<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to_______
Commission file number 0-12992
SYNTHETECH, INC.
(Exact name of registrant as specified in its charter)
Oregon 84-0845771
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1290 Industrial Way, Albany, Oregon 97321
(Address of Principal Executive Offices) (Zip Code)
(541) 967-6575
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes__X__ No_____
The number of shares of the registrant's common stock,
$.001 par value, outstanding as of November 6, 1998 was
14,203,383.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
September 30, March 31,
1998 1998
------ ------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 6,298,000 $ 4,976,000
Accounts receivable, less allowance
for doubtful accounts of $15,000 for
both periods 1,880,000 1,470,000
Inventories 3,633,000 3,184,000
Prepaid expenses 190,000 196,000
Deferred income taxes 70,000 70,000
Other current assets 16,000 24,000
---------- -----------
TOTAL CURRENT ASSETS 12,087,000 9,920,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 9,497,000 9,439,000
OTHER ASSETS 4,000 5,000
------------ ------------
TOTAL ASSETS $ 21,588,000 $ 19,364,000
============ ============
</TABLE>
See Notes To Financial Statements.
<PAGE> 3
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited)
September 30, March 31,
1998 1998
------------------------------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 14,000 $ 14,000
Accounts payable 749,000 672,000
Accrued compensation 231,000 221,000
Deferred revenue 46,000 247,000
Accrued income tax 851,000 514,000
Other accrued liabilities 15,000 15,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,906,000 1,683,000
DEFERRED INCOME TAXES 209,000 209,000
NOTE PAYABLE, net of current portion 159,000 166,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized 100,000,000 shares;
issued and outstanding,
14,203,000 and 14,143,000 shares 14,000 14,000
Paid-in capital 8,501,000 8,467,000
Employee notes receivable and
deferred compensation (79,000) (106,000)
Retained earnings 10,878,000 8,931,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 19,314,000 17,306,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 21,588,000 $ 19,364,000
============ ============
See Notes To Financial Statements.
</TABLE>
<PAGE> 4
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- --------------------- ----------- ----------- ----------- -----------
REVENUES $ 5,327,000 $ 1,491,000 $ 9,455,000 $ 2,971,000
COST OF SALES 3,007,000 861,000 5,542,000 1,584,000
----------- ----------- ----------- -----------
GROSS PROFIT 2,320,000 630,000 3,913,000 1,387,000
RESEARCH AND DEVELOPMENT 76,000 52,000 157,000 113,000
SELLING, GENERAL AND
ADMINISTRATIVE 383,000 321,000 738,000 610,000
----------- ----------- ----------- -----------
OPERATING EXPENSE 459,000 373,000 895,000 723,000
----------- ----------- ----------- -----------
OPERATING INCOME 1,861,000 257,000 3,018,000 664,000
OTHER INCOME, net 63,000 75,000 122,000 158,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,924,000 332,000 3,140,000 822,000
PROVISION FOR INCOME TAXES 731,000 114,000 1,193,000 300,000
----------- ----------- ----------- -----------
NET INCOME $ 1,193,000 $ 218,000 $ 1,947,000 $ 522,000
=========== =========== =========== ===========
BASIC NET INCOME PER
COMMON SHARE $0.08 $0.02 $0.14 $0.04
===== ===== ===== =====
DILUTED NET INCOME PER $0.08 $0.02 $0.14 $0.04
COMMON SHARE ===== ===== ===== =====
See Notes To Financial Statements.
</TABLE>
<PAGE> 5
SYNTHETECH, INC.
STATEMENTS OF CASH FLOWS
----------------------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Six Month Period Ended September 30 1998 1997
- ------------------------------------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,947,000 $ 522,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation, amortization and other 583,000 166,000
Amortization of deferred compensation 54,000 55,000
Accrued interest on securities available
for sale - 1,000
Accrued interest on employee notes
receivable - (1,000)
Loss on disposal of property, plant
and equipment - 5,000
Deferred income taxes - 2,000
(Increase) decrease in assets:
Accounts receivable, net (410,000) (412,000)
Inventories (449,000) (680,000)
Prepaid expenses 6,000 (6,000)
Income tax receivable - 726,000
Other assets 9,000 1,000
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 424,000 (601,000)
Deferred revenue (201,000) -
----------- -----------
Net cash (used in) provided by
operating activities 1,963,000 (222,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (641,000) (2,501,000)
----------- -----------
Net cash used by investing activities (641,000) (2,501,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term
debt obligations (7,000) (6,000)
Proceeds from stock option exercises
and disqualifying dispositions 7,000 118,000
----------- -----------
Net cash provided by financing activities - 112,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,322,000 (2,611,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,976,000 6,740,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,298,000 $ 4,129,000
=========== ===========
NON-CASH INVESTING ACTIVITIES:
Unrealized gain on securities available for sale $ - $ 1,000
Issuance of stock options at below fair value $ 38,000 $ 21,000
See Notes To Financial Statements.
</TABLE>
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
NOTE A. GENERAL AND BUSINESS
The summary financial statements included herein have been
prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
Synthetech management believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these summary financial statements be
read in conjunction with the financial statements and the
notes thereto included in Synthetech's 1998 Form 10-K.
Interim financial statements are by necessity somewhat
tentative; judgments are used to estimate quarterly amounts
for items that are normally determinable only on an annual
basis. For example, provision for income taxes is an
estimate of the annual liability pro-rated over the quarters
of the fiscal year based on estimates of annual income.
Further, all inventory quantities are verified by physically
counting the units on hand at least once a year. Normally,
selected inventories are counted at the end of each quarter.
For those inventories not counted at the end of the quarter,
quantities are determined using measured sales and
production data for the period.
The interim period information included herein reflects all
adjustments which are, in the opinion of Synthetech
management, necessary for a fair statement of the results of
the respective interim periods. Results of operations for
interim periods are not necessarily indicative of results to
be expected for an entire year.
NOTE B. STATEMENTS OF CASH FLOWS
Supplemental cash flow disclosures for the periods
ended September 30:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash Paid
Three Months Six Months
1998 1997 1998 1997
---- ---- ---- ----
Income Taxes $ 841,000 $ 74,000 $ 856,000 $ 153,000
Interest $ 4,000 $ 5,000 $ 8,000 $ 9,000
</TABLE>
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE C. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") in the
quarter ended December 31, 1997. Under the new
requirements, the Company reports basic and diluted earnings
per share. Basic earnings per share are computed by
dividing net income by the weighted average number of shares
of common stock outstanding during the period. Diluted
earnings per share are computed by dividing net income by
the weighted average number of shares of common stock and
common stock equivalents outstanding during the period,
calculated using the treasury stock method as defined in
SFAS 128. Where necessary, prior year amounts have been
restated. The following is a reconciliation of the shares
used to calculate basic earnings per share and diluted
earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares
outstanding for Basic EPS 14,201,171 13,883,630 14,180,688 13,875,048
Dilutive effect of common
stock options issuable
under treasury stock method 86,039 400,724 91,928 406,304
---------- ---------- ---------- ---------
Weighted average common
and common equivalent
shares outstanding for
Diluted EPS 14,287,210 14,284,354 14,272,616 14,281,352
========== ========== ========== ==========
</TABLE>
The following common stock equivalents were excluded from
the earnings per share computation because their effect
would have been anti-dilutive:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended September 30 Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Common stock options
outstanding 593,800 510,000 593,800 510,000
</TABLE>
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE D. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for all
derivative instruments. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company does not
have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's
financial position or results of operations.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
the percentage of revenues represented by each item included
in the Statements of Income.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percentage of Revenues
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ----------- ---- ---- ---- ----
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 56.4 57.7 58.6 53.3
----- ----- ----- -----
Gross Profit 43.6 42.3 41.4 46.7
Research and Development 1.4 3.5 1.7 3.8
Selling, General and
Administration 7.2 21.5 7.8 20.5
----- ----- ----- -----
Operating Expense 8.6 25.0 9.5 24.3
Operating Income 35.0 17.3 31.9 22.4
Other Income 1.2 5.0 1.3 5.3
----- ----- ----- -----
Income Before Income Taxes 36.2 22.3 33.2 27.7
Provision For Income Taxes 13.7 7.7 12.6 10.1
----- ----- ----- -----
Net Income 22.5 % 14.6 % 20.6 % 17.6 %
===== ===== ===== =====
</TABLE>
Revenues
- --------
Revenues increased by 257% to $5.33 million in the second
quarter of fiscal 1999 from $1.49 million in the second
quarter of fiscal 1998. Revenues were $9.46 million for the
first half of fiscal 1999, a 218% increase from revenues of
$2.97 million in the first half of fiscal 1998. International
sales, mainly to Western Europe, were $799,000 and $2.06
million for the second quarter and first half of fiscal 1999
as compared to $417,000 million and $1.19 million for the
second quarter and first half of fiscal 1998.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The increase in revenues for the second quarter and first
half of fiscal 1999 over the same periods of fiscal 1998
principally reflected the $3.08 million and $5.31 million
revenue contribution, respectively, of shipments from large-
scale Peptide Building Block ("PBB") orders to be used
in two marketed drugs. The Company has recently received
additional orders for these two PBBs of nearly
$10 million. With these additional orders, the Company
has orders for these two large-scale PBBs totaling
$11.8 million for periodic deliveries expected to be
completed by the Summer of 1999. Accordingly, the Company
expects large-scale orders to continue to provide a
substantial contribution to revenue for the balance of
fiscal 1999.
Although PBB sales associated with marketed drugs are more
likely to provide a longer term, ongoing revenue stream than
sales associated with drugs at the discovery or clinical
stage, continuation of customer demand for these PBBs
associated with marketed drugs remains subject to various
market conditions, including potential use of alternative
manufacturing routes, competition from other suppliers of
PBBs and continued market demand for the drug. For example,
one of the large-scale PBB customers referenced above has
advised the Company that it is researching the feasibility
of an alternative lower-cost manufacturing route involving a
different PBB than the one currently being sold to it. At
this time, the Company does not know whether this
alternative manufacturing route will be feasible. The
Company's customer has advised the Company that, even if the
alternative route is selected, the customer will continue to
purchase and take delivery of the $9.2 million of orders
that it has already placed with Synthetech. Accordingly,
while large-scale orders for marketed drugs can provide
significant and predictable revenues for the duration of the
orders, there continues to be a significant risk that
revenues can fluctuate from period to period. (See
"Industry Factors" below.)
Gross Profit
- ------------
Gross profit increased to $2.32 million in the second
quarter of fiscal 1999 from $630,000 in the second quarter
of fiscal 1998. As a percent of sales, gross profit
increased to 44% in the second quarter of fiscal 1999 from
42% for the same period last year. Gross profit increased
to $3.91 million or 41% of revenues in the first half of
fiscal 1999 from $1.39 million or 47% of revenues for the
same period of fiscal 1998.
The gross profit margins for the second quarter and the
first half of fiscal 1999 resulted primarily from the mix of
products. Revenues from large-scale PBB orders during the
second quarter and the first half of fiscal 1999 represented
58% and 56%, respectively, of total revenue for the periods.
While large-scale orders for marketed drugs can provide
significant revenues for the duration of the orders, they
typically generate a lower gross profit margin than the sale
of smaller quantities of the same PBB product during the
drug discovery and clinical stages. The Company, however,
continuously seeks to improve the gross profit margins of
large-scale orders through process improvements and
operating efficiencies.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
While there were no significant large-scale PBB sales during
the second quarter or first half of fiscal 1998, the
relatively low gross profit margins during these periods
resulted principally from a low level of revenues occasioned
by the timing of orders. To a lesser extent, the mix of
products also affected gross profit margins during these
periods.
Operating Expenses
- ------------------
Research and development (R&D) and selling, general and
administrative (SG&A) expenses were $459,000 in the second
quarter of fiscal 1999 compared to $373,000 in the second
quarter of fiscal 1998. As a percentage of sales, R&D and
SG&A expenses decreased to 9% in the second quarter of
fiscal 1999 from 25% in the same period of fiscal 1998 due
to the higher level of revenues. R&D and SG&A expenses
increased to $895,000 in the first half of fiscal 1999 from
$723,000 in fiscal 1998. As a percentage of sales, R&D and
SG&A expenses decreased to 10% in the first half of fiscal
1999 from 24% in the same period of fiscal 1998 due to the
higher level of revenues. The increases in R&D expense for
the second quarter and first half of fiscal 1999 reflected
increases in staffing and staffing compensation. The
increases in SG&A expense for the second quarter and first
half of fiscal 1999 principally reflected increases in
staffing compensation and related payments.
Operating Income
- ----------------
Operating income increased to $1.86 million or 35% of
revenues in the second quarter of fiscal 1999 from $257,000
or 17% for the same period last year. For the first half of
fiscal 1999 operating income increased to $3.02 million or
32% of revenues compared with $664,000 or 22% for the first
half of fiscal 1998. The significant increase in operating
income for the second quarter and first half of fiscal 1999
reflected the substantial increase in revenues over prior
periods.
Other Income
- ------------
The net other income of $63,000 for the second quarter of
fiscal 1999 included $68,000 of interest earnings and $4,000
of interest expense. The net other income of $122,000 for
the second half of fiscal 1999 included $132,000 of interest
earnings and $8,000 of interest expense. The $75,000 and
$158,000 net other income in the second quarter and first
half of fiscal 1998, respectively, came primarily from
interest earnings.
Net Income
- ----------
For the second quarter and first half of fiscal 1999, the
Company earned $1.92 million, and $3.14 million before
income taxes, respectively. A provision for income taxes of
$731,000 resulted in net income of $1.19 million for the
second quarter and a provision for income taxes of $1.19
million resulted in net income of $1.95 million for the
first half of fiscal 1999. The Company's effective tax rate
for the first half of fiscal 1999 was 38% and for the first
half of fiscal 1998 was 36.5% reflecting a one time tax
credit legislated by the State of Oregon.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
INDUSTRY FACTORS
The market for PBBs is driven by the market for
synthetically manufactured peptide-based drugs in which they
are incorporated. The drug development process for these
peptide-based drugs is dictated by the marketplace, drug
companies and the regulatory environment. The Company has
no control over the pace of peptide-based drug development,
which drugs get selected for clinical trials, which drugs
are approved by the FDA and, even if approved, the ultimate
market potential of such drugs.
The three stages of the drug development process include:
R&D or discovery stage, clinical trial stage and marketed
drug stage. Synthetech's customers can spend years
researching and developing new drugs, taking only a small
percentage to clinical trials and fewer yet to commercial
market. A substantial amount of the activity continues to
occur at the earlier stages of research and development and
clinical trials. 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 manufacturing
processes which may not include PBBs as an intermediate.
Large-scale PBB orders for use in marketed drugs
significantly increases the size and the term of the
Company's current order base. Also, the likelihood of
recurring revenue from reorders is significantly higher for
PBBs used in marketed drugs. Nevertheless, since the
Company's revenues are composed of PBB sales in all three
drug development stages, and since even sales of PBBs for
marketed drugs are subject to cancellation or reduction, the
Company is likely to continue to experience significant
fluctuations in its quarterly results.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Accordingly, the Company continues to lack a stable baseload
of demand and an ability to predict future demand beyond its
current order base.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of
$10.18 million compared to $8.24 million at March 31, 1998.
The Company's cash and cash equivalents at September 30,
1998 totaled $6.30 million. In addition, the Company had a
$1 million bank line of credit of which there was no amount
outstanding at September 30, 1998.
The increase in cash and cash equivalents to $6.30 million
at September 30, 1998 from $4.98 million at March 31, 1998
reflected the higher level of sales for the period. The
increase in accounts receivable to $1.88 million at
September 30, 1998 from $1.47 million at March 31, 1998
reflected the timing of shipments during the quarter. The
increase of inventory to $3.63 million at September 30, 1998
from $3.18 million at March 31, 1998 primarily resulted from
restocking raw materials.
The Company had approximately $641,000 of capital
expenditures during the first half of fiscal 1999.
Approximately $279,000 was spent for equipment and equipment
upgrades in the existing plant and $362,000 was spent for
the second phase of the new plant expansion. The Company
anticipates total capital expenditures for fiscal 1999 for
the existing plant to be $1 million and for the second phase
of the new plant expansion to be $3.2 million for a total of
$4.2 million. Although the Company expects to be able to
finance these capital expenditures from internal cash flow,
it is also considering whether bank or similar financing
would be preferable.
YEAR 2000
The Year 2000 ("Y2K") issue arose as the result of existing
computer programs that use only the last two digits to refer
to a year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected,
many computer applications could fail or create erroneous
results.
The Company has completed its assessment of its information
systems which support business applications. The Company
utilizes packaged application strategies for these
information systems functions. These information system
components are, or will be by the end of fiscal 1999,
current with all Y2K updates and changes recommended by the
vendors. These information systems include enterprise
software, operating systems, networking components,
application and data servers, PC hardware and core office
automation software. The Company's assessment of research
and development, manufacturing processes and facility
management systems is underway and is expected to be
substantially completed by the end of fiscal 1999.
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The Company has begun a Y2K supplier and customer assessment
program. It is in the process of contacting key suppliers
and customers to determine the level of their Y2K readiness.
This assessment program is in its early stages and does not
have a return rate useful for determining their level of Y2K
readiness.
Like all businesses, the Company will be at risk from
external infrastructure failures that could arise from Y2K
failures. It is not clear that electrical power, telephone
and computer networks, for example, will be fully functional
across the nation in the year 2000. Investigation and
assessment of infrastructures, like the nations' power grid,
is beyond the scope and resources of the Company. Investors
should use their own awareness of the issues in the nations'
infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's
performance.
It should also be noted that there have been predictions of
failures of key components in the transportation
infrastructure due to the Y2K problem. It is possible that
there could be delays in rail, over-the-road and air
shipments due to failure in transportation control systems.
Investigation and validation of the world's transportation
infrastructure is beyond the scope and the resources of the
Company. Investors should use their own awareness of the
issues in the nations' infrastructure to make ongoing
infrastructure risk assessments and their potential impact
to a company's performance.
The failure to correct a material Y2K problem could result
in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could
materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Y2K problem, resulting
in part from the uncertainty of the Y2K readiness of third-
party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Y2K
failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company's efforts to help ensure Y2K preparedness are
expected to significantly reduce the Company's level of
uncertainty about the Y2K problem. The Company believes
that, with completion of the above-mentioned system upgrades
and testing, the possibility of significant interruptions of
normal operations should be reduced.
The Company has not yet developed any contingency plans in
regard to its internal systems, supplier/customer issues or
any of the more global infrastructure issues.
___________________________
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
This Form 10-Q includes "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934).
Investors are cautioned that forward-looking statements
involve risks and uncertainties, and various factors
could cause actual results to differ materially from
those in the forward-looking statements. Forward-looking
statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will likely result," or words
or phrases of similar meanings. The following factors,
among others, could cause actual results to differ from
those indicated in the forward-looking statements: the
uncertain market for products, customer concentration,
potential quarterly revenue fluctuations, the impact of
competitive products and pricing, the impact of government
regulation, product liability risks, technological change
and increased costs associated with the Company's facility
expansions. Investors are directed to the Company's filings
with the Securities and Exchange Commission, including the
Company's Form 10-K for the fiscal year ended March 31,
1998, which are available from the Company without charge,
for a further description of the risks and uncertainties
related to forward-looking statements made by the Company as
well as to other aspects of the Company's business.
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
The Company held its Annual Meeting of Shareholders on
July 23, 1998. At that meeting, the following Directors
were elected by the Shareholders:
Election Of Directors
<TABLE>
<CAPTION>
<S> <C> <C>
Class/Name Votes For Votes Withheld
---------- --------- --------------
Class I Directors (term expiring in 2001):
Paul C. Ahrens 11,742,789 398,783
Page E. Golsan, III 11,742,789 389,783
</TABLE>
Continuing Directors
Class/Name
----------
Class II Directors (term expiring in 1999):
Edward M. Giles
Charles B. Williams
Class III Directors (term expiring in 2000):
Howard L. Farkas
Donald E. Kuhla, Ph.D.
M. ("Sreeni") Sreenivasan
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Articles of Incorporation
3.2* Bylaws
27 Financial Data Schedule
__________________
*Incorporated by reference herein from the Company's
Form 10-KSB for the year ended March 31, 1997.
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports
The following report on Form 8-K was filed during the
quarter ended September 30, 1998:
A Current Report on Form 8-K dated July 24, 1998 was
filed on July 24, 1998 to report the adoption of a
shareholders rights agreement.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
SYNTHETECH, INC.
(Registrant)
Date: November 13, 1998 /s/ M. Sreenivasan
------------------
M. Sreenivasan
President & C.E.O.
Date: November 13, 1998 /s/ Charles B. Williams
-----------------------
Charles B. Williams
Vice President, Finance
and Administration, C.F.O.,
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the September 30, 1998 10-Q Balance Sheets,
Income Statements, and Cash Flow Statements, and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 6298000
<SECURITIES> 0
<RECEIVABLES> 1895000
<ALLOWANCES> 15000
<INVENTORY> 3633000
<CURRENT-ASSETS> 12087000
<PP&E> 9497000
<DEPRECIATION> 0
<TOTAL-ASSETS> 21588000
<CURRENT-LIABILITIES> 1906000
<BONDS> 0
<COMMON> 14000
0
0
<OTHER-SE> 19314000
<TOTAL-LIABILITY-AND-EQUITY> 21588000
<SALES> 5327000
<TOTAL-REVENUES> 5327000
<CGS> 3007000
<TOTAL-COSTS> 3466000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1924000
<INCOME-TAX> 731000
<INCOME-CONTINUING> 1193000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1193000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
