<PAGE> i
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, 1998
[ ] 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 (Zip Code)
offices)
Registrant's telephone number,
including area code: 541/967-6575
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. [ ]
As of May 22, 1998, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was
approximately $81 million based upon $7.38 per share. Shares
of Common Stock held by each officer and director and by each
person who owns 5% or more of the Common Stock have been
excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of the shares of the Company's Common Stock
outstanding on May 22, 1998 was 14,142,683.
<PAGE> ii
Table of Contents
Page
PART I
Item 1 - Business................................................. 1
Item 2 - Properties............................................... 9
Item 3 - Legal Proceedings........................................ 10
Item 4 - Submission of Matters To a Vote of Security Holders...... 10
PART II
Item 5 - Market Registrant's Common Stock and Related Shareholder
Matters................................................. 10
Item 6 - Selected Financial Data.................................. 11
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 7A- Quantitative and Qualitative Disclosure About Market Risk 18
Item 8 - Financial Statements and Supplementary Data.............. 19
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................... 34
PART III
Item 10- Directors and Executive Officers of the Registrant....... 34
Item 11- Executive Compensation................................... 37
Item 12- Security Ownership of Certain Beneficial Owners and
Management.............................................. 41
Item 13- Certain Relationships and Related Transactions........... 43
PART IV
Item 14- Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 43
Signatures........................................................ 47
<PAGE> 1
PART I
ITEM 1. BUSINESS
This Annual Report contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements and as a
result of the factors set forth in "Factors Affecting Future
Results" and elsewhere in this Report.
GENERAL
Synthetech, Inc., an Oregon corporation (the "Company" or
"Synthetech"), produces Peptide Building Blocks ("PBBs") and
other fine chemicals using a combination of organic chemistry
and biocatalysis.
MARKET OVERVIEW
The market for PBBs is driven by the market for the
synthetically manufactured peptides in which they are
incorporated. The size of this market is a function of the
number of these peptides which are initially screened for use
in pharmaceuticals, the number of these pharmaceuticals which
progress down the path toward registration and, ultimately,
the number which are found to be therapeutically useful. The
size of the market is also a function of the quantities and
varieties of PBBs necessary to produce these pharmaceuticals.
(See "Industry Factors" set forth in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations).
STRATEGY
Synthetech's strategy is to emphasize a commitment to its
customers from the early phases of discovery through clinical
development in order to develop more stable, longer-term,
large-scale orders as the drugs receive regulatory approval.
The receipt of two large-scale orders for marketed drugs in
fiscal 1998 exemplified this strategy. The Company had
supplied PBBs for both of these drugs since their early
clinical development stages.
PRODUCT OVERVIEW
Peptide Building Blocks. Peptides are short chains of
generally less than 50 amino acids and are used primarily in
pharmaceuticals. The production of peptides requires amino
acids which have been chemically modified to enable them to
more easily link with other amino acids in a particular
sequence to form the desired peptide. The Company refers to
these chemically modified amino acids as "Peptide Building
Blocks" or "PBBs." The amino acids which are transformed into
PBBs may be either natural amino acids (that is, amino acids
which occur in nature) or synthetic amino acids (that is,
amino acids which have a side chain that does not occur in
nature), which the Company refers to as "Specialty Amino
Acids."
<PAGE> 2
Synthetech chemically modifies natural amino acids to produce
PBBs. The Company also manufactures synthetic amino acids,
and chemically modifies these synthetic amino acids to produce
PBBs. 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 a wide range of PBB products at the multi-kilogram to
multi-ton scale. Since 1987, the Company has produced over
400 different PBB products.
Other Fine Chemicals. The Company is capable of producing
other fine chemical compounds. These compounds have included
grignard reagents and other fine chemicals conforming to the
customer's confidential specifications. As the Company's core
business in PBBs expanded over the past three years, the
Company stopped actively marketing these products. The
Company has not produced nor received any revenue from these
products since fiscal 1996, when it sold $60,000 of grignard
reagents and other fine chemicals. While the Company is
establishing the additional processing facility to augment its
PBB processing capabilities, the Company might seek other fine
chemical compounds and custom manufacturing opportunities as
appropriate.
_____________________
The Company continues to produce most bulk orders on an as-
ordered basis, although it does carry an inventory of over 300
PBB products. At March 31, 1998, the dollar amount of backlog
orders which the Company believed to be firm was approximately
$11.28 million, all of which the Company expects to ship
during fiscal 1999. This backlog included $7.40 million
attributable to additional production in connection with two
large-scale orders that the Company received in fiscal 1998.
The backlog at March 31, 1997 was $1.32 million. The
variation in backlog between March 1998 and March 1997
underscores the continued variability in the demand for the
Company's PBBs at any given time (See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations").
In January 1990, the Company entered into supply and
technology agreements with Biomeasure Incorporated, a Boston
area biotechnology company and a subsidiary of Groupe
Pharmaceutique Beaufour-Ipsen of France with several synthetic
peptide products under development. Under the supply
agreement, the Company has agreed to supply all of
Biomeasure's requirements for a particular synthetic PBB.
This agreement continues from year to year unless terminated
in writing by one of the parties. The Company and Biomeasure
are also parties to a license agreement giving Biomeasure the
option to receive a license to produce for its own use the PBB
which is the subject of the supply agreement between the
parties. Under this license agreement, Biomeasure must pay
certain royalty amounts based on the amount produced.
<PAGE> 3
MARKETING
The Company markets its products through attendance at trade
shows, listings in biotechnology and chemical industry
directories and advertisements in chemical trade periodicals.
In addition, the Company maintains ongoing relationships with
major pharmaceutical and other companies which it believes
might have a need for its products.
CUSTOMERS
Although the Company has over 250 customers, the Company
expects that a few customers will continue to account for a
significant portion of revenues each year. During fiscal
1998, the Company had five customers which accounted for
57% of the Company's revenues. The Company had two customers
which individually accounted for over 10% of the Company's
revenues. These two multinational pharmaceutical companies
accounted for 23% and 11%, respectively, of the Synthetech's
revenues for fiscal 1998.
For the fiscal years ended March 31, 1998, 1997, and 1996,
sales to overseas customers were $2.85 million, $4.14 million
and $1.78 million, respectively, accounting for approximately
34%, 32%, and 21%, respectively, of the Company's total
revenues. These sales were principally to Europe for fiscal
1998, and to Europe and Japan for fiscal 1997 and 1996.
COMPETITION
Because peptide-based pharmaceuticals are relatively new, the
market in the past for PBBs has been quite small -- with most
sales 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
multi-ton order sizes becoming more prevalent, the Company has
begun to see more competition.
Current competition in 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 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 which are significantly greater than those available to
the Company.
The principal methods of competition in the market for PBBs
and other fine chemicals are quality, customer service and
price. 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
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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
The Company's research and development efforts have focused
principally on process development. During the fiscal years
ended March 31, 1998, 1997, and 1996, the Company's research
and development expenses were $215,000, $211,000, and
$217,000, respectively. These figures, however, do not
completely reflect the Company's research and development
activity since substantial process development efforts have
been associated with initial orders for new products and,
accordingly, have been expensed as cost of sales associated
with the product revenue rather than as a research and
development expense. The Company estimates that its combined
research and development effort (including effort directly
associated with the sale of product) was approximately
$419,000, $346,000, and $364,000 during the fiscal years ended
March 31, 1998, 1997 and 1996, respectively.
EMPLOYEES
As of May 22, 1998, the Company employed 43 individuals, two
of whom were part-time.
REGULATORY MATTERS
As the Company's products are intermediates sold to
pharmaceutical producers, the Company has been generally
unaffected by FDA regulation which is directed at final
products sold to the public. The Company's customers do,
however, typically impose inspection and quality assurance
programs on the Company. These programs involve materials
handling, recordkeeping and other requirements. As some
customers have begun to request the Company to provide
additional processing steps, these programs often include more
extensive requirements. The Company anticipates that the
expenses of complying with such programs will increase in the
future.
The Company's business is also subject to substantial
regulation in the areas of safety, environmental release and
hazardous waste disposal. 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.
As additional and more extensive regulations are being added
in these areas at the federal, state and local levels, the
compliance costs will inevitably continue to increase. The
operation of chemical manufacturing plants 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 an unauthorized release
of such substances to the environment. Also, the Company
generates hazardous and other wastes which are disposed of at
various off-site facilities. The
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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.
The Company maintains property damage insurance, liability
insurance, environmental risk insurance, and product liability
insurance.
PRODUCT LIABILITY
Use of the Company's products in pharmaceuticals and the
subsequent testing, marketing and sale of such pharmaceuticals
involves an inherent risk of product liability. There can be
no assurance that claims for product liability will not be
asserted against the Company or that the Company would 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. Also, the Company maintains an umbrella
liability insurance policy with an additional $4 million of
coverage.
COMPANY BACKGROUND
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 had entered into one
license for this technology, the Company does not expect
additional licensing revenue.
Throughout its development during the 1980s, the Company also
offered contract research services. 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 it prior experience, began to focus on the
production of PBBs and other fine chemicals for customers.
During the 1990s, the Company has emerged as a leading
producer of PBBs in gram, multi-kilo and ton quantities.
FACTORS AFFECTING FUTURE RESULTS
This Annual Report on Form 10-K includes forward-looking
statements (as defined in Section 21E of the Securities
Exchange Act of 1934, as amended). 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. Investors are cautioned that forward-looking
statements
<PAGE> 6
involve risks and uncertainties and various factors could
cause actual results to differ materially from the forward-
looking statements. These risks and uncertainties include,
but are not limited to, the following:
Uncertain Market for Products; Customer Concentration;
and Potential Quarterly Revenue Fluctuations. Historically,
the Company has experienced from time to time 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-based drugs 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-based drug
development, which drugs get selected for clinical trials,
which drugs are approved by the Food and Drug Administration
("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, 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.
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.
Industry Cost Factors. The market for PBBs is dependent
on the market for pharmaceuticals products. The levels of
revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governmental and third
party payors 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 both the United States and elsewhere, sales of
prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third party
payors such as government and private insurance plans. Third
<PAGE> 7
party payors are increasingly challenging the prices charged
for medical products and services. Peptide-based drugs may
not be considered cost effective, and reimbursement may not be
available or sufficient to allow peptide-based 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 which may
not include PBBs.
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-based
pharmaceuticals, particularly those which 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 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.
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 which 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. The Company has obtained environmental risk
insurance.
<PAGE> 8
Potential Regulation. The PBBs produced by the Company
are intermediate ingredients which 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 impose inspection and quality
assurance programs on the Company. These programs involve
materials handling, record keeping and other requirements. As
many of the Company's customers are requiring increased
processing by the Company of its products, the Company expects
these compliance programs to become more extensive. The
Company may not be able to comply with the applicable
requirements or such requirements may require the expenditure
of significant capital.
Product Liability. Use of the Company's products in
pharmaceuticals and the subsequent testing, marketing and sale
of such pharmaceuticals 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. 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 limit
of $1 million. Also, the Company maintains an umbrella
liability insurance policy with an additional $4 million of
coverage.
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.
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 recently completed an additional manufacturing
facility on its site in Albany, Oregon to increase production
capacity. Initially, processing equipment was installed in
two of the six bays. Recently the Company announced its
decision to install processing equipment in two additional
bays. The Company expects that this additional phase will be
completed in calendar 1999. Completion of the second phase at
the new facility could be delayed and the existing facilities
may not have sufficient capacity to meet the demand for the
Company's products, particularly in the event that several of
the peptide-based drugs for which the Company supplies PBBs
simultaneously become commercially successful. A disruption
in the Company's production or distribution could have a
material adverse effect on the Company's financial results.
In addition, the Company may not have sufficient demand to
utilize the additional capacity.
Risks of International Business. Sales to customers
outside the United States accounted for approximately 34% of
the Company's net sales during the fiscal year ended March 31,
1998. The Company expects that international sales will
continue to account for a
<PAGE> 9
significant percentage of net sales. The Company's business
is and will be subject to the risks generally 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 business 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 to other
countries in which the Company's products may be sold or
manufactured.
Year 2000 Compliance. The Company relies on computer
systems and software to operate its business. After review,
the Company believes that its software applications will be
able to appropriately interpret the calendar year 2000 and
subsequent years after certain upgrades are completed during
fiscal 1999. The Company does not expect that the cost of
these upgrades will be material. While the Company does not
believe it to be the case, there is a risk that the Company's
software applications will be unable to appropriately
interpret such years despite the installation of these
upgrades. Significant compliance costs or the failure by the
Company to achieve full Year 2000 compliance could have a
material adverse effect on the Company's business and/or
financial condition. In addition, the Company could be
adversely affected by the failure of others, including without
limitation, vendors, customers, transportation companies and
utility companies, to become fully Year 2000 compliant.
ITEM 2. PROPERTIES
Synthetech's headquarters and production facilities are
located in Albany, Oregon. In 1987, the Company purchased the
Albany, Oregon property which included a 23,000 square foot
facility. This original facility houses production, pilot
plant, laboratory, warehouse and office space. In November
1997, the Company completed the construction of an additional
20,000 square foot production facility on the Albany, Oregon
property.
The completion of this additional two-story production
facility substantially increases the Company's capacity to
produce PBBs and other fine chemicals. This facility has six
production bays. Two of the bays are outfitted with
manufacturing equipment and in production. On May 28, 1998,
the Company announced its decision to outfit two more bays.
The final two bays remain vacant and available for future
expansion.
In the initial construction of the building and the build out
of the first two bays, Synthetech contracted with various
third party providers. The Company issued purchase orders to
such providers with detailed specifications, services to be
provided and the prices to be paid. The Company received
either limited or no written warranties by such third party
providers and, therefore, may be limited in its ability to
pursue remedies in the event that the new building has
problems or other defects in the future. However, the
building has been inspected by the City of Albany to verify
that, as constructed, it meets all applicable building codes,
including ADA, electrical, seismic, fire and hazardous
occupancy. All specifications were reviewed by
<PAGE> 10
an independent third-party engineering firm selected by the
City of Albany prior to approval of various construction
permits.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
Commencing on September 11, 1996, the Company's Common Stock
began trading on the Nasdaq National Market. Prior to that
time, the Common Stock was traded on the Nasdaq SmallCap
Market. The Company's common stock trading symbol is "NZYM."
The following table sets forth the range of high and low sales
prices for the Common Stock for the period on and after
September 11, 1996 and the high and low bid quotations for the
Common Stock prior to September 11, 1996, all as reported by
Nasdaq. The bid quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
<C>
Fiscal Year Ended March 31,
-----------------------------------------
1998 1997
----------------- ---------------------
High Low High Low
First Quarter $9.38 $6.25 $10.75(1) $5.81(1)
Second Quarter 7.88 5.19 8.25(1) 6.38(1)
Third Quarter 6.88 5.25 13.88 6.75
Fourth Quarter 6.38 4.50 13.63 6.88
</TABLE>
___________________________
(1)bid quotation
<PAGE> 11
No dividends on the Company's Common Stock have been paid
since 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 22, 1998 was
approximately 709.
ITEM 6. SELECTED FINANCIAL DATA
The following statements of income data for each of the five
years ended March 31, 1998 and the selected balance sheet data
as of March 31, 1994 through 1998, as set forth below, were
derived from the Company's financial statements audited by
Arthur Andersen LLP. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
<C>
Year Ended March 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENTS OF INCOME DATA:
Revenues $ 8,321 $12,797 $ 8,472 $ 5,357 $ 4,034
Gross Profit 3,001 7,694 4,787 2,759 2,078
Operating Income 1,611 6,248 3,737 1,816 1,263
Net Income $ 1,221 $ 4,112 $ 2,574 $ 1,415 $ 1,164
Basic Net Income Per Share $0.09 $0.30 $0.21 $0.12 $0.10
Diluted Net Income Per Share $0.09 $0.29 $0.19 $0.11 $0.09
March 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Working Capital $ 8,237 $ 9,242 $ 8,157 $ 3,574 $ 4,124
Total Assets 19,364 17,323 10,959 6,661 5,574
Long-Term Debt 166 180 - - 370
Retained Earnings
(Accumulated Deficit) 8,931 7,710 3,598 1,024 (391)
Shareholders' Equity $17,306 $15,797 $10,100 $ 6,259 $ 4,773
</TABLE>
<PAGE> 12
ITEM 7. 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>
Percentage of Revenues
Fiscal Year Ended March 31,
1998 1997 1996
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of Sales 63.9% 39.9% 43.5%
------ ------ ------
Gross Profit 36.1% 60.1% 56.5%
Research and Development 2.6% 1.6% 2.6%
Selling, general and
administrative 14.1% 9.7% 9.8%
------ ------ ------
Operating Income 19.4% 48.8% 44.1%
Other Income 3.7% 3.0% 3.4%
Interest Expense - - -
------ ------ ------
Income Before Income Taxes 23.1% 51.8% 47.5%
Provision for Income Taxes 8.4% 19.7% 17.1%
------ ------ ------
Net Income 14.7% 32.1% 30.4%
====== ====== ======
</TABLE>
Revenues
- --------
Synthetech revenues were $8.32 million, $12.80 million and
$8.47 million in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively, reflecting the unpredictability and potential
for significant revenue fluctuations associated with the
industry environment in which the Company operates. (See
"Industry Factors" below.) The 35% decrease in revenues in
fiscal 1998 as compared to fiscal 1997 and the 51% increase in
revenues in fiscal 1997 as compared to fiscal 1996 primarily
reflected the absence or presence of large-scale orders.
Revenues from large-scale orders were $2.17 million, $8.07
million and $1.97 million for fiscal 1998, fiscal 1997 and
fiscal 1996, respectively. The Company expects that fiscal
1999 revenues will be substantially larger than fiscal 1998.
At March 31, 1998, the Company had a backlog of PBB orders for
delivery in fiscal 1999 of approximately $11.28 million. Of
this amount, $7.40 million was attributable to the unfilled
balance of the two large-scale orders that it received in
fiscal 1998.
<PAGE> 13
While the Company produces PBBs for a number of approved
drugs, the two large-scale orders received in fiscal 1998 were
the first large-scale PBB orders in the Company's history to
be received for use in marketed or "approved" drugs. The
revenue received from large-scale orders in fiscal 1997 and
fiscal 1996 were associated with PBBs sold for use in clinical
trials. PBB sales associated with marketed drugs are much
more likely to provide a longer term, ongoing revenue stream.
The risk that drug production is cancelled is substantially
lower after it is being actively marketed. Of course,
continuation of customer demand for these PBBs remains subject
to various market conditions, including continued market
demand for the drug, competition from other suppliers of PBBs
and potential use of alternative drug manufacturing routes not
involving PBBs. (See "Industry Factors" below.)
The two large-scale orders received in fiscal 1998 exemplify
Synthetech's long-term growth strategy of emphasizing a
commitment to its customers from the early phases of discovery
through clinical development in order to develop more stable,
longer-term large-scale orders as the drugs receive regulatory
approval. The Company had supplied PBBs for both of these
drugs since their early clinical development stages.
With the addition of sales from the two large-scale orders,
the Company estimates that in fiscal 1998 approximately 46% of
the Company's PBB sales went into marketed drugs,
approximately 41% went into drugs in clinical or late pre-
clinical trials and approximately 13% went into drugs at the
R&D or discovery stage. With the unfilled balance of the two
large-scale orders aggregating $7.40 million at the beginning
of fiscal 1999, the Company expects the percentage of fiscal
1999 sales of PBBs to be used in the marketed drug sector to
be equal to or higher than the fiscal 1998 percentage. In
fiscal 1997, the Company estimates that approximately 11% of
the Company's PBB sales went into marketed drugs,
approximately 83% went into drugs in clinical or late pre-
clinical trials and approximately 6% went into drugs at the
R&D or discovery stage. In fiscal 1996, the Company estimates
that approximately 12% of the Company's PBB sales went into
marketed drugs, approximately 80% went into drugs in clinical
or late pre-clinical trials 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 and information to
the extent available from customers.
The revenues during fiscal 1998, fiscal 1997 and fiscal 1996
represented sales of PBBs, the Company's primary product line,
except for $60,000 of sales in fiscal 1996 associated with the
sale of grignard reagents and other fine chemicals.
Gross Profit
- ------------
Gross profit was $3.00 million, $7.70 million and
$4.79 million in fiscal 1998, 1997 and 1996, respectively.
This reflects a 61.0% decrease in gross profit in fiscal 1998
from fiscal 1997, and a 60.7% increase in gross profit in
fiscal 1997 from fiscal 1996. As a percentage of revenues,
gross profits were 36.1%, 60.1% and 56.5% in fiscal 1998, 1997
and 1996, respectively.
<PAGE> 14
Decreased revenues negatively affect gross profit margins.
Product mix (i.e., type and volume of product sold as
individual orders) can also significantly affect gross profit
margins either positively or negatively. The decrease in
gross profit margin in fiscal 1998 from fiscal 1997 reflected
a combination of factors: the decline in revenues resulting
from the absence of large-scale projects until the end of the
third quarter of fiscal 1998; the increased manufacturing
overhead costs as the new plant facility came online in fiscal
1998; costs associated with the start up and early process
development at the new plant facility; and the product mix in
fiscal 1998. The Company anticipates that the gross profit
margin will improve in fiscal 1999 with the anticipated
increase in revenues, although the Company expects to see some
reduction in this margin from fiscal 1996 and fiscal 1997
levels reflecting a higher mix of larger-scale orders.
The increase in the gross profit margin in fiscal 1997 from
fiscal 1996 resulted primarily from the increased level of
revenues and product mix.
The Company expects revenues and product mix to continue to
fluctuate from period to period and cause variation in gross
profit margins.
Operating Expenses
- ------------------
Research and development (R&D) expense increased to $215,000,
or 2.6% of sales, in fiscal 1998, from $211,000, or 1.6% of
sales, in fiscal 1997. R&D expense was $217,000, or 2.6%, in
fiscal 1996. These figures, however, do not completely
reflect the Company's research and development activity since
substantial process development efforts have been associated
with initial orders for new products and, accordingly, have
been expensed as cost of sales associated with the product
revenue rather than as a research and development expense.
The Company estimates that its combined research and
development effort (including effort directly associated with
the sale of product) was approximately $419,000, $346,000 and
$364,000 during the fiscal years ended March 31, 1998, 1997
and 1996, respectively.
Selling, general and administrative (SG&A) expense was $1.18
million, $1.24 million and $833,000 in fiscal 1998, 1997 and
1996, respectively. The decrease in SG&A in fiscal 1998 from
fiscal 1997 primarily reflected the employee bonus reduction
in fiscal 1998 as the staffing level in this area remained
relatively constant. The increase in SG&A in fiscal 1997 from
fiscal 1996 principally reflected the addition of one staff
employee, base salary and bonus increases, and increases in
marketing, director and officer insurance and expenses related
to the Company's move to the Nasdaq National Market. SG&A as
a percentage of sales was 14.1%, 9.7%, and 9.8% for fiscal
1998, 1997 and 1996, respectively.
Operating Income
- ----------------
Operating income was $1.61 million in fiscal 1998, $6.25
million in fiscal 1997 and $3.74 million in fiscal 1996. In
fiscal 1998, Company-wide labor costs (including bonus)
(hereinafter "labor costs") decreased to $1.50 million from
$1.82 million in fiscal 1997. While the Company hired
additional employees during fiscal 1998 in connection with its
plant
<PAGE> 15
expansion, the reduction in the level of bonuses paid during
fiscal 1998 as compared to fiscal 1997 more than offset the
hiring increase, causing the net reduction in labor costs. In
fiscal 1997, labor costs increased nearly 23.9% reflecting
compensation increases and employee additions during the
fiscal year. In fiscal 1996, labor costs increased 28.9%.
Over half of this increase was attributable to compensation
increases and the remainder resulted from an increase in
employee hiring beginning in the second half of fiscal 1995.
As a percentage of revenues, operating income decreased to
19.4% in fiscal 1998 compared to 48.8% in fiscal 1997 and to
44.1% in fiscal 1996. With the operating expense level in
fiscal 1998 and fiscal 1997 being relatively comparable, the
decrease in operating margin in fiscal 1998 as compared to
fiscal 1997 principally reflected the decrease in the gross
profit margin discussed above.
Other Income
- ------------
The $312,000 net other income in fiscal 1998 primarily
resulted from $294,000 of interest earnings and a $25,000
recognized gain from the sale of securities available for
sale. The $385,000 net other income in fiscal 1997 primarily
resulted from $376,000 of interest earnings. The $285,000 net
other income in fiscal 1996 primarily resulted from $242,000
of interest earnings and $43,000 of recognized gain on the
sale of securities available for sale.
Interest expense was $0 in fiscal 1998, $1,000 in fiscal 1997
and $0 in fiscal 1996. Near the end of fiscal 1997, the
Company incurred $194,000 in wastewater system development
charges assessed by the City of Albany in connection with the
Company's plant expansion. This fee plus interest on the
unpaid portion is payable over the next ten years. During
fiscal 1998, the Company paid approximately $17,000 of
interest in connection with the unpaid portion of this fee.
This payment was capitalized as part of the plant expansion.
Beginning in fiscal 1999, the Company's interest payments will
be deducted as an interest expense.
Net Income
- ----------
In fiscal 1998, the Company earned $1.92 million before income
taxes. A provision for income taxes of $702,000 resulted in
net income of $1.22 million. In fiscal 1997, the Company
earned $6.63 million before income taxes. A provision for
income taxes of $2.52 million resulted in net income of
$4.11 million. The reduction in the effective tax rate in
fiscal 1998 compared to fiscal 1997 was a result of a
biennially determined credit from the State of Oregon. In
fiscal 1996, the Company earned $4.02 million before income
taxes. A provision for income taxes of $1.45 million resulted
in net income of $2.57 million. The provision for income
taxes in fiscal 1996 was lower than fiscal 1997 primarily
because it included a biennially determined credit of $132,000
from the State of Oregon.
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
<PAGE> 16
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. In spite of the two large-scale orders received by
the Company in fiscal 1998, 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 represented a relatively small
portion of total revenue. With the two large-scale orders
received in fiscal 1998 for PBBs to be used in marketed drugs,
revenues of PBBs for marketed drugs 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 drug manufacturing processes which may not include
PBBs as an intermediate.
In the past, the Company has felt that it had neither a stable
baseload of demand nor an ability to predict future demand
beyond its current order base. With the advent of the two
large-scale PBB orders for use in marketed drugs, the Company
has significantly increased the size and the term of its
current order base. Also, the likelihood of recurring revenue
from reorders is significantly higher for these two PBBs since
they are 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.
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of
$8.24 million compared to $9.24 million at March 31, 1997, and
$8.16 million at March 31, 1996. The Company's cash and cash
equivalents at March 31, 1998 totaled $4.98 million. The
Company no longer holds securities available for sale after
selling its last holding in fiscal 1998. In addition, the
Company has a $1,000,000 unsecured bank line of credit. As of
March 31, 1998 there was no amount outstanding under the bank
line.
The increase in accounts receivable to $1.47 million at
March 31, 1998, from $695,000 at March 31, 1997, reflected the
higher level of revenues in the fourth quarter of fiscal 1998
compared to the fourth quarter in the prior year. The
increase of inventory to $3.18 million at March 31, 1998, from
$1.89 million at March 31, 1997, primarily resulted from
replenishing lower levels of raw material and finished product
inventory items and the build-up of raw materials and work-in-
process related to the two large-scale orders received in
fiscal 1998. Inventory was $1.92 million at March 31, 1996.
The decrease in accrued compensation to $221,000 at March 31,
1998, from $674,000 at March 31, 1997, primarily reflected the
payment in the first quarter of fiscal 1998 of bonuses accrued
for fiscal 1997.
In November 1997, the Company completed the 20,000 square
foot, two-story new building plant expansion project. In this
initial phase, the Company completed the building structure
and built out two of the six production bays. The overall
engineering, construction and equipment costs for this project
spanning 1 1/2 years were approximately $8.23 million. On
May 28, 1998, the Company announced that its Board of
Directors had approved a $5 million second phase expansion to
outfit two more bays of the new plant with four additional
multipurpose reactor systems. The Company is currently
operating three production shifts, five days a week. During
fiscal 1998, the Company's capital costs were approximately
$4.09 million, $3.48 million of which were for the plant
expansion and $614,000 for the existing plant and equipment.
In addition to the $5 million second-phase plant expansion
described above, the Company currently anticipates installing
up to $1 million of additional capital upgrades for the
original facility during fiscal 1999. The Company expects to
finance these capital expenditures from operating cash flow
and reserves and does not anticipate a need for any new debt
or equity financing.
The Company owns its facility and all of its equipment. See
Note D to Financial Statements for a description of the
Company's property, plant and equipment.
The Company has assessed the impact of the Year 2000 issue
and has determined that costs to upgrade its information and
operating systems are not expected to be material.
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not applicable.
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Report of Independent Public Accountants for the years
ended March 31, 1998, 1997 and 1996........................ 20
Financial Statements:
Balance Sheets as of March 31, 1998 and
1997................................................... 21
Statements of Income for the years ended March 31,
1998, 1997 and 1996.................................... 23
Statements of Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996.......................... 24
Statements of Cash Flows for the years ended March 31,
1998, 1997, and 1996................................... 25
Notes to Financial Statements:
Note A - General and Business............................ 26
Note B - Summary of Significant Accounting Policies...... 26
Note C - Inventories..................................... 28
Note D - Property, Plant and Equipment................... 28
Note E - Income Taxes.................................... 29
Note F - Line of Credit.................................. 29
Note G - Note Payable.................................... 30
Note H - Shareholders' Equity............................ 30
Note I - 401(k) Profit Sharing Plan...................... 33
Note J - Segment Information............................. 33
<PAGE> 20
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, 1998 and 1997,
and the related statements of income, shareholders' equity and
cash flows for each of the three years in the period ended
March 31, 1998. 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 generally accepted
auditing standards. 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, 1998 and 1997,
and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
May 14, 1998
<PAGE> 21
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
BALANCE SHEETS
--------------
At March 31 1998 1997
- ------------ ---- ----
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,976,000 $ 6,740,000
Securities available for sale - 176,000
Accounts receivable, less allowance
for doubtful accounts of $15,000
for 1998 and 1997 1,470,000 695,000
Inventories 3,184,000 1,887,000
Prepaid expenses 196,000 164,000
Income tax receivable - 798,000
Deferred income taxes 70,000 56,000
Other current assets 24,000 4,000
----------- -----------
TOTAL CURRENT ASSETS 9,920,000 10,520,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 9,439,000 6,339,000
SECURITIES AVAILABLE FOR SALE - 450,000
OTHER ASSETS 5,000 14,000
----------- -----------
TOTAL ASSETS $ 19,364,000 $ 17,323,000
============ ============
See Notes To Financial Statements
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C>
SYNTHETECH, INC.
BALANCE SHEETS
--------------
(continued)
At March 31 1998 1997
- ----------- ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 14,000 $ 13,000
Accounts payable 672,000 543,000
Accrued compensation 221,000 674,000
Deferred revenue 247,000 44,000
Accrued income tax 514,000 -
Other accrued liabilities 15,000 4,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,683,000 1,278,000
DEFERRED INCOME TAXES 209,000 68,000
NOTE PAYABLE, net of current portion 166,000 180,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized 100,000,000 shares;
issued and outstanding,
14,143,000 and 13,860,000 shares 14,000 14,000
Paid-in capital 8,467,000 8,296,000
Employee notes receivable and
deferred compensation (106,000) (239,000)
Unrealized gain on securities
available for sale - 16,000
Retained earnings 8,931,000 7,710,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 17,306,000 15,797,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 19,364,000 $ 17,323,000
============ ============
See Notes To Financial Statements.
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------
For The Year Ended March 31 1998 1997 1996
- --------------------------- ----------- ----------- ------------
REVENUES $ 8,321,000 $ 12,797,000 $ 8,472,000
COST OF SALES 5,320,000 5,103,000 3,685,000
------------- ------------ -------------
GROSS PROFIT 3,001,000 7,694,000 4,787,000
------------- ------------ -------------
Research and development 215,000 211,000 217,000
Selling, general and
administrative 1,175,000 1,235,000 833,000
------------- ------------ -------------
OPERATING EXPENSE 1,390,000 1,446,000 1,050,000
------------- ------------ -------------
OPERATING INCOME 1,611,000 6,248,000 3,737,000
OTHER INCOME 312,000 385,000 285,000
INTEREST EXPENSE - 1,000 -
------------- ------------ -------------
INCOME BEFORE INCOME TAXES 1,923,000 6,632,000 4,022,000
PROVISION FOR INCOME TAXES 702,000 2,520,000 1,448,000
------------- ------------ -------------
NET INCOME $ 1,221,000 $ 4,112,000 $ 2,574,000
============= ============= =============
BASIC NET INCOME PER SHARE $0.09 $0.30 $0.21
===== ===== =====
DILUTED NET INCOME PER SHARE $0.09 $0.29 $0.19
===== ===== =====
See Notes To Financial Statements.
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SYNTHETECH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
UNREALIZED
EMPLOYEE GAIN
NOTES (LOSS) ON
COMMON STOCK RECEIVABLE SECURITIES
----------------- PAID-IN & DEFERRED AVAILABLE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION FOR SALE EARNINGS
------ ------ ------- ------------ ---------- -----------
BALANCE, March 31, 1995 12,054,000 $12,000 $5,196,000 $ - $27,000 $1,024,000
Issuance of stock for the exercise of
stock options 421,000 - 255,000 - - -
Issuance of stock for the exercise of
stock warrant 1,000,000 1,000 992,000 - - -
Issuance of below-market stock options - - 70,000 (70,000) - -
Amortization of deferred compensation - - - 20,000 - -
Employee notes receivable - - - (80,000) - -
Income tax benefit of disqualifying
dispositions - - 76,000 - - -
Unrealized gain on securities
available for sale - - - - 3,000 -
Net income - - - - - 2,574,000
---------- ------ --------- --------- ------ ---------
BALANCE, March 31, 1996 13,475,000 13,000 6,589,000 (130,000) 30,000 3,598,000
Issuance of stock for the exercise of
stock options 260,000 1,000 322,000 - - -
Issuance of stock for the exercise of
stock warrants 125,000 - 228,000 - - -
Issuance of below-market stock options - - 284,000 (284,000) - -
Amortization of deferred compensation - - - 125,000 - -
Payment on employee note receivable - - - 50,000 - -
Income tax benefit of exercise of stock
warrants - - 216,000 - - -
Income tax benefit of disqualifying
dispositions - - 657,000 - - -
Unrealized loss on securities
available for sale - - - - (14,000) -
Net income - - - - - 4,112,000
---------- ------ --------- --------- ------ ---------
BALANCE, March 31, 1997 13,860,000 14,000 8,296,000 (239,000) 16,000 7,710,000
Issuance of stock for the exercise of
stock options 283,000 - 280,000 - - -
Issuance of below-market stock options - - 21,000 (21,000) - -
Amortization of deferred compensation - - - 124,000 - -
Payment on employee note receivable - - - 30,000 - -
Revision on estimate ofincome tax
benefit on disqualifying dispositions - - (207,000) - - -
Income tax benefit of disqualifying
dispositions - - 40,000 - - -
Income tax benefit of non-qualified
option exercises - - 37,000 - - -
Realized gain on securities available
for sale - - - - (16,000) -
Net income - - - - - 1,221,000
---------- ------- ---------- ---------- --------- ----------
BALANCE, March 31, 1998 14,143,000 $14,000 $8,467,000 ($106,000) $ - $8,931,000
========== ======= ========== ========== ======== ==========
See Notes To Financial Statements
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
------------------------
For The Year Ended March 31 1998 1997 1996
- --------------------------- -------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,221,000 $ 4,112,000 $ 2,574,000
Adjustments to reconcile net income to
net cash provided by (used by) operating
activities:
Depreciation, amortization and other 1,009,000 268,000 205,000
Amortization of deferred compensation 108,000 105,000 20,000
Accrued interest on securities
available for sale - 9,000 13,000
Loss on disposal of property, plant and
equipment 5,000 - -
Realized gain on securities available
for sale (25,000) (10,000) (43,000)
Deferred income taxes 127,000 61,000 (16,000)
(Increase) decrease in assets:
Accounts receivable, net (775,000) 660,000 (515,000)
Inventories (1,297,000) 37,000 (343,000)
Prepaid expenses (32,000) (93,000) (17,000)
Income tax receivable 798,000 (646,000) (152,000)
Other assets (20,000) (1,000) 6,000
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 201,000 470,000 355,000
Deferred revenue 203,000 (54,000) 98,000
---------- --------- ---------
Net cash provided by operating activities 1,523,000 4,918,000 2,185,000
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (4,089,000) (5,079,000) (461,000)
Proceeds from sale of securities
available for sale and redemption of
securities available for sale 635,000 380,000 882,000
Employee notes receivable 30,000 50,000 (80,000)
---------- --------- ---------
Net cash provided by (used by) investing
activities (3,424,000) (4,649,000) 341,000
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
obligations (13,000) (1,000) -
Proceeds from stock option exercises and
disqualifying dispositions 150,000 979,000 331,000
Proceeds from stock warrant exercises,
including tax benefit - 444,000 993,000
---------- ---------- ----------
Net cash provided by financing activities 137,000 1,422,000 1,324,000
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,764,000) 1,691,000 3,850,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 6,740,000 5,049,000 1,199,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,976,000 $ 6,740,000 $ 5,049,000
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities
available for sale - ($14,000) $ 3,000
Issuance of stock options at below
fair value $ 21,000 $ 284,000 $ 70,000
Issuance of note payable for capital
improvement - $ 194,000 -
See Notes To Financial Statements.
</TABLE>
<PAGE> 26
SYNTHETECH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A. GENERAL AND BUSINESS
Synthetech, Inc., an Oregon corporation, produces
specialty amino acids and other fine chemicals using
a combination of organic chemistry and biocatalysis.
The Company's primary product emphasis is on
specialty amino acids referred to as Peptide
Building Blocks which are sold domestically and
internationally to companies developing peptide-
based pharmaceuticals.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial
statements in conformity with generally accepted
accounting principles 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.
Cash and Cash Equivalents: Cash and cash
equivalents include demand cash and all investments
purchased with an original maturity of three months
or less.
Securities Available for Sale: In February 1998,
the Company sold the last of its securities
available for sale. Accordingly, there are no
securities available for sale as of March 31, 1998,
and all investments as of March 31, 1997 have been
reflected as securities available for sale. Any
unrealized gains or losses have been reflected as a
separate component of shareholders' equity in
accordance with SFAS 115.
At March 31, 1997, securities available for sale
consisted of government obligations which were due
to mature during 1998 and 1999. The Company
determined cost basis in its investments using the
specific identification method. As of March 31,
1997, the difference between the fair market value
and cost of the Company's investments was
insignificant.
Property, Plant and Equipment: Property, plant and
equipment are recorded at cost. Depreciation and
amortization are provided on the straight-line
method over seven to forty years for buildings and
land improvements, and five to seven years on all
other property. When property is sold or retired,
the cost and accumulated depreciation reserves are
removed from the accounts and the resulting gain or
loss is included in income.
Revenue Recognition: Sales of products are
recognized when products are shipped.
<PAGE> 27
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs: Research and
development costs are expensed as incurred.
Other Assets: Other assets primarily represent
patent costs, which are amortized over the useful
life of the patent.
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>
1998 1997 1996
---- ---- ----
Weighted average shares outstanding
for basic EPS 13,921,164 13,659,927 12,255,635
Dilutive effect of Common stock
options and warrants issuable under
treasury stock method 149,809 457,114 1,264,549
---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding
for diluted EPS 14,070,973 14,117,041 13,520,184
========== ========== ==========
</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>
1998 1997 1996
---- ---- ----
Common stock options outstanding 482,300 - -
</TABLE>
<PAGE> 28
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental cash flow disclosures are as follows:
Cash Paid During The Year For:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Income Taxes $419,000 $2,232,000 $1,586,000
Interest $ 17,000 $ 1,000 $ -
</TABLE>
NOTE C. 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 include
labor, material, and manufacturing overhead.
The major components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
1998 1997
---- ----
Finished products $1,009,000 $ 779,000
Work-in-process 1,033,000 440,000
Raw materials 1,142,000 668,000
---------- ----------
$3,184,000 $1,887,000
========== ==========
</TABLE>
NOTE D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
---------
1998 1997
---- ----
Land $ 91,000 $ 91,000
Buildings 4,340,000 658,000
Machinery and equipment 6,277,000 1,561,000
Laboratory equipment 338,000 286,000
Furniture and fixtures 176,000 161,000
Vehicles 84,000 26,000
Construction in progress 468,000 4,977,000
---------- ----------
11,774,000 7,760,000
Less:
Accumulated depreciation 2,335,000 1,421,000
----------- -----------
$ 9,439,000 $ 6,339,000
=========== ===========
</TABLE>
<PAGE> 29
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 which those temporary
differences are expected to be recovered or settled.
The provision for income taxes in fiscal 1998 and
fiscal 1997 included a deferred tax provision of
$127,000 and $61,000, respectively. The provision
for income taxes in fiscal 1996 includes a deferred
tax benefit of $16,000.
Total deferred tax assets and liabilities at March
31, 1998 were $70,000 and $209,000, respectively.
Individually significant differences included
book/tax depreciation differences which were
recorded as a deferred tax liability of $209,000.
Total deferred tax assets and liabilities at March
31, 1997, were $56,000 and $68,000, respectively.
There were no individually significant temporary
differences at March 31, 1997.
The reconciliation between the effective tax rate
and the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes 2.5% 4.4% 2.0%
Foreign sales corporation
benefit (1.5)% (1.5)% -
Other 1.5% 1.1% -
----- ----- -----
Effective tax rate 36.5% 38.0% 36.0%
===== ===== =====
</TABLE>
NOTE F. LINE OF CREDIT
The Company has a line of credit available with a
bank in the amount of $1 million with an applicable
interest rate of 8.5% at March 31, 1998. There were
no amounts outstanding under this loan at the end of
the fiscal year. This line of credit is renewable
on an annual basis.
<PAGE> 30
NOTE G. NOTE PAYABLE
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% and is due in monthly installments of $2,459
through February 2007. The note is secured by the
recently completed plant expansion building.
NOTE H. SHAREHOLDERS' EQUITY
On March 27, 1996, JB Partners exercised the warrant
purchased as part of a stock and warrant sale in
1991. The exercise price of the 5-year,
nontransferable warrant was $1.00 per share and the
net proceeds to the Company were $993,000.
On September 17 and 19, 1996, the Emanuel and
Company warrant authorized by the Board of Directors
on February 5, 1992 was exercised. The exercise
price of the 5-year warrant for 100,000 shares was
$2.22 per share. On December 19, 1996, Mr. Page
Golsan, III exercised the warrant authorized by the
Board of Directors on January 7, 1992. The exercise
price of the 5-year warrant for 25,000 shares was
$1.81 per share. The net proceeds of these warrant
exercises was $228,000. As of March 31, 1997, there
were no stock warrants outstanding.
During 1995, the Financial Accounting Standards
Board issued SFAS 123 which defines a fair value
based method of accounting for an employee stock
option or similar equity instrument and encourages
all entities to adopt that method of accounting for
all of their employee stock compensation plans.
However, it also allows an entity to continue to
measure compensation cost for those plans using the
method of accounting prescribed in APB 25. Entities
electing to remain with the accounting in APB 25
must make pro forma disclosures of net income and,
if presented, earnings per share, as if the fair
value based method of accounting defined in the
Statement had been applied.
<PAGE> 31
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has elected to account for its stock-
based compensation plan under APB 25. However, the
Company has computed, for pro forma disclosure
purposes, the value of all options granted during
fiscal 1998, fiscal 1997 and fiscal 1996 using the
Black-Scholes option-pricing model as prescribed by
SFAS 123, using the following weighted average
assumptions for grants in fiscal 1998, fiscal 1997
and fiscal 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Year 1998 1997 1996
----------- ---- ---- ----
Risk-free interest rate 6.49% 6.49% 6.26%
Expected dividend yield 0% 0% 0%
Expected life 3.60 years 3.89 years 3.89 years
Expected volatility 57% 49-50% 49-67%
</TABLE>
The total value of options granted during fiscal
1998, fiscal 1997 and fiscal 1996 would be amortized
on a pro forma basis over the vesting period of the
options. Options generally vest equally over two
years. If the Company had accounted for these
options in accordance with SFAS 123, the Company's
net income and net income per share would have
decreased as reflected in the following pro forma
amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended March 31,
1998 1997 1996
---- ---- ----
Net income:
As reported $1,221,000 $4,112,000 $2,574,000
Pro forma 214,000 3,461,000 2,390,000
Basic net income per share:
As reported $0.09 $0.30 $0.21
Pro forma $0.02 $0.25 $0.20
Diluted net income per share:
As reported $0.09 $0.29 $0.19
Pro Forma $0.02 $0.25 $0.18
</TABLE>
Using the Black-Scholes methodology, the total value
of options granted during fiscal 1998, fiscal 1997
and fiscal 1996 was $873,000, $1,375,000 and
$465,000, respectively, which would be amortized on
a pro forma basis over the vesting period of the
options (generally two years). The weighted average
fair value of options granted during fiscal 1998,
fiscal 1997 and fiscal 1996 was $3.45, $4.17 and
$1.73, respectively.
<PAGE> 32
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
Under the Amended and Restated 1990 Stock Option
Plan 1,600,000 shares were authorized for issuance.
A total of 1,491,160 options were granted under this
plan. A total of 1,233,950 options have been
exercised and 55,110 options have been cancelled as
of March 31, 1998 under the plan since its
inception. The options granted under this plan vest
over a two year period from the beginning of the
fiscal year in which the options are granted and a
maximum term of 5 years.
The 1995 Incentive Compensation Plan authorized
902,000 shares of the Company's stock to be issued.
This plan is the successor to the Amended and
Restated 1990 Stock Option Plan. No further grants
will be made under the original plan. A total of
602,000 options have been granted under this plan.
A total of 7,000 options have been exercised and
47,700 options have been cancelled as of March 31,
1998 under the plan since its inception. The options
granted under this plan generally vest over a two
year period from the beginning of the fiscal year in
which the options are granted. However, to a lesser
extent, some options vest from 50% after one year of
employment and 100% after 2 years of employment, and
some options vest in less than a year and others up
to five years. Options granted under this plan have
a maximum term of 10 years. The 1995 Incentive
Compensation Plan was amended in November 1996 to
permit granting of non-qualified options to
directors who are not employees of the Company.
Activity under the Amended and Restated 1990 Stock
Option Plan and 1995 Incentive Compensation Plans
over the last two fiscal years is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year ended March 31, 1998 1997
-------------------- -------------------- ---------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
------- --------- ------ ---------
Options outstanding at
beginning of year 913,810 $4.06 871,960 $2.02
Granted 253,000 $7.05 330,000 $7.40
Exercised (373,710) $2.04 (275,950) $1.58
Cancelled (43,700) $8.02 (12,200) $4.70
--------- ----- --------- -----
Options outstanding at
end of year 749,400 $5.85 913,810 $4.06
======== ===== ======== =====
Exercisable at end
of year 381,183 $4.48 484,010 $2.08
Weighted average fair value
of options granted at market
value - $3.41 - $3.78
Weighted average fair value
of options granted at below
market value - $7.02 - $5.86
</TABLE>
<PAGE> 33
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth the exercise price
range, number of shares outstanding at March 31,
1998, weighted average remaining contractual life,
weighted average exercise price, number of
exercisable shares and weighted average exercise
price of exercisable options by groups of similar
price and grant date:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Wtd. Avg.
Exercise Outstanding Remaining Wtd. Avg. Wtd. Avg.
Price Shares Contractual Exercise Exercisable Exercise
Range at 3/31/98 Life (Years) Price Options Price
- -------- ----------- ------------ --------- ----------- ----------
$0.30-$0.51 15,000 7.90 $0.49 12,000 $0.42
$1.72-$1.81 50,000 8.58 $1.81 33,333 $1.81
$2.22-$2.84 202,100 1.11 $2.67 202,100 $2.67
$7.13-$8.50 482,300 8.76 $7.77 133,750 $8.25
</TABLE>
NOTE I. 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. Beginning in April 1996, the Company
amended the plan to change the matching contribution
to $.50, $.75 and $1.00 for each $1.00 contributed
up to 10% of compensation corresponding to length of
service with the Company. Prior to this amendment
the Company matching contribution was $.50 for each
$1.00 contributed by each employee up to 10% of
compensation. The Company contribution becomes fully
vested for each employee after 5 years of
employment. The Company matching contribution for
fiscal years 1998, 1997, and 1996 was $46,000,
$77,000 and $42,000, respectively.
NOTE J. SEGMENT INFORMATION
Significant Customers: During fiscal year 1998, two
customers accounted for 23% and 11% of revenues.
During fiscal year 1997, two customers accounted for
30% and 29% of revenues. During fiscal year 1996,
two customers accounted for 23% and 11% of revenues.
The following table reflects foreign sales and
percent of total sales by country:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------- ------------------ -----------------
Europe $2,606,000 31.3% $1,262,000 9.9% $1,252,000 14.8%
Japan $ 205,000 2.5% $2,880,000 22.5% $ 528,000 6.2%
</TABLE>
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The following table sets forth certain information concerning the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position
---- --- --------
M. ("Sreeni") Sreenivasan 49 President, Chief Executive
Officer and Director
Philip L. Knutson* 48 Vice President of Research
and Development
Charles B. Williams 51 Vice President of Finance
and Administration, Chief
Financial Officer,
Secretary and Treasurer and
Director
Jay A. Bouwens 52 Vice President of
Manufacturing
Paul C. Ahrens 46 Chairman of the Board
Howard L. Farkas 74 Director
Edward M. Giles 62 Director
Page E. Golsan, III 60 Director
Donald E. Kuhla, Ph.D. 55 Director
</TABLE>
_______________
* Dr. Knutson resigned his position with the Company
effective May 8, 1998.
The following is a brief account of the business experience of
each executive officer and director of the Company.
M. "Sreeni" Sreenivasan. Mr. Sreenivasan has served as President
and Chief Executive Officer since March 31, 1995 and as Chief
Operating Officer from 1990 through March 31, 1995. Mr.
Sreenivasan has also served as a director 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.
<PAGE> 35
Philip L. Knutson, Ph.D. Dr. Knutson resigned his position with
the Company effective May 8, 1998 after serving as Vice President
of Research and Development since 1988. Dr. Knutson was
responsible for process development, "kilo lab" production and
production support. From 1986 to 1988, he was a Senior Research
Chemist with the Company. Prior thereto, Dr. Knutson was a
Senior Research Chemist at Ash Stevens, Inc. in Detroit, Michigan
for 7 years. He received his B.A. degree from Luther College,
Decorah, Iowa and his M.A. and Ph.D. in Organic Chemistry from
the University of Missouri - Columbia.
Charles B. Williams. Mr. Williams has served as Vice President
of Finance and Administration and Treasurer since 1990. In 1995,
he became the Secretary of the Company and in July 1995, he also
became Chief Financial Officer. Mr. Williams has also served as
a director since July, 1997. Mr. Williams is responsible for
accounting, administration, finance, personnel and information
systems. From 1988 to 1990, Mr. Williams served as the
Controller. Prior thereto, he was Controller for White's
Electronics, Inc. of Sweet Home, Oregon for 5 years. His
responsibilities at White's Electronics included accounting, data
processing, personnel and finance. From 1976 to 1983, he held
several accounting and financial positions with Teledyne Wah
Chang, a metals producer in Albany, Oregon. Mr. Williams earned
his B.S. in Economics and M.B.A. from Oregon State University.
Jay A. Bouwens. Mr. Bouwens has served as Vice President of
Manufacturing since 1996. From 1994 to 1996, he was director of
Manufacturing with the Company. From 1992 to 1994, Mr. Bouwens
was the Pilot Plant Manager at Ash Stevens, Inc. in Detroit,
Michigan. From 1990 to 1992 he was Production Manager for Poly
Organix in Newburyport, Massachusetts. From 1967 to 1990 he held
various chemical manufacturing positions, including Process
Manager for Wyeth-Ayerst laboratories in Rouses Point, New York.
Mr. Bouwens received his B.S. in Chemistry from the University of
Michigan.
Paul C. Ahrens. Mr. Ahrens has been a director of the Company
since its inception in 1981 and became Chairman of the Board
effective March 31, 1995. Since 1996, he has been the founder
and President of Groovie Moovies, Ltd., a film production
company. Mr. Ahrens, a founder of the Company, served as
President and Chief Executive Officer of Synthetech from 1989
through March 1995. From 1981 through 1989 he was the Vice
President of Technology. He also served as Secretary of the
Company from 1981 through 1995. From 1979 to 1980, Mr. Ahrens
served as Vice President of Engineering of Colorado Organic
Chemical Company, an organic chemical manufacturing company
located in Commerce City, Colorado. Prior thereto, Mr. Ahrens
spent five years with Allied Chemical and CIBA-Geigy in various
engineering and research capacities. Mr. Ahrens holds B.S. and
M.S. degrees in Chemical Engineering from M.I.T.
Howard L. Farkas. Mr. Farkas has served as a director of the
Company since 1985. Since 1981, he has been the President of
Farkas Group, Inc., and since 1992 he has been President of
Windsor Gardens Realty, Inc., both of which are engaged in
general real estate brokerage and management activities. From
1984 to 1996, he was also the managing director in Manistee Gas
Limited Liability Company, which is in the gas production and
processing business. Mr. Farkas serves as Secretary and a
director of Acquisition Industries, Inc., a publicly owned
acquisition and merger company. Mr. Farkas serves as the
Chairman of the Board of Logic Devices, Inc., a Sunnyvale,
California company specializing in CMOS digital signal process
semiconductor and SRAM chips.
<PAGE> 36
Since May 1988, Mr. Farkas has also been a vice president of
G.A.S. Corp., which is a general partner of an Oklahoma limited
partnership, Gas Acquisition Services, which filed for bankruptcy
under Chapter 11. In September 1992, Mr. Farkas filed for
personal protection under Chapter 7 of the federal bankruptcy
laws and the court subsequently entered an order discharging his
debts. Though not presently in public or private practice, he
has been a certified public accountant since 1951. Mr. Farkas
received a B.S. (B.A.) from the University of Denver.
Edward M. Giles. Mr. Giles has served as a director since July,
1997. Mr. Giles has served as Chairman and President of The
Vertical Group, Inc., a venture capital investment firm, since
January 1989. Mr. Giles was previously President of F. Eberstadt
& Co., Inc., a securities firm, and Vice Chairman of Peter B.
Cannell & Co., Inc., an investment management firm. He is
currently a director of McWhorter Technologies, Inc. and Ventana
Medical Systems, Inc. Mr. Giles received a B.S.Ch.E. in Chemical
Engineering from Princeton University and an M.S. in Industrial
Management from the Massachusetts Institute of Technology.
Page E. Golsan, III. Mr. Golsan has served as a director of the
Company since 1991. Since 1986, he has been a principal of P.E.
Golsan & Co. (formerly Golsan Management Company), a private
capital management firm. From 1990 to 1992, Mr. Golsan was a
senior advisor with Bane Barham & Holloway, registered investment
advisors under the Investment Advisor Act of 1940. Since 1990
Mr. Golsan has been President and Chief Executive Officer of
Bridgetown Capital, Inc., an investment company. From 1987 to
1989 he was the Executive Vice President of Calumet Industries,
Inc., Chicago, Illinois (manufacturer and marketer of petro-
chemicals and other fine chemicals). Prior to 1987, he was the
President and Chief Operating Officer of the K&W Products
Division (specialty chemical manufacturing) of Berkshire
Hathaway, Inc. Mr. Golsan holds an M.A. in Finance from Claremont
Graduate School of Business and a Doctorate in Pharmacy and a
B.A. in Chemistry and Zoology, both from the University of
Southern California.
Donald E. Kuhla, Ph.D. Dr. Kuhla has served as a director since
July, 1997. Since 1994, he has been Vice President and Chief
Technical Officer of Plexus Ventures, Inc., a biotech consulting
and investment firm. From 1990 to 1994, Dr. Kuhla held senior
management positions with two venture capital backed,
biotechnology start-up companies. Previously, he was in research
and development and operations management positions with Pfizer
Inc. and Rorer Group, Inc., his last position at Rorer being
Senior Vice President of Operations. Dr. Kuhla is a director of
NPS Pharmaceuticals, Inc. (a biotechnology drug discovery and
development company). Dr. Kuhla received a B.A. in Chemistry
from New York University and a Ph.D. in Organic Chemistry from
Ohio State University.
Schedule 16(a) Beneficial Ownership Reporting Compliance
- --------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership on Form 3 and changes in
ownership on Form 4 or Form 5 with the Securities and Exchange
Commission ("SEC"). Such officers,
<PAGE> 37
directors and 10% shareholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received
by it, or written representations from certain reporting persons,
the Company believes that, during the fiscal year ended March 31,
1998, all Section 16(a) filing requirements applicable to its
officers, directors and 10% shareholders were complied with,
except for the following late filings: one Form 4 filed by
Mr. Ahrens with regard to one transaction, one Form 4 filed by
Mr. Sreenivasan with regard to one transaction and one Form 4
filed by Mr. Williams with regard to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee sets, reviews and administers the
executive compensation program of the Company and is comprised of
the individuals noted below, each of whom are non-employee
directors of the Company. The role of the Compensation Committee
is to establish and approve salaries and other compensation paid
to the executive officers of the Company and to administer the
Company's stock option plan, in which capacity the Compensation
Committee reviews and approves stock option grants to all
employees.
Compensation Philosophy. Synthetech's compensation philosophy is
that cash compensation should be directly linked to the short-
term performance of the Company and that longer-term incentives,
such as stock options, should be aligned with the objective of
enhancing shareholder value over the long term. The use of stock
options clearly links the interests of the officers and employees
of the Company to the interests of the shareholders. In
addition, the Compensation Committee believes that the total
compensation package must be competitive with other companies in
the industry to ensure that the Company can continue to attract,
retain and motivate key employees who are critical to the long-
term success of the Company.
Components of Executive Compensation. The principal components
of executive compensation are base salary, bonuses and stock
options.
Base salary is set based on competitive factors and the historic
salary structure for various levels of responsibility within the
Company. In addition, the Company relies on bonuses in order to
emphasize the importance of performance.
The equity component of executive compensation is the stock
option program. Stock options are generally granted when an
executive joins the Company and, typically, on an annual basis
thereafter. The options granted to the executives vest over a
period of two years. The purpose of the annual option grants is
to ensure that the executive always has options that vest in
increments over the following two-year period. This provides a
method of retention and motivation for the senior level
executives of the Company and also aligns senior management's
objectives with long-term stock price appreciation.
<PAGE> 38
Other elements of executive compensation are participation in a
Company-wide life insurance, long-term disability insurance,
medical benefits and ability to defer compensation pursuant to a
401(k) plan. Matching Company contributions to the 401(k) plan
of up to 10% of eligible base pay were made in fiscal 1998.
As a result of the decline in revenues and profits in fiscal
1998, the Compensation Committee did not grant bonuses to Mr.
Sreenivasan, the CEO, or any of the other executive officers.
Consistent with its policy to create longer-term incentives, the
Compensation Committee granted stock options to the executive
officers, including a 25,000 share option to Mr. Sreenivasan.
COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS
Compensation Committee Interlocks and Insider Participation. The
members of the Compensation Committee are Paul C. Ahrens,
Edward M. Giles and Page E. Golsan III. Mr. Ahrens is formerly
an officer of the Company.
Summary of Cash and Certain Other Compensation
- ----------------------------------------------
The following table provides certain summary information
concerning compensation paid by the Company to those persons who
were at March 31, 1998, the Company's Chief Executive Officer,
Chief Financial Officer and one other executive officer of the
Company whose salary and bonus exceeded $100,000 during the last
fiscal year (the "Named Persons") for the fiscal years ended
March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Summary Compensation Table
---------------------------
Long-Term All Other
Annual Compensation Compensation Compensation($)(2)
--------------------------- ------------- ------------------
Name and Stock
Principal Position Year(1) Salary ($) Bonus ($) Options (#)
- ------------------ ------- ----------- ---------- ----------- -------------------
M. ("Sreeni") 1998 150,000 - 25,000 12,500
Sreenivasan 1997 150,000 95,000 50,000 7,125
President & Chief 1996 132,000 60,000 66,000 3,203
Executive Officer
Philip L. Knutson 1998 108,000 - 20,000 12,200
Vice President of 1997 108,000 63,000 40,000 9,500
Research and 1996 95,000 43,000 50,000 3,531
Development*
Charles B. Williams 1998 88,000 - 20,000 7,950
Vice President of 1997 88,000 57,000 32,000 6,544
Finance and 1996 75,000 35,000 34,000 3,122
Administration &
Chief Financial
Officer
</TABLE>
_______________________
*Dr. Knutson resigned his position with the Company on May 8,
1998.
(1)Fiscal year ended March 31.
(2)Represents Company contributions to the account of the Named
Persons under the Company's 401(k) plan.
<PAGE> 39
Stock Option Grants in Last Fiscal Year
- ---------------------------------------
The following table provides information, with respect to the
Named Persons, concerning the grant of stock options during
fiscal year 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Stock Options Grants in the Last Fiscal Year(1)
-----------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants (Through Expiration Date)
---------------------------------------- --------------------------
Options
Granted % of Exercise
(# of Total Price Expiration 5% per 10% per
Name Shares) Options ($/Sh) Date year(4) year(4)
(2) (3)
- ------------- ---------- -------- ------- ----------- --------- ----------
M. ("Sreeni")
Sreenivasan 25,000 12.3% $7.13 July 2007 $112,000 $284,000
Philip L. Knutson* 20,000 9.9% $7.13 July 2007 $89,600 $227,200
Charles B.
Williams 20,000 9.9% $7.13 July 2007 $89,600 $227,200
</TABLE>
_______________________
*Dr. Knutson resigned his position with the Company on May 8,
1998.
(1) The Company has not granted any stock appreciation rights
(SARs).
(2) Based on an aggregate of 203,000 options being granted to
all employees during the fiscal year ended March 31, 1998.
(3) These options were granted under the Company's 1995
Incentive Compensation Plan in July 1997, and have an exercise
price equal to the fair market value of the Company's Common
Stock as of the date of the grant. These grants vest annually
over a two-year period ending April 1999.
(4) The 5% and 10% assumed rates of appreciation are mandated
by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of future
prices for its Common Stock.
Stock Option Exercises in Last Fiscal Year and Fiscal Year-End
- ----------------------------------------------------------------
Stock Option Values
-------------------
The following table provides information, with respect to the
Named Persons, concerning the options granted to them during the
last fiscal year and the options held by them at March 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Option Exercises in Last Fiscal Year and Fiscal Year End Stock Option Values
----------------------------------------------------------------------------
Shares Value Value of
Acquired on Realized Number of Unexercised In-the-
Name Exercise ($) Unexercised Money Options at
(#) Options at Fiscal Year End
Fiscal Year End ($)(1)
- ------------- --------- -------- ---------------- -------------------
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
- ------------- --------- -------- ------- -------- --------- ---------
M. ("Sreeni")
Sreenivasan 125,000 $415,250 91,000 50,000 $221,100 $0
Philip L. 56,240 $233,958 110,000 40,000 $326,300 $0
Knutson*
Charles B.
Williams 93,720 $256,822 16,000 36,000 $0 $0
</TABLE>
_______________________
*Dr. Knutson resigned his position with the Company on May 8,
1998.
(1) Represents the difference between the exercise price of
the options with exercise prices below $6.19 and the $6.19
closing price of the Company's Common Stock on March 31, 1998.
<PAGE> 40
Comparison of Total Cumulative Shareholder Equity
- -------------------------------------------------
The following graph sets forth the Company's total cumulative
shareholder return as compared to the Nasdaq Stock Market (U.S.)
and S&P Specialty Chemicals Indexes for the period March 31, 1993
through March 31, 1998. The total shareholder return assumes
$100 invested at the beginning of the period in Common Stock of
the Company, Nasdaq Stock Market Index (U.S.) and the S&P
Specialty Chemicals Index. Historic stock price performance is
not necessarily indicative of future stock price performance.
Edgar Representation of Data Points Used in Printed Graphic
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nasdaq Stock S&P
Synthetech Market Index Specialty
(U.S.) Chemicals
Index
----------- ------------ ---------
1993 100 100 100
1994 137 108 106
1995 122 120 107
1996 356 163 138
1997 452 181 124
1998 367 275 157
</TABLE>
All data points are at March 31.
Employment Agreements
In July, 1997, the Company entered into Employment Agreements
with Messrs. Sreenivasan, Williams and Knutson (collectively,
"Executives" and individually, "Executive"). In addition to
providing for an annual base salary, the Agreements have certain
noncompetition and nonsolicitation provisions. Pursuant to the
Agreements, the Company will pay the Executives certain payments
after termination of employment for any reason other than death.
Specifically, the Company will pay an amount equal to the base
salary earned by the Executive during the twelve month period
immediately preceding the date of termination plus an additional
amount for one year of health insurance coverage. The Company
has certain rights to extend the agreements and payments under
the Agreement for a total of 24 months after termination of an
Executive's employment. In the event the Executive should die
during the payment period, the Company's payment obligation
immediately terminates.
Compensation of Directors
- -------------------------
In fiscal 1997, the Company established a policy to grant all
current directors who are not employees (other than Mr. Ahrens,
who is a founder of the Company) a nonqualified stock option for
15,000 shares vesting at the rate of 3,000 shares at the next and
each of the subsequent four annual shareholder meetings. This
option is intended to provide the outside director with the
<PAGE> 41
equivalent of an annual grant of 3,000 shares and the Company
does not anticipate granting any additional options until the end
of the fifth year. The exercise price of these options will be
set at the fair market value of the Common Stock on the date of
the grant.
Since fiscal 1998, the Company has provided directors who are
not employees of the Company an annual fee of $4,000. The
Company also established a policy to grant all new directors who
are not employees a one-time nonqualified stock option for
10,000 shares which vests immediately. Thus, new directors who
are not employees of the Company will receive this 10,000 share
option in addition to the ongoing 15,000 share option described
above. Like the 15,000 share option, the exercise price of the
options will be set at the fair market value of the Common Stock
on the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common
Stock and percentage of outstanding shares of Common Stock of the
Company owned as of April 1, 1998, by persons who hold of record
or are known to beneficially own 5% or more of the outstanding
common stock of the Company, each nominee and director of the
Company, the Named Persons and all officers and directors as a
group.
<TABLE>
<CAPTION>
<S><C> <C> <C>
Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial of Class
Ownership
- ------------------- ------------------- -----------
Paul C. Ahrens 1,465,491(1) 10.4%
1290 Industrial Way
Albany, OR
M. ("Sreeni") Sreenivasan 603,810(2) 4.2%(3)
1290 Industrial Way
Albany, OR
Howard L. Farkas 89,042(4) *
5460 South Quebec Street
Suite 300
Englewood, CO
Edward M. Giles 271,000(5) 1.9%(3)
645 Madison Avenue
8th Floor
New York, NY 10022
Page E. Golsan, III 41,000(6) *
3205 Canterbury Drive,
South
Salem, OR
<PAGE> 42
Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial of Class
Ownership
- --------------------- -------------------- -------------
Donald M. Kuhla, Ph.D. 13,000(7) *
1787 Sentry Parkway West
Bldg. 18, Suite 301
Blue Bell, PA 19422
Philip L. Knutson, Ph.D.+ 400,840(8) 2.8%(3)
1290 Industrial Way
Albany, OR
Charles B. Williams 234,120(9) 1.7%(3)
1290 Industrial Way
Albany, OR
Brown Capital Management 752,400(10) 5.3%
809 Cathedral Street
Baltimore, MD 21201
All Officers and Directors 3,171,303(1)(2)(4)(5) 21.8%(3)
as a Group (9 persons) (6)(7)(8)(9)
</TABLE>
______________________
*less than 1%.
+Dr. Knutson resigned his position with the Company on May 8,
1998.
(1) Includes 14,000 shares of common stock which are owned of
record by a private foundation of which Mr. Ahrens is the
President. Mr. Ahrens disclaims beneficial ownership of these
shares.
(2) Includes 128,500 shares of common stock which Mr.
Sreenivasan has the right to acquire immediately or within
sixty (60) days pursuant to employee stock options. Excludes
12,500 shares of common stock issuable pursuant to stock
options held by Mr. Sreenivasan which are not exercisable now
or within sixty (60) days.
(3) The denominator used in calculating the percentage is
equal to the number of shares outstanding plus the number of
shares the beneficial owner (or group of beneficial owners) has
a right to acquire immediately or within sixty days pursuant to
warrants or options.
(4) Includes 39,042 shares of common stock which Mr. Farkas
has the right to acquire immediately or within sixty (60) days
pursuant to stock options. Mr. Farkas disclaims ownership over
50,000 shares of common stock held in his name which have been
pledged as security for a loan and over which Mr. Farkas has no
voting control. Excludes 25,958 shares of common stock
issuable pursuant to stock options held by Mr. Farkas which are
not exercisable now or within sixty (60) days.
(5) Includes 10,000 shares of common stock which Mr. Giles has
the right to acquire immediately or
within sixty (60) days pursuant to stock options. Excludes
15,000 shares of common stock issuable pursuant to stock
options held by Mr. Giles which are not exercisable now or
within sixty (60) days. Also includes 60,000 shares of common
stock held by two individuals who have granted to Mr. Giles the
investment powers associated with these shares. Mr. Giles
disclaims beneficial ownership over these 60,000 shares.
(6) Includes 3,000 shares of common stock which Mr. Golsan has
the right to acquire immediately or within sixty (60) days
pursuant to stock options. Excludes 12,000 shares of common
stock issuable pursuant to stock options held by Mr. Golsan
which are not exercisable now or within sixty (60) days.
(7) Includes 10,000 shares of common stock which Dr. Kuhla has
the right to acquire immediately or within sixty (60) days
pursuant to stock options. Excludes 15,000 shares of common
stock issuable pursuant to stock options held by Dr. Kuhla
which are not exercisable now or within sixty (60) days.
(8) Includes 140,000 shares of common stock which Dr. Knutson
has the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 10,000 shares of
common stock issuable pursuant to stock options held by Dr.
Knutson which are not exercisable now or within sixty (60)
days.
<PAGE> 43
(9) Includes 42,000 shares of common stock which Mr. Williams
has the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 10,000 shares of
common stock issuable pursuant to stock options held by Mr.
Williams which are not exercisable now or within sixty (60)
days.
(10) Based on Schedule 13(g) filings, pursuant to which Brown
Capital Management disclosed controlling 752,400 shares of
common stock with sole dispositive power. Of these shares,
Brown Capital Management further disclosed that it had sole
voting power over 695,800 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Not applicable.
PART IV
ITEM 14. 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:
3(i),(1) Articles of Incorporation of Synthetech, Inc., as amended.
3(ii),(9) Bylaws of Synthetech, Inc., as amended.
10.1(2)(3) License Agreement dated March 16, 1990 between
Synthetech, Inc. and Miwon Co. Ltd.
10.2(2)(4) Supply Agreement dated January 3, 1989 between
Synthetech, Inc. and Biomeasure, Incorporated.
10.3(2)(4) License Agreement dated January 3, 1989 between
Synthetech, Inc. and Biomeasure, Incorporated.
10.4(2)+ Synthetech, Inc. Amended and Restated 1984 Stock Option
and Bonus Plan.
10.5(5)+ Synthetech, Inc. 1990 Stock Option Plan.
10.6(8) Amendment No. 1 to Stock and Warrant Purchase Agreement
between the Company and JB dated as of March 26, 1996.
10.7(6) Agreement dated September 30, 1991 Among Certain
Shareholders of the Company.
<PAGE> 44
10.8(7) Agreement and Release dated as of March 31, 1995 between
Synthetech, Inc. and Paul C. Ahrens (the "Ahrens
Agreement").
10.9(8) Addendum to Ahrens Agreement dated as of April 1, 1996.
10.10(9) 1995 Incentive Compensation Plan, as amended.
10.11(9) Promissory Note dated September 8, 1995 from Synthetech,
Inc. to United States National Bank of Oregon.
10.12(9) Change in Terms Agreement dated September 12, 1996
between Synthetech, Inc. and United States National Bank
of Oregon.
10.13 Letter Agreement dated August 28, 1997 between
Synthetech, Inc. and United States National Bank of
Oregon.
10.14(9) Nonqualified Stock Option dated as of November 7, 1996 to
purchase 50,000 shares of Common Stock issued to Howard
L. Farkas.
10.15(9) Nonqualified Stock Option dated as of November 7, 1996 to
purchase 15,000 shares of Common Stock issued to Howard
L. Farkas.
10.16(9) Nonqualified Stock Option dated as of November 7, 1996 to
purchase 15,000 shares of Common Stock issued to Page E.
Golsan III.
10.17(9) Synthetech, Inc. Purchase Order dated June 17, 1996 to
R.L. Reimers Construction in the amount of $250,000.
10.18(9) Synthetech, Inc. Purchase Order dated August 23, 1996 to
CE/Western in the amount of $240,000.
10.19(9) Synthetech, Inc. Purchase Order dated September 4, 1996
to R.L. Reimers Construction in the amount of $189,000.
10.20(9) Synthetech, Inc. Purchase Order dated November 7, 1996 to
R.L. Reimers Construction in the amount of $1,870,700.
10.21(9) Synthetech, Inc. Purchase Order dated February 20, 1997
to Olsson Industrial Electric in the amount of $335,864.
10.22(9) Synthetech, Inc. Purchase Order dated May 2, 1997 to
Oregon Industrial Contractors, Inc. in the amount of
$626,276.
<PAGE> 45
10.23(9)+ Form of contract entered into by each of Mr. Philip L.
Knutson, Mr. M. Sreenivasan and Mr. Charles B. Williams
dated July 18, 1997.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months Ended March 31,
1998.
__________________________
+ Management contract or compensatory plan.
(1) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991.
(2) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1990.
(3) Confidential treatment of certain portions of this document was
granted by the Commission on May 7, 1990 (File No. 33-27566).
(4) Confidential treatment of certain portions of this document was
granted by the Commission on January 10, 1990 (File No. 33-
27566).
(5) Incorporated by reference to Exhibit A to the definitive copy
of registrant's Proxy Statement (dated October 23, 1990) for the
1990 Annual Meeting of Shareholders.
(6) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992.
(7) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1995.
(8) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996.
(9) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997.
(10) Incorporated by reference to the exhibits filed with
registrant's Quarterly Report on Form 10_Q for the quarterly
period ended June 30, 1997.
(b) Reports on Form 8-K
None.
<PAGE> 46
(c) See (a) (3) above.
(d) See (a) (1) and (2) above.
<PAGE> 47
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 26, 1998 SYNTHETECH, INC.
(Registrant)
By /s/ M. 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. Sreenivasan President, Chief Executive June 26,
M. ("Sreeni") Officer (Principal Executive 1998
Sreenivasan Officer) and Director
/s/ Charles B. Williams Vice President of Finance and June 26,
Charles B. Williams Administration, Chief Financial 1998
Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer),
and Director
/s/ Paul C. Ahrens Chairman of the Board June 26,
Paul C. Ahrens 1998
/s/ Howard L. Farkas Director June 26,
Howard L. Farkas 1998
/s/ Edward M. Giles Director June 26,
Edward M. Giles 1998
/s/ Page E. Golsan, III Director June 26,
Page E. Golsan, III 1998
/s/ Donald M. Kuhla, Director June 26,
Ph.D. 1998
Donald M. Kuhla, Ph.D.
<PAGE> 48
INDEX TO EXHIBITS
Sequential Page No.
3(i),(1) Articles of Incorporation of Synthetech,
Inc., as amended.
3(ii),(9) Bylaws of Synthetech, Inc., as amended.
10.1(2)(3) License Agreement dated March 16, 1990
between Synthetech, Inc. and Miwon Co.
Ltd.
10.2(2)(4) Supply Agreement dated January 3, 1989
between Synthetech, Inc. and Biomeasure,
Incorporated.
10.3(2)(4) License Agreement dated January 3, 1989
between Synthetech, Inc. and Biomeasure,
Incorporated.
10.4(2)+ Synthetech, Inc. Amended and Restated 1984
Stock Option and Bonus Plan.
10.5(5)+ Synthetech, Inc. 1990 Stock Option Plan.
10.6(8) Amendment No. 1 to Stock and Warrant
Purchase Agreement between the Company and
JB dated as of March 26, 1996.
10.7(6) Agreement dated September 30, 1991 Among
Certain Shareholders of the Company.
10.8(7) Agreement and Release dated as of
March 31, 1995 between Synthetech, Inc.
and Paul C. Ahrens (the "Ahrens
Agreement").
10.9(8) Addendum to Ahrens Agreement dated as of
April 1, 1996.
10.10(9) 1995 Incentive Compensation Plan, as
amended.
10.11(9) Promissory Note dated September 8, 1995
from Synthetech, Inc. to United States
National Bank of Oregon.
10.12(9) Change in Terms Agreement dated September
12, 1996 between Synthetech, Inc. and
United States National Bank of Oregon.
10.13 Letter Agreement dated August 28, 1997
between Synthetech, Inc. and United States
National Bank of Oregon.
10.14(9) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 50,004 shares
of Common Stock issued to Howard L. Farkas.
<PAGE> 49
10.15(9) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 15,000 shares
of Common Stock issued to Howard L. Farkas.
10.16(9) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 15,000 shares
of Common Stock issued to Page E. Golsan,
III.
10.17(9) Synthetech, Inc. Purchase Order dated June
17, 1996 to R.L. Reimers Construction in
the amount of $250,000.
10.18(9) Synthetech, Inc. Purchase Order dated
August 23, 1996 to CE/Western in the
amount of $240,000.
10.19(9) Synthetech, Inc. Purchase Order dated
September 4, 1996 to R.L. Reimers
Construction in the amount of $189,000.
10.20(9) Synthetech, Inc. Purchase Order dated
November 7, 1996 to R.L. Reimers
Construction in the amount of $1,870,700.
10.21(9) Synthetech, Inc. Purchase Order dated
February 20, 1997 to Olsson Industrial
Electric in the amount of $335,864.
10.22(9) Synthetech, Inc. Purchase Order dated May
2, 1997 to Oregon Industrial Contractors,
Inc. in the amount of $626,276.
10.23(10)+ Form of contract entered into by each
of Mr. Philip L. Knutson, Mr. M.
Sreenivasan and Mr. Charles B. Williams
dated July 18, 1997.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months Ended March 31,
1998.
__________________________
+ Management contract or compensatory plan.
(1) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991.
(2) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1990.
(3) Confidential treatment of certain portions of this document was
granted by the Commission on May 7, 1990 (File No. 33-27566).
(4) Confidential treatment of certain portions of this document was
granted by the Commission on January 10, 1990 (File No. 33-
27566).
<PAGE> 50
(5) Incorporated by reference to Exhibit A to the definitive copy
of registrant's Proxy Statement (dated October 23, 1990) for the
1990 Annual Meeting of Shareholders.
(6) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992.
(7) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1995.
(8) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996.
(9) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997.
(10) Incorporated by reference to the exhibits filed with
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
<PAGE> 51
Exhibit 10.13
to Form 10-K
ACKNOWLEDGMENT COPY
August 28, 1997
Mr. Charles B. Williams,
Vice President Finance and Administration
Synthetech, Inc.
1290 Industrial Way
PO Box 646
Albany OR 97321
Dear Mr. Williams:
U. S. Bank has approved a revolving line of credit under the
terms and conditions outlined below:
Borrower: Synthetech, Inc.
Guarantor: None
Maximum Loan Amount: $1,000,000
Purpose: General corporate purposes.
Interest Rate: Fully floating variable interest rate equal
to U.S. Bank's prime rate. U.S. Bank's
prime rate is the rate of interest which
U.S. Bank from time to time establishes as
its prime rate and is not, for example, the
lowest rate of interest which U.S. Bank
collects from any borrower or class of
borrowers. All interest shall be computed
on the basis of a 360-day year and the
actual number of days elapsed.
Loan Fee: Non-refundable upfront annual loan fee of $1,250.
Loan Advances: Advances may be requested by Borrower from
time to time in accordance with the terms
of the promissory note.
<PAGE> 52
All advances shall be made at the sole
option of U.S. Bank. U.S. Bank may decline
to make any advances and may terminate the
availability of advances at any time.
Maturity Date: Payable on demand.
Repayment: Principal and interest payable on demand.
Interest payable monthly in absence of
demand.
Collateral: Unsecured.
Insurance: Borrower shall maintain insurance in such
amounts and covering such risks as U.S.
Bank shall require.
Financial Reporting: Annual CPA audited financial statement
within 90 days after the end of each fiscal
year.
At any time requested by U.S. Bank,
Borrower shall furnish any additional
information regarding Borrower's financial
condition and business operations that U.S.
Bank requests. This information may
include, but is not limited to, financial
statements, tax returns, lists of assets
and liabilities, agings of receivables and
payables, inventory schedules, budgets and
forecasts.
Loan Documentation: Borrower shall deliver to U.S. Bank duly
executed promissory note, deeds of trust,
mortgages, security agreements, financing
statements, loan agreements, guaranties,
borrower authorizations, attorney opinion
letters and other documents ("Loan
Documents") as required by U.S. Bank in
form and substance satisfactory to U.S.
Bank and its counsel.
Non-Assignable: This credit
accommodation may not be assigned by
Borrower. No guarantor or any third party
is intended as a third-party beneficiary or
has any right to rely hereon.
Arbitration: Borrower and U.S. Bank hereby agree to be
bound by the terms of the Arbitration
clause attached hereto as Exhibit A.
Expenses: Borrower shall reimburse U.S. Bank for all
out-of-pocket expenses incurred in
connection with this credit accommodation
upon demand, whether or not this
transaction closes or is funded. Such
expenses shall include, without limitation,
attorney fees, title insurance fees, travel
costs, examination expenses, and filing
fees.
<PAGE> 53
This letter summarizes certain principal terms and conditions
relating to the loan and supersedes all prior oral and written
negotiations, understandings, representations and agreements with
respect to the loan. However, the Loan Documents will include
additional terms, conditions, covenants, representations,
warranties and other provisions which U.S. Bank customarily
includes in similar transactions or which U.S. Bank determines to
be appropriate to this transaction. Except to the extent
modified by any other agreement, all terms, conditions, covenants
and other provisions of this letter shall remain in effect until
the revolving line of credit (including any renewals, extensions
or modifications) is terminated and the loan balance is paid in
full, and by signing below, Borrower agrees to comply with all
such provisions.
In addition to the events of default in any Loan Document, any
failure to comply with any term, condition or obligation in this
letter shall constitute an event of default under each of the
Loan Documents. The provisions of this letter shall survive the
closing of the loan and the execution and delivery of the Loan
Documents. In the event of a conflict between this letter and
the Loan Documents, the terms of the Loan Documents shall
control.
Under Oregon law, most agreements, promises and commitments made
by lenders after October 3, 1989 concerning loans and other
credit extensions which are not for personal, family or household
purposes or secured solely by the borrower's residence must be in
writing, express consideration and be signed by the lender to be
enforceable.
If the above terms and conditions are acceptable to you, please
sign, date and return the acknowledgment copy of this letter,
together with the non-refundable loan fee in the amount of
$1,250.
Sincerely,
Robert V. Albright
Assistant Vice President
(503) 399-4139
Borrower hereby accepts U. S. Bank's offer to extend credit on
the terms and conditions stated above and agrees to the
Arbitration clause set forth in Exhibit A attached hereto.
Synthetech, Inc.
By: _______________________________
Title: _______________________________
Date: _______________________________
<PAGE> 54
EXHIBIT A
ARBITRATION: U.S. Bank and Borrower agree that all disputes,
claims and controversies between them, whether individual, joint,
or class in nature, arising from this letter or the revolving
line of credit or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the
Rules of the American Arbitration Association, upon request of
either party. No act to take or dispose of any collateral
securing any loan shall constitute a waiver of this arbitration
agreement. This includes, without limitation, obtaining
injunctive relief or a temporary restraining order; foreclosing
by notice and sale under any deed of trust or mortgage; obtaining
a writ of attachment or imposition of a receiver; or exercising
any rights relating to personal property, including taking or
disposing of such property with or without judicial process
pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or
reasonableness or any act, or exercise of any right, concerning
any collateral securing any loan, including any claim to rescind,
reform, or otherwise modify any agreement, relating to the
collateral securing any loan, shall also be arbitrated, provided
however that no arbitrator shall have the right or other power to
enjoin or restrain any act of any party. Judgment upon any award
rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing herein shall preclude any party from
seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar
doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration
proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of any action for these
purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
<PAGE> 55
Exhibit 23
to Form 10-K
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated May 14, 1998 included in this
Form 10-K for the year ended March 31, 1998, into Synthetech,
Inc.'s previously filed Registration Statement Nos. 33-45913, 33-
64621 and 333-8203.
Arthur Andersen LLP
Portland, Oregon,
June 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the March 31, 1998 10-K 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> 12-Mos
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 4976000
<SECURITIES> 0
<RECEIVABLES> 1470000
<ALLOWANCES> 15000
<INVENTORY> 3184000
<CURRENT-ASSETS> 9920000
<PP&E> 9439000
<DEPRECIATION> 0
<TOTAL-ASSETS> 19364000
<CURRENT-LIABILITIES> 1683000
<BONDS> 0
<COMMON> 14000
0
0
<OTHER-SE> 17306000
<TOTAL-LIABILITY-AND-EQUITY> 193640000
<SALES> 8321000
<TOTAL-REVENUES> 8321000
<CGS> 5320000
<TOTAL-COSTS> 6710000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1923000
<INCOME-TAX> 702000
<INCOME-CONTINUING> 1221000
<DISCONTINUED> 0
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<EPS-PRIMARY> .09
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