------
10
M. "Sreeni" Sreenivasan. Mr. Sreenivasan has served as President and Chief
Executive Officer since 1995 and as Chief Operating Officer from 1990 through
1995. Mr. Sreenivasan has also served as a board member since 1995. From 1988 to
1990 he was Executive Vice President and General Manager and from 1987 to 1988
he was Director of Manufacturing. Previously, he worked for Ruetgers-Nease
Chemical Co. (bulk pharmaceuticals and other fine chemicals) for 13 years in
various technical and manufacturing management capacities, including 7 years as
Plant Manager of their Augusta, Georgia plant. Mr. Sreenivasan received his M.S.
in Chemical Engineering from Bucknell University and his M.B.A. from Penn State
University.
Gary A. Weber. Mr. Weber joined the Company as Vice President of Finance and
Administration in June 2002. In July 2002, the Company's Board of Directors
appointed Mr. Weber to the additional positions of Chief Financial Officer,
Treasurer and Secretary. From 1998 until March 2002, Mr. Weber was Vice
President of Finance for Wah Chang and Oremet-Wah Chang (specialty metals and
chemicals manufacturing), a division of Allegheny Technologies Incorporated.
From 1994-1998 Mr. Weber was Controller for Oregon Metallurgical Corporation
(titanium products). From 1981-1994 Mr. Weber held various positions of
increasing responsibility for Coopers & Lybrand, a predecessor firm of
PriceWaterhouseCoopers. Mr. Weber received his B.S. degree in Accounting from
the University of Oregon.
Joel D. Melka. In May 2002, Mr. Melka was named Vice President of Operations. He
joined the Company as Director of Manufacturing in February 1999. From 1988 to
1999 he worked at ChemDesign Inc. (custom chemical manufacturing) in various
capacities, his last position being Director of Manufacturing. From 1984 to
1988, he worked for Polaroid Corporation in various manufacturing positions.
Prior to 1984, he spent five years as an officer in the U.S. Navy nuclear
submarine service. Mr. Melka received his M.S. in Chemistry from the University
of British Columbia and his B.S. in Chemistry from Michigan Technological
University.
Michael J. Cannarsa. Dr. Cannarsa joined the Company as Director of Business
Development in January 2001. From 1999 to 2000 he worked at Symyx Technologies
(combinatorial chemistry) as Vice President of Fine Chemicals Business
Development. From 1997 to 1999 he worked at PPG-Sipsy (custom chemical
manufacturing) as Commercial Development Manager. Prior to 1997 he spent two
years at Technology Catalysts International (a chemistry consulting firm) and
previous to that he spent 12 years with ARCO Chemical Company. Dr. Cannarsa
received his B.S. in Chemistry from Georgetown University and his Ph.D. in
Organic Chemistry from Cornell University.
Michael C. Standen. Dr. Standen joined Synthetech in March 2001 in a senior
capacity and was named Technical Director in March 2003. Before joining
Synthetech, he spent 12 years working as a process development scientist with
Zeneca Agrochemicals in Scotland and then later with Syngenta Ag in Mobile,
Alabama. Prior to 1989, Dr. Standen spent one year as a post doctoral researcher
in fluorocarbon chemistry at the University of Birmingham in the United Kingdom.
From 1985-86 he worked as a postdoctoral Fulbright scholar at the Center for
Fast Kinetics Research at the University of Texas at Austin. Dr. Standen earned
BSc(hons), MSc and PhD degrees in chemistry from the University of Manchester in
the United Kingdom.
11
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
----------------------------------------------------------------------------
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"NZYM." The following table sets forth the range of high and low sales prices
for the Common Stock for the last two fiscal years as reported by Nasdaq.
Fiscal Year Ended March 31,
-------------------------------------------------------
2003 2002
-------------------------------------------------------
High Low High Low
First Quarter $2.45 $1.16 $2.85 $1.78
Second Quarter 1.74 1.15 2.49 1.16
Third Quarter 1.51 0.90 2.10 1.20
Fourth Quarter 1.34 0.91 2.00 1.38
No dividends on the Company's Common Stock have been paid since the Company's
inception and the Company does not anticipate that dividends will be paid in the
foreseeable future. The number of record holders of Common Stock as of May 29,
2003 was 546.
12
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
The following selected financial data were derived from the Company's audited
financial statements. The following data should be read in conjunction with
"Item 8. Financial Statements And Supplementary Data" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
SYNTHETECH, INC. 2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................................. $ 11,289 $ 10,876 $ 7,359 $ 12,132 $ 23,133
Gross Profit (Loss)................................. 1,884 (55) 71 4,196 10,150
Operating Income (Loss)............................. (849) (2,294) (1,751) 2,544 8,341
Net Income (Loss)................................... $ (494) $ (1,351) $ (841) $ 1,942 $ 5,418
Basic and Diluted Earnings (Loss) Per Share......... $ (0.03) $ (0.09) $ (0.06) $ 0.14 $ 0.38
MARCH 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and Cash Equivalents........................... $ 5,965 $ 4,214 $ 5,389 $ 6,404 $ 7,470
Working Capital..................................... 10,671 11,316 11,574 12,300 12,110
Total Assets........................................ 24,268 24,409 25,995 26,917 26,230
Long-Term Debt...................................... 75 97 117 135 152
Retained Earnings................................... 13,605 14,099 15,450 16,291 14,349
Shareholders' Equity................................ $ 22,552 $ 22,985 $ 24,250 $ 25,058 $ 23,027
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THE FOLLOWING DISCUSSION OF THE RESULTS OF THE COMPANY'S OPERATIONS AND
FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED WITHIN THIS REPORT.
OVERVIEW
- --------
Synthetech has a full cycle "grams to tons" production capability to produce
synthetically manufactured amino acid derivatives, small peptides, and similar
intermediates (referred to as "Peptide Building Blocks" or "PBBs"). This full
cycle PBB production capability reinforces Synthetech's long-term growth
strategy emphasizing a commitment to its customers from the early phases of
research and discovery through regulatory trials and culminating in marketed
product.
Management believes that Synthetech is well positioned for growth and is active
as a supplier of PBBs for a variety of pharmaceutical development projects, and
a marketed pharmaceutical and cosmeceutical project. Although the progress,
timing and continued success of these projects remain outside the Company's
control, management believes that there are a number of different combinations
of possible revenue sources with the potential to generate substantial future
revenues. (See "Industry Factors" below.)
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement
Obligations," which becomes effective beginning with fiscal year 2004. 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. The adoption of SFAS 143 is not expected to have a significant
impact on the Company's financial condition or results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue generating activities. EITF No. 00-21 will be
effective for interim periods beginning after June 15, 2003. The Company does
not expect the application of the provisions of EITF No. 00-21 to have a
material effect on the Company's financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The discussion and analysis of Synthetech's financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires Synthetech to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, Synthetech evaluates its estimates, including
those related to inventory realizability, allowance for doubtful accounts and
revenue recognition. Synthetech bases its estimates on historical experience and
on various other assumptions. Actual results may differ from these estimates
under different assumptions or conditions. Synthetech believes the following
critical accounting policies and the related judgments and estimates affect the
preparation of its financial statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
INVENTORIES
Inventories are valued at the lower of cost or market, determined on the
first-in first-out (FIFO) basis. Costs include direct material, direct labor,
applicable manufacturing overhead, and other direct costs.
Management evaluates the Company's inventory for impairment whenever indicators
of impairment exist. Factors contributing to inventory impairment include, but
are not limited to, decreases in selling price; changes in customer
specifications; project terminations or holds; variations in material produced
by the Company from customer specifications; production costs materially in
excess of current market price. Management writes down the Company's inventories
to reflect an estimate for impairment in an amount equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required in the future. Write-downs would be
reflected as a charge to earnings in the relevant period.
LONG-LIVED ASSET IMPAIRMENT
Management regularly evaluates long-lived assets for impairment in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long- Lived Assets," which requires a review
of long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable,
utilizing an undiscounted cash flow analysis. Based on this analysis, the
Company did not recognize an impairment on long-lived assets during the year
ended March 31, 2003. If circumstances related to long-lived assets change, the
Company may record an impairment charge in the future.
In addition, the useful lives of long-lived assets are an estimate and may
change based on the Company's experience with the actual lives. If circumstances
related to the Company's estimate of useful lives changes, depreciation expense
could materially change.
REVENUE RECOGNITION
The Company recognizes revenues including shipping and handling charges billed
to customers, upon shipment of product when title and risk of loss pass to
customers. Shipping and handling costs are classified as part of cost of
revenues.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Credit limits for customers are established through a process of reviewing the
financial history and stability of each customer. The Company regularly
evaluates the collectability of its trade receivable balances by monitoring past
due balances. If the Company determines that a customer will be unable to meet
its financial obligation, the Company will record a specific reserve for bad
debt to reduce the related receivable to the amount the Company expects to
recover. Bad debts have not historically been significant. If circumstances
related to specific customers change, the Company's estimates of the
recoverability of receivables could materially change.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
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
- --------------------------------------------------------------------------------
Fiscal Year Ended March 31,
------------------------------------
2003 2002 2001
-------- -------- --------
Revenue 100.0% 100.0% 100.0%
Cost of Revenue 83.3% 100.5% 99.0%
-------- -------- --------
Gross Profit (Loss) 16.7% (0.5%) 1.0%
-------- -------- --------
Research and Development 6.8% 6.0% 6.2%
Selling, General and Administrative 17.4% 14.6% 18.5%
-------- -------- --------
Operating Expense 24.2% 20.6% 24.7%
-------- -------- --------
Operating Loss (7.5%) (21.1%) (23.7%)
Interest Income 0.5% 1.2% 5.5%
Interest Expense (0.1%) (0.1%) (0.2%)
-------- -------- --------
Loss Before Income Taxes (7.1%) (20.0%) (18.4%)
Benefit for Income Taxes (2.7%) (7.6%) (7.0%)
-------- -------- --------
Net Loss (4.4%) (12.4%) (11.4%)
======== ======== ========
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
REVENUE
Synthetech revenues were $11.3 million, $10.9 million, and $7.4 million in
fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Revenues increased 4% in
fiscal 2003 as compared to fiscal 2002 and increased 48% in fiscal 2002 as
compared to fiscal 2001. In total, fiscal 2003 revenue was substantially similar
to fiscal 2002. Changes in revenue for the specified periods primarily relate to
revenue from significant customers.
Revenue from significant customer projects was $8.5 million, $7.5 million, and
$577,000 for fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Significant
project revenue in fiscal 2003 arose from four customer projects. Two of those
included shipments of PBBs to support production of large-scale drug projects in
clinical trials. One of those projects achieved marketing approval in the United
States and Europe and the other moved into Phase 3 testing following favorable
clinical results. Fiscal 2003 significant project revenue also included PBB
shipments to a major pharmaceutical company to support a drug project in early
development and shipments to support an established product in the cosmeceutical
sector. Significant project revenue in fiscal 2002 was attributable to three
orders. Significant project revenue in fiscal 2001 was for a PBB to be used in
pre-launch and market launch quantities of a cosmeceutical. The Company
continues to produce PBBs for this marketed cosmeceutical.
The Company estimates that in fiscal 2003 approximately 63% of the Company's PBB
sales went into drugs in clinical trials, approximately 32% went into marketed
drugs and the cosmeceutical and approximately 5% went into drugs at the R&D or
discovery stage. In fiscal 2002, the Company estimates that approximately 73% of
the Company's PBB sales went into drugs in clinical trials, approximately 23%
went into marketed drugs and the cosmeceutical and approximately 4% went into
drugs at the R&D or discovery stage. In fiscal 2001, the Company estimates that
approximately 72% of the Company's PBB sales went into drugs in clinical trials,
approximately 20% went into marketed drugs and the cosmeceutical, and
approximately 8% went into drugs at the R&D or discovery stage. These estimates
are based on an analysis of the Company's sales, publicly available information
and information to the extent available from customers.
The Company's backlog of PBB orders at March 31, 2003 was $4.6 million compared
to a backlog at March 31, 2002 and 2001 of $6.2 million and $3.9 million,
respectively. Approximately $4.3 million of the March 31, 2003 backlog is
comprised of PBBs for the recently approved drug and the cosmeceutical.
Deliveries for the March 31, 2003 backlog extend into fiscal 2005.
During the fourth quarter of fiscal 2003 the Company experienced a substantial
price decline on a product that accounted for a significant level of revenue in
fiscal 2003. Fiscal 2004 customer requirements, if any, for this product are
dependent on future outcomes of clinical trials and timing of the customer's
drug development efforts.
To the extent successful customer projects develop into larger volumes, either
during late stage clinical trials, pre-launch or as a marketed product, the
Company's per unit pricing may decline. There is a risk that the impact on
future sales and profitability from declines in pricing may not be offset by an
increase in customer requirements.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
The level of Synthetech's business from period to period is largely
unpredictable. Although PBB sales associated with marketed products are more
likely to provide a longer term, on-going revenue stream than sales associated
with drugs at the clinical or discovery stages, continuation of customer demand
for PBBs associated with marketed products remains subject to various market
conditions, including potential use of alternative manufacturing methods,
continued market demand for drugs that include PBBs, or the cosmeceutical and
competition from other suppliers of PBBs. Accordingly, while significant orders
for marketed products provide substantial and predictable revenues the Company
expects revenues to continue to fluctuate from period to period.
GROSS PROFIT (LOSS)
Cost of revenue in fiscal 2003 was $9.4 million, resulting in a gross profit of
$1.9 million. Cost of revenue in fiscal 2002 was $10.9 million, resulting in a
gross loss of $55,000. Cost of revenue in fiscal 2001 was $7.3 million,
resulting in a gross profit of $71,000. As a percentage of revenue, gross profit
(loss) margins were 16.7%, (0.5)% and 1.0% in fiscal 2003, 2002 and fiscal 2001,
respectively.
The improvement in gross profit between fiscal 2003 and fiscal 2002 relates to
an improved product mix and a reduction in depreciation expense relating to the
extension of asset lives, partially offset by unfavorable adjustments for
impaired inventory.
The mix of products shipped in fiscal 2003 had an unusually high gross profit.
In future periods, the Company does not expect to achieve the level of gross
profit experienced in fiscal 2003 at this level of revenue.
As further discussed in Note D to the attached financial statements, at the
beginning of fiscal 2003, the Company reassessed the useful lives of certain of
its machinery and equipment. The resulting extension in asset lives decreased
depreciation expense which increased gross profit for fiscal 2003 by
approximately $1.6 million.
Gross profit for fiscal 2003 also reflects charges for impaired inventory of
$1.9 million. This compares to charges for impaired inventory totaling
approximately $921,000 in fiscal 2002. The Company routinely develops
manufacturing processes to produce new products or refine procedures for
existing products. It is not unusual for manufacturing costs associated with new
processes to exceed the selling price for the initial batches of product, which
results in an inventory write-off. The international fine chemicals industry,
where the Company is a niche participant, has been marked by overcapacity and a
resulting downward pressure on pricing. It has become increasingly difficult to
rework certain materials on a cost effective basis. A significant portion of the
charges for impaired inventory for fiscal 2003 and 2002 related to material that
failed to meet customer specifications or was associated with the early stages
of development and production of products not previously manufactured by the
Company. In addition, the Company's charge for impaired inventory also included
material related to customer projects that have been discontinued or are on
hold, and changes in customer preferences towards products that contain no
animal content.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Property taxes and insurance costs increased $147,000, or 39%, during fiscal
2003 compared to fiscal 2002. The increase is the result of the Company's plant
expansions, the expiration of a property tax deferral, and general increases in
the cost of insurance. Losses on the retirement of machinery and equipment
totaled $114,000 in fiscal 2003.
As discussed above, fiscal 2002 gross loss was impacted by inventory write-offs
of $921,000 primarily resulting from production batches not meeting
specification. To a lesser extent, fiscal 2002 was negatively impacted by lower
than expected yields and product rework associated with production scale up of
certain existing products and initial production batches of certain new
products. (See "Industry Factors" below.)
Fiscal 2001 gross profit was affected by lower revenues and increased
manufacturing overhead costs associated with the Company's plant expansions.
Cost of revenues 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.
OPERATING EXPENSES
Research and development (R&D) expense in fiscal 2003 was $765,000, or 7% of
revenue, compared to $651,000, or 6% of revenue, and $458,000, also 6% of
revenue, in fiscal 2002 and 2001, respectively. During the past two years, the
Company expanded and modernized its R&D facility and has added chemists to
better support critical customer programs.
The Company's R&D Department develops processes to produce and optimize the
production of PBBs and their related scale-up to manufacturing quantities.
Selling, general and administrative (SG&A) expense in fiscal 2003 was $2.0
million, or 17% of revenue, compared to $1.6 million, or 15% of revenue, and
$1.4 million, or 19% of revenue, in fiscal 2002 and 2001, respectively. The
increase in SG&A expense for fiscal 2003 compared to fiscal 2002 includes
severance costs related to the retirement of a Company officer, general
increases in compensation and related employee benefit costs, increased costs
related to professional services and increased expenditures for marketing
programs. The increase in SG&A expense in fiscal 2002 compared to fiscal 2001
primarily reflected the increased cost associated with the addition of a senior
member to the Company's marketing staff.
SG&A expense consists of compensation and related fringe benefits for sales and
administrative employees, cost of professional services, marketing costs, costs
associated with being a public company and costs related to administrative
facilities and information services.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
OPERATING LOSS
As a result of the foregoing, the Company's operating loss decreased to $849,000
in fiscal 2003 from $2.3 million and $1.8 million in fiscal 2002 and 2001,
respectively. The decrease in operating loss between fiscal 2003 and 2002 was
primarily the result of a more favorable product mix and the reduction of
depreciation expense from the reassessment of useful lives of certain machinery
and equipment. These favorable items were partially offset by unfavorable
adjustments for impaired inventory and increased SG&A and R&D expenses. In
fiscal 2002, labor costs increased to $3.0 million from $2.3 million in fiscal
2001, principally due to an increase in headcount.
INTEREST INCOME
Interest income in fiscal 2003 was $61,000, compared to $127,000 and $408,000 in
fiscal 2002 and 2001, respectively. The Company's interest income is primarily
derived from earnings on the Company's cash equivalents. The changes in interest
income for the years presented were due to the amount of cash equivalents and
the interest rates in effect during the periods. Average rates of interest
earned on the Company's cash and cash equivalents in fiscal 2003 were 1.3%,
compared to 3.3% and 6.1% in fiscal 2002 and 2001, respectively. The decrease
for fiscal 2003 was primarily due to lower average interest rates. The decrease
for fiscal 2002 was a combination of lower average interest rates and lower
average cash equivalents.
INTEREST EXPENSE
Interest expense in fiscal 2003 was $9,000, compared to $12,000 and $13,000 in
fiscal 2002 and 2001, respectively.
BENEFIT FOR INCOME TAXES
For all periods presented, the Company recorded an income tax benefit at the
statutory combined federal and state income tax rate of 38%. Management has
determined for the tax losses incurred, it is more likely than not the resulting
deferred tax asset will be realized.
NET LOSS
Net loss for fiscal 2003 was $494,000, compared to a net loss of $1.4 million
and $841,000 for fiscal 2002 and 2001, respectively. The effect on net loss for
fiscal 2003 from the extension of the useful lives of certain of the Company's
machinery and equipment, as discussed in Note D to the attached financial
statements, was to decrease net loss by approximately $952,000, or $0.07 per
share.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
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, and take only a small
percentage to clinical trials and fewer yet to commercial market. A substantial
amount of 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 because of the high
cancellation rate for drug development programs there is 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
customer orders relating to specific drug development programs vary
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 remains
subject to many uncertainties, including 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 that may not include the Company's PBBs as an
intermediate. Finally, with longer-term, significant or large-scale orders, the
Company expects increased competition to supply these PBBs.
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" are reduced.
Due to the foregoing industry factors the Company cannot predict future demand
beyond its current order base. Until there is stable demand for its products,
the Company is likely to continue to experience significant fluctuations in its
periodic results.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
PRODUCTION FACTORS
Synthetech has a full cycle "grams to tons" production capability and has made
over 400 products. With over 15 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 for existing products may result in significantly lower than expected
yields and extended processing time, and may require substantial rework to meet
the required specification. These factors could cause increased costs and
delayed shipments, either of which could negatively affect periodic operating
results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents totaled $6.0 million at March 31, 2003,
compared to $4.2 million and $5.4 million at March 31, 2002 and 2001,
respectively. During the past three years, the Company has incurred a cumulative
net loss of $2.7 million and generated cash from operating activities of $5.3
million, offset by investments in property plant and equipment totaling $5.7
million. The Company has not undertaken any significant external financing
activities during this period.
At March 31, 2003, the Company had working capital of $10.7 million, compared to
$11.3 million and $11.6 million at March 31, 2002 and March 31, 2001,
respectively. The Company has a $2 million bank line of credit, collateralized
by accounts receivable, of which there was no amount outstanding at March 31,
2003. The line of credit expires on August 31, 2003. The Company intends to
renew the credit facility upon expiration.
Accounts receivable decreased to $966,000 at March 31, 2003 from $2.2 million at
March 31, 2002 primarily due to differences in the timing and the amount of
shipments between the periods. Inventory decreased to $4.0 million at March 31,
2003 from $4.4 million at March 31, 2002 primarily due to fiscal 2003 charges
for impaired inventory. (See the Gross Profit (Loss) section of the Management
Discussion and Analysis, in this Report on Form 10-K.) Income tax receivable
decreased to $-0- at March 31, 2003, from $852,000 at March 31, 2002, as a
result of a tax refund in the amount of $892,000 received in the fourth quarter
of fiscal 2003. Accounts payable increased to $754,000 at March 31, 2003, from
$465,000 at March 31, 2002, primarily due to timing differences in expenditures
related to raw materials and capital equipment.
On March 20, 2003, the Company's Board of Directors approved a share repurchase
program and authorized the purchase of up to 500,000 shares of the Company's
common stock in the open market over the succeeding year. As of March 31, 2003,
the Company has not repurchased any of its shares.
Capital expenditures for fiscal 2003 totaled $1.4 million. During fiscal 2003,
the Company purchased and improved an office and warehouse facility adjacent to
its production facility at a total cost of $453,000. The Company also completed
the installation of an automated process control system, at a total cost of
$345,000, $285,000 of which was incurred in fiscal 2003. In addition, the
Company remodeled its
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Quality Control Department in fiscal 2003 for a cost of $208,000 and extended
its fire suppression system on a budgeted cost of $139,000, $100,000 of which
was incurred in fiscal 2003. The Company had various other capital expenditures
during fiscal 2003 totaling $370,000. The Company's capital plan for fiscal 2004
is for various projects totaling approximately $600,000. The Company expects to
finance all capital expenditures from cash on hand and internal cash flow and
does not anticipate the need for any new debt or equity financing.
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 its
operations and its stock repurchase program for the next twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------------------------------------------------------------------
Synthetech's primary market risk exposure is the impact of interest rate
fluctuations on interest income earned on the Company's 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 Synthetech's investments.
Substantially all of Synthetech'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. Should the Company
enter into a significant transaction denominated in a foreign currency the
Company may enter into a forward exchange contract at that time. The Company is
not a party to any forward exchange contracts as of March 31, 2003. With regards
to existing Company transactions denominated in a foreign currency, the effect
of an immediate 10% change in relevant exchange rates would not have a material
impact on Synthetech's operating results or cash flows.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------
INDEX PAGE
----- ----
Independent Auditors' Report for the years ended March 31, 2003 and 2002........................ 25
Report of Independent Public Accountants for the year ended March 31, 2001...................... 26
Financial Statements:
Balance Sheets as of March 31, 2003 and 2002................................................ 27
Statements of Operations for the years ended March 31, 2003, 2002 and 2001.................. 29
Statements of Shareholders' Equity for the years ended March 31, 2003, 2002 and 2001........ 30
Statements of Cash Flows for the years ended March 31, 2003, 2002, and 2001................. 31
Notes to Financial Statements............................................................... 32
24
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Synthetech, Inc.:
We have audited the accompanying balance sheets of Synthetech, Inc. as
of March 31, 2003 and 2002, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the two-year
period ended March 31, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements of
Synthetech, Inc. for the year ended March 31, 2001 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated May 15, 2001.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Synthetech, Inc. as
of March 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the years in the two-year period ended March 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
Portland, Oregon /s/ KPMG LLP
May 16, 2003
25
THIS REPORT IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED.
THIS REPORT REFERS TO CERTAIN FINANCIAL STATEMENTS NOT
INCLUDED IN THIS FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Synthetech, Inc.:
We have audited the accompanying balance sheets of Synthetech, Inc. (an Oregon
corporation) as of March 31, 2001 and 2000, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended March 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Synthetech, Inc. as of March
31, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2001 in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Portland, Oregon,
May 15, 2001
RISK RELATING TO ARTHUR ANDERSEN LLP'S LACK OF CONSENT
Arthur Andersen LLP were the independent accountants for Synthetech, Inc. until
May 9, 2002. Representatives of Arthur Andersen LLP are not available to provide
the consent required for the incorporation by reference of their report on the
financial statements of Synthetech, Inc. appearing in this Form 10-K into
registration statements filed by Synthetech, Inc. with the Securities and
Exchange Commission and currently effective under the Securities Act of 1933,
and we have dispensed with the requirement to file their consent in reliance
upon rule 437a under the Securities Act of 1933. Because Arthur Andersen LLP
have not consented to the incorporation by reference of their report, investors
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933 for any untrue statements of a material fact contained in
the financial statements audited by Arthur Andersen LLP that are included in
this report or any omissions to state a material fact required to be stated
therein.
26
SYNTHETECH, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31, March 31,
2003 2002
------------ ------------
ASSETS
- --------------------------------------------------
Current Assets
Cash and cash equivalents $ 5,965,000 $ 4,214,000
Accounts receivable, less allowance
for doubtful accounts of $15,000
for both periods 966,000 2,174,000
Inventories, net 4,032,000 4,398,000
Prepaid expenses 450,000 426,000
Income tax receivable -- 852,000
Deferred income taxes 403,000 116,000
------------ ------------
Total Current Assets 11,816,000 12,180,000
Property, Plant and Equipment, net 12,452,000 12,229,000
------------ ------------
Total Assets $ 24,268,000 $ 24,409,000
============ ============
The accompanying notes are an integral part of these financial statements.
27
SYNTHETECH, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
(continued)
MARCH 31, March 31,
2003 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
Current Liabilities:
Current portion of long term obligations $ 22,000 $ 20,000
Accounts payable 754,000 465,000
Accrued compensation 122,000 138,000
Income taxes payable 180,000 180,000
Other accrued liabilities 67,000 61,000
------------ ------------
Total Current Liabilities 1,145,000 864,000
Deferred Income Taxes 473,000 463,000
Long Term Obligations, net of current portion 75,000 97,000
Other Long Term Liabilities 23,000 --
------------ ------------
Total Liabilities 1,716,000 1,424,000
Shareholders' Equity:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
14,339,000 and 14,307,000 shares 14,000 14,000
Paid-in capital 8,991,000 8,933,000
Deferred compensation (58,000) (61,000)
Retained earnings 13,605,000 14,099,000
------------ ------------
Total Shareholders' Equity 22,552,000 22,985,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 24,268,000 $ 24,409,000
============ ============
The accompanying notes are an integral part of these financial statements.
28
SYNTHETECH, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
THE YEAR ENDED MARCH 31, 2003 2002 2001
- -------------------------------------------- ------------ ------------ ------------
Revenue $ 11,289,000 $ 10,876,000 $ 7,359,000
Cost of Revenue 9,405,000 10,931,000 7,288,000
------------ ------------ ------------
Gross Profit (Loss) 1,884,000 (55,000) 71,000
------------ ------------ ------------
Research and Development 765,000 651,000 458,000
Selling, General and Administrative 1,968,000 1,588,000 1,364,000
------------ ------------ ------------
Total Operating Expenses 2,733,000 2,239,000 1,822,000
------------ ------------ ------------
Operating Loss (849,000) (2,294,000) (1,751,000)
Interest Income 61,000 127,000 408,000
Interest Expense (9,000) (12,000) (13,000)
------------ ------------ ------------
Loss Before Income Taxes (797,000) (2,179,000) (1,356,000)
Benefit for Income Taxes (303,000) (828,000) (515,000)
------------ ------------ ------------
Net Loss $ (494,000) $ (1,351,000) $ (841,000)
============ ============ ============
Net Loss Per Common Share:
Basic and Diluted Loss Per Share $ (0.03) $ (0.09) $ (0.06)
============ ============ ============
Weighted Average Shares Outstanding:
Basic and Diluted 14,321,862 14,288,076 14,277,767
============ ============ ============
The accompanying notes are an integral part of these financial statements.
29
SYNTHETECH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK
--------------------------- PAID-IN DEFERRED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 14,277,000 $ 14,000 $ 8,793,000 $ (40,000) $ 16,291,000 $ 25,058,000
Net loss -- -- -- -- (841,000) (841,000)
Issuance of stock for the exercise
of stock options 3,000 -- 1,000 -- -- 1,000
Compensation on stock options granted -- -- 61,000 (61,000) -- --
Amortization of deferred compensation -- -- -- 29,000 -- 29,000
Income tax benefit of non-qualified
Option exercises -- -- 3,000 -- -- 3,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 14,280,000 14,000 8,858,000 (72,000) 15,450,000 24,250,000
Net loss -- -- -- -- (1,351,000) (1,351,000)
Issuance of stock for purchases under
the Employee Stock Purchase Plan 27,000 -- 42,000 -- -- 42,000
Compensation on stock options granted -- -- 33,000 (15,000) -- 18,000
Amortization of deferred compensation -- -- -- 26,000 -- 26,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 14,307,000 14,000 8,933,000 (61,000) 14,099,000 22,985,000
Net loss -- -- -- -- (494,000) (494,000)
Issuance of stock for purchases under
the Employee Stock Purchase Plan 32,000 -- 35,000 -- -- 35,000
Compensation on stock options granted -- -- 23,000 (23,000) -- --
Amortization of deferred compensation -- -- -- 26,000 -- 26,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2003 14,339,000 $ 14,000 $ 8,991,000 $ (58,000) $ 13,605,000 $ 22,552,000
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
30
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31, 2003 2002 2001
- ---------------------------------------------------- ------------ ------------ ------------
Cash Flows From Operating Activities:
Net loss $ (494,000) $ (1,351,000) $ (841,000)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation expense 1,079,000 2,932,000 2,463,000
Loss on retirement of equipment 114,000 56,000 34,000
Non-cash compensation related to stock options 26,000 44,000 29,000
Income tax benefits from non-qualified stock
option exercises and disqualifying dispositions -- -- 3,000
Deferred income taxes (277,000) (162,000) 167,000
(Increase) decrease in assets:
Accounts receivable, net 1,208,000 (1,003,000) 1,262,000
Inventories 366,000 115,000 (401,000)
Prepaid expenses (24,000) (22,000) (119,000)
Income tax receivable 852,000 72,000 (787,000)
Other current assets -- -- 31,000
Increase (decrease) in liabilities:
Accounts payable 289,000 (316,000) 234,000
Accrued compensation (16,000) 20,000 9,000
Income taxes payable -- 180,000 --
Other accrued liabilities 6,000 50,000 (14,000)
Other long term liabilities 23,000 -- --
Deferred revenue -- (17,000) (527,000)
------------ ------------ ------------
Cash Provided By Operating Activities 3,152,000 598,000 1,543,000
Cash Flows From Investing Activities:
Property, plant and equipment purchases (1,416,000) (1,769,000) (2,539,000)
------------ ------------ ------------
Cash Used In Investing Activities (1,416,000) (1,769,000) (2,539,000)
Cash Flows From Financing Activities:
Principal payments under long-term debt obligations (20,000) (46,000) (20,000)
Proceeds from stock option exercises -- -- 1,000
Proceeds from stock purchase plan 35,000 42,000 --
------------ ------------ ------------
Cash Provided By (Used In) Financing Activities 15,000 (4,000) (19,000)
------------ ------------ ------------
Increase (Decrease) in Cash Equivalents 1,751,000 (1,175,000) (1,015,000)
Cash and Cash Equivalents - Beginning of Year $ 4,214,000 $ 5,389,000 $ 6,404,000
------------ ------------ ------------
Cash and Cash Equivalents - End of Year $ 5,965,000 $ 4,214,000 $ 5,389,000
============ ============ ============
Non-Cash Investing and Financing Activities:
Deferred compensation on stock options granted
below fair value $ 23,000 $ 15,000 $ 61,000
Equipment purchased with capital lease $ -- $ -- $ 31,000
The accompanying notes are an integral part of these financial statements.
31
SYNTHETECH, INC.
----------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE A. GENERAL AND BUSINESS
--------------------
Synthetech, Inc., 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 predominately 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.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
USE OF ESTIMATES: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant items subject to such estimates and assumptions
include the valuation of inventory, accounts receivable, deferred tax
assets and the carrying amount of property, plant and equipment.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include demand
cash and highly liquid debt instruments with maturities of three
months or less when purchased. Cash equivalents were $5.7 million and
$3.9 million at March 31, 2003 and 2002, respectively.
ACCOUNTS RECEIVABLE: accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful accounts
is the Company's best estimate of the amount of probable credit losses
in the Company's existing accounts receivable. The Company reviews its
allowance for doubtful accounts monthly. Past due balances are
reviewed individually for collectibility. The Company does not finance
its trade receivables by factoring the balances to a third party.
INVENTORIES: Inventories are stated at the lower of cost or market,
determined on the first-in, first-out (FIFO) basis. Cost utilized for
inventory purposes includes labor, material, and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. Expenditures for maintenance and repairs are
expensed as incurred. Expenditures that materially increase values,
change capacities or extend useful lives are capitalized. When assets
are retired, sold, or otherwise disposed of, the applicable costs and
accumulated depreciation are removed from the accounts and the
resulting gain or loss is recognized. Depreciation and amortization
are provided on the straight-line method over the estimated useful
lives of the individual assets.
32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION: The Company recognizes revenue, including
shipping and handling charges billed to customers, upon shipment of
product when title and risk of loss pass to customers. Shipping and
handling costs are classified as part of cost of revenues.
EMPLOYEE STOCK PLANS: In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," and was effective immediately upon issuance. SFAS No.
148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation as well as amending the disclosure requirements of
Statement No. 123 to require interim and annual disclosure about the
method of accounting for stock-based compensation and the effect of
the method used on reported results.
As permitted by SFAS No. 123, as amended by SFAS No. 148, the Company
elected to continue to apply the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock option and stock
purchase plans. The Company is generally not required under APB
Opinion No. 25 and related interpretations to recognize compensation
expense in connection with its employee stock option and stock
purchase plans. The company is required by SFAS No. 123 to present, in
the Notes to Financial Statements, the pro forma effects on reported
net income and earnings per share as if compensation expense had been
recognized based on the fair value method of accounting prescribed by
SFAS No. 123.
If compensation expense had been determined based on the grant date
fair value as computed under the Black-Scholes option pricing model
for awards in fiscal 2003, 2002 and 2001 in accordance with the
provisions of SFAS No. 123, the Company's net loss and loss per share
would have increased to the pro forma amounts indicated below:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net loss, as reported $ (494,000) $ (1,351,000) $ (841,000)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 16,000 16,000 18,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (132,000) (204,000) (226,000)
------------ ------------ ------------
Pro forma net loss $ (610,000) $ (1,539,000) $ (1,049,000)
============ ============ ============
Net loss per share:
Basic and Diluted - as reported $ (0.03) $ (0.09) $ (0.06)
============ ============ ============
Basic and Diluted - pro forma $ (0.04) $ (0.11) $ (0.07)
============ ============ ============
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Using the Black-Scholes methodology, the total value of options
granted during fiscal 2003, 2002 and 2001 was $339,000, $448,000 and
$374,000, respectively, which would be amortized to expense on a pro
forma basis over the vesting period of the options.
In calculating pro forma compensation, the fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes
option pricing model and the following weighted average assumptions:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Expected dividend yield -- -- --
Risk-free interest rate 3.54% 4.91% 5.57%
Expected volatility 52% 55% 54%
Expected life (in years) 6.23 4.26 4.83
Weighted-Average fair value
of options granted:
At market value $ 1.15 $ 0.75 $ 1.69
Below market value $ 0.74 $ 1.76 $ 2.17
All options granted $ 1.09 $ 0.77 $ 1.76
CONCENTRATIONS OF CREDIT RISK: Financial instruments that potentially
subject the Company to significant concentrations of credit risk
consist principally of cash equivalents and trade accounts receivable.
Cash equivalents primarily consist of money market accounts and
municipal bonds with maturities at purchase of less than three months.
The Company's customers consist primarily of major pharmaceutical,
emerging biopharmaceutical, contract drug synthesis and cosmeceutical
companies. The Company's customers are primarily located in the United
States and Western Europe. At March 31, 2003, two customers had
accounts receivable balances of 20% and 17% of total accounts
receivable. At March 31, 2002, two customers had accounts receivable
balances of 57% and 15% of total accounts receivable. The Company's
reliance on a few major customers and the absence of long term
contracts could adversely impact operating results if a major customer
was lost.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are
expensed as incurred.
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.
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share (EPS) are
computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted
earnings (loss) per share are computed by dividing net income (loss)
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. For the three years
ended March 31, 2003, the weighted average shares used to compute
diluted loss per share did not differ from the weighted average shares
used to compute basic loss per share.
The following common stock equivalents were excluded from the earnings
per share computation because their effect would have been
anti-dilutive:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Common stock options
outstanding 1,078,850 819,000 748,600
========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES ARE AS FOLLOWS:
Cash Paid During The Year For:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Income taxes, net of refunds $ -- $ -- $ 101,000
Interest $ 9,000 $ 12,000 $ 13,000
RECLASSIFICATION: Certain reclassifications were made to prior year
amounts to conform with the current year presentation
NOTE C. INVENTORIES
-----------
The major components of inventories are as follows:
MARCH 31,
------------------------
2003 2002
---------- ----------
Finished products $1,815,000 $1,991,000
Work-in-process 968,000 1,281,000
Raw materials 1,249,000 1,126,000
---------- ----------
$4,032,000 $4,398,000
========== ==========
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consist of the following:
MARCH 31,
-------------------------------
2003 2002
------------ ------------
Land $ 241,000 $ 91,000
Buildings 6,793,000 6,330,000
Machinery and equipment 15,135,000 14,800,000
Laboratory equipment 938,000 1,005,000
Furniture and fixtures 423,000 372,000
Vehicles 149,000 125,000
Construction in progress 132,000 276,000
------------ ------------
23,811,000 22,999,000
Less:
Accumulated depreciation 11,359,000 10,770,000
------------ ------------
$ 12,452,000 $ 12,229,000
============ ============
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 reassessed 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 changes in estimated useful lives, which are
indicated in the table below, reduced total depreciation expense and
resulted in an after-tax decrease to net loss of approximately
$952,000, or $0.07 per share, for fiscal 2003.
Estimated Useful Lives:
(in years) 2003 2002
---------------------------- ---------- ----------
Machinery and equipment 5 - 17 5
Laboratory equipment 5 - 7 5
-------------------------------------------------------
36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E. INCOME TAXES
------------
The Company accounts for income taxes under the asset and liability
method as defined by the provisions of Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under this method, deferred income taxes are recognized for
the future tax consequences attributable to temporary differences
between the financial statement carrying amounts and tax balances of
existing assets and liabilities. Deferred tax assets and liabilities
are measured using the enacted rates expected to apply to taxable
income in the years during which those temporary differences are
expected to be recovered or settled.
The benefit for income taxes in fiscal 2003, fiscal 2002 and fiscal
2001 included a deferred tax (benefit) provision of ($277,000),
($162,000) and $167,000, respectively.
Deferred tax assets and liabilities consist of the following:
MARCH 31,
------------------------
2003 2002
---------- ----------
Current deferred tax assets
Inventory $ 319,000 $ 32,000
Accrued liabilities 37,000 53,000
Other 47,000 31,000
---------- ----------
Total deferred tax assets 403,000 116,000
Noncurrent deferred tax assets (liabilities)
Net operating loss carryforwards 709,000 271,000
Depreciation (1,182,000) (734,000)
---------- ----------
Total noncurrent deferred tax liabilities (473,000) (463,000)
---------- ----------
$ (70,000) $ (347,000)
========== ==========
As of March 31, 2003, the Company had gross federal and state net
operating loss carryforwards of $1,157,000 and $5,263,000, which
expire beginning in fiscal 2023 and 2016, respectively.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. As of March 31, 2003
and 2002, there was no valuation allowance recorded against deferred
tax assets because management determined that it was more likely than
not the deferred tax assets would be realized.
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation between the effective tax rate and the statutory
federal income tax rate is as follows:
2003 2002 2001
---------- ---------- ----------
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes 4.4 4.4 4.4
Other (0.4) (0.4) (0.4)
---------- ---------- ----------
Effective tax rate 38.0% 38.0% 38.0%
========== ========== ==========
NOTE F. LINE OF CREDIT
--------------
The Company has a bank line of credit in the amount of $2 million with
an applicable interest rate equal to the bank's prime lending rate,
which was 4.25% at March 31, 2003. The line of credit is
collateralized by accounts receivable. There were no amounts
outstanding at the end of fiscal 2003. This line of credit has a
one-year term and expires on August 31, 2003. The Company is subject
to certain financial and nonfinancial covenants in relation to the
line of credit.
NOTE G. LONG TERM OBLIGATIONS
---------------------
In 1997, the Company entered into a note payable with the City of
Albany for payment of wastewater system development charges assessed
in connection with the Company's plant expansion. The note bears
interest of 9.0% per annum and is due in monthly installments of
$2,459 through February 2007. The note is secured by the Company's
property, plant and equipment. The remaining balance of the note
payable was $97,000 and $117,000, as of March 31, 2003 and 2002,
respectively.
NOTE H. SHAREHOLDERS' EQUITY
--------------------
SHAREHOLDERS RIGHTS PLAN
In July 1998, the Company adopted a Shareholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, the Company declared a dividend
of one common share purchase right (a "Right") for each share of
common stock outstanding at the close of business on August 4, 1998.
The Rights are attached to, and automatically trade with, the
outstanding shares of the Company's common stock. Under certain
conditions, each right may be exercised to purchase one share of
common stock at a purchase price of $30 per share, subject to
adjustment. In the event that a person or group acquires 15% or more
of the Company's common stock, each Right will entitle all other
shareholders to purchase from the Company common stock having a market
value equal to two times the exercise price of the Right. In addition,
if the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power
are sold, proper provision will be made so that each shareholder with
unexercised Rights will be entitled to purchase common stock of the
acquirer with a value of twice the exercise price of the Rights. The
Company is entitled to redeem the Rights at $.0001 per Right at any
time prior
38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to the earlier of the expiration of the Rights in July 2008 or the
time that a person or group has acquired a 15% position. The Rights do
not have voting or distribution rights.
SHARE REPURCHASE PROGRAM
On March 20, 2003 the Board of Directors approved a share repurchase
program and authorized the purchase of up to 500,000 shares of the
Company's common stock in the open market over the succeeding year. No
shares were repurchased in fiscal 2003.
NOTE I. EMPLOYEE BENEFIT PLANS
----------------------
STOCK OPTIONS
The Company grants options to employees and non-employee directors to
purchase shares of its common stock, at future dates, at the fair
market value and occasionally below the fair market value, on the date
of grant. Options generally vest 25% each year and are 100% vested
after 4 years from the beginning of the fiscal year in which the
options are granted. However, some options vest immediately and other
options vest over two years or five years of service. Options expire
ten years from the date of grant. The Company has 311,600 shares
available for grant as of March 31, 2003.
On July 17, 2001, options to purchase 521,900 shares of Synthetech
common stock were cancelled pursuant to an option exchange program.
The cancelled options had exercise prices ranging from $3.69 per share
to $8.50 per share. On January 22, 2002, options for 521,900 shares of
Synthetech stock were granted under the 2000 Stock Incentive Plan,
pursuant to the option exchange program at an exercise price of $1.48,
the then fair value. These options vest 50% on the grant date and 25%
after each subsequent year from the grant date. These options will be
fully vested January 22, 2004. This option exchange program has been
accounted for as a fixed plan pursuant to FASB Interpretation (FIN) 44
and its related interpretations.
Stock option activity was as follows:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Beginning balance 819,000 $ 1.76 748,600 $ 5.33 732,800 $ 6.15
Granted 287,100 $ 2.00 601,400 $ 1.52 209,400 $ 2.84
Exercised -- -- -- -- (3,000) $ 0.51
Cancelled (27,250) $ 2.07 (531,000) $ 6.52 (190,600) $ 5.80
---------- ---------- ---------- ---------- ---------- ----------
Ending balance 1,078,850 $ 1.80 819,000 $ 1.76 748,600 $ 5.33
========== ========== ========== ========== ========== ==========
Options exercisable
at year-end 613,888 $ 1.85 441,127 $ 1.84 498,050 $ 6.31
========== ========== ========== ========== ========== ==========
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to options
outstanding and options exercisable at March 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
EXERCISE PRICE RANGE SHARES PRICE LIFE SHARES PRICE
--------------------- ---------- -------- --------- ---------- --------
$0.32 - $1.08........ 82,000 $ 0.55 7.3 40,125 $ 0.69
$1.48 - $1.81........ 603,950 $ 1.51 8.3 447,963 $ 1.52
$2.07 - $2.15 ....... 283,100 $ 2.08 9.0 26,000 $ 2.15
$2.44 - $4.56........ 105,800 $ 3.51 7.0 95,800 $ 3.62
$6.25................ 4,000 $ 6.25 5.0 4,000 $ 6.25
---------- -------- --------- ---------- --------
1,078,850 $ 1.80 8.2 613,888 $ 1.85
========== ======== ========= ========== ========
EMPLOYEE STOCK PURCHASE PLAN
In July 2000, the Company established an employee stock purchase plan
(ESPP) for the benefit of its employees. The plan is qualified under
Section 423 of the Internal Revenue Code. Under the ESPP,
substantially all employees may purchase the Company's common stock
through payroll deductions at a price equal to 85 percent of the lower
of the fair market value at the beginning or end of each six-month
offering period. Stock purchases under the ESPP are limited to 15
percent of an employee's eligible compensation, up to a maximum of
$15,000, in any plan year. Shares issued under the ESPP were 32,000
for fiscal 2003, 27,000 for fiscal 2002 and no shares were issued in
fiscal 2001.
NOTE J. 401(K) PROFIT SHARING PLAN
--------------------------
The Company established a 401(k) Profit Sharing Plan on April 1, 1992.
This plan is offered to eligible employees, who may elect to
contribute up to 15% of compensation and includes a Company matching
contribution. The Company's matching contribution is $0.50, $0.75 or
$1.00 for each $1.00 contributed, up to 10% of compensation depending
on the employee's length of service with the Company. The Company's
matching contribution becomes fully vested for each employee after 5
years of employment. The Company matching contribution for fiscal
2003, 2002 and 2001 was $129,000, $90,000 and $91,000, respectively.
40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K. SEGMENT INFORMATION
-------------------
The Company operates in one segment for the development and production
of peptide building blocks. Long-lived assets, other than in the
United States, are not material.
Significant Customers: During fiscal year 2003, two customers
accounted for approximately 39% and 21% of revenues. During fiscal
year 2002, three customers accounted for approximately 29%, 21% and
20% of revenues. During fiscal year 2001, two customers accounted for
approximately 32% and 12% of revenues.
The following table reflects sales and percent of total sales by
geographic area:
FOR THE YEAR ENDING MARCH 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
United States $ 9,409,000 83.3% $ 9,440,000 86.8% $ 5,697,000 77.5%
Europe 1,827,000 16.2 1,338,000 12.3 1,531,000 20.8
Japan 35,000 0.3 19,000 0.2 126,000 1.7
Other 18,000 0.2 79,000 0.7 5,000 --
----------- -------- ----------- -------- ----------- --------
Total $11,289,000 100% $10,876,000 100% $ 7,359,000 100%
=========== ======== =========== ======== =========== ========
41
SUPPLEMENTARY FINANCIAL DATA
The financial statements and notes thereto required by this item begin on page
24 of this document. Unaudited quarterly financial data for each of the eight
quarters in the two-year period ended March 31, 2003 is as follows:
YEAR ENDED MARCH 31, 2003
-----------------------------------------------
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenue $ 2,851 $ 2,025 $ 3,991 $ 2,422
Gross profit (loss) 957 (1,075) 1,990 12
Operating income (loss) 224 (1,679) 1,339 (733)
Net income (loss) 147 (1,031) 838 (448)
Basic and diluted earnings (loss) per share $ 0.01 $ (0.07) $ 0.06 $ (0.03)
YEAR ENDED MARCH 31, 2002
-----------------------------------------------
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenue $ 2,322 $ 2,409 $ 3,138 $ 3,007
Gross profit (loss) 12 (677) 857 (247)
Operating income (loss) (579) (1,210) 307 (812)
Net income (loss) (327) (731) 203 (496)
Basic and diluted earnings (loss) per share $ (0.02) $ (0.05) $ 0.01 $ (0.03)
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
The information required about the Company's executive officers by this item is
included in Item 1 of this report under the caption "Executive Officers of the
Registrant." The remaining information required by this item will be included in
the Company's Proxy Statement for its 2003 annual meeting of shareholders, which
will be filed with the Securities and Exchange Commission within 120 days after
March 31, 2003 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
The information required by this item will be included in the Company's Proxy
Statement for its 2003 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2003 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
Additional information required by this item will be included in the Company's
Proxy Statement for its 2003 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after March 31, 2003
and is incorporated herein by reference.
DISCLOSURE REGARDING THE COMPANY'S EQUITY COMPENSATION PLANS
- ------------------------------------------------------------
The Company maintains the 1995 Incentive Compensation Plan and the 2000 Stock
Incentive Plan pursuant to which it may grant equity awards to eligible persons.
The following table summarizes information about the Company's common stock that
may be issued upon exercise of outstanding equity awards made as of March 31,
2003 under its existing equity compensation plans:
- -------------------------- ------------------------- --------------------------- ----------------------------------
(a) (b) (c)
- -------------------------- ------------------------- --------------------------- ----------------------------------
Number of securities remaining
Number of securities to Weighted-average exercise available for future issuance
be issued upon exercise price of outstanding under equity compensation plans
of outstanding options, options, warrants and (excluding securities reflected
Plan Category warrants and rights rights in column (a))
- -------------------------- ------------------------- --------------------------- ----------------------------------
Equity compensation 1,078,850 $1.80 311,600
plans approved by
security holders
- -------------------------- ------------------------- --------------------------- ----------------------------------
The Company has no equity compensation plans not approved by security holders.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
The information required by this item will be included in the Company's Proxy
Statement for its 2003 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2003 and
is incorporated herein by reference.
PART IV
-------
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
The Company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of the Company's published
financial statements and other disclosures included in the Company's reports
under the Securities Exchange Act of 1934. Within the 90-day period prior to the
date of this report, the Company, under the supervision and with the
participation of management, including the Company's Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and required to be included in the
Company's periodic Exchange Act filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses, subsequent to the date that the Company completed its evaluation.
The Company's Chief Executive Officer and Chief Financial Officer do not expect
that the Company's disclosure controls and internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple mistake or error. Additionally, controls can be
circumvented by individual acts or some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based partly on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
44
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------------------------------------------------------------------------
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The
information required by this item is included under Item 8 of this Report.
(a)(3) EXHIBITS.
The following documents are filed as part of this Annual Report on Form 10-K and
this list is intended to constitute the exhibit index:
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation, as amended (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1991)
3.2 Bylaws, as amended (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2001)
4 Rights Agreement, (incorporated by reference to the Company's
Registration Statement on Form 8-A (File No. 000-12992) as filed on
July 24, 1998)
10.1 + 1995 Incentive Compensation Plan, as amended (incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997)
10.2 + Form of employment contract entered into by each of Mr. M. Sreenivasan
and Mr. Charles B. Williams (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997)
10.3 + 2000 Stock Incentive Plan (incorporated by reference to the Company's
Tender Offer Statement on Schedule TO (File No. 005-36505) as filed on
June 15, 2001)
10.4 Revolving Credit Note and Agreement (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2002)
10.5 Amendment to Revolving Credit Note and Agreement (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 31, 2002)
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
99.1 Certification of M. Sreenivasan pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Gary Weber pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------
45
+ Management contract or compensatory plan.
(b) Reports on Form 8-K
None.
(c) See (a) (3) above.
(d) See (a) (1) and (2) above.
46
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 9, 2003 SYNTHETECH, INC.
(Registrant)
By /s/ M. ("Sreeni") Sreenivasan
-------------------------------------
M. ("Sreeni") Sreenivasan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ M. ("Sreeni") Sreenivasan President, Chief Executive Officer (Principal June 9, 2003
- --------------------------------- Executive Officer) and Board Member
M. ("Sreeni") Sreenivasan
/s/ Gary A. Weber Vice President Finance and Administration, Chief June 9, 2003
- --------------------------------- Financial Officer, Secretary, Treasurer (Principal
Gary A. Weber Financial Officer and Principal Accounting Officer)
/s/ Paul C. Ahrens Chairman of the Board of Directors June 5, 2003
- ---------------------------------
Paul C. Ahrens
/s/ David R. Clarke Member of the Board of Directors June 6, 2003
- ---------------------------------
David R. Clarke
/s/ Daniel T. Fagan Member of the Board of Directors June 4, 2003
- ---------------------------------
Daniel T. Fagan
/s/ Howard L. Farkas Member of the Board of Directors June 4, 2003
- ---------------------------------
Howard L. Farkas
/s/ Edward M. Giles Member of the Board of Directors June 5, 2003
- ---------------------------------
Edward M. Giles
/s/ Page E. Golsan Member of the Board of Directors June 4, 2003
- ---------------------------------
Page E. Golsan, III
/s/ Charles B. Williams Member of the Board of Directors June 4, 2003
- ---------------------------------
Charles B. Williams
47
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002
I, M. Sreenivasan, certify that:
1. I have reviewed this annual report on Form 10-K of Synthetech, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 9, 2003 By: /s/ M. Sreenivasan
Title: President & Chief Executive Officer
48
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002
I, Gary A. Weber, certify that:
1. I have reviewed this annual report on Form 10-K of Synthetech, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 9, 2003 By: /s/ Gary A. Weber
Title: Vice President Finance &
Chief Financial Officer
49
SYNTHETECH, INC.
Peptide Building Blocks
Specialty Amino Acids
1290 Industrial
Way
P.O. Box 646
Albany, Oregon 97321
Phone:
541.967.6575
Fax:
541.812.6036
NASDAQ:
NZYM
www.synthetech.com