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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
[ ] 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.)
of incorporation or organization)
1290 Industrial Way, Albany, Oregon 97321
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, 541/967-6575
including area code:
Securities registered pursuant to None
Section 12(b) of the Act:
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 24, 2000, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was approximately
$34 million based upon $3.25 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 24, 2000 was 14,276,641.
i
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........................................ 11
PART II
Item 5 - Market for Registrant's Common Stock and Related
Shareholder Matters............................. 11
Item 6 - Selected Financial Data......................... 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 13
Item 7A- Quantitative and Qualitative Disclosure About
Market Risk..................................... 19
Item 8 - Financial Statements and Supplementary Data..... 20
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.......... 38
PART III
Item 10- Directors and Executive Officers of the Registrant 39
Item 11- Executive Compensation........................... 42
Item 12- Security Ownership of Certain Beneficial Owners
and Management................................... 48
Item 13- Certain Relationships and Related Transactions... 49
PART IV
Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 49
Signatures................................................ 52
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 chemically modified naturally occurring
and synthetic amino acids which it refers to as "Peptide Building
Blocks" ("PBBs"). These PBBs are pharmaceutical intermediates
which are purchased by major pharmaceutical companies, emerging
biopharmaceutical companies and contract drug synthesis companies
as starting materials in the manufacture of peptide,
peptidomimetic small molecule and other drugs. Using organic
chemistry and biocatalysis techniques, the Company has the
expertise and capacity to produce PBBs on a full cycle "grams to
tons" production basis for use in all stages of drug development
from initial discovery through approved, marketed drugs.
Synthetech's PBBs are used in peptide, peptidomimetic small
molecule and other drugs under development and on the market for
the treatment of AIDS, cancer, cardiovascular and other diseases.
MARKET OVERVIEW
- ---------------
The market for PBBs is driven by the market for the peptide,
peptidomimetic small molecule and other drugs in which they are
incorporated. Peptide drugs are chains of generally 3 to 50
amino acids and retain their peptide structure after completion
of drug manufacturing. Since naturally occurring peptides in the
human body regulate many of its complex biochemical systems,
researchers have been investigating peptide drug candidates to
determine their ability to regulate these systems to either
promote health or hinder disease. With structures and
characteristics similar to the body's own peptides and enzymes,
peptide drugs generally are quite potent. Peptide drugs also
tend to be administered through intravenous or other non-oral
delivery paths. During clinical trials, PBB orders for these
candidates are typically multi-kilogram ("multi-kilo") in size.
At the marketed drug stage, orders for PBBs for these drugs can
reach the tens of kilograms ("kilos") to hundreds of kilos size.
Researchers have also been investigating combining one or more
amino acids with other chemicals which are not amino acids to
create drug candidates. These drug candidates are commonly
referred to as peptidomimetic small molecule drugs since they
exhibit peptide-like qualities in a smaller molecule which is not
a defined sequence of amino acids. Peptidomimetic small molecule
drugs typically are less potent than peptide drugs. They also
often are able to be administered orally. During clinical
trials, PBB orders for these candidates can be in the hundreds of
kilos to low tons size. At the marketed drug stage, orders for
these drugs can reach the tons to tens of tons size.
2
The size of the peptide and peptidomimetic small molecule drug
market is a function of the number of these drugs which are
initially screened for therapeutic attributes, progress down the
clinical trial path toward regulatory approval and, ultimately,
are approved and marketed. The market size for any individual
approved drug is affected by many factors, including, without
limitation, size of the patient population addressed, efficacy
level, level and frequency of side effects, method of drug
delivery, cost and competing drugs. The size of the PBB market
for peptide, peptidomimetic small molecule and other drugs is
also a function of the quantities and varieties of PBBs necessary
to produce these drugs. (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 drug discovery through
clinical development in order to develop larger orders as the
drugs receive regulatory approval.
PRODUCT OVERVIEW
- ----------------
Peptide Building Blocks. PBBs are amino acids which have been
chemically modified through organic chemistry and biocatalysis
techniques to enable them to link with other amino acids or
chemicals in a particular defined sequence. These PBBs are
pharmaceutical intermediates and are used as starting materials
in the manufacture of peptide, peptidomimetic small molecule and
other drugs. The amino acids which are transformed into PBBs may
be either natural amino acids (that is, amino acids which occur
in nature, including their chiral or "mirror image" form) or
synthetic amino acids (that is, amino acids which have a side
chain that does not occur in nature). Synthetech refers to the
synthetic amino acids as "Specialty Amino Acids."
Since 1987, the Company has produced a wide range of natural
amino acid PBB products. The Company has also developed and
manufactures over three dozen Specialty Amino Acids. The Company
uses a wide array of raw materials to produce PBBs. These
materials generally are in adequate supply from multiple
suppliers.
The Company has developed and scaled up process technology to
produce this wide range of PBB products in a "grams to tons"
scale. The Company continues to produce most bulk orders on an
as-ordered basis. The Company also maintains small inventory
quantities of many PBBs, permitting immediate deliveries.
At March 31, 2000, the dollar amount of backlog orders was
$2.42 million, all of which the Company expects to ship during
fiscal 2001. At March 31, 1999, the dollar amount of backlog
orders was $8.86 million, including $2.99 million attributable
to the final shipments under a discontinued large-scale order.
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 Specialty Amino Acids under
development. Under the supply agreement, the Company has agreed
to supply all of Biomeasure's requirements for a particular
Specialty Amino Acid. 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
3
Biomeasure the option to receive a license to produce for its own
use the Specialty Amino Acids which are the subject of the supply
agreement between the parties. Under this license agreement,
Biomeasure must pay certain royalty amounts based on any amount
it produces.
MARKETING
- ---------
The Company markets its products and capabilities through
attendance at trade shows, listings in biotechnology and chemical
industry directories, advertisements in chemical trade
periodicals and an internet presence. In addition, the Company
maintains ongoing direct relationships with major pharmaceutical
firms, emerging biopharmaceutical firms, contract drug synthesis
firms and other firms which it believes might have a need for its
products. The Company typically sells its products directly to
its customers, although it uses sales representatives for some
European sales and has often sold products to Japanese customers
through chemical trading firms.
CUSTOMERS
- ---------
Although the Company has several hundred customers in more than
25 countries, the Company expects that a few customers will
continue to account for a significant portion of revenues each
year. During fiscal 2000, the top 20 customers represented 95%
of the Company's revenues. Of these twenty customers, 12 were
major pharmaceutical companies, 4 were emerging biopharmaceutical
companies and 4 were contract drug synthesis companies. The
Company had three customers each accounting for over 10% of
fiscal 2000 revenue-F. Hoffman-La Roche, Ltd., UCB-Bioproducts
S.A. and Searle, which individually accounted for approximately
29%, 19% and 14%, respectively, of the Company's fiscal 2000
revenues.
For the fiscal years ended March 31, 2000, 1999 and 1998, sales
to international customers were $6.39 million, $6.45 million, and
$2.85 million, respectively, accounting for approximately 53%,
28%, and 34%, of the Company's total revenues. These sales were
principally to Europe and Mexico for fiscal 2000 and to Europe
for fiscal 1999 and 1998. See Note J to Financial Statements.
COMPETITION
- -----------
Because peptide and peptidomimetic small molecule drugs are
relatively new, the market in the past for PBBs has been quite
small -- with sales typically in the hundreds of kilos or smaller
size. As a result, the PBB market has not attracted a
significant amount of direct competition. As the market
continues to grow with larger order sizes becoming more
prevalent, the Company has begun to see more competition.
Current competition in multi-kilo quantities of natural amino
acid based PBBs comes primarily from several European fine
chemical companies. Multi-ton order sizes of these natural PBBs
have begun to attract a wider group of approximately a dozen
domestic and international chemical companies. In the area of
Specialty Amino Acids, the Company has competition on a selected
product basis at the multi-kilo scale from approximately half a
dozen fine chemical producers in Europe, Japan and the United
States. Competition from companies in developing countries, such
as India, China and Korea, is also starting to emerge.
4
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, delivery responsiveness,
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 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 Group is composed of seven
people, of which three have graduate degrees in chemistry. The
Company's research and development efforts focus on process
development to support the Company's PBB product lines. In
addition, the Group explores alternative scaleable routes for PBB
production, especially for its Specialty Amino Acids.
During the fiscal years ended March 31, 2000, 1999 and 1998, the
Company's research and development expenses were $436,000,
$338,000 and $215,000, 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 $522,000, $450,000 and $419,000 during
the fiscal years ended March 31, 2000, 1999 and 1998,
respectively.
EMPLOYEES
- ---------
As of May 24, 2000, the Company employed 51 individuals.
REGULATORY MATTERS
- ------------------
As the Company's products are intermediates sold to drug
manufacturers, the Company has been generally unaffected by FDA
regulation which is directed at the drug manufacturers. The
Company's customers do, however, typically conduct periodic
reviews and audits of the Company's operations, including its
inspection and quality assurance programs. These programs
involve materials tracking, record keeping and other
documentation. As some customers have begun to request the
Company to manufacture and supply PBBs with additional
processing, the Company expects these programs will often include
more extensive documentation. The Company anticipates that the
expenses of implementing these programs will increase in the
future.
5
The Company's business is also subject to substantial regulation
in the areas of safety, environmental control and hazardous waste
management. Although the Company believes that it is in
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 fine 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 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.
In fiscal 2000, the Company undertook capital expenditures
aggregating $1.03 million associated with air quality scrubbers,
waste water handling and other environmental control facilities.
The Company is currently reviewing additional capital
expenditures associated with environmental control facilities and
has not determined its fiscal 2001 budget.
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 $9 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
has entered into one license for this technology, the Company
discontinued marketing this technology in 1991 and 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
6
micro-organisms). Since the end of fiscal 1990, the Company has
phased out contract research services and does not anticipate
receiving any significant revenue from research services in the
future. By the end of the 1980s, the Company, building on prior
experience, began to focus on the production of PBBs and other
fine chemicals for customers. With the successful completion of
two large-scale orders, the Company has demonstrated its
capability as a full-cycle "grams to tons" PBB producer.
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 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,
peptidomimetic small molecule and other 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, peptidomimetic
small molecule and other 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.
7
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 pharmaceutical 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 party payors are
increasingly challenging the prices charged for medical products
and services. Peptide and peptidomimetic small molecule drugs
may not be considered cost effective, and reimbursement may not
be available or sufficient to allow these drugs to be sold on a
profitable basis. In addition, as cost pressures in the
pharmaceutical industry have tightened, the cancellation rate for
drug development programs has increased. Industry cost pressures
can also cause pharmaceutical companies to investigate
alternative drug manufacturing processes 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 and peptidomimetic small
molecule drugs, 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 from companies in developing countries,
such as India, China and Korea, is also starting to emerge.
Competition has also increased for supplying PBBs for drug
development programs that reach late clinical trials and move
into an approved status as a result of increased quantities
typically required at these stages and pharmaceutical company
requirements to have second sources of material available. The
Company's competitors have technical, financial, selling and
other resources available to them that are significantly greater
than those available to the Company.
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
8
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.
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 conduct periodic reviews and audits of the
Company's operations, including its inspection and quality
assurance programs. These programs involve materials tracking,
record keeping and other documentation. As some customers have
begun to request the Company to manufacture and supply PBBs with
additional processing, the Company believes that these programs
will often become more extensive. Accordingly, the Company
expects its compliance documentation efforts will continue to
increase and anticipates that the expenses of implementing such
programs will increase in the future. It is also possible that
in the future that the Company may not be able to comply with the
applicable documentation or such documentation may require
substantial incremental expense for additional labor and capital.
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 $9 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
constructed additional manufacturing and related facilities on
its site in Albany, Oregon. Nevertheless, existing facilities may
not have sufficient capacity to meet the future demand for the
Company's products. A disruption in the Company's production or
distribution could have a material adverse effect on the
Company's financial results. Conversely, the Company may not
9
have sufficient demand to utilize the additional capacity, which
could also have a material adverse effect on the Company's
financial results.
Risks of International Business. Sales to customers outside
the United States accounted for approximately 53% of the
Company's net sales during the fiscal year ended March 31, 2000.
The Company expects that international sales will continue to
account for a significant percentage of net sales. The Company's
business is and will be subject to the risks generally associated
with doing business internationally, including changes in demand
resulting from fluctuations in exchange rates, foreign
governmental regulation and changes in economic conditions. These
factors, among others, could influence the Company's ability to
sell its products in international markets. In addition, the
Company's sale of its products is subject to the risks associated
with legislation and regulation relating to imports, including
quotas, duties or taxes and other charges, restrictions and
retaliatory actions on imports into other countries in which the
Company's products may be sold. The Company is also subject to
similar risks with respect to the importation of raw materials
from foreign countries.
ITEM 2. PROPERTIES
-------------------
Synthetech's headquarters and production facility are located in
Albany, Oregon. The Company purchased this Albany, Oregon
property in 1987. Since then, it has undergone a number of plant
and building expansions on site. At present, the Company's
facilities, which aggregate 47,700 square feet, include
production, pilot plant, laboratory, warehouse and office space.
These facilities include a recently constructed separate 20,000
square foot production facility with six production bays. Three
of these bays have been outfitted with reactor vessels and other
equipment and are operational. A fourth bay is being outfitted
with reactor vessels and other equipment and can be completed and
put into service as the Company needs additional capacity. The
final two bays remain vacant and available for future expansion.
To accomplish the plant expansions, Synthetech has contracted
with various third party providers. The Company typically has
issued purchase orders to such providers with detailed
specifications, services to be provided and the prices to be
paid. The Company has 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 an independent
third-party engineering firm selected by the City of Albany prior
to approval of various construction permits.
10
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Not applicable.
11
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
---------------------------
The Company's Common Stock trades on the Nasdaq National 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 last two fiscal years as reported by
Nasdaq.
Fiscal Year Ended March 31,
--------------------------
2000 1999
---- ----
High Low High Low
---- --- ---- ---
First Quarter $6.41 $4.00 $8.00 $6.00
Second Quarter 6.38 4.25 7.00 3.38
Third Quarter 4.63 3.25 7.13 3.88
Fourth Quarter 6.88 3.44 6.50 4.00
___________________________
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 24, 2000 was 589.
12
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following selected financial data 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.
Year Ended March 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENTS OF INCOME DATA:
Revenues $12,132 $ 23,133 $ 8,321 $12,797 $ 8,472
Gross Profit 4,196 10,150 3,001 7,694 4,787
Operating Income 2,544 8,341 1,611 6,248 3,737
Net Income $ 1,942 $ 5,418 $ 1,221 $ 4,112 $ 2,574
Basic Earnings Per Share $0.14 $0.38 $0.09 $0.30 $0.21
Diluted Earnings Per $0.14 $0.38 $0.09 $0.29 $0.19
March 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Working Capital $12,300 $12,110 $ 8,237 $ 9,242 $ 8,157
Total Assets 26,917 26,230 19,364 17,323 10,959
Long-Term Debt 135 152 166 180 -
Retained Earnings 16,291 14,349 8,931 7,710 3,598
Shareholders' Equity $25,058 $23,027 $17,306 $15,797 $10,100
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
OVERVIEW
- --------
Synthetech's large-scale production during fiscal 2000 and fiscal
1999 confirmed the Company's capability to produce PBBs at the
higher volumes often associated with marketed drugs. Combined
with the Company's already well established production capability
at the research and clinical testing stages, the Company has
demonstrated a full cycle "grams to tons" production capability.
This full cycle capability reinforces Synthetech's long-term
growth strategy emphasizing a commitment to its customers from
the early phases of discovery through clinical development and
culminating in marketed drugs.
Despite the drop in revenues for fiscal 2000 compared to fiscal
1999, the Company remains profitable and in a sound financial
condition. The Company's operating cash flow during fiscal 2000
and financial reserves enabled it to continue significant
investments in facilities and organizational infrastructure.
While the financial results for the first half of fiscal 2001 may
be similar to the second half of fiscal 2000, Synthetech remains
well positioned for growth and active as a supplier of Peptide
Building Blocks (PBBs) for several pharmaceutical development
projects in clinical trials. Although the progress and timing of
these projects remain outside the Company's control, there are a
number of different combinations with the potential to generate
substantial future revenues.
OPERATIONS
- ----------
The following table sets forth, for the periods indicated, the
percentage of revenues represented by each item included in the
Statements of Income.
Percentage of Revenues
Fiscal Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of Revenues 65.4% 56.1% 63.9%
------ ------ ------
Gross Profit 34.6% 43.9% 36.1%
Research and
development 3.6% 1.5% 2.6%
Selling, general
and administrative 10.0% 6.4% 14.1%
----- ----- -----
Operating Income 21.0% 36.0% 19.4%
Other Income 2.9% 0.9% 3.7%
Interest Expense (0.1)% (0.1)% -
------ ------ -----
Income Before Income
Taxes 23.8% 36.8% 23.1%
Provision for Income
Taxes 7.8% 13.5% 8.4%
----- ----- -----
Net Income 16.0% 23.3% 14.7%
===== ===== =====
14
Revenues
- ---------
Synthetech revenues were $12.13 million, $23.13 million and
$8.32 million in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively, reflecting the unpredictability and potential for
significant revenue fluctuations associated with the industry
environment in which the Company operates. Revenues decreased
48% in fiscal 2000 as compared to fiscal 1999 and revenues
increased 178% in fiscal 1999 as compared to fiscal 1998.
Synthetech's revenue decrease in fiscal 2000 compared to fiscal
1999 and revenue increase in fiscal 1999 compared to fiscal 1998
were largely due to absence or presence of large-scale orders.
Revenues from large-scale orders were $3.2 million,
$14.14 million and $2.17 million for fiscal 2000, fiscal 1999 and
fiscal 1998, respectively. The $3.2 million large-scale order
revenue in fiscal 2000 was attributable to the completion of a
large-scale PBB order for a marketed drug initially received in
fiscal 1998. This order provided $10.18 million and $879,000 of
revenue in fiscal 1999 and 1998, respectively. One other large
scale order for a marketed drug provided $3.96 million and
$1.29 million of revenue in fiscal 1999 and 1998, respectively.
The Company estimates that in fiscal 2000 approximately 31% of
the Company's PBB sales went into marketed drugs, approximately
65% went into drugs in clinical trials and approximately 4% went
into drugs at the R&D or discovery stage. In fiscal 1999 and
fiscal 1998, the Company estimates that approximately 63% and
46%, respectively, of the Company's PBB sales went into marketed
drugs, approximately 33% and 41%, respectively, went into drugs
in clinical trials and approximately 4% and 13%, respectively,
went into drugs at the R&D or discovery stage. These estimates
are based on an analysis of the Company's sales, publicly
available information and information to the extent available
from customers.
The level of Synthetech's business from period to period
continues to be unpredictable to a large extent. 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 clinical or discovery stages, continuation of
customer demand for PBBs associated with marketed drugs remains
subject to various market conditions, including, without
limitation, potential use of alternative manufacturing routes and
continued market demand for the drug and competition from other
suppliers of PBBs. For example, the customer to whom the Company
shipped $3.2 million in fiscal 2000 PBB orders adopted an
alternative lower-cost manufacturing route not using Synthetech's
PBB and the Company does not expect any additional orders for
this product from this customer. 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. The Company is also not expecting additional orders in
the near term from the other customer which placed large scale
orders in fiscal 1998 and 1999 since certain side effects have
reduced the demand for the drug and, therefore, the demand for
the Company's PBBs.
The level of Synthetech's business from period to period at the
clinical and discovery stages remains unpredictable as well. For
example, in the third quarter of fiscal 2000 the Company received
a $3.6 million order for use in a drug in clinical trials. The
customer's inability to timely source raw materials for the order
and a subsequent curtailed and revised scope of this project
resulted in only $712,000 of product being shipped during fiscal
2000 and the payment to the Company of a $660,000 idle equipment
reservation charge in the fourth quarter of fiscal 2000. Under
15
the revised scope of this project, Synthetech expects to ship an
additional $2 million for this project to the customer in fiscal
2001.
With this industry environment, it is difficult to predict with
certainty the level of future business. The Company's backlog of
PBB orders at March 31, 2000 was $2.42 million (of which
$2 million represents shipments under the project discussed
above) compared to a backlog at March 31, 1999 of $8.86 million.
While the Company believes that the financial results for the
first half of fiscal 2001 may be similar to the second half of
fiscal 2000, it remains active as a supplier of Peptide Building
Blocks (PBBs) for several pharmaceutical development projects in
clinical trials. These projects could have substantial future
business potential. There are, however, many factors affecting
the success of these drug candidates and Synthetech's
involvement. (See "Industry Factors" below.)
Gross Profit
- ------------
Gross profit was $4.20 million, $10.15 million and $3.00 million
in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. This
reflects a 59.0% decrease in gross profit in fiscal 2000 from
fiscal 1999, and a 238.0% increase in gross profit in fiscal 1999
from fiscal 1998. As a percentage of revenues, gross profit
margins were 34.6%, 43.9% and 36.1% in fiscal 2000, fiscal 1999
and fiscal 1998, respectively.
The decrease in the gross profit margins for fiscal 2000 as
compared to fiscal 1999 reflected a combination of factors: the
downward pressure caused by a lower level of revenues in fiscal
2000 and the increased manufacturing overhead costs associated
with the second phase expansion of the new plant in fiscal 2000
being somewhat offset by the positive impact of the idle
equipment reservation fee. The increase in the gross profit
margins for fiscal 1999 as compared to fiscal 1998 resulted from
the mix of products (i.e., type and volume of products sold as
individual orders) and the fiscal 1999's closely associated high
revenue levels. 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 $436,000 or
3.6% of sales, in fiscal 2000, from $338,000, or 1.5% of sales,
in fiscal 1999. R&D expense was $215,000, or 2.6%, in fiscal
1998. The increase in fiscal 2000 resulted primarily from an
increase in personnel. 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 $522,000, $450,000 and $419,000 during the
fiscal years ended March 31, 2000, 1999 and 1998, respectively.
Selling, general and administrative (SG&A) expense was $1.22
million, $1.47 million and $1.18 million in fiscal 2000, fiscal
1999 and fiscal 1998, respectively. The decrease in SG&A in
fiscal 2000 from fiscal 1999 primarily reflected a reduced bonus
pool, reduced compensation expenses related to the granting of a
non-qualified stock option, and payments made pursuant to a
16
termination of employment in fiscal 1999. The increase in SG&A
in fiscal 1999 from fiscal 1998 primarily reflected the increased
labor costs described below and payments made pursuant to a
termination of employment. SG&A as a percentage of sales was
10.0%, 6.4% and 14.1% for fiscal 2000, fiscal 1999 and fiscal
1998, respectively.
Operating Income
- ----------------
Operating income was $2.54 million in fiscal 2000, $8.34 million
in fiscal 1999 and $1.61 million in fiscal 1998. In fiscal 2000,
Company-wide labor costs (including the employee bonus pool)
("labor costs") decreased to $2.36 million from $2.48 million in
fiscal 1999. While the salary component of labor costs in fiscal
2000 increased, it was more than offset by the significant
reduction of the bonus pool for fiscal 2000 as compared to fiscal
1999.
In fiscal 1999, the Company's labor costs increased to
$2.48 million from $1.50 million in fiscal 1998. Commencing in
the second half of fiscal 1998 and continuing in fiscal 1999, the
Company hired additional employees in connection with its plant
expansion and overall Company growth. The increase in labor
costs in fiscal 1999 reflected this hiring program. In addition,
the Company's fiscal 1999 employee bonus pool was significantly
higher than the fiscal year 1998 pool, reflecting fiscal 1999's
record results.
As a percentage of revenues, operating income was 21.0% in fiscal
2000, 36.0% in fiscal 1999 and 19.4% in fiscal 1998.
Other Income
- ------------
The $361,000 net other income in fiscal 2000 resulted primarily
from $364,000 of interest earnings less miscellaneous expenses of
$3,000. The $215,000 net other income in fiscal 1999 resulted
primarily from $275,000 of interest earnings less miscellaneous
expenses of $60,000. 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.
Net Income
- ----------
In fiscal 2000, the Company earned $2.89 million before income
taxes. A provision for income taxes of $949,000 resulted in net
income of $1.94 million. In fiscal 1999, the Company earned
$8.54 million before income taxes. A provision for income taxes
of $3.12 million resulted in net income of $5.42 million. 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. The effective tax rates for the Company
were 32.8%, 36.5% and 36.5% in fiscal 2000, fiscal 1999 and
fiscal 1998, respectively. The decrease in the effective tax
rate for fiscal 2000 from fiscal 1999 reflects a relatively high
proportion of export sales in fiscal 2000 and the associated
foreign sales corporation tax benefit.
INDUSTRY FACTORS
- ----------------
The market for PBBs is driven by the market for synthetically
manufactured peptide, peptidomimetic small molecule and other
drugs in which they are incorporated. The drug development
process for these drugs is dictated by the marketplace, drug
17
companies and the regulatory environment. The Company has no
control over the pace of these drug development efforts, which
drugs get selected for clinical trials, which drugs are approved
by the FDA and, even if approved, the ultimate market potential
of such drugs.
The three stages of the drug development process include: R&D or
discovery stage, clinical trial stage and marketed drug stage.
Synthetech's customers can spend years researching and developing
new drugs, taking only a small percentage to clinical trials and
fewer yet to commercial market. A substantial amount of the
activity continues to occur at the earlier stages of research and
development and clinical trials. The market for peptide and
peptidomimetic small molecule drugs is still very early in
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.
The size of the PBB orders for marketed drugs can be
substantially larger than those for the discovery or clinical
trial stages. Sales of PBBs for marketed drugs can also provide
an opportunity for continuing longer-term sales. While not
subject to the same high cancellation rate faced by discovery and
clinical trial stage drug development programs, the demand for
the approved drugs, however, remains subject to many
uncertainties, including, without limitation, the drug price, the
drug side effects and the existence of other competing drugs.
These factors, which are outside of the control of the Company,
will affect the level of demand for the drug itself and,
therefore, the demand for PBBs. Also, industry cost pressures can
cause pharmaceutical companies to explore and, as was the case
with one of the large-scale orders, ultimately adopt alternative
manufacturing processes which do not include the Company's PBBs
as an intermediate. Finally, with the longer-term, larger-scale
orders, the Company expects increased competition to supply these
PBBs.
Accordingly, these industry factors create an inability for the
Company to predict future demand beyond its current order base.
Until the Company develops a stable baseload of demand, the
Company is likely to continue to experience significant
fluctuations in its quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 2000, the Company had working capital of
$12.30 million compared to $12.11 million at March 31, 1999. The
Company does not invest in derivative securities. The Company's
cash and cash equivalents at March 31, 2000 totaled
$6.40 million, a $1.07 million decrease from the March 31, 1999
level. This net decrease reflected a number of factors including
decreased accounts receivable, increased inventory, decreased
accounts payable and increased deferred revenue together with
substantial capital expenditures involving the phase two of the
plant expansion and upgrades to the existing plant. All of the
Company's $3.75 million capital expenditures in fiscal 2000 were
internally funded. In addition, the Company has a $1,000,000
unsecured bank line of credit. As of March 31, 2000 there was no
amount outstanding under the bank line.
18
The decrease in accounts receivable to $2.43 million at March 31,
2000, from $3.41 million at March 31, 1999, reflected the lower
level of revenues in the fourth quarter of fiscal 2000 compared
to the fourth quarter in the prior year. The increase of income
tax receivable to $137,000 at March 31, 2000 from $0 at March 31,
1999 and the reduction of accrued income taxes to $0 at March 31,
2000 from $561,000 at March 31, 1999 reflected overpayments of
estimated taxes. The increase in inventories to $4.11 million at
March 31, 2000 from $3.36 million at March 31, 1999 principally
reflected the manufacturing and stocking of certain products for
future sale and, to a lesser extent, the provisioning of raw
materials for specific projects. The decrease in accounts
payable to $547,000 at March 31, 2000 from $1.54 million at March
31, 1999 primarily reflected the timing of expenditure
commitments related to the second phase of the plant expansion
and timing of raw material purchases. The decrease in accrued
compensation to $109,000 at March 31, 2000 from $375,000 at March
31, 1999 primarily reflected accrued bonus and related
compensation paid during the first quarter. The increase in
deferred revenue to $544,000 at March 31, 2000 from $44,000 at
March 31, 1999 resulted from customer advance payments.
In fiscal 1998, 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 one
and one-half years were approximately $8.23 million. The Company
has undertaken an approximately $6.5 million second-phase
expansion outfitting additional bays of the new plant with four
additional multipurpose reactor systems and constructing
additional warehouse, bulk storage and related facilities. Most
of the second-phase expansion has been completed and is
operational. During fiscal 2000, the Company's capital
expenditures were $3.75 million, $3.34 million of which were for
the second phase plant expansion and $410,000 for the existing
plant and equipment upgrades. During fiscal 2001, the Company
estimates that roughly $1 million will be used substantially for
existing plant and equipment upgrades and a small amount to
finish the second-phase plant expansion. The Company, however,
has not finalized its capital expenditure budget for fiscal 2001
and will be also reviewing other possible projects. The Company
expects to finance these capital expenditures internally 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.
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 established a Y2K team lead by its Chief Financial
Officer. During fiscal 2000, the team completed its assessment
of the Company's information systems which support business
applications and the Company believes that these information
system components are current with all Y2K updates and changes
19
recommended by the vendors. The team also completed its
assessment of the Company's research and development,
manufacturing processes and facility management systems and the
Company believes that these systems and components are current
with all Y2K updates and changes recommended by the vendors. The
Company also completed its survey of key suppliers and customers
to determine the level of their Y2K readiness. Due to the nature
and size of its operations and its Y2K efforts, the Company did
not develop any contingency plans other than to identify second
sources for any of its key suppliers who could not advise the
Company that they were Y2K compliant. The Company's information
technology expenditures for fiscal 2000 were $197,000, of which
approximately 24% related to the Company's Y2K program, including
$18,000 paid to outside consultants. These expenses were paid
out of revenues from operations. To date, the Company is unaware
of any significant Y2K issues affecting it, its key suppliers or
customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
-------------------------------------------------------
MARKET RISK
-----------
No disclosure is required under this item.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Index Page
----- ----
Report of Independent Public Accountants for the years ended
March 31, 2000, 1999 and 1998............................... 21
Financial Statements:
Balance Sheets as of March 31, 2000 and
1999...................................................... 22
Statements of Income for the years ended March 31, 2000,
1999 and 1998............................................. 24
Statements of Shareholders' Equity and Comprehensive
Income for the years ended March 31, 2000, 1999 and 1998.. 25
Statements of Cash Flows for the years ended March 31,
2000, 1999, and 1998...................................... 26
Notes to Financial Statements:
Note A - General and Business............................. 27
Note B - Summary of Significant Accounting Policies....... 27
Note C - Inventories...................................... 30
Note D - Property, Plant and Equipment.................... 30
Note E - Income Taxes..................................... 31
Note F - Line of Credit................................... 31
Note G - Note Payable..................................... 32
Note H - Shareholders' Equity............................. 32
Note I - 401(k) Profit Sharing Plan....................... 35
Note J - Segment Information.............................. 36
Note K - Commitments and Contingencies.................... 36
Supplementary Financial Data................................ 37
21
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, 2000 and 1999, and
the related statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the three years
in the period ended March 31, 2000. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Synthetech, Inc. as of March 31, 2000 and 1999, and the
results of its operations and its cash flows for each of the
three years in the period ended March 31, 2000 in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Portland, Oregon,
May 12, 2000
22
SYNTHETECH, INC.
BALANCE SHEETS
----------------------
At March 31, 2000 1999
- ------------ ------ ------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 6,404,000 $ 7,470,000
Accounts receivable, less allowance
for doubtful accounts of $15,000
for 2000 and 1999 2,433,000 3,414,000
Income tax receivable 137,000 -
Inventories 4,112,000 3,359,000
Prepaid expenses 285,000 284,000
Deferred income taxes 140,000 133,000
Other current assets 31,000 5,000
----------- -----------
TOTAL CURRENT ASSETS 13,542,000 14,665,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 13,375,000 11,561,000
OTHER ASSETS - 4,000
----------- -----------
TOTAL ASSETS $26,917,000 $26,230,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
23
SYNTHETECH, INC.
BALANCE SHEETS
-------------------------
(continued)
At March 31, 2000 1999
- ------------------------------------- ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 17,000 $ 15,000
Accounts payable 547,000 1,543,000
Accrued compensation 109,000 375,000
Deferred revenue 544,000 44,000
Accrued income taxes - 561,000
Other accrued liabilities 25,000 17,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,242,000 2,555,000
DEFERRED INCOME TAXES 482,000 496,000
NOTE PAYABLE, net of current portion 135,000 152,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding,
14,277,000 and 14,252,000 shares 14,000 14,000
Paid-in capital 8,793,000 8,740,000
Deferred compensation (40,000) (76,000)
Retained earnings 16,291,000 14,349,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,058,000 23,027,000
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $26,917,000 $26,230,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
24
SYNTHETECH, INC.
STATEMENTS OF INCOME
------------------------------
For The Year Ended March 31, 2000 1999 1998
- ---------------------------- --------- ---------- ----------
REVENUES $12,132,000 $23,133,000 $8,321,000
COST OF REVENUES 7,936,000 12,983,000 5,320,000
----------- ----------- ----------
GROSS PROFIT 4,196,000 10,150,000 3,001,000
----------- ----------- ----------
Research and development 436,000 338,000 215,000
Selling, general and
administrative 1,216,000 1,471,000 1,175,000
----------- ----------- -----------
OPERATING EXPENSE 1,652,000 1,809,000 1,390,000
----------- ----------- -----------
OPERATING INCOME 2,544,000 8,341,000 1,611,000
OTHER INCOME, net 361,000 215,000 312,000
INTEREST EXPENSE (14,000) (17,000) -
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,891,000 8,539,000 1,923,000
PROVISION FOR INCOME TAXES 949,000 3,121,000 702,000
----------- ----------- -----------
NET INCOME $ 1,942,000 $ 5,418,000 $ 1,221,000
=========== =========== ===========
BASIC EARNINGS PER SHARE $0.14 $0.38 $0.09
===== ===== =====
DILUTED EARNINGS PER SHARE $0.14 $0.38 $0.09
===== ===== =====
The accompanying notes are an integral part of these financial statements.
25
SYNTHETECH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
-----------------------------------------------------------
EMPLOYEE
NOTES
COMMON STOCK RECEIVABLE CUMULATIVE
----------------- PAID-IN & DEFERRED COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) EARNINGS TOTAL
------ ------ ------- ------------ ------------- ---------- -----------
BALANCE, March 31, 1997 13,860,000 $14,000 $8,296,000 ($239,000) $16,000 $7,710,000 $15,797,000
-----------
Realized loss on securities
available for sale - - - - (16,000) - (16,000)
Net income - - - - - 1,221,000 1,221,000
-----------
Comprehensive income - - - - - - 1,205,000
Issuance of stock for the
exercise of stock options 283,000 - 280,000 - - - 280,000
Issuance of below-market stock
options - - 21,000 (21,000) - - -
Amortization of deferred
compensaton - - - 124,000 - - 124,000
Payment on employee note
receivable - - - 30,000 - - 30,000
Revision on estimate of income
tax benefit on disqualifying
dispositions - - (207,000) - - - (207,000)
Income tax benefit of
disqualifying dispositions - - 40,000 - - - 40,000
Income tax benefit of non-
qualified option exercises - - 37,000 - - - 37,000
---------- ------ --------- ---------- ---------- --------- ----------
BALANCE, March 31, 1998 14,143,000 14,000 8,467,000 (106,000) - 8,931,000 17,306,000
Net income - - - - - 5,418,000 5,418,000
Issuance of stock for the
exercise of stock options 109,000 - 36,000 - - - 36,000
Issuance of below-market stock
options - - 90,000 (90,000) - - -
Amortization of deferred
compensation - - - 120,000 - - 120,000
Income tax benefit of
disqualifying dispositions - - 83,000 - - - 83,000
Income tax benefit of non-
qualified option exercises - - 64,000 - - - 64,000
---------- ------ --------- -------- ---------- ---------- ----------
BALANCE, March 31, 1999 14,252,000 14,000 8,740,000 (76,000) - 14,349,000 23,027,000
Net income - - - - - 1,942,000 1,942,000
Issuance of stock for the
exercise of stock options 25,000 - 15,000 - - - 15,000
Issuance of below-market
stock options - - 10,000 (10,000) - - -
Amortization of deferred
compensation - - - 46,000 - - 46,000
Income tax benefit of
disqualifying dispositions - - 7,000 - - - 7,000
Income tax benefit of non-
qualified option exercises - - 21,000 - - - 21,000
---------- ------- ---------- --------- ---------- ----------- -----------
BALANCE, March 31, 2000 14,277,000 $14,000 $8,793,000 ($40,000) $ - $16,291,000 $25,058,000
========== ======= ========== ========= ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
26
SYNTHETECH, INC.
STATEMENT OF CASH FLOWS
-----------------------
For The Year Ended March 31, 2000 1999 1998
- ---------------------------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,942,000 $5,418,000 $1,221,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and other 1,936,000 1,351,000 1,014,000
Amortization of deferred compensation 46,000 120,000 108,000
Realized gain on securities available
for sale - - (25,000)
(Benefit) provision for deferred income
taxes (21,000) 224,000 127,000
(Increase) decrease in assets:
Accounts receivable, net 981,000 (1,944,000) (775,000)
Inventories (753,000) (175,000) (1,297,000)
Prepaid expenses (1,000) (88,000) (32,000)
Income tax receivable (137,000) - 798,000
Other current assets (26,000) 19,000 (20,000)
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities (1,815,000) 1,074,000 201,000
Deferred revenue 500,000 (203,000) 203,000
---------- ---------- ----------
Net cash provided by operating
activities 2,652,000 5,796,000 1,523,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment
purchases, net (3,746,000) (3,472,000) (4,089,000)
Proceeds from sale of securities
available for sale and redemption
of securities available for sale - - 635,000
Employee notes receivable - - 30,000
---------- ---------- ----------
Net cash used by investing
activities (3,746,000) (3,472,000) (3,424,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term
debt obligations (15,000) (13,000) (13,000)
Proceeds from stock option exercises
and related tax benefits 43,000 183,000 150,000
---------- ---------- ----------
Net cash provided by
financing activities 28,000 170,000 137,000
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,066,000) 2,494,000 (1,764,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 7,470,000 4,976,000 6,740,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $6,404,000 $7,470,000 $4,976,000
========== ========== ==========
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of stock options at
below fair value $10,000 $90,000 $21,000
Mature shares exchanged for
the exercise of stock options $94,000 $401,000 $480,000
The accompanying notes are an integral part of these financial statements.
27
SYNTHETECH, INC.
----------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE A. GENERAL AND BUSINESS
Synthetech, Inc., an Oregon corporation, specializes in
developing and producing Peptide Building Blocks
(PBBs), which are chemically modified forms of natural
amino acids and synthetic non-natural amino acids
(Specialty Amino Acids) using a combination of organic
chemistry and biocatalysis. The Company's PBBs are
used by pharmaceutical companies to make a wide range
of peptide-based drugs under development and on the
market for the treatment of AIDS, cancer,
cardiovascular and other diseases. The Company has
established a worldwide reputation in a unique product
and technology area as a leading supplier for all
phases of the drug development cycle from discovery
through market launch.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Use of Estimates: The preparation of financial
statements in conformity with accounting principles
generally accepted in the United States requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash and Cash Equivalents: Cash and cash equivalents
include demand cash and all investments purchased with
a maturity at acquisition of three months or less.
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.
Securities Available for Sale: In February 1998, the
Company sold the last of its securities available for
sale. Any unrealized gains or losses have been
reflected as a separate component of shareholders'
equity in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115.
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 are removed from the
accounts and the resulting gain or loss is included in
income.
28
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Revenue Recognition: Sales of products are recognized
when products are shipped and title and risk of loss
have been passed to the customer. The Company has not
experienced any significant history of sales returns
and thus, no reserve for sales returns has been
provided.
Concentrations of Credit Risk: Financial instruments
which potentially expose the Company to concentrations
of credit risk consist primarily of accounts
receivable. At March 31, 2000, two customers had
accounts receivable balances of 68% and 15% of total
accounts receivable. At March 31, 1999, 3 customers
had accounts receivable balances of 53%, 17% and 12% of
total accounts receivable.
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: Basic earnings per share (EPS) are
computed by dividing net income by the weighted average
number of shares of common stock outstanding during the
period. Diluted earnings per share are computed by
dividing net income by the weighted average number of
shares of common stock and common stock equivalents
outstanding during the period, calculated using the
treasury stock method as defined in SFAS No. 128. The
following is a reconciliation of the shares used to
calculate basic earnings per share and diluted earnings
per share:
2000 1999 1998
---- ---- ----
Weighted average shares
outstanding for basic EPS 14,256,761 14,200,399 13,921,164
Dilutive effect of common
stock options issuable
under treasury stock method 37,938 57,708 149,809
---------- ---------- ----------
Weighted average common and
common equivalent shares
outstanding for diluted EPS 14,294,699 14,258,107 14,070,973
========== ========== ==========
The following common stock equivalents were excluded
from the earnings per share computation because their
effect would have been anti-dilutive:
2000 1999 1998
---- ---- ----
Common stock options
outstanding 523,800 523,800 482,300
29
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
Supplemental cash flow disclosures are as follows:
Cash Paid During The Year For:
2000 1999 1998
---- ---- ----
Income Taxes $1,640,000 $2,702,000 $ 419,000
Interest $ 14,000 $ 17,000 $ 17,000
Comprehensive Income: In 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." The
source of comprehensive income for the Company,
other than net income, is losses on marketable
securities available for sale. The Company has
elected to disclose comprehensive income in the
Statements of Shareholders' Equity and Comprehensive
Income.
Segment Reporting: The Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and
Related Information" for the year ended March 31, 1999.
Based upon definitions contained within SFAS No. 131,
the Company has determined that it operates in one segment.
New Accounting Pronouncement: In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 137"). SFAS 137 is an amendment to
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." SFAS 137 establishes accounting and
reporting standards for all derivative instruments.
SFAS 137 is effective for fiscal years beginning after
June 15, 2000. The Company does not currently have any
derivative instruments and, accordingly, does not
expect the adoption of SFAS 137 to have an impact on
its financial position or results of operations.
30
NOTE C. INVENTORIES
-----------
The major components of inventories are as follows:
March 31,
---------
2000 1999
---- ----
Finished products $ 1,666,000 $ 1,206,000
Work-in-process 943,000 824,000
Raw materials 1,503,000 1,329,000
--------- ---------
$ 4,112,000 $ 3,359,000
============ ===========
NOTE D. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consist of the following:
March 31,
---------
2000 1999
---- ----
Land $ 91,000 $ 91,000
Buildings 5,139,000 4,446,000
Machinery and equipment 10,767,000 7,293,000
Laboratory equipment 469,000 400,000
Furniture and fixtures 290,000 283,000
Vehicles 132,000 132,000
Construction in progress 1,887,000 2,600,000
---------- ----------
18,775,000 15,245,000
Less:
Accumulated depreciation 5,400,000 3,684,000
------------ ------------
$ 13,375,000 $ 11,561,000
============ ============
31
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 2000, fiscal
1999 and fiscal 1998 included a deferred tax (benefit)
provision of ($21,000), $224,000 and $127,000,
respectively.
Total deferred tax assets and liabilities at March 31,
2000 were $140,000 and $482,000, respectively. Total
deferred tax assets and liabilities at March 31, 1999,
were $133,000 and $496,000, respectively. Individually
significant differences included book/tax depreciation
differences which were recorded as a deferred tax
liability of $482,000 and $496,000 at March 31, 2000
and March 31, 1999, respectively.
The reconciliation between the effective tax rate and
the statutory federal income tax rate is as follows:
2000 1999 1998
---- ---- ----
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes 4.4% 4.4% 2.5%
Foreign sales corporation
benefit (5.7)% (0.6)% (1.5)%
Other 0.1% (1.3)% 1.5%
------ ------ ------
Effective tax rate 32.8% 36.5% 36.5%
===== ===== =====
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 equal to the bank's prime lending rate which was
9.0% at March 31, 2000. There were no amounts
outstanding under this loan at the end of the fiscal
year. This line of credit is renewable on September 1,
2000.
32
NOTE G. NOTE PAYABLE
------------
In 1997, the Company entered into a note payable with
the City of Albany for payment of wastewater system
development charges assessed in connection with the
Company's plant expansion. The note bears interest of
9.0% and is due in monthly installments of $2,459
through February 2007. The note is secured by the
Company's property, plant and equipment.
NOTE H. SHAREHOLDERS' EQUITY
--------------------
In July 1998, the Company adopted a Shareholder Rights
Plan (the "Rights Plan"). Under the Rights Plan, the
Company declared a dividend of one common share
purchase right (a "Right") for each outstanding share
of common stock outstanding at the close of business on
August 4, 1998. The Rights are attached to, and
automatically trade with, the outstanding shares of the
Company's common stock. Under certain conditions, each
right may be exercised to purchase one share of common
stock at a purchase price of $30 per share, subject to
adjustment. In the event that a person or group
acquires 15% or more of the Company's common stock,
each Right will entitle all other shareholders to
purchase from the Company common stock having a market
value equal to two times the exercise price of the
Right. In addition, if the Company is acquired in a
merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are
sold, proper provision will be made so that each
shareholder with unexercised Rights will be entitled to
purchase common stock of the acquirer with a value of
twice the exercise price of the Rights. The Company is
entitled to redeem the Rights at $.0001 per Right at
any time prior to the earlier of the expiration of the
Rights in July 2008 or the time that a person or group
has acquired a 15% position. The Rights do not have
voting or distribution rights.
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 1,436,050 options have been exercised and
55,110 options have been cancelled as of March 31, 2000
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.
33
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
--------------------------------
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 983,000 options have been
granted under this plan. A total of 20,500 options
have been exercised and 220,200 options have been
cancelled as of March 31, 2000 under the plan since its
inception. The options granted under this plan
generally vest 50% after 1 year and 100% after 2 years
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.
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.
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 2000, fiscal
1999 and fiscal 1998 using the Black-Scholes option-
pricing model as prescribed by SFAS 123, using the
following weighted average assumptions for grants in
fiscal 2000, fiscal 1999 and fiscal 1998:
Fiscal Year 2000 1999 1998
----------- ---- ---- ----
Risk-free interest rate 5.50% 5.50% 6.49%
Expected dividend yield 0% 0% 0%
Expected life 3.84 years 3.81 year 3.60 years
Expected volatility 55% 55% 57%
The total value of options granted during fiscal 2000,
fiscal 1999 and fiscal 1998 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
34
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
---------------------------------
earnings per share would have decreased as reflected in
the following pro forma amounts:
Year ended March 31,
--------------------
2000 1999 1998
---- ---- ----
Net income:
As reported $ 1,942,000 $ 5,418,000 $ 1,221,000
Pro forma $ 1,453,000 4,761,000 322,000
Basic earnings per
share:
As reported $0.14 $0.38 $0.09
Pro forma $0.10 $0.33 $0.02
Diluted earnings per
share:
As reported $0.14 $0.38 $0.09
Pro forma $0.10 $0.33 $0.02
Using the Black-Scholes methodology, the total value of
options granted during fiscal 2000, fiscal 1999 and
fiscal 1998 was $299,000, $743,000 and $873,000,
respectively, which would be amortized on a pro forma
basis over the vesting period of the options. The
weighted average fair value of options granted during
fiscal 2000, fiscal 1999 and fiscal 1998 was $2.18,
$3.05 and $3.45, respectively.
Activity under the Amended and Restated 1990 Stock
Option Plan and 1995 Incentive Compensation Plans over
the last three fiscal years is summarized as follows:
Year ended March 31,
--------------------
2000 1999 1998
------------ ------------- --------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Shares Ex. Shares Ex. Shares Ex.
Price Price Price
------ ----- ------ ----- ------ -----
Options outstanding
at beginning of year 659,513 $6.26 749,400 $5.85 913,810 $4.06
Granted 137,000 $4.32 244,000 $5.64 253,000 $7.05
Exercised (41,713) $2.60 (173,887) $2.52 (373,710) $2.04
Cancelled (22,000) $5.03 (160,000) $7.45 (43,700) $8.02
------- ----- ------- ----- ------- -----
Options outstanding at
at end of year 732,800 $6.15 659,513 $6.26 749,400 $5.85
======= ===== ======= ===== ======= =====
Exerciseable at end
of year 488,300 $6.67 346,113 $6.40 381,183 $4.48
Weighted average fair
value of optons granted
at market value - $2.13 - $2.84 - $3.41
Weighted average fair
value of options granted
at below market value - $3.18 - $5.45 - $7.02
35
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
--------------------------------
The following table sets forth the exercise price
range, number of shares outstanding at March 31, 2000,
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:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Exercise Outstanding Remaining Wtd. Avg. Wtd. Avg.
Price Shares Contractual Exercise Exercisable Exercise
Range at 3/31/00 Life (Years) Price Options Price
- ----------- ---------- ----------- -------- ------------ -------
$0.30-$1.08 24,500 8.41 $0.84 9,500 $0.84
$1.72-$1.81 50,000 6.58 $1.81 50,000 $1.81
$2.22-$4.56 144,000 8.73 $4.49 12,500 $4.38
$6.25-$8.50 514,300 7.15 $7.29 416,300 $7.46
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. The Company's matching contribution is
$.50, $.75 and $1.00 for each $1.00 contributed up to
10% of compensation corresponding to length of service
with the Company. The Company contribution becomes
fully vested for each employee after 5 years of
employment. The Company matching contribution for
fiscal years 2000, 1999 and 1998 was $73,000, $77,000
and $46,000, respectively.
36
NOTE J. SEGMENT INFORMATION
-------------------
Long-lived assets, other than in the United States, are
not material.
Significant Customers: During fiscal year 2000, three
customers accounted for approximately 29%, 19% and 14%
of revenues. During fiscal year 1999, two customers
accounted for 44% and 20% of revenues. During fiscal
year 1998, two customers accounted for 23% and 11% of
revenues.
The following table reflects sales and percent of total
sales by geographic area for the year ended March 31,
2000 1999 1998
------------------ ------------------ -------------------
United States $ 5,738,000 47.3% $16,680,000 72.1% $ 5,472,000 65.7%
Europe 4,807,000 39.6% 5,688,000 24.6% 2,606,000 31.3%
Mexico 1,522,000 12.6% 552,000 2.4% - -
Japan 53,000 0.5% 198,000 0.9% 205,000 2.5%
Other 12,000 - 15,000 - 38,000 0.5%
----------- ----- ----------- ----- ---------- -----
Total $12,132,000 100% $23,133,000 100% $ 8,321,000 100%
=========== =========== ===========
NOTE K. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is a party to a legal proceeding.
Management believes that the outcome of such proceeding
will not have a material effect on the business,
financial position or results of operations of the
Company.
37
Supplementary Financial Data
- ----------------------------
The financial statements and notes thereto required by
this item begin on page 20 of this document. Unaudited
quarterly financial data for each of the eight quarters
in the two-year period ended March 31, 2000 is as
follows:
Year Ended March 31, 2000
-------------------------
(in thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $4,636 $3,370 $1,503 $2,623
Gross profit 2,007 1,365 135 689
Operating income (loss) 1,537 955 (243) 295
Net income (loss) 1,005 645 (92) 384
Basic and diluted earnings
(loss) per share $0.07 $0.05 ($0.01) $0.03
Year Ended March 31, 1999
-------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $4,128 $5,327 $6,047 $7,631
Gross profit 1,593 2,320 2,423 3,814
Operating income 1,157 1,861 1,979 3,344
Net income 754 1,193 1,267 2,204
Basic and diluted
earnings per share $0.05 $0.08 $0.09 $0.15
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not applicable.
39
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
-------------------------------------------------
REGISTRANT
----------
The following table sets forth certain information concerning the
executive officers, key employees and directors of the Company:
Name Age Position
---- --- --------
M. ("Sreeni") Sreenivasan 51 President, Chief Executive
Officer and Director
Charles B. Williams 53 Vice President of Finance
and Administration, Chief
Financial Officer,Secretary,
Treasurer, and Director
Mitchell R. McVay 49 Director of Engineering(1)
Timothy D. Fitzpatrick 35 Director of R&D and Pilot
Plant Operations(2)
Joel D. Melka 46 Director of Manufacturing
Paul C. Ahrens 48 Chairman of the Board
Howard L. Farkas 76 Director
Edward M. Giles 64 Director
Page E. Golsan, III 62 Director
Donald E. Kuhla, Ph.D. 57 Director(3)
____________
(1)Mr. McVay resigned his position with the Company effective
March 31, 2000.
(2)Mr. Fitzpatrick resigned his position with the Company
effective June 1, 2000.
(3)Dr. Kuhla has advised the Company that he will not be standing
for reelection as a Director at the Annual Meeting of Shareholders
to be held July 20, 2000.
The following is a brief account of the business experience of
each executive officer, key employee and director of the Company.
M. "Sreeni" Sreenivasan. Mr. Sreenivasan has served as President
and Chief Executive Officer since 1995 and as Chief Operating
Officer from 1990 through 1995. Mr. Sreenivasan has also served
as a 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.
40
Charles B. Williams. Mr. Williams has served as Vice President
of Finance and Administration and Treasurer since 1990. In 1995,
he also became Chief Financial Officer and Secretary. Mr.
Williams has also served as a director since 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. 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.
Mitchell R. McVay. Mr. McVay resigned his position with the
Company on March 31, 2000. He had been Director of Engineering
since April 1, 1998. From 1996 to 1998 he served as the Plant
Engineer. Previously Mr. McVay worked for Salsbury Chemicals
Inc., a division of Cambrex Inc. (chemical manufacturing) from
1983 to 1996 in various technical and management capacities, his
last position being the Manager of Engineering and Maintenance.
Mr. McVay received his B.S. in Chemical Engineering from Texas A
& M University.
Timothy D. Fitzpatrick. Mr. Fitzpatrick resigned his position
with the Company on June 1, 2000. He has served as Director of
R&D and Pilot Plant Operations of the since October 1, 1998.
From 1994 to 1998 he was the R&D Laboratory Manager. Previously,
he worked for Cortech, Inc. from 1993 to 1994 and Somatogen, Inc.
from 1992 to 1993 (both start-up biotechnology companies) as a
research scientist in new drug discovery. Prior to 1992, he was
a research chemist in LHRH Drug Discovery at Abbott Laboratories
of North Chicago, Illinois (pharmaceutical research and
manufacturing). Mr. Fitzpatrick holds his M.S. in Organic
Chemistry from University of Wisconsin-Madison and his B.S. in
Chemistry from Montana Tech.
Joel D. Melka. Mr. Melka joined the Company as Director of
Manufacturing in February 1999. From 1988 to 1999 he worked at
ChemDesign Inc. (custom chemical manufacturing) in various
capacities, his last position being Director of Manufacturing.
From 1984 to 1988, he worked for Polaroid Corporation in various
manufacturing positions. Prior to 1984, he spent 5 years as an
officer in the U.S. Navy nuclear submarine service. Mr. Melka
received his M.S. in Chemistry from the University of British
Columbia and his B.S. in Chemistry from Michigan Technological
University.
Paul C. Ahrens. Mr. Ahrens has been a director of the Company
since its inception in 1981 and became Chairman of the Board in
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
41
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. 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 1997.
Since 1989 he has served as Chairman of The Vertical Group, Inc.,
a venture capital investment firm. He was also President of The
Vertical Group from 1989 to 1998. 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. (chemical company) and Ventana Medical
Systems, Inc. (medical diagnostic company). Mr. Giles received a
B.S. 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
1997 and has notified the Company that he will not be standing
for reelection as a Director at the Annual Meeting of
Shareholders to be held July 20, 2000. Since 1998 he has been
President and Chief Operating Officer of Albany Molecular
Research, Inc. (contract research organization). From 1994 to
1998, he was 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.
42
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, 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,
2000, all Section 16(a) filing requirements applicable to its
officers, directors and 10% shareholders were complied with.
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
43
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.
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 2000.
As a result of the decline in revenues and profits in fiscal
2000, the Compensation Committee did not grant bonuses to Mr.
Sreenivasan, the CEO, or any of the other executive officer. In
fiscal 1999, recognizing Mr. Sreenivasan's long term efforts on
behalf of the Company, the Compensation Committee granted him a
$45,000 one-time bonus payable over thirty-six months. Mr.
Sreenivasan received $15,000 of this bonus in fiscal 2000 and
$7,500 in fiscal 1999. Consistent with its policy to create
longer-term incentives, the Compensation Committee granted stock
options in fiscal 2000 to the executive officers, including a
14,000 share option to Mr. Sreenivasan.
Paul C. Ahrens
Edward M. Giles
Page E. Golsan III
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.
44
Summary of Cash and Certain Other Compensation
- ----------------------------------------------
The following table provides certain summary information
concerning compensation paid by the Company to the Company's
Chief Executive Officer and Chief Financial Officer (the "Named
Persons") for the fiscal years ended March 31, 2000, 1999 and
1998 (no other officer or key employee received a salary and
bonus exceeding $100,000 during fiscal 2000):
Summary Compensation Table
--------------------------
Long-Term All Other
Annual Compensation Compensation Compensation($)(2)
----------------------------- ------------ ------------------
Name and Principal Stock
Position Year(1) Salary($) Bonus($) Options(#)
- ------------------------- ------- --------- --------- ---------- ------
M. ("Sreeni") Sreenivasan 2000 180,000 15,000(3) 14,000 5,800
President & Chief 1999 165,000 71,500(3) 24,000 11,200
Executive Officer 1998 150,000 - 25,000 12,500
- -------------------------
Charles B. Williams 2000 110,000 - 14,000 10,000
Vice President of 1999 99,000 36,000 19,000 9,900
Finance and Adminsitration 1998 88,000 - 20,000 7,950
& Chief Financial Officer
_______________________
(1)Fiscal year ended March 31.
(2)Unless otherwise footnoted, represents Company contributions
to the account of the Named Persons under the Company's 401(k) plan.
(3)In fiscal 1999, Mr. Sreenivasan was granted a special $45,000
bonus payable over thirty-six months. The bonus figures
include a $7,500 payment in fiscal 1999 and a $15,000 payment
in fiscal 2000. See "Report of the Compensation Committee" above.
45
Stock Option Grants in Last Fiscal Year
- ---------------------------------------
The following table provides information, with respect to the
Named Persons, concerning the grant of stock options during
fiscal year 2000.
Stock Options Grants in the Last Fiscal Year(1)
-----------------------------------------------
Potential Realizable
Value at Assumed Annual
Individual Grants Rates of Stock Price
--------------------------------------------- Appreciation (Through
Expiration Date)
Options Exercise
Name Granted % of Total Price Expiration 5% per 10% per
(# of Shares) Options(2) ($/Sh)(3) Date year(4) year(4)
- ------------------------- ------------- ---------- --------- ---------- -------- --------
M. ("Sreeni") Sreenivasan 14,000 10.2% $4.56 May 2009 $40,040 $101,780
Charles B. Williams 14,000 10.2% $4.56 May 2009 $40,040 $101,780
_______________________
(1)The Company has not granted any stock appreciation rights (SARs).
(2)Based on an aggregate of 137,000 options being granted to all employees
during the fiscal year ended March 31, 2000.
(3)These options were granted under the Company's 1995 Incentive Compensation
Plan in May 1999. Each option has an exercise price equal to the
fair market value of the Company's Common Stock as of the date of the
grant. These grants vest annually over a two-year period ending April 2001
for each individual.
(4)The 5% and 10% assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future prices for its Common Stock.
46
Stock Option Exercises in Last Fiscal Year and Fiscal Year-End Stock Option
- ---------------------------------------------------------------------------
Values
- ------
The following table provides information, with respect to the Named Persons,
concerning the options granted to them during the last fiscal year and the
options held by them at March 31, 2000.
Option Exercises in Last Fiscal Year and Fiscal Year End Stock Option Values
----------------------------------------------------------------------------
Shares
Acquired
On Value Number of Unexercised Value of Unexercised
Exercise Realized Options at Fiscal Year In-the-Money Options
(#) ($) End at Fiscal Year End($)(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ------ ------- ----------- ------------- ----------- -------------
M. ("Sreeni") Sreenivasan 18,113 $50,535 87,000 26,000 $0 $0
Charles B. Williams 0 $0 61,500 23,500 $0 $0
_______________________
(1)Represents the difference between the exercise price of the options with
exercise prices below $4.19 and the $4.19 closing price of the Company's
Common Stock on March 31, 2000.
Comparison of Total Cumulative Shareholder Equity
- -------------------------------------------------
The following graph provides a comparison of the five year
cumulative total stockholder return on (i) the Company's Common
Stock, (ii) the Nasdaq Stock Market Index (U.S.), and (iii) the
S&P Specialty Chemicals Index. The graph assumes that $100 was
invested on March 31, 1995 in the Company Common Stock, the
Nasdaq Stock Market Index (U.S.), and the S&P Specialty Chemicals
Index, and that all dividends were reinvested. Historic stock
price performance is not necessarily indicative of future stock
price performance.
Edgar Representation of Data Points Used in Printed Graphic
- -----------------------------------------------------------
Nasdaq Stock S&P Specialty
Synthetech, Market Index Chemicals
Inc. (U.S.) Index
----------- ------------ -------------
1995 $ 100.00 $ 100.00 $ 100.00
1996 290.84 135.80 129.10
1997 369.61 150.95 116.05
1998 299.95 228.88 147.03
1999 212.07 309.19 123.89
2000 203.01 574.04 119.88
All data points are at March 31.
47
Employment Agreements
- ---------------------
In July, 1997, the Company entered into Employment Agreements
with Messrs. Sreenivasan, Knutson and Williams (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. In May 1998, Mr. Knutson resigned his
employment and has received payments under this Agreement for the
immediate twelve month period thereafter.
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
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.
48
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, 2000, 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, key employees and
directors as a group.
Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Class
Ownership
- ------------------- ----------------- -----------
Paul C. Ahrens 1,328,491 9.3%
1290 Industrial Way
Albany, OR
M. ("Sreeni") Sreenivasan 619,018(1) 4.3%(2)
Howard L. Farkas 109,000(3) *
Edward M. Giles 277,000(4) 1.9%(2)
Page E. Golsan, III 51,000(5) *
Donald M. Kuhla, Ph.D. 20,000(6) *
Charles B. Williams 271,120(7) 1.9%(2)
Brown Capital Management 1,432,000(8) 10.0%
809 Cathedral Street
Baltimore, MD 21201
All Officers, Key 2,729,379(9) 18.6%(2)
Employees and Directors
as a Group (9 persons)
______________________
*less than 1%.
(1)Includes 106,000 shares of common stock which Mr. Sreenivasan has the
right to acquire immediately or within sixty (60) days pursuant to employee
stock options. Excludes 7,000 shares of common stock issuable pursuant to
stock options held by Mr. Sreenivasan which are not exercisable now or within
sixty (60) days.
(2)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.
(3)Includes 59,000 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 6,000 shares of common stock
issuable pursuant to stock options held by Mr. Farkas which are not
exercisable now or within sixty (60) days.
49
(4)Includes 16,000 shares of common stock which Mr. Giles hasthe right to
acquire immediately or within sixty (60) days pursuant to stock options.
Excludes 9,000 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.
(5)Includes 9,000 shares of common stock which Mr. Golsan has the
right to acquire immediately or within sixty (60) days pursuant to stock
options. Excludes 6,000 shares of common stock issuable pursuant to stock
options held by Mr. Golsan which are not exercisable now or within sixty (60)
days.
(6)Includes 16,000 shares of common stock which Dr. Kuhla has the right to
acquire immediately or within sixty (60) days pursuant to stock options.
Excludes 9,000 shares of common stock issuable pursuant to stock options
held by Dr. Kuhla which are not exercisable now or within sixty (60) days.
(7)Includes 78,000 shares of common stock which Mr. Williams has the right to
acquire immediately or within sixty (60) days pursuant to employee stock
options. Excludes 7,000 shares of common stock issuable pursuant to
stock options held by Mr.Williams which are not exercisable now or
within sixty (60) days.
(8)Based on Schedule 13(g) filings, pursuant to which Brown Capital Management
disclosed controlling 1,432,000 shares of common stock with sole dispositive
power. Of these shares, Brown Capital Management further disclosed that
it had sole voting power over 1,333,700 shares of common stock.
(9)See footnotes 1, 3, 4, 5, 6 and 7.
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)(6) Bylaws of Synthetech, Inc., as amended.
4(7) Synthetech, Inc. and American Securities Transfer and
Trust, Inc. Rights Agent, Rights Agreement dated July 23,
1998.
50
10.1(2),(3) Supply Agreement dated January 3, 1989 between
Synthetech, Inc. and Biomeasure, Incorporated.
10.2(2),(3) License Agreement dated January 3, 1989 between
Synthetech, Inc. and Biomeasure, Incorporated.
10.3(4)+ Synthetech, Inc. 1990 Stock Option Plan.
10.4(5) Amendment No. 1 to Stock and Warrant Purchase Agreement
between the Company and JB dated as of March 26, 1996.
10.5(6) 1995 Incentive Compensation Plan, as amended.
10.6(8) Promissory Note dated August 26, 1998 from Synthetech,
Inc. to United States National Bank of Oregon.
10.7(8) Letter Agreement dated August 26, 1998 between
Synthetech, Inc. and United States National Bank of
Oregon.
10.8(6) Nonqualified Stock Option dated as of November 7, 1996 to
purchase 50,000 shares of Common Stock issued to Howard
L. Farkas.
10.9(6) Nonqualified Stock Option dated as of November 7, 1996 to
purchase 15,000 shares of Common Stock issued to Howard
L. Farkas.
10.10()6 Nonqualified Stock Option dated as of November 7, 1996 to
purchase 15,000 shares of Common Stock issued to Page E.
Golsan III.
10.11(6)+ Form of contract entered into by each of Mr. Philip L.
Knutson, Mr. M. Sreenivasan and Mr. Charles B. Williams
dated July 18, 1997.
10.12(8)+ Bonus for M. Sreenivasan granted October 1, 1998.
10.13(8) Contract entered into by Synthetech, Inc. and R.L.
Reimers Company dated December 1, 1998.
10.14 Form of Purchase Order and Schedule of Vendors and
Purchase Order terms.
10.15 Contracts entered into between Synthetech, Inc. and
Olsson Industrial Electric, Inc. October 13, 1998 and
March 5, 1999.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months Ended March 31,
2000.
51
__________________________
+ 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 January 10, 1990 (File No. 33-
27566).
(4) 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.
(5) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996.
(6) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997.
(7) Incorporated by reference to the exhibits filed with
registrant's Current Report on Form 8-K for July 24,
1998.
(8) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999.
(b) Reports on Form 8-K
None.
(c) See (a) (3) above.
(d) See (a) (1) and (2) above.
52
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 5, 2000 SYNTHETECH, INC.
(Registrant)
By /s/ M. ("Sreeni") Sreenivasan
-----------------------------
M. ("Sreeni") Sreenivasan
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ M. ("Sreeni") Sreenivasan President, Chief Executive June 5, 2000
- ----------------------------- Officer (Prinicpal Executive
M. ("Sreeni") Sreenivasan Officer) and Director
/s/ Charles B. Williams Vice President of Finance and June 5, 2000
- ----------------------- Administration, Chief Financial
Charles B. Williams Officer, Secretary, Treasurer
(Principal Financial Officer
and Principal Accounting
Officer), and Director
/s/ Paul C. Ahrens Chairman of the Board June 5, 2000
- ------------------
Paul C. Ahrens
/s/ Howard L. Farkas Director June 5, 2000
- --------------------
Howard L. Farkas
/s/ Edward M. Giles Director June 5, 2000
- -------------------
Edward M. Giles
/s/ Page E. Golsan, III Director June 5, 2000
- -----------------------
Page E. Golsan, III
/s/ Director
- --------------------------
Donald M. Kuhla, Ph.D.
53
INDEX TO EXHIBITS
-----------------
Sequential Page No.
3(i)(1) Articles of Incorporation of Synthetech,
Inc., as amended
3(ii)(6) Bylaws of Synthetech, Inc., as amended
4(7) Synthetech, Inc. and American Securities
Transfer and Trust, Inc. Rights Agent,
Rights Agreement dated July 23, 1998.
10.1(2),(3) Supply Agreement dated January 3, 1989
between Synthetech, Inc. and Biomeasure,
Incorporated.
10.2(2),(3) License Agreement dated January 3, 1989
between Synthetech, Inc. and Biomeasure,
Incorporated.
10.3(4)+ Synthetech, Inc. 1990 Stock Option Plan.
10.4(5) Amendment No. 1 to Stock and Warrant
Purchase Agreement between the Company and
JB dated as of March 26, 1996.
10.5(6) 1995 Incentive Compensation Plan, as
amended.
10.6(8) Promissory Note dated August 26, 1998 from
Synthetech, Inc. to United States National
Bank of Oregon.
10.7(8) Letter Agreement dated August 26, 1998
between Synthetech, Inc. and United States
National Bank of Oregon.
10.8(6) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 50,000
shares of Common Stock issued to Howard L.
Farkas.
10.9(6) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 15,000 shares
of Common Stock issued to Howard L.
Farkas.
10.10(6) Nonqualified Stock Option dated as of
November 7, 1996 to purchase 15,000 shares
of Common Stock issued to Page E. Golsan
III.
10.11(6)+ Form of contract entered into by each of
Mr. Philip L. Knutson, Mr. M. Sreenivasan
and Mr. Charles B. Williams dated July 18,
1997.
10.12(8)+ Bonus for M. Sreenivasan granted
October 1, 1998.
10.13(8) Contract entered into by Synthetech, Inc.
and R.L. Reimers Company dated December 1,
1998.
54
10.14 Form of Purchase Order and Schedule of
Vendors and Purchase Order terms.
10.15 Contracts entered into between Synthetech,
Inc. and Olsson Industrial Electric, Inc.
October 13, 1998 and March 5, 1999.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months
Ended March 31, 2000.
__________________________
+ 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 January 10, 1990 (File No. 33-
27566).
(4) 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.
(5) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996.
(6) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997.
(7) Incorporated by reference to the exhibits filed with
registrant's Current Report on Form 8-K for July 24, 1998.
(8) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999.