10-Q 1 f02q3.htm FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2001 f02q3

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

(Mark One)

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2001

 

OR

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_______________to_______________

 

Commission file number 0-12992

 

SYNTHETECH, INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

Oregon

 

84-0845771

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1290 Industrial Way, Albany, Oregon

(Address of Principal Executive Offices)

 

97321

(Zip Code)

 

 

 

 

(541) 967-6575

 

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No_____

The number of shares of the registrant's common stock, $.001 par value, outstanding as of February 8, 2002 was 14,290,383.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

<Table>

<Caption>

SYNTHETECH, INC.

BALANCE SHEETS

-------------------------

<S><C>

<C>

<C>

(unaudited)

December 31,

March 31,

2001

2001

------------

------

------

ASSETS

------------

CURRENT ASSETS:

Cash and cash equivalents

$ 2,467,000

$ 5,389,000

Accounts receivable, less allowance

for doubtful accounts of $15,000 for

both periods

2,502,000

1,171,000

Inventories

4,820,000

4,513,000

Prepaid expenses

553,000

404,000

Income tax receivable

1,450,000

924,000

Deferred income taxes

146,000

146,000

Other current assets

6,000

-

---------------

---------------

TOTAL CURRENT ASSETS

11,944,000

12,547,000

PROPERTY, PLANT AND EQUIPMENT, at cost, net

12,886,000

13,448,000

---------------

---------------

TOTAL ASSETS

$ 24,830,000

$ 25,995,000

==========

==========

</Table>

The accompanying notes are an integral part of these financial statements.

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<Table>

<Caption>

SYNTHETECH, INC.

BALANCE SHEETS

-------------------------

(continued)

<S><C>

<C>

<C>

(unaudited)

December 31,

March 31,

2001

2001

---------------------------------------------------------------

------

------

LIABILITIES AND SHAREHOLDERS' EQUITY

---------------------------------------------------------------

CURRENT LIABILITIES:

Current portion of long term obligations

$ 19,000

$ 46,000

Accounts payable

462,000

781,000

Accrued compensation

134,000

118,000

Deferred revenue

-

17,000

Other accrued liabilities

23,000

11,000

---------------

---------------

TOTAL CURRENT LIABILITIES

638,000

973,000

DEFERRED INCOME TAXES

655,000

655,000

LONG TERM OBLIGATIONS, net of current portion

103,000

117,000

SHAREHOLDERS' EQUITY:

Common stock, $.001 par value; authorized

100,000,000 shares; issued and outstanding,

14,290,000 and 14,280,000 shares

14,000

14,000

Paid-in capital

8,889,000

8,858,000

Deferred compensation

(64,000)

(72,000)

Retained earnings

14,595,000

15,450,000

---------------

---------------

TOTAL SHAREHOLDERS' EQUITY

23,434,000

24,250,000

---------------

---------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$ 24,830,000

$ 25,995,000

==========

==========

</Table>

The accompanying notes are an integral part of these financial statements.

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<Table>

<Caption>

SYNTHETECH, INC.

STATEMENTS OF OPERATIONS

----------------------------------------------

(unaudited)

<S><C>

<C>

<C>

<C>

<C>

For the Three Months Ended

For the Nine Months Ended

December 31,

December 31,

2001

2000

2001

2000 (1)

------------------------------------------

--------------

--------------

--------------

---------------

REVENUES

$ 3,138,000

$ 1,413,000

$ 7,869,000

$ 5,193,000

COST OF REVENUES

2,281,000

1,757,000

7,677,000

4,986,000

--------------

--------------

--------------

---------------

GROSS PROFIT (LOSS)

857,000

(344,000)

192,000

207,000

RESEARCH AND DEVELOPMENT

166,000

84,000

464,000

310,000

SELLING, GENERAL AND ADMINISTRATIVE

384,000

313,000

1,210,000

1,026,000

--------------

--------------

--------------

---------------

OPERATING EXPENSE

550,000

397,000

1,674,000

1,336,000

--------------

--------------

--------------

----------------

OPERATING INCOME (LOSS)

307,000

(741,000)

(1,482,000)

(1,129,000)

OTHER INCOME, net

23,000

108,000

112,000

323,000

INTEREST EXPENSE

(3,000)

(7,000)

(9,000)

(13,000)

--------------

--------------

--------------

----------------

INCOME (LOSS) BEFORE INCOME TAXES

327,000

(640,000)

(1,379,000)

(819,000)

PROVISION (BENEFIT) FOR INCOME TAXES

124,000

(243,000)

(524,000)

(311,000)

--------------

--------------

--------------

----------------

NET INCOME (LOSS)

$ 203,000

$ (397,000)

$ (855,000)

$ (508,000)

=========

=========

=========

=========

BASIC EARNINGS (LOSS) PER COMMON SHARE

$ 0.01

$ (0.03)

$ (0.06)

$ (0.04)

=========

=========

=========

=========

DILUTED EARNINGS (LOSS) PER COMMON SHARE

$ 0.01

$ (0.03)

$ (0.06)

$ (0.04)

=========

=========

=========

=========

</Table>

(1) Restated to reflect the reversal of a $73,000 equipment write down incorrectly reported in the first quarter of fiscal 2001.

The accompanying notes are an integral part of these financial statements.

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<Table>

<Caption>

SYNTHETECH, INC.

STATEMENTS OF CASH FLOWS

----------------------------------------------

(unaudited)

<S><C>

<C>

<C>

For the Nine Month Period Ended December 31

2001

2000 (1)

-----------------------------------------------------------------

----------

----------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$ (855,000)

$ (508,000)

Adjustments to reconcile net loss to

net cash (used in) provided by operating activities:

Depreciation, amortization and other

2,157,000

1,920,000

Amortization of deferred compensation

21,000

23,000

Proceeds from stock option exercises and disqualifying dispositions

-

2,000

(Increase) decrease in assets:

Accounts receivable, net

(1,331,000)

1,328,000

Inventories

(307,000)

(545,000)

Prepaid expenses

(149,000)

(108,000)

Income tax receivable

(526,000)

(783,000)

Other assets

(6,000)

29,000

Decrease in liabilities:

Accounts payable and accrued liabilities

(291,000)

(160,000)

Deferred revenue

(17,000)

(500,000)

--------------

--------------

Net cash (used in) provided by operating activities

(1,304,000)

698,000

--------------

--------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Property, plant and equipment purchases, net

(1,595,000)

(1,168,000)

--------------

--------------

Net cash used in investing activities

(1,595,000)

(1,168,000)

--------------

--------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments under long-term debt obligations

(41,000)

(13,000)

Proceeds from stock purchase plan

18,000

-

--------------

--------------

Net cash used in financing activities

(23,000)

(13,000)

--------------

--------------

NET DECREASE IN CASH AND CASH EQUIVALENTS

(2,922,000)

(483,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

$ 5,389,000

$ 6,404,000

--------------

--------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$ 2,467,000

$ 5,921,000

=========

=========

NON-CASH INVESTING ACTIVITIES:

Issuance of stock options at below fair value

$ 13,000

$ 16,000

</Table>

(1) Restated to reflect the reversal of a $73,000 equipment write down incorrectly reported in the first quarter of fiscal 2001.

The accompanying notes are an integral part of these financial statements.

<Page>

 

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 predominantly by pharmaceutical companies to make a wide range of peptide-based drugs under development and on the market for the treatment of AIDS, cancer, cardiovascular and other diseases. The Company has established a worldwide reputation in a unique product and technology area as a leading supplier for all phases of the drug development cycle from discovery through market launch.

The summary financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Synthetech management believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these summary financial statements are read in conjunction with the financial statements and the notes thereto included in Synthetech's Annual Report on Form 10-K for the year ended March 31, 2001.

Interim financial statements are by necessity somewhat tentative; judgments are used to estimate quarterly amounts for items that are normally determinable only on an annual basis. For example, provision for income taxes is an estimate of the annual liability pro-rated over the quarters of the fiscal year based on estimates of annual income. Further, all inventory quantities are verified by physically counting the units on hand at least once a year. Normally, selected inventory items are cycle counted during each quarter. For those inventories not counted during the quarter, quantities are determined using measured sales and production data for the period.

The interim period information included herein reflects all adjustments that are, in the opinion of Synthetech management, necessary for a fair statement of the results of the respective interim periods. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

 

 

NOTE B. STATEMENTS OF CASH FLOWS

Supplemental cash flow disclosures for the nine-month period ended December 31:

Cash Paid

 

 

 

Three Months

Nine Months

 

2001

2000

2001

2000

Income Taxes

$ -

$ 1,000

$ 1,000

$ 443,000

Interest

$ 3,000

$ 7,000

$ 9,000

$ 13,000

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NOTES TO FINANCIAL STATEMENTS (continued)

NOTE C. EARNINGS PER SHARE

 

Basic earnings per share (EPS) are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period, calculated using the treasury stock method as defined in SFAS No. 128. The following is a reconciliation of the shares used to calculate basic earnings per share and diluted earnings per share:

 

For the Three Months

Ended December 31,

For the Nine Months

Ended December 31,

 

2001

2000

2001

2000

Weighted average shares outstanding for Basic EPS

14,290,383

14,278,174

14,284,836

14,277,154

Dilutive effect of common stock options issuable under treasury stock method

  23,390

  -

  -

  -

 

------------

-------------

------------

------------

Weighted average common and common equivalent shares outstanding for Diluted EPS

 

14,313,773

 

14,278,174

 

14,284,386

 

14,277,154

 

========

========

========

========

 

The following common stock equivalents were excluded from the earnings per share computation because their effect would have been anti-dilutive:

 

For the Three Months

Ended December 31,

For the Nine Months

Ended December 31,

 

2001

2000

2001

2000

Common stock options outstanding

212,100

707,100

275,100

707,100

<Page>

 

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE D. NEW ACCOUNTING PRONOUNCEMENTS

 

In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amended certain guidance within SFAS 137. The Company does not currently have any derivative instruments and, accordingly, the adoption of these standards in fiscal 2002 did not have an impact on its financial position or results of operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement. SFAS No. 142 becomes effective for fiscal years beginning after December 15, 2001, with early adoption permitted for entities with fiscal years beginning after March 15, 2001. The adoption of SFAS No. 141 and SFAS 142 will not have an impact on financial condition or results of operations.

In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations," which will be effective beginning fiscal year 2003. SFAS No. 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.

In October 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121, but resolves certain implementation issues associated with that Statement. SFAS Nos. 143 and 144 will be effective beginning in fiscal 2003. The adoption of SFAS Nos. 143 and 144 will not have a significant impact on the Company's financial condition or results of operations.

<Page> 

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE E. RECLASSIFICATIONS

Certain reclassifications were made to prior year amounts to conform with the current year presentation.

 

NOTE F. 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.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS 

The following table sets forth, for the periods indicated, the percentage of revenues represented by each item included in the Statements of Operations.

<Table>

<Caption>

Percentage of Revenues

<S><C>

<C>

<C>

<C>

<C>

For the Three Months

For the Nine Months

Ended December 31,

Ended December 31,

2001

2000

2001

2000 (1)

------------------------------

-----

-----

-----

-----

Revenues

100.0 %

100.0 %

100.0 %

100.0 %

Cost of Revenues

72.7

124.3

97.6

96.0

------

------

------

------

Gross Profit (Loss)

27.3

(24.3)

2.4

4.0

Research and Development

5.3

5.9

5.9

6.0

Selling, General and Administration

12.2

22.2

15.4

19.8

------

------

------

------

Operating Expense

17.5

28.1

21.3

25.8

------

------

------

------

Operating Income (Loss)

9.8

(52.4)

(18.9)

(21.8)

Other Income

0.7

7.6

1.4

6.2

Interest Expense

(0.1)

(0.5)

(0.1)

(0.2)

------

------

------

------

Income (Loss) Before Income Taxes

10.4

(45.3)

(17.6)

(15.8)

Provision (Benefit) For Income Taxes

4.0

(17.2)

(6.7)

(6.0)

------

------

------

------

Net Income (Loss)

6.4 %

(28.1) %

(10.9) %

(9.8) %

======

======

======

======

</Table>

(1) Restated to reflect the reversal of a $73,000 equipment write down

Incorrectly reported in the first quarter of fiscal 2001.

 

Revenues

Revenues increased by 122% to $3.14 million in the third quarter of fiscal 2002 from $1.41 million in the third quarter of fiscal 2001. Revenues were $7.87 million in the nine months of fiscal 2002, a 52% increase from revenues of $5.19 million in the nine months of fiscal 2001. Revenues in the third quarter of fiscal 2002 included $741,000 of the remaining $3.14 million of orders for Peptide Building Blocks (PBBs) to support production of launch volumes of a drug in late-state clinical trials and for a cosmeceutical. A substantial portion of fiscal 2002 third quarter and nine months revenues were comprised of orders relating to a few projects. A substantial portion of revenues for any given quarter is typically comprised of orders relating to a few projects and the delay or loss of any of them would have a significant negative impact on the Company's results of operations. International sales were $109,000 and $1.17 million in the third quarter and first nine months of fiscal 2002, respectively, as compared to $140,000 and $852,000 in the third quarter and nine months of fiscal 2001, respectively. International sales, like all Company revenues, are subject to significant quarterly fluctuations.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

In addition, while the Company continues to be a supplier of PBBs for pharmaceutical development projects that could have substantial future business potential, the receipt and timing of orders relating to these projects is uncertain. The Company believes that it is well positioned in terms of facilities and organization to take advantage of business opportunities as a supplier of PBBs and other projects. There are many additional factors affecting the future progress of these drug and cosmeceutical projects and the resulting demand for Synthetech's PBBs. (See "Industry Factors" below.)

 

Gross Profit (Loss)

Gross Profit for the third quarter of fiscal 2002 was $857,000 or 27% of revenues compared to a gross loss of $344,000 for the third quarter of fiscal 2001 or 24% of revenues. Gross profit for the nine months of fiscal 2002 was $192,000 or 2% of revenues compared to a gross profit of $207,000 or 4% of revenues for the nine months of fiscal 2001. 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. The plant expansions over the past several years and recent increases to organization resources have significantly contributed to the increase in fixed manufacturing costs included in cost of revenues in the nine months of fiscal 2002 as compared to the nine months of fiscal 2001. Accordingly, with the current level of revenues, this has a significant negative effect on gross profit. In addition, cost of revenues in the nine months of fiscal 2002 included added costs associated with the initial development and production of products not previously manufactured by the Company and there were approximately $563,000 in non-recurring inventory write-offs resulting from production batches not meeting specification. The Company may experience inventory write-offs in the future. The mix of projects shipped in the third quarter of fiscal 2002 had an unusually high gross profit. The Company does not expect to consistently experience revenues with this level of gross profit. As a result, in future periods the Company would not expect to achieve the level of profitability experienced in the third quarter at this level of revenues. The nine months of fiscal 2001 also included a project with an unusually high gross profit.

  

Operating Expenses

Research and development (R&D) expense in the third quarter and nine months of fiscal 2002 increased to $166,000 and $464,000, respectively, compared to $84,000 and $310,000 for the third quarter and nine months of fiscal 2001, respectively. As a percentage of sales, R&D expenses decreased to 5% in the third quarter of fiscal 2002 from 6% in the same period of fiscal 2001 and were 6% for the nine months of fiscal 2002 and fiscal 2001. The increase in R&D expense in the third quarter and nine months of fiscal 2002 primarily reflected increased depreciation costs and supplies expense associated with the lab remodel completed in May of 2001, and the hiring of additional staff during the first half of fiscal 2002. The Company expects R&D expense to increase in future quarters due to the hiring of additional R&D staff in connection with the expanded capacity that resulted from the completion of the R&D lab remodel. Selling, general and administrative (SG&A) expense in the third quarter and nine

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

months of fiscal 2002 increased to $384,000 and $1.21 million, respectively, compared to $313,000 and $1.03 million, respectively, for the third quarter and nine months of fiscal 2001. As a percentage of sales, SG&A expense decreased to 12% in the third quarter of fiscal 2002 from 22% in the same period of fiscal 2001 and decreased to 15% for nine months of fiscal 2002 from 20% for fiscal 2001. The increase in SGA expense in the third quarter and nine months of fiscal 2002 compared to the same periods of fiscal 2001 primarily reflected the increased cost associated with the addition of a member to the Company's marketing staff. Operating expenses as a percentage of revenues were approximately 18% and 21%, respectively, in the third quarter and nine months of fiscal 2002 and were 28% and 26%, respectively, in the third quarter and nine months of fiscal 2001.

 

Operating Income (Loss)

Operating income in the third quarter of fiscal 2002 was $307,000 and operating loss in the nine months of fiscal 2002 was $1.48 million, compared with operating loss in the third quarter and nine months of fiscal 2001 of $741,000 and $1.13 million, respectively.

 

Other Income, net

Other income, net in the third quarter and nine months of fiscal 2002 was $23,000 and $112,000, respectively, compared to $108,000 and $323,000, respectively, for the third quarter and nine months of fiscal 2001. Other income in the third quarter and nine months of fiscal 2002 and 2001 primarily reflected interest earnings.  

 

Interest Expense

Interest expense was $3,000 and $9,000, respectively, for the third quarter and nine months of fiscal 2002 and $7,000 and $13,000 for the third quarter and nine months of fiscal 2001, respectively.

 

Net Income (Loss)

For the third quarter of fiscal 2002 income before taxes was $327,000. For the nine months of fiscal 2002 the Company incurred a loss before taxes of $1.38 million. The Company recorded a provision for income tax of $124,000 for the third quarter and an income tax benefit of $524,000 for the nine months of fiscal 2002. This resulted in net income of $203,000 for the third quarter and a net loss of $855,000 for nine months of fiscal 2002.

 

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Item 2. 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, taking only a small percentage to clinical trials and fewer yet to commercial market. A substantial amount of the activity continues to occur at the earlier stages of research and development and clinical trials. The market for peptide and peptidomimetic small molecule drugs is still developing.

Recurring sales of PBBs for development programs is sporadic at best. The high cancellation rate for drug development programs results in a significant likelihood that there will be no subsequent or "follow-on" PBB sales for any particular drug development program. Accordingly, the level and timing of orders by the Company's customers relating to specific drug development programs varies substantially from quarter to quarter and the Company cannot rely on any one customer as a constant source of revenue.

 

The size of the PBB orders for marketed drugs can be substantially larger than those for the discovery or clinical trial stages. Sales of PBBs for marketed drugs can also provide an opportunity for continuing longer-term sales. While not subject to the same high cancellation rate faced by discovery and clinical trial stage drug development programs, the demand for the approved drugs, however, remains subject to many uncertainties, including, without limitation, the drug price, the drug side effects and the existence of other competing drugs. These factors, which are outside of the control of the Company, will affect the level of demand for the drug itself and, therefore, the demand for PBBs. Also, industry cost pressures can cause pharmaceutical companies to explore and ultimately adopt alternative manufacturing processes which may not include the Company's PBBs as an intermediate. Finally, with the longer-term, larger-scale orders, the Company expects increased competition to supply these PBBs.

Similar dynamics affect the cosmeceutical development process and market, except that the regulatory oversight and, consequently, the typical length of a product's "time to market" is reduced. Cosmeceutical products make no therapeutic claims and, accordingly, the more extensive and time-consuming clinical trials to establish efficacy are not required.

The foregoing industry factors create an inability for the Company to predict future demand beyond its current order base. Until the Company develops a stable baseload of demand, the Company is likely to continue to experience significant fluctuations in its quarterly results.

 

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Item 2. 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 14 years of experience, Synthetech has developed extensive PBB process technology and is recognized as one of the leaders in this area. Nevertheless, initial batches of new products and scaling up production processes of existing products may result in significantly lower than expected yields, extended processing time and may require substantial rework to meet the required specification. These factors could cause increased costs and delay shipments and, thus, affect periodic operating results.

  

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, the Company had working capital of $11.31 million compared to $11.57 million at March 31, 2001. The Company's cash and cash equivalents at December 31, 2001 totaled $2.47 million compared to $5.39 million at March 31, 2001. The Company believes that its existing cash and cash equivalents, its bank line of credit and funds generated from operations will be sufficient to support operations for the next twelve months. The $2.92 million reduction in cash and cash equivalents primarily reflected $1.30 million used in operating activities and $1.60 million of capital expenditures. Depreciation expense included in operating activities was $2.16 million for the nine months. The Company has a $1 million unsecured bank line of credit of which there was no amount outstanding at December 31, 2001 or as of the date of this report. The line of credit is renewable on September 1, 2002.

The increase in accounts receivable to $2.50 million at December 31, 2001 from $1.17 million at March 31, 2001 primarily reflected differences in the timing of shipments between the periods. The increase in income tax receivable to $1.45 million at December 31, 2001 from $924,000 at March 31, 2001 reflected the tax benefit for the nine months of fiscal 2002. The increase in inventory to $4.82 million at December 31, 2001 from $4.51 million at March 31, 2001 reflected an increase in raw materials and work in process offset somewhat by a reduction in the level of finished products held in inventory. The decrease in accounts payable to $462,000 at December 31, 2001 from $781,000 at March 31, 2001 reflected the reduction of expenditure commitments related to capital projects.

The Company had approximately $1.60 million of capital expenditures during the nine months of fiscal 2002 that included $401,000 for equipment and equipment upgrades in the existing plant, $84,000 for the completion of the R&D lab remodel, and $1.11 million for the wastewater treatment system. The Company anticipates capital expenditures in fourth quarter of fiscal 2002 to be approximately $184,000 for a total of $1.78 million for the fiscal year. The Company expects to finance all capital expenditures from internal cash flow and financial resources and does not anticipate the need for any new debt or equity financing.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company's primary market risk exposure is the impact of interest rate fluctuations on interest income earned on our cash deposits and cash equivalents. The risks associated with market, liquidity and principal are mitigated by investing in high-credit quality securities and limiting concentrations of issuers and maturity dates. Derivative financial instruments are not part of the Company's investments.

Substantially all of the Company's purchases and sales are denominated in U.S. dollars and as a result, it has relatively little exposure to foreign currency exchange risk with respect to any of its purchases and sales. The Company does not currently hedge against foreign currency rate fluctuations. The effect of an immediate 10 percent change in exchange rates would not have a material impact on the Company's operating results or cash flows.

_____________________________

 

This Form 10-Q includes "forward-looking" information (as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Investors are cautioned that forward-looking statements involve risks and uncertainties, and various factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result," or words or phrases of similar meanings. The risks and uncertainties include, but are not limited to, the following: the uncertain market for our products, customer concentration, potential quarterly revenue fluctuations, production factors, industry cost factors, competition, government regulation, product liability risks, technological change, increased costs associated with the Company's facility expansions, and international business risks. Investors are directed to the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the fiscal year ended March 31, 2001 which are available from the Company without charge, for a further description of the risks and uncertainties related to forward-looking statements made by the Company as well as to other aspects of the Company's business.

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PART II - OTHER INFORMATION

 

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

3(i)(1) Articles of Incorporation of Synthetech, Inc., as amended.

3(ii)(2) Bylaws of Synthetech, Inc., as amended.

__________________

(1) Incorporated by reference herein from the Company's Form 10-K for the year ended

March 31, 1991.

(2) Incorporated by reference herein from the Company's Form 10-Q for the period ended

September 30, 2001.

(b) Reports

No reports on Form 8-K were filed during the quarter.

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SYNTHETECH, INC.

 

(Registrant)

 

Date: February 11, 2002

 

 

/s/ M. Sreenivasan

 

 

 

 

 

M. Sreenivasan

 

 

 

 

 

President & C.E.O.

 

Date: February 11, 2002

 

 

/s/ Charles B. Williams

 

 

 

 

 

Charles B. Williams

 

 

 

 

 

Vice President, Finance

 

 

 

 

 

and Administration, C.F.O.,

 

 

 

 

 

Chief Accounting Officer

 

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INDEX TO EXHIBITS

 

3(i)(1) Articles of Incorporation of Synthetech, Inc., as amended.

3(ii)(2) Bylaws of Synthetech, Inc., as amended.

__________________

(1) Incorporated by reference herein from the Company's Form 10-K for the year ended

March 31, 1991.

(2) Incorporated by reference herein from the Company's Form 10-Q for the period ended

September 30, 2001.