<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________to_______________
Commission file number 0-12992
SYNTHETECH, INC.
(Exact name of registrant as specified in its charter)
Oregon 84-0845771
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1290 Industrial Way, Albany, Oregon 97321
(Address of Principal Executive Offices) (Zip Code)
(541) 967-6575
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No_____
The number of shares of the registrant's common stock,
$.001 par value, outstanding as of February 3, 1999 was
14,218,383.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
December 31, March 31,
1998 1998
----------- ---------------- ---------------
ASSETS
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 6,377,000 $ 4,976,000
Accounts receivable, less allowance
for doubtful accounts of $15,000 for
both periods 2,364,000 1,470,000
Inventories 3,484,000 3,184,000
Prepaid expenses 232,000 196,000
Deferred income taxes 70,000 70,000
Other current assets 7,000 24,000
------------ ------------
TOTAL CURRENT ASSETS 12,534,000 9,920,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 10,132,000 9,439,000
OTHER ASSETS 4,000 5,000
------------ ------------
TOTAL ASSETS $ 22,670,000 $ 19,364,000
============ ============
See Notes To Financial Statements.
</TABLE>
<PAGE> 3
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
December 31, March 31,
1998 1998
- -------------------------------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 15,000 $ 14,000
Accounts payable 1,055,000 672,000
Accrued compensation 276,000 221,000
Deferred revenue 44,000 247,000
Accrued income tax 167,000 514,000
Other accrued liabilities 10,000 15,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,567,000 1,683,000
DEFERRED INCOME TAXES 209,000 209,000
NOTE PAYABLE, net of current portion 155,000 166,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized 100,000,000 shares;
issued and outstanding,
14,213,000 and 14,143,000 shares 14,000 14,000
Paid-in capital 8,647,000 8,467,000
Deferred compensation (67,000) (106,000)
Retained earnings 12,145,000 8,931,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 20,739,000 17,306,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 22,670,000 $ 19,364,000
============ ============
See Notes To Financial Statements.
</TABLE>
<PAGE> 4
SYNTHETECH, INC.
STATEMENTS OF INCOME
------------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
- ----------------- ------------ ------------ ------------ ------------
REVENUES $ 6,047,000 $ 2,226,000 $ 15,502,000 $ 5,197,000
COST OF SALES 3,624,000 1,248,000 9,166,000 2,832,000
------------ ------------ ----------- ------------
GROSS PROFIT 2,423,000 978,000 6,336,000 2,365,000
RESEARCH AND DEVELOPMENT 71,000 57,000 228,000 170,000
SELLING, GENERAL AND
ADMINISTRATIVE 373,000 303,000 1,111,000 913,000
------------ ------------ ------------ ------------
OPERATING EXPENSE 444,000 360,000 1,339,000 1,083,000
------------ ------------ ------------ ------------
OPERATING INCOME 1,979,000 618,000 4,997,000 1,282,000
OTHER INCOME, net 65,000 62,000 187,000 220,000
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 2,044,000 680,000 5,184,000 1,502,000
PROVISION FOR INCOME
TAXES 777,000 248,000 1,970,000 548,000
------------ ------------ ------------ ------------
NET INCOME $ 1,267,000 $ 432,000 $ 3,214,000 $ 954,000
============ ============ ============ ===========
BASIC NET INCOME PER $0.09 $0.03 $0.23 $0.07
COMMON SHARE ===== ===== ===== =====
DILUTED NET INCOME PER $0.09 $0.03 $0.23 $0.07
COMMON SHARE ===== ===== ===== =====
See Notes To Financial Statements.
</TABLE>
<PAGE> 5
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Month Period Ended December 31 1998 1997
- ------------------------------------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,214,000 $ 954,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation, amortization and other 957,000 342,000
Amortization of deferred compensation 85,000 82,000
Accrued interest on securities available
for sale - (11,000)
Loss on disposal of property, plant and
equipment 1,000 5,000
Deferred income taxes - 1,000
(Increase) decrease in assets:
Accounts receivable, net (894,000) (703,000)
Inventories (300,000) (979,000)
Prepaid expenses (36,000) (91,000)
Income tax receivable - 798,000
Other assets 18,000 12,000
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 87,000 (214,000)
Deferred revenue (203,000) 165,000
----------- -----------
Net cash provided by operating activities 2,929,000 361,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (1,652,000) (3,468,000)
Employee notes receivable - 30,000
----------- -----------
Net cash used in investing activities (1,652,000) (3,438,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt obligations (11,000) (9,000)
Proceeds from stock option exercises and
disqualifying dispositions 135,000 7,000
----------- -----------
Net cash provided by (used in) financing
activities 124,000 (2,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,401,000 (3,079,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,976,000 6,740,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,377,000 $ 3,661,000
=========== ===========
NON-CASH INVESTING ACTIVITIES:
Issuance of stock options at below fair value $ 57,000 $ 21,000
See Notes To Financial Statements.
</TABLE>
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
NOTE A. GENERAL AND BUSINESS
The summary financial statements included herein have been
prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
Synthetech management believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these summary financial statements be
read in conjunction with the financial statements and the
notes thereto included in Synthetech's 1998 Form 10-K.
Interim financial statements are by necessity somewhat
tentative; judgments are used to estimate quarterly amounts
for items that are normally determinable only on an annual
basis. For example, provision for income taxes is an
estimate of the annual liability pro-rated over the quarters
of the fiscal year based on estimates of annual income.
Further, all inventory quantities are verified by physically
counting the units on hand at least once a year. Normally,
selected inventories are counted at the end of each quarter.
For those inventories not counted at the end of the quarter,
quantities are determined using measured sales and
production data for the period.
The interim period information included herein reflects all
adjustments which are, in the opinion of Synthetech
management, necessary for a fair statement of the results of
the respective interim periods. Results of operations for
interim periods are not necessarily indicative of results to
be expected for an entire year.
NOTE B. STATEMENTS OF CASH FLOWS
Supplemental cash flow disclosures for the periods
ended December 31:
Cash Paid
---------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Nine Months
1998 1997 1998 1997
---- ---- ---- ----
Income Taxes $ 1,354,000 $ - $ 2,210,000 $ 153,000
Interest $ 4,000 $ 5,000 $ 12,000 $ 14,000
</TABLE>
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE C. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") in the
quarter ended December 31, 1997. Under the new
requirements, the Company reports basic and diluted earnings
per share. Basic earnings per share 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 128. Where necessary, prior year amounts have been
restated. The following is a reconciliation of the shares
used to calculate basic earnings per share and diluted
earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares
outstanding for Basic
EPS 14,207,622 13,909,805 14,189,698 13,887,189
Dilutive effect of
common stock options
issuable under treasury
stock method 82,733 324,145 90,905 346,688
---------- ---------- ---------- ----------
Weighted average
common and common
equivalent shares
outstanding for
Diluted EPS 14,290,355 14,233,950 14,280,603 14,233,877
========== ========== ========== ==========
</TABLE>
The following common stock equivalents were excluded from
the earnings per share computation because their effect
would have been anti-dilutive:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Common stock options
outstanding 593,800 499,750 593,800 499,750
</TABLE>
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE D. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for all
derivative instruments. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company does not
have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's
financial position or results of operations.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
the percentage of revenues represented by each item included
in the Statements of Income.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percentage of Revenues
----------------------
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
1998 1997 1998 1997
- ------------------------------ -------- ------- ------- -------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Sales 59.9 56.1 59.1 54.5
------ ------ ------ ------
Gross Profit 40.1 43.9 40.9 45.5
Research and Development 1.2 2.6 1.5 3.3
Selling, General and
Administration 6.2 13.6 7.2 17.6
------ ------ ------ ------
Operating Expense 7.4 16.2 8.6 20.9
Operating Income 32.7 27.7 32.2 24.6
Other Income 1.1 2.8 1.2 4.2
------ ------ ------ ------
Income Before Income Taxes 33.8 30.5 33.4 28.8
Provision For Income Taxes 12.8 11.1 12.7 10.5
------ ------ ------ ------
Net Income 21.0 % 19.4 % 20.7 % 18.3 %
====== ====== ====== ======
</TABLE>
Revenues
- --------
Revenues increased by 172% to $6.05 million in the third
quarter of fiscal 1999 from $2.23 million in the third
quarter of fiscal 1998. Revenues were $15.50 million for
the nine months of fiscal 1999, a 198% increase from
revenues of $5.20 million for the nine months of fiscal
1998. International sales, mainly to Western Europe, were
$1.59 million and $3.65 million for the third quarter and
nine months of fiscal 1999 as compared to $269,000 and $1.46
million for the third quarter and nine months of fiscal
1998.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Revenues for the third quarter and nine months of fiscal
1999 were at record levels. In fact, the $15.50 million of
revenues for the nine months of fiscal 1999 exceeded by over
20% the previous highest revenues recorded for an entire
year.
The increase in revenues for the third quarter and nine
months of fiscal 1999 over the same periods of fiscal 1998
principally reflected the $4.07 million and $9.37 million
revenue contribution, respectively, of shipments from large-
scale Peptide Building Block ("PBB") orders to be used in
two marketed drugs. The Company expects that the fourth
quarter will be another strong quarter with the two large-
scale orders continuing to provide a substantial
contribution to revenues.
Although PBB sales associated with marketed drugs are more
likely to provide a longer term, ongoing revenue stream than
sales associated with drugs at the discovery or clinical
stage, continuation of customer demand for PBBs associated
with marketed drugs remains subject to various market
conditions, including potential use of alternative
manufacturing routes, competition from other suppliers of
PBBs and continued market demand for the drug. For example,
one of the large-scale PBB customers referenced above has
advised the Company that it is researching the feasibility
of an alternative lower-cost manufacturing route involving a
different PBB than the one currently being sold to it. At
this time, Synthetech believes that additional orders from
this customer are unlikely after it completes the current
order by the summer of 1999. This could change, however, if
the customer determines that the alternative manufacturing
route is not feasible. Accordingly, while large-scale orders
for marketed drugs can provide significant and predictable
revenues for the duration of the orders, there continues to
be a significant risk that revenues can fluctuate from
period to period. (See "Industry Factors" below.)
Gross Profit
- ------------
Gross profit increased to $2.42 million in the third quarter
of fiscal 1999 from $978,000 in the third quarter of fiscal
1998. As a percent of sales, gross profit decreased to 40%
in the third quarter of fiscal 1999 from 44% for the same
period last year. Gross profit increased to $6.34 million
or 41% of revenues in the nine months of fiscal 1999 from
$2.37 million or 46% of revenues for the same period of
fiscal 1998.
The gross profit margins for the third quarter and the nine
months of fiscal 1999 resulted primarily from the mix of
products. Revenues from large-scale PBB orders during the
third quarter and the nine months of fiscal 1999 represented
67% and 60%, respectively, of total revenue for the periods.
While large-scale orders for marketed drugs can provide
significant revenues for the duration of the orders, they
typically generate a lower gross profit margin than the sale
of smaller quantities of the same PBB product during the
drug discovery and clinical stages. The Company, however,
continuously seeks to improve the gross profit margins of
large-scale orders through process improvements and
operating efficiencies.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Gross profit margins during the third quarter and nine
months of fiscal 1998 resulted from a low level of revenues
occasioned by the timing of orders. To a lesser extent, the
mix of products also affected gross profit margins during
these periods.
Operating Expenses
- ------------------
Research and development (R&D) and selling, general and
administrative (SG&A) expenses were $444,000 in the third
quarter of fiscal 1999 compared to $360,000 in the third
quarter of fiscal 1998. As a percentage of sales, R&D and
SG&A expenses decreased to 7% in the third quarter of fiscal
1999 from 16% in the same period of fiscal 1998 due to the
higher level of revenues. R&D and SG&A expenses increased
to $1.34 million for the nine months of fiscal 1999 from
$1.08 million in fiscal 1998. As a percentage of sales, R&D
and SG&A expenses decreased to 9% for the nine months of
fiscal 1999 from 21% in the same period of fiscal 1998 due
to the higher level of revenues. The increase in R&D for
the nine months of fiscal 1999 reflected increases in
staffing and staffing compensation. The increases in SG&A
expense for the third quarter and nine months of fiscal 1999
principally reflected increases in staffing compensation and
related payments.
Operating Income
- ----------------
Operating income increased to $1.98 million or 33% of
revenues in the third quarter of fiscal 1999 from $618,000
or 28% for the same period last year. For the nine months
of fiscal 1999 operating income increased to $5.0 million or
32% of revenues compared with $1.28 million or 25% for the
nine months of fiscal 1998. The significant increase in
operating income for the third quarter and nine months of
fiscal 1999 reflected the substantial increase in revenues
over prior periods.
Other Income
- ------------
The net other income of $65,000 for the third quarter of
fiscal 1999 included $70,000 of interest earnings and $4,000
of interest expense. The net other income of $187,000 for
the nine months of fiscal 1999 included $203,000 of interest
earnings and $12,000 of interest expense. The $62,000 and
$220,000 net other income in the third quarter and nine
months of fiscal 1998, respectively, came primarily from
interest earnings.
Net Income
- ----------
For the third quarter and nine months of fiscal 1999, the
Company earned $2.04 million, and $5.18 million before
income taxes, respectively. A provision for income taxes of
$777,000 resulted in net income of $1.27 million for the
third quarter and a provision for income taxes of $1.97
million resulted in net income of $3.21 million for the nine
months of fiscal 1999. The Company's effective tax rate for
the nine months of fiscal 1999 was 38% and for the nine
months of fiscal 1998 was 36.5% reflecting a one time tax
credit legislated by the State of Oregon.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
INDUSTRY FACTORS
The market for PBBs is driven by the market for
synthetically manufactured peptide-based drugs in which they
are incorporated. The drug development process for these
peptide-based drugs is dictated by the marketplace, drug
companies and the regulatory environment. The Company has
no control over the pace of peptide-based drug development,
which drugs get selected for clinical trials, which drugs
are approved by the FDA and, even if approved, the ultimate
market potential of such drugs.
The three stages of the drug development process include:
R&D or discovery stage, clinical trial stage and marketed
drug stage. Synthetech's customers can spend years
researching and developing new drugs, taking only a small
percentage to clinical trials and fewer yet to commercial
market. A substantial amount of the activity continues to
occur at the earlier stages of research and development and
clinical trials. The market for peptide-based drugs is still
very early in development.
While the Company has recorded substantial annual sales of
PBBs for discovery and clinical trial stage development,
recurring sales of PBBs for development programs is sporadic
at best. The high cancellation rate for drug development
programs results in a significant likelihood that there will
be no subsequent or "follow-on" PBB sales for any particular
drug development program. Accordingly, the level of
purchasing by the Company's customers for specific drug
development programs varies substantially from quarter to
quarter and the Company cannot rely on any one customer as a
constant source of revenue.
While the Company has been selling PBBs for marketed drugs
for several years, these sales have represented a relatively
small portion of total revenue in the past. Revenues of PBBs
for marketed drugs now represent a significant portion of
total revenue for the first time in the Company's history.
Sales of PBBs for marketed drugs provide an opportunity for
continuing longer-term sales. Moreover, the size of the PBB
orders for marketed drugs can be substantially larger than
those for the discovery or clinical trial stages. While not
subject to the same high cancellation rate faced by
discovery and clinical trial stage drug development
programs, the demand for the approved drugs remains subject
to many uncertainties, including, without limitation, the
drug price, the drug side effects and the existence of other
competing drugs. These factors, which are outside of the
control of the Company, will affect the level of demand for
the drug itself and, therefore, the demand for PBBs. Also,
with the longer-term, larger-scale orders, the Company
expects increased competition to supply these PBBs, and
industry cost pressures can also cause pharmaceutical
companies to investigate alternative manufacturing
processes which may not include PBBs as an intermediate.
Large-scale PBB orders for use in marketed drugs
significantly increases the size and the term of the
Company's current order base. Also, the likelihood of
recurring revenue from reorders can be significantly higher
for PBBs used in marketed drugs. Nevertheless, since the
Company's revenues are composed of PBB sales in all three
drug development stages, and since even sales of PBBs for
marketed drugs are subject to cancellation or reduction, the
Company is likely to continue to experience significant
fluctuations in its quarterly results. Accordingly, the
Company continues to lack a stable baseload of demand and an
ability to predict future demand beyond its current order
base.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of
$10.97 million compared to $8.24 million at March 31, 1998.
The Company's cash and cash equivalents at December 31, 1998
totaled $6.38 million. In addition, the Company had a $1
million bank line of credit of which there was no amount
outstanding at December 31, 1998.
The increase in cash and cash equivalents to $6.38 million
at December 31, 1998 from $4.98 million at March 31, 1998
reflected the higher level of sales for the period. The
increase in accounts receivable to $2.36 million at December
31, 1998 from $1.47 million at March 31, 1998 reflected the
higher level of sales during the quarter. The increase of
inventory to $3.48 million at December 31, 1998 from $3.18
million at March 31, 1998 primarily resulted from restocking
raw materials and the timing of production projects in work-
in-process inventory.
The Company had approximately $1.65 million of capital
expenditures for the nine months of fiscal 1999.
Approximately $550,000 was spent for equipment and equipment
upgrades in the existing plant and $1.10 million was spent
for the second phase of the new plant expansion. The
Company anticipates total capital expenditures for fiscal
1999 for the existing plant to be $800,000 and for the
second phase of the new plant expansion to be $2.60 million
for a total of $3.40 million Although the Company expects
to be able to finance these capital expenditures from
internal cash flow, it is also considering whether bank or
similar financing would be preferable.
YEAR 2000
The Year 2000 ("Y2K") issue arose as the result of existing
computer programs that use only the last two digits to refer
to a year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected,
many computer applications could fail or create erroneous
results.
The Company has established a Y2K team consisting of its
Chief Financial Officer and associates from the Finance and
Administration, and Manufacturing Groups. The team has
completed its assessment of the Company's information
systems which support business applications. The Company
utilizes packaged application strategies for these
information systems functions. The Company believes that
these information system components are current with all Y2K
updates and changes recommended by the vendors, except for
its manufacturing/accounting software package, a facility
maintenance software package and an electronic data
interface. The Company intends to install a Y2K compliant
upgrade for the manufacturing/accounting software no later
than the end of fiscal 1999 and for the facility maintenance
software and the electronic data exchange during the summer
of 1999. These information systems include enterprise
software, operating systems, networking components,
application and data servers, PC hardware and core office
automation software. The Company's assessment of research
and development, manufacturing processes and facility
management systems is underway and is expected to be
completed by the end of fiscal 1999. Based on current
information, the Company believes that it will be able to
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
complete any Y2K compliant upgrades or replacements associated
with research and development, manufacturing processes or
facility management systems by the summer of 1999.
The Company has begun a Y2K supplier and customer assessment
program. It is in the process of contacting key suppliers
and customers by questionnaire to determine the level of
their Y2K readiness. This assessment program is in its
early stages and does not have a return rate useful for
determining their level of Y2K readiness.
The Company's information technology budget for fiscal 1999
is $102,000, of which approximately 33% is allocated for the
Company's Y2K program. These expenses will be paid out of
revenues from operations. In fiscal 1999, the Company has
already spent $9,000 and anticipates spending an additional
$10,000 for computer hardware and software Y2K compliant
upgrades or replacements. In addition, the Company is
currently considering hiring a consultant to assist the
Company in running Y2K compliance tests and the Company has
budgeted $15,000 for this effort.
Like all businesses, the Company will be at risk from
external infrastructure failures that could arise from Y2K
failures. It is not clear that electrical power, telephone
and computer networks, for example, will be fully functional
across the nation in the year 2000. Investigation and
assessment of infrastructures, like the nations' power grid,
is beyond the scope and resources of the Company. Investors
should use their own awareness of the issues in the nations'
infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's
performance.
It should also be noted that there have been predictions of
failures of key components in the transportation
infrastructure due to the Y2K problem. It is possible that
there could be delays in rail, over-the-road and air
shipments due to failure in transportation control systems.
Investigation and validation of the world's transportation
infrastructure is beyond the scope and the resources of the
Company. Investors should use their own awareness of the
issues in the nations' infrastructure to make ongoing
infrastructure risk assessments and their potential impact
to a company's performance.
The failure to correct a material Y2K problem could result
in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could
materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Y2K problem, resulting
in part from the uncertainty of the Y2K readiness of third-
party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Y2K
failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company's efforts to help ensure Y2K preparedness are
expected to significantly reduce the Company's level of
uncertainty about the Y2K problem. The Company believes
that, with completion of the above-mentioned system upgrades
and testing, the possibility of significant interruptions of
normal operations should be reduced.
The Company has not developed any worst-case scenarios or
contingency plans in regard to its internal systems,
supplier/customer issues or any of the more global
infrastructure issues. The Company is considering whether,
and to what extent, to develop such scenarios or plans and
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
expects to have made a decision no later than the end of
fiscal 1999.
This Form 10-Q includes "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934).
Investors are cautioned that forward-looking statements
involve risks and uncertainties, and various factors could
cause actual results to differ materially from those
in the forward-looking statements.Forward-looking statements
include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe,"
"anticipate," "expect," "estimate," "project," "will be,"
"will continue," "will likely result," or words or phrases
of similar meanings. The following factors, among others,
could cause actual results to differ from those indicated in
the forward-looking statements: the uncertain market for
products, customer concentration, potential quarterly
revenue fluctuations, the impact of competitive products
and pricing, the impact of government regulation, product
liability risks, technological change and increased costs
associated with the Company's facility expansions.
Investors are directed to the Company's filings with the
Securities and Exchange Commission, including the Company's
Form 10-K for the fiscal year ended March 31, 1998,
which are available from the Company without charge, for a
further description of the risks and uncertainties related
to forward-looking statements made by the Company as well as
to other aspects of the Company's business.
<PAGE> 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Articles of Incorporation
3.2* Bylaws
27 Financial Data Schedule
__________________
*Incorporated by reference herein from the Company's
Form 10-KSB for the year ended March 31, 1997.
(b) Reports
No reports on Form 8-K were filed during the quarter.
<PAGE> 17
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, 1999 /s/ M. Sreenivasan
M. Sreenivasan
President & C.E.O.
Date: February 11, 1999 /s/Charles B. Williams
Charles B. Williams
Vice President, Finance
and Administration, C.F.O.,
Chief Accounting Officer
<PAGE>
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<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the December 31, 1998 10-Q Balance Sheets,
Income Statements, and Cash Flow Statements, and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Dec-31-1998
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<ALLOWANCES> 15000
<INVENTORY> 3484000
<CURRENT-ASSETS> 12534000
<PP&E> 10132000
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<CURRENT-LIABILITIES> 1567000
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0
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<SALES> 6047000
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