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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-12992
SYNTHETECH, INC.
(Exact name of registrant as specified in its charter)
Oregon 84-0845771
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1290 Industrial Way, Albany, Oregon 97321
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 541/967/6575
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
(Title of class)
Indicate by check mark whether registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 24, 1999, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was approximately
$49 million based upon $4.50 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, 1999 was 14,251,630.
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Table of Contents
Page
PART I
Item 1 - Business.................................................. 1
Item 2 - Properties................................................ 10
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.. 21
Item 8 - Financial Statements and Supplementary Data................ 22
Item 9 - Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 39
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 50
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 currently used in a wide range of 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 several 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-kilo in size. At the marketed
drug stage, orders for PBBs for these drugs can reach the tens
of kilos to hundreds of kilos.
Researchers have also been investigating the 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 since the
human body does not recognized them as peptides. 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 PBBs for
these drugs can reach the tons to tens of tons size.
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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. The two large-scale PBB
orders in fiscal 1999 exemplified this strategy. The Company had
supplied PBBs for both of these drugs since their early clinical
development stages.
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, 1999, the dollar amount of backlog orders was
$8.86 million, all of which the Company expects to ship during
fiscal 2000. Over two-thirds of the backlog ($5.87 million)
represents a diverse set of PBBs including several Specialty
Amino Acids for a handful of drugs advancing through the clinical
pipeline. The remaining balance of this backlog ($2.99 million)
represents the final shipments under a discontinued large-scale
order. (See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".) At March 31,
1998, the dollar amount of backlog orders was $11.28 million.
This backlog included $7.40 million attributable to two large-
scale orders.
3
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
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 its Internet website. 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 25
countries, the Company expects that a few customers will continue
to account for a significant portion of revenues each year.
During fiscal 1999, the top 20 customers represented 96% of the
Company's revenues. Of these twenty customers, ten were major
pharmaceutical companies, four were emerging biopharmaceutical
companies and six were contract drug synthesis companies. The
Company had two 10% customers-F. Hoffman-La Roche, Ltd. and
Pfizer, Inc.-which individually accounted for over 44% and 20%,
respectively, of the Company's fiscal 1999 revenues.
For the fiscal years ended March 31, 1999, 1998, and 1997, sales
to international customers were $6.45 million, $2.85 million and
$4.14 million, respectively, accounting for approximately 28%,
34% and 32%, respectively, of the Company's total revenues.
These sales were principally to Europe for fiscal 1999 and 1998,
and to Europe and Japan for fiscal 1997. 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
4
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
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, 1999, 1998, and 1997, the
Company's research and development expenses were $338,000,
$215,000 and $211,000, 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 $450,000, $419,000 and $346,000 during
the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
EMPLOYEES
As of May 21, 1999, the Company employed 54 individuals. In
addition to production, maintenance, materials handling and
quality control personnel essential for a round-the-clock
operation, the Company added technical and professional staff in
various support functions during fiscal 1999. In keeping with
the growing regulatory and compliance demands of the industry,
Synthetech also added full-time coordinators in the areas of
Quality Assurance and Environment, Health & Safety.
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
5
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.
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.
The Company estimates that in fiscal 1999 and fiscal 2000, it
will undertake capital expenditures aggregating $700,000
associated with air quality scrubbers, waste water handling and
other environmental control facilities.
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
5
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
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 the two large-scale orders in fiscal 1999, the
Company has emerged as a leading producer of PBBs capable of
full-cycle "grams to tons" production.
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
7
discovery and clinical trial stage drug development programs,
the demand for the approved drugs remains subject to many
uncertainties, including, without limitation, the drug price, the
drug side effects and the existence of other competing drugs.
These factors, which are outside of the control of the Company,
will affect the level of demand for the drug itself and,
therefore, the demand for PBBs.
Since the Company's revenues are composed of PBB sales in
all three drug development stages, and since even sales of PBBs
for marketed drugs are subject to cancellation or reduction, the
Company is likely to continue to experience significant
fluctuations in its quarterly results.
Industry Cost Factors. The market for PBBs is dependent on
the market for 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 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
8
chemicals. Although the Company believes that it is in
compliance with these laws, rules and regulations in all material
respects, the failure to comply with present or future
regulations could result in fines being imposed on the Company,
suspension of production or cessation of operations. Third
parties may also have the right to sue to enforce compliance.
Moreover, it is possible that increasingly strict requirements
imposed by environmental laws and enforcement policies thereunder
could require the Company to make significant capital
expenditures. The operation of a chemical manufacturing plant
entails the inherent risk of environmental damage or personal
injury due to the handling of potentially harmful substances, and
there can be no assurance that material costs and liabilities
will not be incurred in the future because of an accident or
other event resulting in personal injury or unauthorized release
of such substances to the environment. In addition, the Company
generates hazardous materials and other wastes which are disposed
at various offsite facilities. The Company may be liable,
irrespective of fault, for material cleanup costs or other
liabilities incurred at these disposal facilities in the event of
a release of hazardous substances by such facilities into the
environment. The Company has obtained environmental risk
insurance.
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
9
additional capital equipment, increased maintenance costs, plant
and equipment obsolescence and quality control. In November
1997, the Company completed construction of an additional
manufacturing facility on its site in Albany, Oregon. In this
first phase, processing equipment was installed in two of the six
bays. In May 1998, the Company announced its decision to install
processing equipment in two additional bays and to construct
additional warehouse, bulk storage and related facilities. The
Company expects that this second phase will be completed in
calendar 1999. Completion of the second phase at the new
facility could be delayed and the existing facilities may not
have sufficient capacity to meet the demand for the Company's
products, particularly in the event that several of the peptide
and peptidomimetic small molecule drugs for which the Company
supplies PBBs simultaneously become commercially successful. A
disruption in the Company's production or distribution could have
a material adverse effect on the Company's financial results. In
addition, the Company may not have sufficient demand to utilize
the additional capacity.
Risks of International Business. Sales to customers outside
the United States accounted for approximately 28% of the
Company's net sales during the fiscal year ended March 31, 1999.
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 in to 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.
Year 2000 Compliance. After review, the Company believes
that its information systems which support business applications
and its research and development, manufacturing processes and
facility management systems currently are able to appropriately
interpret the calendar year 2000 ("Y2K") and subsequent years or
will be able to appropriately interpret Y2K and subsequent years
after certain upgrades are completed by the Summer of 1999.
While the Company does not believe it to be the case, there is a
risk that the Company's software applications will be unable to
appropriately interpret such years despite the installation of
these upgrades. The failure to correct a material Y2K problem
could result in an interruption in, or a failure of, certain
normal business activities or operations. Such failures could
materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K issue, resulting in part from
the uncertainty of the Y2K readiness of third-party suppliers and
customers, the Company is unable to determine at this time
whether the consequences of Y2K failures will have a material
impact on the Company's results of operations, liquidity or
financial condition.
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ITEM 2. PROPERTIES
Synthetech's headquarters and production facilities are located
in Albany, Oregon. In 1987, the Company purchased the Albany,
Oregon property which included a 23,000 square foot facility.
This original facility houses production, pilot plant,
laboratory, warehouse and office space. In November 1997, the
Company completed the construction of an additional 20,000 square
foot production facility on the Albany, Oregon property.
The completion of this additional two-story production facility
substantially increases the Company's capacity to produce PBBs
and other fine chemicals. This facility has six production bays.
Two of the bays are outfitted with manufacturing equipment and are
in production. On May 28, 1998, the Company announced its decision
to outfit two more bays. The Company expects that these
additional two bays will be completed during Summer 1999. The
final two bays remain vacant and available for future expansion.
In the initial construction of the building and the build out of
the bays, Synthetech has contracted with various third party
providers. The Company 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.
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,
---------------------------
1999 1998
High Low High Low
---- --- ---- ---
First
Quarter $8.00 $6.00 $9.38 $6.25
Second
Quarter 7.00 3.38 7.88 5.19
Third
Quarter 7.13 3.38 6.88 5.25
Fourth
Quarter 6.50 4.00 6.38 4.50
___________________________
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, 1999 was 684.
12
ITEM 6. SELECTED FINANCIAL DATA
The following statements of income data for each of the five
years ended March 31, 1999 and the selected balance sheet data as
of March 31, 1995 through 1999, as set forth below, were derived
from the Company's financial statements audited by Arthur
Andersen LLP. The following data should be read in conjunction
with "Item 8. Financial Statements And Supplementary Data" and
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
Year Ended March 31,
1999 1998 1997 1996 1995
(in thousands, except per share data)
STATEMENTS OF INCOME DATA:
Revenues $ 23,133 $ 8,321 $ 12,797 $ 8,472 $ 5,357
Gross Profit 10,150 3,001 7,694 4,787 2,759
Operating Income 8,341 1,611 6,248 3,737 1,816
Net Income $ 5,418 $ 1,221 $ 4,112 $ 2,574 $ 1,415
Basic Earnings Per Share $0.38 $0.09 $0.30 $0.21 $0.12
Diluted Earnings Per Share $0.38 $0.09 $0.29 $0.19 $0.11
March 31,
1999 1998 1997 1996 1995
(in thousands)
BALANCE SHEET DATA:
Working Capital $ 12,110 $ 8,237 $ 9,242 $ 8,157 $ 3,574
Total Assets 26,230 19,364 17,323 10,959 6,661
Long-Term Debt 152 166 180 - -
Retained Earnings 14,349 8,931 7,710 3,598 1,024
Shareholders' Equity $ 23,027 $ 17,306 $ 15,797 $ 10,100 $ 6,259
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by each item included in the
Statements of Income.
Percentage of Revenues
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of Sales 56.1% 63.9% 39.9%
------ ------ ------
Gross Profit 43.9% 36.1% 60.1%
Research and Development 1.5% 2.6% 1.6%
Selling, general and
administrative 6.4% 14.1% 9.7%
------ ------- -------
Operating Income 36.0% 19.4% 48.8%
Other Income 0.9% 3.7% 3.0%
Interest Expense (0.1)% - -
------ ------ ------
Income Before Income Taxes 36.8% 23.1% 51.8%
Provision for Income Taxes 13.5% 8.4% 19.7%
------ ------ ------
Net Income 23.3% 14.7% 32.1%
====== ====== ======
Revenues
- --------
Synthetech revenues were $23.13 million, $8.32 million and
$12.80 million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively, reflecting the unpredictability and potential for
significant revenue fluctuations associated with the industry
environment in which the Company operates. The 178% increase in
revenues in fiscal 1999 as compared to fiscal 1998 and the 35%
decrease in revenues in fiscal 1998 as compared to fiscal 1997
primarily reflected the impact of large-scale orders. Revenues
from large-scale orders were $14.14 million, $2.17 million and
$8.07 million for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. In fiscal 1999, there were two large-scale orders
totaling $10.18 million and $3.96 million of revenue during the
year. These two PBB orders for marketed drugs were initially
received in the third quarter of fiscal 1998 and represented
$879,000 and $1.29 million of the fiscal 1998 large-scale order
revenue. The fiscal
14
1997 large-scale order revenue was attributable to PBBs for three
drugs in clinical trials. All revenues during fiscal 1999, fiscal
1998 and fiscal 1997 represented sales of PBBs.
Synthetech had record revenues in fiscal 1999. Fiscal 1999 was
also the first year in which PBB production for marketed drugs
represented over half of the Company's annual revenue. The
Company estimates that in fiscal 1999 approximately 63% of the
Company's PBB sales went into marketed drugs, approximately 33%
went into drugs in clinical or late pre-clinical trials and
approximately 4% went into drugs at the R&D or discovery stage.
In fiscal 1998 and fiscal 1997, the Company estimates that
approximately 46% and 11%, respectively, of the Company's PBB
sales went into marketed drugs, approximately 41% and 83%,
respectively, went into drugs in clinical or late pre-clinical
trials and approximately 13% and 6%, respectively, went into
drugs at the R&D or discovery stage. These estimates are based on
an analysis of the Company's sales and information to the extent
available from customers.
Synthetech's fiscal 1999 large-scale production 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. In fact, the two fiscal 1999 large-scale orders
exemplify this strategy: the Company had supplied PBBs for both
of these drugs since their early clinical development stages.
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 discovery or clinical stage, 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,
competition from other suppliers of PBBs and continued market
demand for the drug. For example, the customer to whom the
Company shipped $10.18 million in fiscal 1999 PBB orders has
advised the Company that it is adopting an alternative lower-cost
manufacturing route not using Synthetech's PBB. Synthetech does
not expect any additional orders for this product from this
customer after the current order is completed by the summer of
1999. 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 timing of order placement also affects the Company's revenues.
The other large-scale customer placed its fiscal 1999 PBB orders to
coincide with its own drug production schedule. While Synthetech
believes that it will receive additional orders from this customer,
the timing and extent of the customer's next drug production campaign,
and thus the order for PBBs, has not been finalized.
With this industry environment, it is difficult to predict with
certainty the level of future business. Nevertheless, the Company
has a sizable backlog of PBB orders of approximately
$8.86 million at March 31, 1999. Less than a third of this
backlog ($2.99 million) represents the final shipments under the
discontinued large-scale order discussed above. The balance of
the backlog ($5.87 million) represents a diverse set of PBBs
including several novel PBBs for a handful of drugs advancing
through the clinical pipeline. If these continue to progress and
15
Synthetech remains a primary PBB supplier, they could have
significant future business potential. There are, however, many
factors, most of which are outside the control of the Company,
affecting the success of these drug candidates and Synthetech's
involvement. (See "Industry Factors" below.)
Gross Profit
- ------------
Gross profit was $10.15 million, $3.00 million and $7.70 million
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. This
reflects a 238.0% increase in gross profit in fiscal 1999 from
fiscal 1998, and a 61.0% decrease in gross profit in fiscal 1998
from fiscal 1997. As a percentage of revenues, gross profit
margins were 43.9%, 36.1% and 60.1% in fiscal 1999, fiscal 1998
and fiscal 1997, respectively.
The gross profit margins for fiscal 1999 resulted primarily from
the mix of products (i.e., type and volume of products sold as
individual orders) and this year's closely associated high
revenue levels. Revenues from large-scale PBB orders during
fiscal 1999 represented 61.1% of total revenue for the period.
While large-scale orders for marketed drugs can provide
significant revenues for the duration of the orders, they
typically generate a lower gross profit margin than the sale of
smaller quantities of the same PBB product during the drug
discovery and clinical stages. The Company, however, continuously
seeks to improve the gross profit margins of large-scale orders
through process improvements and operating efficiencies.
Gross profit margins for fiscal 1998 reflected a combination of
factors: a low level of revenues resulting from the absence of
large-scale projects until the end of the third quarter of fiscal
1998; the increased manufacturing overhead costs as the new plant
facility came online in fiscal 1998; costs associated with the
start up and early process development at the new plant facility;
and the product mix in fiscal 1998.
Fiscal 1997 gross profit margins reflected significant revenue
levels, a high margin product mix and the lower manufacturing
overhead costs prior to the new plant facility coming online.
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 $338,000, or
1.5% of sales, in fiscal 1999, from $215,000, or 2.6% of sales,
in fiscal 1998. R&D expense was $211,000, or 1.6%, in fiscal
1997. 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
$450,000, $419,000 and $346,000 during the fiscal years ended
March 31, 1999, 1998 and 1997, respectively.
Selling, general and administrative (SG&A) expense was
$1.47 million, $1.18 million and $1.24 million in fiscal 1999,
fiscal 1998 and fiscal 1997, respectively. The increase in SG&A
in fiscal 1999 from fiscal 1998 primarily reflected increased
labor costs (as described below) and
16
payments made under an agreement with a former officer of the
Company. The decrease in SG&A in fiscal 1998 from fiscal 1997
primarily reflected a reduced employee bonus pool in fiscal 1998
as the staffing level in this area remained relatively constant.
SG&A as a percentage of sales was 6.4%, 14.1% and 9.7% for fiscal
1999, fiscal 1998 and fiscal 1997, respectively.
Operating Income
- ----------------
Operating income was $8.34 million in fiscal 1999, $1.61 million
in fiscal 1998 and $6.25 million in fiscal 1997. In fiscal 1999,
Company-wide labor costs (including the employee bonus pool)
(hereinafter "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.
Fiscal 1998 labor costs of $1.5 million were less than the
$1.82 million of labor costs in fiscal 1997. While the Company
hired additional employees during fiscal 1998 in connection with
its plant expansion, the reduction in the employee bonus pool
paid during fiscal 1998 as compared to fiscal 1997 more than
offset the hiring increase, causing the net reduction in labor
costs.
As a percentage of revenues, operating income was 36.0% in fiscal
1999, 19.4% in fiscal 1998 and 48.8% in fiscal 1997.
Other Income
- ------------
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.
The $385,000 net other income in fiscal 1997 primarily resulted
from $376,000 of interest earnings.
Near the end of fiscal 1997, the Company incurred $194,000 in
wastewater system development charges assessed by the City of
Albany in connection with the Company's plant expansion. This fee
plus interest on the unpaid portion is payable in monthly
payments of approximately $2,500 through February 2008.
Net Income
- ----------
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. In fiscal
1997, the Company earned $6.63 million before income taxes. A
provision for income taxes of $2.52 million resulted in net
income of $4.11 million. The effective tax rates for the Company
were relatively flat between years at 36.5%, 36.5% and 38% in
fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
17
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 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 fiscal 1999 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, 1999, the Company had working capital of
$12.11 million compared to $8.24 million at March 31, 1998. The
Company's cash and cash equivalents at March 31, 1999 totaled
$7.47 million, a $2.49 million increase from the March 31, 1998
level. This increase reflected the higher level of revenues
during fiscal 1999 compared to fiscal 1998. The Company does not
invest in derivative securities. Capital expenditures associated
with phase two of the plant expansion and upgrades to the
existing plant were more than offset by cash from operations
18
in fiscal 1999. Looking forward to fiscal 2000, the Company
expects its capital expenditures to be similar to the fiscal 1999
level and, accordingly, the change to its working capital
position in fiscal 2000 will be largely affected by the level of
cash provided by operating activities. In addition, the Company
has a $1,000,000 unsecured bank line of credit. As of March 31,
1999 there was no amount outstanding under the bank line.
The increase in accounts receivable to $3.41 million at March 31,
1998, from $1.47 million at March 31, 1998, reflected the higher
level of revenues in the fourth quarter of fiscal 1999 compared
to the fourth quarter in the prior year. The increase in accounts
payable to $1.53 million at March 31, 1999 from $672,000 at March
31, 1998 was primarily the result of expenditure commitments
related to the second phase of the plant expansion and increased
raw material purchases. The decrease in deferred revenue to
$44,000 at March 31, 1999 from $247,000 at March 31, 1998
resulted from shipments against customer advance payments.
In November 1997, the Company completed the 20,000 square foot,
two-story new building plant expansion project. In this initial
phase, the Company completed the building structure and built out
two of the six production bays. The overall engineering,
construction and equipment costs for this project spanning one
and one-half years were approximately $8.23 million. In the first
quarter of fiscal 1999, the Company announced that its Board of
Directors had approved a $5 million second-phase expansion to
outfit two more bays of the new plant with four additional
multipurpose reactor systems and to construct warehouse, bulk
storage and related facilities. During fiscal 1999, the Company's
capital expenditures were $3.47 million, $2.80 million of which
were for the second phase plant expansion and $674,000 for the
existing plant and equipment upgrades.
During fiscal 2000, the Company estimates that $2.2 million will
be used to complete the second-phase plant expansion and up to
$1.3 million will be used for existing plant and equipment
upgrades. The Company expects to finance these capital
expenditures from operating cash flow and reserves and does not
anticipate a need for any new debt or equity financing.
The Company owns its facility and all of its equipment. See
Note D to Financial Statements for a description of the Company's
property, plant and equipment.
YEAR 2000
The Year 2000 ("Y2K") issue arose as the result of existing
computer programs that use only the last two digits to refer to a
year. Any of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. If not corrected, many computer
applications could fail or create erroneous results.
The Company has established a Y2K team lead by its Chief
Financial Officer. The team has completed its assessment of the
Company's information systems which support business
applications. The Company utilizes packaged application
strategies for these information systems functions. The Company
believes that these information system components are current
with all Y2K updates and changes recommended by the vendors.
These information systems include enterprise software, operating
systems, networking components, application and data servers, PC
19
hardware and core office automation software. The team has also
completed its assessment of the Company's research and
development, manufacturing processes and facility management
systems. The Company believes that these systems and components
are current, or will be current by the end of September 1999,
with all Y2K updates and changes recommended by the vendors. The
Company is undertaking a Y2K supplier and customer assessment
program. It is in the process of contacting key suppliers and
customers to determine the level of their Y2K readiness.
The Company's information technology expenditures for fiscal 1999
were $90,000, of which approximately 22% related to the Company's
Y2K program. These expenses were paid out of revenues from
operations. In connection with its responsibility to undertake a
Y2K program, the Company has hired an outside consultant to
provide limited advice to the Company's Y2K team and Board of
Directors on the Company's Y2K program. The Company has hired
another outside consultant to assist the Company's Y2K team in
developing and running certain Y2K on-site testing protocols. The
Company expects that these activities will be completed by the
end of Summer 1999 and has budgeted $20,000 for these
consultants.
Like all businesses, the Company will be at risk from external
infrastructure failures that could arise from Y2K failures. It is
not clear that electrical power, telephone and computer networks,
for example, will be fully functional across the nation in the
year 2000. Investigation and assessment of infrastructures, like
the nations' power grid, is beyond the scope and resources of the
Company. Investors should use their own awareness of the issues
in the nations' infrastructure to make ongoing infrastructure
risk assessments and their potential impact to a company's
performance.
It should also be noted that there have been predictions of
failures of key components in the transportation infrastructure
due to the Y2K issue. It is possible that there could be delays
in rail, over-the-road and air shipments due to failure in
transportation control systems. Investigation and validation of
the world's transportation infrastructure is beyond the scope and
the resources of the Company. Investors should use their own
awareness of the issues in the nations' infrastructure to make
ongoing infrastructure risk assessments and their potential
impact to a company's performance.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent
in the Y2K issue, resulting in part from the uncertainty of the
Y2K readiness of third-party suppliers and customers, the Company
is unable to determine at this time whether the consequences of
Y2K failures will have a material impact on the Company's results
of operations, liquidity or financial condition. The Company's
efforts to help ensure Y2K preparedness are expected to
significantly reduce the Company's level of uncertainty about the
Y2K issue. The Company believes that, with completion of the
above-mentioned system upgrades and testing, the possibility of
significant interruptions of normal operations should be reduced.
During the Summer of 1999, Company intends to determine whether,
and to what extent, to develop contingency plans in regard to Y2K
issues. the Company expects to have completed any contingency
plans that it decides to undertake by the end of Fall 1999.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Not applicable.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
----- ----
Report of Independent Public Accountants for the years ended
March 31, 1999, 1998 and 1997..................................... 23
Financial Statements:
Balance Sheets as of March 31, 1999 and 1998..................... 24
Statements of Income for the years ended March 31, 1999,
1998 and 1997................................................... 26
Statements of Shareholders' Equity and Comprehensive Income for
the years ended March 31, 1999, 1998 and 1997................... 27
Statements of Cash Flows for the years ended March 31, 1999, 1998,
and 1997........................................................ 28
Notes to Financial Statements:
Note A - General and Business.................................... 29
Note B - Summary of Significant Accounting Policies.............. 29
Note C - Inventories............................................. 32
Note D - Property, Plant and Equipment........................... 32
Note E - Income Taxes............................................ 33
Note F - Line of Credit.......................................... 33
Note G - Note Payable............................................ 34
Note H - Shareholders' Equity.................................... 34
Note I - 401(k) Profit Sharing Plan.............................. 37
Note J - Segment Information..................................... 38
22
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, 1999 and 1998, 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, 1999. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Synthetech, Inc. as of March 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
May 14, 1999
23
SYNTHETECH, INC.
BALANCE SHEETS
----------------
At March 31, 1999 1998
- ------------ ---- ----
ASSETS
- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,470,000 $ 4,976,000
Accounts receivable, less allowance
for doubtful accounts of $15,000 for
1999 and 1998 3,414,000 1,470,000
Inventories 3,359,000 3,184,000
Prepaid expenses 284,000 196,000
Deferred income taxes 133,000 70,000
Other current assets 5,000 24,000
------------ ------------
TOTAL CURRENT ASSETS 14,665,000 9,920,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net 11,561,000 9,439,000
OTHER ASSETS 4,000 5,000
------------ ------------
TOTAL ASSETS $ 26,230,000 $ 19,364,000
============ ============
See Notes to Financial Statements.
24
SYNTHETECH, INC.
BALANCE SHEETS
----------------
At March 31, 1999 1998
- ------------------------------------- ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Current portion of note payable $ 15,000 $ 14,000
Accounts payable 1,543,000 672,000
Accrued compensation 375,000 221,000
Deferred revenue 44,000 247,000
Accrued income taxes 561,000 514,000
Other accrued liabilities 17,000 15,000
----------- ----------
TOTAL CURRENT LIABILITIES 2,555,000 1,683,000
DEFERRED INCOME TAXES 496,000 209,000
NOTE PAYABLE, net of current portion 152,000 166,000
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized 100,000,000 shares; issued
and outstanding, 14,252,000 and
14,143,000 shares 14,000 14,000
Paid-in capital 8,740,000 8,467,000
Deferred compensation (76,000) (106,000)
Retained earnings 14,349,000 8,931,000
------------ -----------
TOTAL SHAREHOLDERS' EQUITY $ 23,027,000 $ 17,306,000
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 26,230,000 $ 19,364,000
============ ============
See Notes to Financial Statements.
25
SYNTHETECH, INC.
STATEMENTS OF INCOME
--------------------
For The Year Ended March 31, 1999 1998 1997
---- ---- ----
REVENUES $ 23,133,000 $ 8,321,000 $ 12,797,000
COST OF SALES 12,983,000 5,320,000 5,103,000
------------ ------------ ------------
GROSS PROFIT 10,150,000 3,001,000 7,694,000
------------ ------------ ------------
Research and development 338,000 215,000 211,000
Selling, general and
adminsitrative 1,471,000 1,175,000 1,235,000
------------ ------------ -----------
OPERATING EXPENSE 1,809,000 1,390,000 1,446,000
------------ ------------ -----------
OPERATING INCOME 8,341,000 1,611,000 6,248,000
OTHER INCOME, net 215,000 312,000 385,000
INTEREST EXPENSE (17,000) - (1,000)
------------ ------------ -----------
INCOME BEFORE INCOME TAXES 8,539,000 1,923,000 6,632,000
PROVISION FOR INCOME TAXES 3,121,000 702,000 2,520,000
------------ ------------ ----------
NET INCOME $ 5,418,000 $ 1,221,000 $ 4,112,000
============ ============ ============
BASIC EARNINGS PER SHARE $0.38 $0.09 $0.30
===== ===== =====
DILUTED EARNINGS PER SHARE $0.38 $0.09 $0.29
===== ===== =====
See Notes to Financial Statements.
26
SYNTHETECH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
-----------------------------------------------------------
EMPLOYEE
NOTES
COMMON STOCK RECEIVABE CUMULATIVE
------------------- PAID-IN & DEFERRED COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION INCOME(LOSS) EARNINGS TOTAL
---------- ------- ---------- ---------- ----------- ---------- ----------- -----------
BALANCE, March 31, 1996 13,475,000 $13,000 $6,589,000 ($130,000) $30,000 $3,598,000 $10,100,000
---------
Unrealized loss on securities
available for sale - - - - (14,000) - (14,000)
Net income - - - - - 4,112,000 4,112,000
---------
Comprehensive income - - - - - - 4,098,000
Issuance of stock for the
exercise of stock options 260,000 1,000 322,000 - - - 323,000
Issuance of stock for the
exercise of stock warrants 125,000 - 228,000 - - - 228,000
Issuance of below-market stock
options - - 284,000 (284,000) - - -
Amortization of deferred
compensation - - - 125,000 - - 125,000
Payment on employee note
receivable - - - 50,000 - - 50,000
Income tax benefit of exercise
of stock warrants - - 216,000 - - - 216,000
Income tax benefit of
disqualifying dispositions - - 657,000 - - - 657,000
---------- ------ --------- -------- ------ --------- ----------
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
compensation - - - 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
========== ======= ========== ========= ========= =========== ===========
See Notes To Financial Statements.
27
SYNTHETECH, INC.
STATEMENT OF CASH FLOWS
-----------------------
For The Year Ended March 31, 1999 1998 1997
- -------------------------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,418,000 $1,221,000 $4,112,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, amortization and
other 1,351,000 1,014,000 268,000
Amortization of deferred compensation 120,000 108,000 105,000
Accrued interest on securities
available for sale - - 9,000
Realized gain on securities
available for sale - (25,000) (10,000)
Provision for deferred income taxes 224,000 127,000 61,000
(Increase) decrease in assets:
Accounts receivable, net (1,944,000) (775,000) 660,000
Inventories (175,000)(1,297,000) 37,000
Prepaid expenses (88,000) (32,000) (93,000)
Income tax receivable - 798,000 (646,000)
Other assets 19,000 (20,000) (1,000)
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities 1,074,000 201,000 470,000
Deferred revenue (203,000) 203,000 (54,000)
--------- -------- --------
Net cash provided by operating
activities 5,796,000 1,523,000 4,918,000
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment purchases (3,472,000)(4,089,000)(5,079,000)
Proceeds from sale of securities
available for sale and redemption
of securities available for sale - 635,000 380,000
Employee notes receivable - 30,000 50,000
--------- --------- ---------
Net cash used by investing activities (3,472,000)(3,424,000)(4,649,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term
debt obligations (13,000) (13,000) (1,000)
Proceeds from stock option exercises
and disqualifying dispositions 183,000 150,000 979,000
Proceeds from stock warrant exercises,
including tax benefit - - 444,000
---------- ---------- ---------
Net cash provided by financing activities 170,000 137,000 1,422,000
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,494,000 (1,764,000) 1,691,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 4,976,000 6,740,000 5,049,000
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $7,470,000 $4,976,000 $6,740,000
========== ========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities available
for sale - - $14,000
Issuance of stock options at below fair
value $90,000 $21,000 $284,000
Issuance of note payable for capital
improvement - - $194,000
Mature shares exchanged for the exercise
of stock options $401,000 $480,000 $112,000
See Notes to Financial Statements.
28
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 generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents
include demand cash and all investments purchased with
an original maturity of three months or less.
Securities Available for Sale: In February 1998, the
Company sold the last of its securities available for
sale. 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.
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.
29
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs: Research and
development costs are expensed as incurred.
Other Assets: Other assets primarily represent patent
costs, which are amortized over the useful life of the
patent.
Earnings Per Share: 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:
1999 1998 1997
---- ---- ----
Weighted average shares
outstanding for basic EPS 14,200,399 13,921,164 13,659,927
Dilutive effect of common stock
options issuable under treasury
stock method 57,708 149,809 457,114
---------- ---------- ----------
Weighted average common and
common equivalent shares
outstanding for diluted EPS 14,258,107 14,070,973 14,117,041
========== ========== ==========
The following common stock equivalents were excluded
from the earnings per share computation because their
effect would have been anti-dilutive:
1999 1998 1997
---- ---- ----
Common stock options
outstanding 523,800 482,300 -
30
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Supplemental cash flow disclosures are as follows:
Cash Paid During The Year For:
1999 1998 1997
---- ---- ----
Income Taxes $2,702,000 $ 419,000 $2,232,000
Interest $ 17,000 $ 17,000 $ 1,000
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements:
Comprehensive Income: In 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income" which
requires companies to report a measure of all changes
in equity except those resulting from investment by
owners and distribution to owners, in a financial
statement for the period in which they are recognized.
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. Prior
years have been restated to conform to the requirements
of SFAS No. 130.
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.
Derivative Reporting: In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and
reporting standards for all derivative instruments.
SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company does not have any
derivative instruments and, accordingly, the adoption
of SFAS No. 133 will have no impact on the Company's
financial position or results of operations.
Reclassifications: Certain amounts in the prior year
financial statements have been reclassified to conform
to the current presentation.
31
NOTE C. INVENTORIES
Inventories are stated at the lower of cost or market,
determined on the first-in, first-out (FIFO) basis.
Cost utilized for inventory purposes include labor,
material, and manufacturing overhead.
The major components of inventories are as follows:
March 31,
---------
1999 1998
---- ----
Finished products $ 1,206,000 $ 1,009,000
Work-in-process 824,000 1,033,000
Raw materials 1,329,000 1,142,000
----------- -----------
$ 3,359,000 $ 3,184,000
=========== ===========
NOTE D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31,
---------
1999 1998
---- ----
Land $ 91,000 $ 91,000
Buildings 4,446,000 4,340,000
Machinery and equipment 7,293,000 6,277,000
Laboratory equipment 400,000 338,000
Furniture and fixtures 283,000 176,000
Vehicles 132,000 84,000
Construction in progress 2,600,000 468,000
---------- ----------
15,245,000 11,774,000
Less:
Accumulated depreciation 3,684,000 2,335,000
------------ ------------
$ 11,561,000 $ 9,439,000
============ ============
32
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 1999, fiscal
1998 and fiscal 1997 included a deferred tax provision
of $224,000, $127,000 and $61,000, respectively.
Total deferred tax assets and liabilities at March 31,
1999 were $133,000 and $496,000, respectively. Total
deferred tax assets and liabilities at March 31, 1998,
were $70,000 and $209,000, respectively. Individually
significant differences included book/tax depreciation
differences which were recorded as a deferred tax
liability of $496,000 and $209,000 at March 31, 1999
and March 31, 1998, respectively.
The reconciliation between the effective tax rate and
the statutory federal income tax rate is as follows:
1999 1998 1997
---- ---- ----
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes 4.4% 2.5% 4.4%
Foreign sales corporation
benefit (0.6)% (1.5)% (1.5)%
Other (1.3)% 1.5% 1.1%
----- ----- -----
Effective tax rate 36.5% 36.5% 38.0%
===== ===== =====
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
7.75% at March 31, 1999. There were no amounts
outstanding under this loan at the end of the fiscal
year. This line of credit is renewable on August 26,
1999.
33
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
On September 17 and 19, 1996, the Emanuel and Company
warrant authorized by the Board of Directors on
February 5, 1992 was exercised. The exercise price of
the 5-year warrant for 100,000 shares was $2.22 per
share. On December 19, 1996, Mr. Page Golsan, III
exercised the warrant authorized by the Board of
Directors on January 7, 1992. The exercise price of
the 5-year warrant for 25,000 shares was $1.81 per
share. The net proceeds of these warrant exercises was
$228,000. As of March 31, 1997, there were no stock
warrants outstanding.
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 1,398,837 options have been exercised and
55,110 options have been cancelled as of March 31, 1999
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.
34
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 846,000 options have been
granted under this plan. A total of 16,000 options
have been exercised and 207,700 options have been
cancelled as of March 31, 1999 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 1999, fiscal
1998 and fiscal 1997 using the Black-Scholes option-
pricing model as prescribed by SFAS 123, using the
following weighted average assumptions for grants in
fiscal 1999, fiscal 1998 and fiscal 1997:
Fiscal Year 1999 1998 1997
----------- ---- ---- ----
Risk-free interest rate 5.50% 6.49% 6.49%
Expected dividend yield 0% 0% 0%
Expected life 3.81 years 3.60 years 3.89 years
Expected volatility 55% 57% 49-50%
The total value of options granted during fiscal 1999,
fiscal 1998 and fiscal 1997 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
35
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
earnings per share would have decreased as reflected in
the following pro forma amounts:
Year ended March 31,
--------------------
1999 1998 1997
---- ---- ----
Net income:
As reported $ 5,418,000 $ 1,221,000 $ 4,112,000
Pro forma 4,761,000 322,000 3,461,000
Basic earnings per Share:
As reported $0.38 $0.09 $0.30
Pro forma $0.33 $0.02 $0.25
Diluted earnings per share:
As reported $0.38 $0.09 $0.29
Pro Forma $0.33 $0.02 $0.25
Using the Black-Scholes methodology, the total value of
options granted during fiscal 1999, fiscal 1998 and
fiscal 1997 was $743,000, $873,000 and $1,375,000,
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 1999, fiscal 1998 and fiscal 1997 was $3.05,
$3.45 and $4.17, 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,
1999 1998 1997
--------------- ---------------- --------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Ex. Ex. Ex.
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year 749,400 $5.85 913,810 $4.06 871,960 $2.02
Granted 244,000 $5.64 253,000 $7.05 330,000 $7.40
Exercised (173,887) $2.52 (373,710) $2.04 (275,950) $1.58
Cancelled (160,000) $7.45 (43,700) $8.02 (12,200) $4.70
--------- ----- -------- ----- -------- -----
Options outstanding at
end of year 659,513 $6.26 749,400 $5.85 913,810 $4.06
======= ===== ======= ===== ======= =====
Exercisable at end of year 346,113 $6.40 381,183 $4.48 484,010 $2.08
Weighted average fair value
of options granted at market
value - $2.84 - $3.41 - $3.78
Weighted average fair value
of options granted at below
market value - $5.45 - $7.02 - $5.86
36
NOTE H. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth the exercise price
range, number of shares outstanding at March 31, 1999,
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
---------------------------------- ----------------------
Wtd. Avg.
Remaining
Exercise Outstanding Contractual Wtd. Avg. Wtd. Avg.
Price Shares Life Exercise Exercisable Exercise
Range at 3/31/99 (Years) Price Options Price
- ----------- --------- ------ ------ ------- ------
$0.30-$1.08 23,500 9.30 $0.83 4,500 $0.51
$1.72-$1.81 50,000 8.58 $1.81 50,000 $1.81
$2.22-$4.38 62,213 4.47 $3.46 37,213 $2.84
$6.25-$8.50 523,800 8.87 $7.27 254,400 $7.92
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 1999, 1998, and 1997 was $77,000, $46,000
and $77,000, respectively.
37
NOTE J. SEGMENT INFORMATION
Long-lived assets, other than in the United States, are
not material.
Significant Customers: 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. During fiscal year 1997, two
customers accounted for 30% and 29% of revenues.
The following table reflects sales and percent of total
sales by geographic area:
1999 1998 1997
------------------ ------------------ ------------------
United States $ 16,680,000 72.1% $ 5,472,000 65.7% $ 8,655,000 67.6%
Europe 5,688,000 24.6% 2,606,000 31.3% 1,262,000 9.9%
Japan 198,000 0.8% 205,000 2.5% 2,880,000 22.5%
Other 567,000 2.5% 38,000 .5% - -
------------ ----- ------------ ------ ------------ -----
Total $ 23,133,000 100% $ 8,321,000 100% $ 12,797,000 100%
============ ============ ============
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The following table sets forth certain information concerning the
executive officers, key employees and directors of the Company:
Name Age Position
---- --- --------
M. ("Sreeni") Sreenivasan 50 President, Chief Executive
Officer and Director
Charles B. Williams 52 Vice President of Finance
and Administration, Chief
Financial Officer,
Secretary, Treasurer, and
Director
Timothy D. Fitzpatrick 34 Director of R&D and Pilot
Plant Operations
Joel D. Melka 44 Director of Manufacturing
Mitchell R. McVay 48 Director of Engineering
Paul C. Ahrens 47 Chairman of the Board
Howard L. Farkas 75 Director
Edward M. Giles 63 Director
Page E. Golsan, III 61 Director
Donald E. Kuhla, Ph.D. 56 Director
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.
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,
39
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.
Timothy D. Fitzpatrick. Mr. Fitzpatrick has served as Director of
R&D and Pilot Plant Operations 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.
Mitchell R. McVay. Mr. McVay has 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.
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
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
40
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. and Ventana Medical Systems, Inc. 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. Since 1998 he was President and Chief Operating
Officer of Albany Molecular Research, Inc. (contract research
organization). From 1994 to 1998, he has been Vice President and
Chief Technical Officer of Plexus Ventures, Inc., a biotech
consulting and investment firm. From 1990 to 1994 Dr. Kuhla
held senior management positions with two venture capital backed,
biotechnology start-up companies. Previously, he was in research
and development and operations management positions with Pfizer
Inc. and Rorer Group, Inc., his last position at Rorer being
Senior Vice President of Operations. Dr. Kuhla is a director of
NPS Pharmaceuticals, Inc. (a biotechnology drug discovery and
development company). Dr. Kuhla received a B.A. in Chemistry
from New York University and a Ph.D. in Organic Chemistry from
Ohio State University.
41
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,
1999, all Section 16(a) filing requirements applicable to its
officers, directors and 10% shareholders were complied with, except
that Messrs. Fitzpatrick, McVay and Melka each failed to file a Form 3
and Form 5.
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
42
the annual option grants is to ensure that the executive always
has options that vest in increments over the following two-year
period. This provides a method of retention and motivation for
the senior level executives of the Company and also aligns senior
management's objectives with long-term stock price appreciation.
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 1999.
As a result of the Company's excellent fiscal 1999 performance,
including record revenues and profits, the Compensation Committee
granted significant bonuses to Mr. Sreenivasan, the CEO, and Mr.
Williams, the CFO. Recognizing Mr. Sreenivasan's long term
efforts on behalf of the Company, the Compensation Committee also
granted him a $45,000 one-time bonus payable over the next three years.
Mr. Sreenivasan received $7,500 of this bonus in fiscal 1999.
Consistent with its policy to create longer-term incentives, the
Compensation Committee granted stock options to the executive
officers, including a 24,000 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.
43
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid by the Company to those persons who
were at March 31, 1999, the Company's Chief Executive Officer,
Chief Financial Officer and two other key employees of the
Company whose salary and bonus exceeded $100,000 during the last
fiscal year (the "Named Persons") for the fiscal years ended
March 31, 1999, 1998 and 1997:
Summary Compensation Table
--------------------------
Long-Term All Other
Annual Compensation Compensation Compensation($)(2)
--------------------------- ------------ ------------
Name and Principal Stock
Position Year(1) Salary($) Bonus($) Options(#)
- ------------------ -------- --------- -------- ------------- -----------
M.("Sreeni")
Sreenivasan 1999 165,000 71,500(3) 24,000 11,200
President & Chief 1998 150,000 - 25,000 12,500
Executive Officer 1997 150,000 95,000 50,000 7,125
Charles B. Williams 1999 99,000 36,000 19,000 9,900
Vice President of 1998 88,000 - 20,000 7,950
Finance and 1997 88,000 57,000 32,000 6,544
Administration &
Chief Financial
Officer
Mitchell R. McVay 1999 85,500 24,000 19,000 -
Director of 1998 78,000 - 15,000 975
Engineering 1997 74,250 30,000 - -
Timothy D. 1999 71,500 30,600 35,000 4,130
Fitzpatrick 1998 60,000 2,500 9,500 4,050
Director of R&D and 1997 57,500 21,000 11,000 3,488
Pilot Plant
Operations
_______________________
(1)Fiscal year ended March 31.
(2)Represents Company contributions to the account of the Named
Persons under the Company's 401(k) plan.
(3)Mr. Sreenivasan was granted a special $45,000 bonus payable
over three years. The fiscal 1999 bonus set forth in the table
includes the initial $7,500 payment of this bonus. See "Report
of the Compensation Committee" above.
44
Stock Option Grants in Last Fiscal Year
The following table provides information, with respect to the
Named Persons, concerning the grant of stock options during
fiscal year 1999.
Stock Options Grants in the Last Fiscal Year(1)
-----------------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants (Through Expiration Date)
------------------------------------ ------------------------
Options
Granted Exercise
(# of % of Total Price Expiration 5% Per 10% Per
Name Shares) Options(2) ($/Sh)(3) Date year(4) Year(4)
- ---- ------- ---------- ------- -------- ------- -------
M. ("Sreeni")
Sreenivasan 24,000 9.8% $6.25 May 2008 $82,800 $203,760
Charles B.
Williams 19,000 7.8% $6.25 May 2008 $65,550 $161,310
Mitchell R.
McVay 19,000 7.8% $6.25 May 2008 $65,550 $161,310
Timothy D. 10,000 4.1% $6.25 May 2008 $34,500 $84,900
Fitzpatrick 25,000 10.2% $4.38 Oct 2008 $60,370 $148,695
_______________________
(1)The Company has not granted any stock appreciation rights
(SARs).
(2)Based on an aggregate of 244,000 options being granted to all
employees during the fiscal year ended March 31, 1999.
(3)These options were granted under the Company's 1995 Incentive
Compensation Plan in May 1998 to each individual for the
options expiring in May 2008, and in October 1998 to Mr.
Fitzpatrick for the option expiring in October 2008. Each
option has an exercise price equal to the fair market value of
the Company's Common Stock as of the date of the grant. These
grants vest annually over a two-year period ending April 2000
for each individual for the options expiring in May 2008,
and the two-year period ending October 2000 for Mr. Fitzpatrick
for the option expiring in October 2008.
(4)The 5% and 10% assumed rates of appreciation are mandated by
the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future prices
for its Common Stock.
Stock Option Exercises in Last Fiscal Year and Fiscal Year-End
Stock Option Values
- -----------------------------------------------------------------
The following table provides information, with respect to the
Named Persons, concerning the options granted to them during the
last fiscal year and the options held by them at March 31, 1999.
Option Exercises in Last Fiscal Year and Fiscal Year End Stock Option Values
----------------------------------------------------------------------------
Number of Value of Unexercised In-
Shares Unexercised Options the-Money Options at
Acquired at Fiscal Year End Fiscal Year End($)(1)
on Value ---------- ---------- ---------- ---------
Exercise Realized Exerci- Unexerci- Exerci- Unexerci-
Name (#) ($) sable sable sable sable
- ---- -------- --------- ---------- ---------- --------- --------
M.("Sreeni")
Sreenivasan 47,887 $133,605 80,613 36,500 $27,894 $0
Charles B.
Williams 0 $0 42,000 29,000 $0 $0
Mitchell R.
McVay 2,500 $14,350 9,000 26,500 $5,805 $0
Timothy D.
Fitzpatrick 0 $0 15,750 39,750 $0 $0
45
_______________________
(1)Represents the difference between the exercise price of the
options with exercise prices below $4.38 and the $4.38 closing
price of the Company's Common Stock on March 31, 1999.
Comparison of Total Cumulative Shareholder Equity
The following graph sets forth the Company's total cumulative
shareholder return as compared to the Nasdaq Stock Market (U.S.)
and S&P Specialty Chemicals Indexes for the period March 31, 1994
through March 31, 1999. The total shareholder return assumes
$100 invested at the beginning of the period in Common Stock of
the Company, Nasdaq Stock Market Index (U.S.) and the S&P
Specialty Chemicals Index. Historic stock price performance is
not necessarily indicative of future stock price performance.
Edgar Representation of Data Points Used in Printed Graphic
S&P
Nasdaq Stock Specialty
Market Index Chemicals
Synthetech (U.S) Index
---------- ------------ ----------
1994 $ 100.00 $ 100.00 $ 100.00
1995 84.62 111.25 100.65
1996 246.10 151.06 129.94
1997 312.76 167.83 116.80
1998 253.81 254.43 147.98
1999 179.45 342.42 124.69
All data points are at March 31.
46
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.
47
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, 1999, 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.
Amount and Nature
Name and Address of Beneficial Percent
Beneficial Owner Ownership of Class
- ------------------- ----------------- --------
Paul C. Ahrens 1,405,491(1) 9.9%
1290 Industrial Way
Albany, OR
M. ("Sreeni")
Sreenivasan 604,154(2) 4.2%(3)
Howard L. Farkas 106,000(4) *
Edward M. Giles 274,000(5) 1.9%(3)
Page E. Golsan, III 44,000(6) *
Donald M. Kuhla, Ph.D. 17,000(7) *
Charles B. Williams 253,620(8) 1.8%(3)
Timothy D. Fitzpatrick 25,500(9) *
Mitchell R. McVay 26,100(10) *
Brown Capital Management 1,035,800(11) 7.3%
809 Cathedral Street
Baltimore, MD 21201
All Officers, Key 2,755,865(1)(2)(4)(5) 18.9%(3)
Employees and Directors (6)(7)(8)(9)(10)(12)
as a Group (10 persons)
48
______________________
*less than 1%.
(1)Includes 6,000 shares of common stock which are owned of
record by a private foundation of which Mr. Ahrens is the
President. Mr. Ahrens disclaims beneficial ownership of these
shares.
(2)Includes 105,113 shares of common stock which Mr. Sreenivasan
has the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 12,000 shares of
common stock issuable pursuant to stock options held by Mr.
Sreenivasan which are not exercisable now or within sixty (60)
days.
(3)The denominator used in calculating the percentage is equal to
the number of shares outstanding plus the number of shares the
beneficial owner (or group of beneficial owners) has a right to
acquire immediately or within sixty days pursuant to warrants
or options.
(4)Includes 56,000 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 9,000 shares of common stock issuable
pursuant to stock options held by Mr. Farkas which are not
exercisable now or within sixty (60) days.
(5)Includes 13,000 shares of common stock which Mr. Giles has the
right to acquire immediately or within sixty (60) days pursuant
to stock options. Excludes 12,000 shares of common stock
issuable pursuant to stock options held by Mr. Giles which are
not exercisable now or within sixty (60) days. Also includes
60,000 shares of common stock held by two individuals who have
granted to Mr. Giles the investment powers associated with
these shares. Mr. Giles disclaims beneficial ownership over
these 60,000 shares.
(6)Includes 6,000 shares of common stock which Mr. Golsan 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 Mr. Golsan which are
not exercisable now or within sixty (60) days.
(7)Includes 13,000 shares of common stock which Dr. Kuhla has the
right to acquire immediately or within sixty (60) days pursuant
to stock options. Excludes 12,000 shares of common stock
issuable pursuant to stock options held by Dr. Kuhla which are
not exercisable now or within sixty (60) days.
(8)Includes 61,500 shares of common stock which Mr. Williams has
the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 9,500 shares of
common stock issuable pursuant to stock options held by Mr.
Williams which are not exercisable now or within sixty (60)
days.
(9)Includes 25,500 shares of common stock which Mr. Fitzpatrick
has the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 30,000 shares of
common stock issuable pursuant to stock options held by Mr.
Fitzpatrick which are not exercisable now or within sixty (60)
days.
(10)Includes 26,000 shares of common stock which Mr. McVay has
the right to acquire immediately or within sixty (60) days
pursuant to employee stock options. Excludes 9,500 shares of
common stock issuable pursuant to stock options held by Mr.
McVay which are not exercisable now or within sixty (60) days.
(11)Based on Schedule 13(g) filings, pursuant to which Brown
Capital Management disclosed controlling 1,035,800 shares of
common stock with sole dispositive power. Of these shares,
Brown Capital Management further disclosed that it had sole
voting power over 971,500 shares of common stock.
(12)Excludes 10,000 shares of common stock issuable pursuant to
stock options held by Mr. Melka which are not exercisable now
or within sixty (60) days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Not applicable.
49
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.
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 Promissory Note dated August 26, 1998 from Synthetech,
Inc. to United States National Bank of Oregon.
10.7 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.
50
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+ Bonus for M. Sreenivasan granted October 1, 1998.
10.13 Contract entered into by Synthetech, Inc. and R.L.
Reimers Company dated December 1, 1998.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months Ended March 31,
1998.
__________________________
+ Management contract or compensatory plan.
(1) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991.
(2) Incorporated by reference to the exhibits filed with
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1990.
(3) Confidential treatment of certain portions of this document was
granted by the Commission on 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.
(b) Reports on Form 8-K
None.
(c) See (a) (3) above.
(d) See (a) (1) and (2) above.
51
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 __, 1999 SYNTHETECH, INC.
(Registrant)
By
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
__________________ President, Chief Executive June 9,
M. ("Sreeni") Officer (Principal Executive 1999
Sreenivasan Officer) and Director
__________________ Vice President of Finance and June 9,
Charles B. Williams Administration, Chief Financial 1999
Officer, Secretary, Treasurer
(Principal Financial Officer
and Principal Accounting
Officer), and Director
___________________ Chairman of the Board June 9,
Paul C. Ahrens 1999
___________________ Director
Howard L. Farkas June 9,
1999
___________________ Director June 9,
Edward M. Giles 1999
___________________ Director June 9,
Page E. Golsan, III 1999
____________________ Director June 9,
Donald M. Kuhla, 1999
Ph.D.
___________
52
INDEX TO EXHIBITS
Sequential Page No.
3(i)(1)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 Promissory Note dated August 26, 1998 from
Synthetech, Inc. to United States National
Bank of Oregon.
10.7 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+ Bonus for M. Sreenivasan granted
October 1, 1998.
10.13 Contract entered into by Synthetech, Inc.
and R.L. Reimers Company dated December 1,
1998.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Twelve Months Ended March 31,
1999.
53
__________________________
+ 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.