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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 0-25323
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ALBANY MOLECULAR RESEARCH, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 14-1742717
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21 CORPORATE CIRCLE, P.O. BOX 15098
ALBANY, NEW YORK 12212-5098
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (518) 464-0279
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant 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. / /
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on March 15, 2001 was approximately
$545.3 million based upon the closing price per share of the Registrant's Common
Stock as reported on the Nasdaq National Market on March 15, 2001. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 15, 2001, there were 32,950,967 outstanding shares of the
Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into Part III
of this Report on Form 10-K:
(1) The Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 22, 2001.
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ALBANY MOLECULAR RESEARCH, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
PAGE NO.
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Part I.
Cautionary Note Regarding Forward Looking Statements.................. 2
Item 1. Business.................................................... 7
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 55
Part III.
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 55
Item 13. Certain Relationships and Related Transactions.............. 55
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 55
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Company's actual results could
differ materially from those projected in the forward-looking statements and
therefore, prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including, without limitation, the factors set forth under "Risk Factors and
Certain Factors Affecting Forward-Looking Statements," the discussion set forth
below and the matters set forth in this Form 10-K generally.
RISK FACTORS AND CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The following factors should be considered carefully in addition to the
other information in this Form 10-K. Except as mentioned under "Quantitative and
Qualitative Disclosure About Market Risk" and except for the historical
information contained herein, the discussion contained in this Form 10-K
contains "forward-looking statements," within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, that involve risk and
uncertainties. The Company's actual results could differ materially from those
discussed in this Form 10-K. Important factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere herein.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED.
Our future growth and profitability depends upon the research and efforts of
our highly skilled employees, such as our scientists, and their ability to keep
pace with changes in drug discovery and development technologies. We believe
that there is a shortage of scientists, and we compete vigorously with
pharmaceutical firms, biotechnology firms, contract research firms, and academic
and research institutions to recruit scientists. If we cannot recruit and retain
scientists and other highly skilled employees, we will not be able to continue
our existing services and will not be able to expand the services we offer to
our customers.
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES MAY DISCONTINUE OR DECREASE THEIR
USAGE OF OUR SERVICES.
We depend on pharmaceutical and biotechnology companies that use our
services for a large portion of our revenues. Although there is a trend among
pharmaceutical and biotechnology companies to outsource drug research and
development functions, this trend may not continue. If pharmaceutical and
biotechnology companies discontinue or decrease their usage of our services,
including as a result of the slowdown in the overall United States economy, our
revenues and earnings could be lower than we expect and our revenues may
decrease or not grow at historical rates.
WE MAY LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS.
During the year ended December 31, 2000, we earned approximately 47% of our
contract revenues providing services to three major customers. Our customers
typically may cancel their contracts with 30 to 90 days' notice for a variety of
reasons, many of which are out of our control. Our contract with our most
significant customer requires the customer to wind-down the contract over an
extended period or pay a contract termination fee. If any one of our other major
customers cancels its contract with us, our contract revenues may decrease.
THE ROYALTIES WE EARN ON ALLEGRA MAY DECREASE.
We have been issued several patents on a pure form of, and manufacturing
process for, the drug fexofenadine HCl, which is the active ingredient in a
non-sedating antihistamine marketed and sold by Aventis under a license from us.
The product is marketed in the Americas under the brand name
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Allegra and in the rest of the world under the brand name Telfast. During the
year end December, 2000, our revenue from the license was $29.2 million, which
represented approximately 44% of our total revenues, and for the year ended
December 31, 1999, our revenue from the license was $21.4 million, which
represented approximately 49% of our total revenues. Allegra sales may decrease
for a variety of reasons, including the introduction into the marketplace of a
superior drug or generic versions of competing branded drugs, or the discovery
of unintended side effects from the use of Allegra. If Allegra sales decrease
due to these or any other factors, our revenues from the license agreement will
decrease. Because we have very few costs associated with the Allegra license,
any decrease in our revenues from the license agreement for Allegra would have a
disproportionately adverse effect on our results of operations.
WE MAY BE UNSUCCESSFUL IN PRODUCING PROPRIETARY TECHNOLOGY FROM OUR INTERNAL
RESEARCH AND DEVELOPMENT EFFORTS.
We have expended and continue to expend time and money on internal research
and development with the intention of producing proprietary technologies in
order to patent and then license them to other companies. However, we may not be
successful in producing any valuable technology. To the extent we are unable to
produce technology that we can license, we may not receive any revenues related
to our internal research and development efforts.
WE MAY LOSE VALUABLE INTELLECTUAL PROPERTY IF WE ARE UNABLE TO PROTECT IT.
Some of our most valuable assets include patents and trade secrets. Part of
our business is developing technologies that we patent and then license to other
companies. However, some technologies that we develop may already be patented by
other companies. For this and other reasons, we may not be able to obtain
patents for each new technology that we develop. Even if we are able to obtain
patents, the patents may not sufficiently protect our interest in the
technology. Similarly, we may not be able to protect our trade secrets by
keeping them confidential. Additionally, protecting our patents and trade
secrets may be costly and time consuming. To the extent we are unable to protect
intellectual property, our investment in those technologies may not yield the
benefits we expected. In addition, we may be subject to claims that we are
infringing on the intellectual property of others. We could incur significant
costs defending such claims. If we are unsuccessful in defending these claims,
we may be subject to liability for infringement.
WE MAY NOT BE ABLE TO LICENSE TECHNOLOGIES THAT WE NEED TO CONDUCT OUR BUSINESS.
In addition to the technologies that we develop, we also rely on
technologies that we license from other companies. We may not be able to license
technologies that we need in the future or we may be unable to license such
technologies on a commercially reasonable basis. Our inability to license the
technologies we need could result in increased costs and, therefore, reduced
profits, or the inability to engage in certain activities that require those
technologies.
OUR FAILURE TO MANAGE OUR EXPANSION MAY ADVERSELY AFFECT US.
Our business has expanded rapidly in the past several years. Expansion
places increased stress on our financial, managerial and human resources. As we
expand, we will need to recruit and retain additional highly skilled scientists
and technicians. Expansion of our facilities may lead to increased expenses and
may divert management attention away from operations.
FUTURE ACQUISITIONS MAY DISRUPT OUR BUSINESS AND DISTRACT OUR MANAGEMENT.
We have engaged in a number of acquisitions and strategic investments, and
we expect to continue to do so. We may not be able to identify suitable
acquisition candidates, and if we do identify suitable candidates, we may not be
able to make such acquisitions on commercially acceptable terms or at all. If
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we acquire another company, we may not be able to successfully integrate the
acquired business into our existing business in a timely and non-disruptive
manner or at all. We may have to devote a significant amount of time and
resources to do so. Even with this investment of time and resources, an
acquisition may not produce the revenues, earnings or business synergies that we
anticipate. If we fail to integrate the acquired business effectively or if key
employees of that business leave, the anticipated benefits of the acquisition
would be jeopardized. The time, capital, management and other resources spent on
an acquisition that fails to meet our expectations could cause our business and
financial condition to be materially and adversely affected. In addition,
acquisitions can involve non-recurring charges and amortization of significant
amounts of goodwill that could adversely affect our results of operations.
WE MAY NOT BE ABLE TO REALIZE THE BENEFITS OF RECENT ACQUISITIONS AND STRATEGIC
INVESTMENTS.
We acquired EnzyMed, Inc., a provider of combinatorial biocatalysis
discovery services, in October 1999 and American Advanced Organics, Inc., a
contract manufacturer of novel compounds, pharmaceutical intermediates and test
drug substances, in February 2000 and New Chemical Entities, a chemistry-based
drug discovery company, in January 2001. These transactions may not be as
beneficial to us as we expect. In addition to these acquisitions, we made a
$30 million strategic investment in Organichem Corporation in December 1999 to
facilitate a management buyout of a chemical manufacturing facility from Nycomed
Amersham, plc. If Organichem fails to perform as we expect, our investment may
not yield adequate returns or we may lose our investment. In addition, the other
equity holders of Organichem have the right to require us to purchase their
interests in Organichem based on a predetermined formula. We may be required to
purchase their entire interests in 2004 at a price that is higher than the fair
market value of these interests at the time of purchase, which would negatively
impact our financial condition. We also made a $650,000 investment in Fluorous
Technologies, Inc. in May 2000. Fluorous Technologies is a development stage
company and may not be able to successfully develop technology and products.
WE MAY LOSE ONE OR MORE OF OUR KEY EMPLOYEES.
Our business is highly dependent on our senior management and scientific
staff, including:
- Dr. Thomas E. D'Ambra, our Chairman and Chief Executive Officer,
- Dr. Donald E. Kuhla, our President and Chief Operating Officer, and
- David P. Waldek, our Chief Financial Officer and Treasurer.
Although we have employment agreements with the individuals listed above, we
do not have employment agreements with all of our key employees. Additionally,
the loss of any of our other key employees, including our scientists, may have
an adverse effect on our business.
THE ROYALTIES WE EARN ON ALLEGRA WILL LIKELY BE AFFECTED BY THE SEASONAL NATURE
OF ALLERGIES.
Allergic reactions to plants, pollens and other airborne allergens generally
occur during the spring and summer seasons. Therefore, we expect the demand for
Allegra to be lower during other times of the year. Because Allegra sales change
seasonally based on the demand for allergy medicines, our quarter-to-quarter
revenues will likely experience fluctuations.
WE FACE INCREASED COMPETITION.
We compete directly with the in-house research departments of pharmaceutical
companies and biotechnology companies, as well as combinatorial chemistry
companies, contract research companies, and research and academic institutions.
Many of our competitors have greater financial and other resources than we have.
As new companies enter the market and as more advanced technologies become
available, we expect to face increased competition. In the future, any one of
our competitors
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may develop technological advances that render the services that we provide
obsolete. While we plan to develop technologies which will give us competitive
advantages, our competitors plan to do the same. We may not be able to develop
the technologies we need to successfully compete in the future, and our
competitors may be able to develop such technologies before we do. Consequently,
we may not be able to successfully compete in the future.
WE MAY BE HELD LIABLE FOR HARM CAUSED BY DRUGS THAT WE DEVELOP AND TEST.
We develop, test and, to a limited extent, manufacture drugs that are used
by humans. If any one of the drugs that we develop, test or manufacture harms
people, we may be required to pay damages to those persons. Although we carry
liability insurance, we may be required to pay damages in excess of the amounts
of our insurance coverage. Damages awarded in a product liability action could
be substantial and could have a negative impact on our financial condition.
WE MAY BE LIABLE FOR CONTAMINATION OR OTHER HARM CAUSED BY HAZARDOUS MATERIALS
THAT WE USE.
Our research and development processes involve the use of hazardous
materials. We are subject to federal, state and local regulation governing the
use, manufacture, handling, storage and disposal of hazardous materials. We
cannot completely eliminate the risk of contamination or injury resulting from
hazardous materials and we may incur liability as a result of any contamination
or injury. We may also incur expenses relating to compliance with environmental
laws. Such expenses or liability could have a significant negative impact on our
financial condition.
IF WE FAIL TO MEET STRICT REGULATORY REQUIREMENTS, WE COULD BE REQUIRED TO PAY
FINES OR EVEN CLOSE OUR FACILITIES.
All facilities and manufacturing techniques used to manufacture drugs in the
United States must conform to standards that are established by the federal Food
and Drug Administration. The FDA conducts scheduled periodic inspections of our
facilities to monitor our compliance with regulatory standards. If the FDA finds
that we fail to comply with the appropriate regulatory standards, they may
impose fines on us or, if the FDA determines that our non-compliance is severe,
they may close our facilities. Any adverse action by the FDA would have a
negative impact on our operations.
OUR OPERATIONS MAY BE INTERRUPTED BY THE OCCURRENCE OF A NATURAL DISASTER OR
OTHER CATASTROPHIC EVENT AT OUR PRIMARY FACILITIES.
We depend on our laboratories and equipment for the continued operation of
our business. Our research and development operations and all administrative
functions are primarily conducted at our facilities in Albany and Rensselaer,
New York. Although we have contingency plans in effect for natural disasters or
other catastrophic events, catastrophic events could still disrupt our
operations. Even though we carry business interruption insurance policies, we
may suffer losses as a result of business interruptions that exceed the coverage
available under our insurance policies. Any natural disaster or catastrophic
event in the Albany area or in our facilities could have a significant negative
impact on our operations.
HEALTH CARE REFORM COULD REDUCE THE PRICES PHARMACEUTICAL AND BIOTECHNOLOGY
COMPANIES CAN CHARGE FOR DRUGS THEY SELL WHICH, IN TURN, COULD REDUCE THE
AMOUNTS THAT THEY HAVE AVAILABLE TO RETAIN OUR SERVICES.
We depend on contracts with pharmaceutical and biotechnology companies for a
majority of our revenues. We therefore depend upon the ability of pharmaceutical
and biotechnology companies to earn enough profit on the drugs they market to
devote substantial resources to the research and development of new drugs.
Future legislation may limit the prices pharmaceutical and biotechnology
companies can charge for the drugs they market. Such laws may have the effect of
reducing the
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resources that pharmaceutical and biotechnology companies can devote to the
research and development of new drugs. If pharmaceutical and biotechnology
companies decrease the resources they devote to the research and development of
new drugs, the amount of services that we perform, and therefore our revenues,
could be reduced.
THE ABILITY OF OUR STOCKHOLDERS TO CONTROL OUR POLICIES AND EFFECT A CHANGE OF
CONTROL OF OUR COMPANY IS LIMITED, WHICH MAY NOT BE IN YOUR BEST INTERESTS.
There are provisions in our certificate of incorporation and bylaws which
may discourage a third party from making a proposal to acquire us, even if some
of our stockholders might consider the proposal to be in their best interests.
These provisions include the following:
- our certificate of incorporation provides for three classes of directors
with the term of office of one class expiring each year, commonly referred
to as a "staggered board." By preventing stockholders from voting on the
election of more than one class of directors at any annual meeting of
stockholders, this provision may have the effect of keeping the current
members of our board of directors in control for a longer period of time
than stockholders may desire.
- our certificate of incorporation authorizes our board of directors to
issue shares of preferred stock without stockholder approval and to
establish the preferences and rights of any preferred stock issued, which
would allow the board to issue one or more classes or series of preferred
stock that could discourage or delay a tender offer or change in control.
Additionally, we are subject to Section 203 of the Delaware General
Corporation Law, which, in general, imposes restrictions upon acquirors of 15%
or more of our stock.
OUR OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT CONTROL OVER US AND THEIR
INTERESTS MAY DIFFER FROM YOURS.
At March 15, 2001, our directors and officers beneficially owned or
controlled approximately 36.5% of our common stock. Individually and in the
aggregate, these stockholders significantly influence our management, affairs
and all matters requiring shareholder approval. In particular, this
concentration of ownership may have the effect of delaying, deferring or
preventing an acquisition of us and may adversely affect the market price of our
common stock.
BECAUSE OUR STOCK PRICE MAY BE VOLATILE, OUR STOCK PRICE COULD EXPERIENCE
SUBSTANTIAL DECLINES.
The market price of our common stock has historically experienced and may
continue to experience volatility. Our quarterly operating results, changes in
general conditions in the economy or the financial markets and other
developments affecting us or our competitors could cause the market price of our
common stock to fluctuate substantially. In addition, in recent years, the stock
market has experienced significant price and volume fluctuations. In addition,
during the past twelve months, the stock market, and in particular technology
companies, have experienced significant decreases in market value. This
volatility and the recent market decline has affected the market prices of
securities issued by many companies, often for reasons unrelated to their
operating performance and may adversely affect the price of our common stock.
BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOU WILL BENEFIT FROM AN INVESTMENT
IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future. As a result, the success of your investment in our common stock will
depend entirely upon any future appreciation. There is no guarantee that our
common stock will appreciate in value or even maintain the price at which you
purchased your shares.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a leading chemistry research and drug discovery and development
company focused on applications for the pharmaceutical, biotechnology and life
sciences industries. We engage in chemistry research, from lead discovery,
optimization and development to commercial manufacturing. We perform chemistry
research for many of the leading pharmaceutical and biotechnology companies and
for our own internal research and development. We believe we are the only
company providing contract chemistry services to customers across the entire
product development cycle from lead discovery to commercial manufacturing. Most
of the services we offer have been traditionally provided by chemistry divisions
within pharmaceutical and biotechnology companies, including drug discovery,
medicinal chemistry, chemical development, analytical chemistry services and
small-scale and pilot-plant manufacturing. Recently, we expanded our service
offerings to include commercial manufacturing through our strategic relationship
with and investment in Organichem Corporation. We have designed our services to
permit our customers to reduce overall drug development time and cost and to
pursue simultaneously a greater number of drug discovery and development
opportunities.
In addition to our chemistry research services, we also conduct proprietary
research and development to discover new lead compounds with commercial
potential. We anticipate that we would then license these compounds to third
parties in return for up-front service fees and milestone payments as well as
recurring royalty payments if these compounds are developed into new drugs
successfully reaching the market. In 1995, our proprietary research and
development activities led to the development and patenting of a substantially
pure form of, and a manufacturing process for, the active ingredient in the
non-sedating antihistamine marketed by Aventis as Allegra in the Americas and as
Telfast elsewhere. Pursuant to a licensing agreement with Aventis, we have
earned a total of $74.0 million in milestones and royalties from the beginning
of the contract in 1995 through December 31, 2000 and are entitled to receive
ongoing royalties from Aventis based upon a percentage of sales of the product.
In addition, many of our discovery technology contracts provide for us to
receive licensing, milestone and royalty payments for discoveries which lead to
products that reach the market.
In January 2001, we acquired New Chemical Entities, Inc. (NCE), currently
known as the AMRI Bothell Research Center, a privately held, chemistry-focused
drug discovery company in Bothell, WA. NCE has built a comprehensive group of
integrated and information rich technologies in lead discovery and lead
optimization. The company provides a range of drug discovery services, as well
as platform technologies for proprietary lead discovery. The company's core
technologies include: isolation, purification, structure elucidation and the
supply of natural products libraries from microbial and botanical sources;
computational and combinatorial chemistry, including chemoinformatics,
proprietary databases and proprietary data mining capabilities; chemical
synthesis; and pharmaco- and toxicogenomics.
INDUSTRY OVERVIEW
The pace of drug discovery has accelerated significantly in recent years.
Fueled by advances in disciplines such as molecular biology, high-throughput
synthesis and screening and, in particular, human genomics research,
opportunities to develop therapeutics for previously unmet or undermet medical
needs are greater than ever before. We believe that human genomics research will
lead to a dramatic increase in the number of newly identified biological targets
over the next few years. In addition, pharmaceutical and biotechnology companies
are under pressure to deliver new drugs to market and reduce the time required
for drug development. This pressure has come about, in part, as a result of
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the significant number of current drug products on the market for which patent
protection will soon expire.
In order to take advantage of these opportunities and to respond to these
pressures, many pharmaceutical and biotechnology companies have augmented their
internal research and development capacity through contract services.
DRUG DISCOVERY, DEVELOPMENT AND MANUFACTURING PROCESS
Although many scientific disciplines are required for new drug discovery and
development, chemistry and biology are at the center of this process. Chemists
and biologists typically work together to prepare and deliver new chemical
substances, develop laboratory models of disease, test compounds to identify
agents that demonstrate the desired activity and finally create a marketable
drug. The drug discovery and development process includes the following steps:
- lead discovery--the identification of a compound that may be developed
into a new drug,
- lead optimization--an iterative process of modifying the structure of a
lead compound to optimize its therapeutic properties,
- preclinical testing--the testing of the compound in increasingly complex
animal models,
- clinical trials--the multi-phase testing of the compound for safety and
efficacy in humans, and
- product commercialization--the manufacture, marketing and sale of
commercial quantities of the approved drug.
THE IMPORTANCE OF CHEMISTRY IN THE DRUG DISCOVERY AND DEVELOPMENT PROCESS
LEAD DISCOVERY. The first major hurdle in drug discovery is the
identification of one or more lead compounds that interact with a biological
target, such as an enzyme, receptor or other protein, that may be associated
with a disease. A biological test, or assay, based on the target is developed
and used to test or "screen" chemical compounds. Medicinal chemistry is used to
synthesize these compounds rapidly and study the interaction between the
three-dimensional molecular structures of the compounds and biological targets.
The objective of lead discovery is to identify a lead compound for further
research and development.
LEAD OPTIMIZATION. Once a lead compound has been identified, medicinal
chemistry is used to optimize that lead compound by modifying and synthesizing
analogs of active lead candidates with improved potency, selectivity and/or
pharmacokinetics (improved absorption, solubility, half-life and metabolism) in
order to identify a more promising drug candidate. This iterative process
involves the synthesis of compounds for biological testing, the analysis of the
screening results and the further design and synthesis of additional compounds
based upon the analysis of structure-activity relationships. During lead
optimization, specialists in chemical development perform the scale-up synthesis
of a lead compound as that compound is advanced through the drug discovery and
development process. These scientists are experts in the preparation of
chemicals on a larger scale and focus on the efficiency, economics, simplicity
and safety of the preparation of such chemicals. Chemical development is also an
iterative process which may require progressive improvements in chemical
synthesis as subsequent repeat batches are prepared. In addition to providing
repeat synthesis, significant process research may be required to refine
existing or develop new synthesis processes. Also during the lead optimization
stage, analytical chemistry services are required for identity and purity
testing and method development.
PRECLINICAL TESTING. Following the development of a lead compound during
the lead optimization stage, advanced preclinical testing is conducted in order
to evaluate the efficacy and safety of the lead compound prior to initiating
human clinical trials. The lead compound must demonstrate a scientifically
proven benefit in controlled and well-defined biological tests in animal models,
and must exhibit this
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benefit at doses much lower than those at which side effects would occur. During
the lead optimization and preclinical testing phases, scientists continue the
synthesis of additional analogs of the lead compound using medicinal chemistry.
Often a second compound, referred to as a backup compound or second generation
analog, is synthesized and enters the drug development cycle. In addition,
continued synthesis is desirable in order to prepare compounds of significant
diversity to broaden potential patent coverage. As a result, the advancement of
a lead compound into preclinical testing is often a catalyst which increases,
rather than decreases, the need for additional medicinal chemical synthesis.
During this phase, specialists in chemical development continue to conduct
significant process research to optimize the production of a compound.
CLINICAL TRIALS. During clinical trials, several phases of studies are
conducted to test the safety and efficacy of a drug candidate. As study
populations increase and trial durations lengthen, larger quantities of the
active ingredient are required. The bulk active ingredient, and the formulated
drug product, must be prepared under current good manufacturing practices,
commonly referred to as cGMP, guidelines. Analytical chemistry services are
critical to cGMP manufacturing. Additional preparations provide an opportunity
to further refine the manufacturing process, with the ultimate goal of
maximizing the cost effectiveness and safety of the synthesis prior to
commercialization.
TRENDS TOWARD CONTRACTING FOR CHEMISTRY SERVICES
While contract services have traditionally been limited to the later stages
of drug development, such as clinical trial management and manufacturing, many
pharmaceutical and biotechnology companies are utilizing contract chemistry
service providers to complement or, in some cases, supplement internal chemistry
expertise. Currently, only a few companies provide chemistry services for drug
discovery, development and manufacturing, and these companies have typically
focused only on certain stages of the drug development process. We believe the
following trends have led and will continue to lead to an increase in contract
chemistry services in drug discovery, development and manufacturing:
- development of new technologies that have increased the number of targets
and accelerated the identification of active compounds,
- pressure to develop new lead compounds due to the near-term loss of patent
protection for many drug products,
- increased pressure to reduce the time spent in drug discovery and
development to bring drugs to market sooner and maximize patent life,
- increased focus on converting fixed costs to variable costs and
streamlining operations by contracting for research and development
services,
- heightened regulatory environment and increased complexity that has made
the internal management of complicated discovery, development and
manufacturing projects more difficult and costly, and
- biotechnology and emerging pharmaceutical companies have available
capital, but, in many cases, lack the required in-house discovery and
development expertise.
We believe that significant opportunities exist for a company that provides
a comprehensive range of contract chemistry services throughout the drug
discovery, development and manufacturing process.
OUR CAPABILITIES
We have a broad range of high-quality drug discovery and development,
chemistry research and manufacturing capabilities. The problem-solving abilities
of our scientists provide added value throughout the drug discovery, development
and manufacturing process. We offer proprietary discovery
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technologies as well as chemistry services on a contract basis that have
traditionally required significant time and capital investment to create
internally. Our comprehensive suite of services allows our customers to contract
with a single vendor, eliminating the time and cost of transitioning projects
among multiple vendors.
SERVICE OFFERINGS
DRUG DISCOVERY TECHNOLOGIES
We provide proprietary drug discovery technologies that employ biocatalysis
technology and that assist in the creation of combinatorial chemistry libraries.
Biocatalysis technology uses enzymes and microbial cell systems to synthesize
new compounds. Our drug discovery technologies complement our medicinal
chemistry services as additional methods of developing and screening large
numbers of compounds against drug targets to generate new drug leads. These drug
discovery technologies give us the capability to:
- improve chemical compounds for currently marketed drugs,
- develop lead extensions from unsuccessful Phase II or Phase III clinical
trials,
- improve solubility and/or bioavailability of drug compounds,
- create libraries of potential lead compounds,
- identify active metabolites,
- widen patent coverage, and
- perform process research, consisting of the improvement or modification of
existing processes.
MEDICINAL CHEMISTRY
The chemistry functions associated with the identification and optimization
of a lead compound are handled by chemists specializing in medicinal chemistry.
The role of the medicinal chemist is to synthesize small quantities of new and
potentially patentable compounds for biological testing. Our medicinal chemistry
group assists our customers in the pursuit of new drug leads as well as in lead
development and optimization using modern structure-based drug design. Our
medicinal chemistry group uses tools such as computational and combinatorial
chemistry in conjunction with the traditional techniques of medicinal drug
development. Medicinal chemistry services provided by us include:
- design and synthesis of potential lead compounds,
- design, modification and synthesis of lead compounds with improved
potency, selectivity and pharmacokinetics,
- development and synthesis of analogs of lead compounds to broaden patent
protection, and
- resynthesis and expansion of customers' chemistry libraries by employing
combinatorial and computational chemistry.
CHEMICAL DEVELOPMENT
Chemical development involves the scale-up synthesis of a lead compound.
Processes developed for small scale production of a compound may not be suitable
for larger scale production because they may be too expensive, environmentally
unacceptable or present safety concerns. Our chemical development scientists
design novel or improved methods and processes suitable for medium to large
scale production. Our chemical development scientists possess expertise in a
broad range of structural classes
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of molecules and are able to address a wide variety of chemical synthesis and
production problems. Chemical development services provided by us include:
- process research, consisting of the improvement or modification of
existing processes,
- discovery and development of new product methodologies to prepare
products,
- process development and production of single-isomer molecules, and
- development of practical purification techniques.
ANALYTICAL CHEMISTRY SERVICES
Our analytical chemistry services include identity and purity testing,
method development and validation, and stability testing. We also provide
regulatory consulting services, including the preparation of regulatory filings,
chemistry manufacturing and control documentation and testing, and scientific
and technical writing. The cGMP guidelines mandated by the FDA necessitate
employing analytical support for drugs under development, as well as for drugs
already on the market. Our analytical services are designed to support our
customers' compliance with these guidelines. We typically provide these services
at several stages throughout the drug discovery, development and manufacturing
process starting with lead optimization. Analytical services provided by us
include:
- test method development and validation,
- quality control and release testing,
- high performance liquid and/or gas chromatography (including purity
assessment), separation of enantiomers and identification of impurities,
- stability studies for bulk active ingredients and formulated drug
products, and
- preparation of regulatory documentation, including chemistry manufacturing
and control sections of investigational new drug applications, new drug
applications and drug master files.
CGMP MANUFACTURING SERVICES
We provide chemical synthesis and manufacturing services for our customers
under cGMP guidelines. All facilities and manufacturing techniques used in the
manufacture of products for clinical use or for sale in the United States must
be operated in conformity with cGMP guidelines as established by the FDA. Our
Albany facility has production facilities and quarantine and restricted access
storage necessary for conducting cGMP manufacturing in quantities sufficient for
conducting Phase I clinical trials (up to approximately 10 kilograms). Through
our strategic relationship with Organichem, our customers can also obtain
product quantities sufficient to conduct Phase II and Phase III clinical trials
(between 10 and 100 kilograms) as well as commercial product quantities (greater
than 100 kilograms).
CONSULTING SERVICES
We provide to our customers, in particular our biotechnology customers,
consulting services across all chemistry phases of drug discovery, development
and manufacturing.
PROPRIETARY RESEARCH AND DEVELOPMENT
We conduct proprietary research and development on promising drug candidates
utilizing our medicinal chemistry tools as well as our discovery technologies,
which consist of our biocatalysis technology and our technology for the
synthesis of combinatorial libraries. We are currently pursuing opportunities
for applying our discovery technologies to promising drug candidates about which
11
information is publicly available. In the event that we discover promising drug
targets, we anticipate that we would license them to third parties in return for
licensing, milestone and royalty payments. We also seek to incorporate terms in
our contract services agreements with customers which provide for us to receive
up-front service fees and milestone payments for advancing new products as well
as recurring royalty payments for new drugs successfully reaching the market.
ALLEGRA/TELFAST LICENSING AGREEMENT
Our proprietary research and development efforts to date have contributed to
the discovery and development of one product which has reached the market. We
discovered a new process to prepare a metabolite known as terfenadine carboxylic
acid, or TAM, in a purer form. The purer form of TAM is a non-sedating
antihistamine known as fexofenadine HCl, which is sold by Aventis under the name
Allegra in the Americas and as Telfast elsewhere. We have been issued several
United States and foreign patents relating to TAM and the process chemistry by
which TAM is produced. Subject to payment of government annuities and
maintenance fees, our issued patents relating to TAM expire between 2013 and
2016.
In March 1995, we entered into a license agreement with Aventis. Under the
terms of the license agreement, we granted Aventis an exclusive, worldwide
license to any patents issued to us related to our original TAM patent
applications. Since the beginning of the agreement through December 31, 2000, we
have earned $7.2 million in milestone payments and $66.8 million in royalties
under this license agreement. Aventis is obligated under the license agreement
to pay ongoing royalties to us based upon sales of Allegra/Telfast. We are not
entitled, however, to receive any additional milestone payments under the
license agreement. Sales of Allegra/Telfast worldwide were approximately
$1.07 billion for the year ended December 31, 2000 and approximately
$780 million for the year ended December 31, 1999
CUSTOMERS
Our customers include pharmaceutical companies and biotechnology companies
and, to a limited extent, agricultural companies, fine chemical companies and
contract chemical manufacturers. Contract revenue from DuPont Pharmaceuticals
Company accounted for 12% of our total revenue for the year ended December 31,
2000 and 11% for the year ended December 31, 1999. No other customer accounted
for more than 10% of our total revenue for the year ended December 31, 2000 or
for the year ended December 31, 1999. For the year ended December 31, 2000, net
contract revenue from our three largest customers represented 22%, 13% and 12%
of our net contract revenue. For the year ended December 31, 1999, net contract
revenue from our three largest customers respectively represented approximately
22%, 10% and 10% of our net contract revenue.
MARKETING
Our senior management and dedicated business development personnel are
primarily responsible for marketing our services. Because our customers are
typically highly skilled scientists, our use of technical experts in marketing
has allowed us to establish strong customer relationships. In addition to our
internal marketing efforts, we also rely on the marketing efforts of
consultants, both in the United States and abroad. We market our services
directly to customers through targeted mailings, meetings with senior management
of pharmaceutical and biotechnology companies, maintenance of an extensive
Internet Web site, participation in trade conferences and shows, and
advertisements in scientific and trade journals. We also receive a significant
amount of business from customer referrals and through expansion of existing
contracts.
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EMPLOYEES
We believe that the successful recruitment and retention of qualified Ph.D.,
masters and bachelor level scientists is a key element in achieving our
strategic goals. We believe that as competitive pressures in the pharmaceutical
and biotechnology industries increase, the recruitment and retention of chemists
will become increasingly competitive. In order to meet this challenge, we
actively recruit scientists at colleges and universities, through third-party
recruitment firms and through contacts of our employees. We believe the
sophisticated chemistry performed in the course of our business will assist us
in attracting and retaining qualified scientists. We offer competitive salaries
and benefits to our scientists. As an incentive directed toward the recruitment
and retention of highly skilled scientists, we have a program which provides
that any scientist or scientists employed by us named as an inventor on a patent
not obtained in connection with a customer contract will receive a percentage of
any net licensing, milestone and royalty revenues received by us with respect to
the patent. Under this program, Thomas E. D'Ambra, Ph.D., our Chairman and Chief
Executive Officer, receives payments as the sole inventor on the patents for
fexofenadine HCl. Dr. D'Ambra earned $2.1 million and $2.9 million in 1999 and
2000, respectively, under this program.
Since January 1, 2000, we have added a net of 114 employees, including 74
scientists. As of February 28, 2001, we had 379 employees, including 261
scientists of whom 59% have Ph.D. degrees. None of our employees are covered by
a collective bargaining agreement. We consider our relations with our employees
to be good.
COMPETITION
We face competition based on a number of factors, including size, relative
expertise and sophistication, speed and costs of identifying and optimizing
potential lead compounds and of developing and optimizing chemical processes. We
compete with the research departments of pharmaceutical companies, biotechnology
companies, combinatorial chemistry companies, contract research companies and
research and academic institutions. Many of these competitors have greater
financial and other resources and more experience in research and development
than us. Smaller companies may also prove to be significant competitors,
particularly through arrangements with large corporate collaborators.
Historically, pharmaceutical companies have maintained close control over
their research and development activities, including the synthesis, screening
and optimization of chemical compounds and the development of chemical
processes. Many of these companies, which represent a significant potential
market for our products and services, are developing or already possess in-house
technologies and services offered by us. Academic institutions, governmental
agencies and other research organizations are also conducting research in areas
in which we provide services either on their own or through collaborative
efforts.
We anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies become available. Our
services and expertise may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of our
competitors. The existing approaches of our competitors or new approaches or
technologies developed by our competitors may be more effective than those
developed by us. We cannot assure you that our competitors will not develop more
effective or more affordable technologies or services thus rendering our
technologies and/or services obsolete, uncompetitive or uneconomical.
13
PATENTS AND PROPRIETARY RIGHTS
Our success will depend, in part, on our ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary, and conduct our business without infringing the
proprietary rights of others. The patent positions of pharmaceutical, medical
products and biotechnology firms can be uncertain and involve complex legal and
factual questions. We cannot assure you that any patent applications will result
in the issuance of patents or, if any patents are issued, whether they will
provide significant proprietary protection or commercial advantage, or will not
be circumvented by others. In the event a third party has also filed one or more
patent applications for inventions which conflict with one of ours, we may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which could result in
the loss of any opportunity to secure patent protection for the inventions and
the loss of any right to use the inventions. Even if the eventual outcome is
favorable to us, these proceedings could result in substantial cost to us. The
filing and prosecution of patent applications, litigation to establish the
validity and scope of patents, assertion of patent infringement claims against
others and the defense of patent infringement claims by others can be expensive
and time consuming. We cannot assure you that in the event that any claims with
respect to any of our patents, if issued, are challenged by one or more third
parties, that any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome
in such litigation could cause us to lose exclusivity afforded by the disputed
rights. If a third party is found to have rights covering products or processes
used by us, we could be forced to cease using the technologies covered by such
rights, could be subject to significant liability to the third party, and could
be required to license technologies from the third party. Furthermore, even if
our patents are determined to be valid, enforceable, and broad in scope, we
cannot assure you that competitors will not be able to design around such
patents and compete with us and our licensees using the resulting alternative
technology.
We have a policy of seeking patent protection for patentable aspects of our
proprietary technology. We have been issued eight United States patents, three
New Zealand patents, two Australian patents, two Canadian patents, two European
patents and one Japanese patent collectively covering fexofenadine HCl and
certain related manufacturing processes. Subject to payment of government
annuities and maintenance fees, our United States patents expire between 2013
and 2015, our Australian, Canadian, European and Japanese patents expire in 2014
and our New Zealand patents expire between 2014 and 2016. Through our
acquisition of EnzyMed, we obtained an exclusive license to one United States
patent relating to a process of reacting enzymes in a non-aqueous solvent.
Subject to payment of government annuities and maintenance fees, this patent
expires in 2012. We seek patent protection with respect to products and
processes developed in the course of our activities when we believe such
protection is in our best interest and when the cost of seeking such protection
is not inordinate. However, we cannot assure you that any patent application
will be filed, that any filed applications will result in issued patents or that
any issued patents will provide us with a competitive advantage or will not be
successfully challenged by third parties. The protections afforded by patents
will depend upon their scope and validity, and others may be able to design
around our patents.
We may also enter into collaborations or other arrangements with our
customers whereby we retain certain ownership rights or may be entitled to
receive milestones and royalties with respect to proprietary technology
developed by us during the contract period. However, many of our contracts with
our customers provide that ownership of proprietary technology developed by us
in the course of work performed under the contract is vested in the customer,
and we retain little or no ownership interest.
We also rely upon trade secrets and proprietary know-how for certain
unpatented aspects of our technology. To protect such information, we require
all employees, consultants and licensees to enter into confidentiality
agreements limiting the disclosure and use of such information. We cannot assure
you that these agreements provide meaningful protection or that they will not be
breached, that we
14
would have adequate remedies for any such breach, or that our trade secrets,
proprietary know-how, and technological advances will not otherwise become known
to others. In addition, we cannot assure you that, despite precautions taken by
us, others have not and will not obtain access to our proprietary technology.
Further, we cannot assure you that third parties will not independently develop
substantially equivalent or better technology.
GOVERNMENT REGULATION
Although the sale of our services is not subject to significant government
regulation, the manufacture, transportation and storage of our products are
subject to certain laws and regulations. However, our future profitability is
indirectly dependent on the sales of pharmaceuticals and other products
developed by our customers. Regulation by governmental entities in the United
States and other countries will be a significant factor in the production and
marketing of any pharmaceutical products that may be developed by one of our
customers. The nature and the extent to which such regulation may apply to our
customers will vary depending on the nature of any such pharmaceutical products.
Virtually all pharmaceutical products developed by our customers will require
regulatory approval by governmental agencies prior to commercialization. Human
pharmaceutical products are subject to rigorous preclinical and clinical testing
and other approval procedures by the FDA and by foreign regulatory authorities.
Various federal and, in some cases, state statutes and regulations also govern
or influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such pharmaceutical products. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time consuming and require the expenditure of
substantial resources.
Generally, in order to gain FDA approval, a company first must conduct
preclinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an investigational new drug
application, or IND, that the FDA must review before human clinical trials of an
investigational drug can start. In order to commercialize any products, we or
our customer will be required to sponsor and file an IND and will be responsible
for initiating and overseeing the clinical studies to demonstrate the safety and
efficacy that are necessary to obtain FDA approval of any such products.
Clinical trials are normally done in three phases and generally take two to five
years, but may take longer, to complete. After completion of clinical trials of
a new product, FDA and foreign regulatory authority marketing approval must be
obtained. If the product is classified as a new drug, we or our customer will be
required to file a new drug application, or NDA, and receive approval before
commercial marketing of the drug. The testing and approval processes require
substantial time, effort and expense and we cannot assure you that any approval
will be granted on a timely basis, if at all. NDAs submitted to the FDA can take
several years to obtain approval. Even if FDA regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. For marketing outside the United States, we will also be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country.
All facilities and manufacturing techniques used in the manufacture of
products for clinical use or for sale in the United States must be operated in
conformity with cGMP guidelines as established by the FDA. Our facilities are
subject to scheduled periodic regulatory inspections to ensure compliance with
cGMP requirements. Failure on our part to comply with applicable requirements
could result in the termination of ongoing research or the disqualification of
data for submission to regulatory authorities. A finding that we had materially
violated cGMP requirements could result in additional
15
regulatory sanctions and, in severe cases, could result in a mandated closing of
our facilities which would materially and adversely affect our business,
financial condition and results of operations.
Our research and development processes involve the controlled use of
hazardous materials. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although we believe that our
activities currently comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated. In the event of such an accident, we could be held liable
for any damages that result and any such liability could exceed our resources.
In addition, we cannot assure you that we will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
ITEM 2. PROPERTIES.
The Company leases a two-story 90,500 square foot facility in Albany, New
York. The lease for this facility expires on November 30, 2007, although we have
an option to renew this lease for an additional ten years. The lease also
provides us with an option to purchase the building on November 30, 2002 for
$3.5 million, towards which we have made a $1.0 million non-refundable deposit.
Our Albany facility has eight medicinal chemistry laboratories, five chemical
development laboratories, two analytical laboratories, three analytical
instrumentation rooms, four dedicated cGMP manufacturing suites, four segregated
cGMP dryer rooms and two areas for stability chambers. We recently began to
lease approximately 20,000 square feet of facilities in a building adjacent to
our Albany facility. We have begun to renovate these facilities in order to
convert them to additional laboratory facilities. We expect to complete the
renovation in the second half of 2001. We expect the facility will provide 28
additional scientific workstations. We also recently acquired additional
properties adjacent to our Albany, New York facility which may be used for
additional expansion.
We also lease approximately 40,000 square feet of laboratory space in
Rensselaer, New York at our East Campus. The lease for these laboratories
expires November 30, 2009, although we may renew the lease for eight additional
five-year periods at our option. Our Rensselaer facility has nine medicinal
chemistry, two combinatorial chemistry and three chemical development
laboratories.
We recently completed the renovation of a new state-of-the-art biotechnology
development center with 33 scientific workstations at our East Campus. We have
entered into a ten-year lease for this facility. We may renew the lease for
eight additional five-year periods at our option.
We also lease two facilities in Iowa City, Iowa with total square footage of
15,000 and a 6,000 square foot of facility in Syracuse, New York. We recently
purchased a 20,000 square foot facility in Syracuse, New York for approximately
$1.0 million, and we expect to incur approximately $5.5 million in connection
with the renovation of that building. We anticipate that we will finance these
renovations through an industrial revenue bond.
In 2000, we had total operating lease costs of $1.05 million.
ITEM 3. LEGAL PROCEEDINGS.
We, from time to time, may be involved in various claims and legal
proceedings arising in the ordinary course of our business. We are not currently
a party to any such claims or proceedings which, if decided adversely to us,
would either individually or in the aggregate have a material adverse effect on
our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitation of
proxies or otherwise.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information. The Common Stock of the Company has been traded on
the Nasdaq National Market ("Nasdaq") since the Company's initial public
offering on February 4, 1999 and currently trades under the symbol "AMRI." The
following table sets forth the high and low closing prices for the Company's
Common Stock as reported by the Nasdaq National Market for the periods
indicated:
PERIOD HIGH LOW
- ------ -------- --------
Year ended December 31, 1999
First Quarter (from February 4 through March 31, 1999).... $12.50 $ 9.75
Second Quarter............................................ $15.50 $11.00
Third Quarter............................................. $18.25 $10.25
Fourth Quarter............................................ $15.88 $11.50
Year ending December 31, 2000
First Quarter............................................. $38.63 $13.69
Second Quarter............................................ $39.13 $21.13
Third Quarter............................................. $56.50 $25.06
Fourth Quarter............................................ $67.63 $42.25
(b) Holders. The number of record holders of the Company's Common Stock as
of March 15, 2001 was approximately 195. We believe that the number of
beneficial owners of our Common Stock at that date was substantially greater.
(c) Dividends. We have not declared any cash dividends on our Common Stock
since our inception in 1991. We currently intend to retain our earnings for
future growth and, therefore, do not anticipate paying cash dividends in the
foreseeable future. Under Delaware law, we are permitted to pay dividends only
out of our surplus, or, if there is no surplus, out of our net profits. Although
our current bank credit facility permits us to pay cash dividends, subject to
certain limitations, the payment of cash dividends may be prohibited under
agreements governing debt which we may incur in the future.
(d) Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.
NONE
17
ITEM 6. SELECTED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net contract revenue.......................... $ 5,499 $ 8,209 $13,649 $22,027 $ 37,377
Non-recurring licensing fees, milestones and
royalties................................... 1,000 2,500 8,069 -- --
Recurring royalties........................... -- 31 11,576 21,444 29,226
------- ------- ------- ------- --------
Total revenue............................. 6,499 10,740 33,294 43,471 66,603
Cost of contract revenue...................... 3,052 4,430 7,734 12,491 20,859
Technology incentive award.................... 100 253 1,822 2,132 2,921
Research and development...................... 813 1,520 1,782 1,827 2,435
Selling, general and administrative........... 1,786 2,881 5,109 6,873 7,966
------- ------- ------- ------- --------
Total operating expenses.................. 5,751 9,084 16,447 23,323 34,181
Income from operations........................ 748 1,656 16,847 20,148 32,422
Other income (expense):
Equity in income (loss) of unconsolidated
affiliates................................ -- -- -- (98) 552
Interest income, net........................ 25 40 38 2,000 4,521
Other income (expense), net................. 20 (28) (37) (81) 187
------- ------- ------- ------- --------
Total other income, net....................... 45 12 1 1,821 5,260
Income before income tax expense.............. 793 1,668 16,848 21,969 37,682
Income tax expense............................ 244 373 6,351 8,195 14,089
------- ------- ------- ------- --------
Net income.................................... $ 549 $ 1,295 $10,497 $13,774 $ 23,593
======= ======= ======= ======= ========
Basic earnings per share...................... $ 0.02 $ 0.06 $ 0.46 $ 0.51 $ 0.78
Diluted earnings per share.................... $ 0.02 $ 0.05 $ 0.41 $ 0.46 $ 0.74
Weighted average common shares
outstanding, basic.......................... 22,370 22,670 22,696 27,132 30,363
Weighted average common shares
outstanding, diluted........................ 24,278 24,819 25,547 29,634 32,063
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments........ $ 4,677 $ 4,532 $ 7,347 $23,845 $152,024
Property and equipment, net................... 4,315 4,436 14,866 15,879 30,914
Working capital............................... 4,588 5,542 9,142 34,432 161,335
Total assets.................................. 11,326 13,548 32,630 88,242 238,566
Long-term debt, less current maturities....... 2,375 1,776 13,349 168 120
Total stockholders' equity.................... $ 7,456 $ 9,799 $12,824 $82,920 $228,533
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the results of our operations and financial
condition should be read in conjunction with the accompanying Consolidated
Financial Statements and the Notes thereto included within this report.
OVERVIEW
We are a leading chemistry research and drug discovery and development
company focused on applications for the pharmaceutical, biotechnology and life
sciences industries. We engage in comprehensive chemistry research from lead
discovery, optimization and development to commercial manufacturing. We perform
chemistry research for many of the leading pharmaceutical and biotechnology
companies and for our own internal research and development.
NET CONTRACT REVENUE
Our net contract revenue consists primarily of fees earned under contracts
with third-party customers, net of our reimbursed expenses. Reimbursed expenses
consist of laboratory supplies, chemicals and other costs reimbursed by our
customers and, in accordance with industry practice, are netted against gross
contract revenue. Reimbursed expenses vary from contract to contract.
Accordingly, we view net contract revenue as our primary measure of revenue
growth rather than licensing fees and royalties, which are dependent upon our
licensee's sales.
In general, we provide services to our customers on the following basis:
- a full-time equivalent basis that establishes the number of full-time
equivalents contracted for a project or a series of projects, the duration
of the contract period, the fixed price per full-time equivalent, plus an
allowance for out-of-pocket expenses which may or may not be incorporated
in the full-time equivalent rate,
- a time and materials basis under which we charge our customers based on an
hourly rate plus out-of-pocket expenses, or
- to a lesser extent, a fixed-price basis.
Typically, our full-time equivalent contracts have terms of six months or
longer and our time and materials contracts have terms of one to twelve months.
Fixed-price contracts are entered into for much shorter periods of time,
generally two to six months. Because our fixed-price contracts relate to
projects that are generally limited in scope and are of short duration, we have
not historically experienced any material cost overruns under these contracts.
Full-time equivalent and time and materials contracts provide for annual
adjustments in billing rates for the scientists assigned to the contract.
Generally, our contracts may be terminated by the customer upon 30 to 90 days'
prior notice. We recognize contract revenue on a percentage-of-completion or per
diem basis. Cost of revenue consists primarily of compensation and associated
fringe benefits for employees and other direct project-related costs.
LICENSING FEES, MILESTONES AND ROYALTIES
Many of our contracts for discovery technology services contain provisions
for licensing, milestone and royalty payments should our proprietary technology,
including enzymes, microbial manipulation and combinatorial chemistry, lead to
discovery of new products that reach the market. To date, we have received
substantially all of our milestone and royalty payments under these arrangements
from Aventis with respect to Allegra.
19
NON-RECURRING LICENSING FEES, MILESTONES AND ROYALTIES. Although we entered
into a license agreement with Aventis in 1995, we began to recognize royalty
revenue related to sales in the United States under that agreement in
February 1998. This delay was due to the significant time expended for issuance
of our patents and the resolution of related patent interference claims by
Aventis. In 1998, we received from Aventis $3.7 million in non-recurring
milestone payments and $4.4 million in royalties related to prior periods.
RECURRING ROYALTIES. Recurring royalties consist of royalties from Aventis
under a license agreement based on sales of fexofenadine HCl, marketed as
Allegra in the Americas and Telfast elsewhere. Royalty payments are due within
45 days after each calendar quarter and are determined based on sales in that
quarter.
COSTS AND EXPENSES
COST OF CONTRACT REVENUE. Our cost of contract revenue, from which we
derive gross profit from net contract revenue, consists primarily of
compensation and associated fringe benefits for employees and other direct
project-related costs.
TECHNOLOGY INCENTIVE AWARD. We maintain a Technology Development Incentive
Plan designed to stimulate and encourage novel technology development by our
employees. This plan allows eligible participants to share in a percentage of
the net revenue earned by us relating to patented technology with respect to
which the eligible participant is named as an inventor. Under our Technology
Development Incentive Plan, Thomas E. D'Ambra, our Chairman and Chief Executive
Officer, receives payments as the sole inventor on the patents for fexofenadine
HCl equal to 10% of the total payments received by us with respect to those
patents.
RESEARCH AND DEVELOPMENT. Research and development expense consists of
payments in connection with collaborations with academic institutions,
compensation and benefits for scientific personnel for work performed on
proprietary research projects and costs of supplies and related chemicals.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists of compensation and related fringe benefits for marketing and
administrative employees, professional services, marketing costs and all costs
related to facilities and information services.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income, interest expense, our
equity in our unconsolidated affiliates, Organichem and Fluorous Technologies,
realized gains or losses on sales of investment securities and other
non-operating expenses.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET CONTRACT REVENUE. Net contract revenue increased 70% to $37.4 million
for the year ended December 31, 2000, compared to $22.0 million in 1999. This
increase was due principally to a greater number of projects under contract
primarily for medicinal and chemical development services. This increase was
facilitated by an increase in the number of scientific staff to 222 at
December 31, 2000 from 148 at December 31, 1999.
RECURRING ROYALTIES. Recurring royalties for the year ended December 31,
2000 increased 36% to $29.2 million, compared to $21.4 million for 1999. The
increase was attributable to increased sales of fexofenadine HCl by Aventis.
20
TOTAL REVENUE. Total revenue for the year ended December 31, 2000 increased
53% to $66.6 million, compared to $43.5 million for 1999.
COST OF CONTRACT REVENUE. Cost of contract revenue increased 67% to
$20.9 million for the year ended December 31, 2000, compared to $12.5 million
for 1999. Net contract revenue margin increased to 44.2% in 2000 from 43.3% in
1999, primarily due to increased rates on customer contracts and leveraging the
expansion of our facilities.
TECHNOLOGY INCENTIVE AWARD. The technology incentive award expense incurred
under our Technology Development Incentive Plan increased 37% to $2.9 million
for the year ended December 31, 2000, compared to $2.1 million for 1999. The
increase was directly attributable to the increase in recurring royalties.
RESEARCH AND DEVELOPMENT. Research and development expense increased 33.3%
to $2.4 million for the year ended December 31, 2000 compared to $1.8 million
for 1999. The increase was due primarily to an increase in internally-funded
research efforts.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 16% to $8.0 million for the year ended December 31, 2000,
compared to $6.9 million for 1999. The increase was primarily attributable to an
increase in administrative and marketing staff to support the expansion of our
operations, and an increase in expenses related to recruitment of scientists.
Selling, general and administrative expenses represented 21% of net contract
revenue in 2000 as compared to 31% for 1999.
TOTAL OTHER INCOME, NET. Total other income, net was $5.3 million for the
year ended December 31, 2000, compared to $1.8 million for 1999. This was
comprised of $4.5 million in interest income, net of interest expense, $551,600
in income from our unconsolidated affiliate, Organichem, and $186,800 of other
non-operating income. Total other income, net for 1999 was comprised of
$2.0 million in interest income, net of interest expense, a $98,000 loss from
our unconsolidated affiliate, Organichem, and $81,000 of other non-operating
expense.
INCOME TAX EXPENSE. Income tax expense increased to $14.1 million for the
year ended December 31, 2000, compared to $8.2 million for 1999. The effective
rate for our provision for income taxes was 37.4% in 2000 as compared to 37.3%
for 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET CONTRACT REVENUE. Net contract revenue increased 61.8% to
$22.0 million in 1999 from $13.6 million in 1998. The increase was due
principally to the performance of a greater number of projects under contract
primarily for medicinal and chemical development services, which were enabled
through an increase in the number of scientific staff to 148 at December 31,
1999 from 101 at December 31, 1998.
NON-RECURRING LICENSING FEES, MILESTONES AND ROYALTIES. We did not receive
any non-recurring licensing fees, milestones or royalties in 1999. As a result
of the February 1998 United States Patent & Trademark Office decision, we met
all prerequisites of the licensing agreement with Aventis and recognized and
received in the first three months of 1998 milestone payments and royalties on
all sales of fexofenadine HCl in the United States from November 26, 1996, the
date of patent issuance, through December 31, 1997. Our milestones and royalties
from fexofenadine HCl for 1998 include $3.7 million in non-recurring milestone
payments and $4.4 million in royalties related to prior periods and, as a
result, such milestone payments and royalties may not be indicative of future
amounts earned under the license agreement with Aventis. In particular, no
further milestone payments are required under the agreement.
21
RECURRING ROYALTIES. Recurring royalty revenue for the year ended
December 31, 1999 increased 85.3% to $21.4 million, compared to $11.6 million in
1998. The increase was attributable to increased sales of fexofenadine HCl by
the licensee.
TOTAL REVENUE. Total revenue for the year ended December 31, 1999 increased
30.6% to $43.5 Million, compared to $33.3 million for 1998.
COST OF CONTRACT REVENUE. Our cost of contract revenue increased 61.5% to
$12.5 million in the year ended December 31, 1999 from $7.7 million for 1998.
Our net contract revenue margin remained relatively constant as a percentage of
net contract revenue.
TECHNOLOGY INCENTIVE AWARD. The technology incentive award expense incurred
under our Technology Development Incentive Plan increased 17.0% to $2.1 million
in the year ended December 31, 1999 compared to $1.8 million for 1998. The
increase was directly attributable to the increase in royalty revenue.
RESEARCH AND DEVELOPMENT. Research and development expense increased 2.5%
to $1.8 million for the year ended December 31, 1999 compared to $1.7 million
for 1998. The increase was due primarily to an increase in internally-funded
research efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34.5% to $6.9 million for the year ended
December 31, 1999 from $5.1 million for 1998. The dollar increase was primarily
attributable to an increase in administrative and marketing staffing to support
the expansion of our operations, and an increase in expenses related to
recruitment of scientists. Selling, general and administrative expenses
represented 31.2% of net contract revenue in 1999 as compared to 37.4% for 1998.
TOTAL OTHER INCOME, NET. Total net other income was $1.8 million for the
year ended December 31, 1999 as compared to $1,002 for 1998. This was comprised
of $2.0 million in interest income, net of interest expense, a $98,000 loss from
our unconsolidated affiliate, Organichem, and $81,000 of other non-operating
expense. Total net other income for 1998 was comprised of interest income of
$38,000 net of non-operating Expenses of $37,000.
INCOME TAX EXPENSE. Income tax expense increased to $8.2 million for the
year ended December 31, 1999 as compared to $6.4 million for 1998. The effective
rate for our provision for income taxes was 37.5% in 1999 as compared to 38.0%
for 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. For the year
ended December 31, 2000, we generated cash of $26.5 million from operating
activities.
Total capital expenditures for the year ended December 31, 2000 were
$16.5 million. Capital expenditures in 2000 were predominantly in connection
with the expansion of our facilities in Rensselaer, New York and Iowa City,
Iowa. Additionally, we acquired three additional properties during 2000, one in
Syracuse, New York for approximately $1.0 million and two in Albany, New York
for an aggregate purchase price of approximately $3.4 million. We are presently
renovating the Syracuse, New York property and expect to incur approximately
$5.5 in renovation costs. We used approximately $869,000 of operating cash flows
to fund a portion of the purchase price for American Advanced Organics, and
$650,000 was used to acquire an equity interest in Fluorous Technologies, Inc.
During 2000, we generated $118.7 million from financing activities,
consisting of cash generated of $119.5 from the sale of common stock offset by
$838,000 in payments on outstanding debt.
22
Working capital was $161.3 million at December 31, 2000 compared to
$34.4 million at December 31, 1999. We have available a $25 million credit
facility to supplement our liquidity needs. There were no borrowings under this
credit facility at December 31, 2000.
We are pursuing the expansion of our operations through internal growth and
strategic acquisitions. We expect that such activities will be funded from
existing cash and cash equivalents, cash flow from operations, the issuance of
debt or equity securities and borrowings. Future acquisitions, if any, could be
funded with cash on hand-cash from operations, borrowings under our credit
facility and/or the issuance of equity or debt securities. There can be no
assurance that attractive acquisition opportunities will be available to us or
will be available at prices and upon such other terms that are attractive to us.
We regularly evaluate potential acquisitions of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions. As
a general rule, we will publicly announce such acquisitions only after a
definitive agreement has been signed. In addition, in order to meet our
long-term liquidity needs or consummate future acquisitions, we may incur
additional indebtedness or issue additional equity or debt securities, subject
to market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to us or at all. The failure to
raise the funds necessary to finance our future cash requirements or consummate
future acquisitions could adversely affect our ability to pursue our strategy
and could negatively affect our operations in future periods.
In February 2000, we purchased American Advanced Organics, a provider of
rapid scale-up manufacturing services, for approximately $2.3 million in cash
and stock. We may also be required to pay in the aggregate up to an additional
$800,000 in cash to former American Advanced Organics stockholders in 2001 and
2002 based on the financial performance of this division. Subsequent to
December 31, 2000, $500,000 was paid to the former AAO stockholders.
In June 2000, we made an investment in Fluorous Technologies, Inc., a newly
formed company based in Pittsburgh, Pennsylvania. Fluorous Technologies has
licensed from the University of Pittsburgh several patents and pending patent
applications for the use of "fluorous organic chemistry" technology for chemical
synthesis, isolation and purification. Fluorous Technologies was formed to
capitalize on the potential of this technology for pharmaceutical drug
discovery, agrochemical product development, and more environmentally friendly
chemical manufacturing. We invested $650,000 in Fluorous Technologies
representing an initial 69.9% ownership interest. Our ownership interest in
Fluorous Technologies is expected to be diluted to less than 50% as Fluorous
Technologies issues additional common stock to fund its operations and
development. As a result of our investment, a proportionate share of Fluorous
Technologies' losses has been included in our consolidated financial results
from date of formation.
In January 2001, we acquired New Chemical Entities, Inc. of Bothell, Wa. for
$22.4 million in cash and the assumption of $0.6 million in outstanding debt.
NCE possesses an extensive collection of over 100,000 diverse compounds and
natural products extracts, which are integrated into NCE's drug discovery
efforts. These samples are complemented by a chemofocus library composed of pure
single compound samples of both natural products and natural product-based
compounds augmented by combinatorial chemistry and computational drug design.
NCE sells or licenses these libraries, or subsets, to customers for high
throughput screening and novel drug lead discovery. The company also sells or
licenses subscriptions to its proprietary databases and data mining technology.
During 2000 our board of directors approved a two-for-one split of our
common stock. The stock split entitled each stockholder of record at the close
of business on August 8, 2000, to receive a stock dividend of one additional
share for every share of our common stock held on that date. The additional
shares resulting from the stock split were distributed on August 24, 2000.
23
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133, as amended, establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet and measure those instruments at fair value. Our current
business strategy is not to use derivative instruments and we expect the
adoption of SFAS 133 to have an immaterial impact on us.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. We adopted SAB 101 in the fourth quarter of
2000. Such adoption did not have a material effect on our financial condition or
results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We are in
compliance with the provisions of FIN 44.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We invest our excess cash in interest-bearing investment-grade securities
that we hold for the duration of the term of the respective instrument. We do
not utilize derivative financial instruments, derivative commodity instruments
or other market risk sensitive instruments, positions or transactions in any
material fashion. Accordingly, we believe that, while the investment-grade
securities we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALBANY MOLECULAR RESEARCH, INC.
PAGE
--------
Report of Independent Accountants........................... 26
Independent Auditors' Report................................ 27
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1999 and 2000.......................... 28
Consolidated Balance Sheets at December 31, 1999 and 2000... 29
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
1998, 1999 and 2000....................................... 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... 31
Notes to Consolidated Financial Statements.................. 32
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Albany Molecular Research, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Albany Molecular Research, Inc. and its subsidiary at
December 31, 2000 and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under 14(a)(2) present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Albany, New York
February 15, 2001
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Albany Molecular Research, Inc.:
We have audited the accompanying consolidated balance sheet of Albany
Molecular Research, Inc. and subsidiary as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for the years ended December 31, 1999 and December 31,
1998. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule for the years ended
December 31, 1999 and December 31, 1998. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Albany Molecular Research, Inc. and subsidiary as of December 31, 1999, and the
results of their operations and their cash flows for the years ended
December 31, 1999 and December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Albany, New York
February 4, 2000
27
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net contract revenue........................................ $ 13,649 $ 22,027 $ 37,377
Non-recurring licensing fees, milestones and royalties...... 8,069 -- --
Recurring royalties......................................... 11,576 21,444 29,226
-------- -------- --------
Total revenue........................................... 33,294 43,471 66,603
-------- -------- --------
Cost of contract revenue.................................... 7,734 12,491 20,859
Technology incentive award.................................. 1,822 2,132 2,921
Research and development.................................... 1,782 1,827 2,435
Selling, general and administrative......................... 5,109 6,873 7,966
-------- -------- --------
Total operating expenses................................ 16,447 23,323 34,181
-------- -------- --------
Income from operations...................................... 16,847 20,148 32,422
Other income (expense):
Equity in income (loss) of unconsolidated affiliates........ -- (98) 552
Interest expense............................................ (381) (158) (28)
Interest income............................................. 419 2,158 4,549
Realized gain (loss) on sale of investment securities....... -- (66) 3
Other income (expense), net................................. (37) (15) 184
-------- -------- --------
Total other income, net................................. 1 1,821 5,260
-------- -------- --------
Income before income tax expense............................ 16,848 21,969 37,682
Income tax expense.......................................... 6,351 8,195 14,089
-------- -------- --------
Net income.................................................. $ 10,497 $ 13,774 $ 23,593
======== ======== ========
Basic earnings per share.................................... $ 0.46 $ 0.51 $ 0.78
Diluted earnings per share.................................. $ 0.41 $ 0.46 $ 0.74
See Accompanying Notes to Consolidated Financial Statements
28
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,673 $124,498
Short-term investment..................................... 1,000 --
Accounts receivable (net of allowance for doubtful
accounts of $0 at December 31, 1998 and $110,000 at
December 31, 1999 and 2000)............................. 4,222 7,952
Current installment of notes receivable--related party.... 20 20
Royalty income receivable................................. 5,382 7,827
Investment securities, available-for-sale................. 21,172 27,526
Inventory................................................. 1,116 1,606
Unbilled services......................................... 76 53
Income tax prepayments.................................... 3,080 --
Prepaid expenses and other current assets................. 845 1,680
-------- --------
Total current assets.................................. 39,586 171,162
-------- --------
Property and equipment, net................................. 15,879 30,914
-------- --------
Other assets:
Intangible assets and patents, net........................ 332 2,721
Notes receivable, excluding current installment--related
party................................................... 40 20
Deferred income taxes..................................... 1,329 --
Equity investment in unconsolidated affiliates............ 15,033 16,281
Convertible subordinated debentures from unconsolidated
affiliate............................................... 15,000 16,436
Other assets.............................................. 1,043 1,032
-------- --------
Total other assets.................................... 32,777 36,490
-------- --------
Total assets.......................................... $ 88,242 $238,566
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 804 $ 2,591
Unearned income........................................... 1,480 1,011
Customer deposits......................................... 278 595
Accrued compensation...................................... 1,948 2,883
Accrued expenses.......................................... 557 1,299
Income taxes payable...................................... -- 1,443
Current installments of long-term debt.................... 87 5
-------- --------
Total current liabilities............................. 5,154 9,827
Long-term liabilities:
Long-term debt, excluding current installments............ 168 120
Deferred income taxes..................................... -- 86
-------- --------
Total liabilities........................................... 5,322 10,033
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 2,000,000
shares, none issued or outstanding...................... -- --
Common stock, $0.01 par value, authorized 50,000,000
shares; issued and outstanding 29,187,118 shares in 1999
and 32,785,913 in 2000.................................. 292 328
Additional paid-in capital.................................. 56,927 178,871
Retained earnings........................................... 25,716 49,309
Accumulated other comprehensive income (loss), net.......... (15) 25
-------- --------
Total stockholders' equity............................ 82,920 228,533
-------- --------
Total liabilities and stockholders' equity............ $ 88,242 $238,566
======== ========
See Accompanying Notes to Consolidated Financial Statements.
29
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
COMMON STOCK
------------------- ACCUMULATED
NUMBER $0.01 ADDITIONAL OTHER
PREFERRED OF PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK SHARES VALUE CAPITAL EARNINGS INCOME STOCK
--------- -------- -------- ---------- -------- -------------- --------
Balances at January 1, 1998........ $ 1 22,770 $228 $ 8,071 $ 1,445 $ 54 $ --
Comprehensive income:
Net income....................... -- -- -- -- 10,497 -- --
Unrealized gain on investment
securities, available-for-sale,
net of taxes..................... 12
Total comprehensive income.....
Purchase of 2,263,806 shares for
treasury stock................. (10,061)
Issuance of common stock in
connection with stock option
plan........................... 596 6 185
Tax benefit from exercise of
stock options.................. 742
Sale of common stock, net of
issuance expenses of $6........ 177 2 1,642
--- ------ ---- -------- ------- ---- --------
Balances at December 31, 1998...... 1 23,543 236 10,640 11,942 66 (10,061)
Comprehensive income:
Net income....................... 13,774
Unrealized (loss) on investment
securities, available-for-sale,
net of taxes................... (81)
Total comprehensive income.....
Conversion of 100,000 shares of
preferred stock................ (1) 90 -- 1 -- -- --
Issuance of common stock in
connection with stock option
plan........................... -- 2,188 22 1,790
Tax benefit from exercise of
stock options.................. 3,204
Sale of 3,366,194 shares of
common stock and reissuance of
2,263,806 shares of treasury
stock, net of issuance expense
of $971........................ 3,366 34 41,292 10,061
--- ------ ---- -------- ------- ---- --------
Balances at December 31, 1999...... 29,187 292 56,927 25,716 (15) --
Comprehensive income:
Net income....................... 23,593
Unrealized gain on investment
securities, available-for-sale,
net of taxes................... 40
Total comprehensive income.....
Proceeds from issuance of common
stock, net of issuance costs... 3,000 30 118,587
Tax benefit from exercise of
stock options.................. 1,187
Issuance of common stock in
connection with stock option
plan and ESPP.................. 549 5 832
Issuance of common stock in
connection with business
combination.................... -- 50 1 1,338 -- -- --
--- ------ ---- -------- ------- ---- --------
Balances at December 31, 2000...... $-- 32,786 $328 $178,871 $49,309 $ 25 $ --
=== ====== ==== ======== ======= ==== ========
COMPREHENSIVE
TOTAL INCOME
--------- --------------
Balances at January 1, 1998........ $ 9,799
Comprehensive income:
Net income....................... 10,497 $ 10,497
Unrealized gain on investment
securities, available-for-sale,
net of taxes..................... 12 12
--------
Total comprehensive income..... $ 10,509
========
Purchase of 2,263,806 shares for
treasury stock................. (10,061)
Issuance of common stock in
connection with stock option
plan........................... 191
Tax benefit from exercise of
stock options.................. 742
Sale of common stock, net of
issuance expenses of $6........ 1,644
---------
Balances at December 31, 1998...... 12,824
Comprehensive income:
Net income....................... 13,774 $ 13,774
Unrealized (loss) on investment
securities, available-for-sale,
net of taxes................... (81) (81)
--------
Total comprehensive income..... $ 13,693
========
Conversion of 100,000 shares of
preferred stock................ --
Issuance of common stock in
connection with stock option
plan........................... 1,812
Tax benefit from exercise of
stock options.................. 3,204
Sale of 3,366,194 shares of
common stock and reissuance of
2,263,806 shares of treasury
stock, net of issuance expense
of $971........................ 51,387
---------
Balances at December 31, 1999...... 82,920
Comprehensive income:
Net income....................... 23,593 $ 23,593
Unrealized gain on investment
securities, available-for-sale,
net of taxes................... 40 40
--------
Total comprehensive income..... $ 23,633
========
Proceeds from issuance of common
stock, net of issuance costs... 118,617
Tax benefit from exercise of
stock options.................. 1,187
Issuance of common stock in
connection with stock option
plan and ESPP.................. 837
Issuance of common stock in
connection with business
combination.................... 1,339
---------
Balances at December 31, 2000...... $ 228,533
=========
See Accompanying Notes to Consolidated Financial Statements.
30
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
-------- -------- ---------
Operating activities:
Net income.................................................. $ 10,497 $ 13,774 $ 23,593
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,171 1,825 2,413
Tax benefit of stock option exercises..................... 743 3,204 1,187
Net realized (gain) loss on sale of investment
securities.............................................. -- 66 (3)
Net loss on sale of assets................................ 44 -- --
Provision for doubtful accounts........................... (30) 165 --
Non-cash interest income.................................. -- -- (1,436)
Equity in (income) loss of unconsolidated affiliate....... -- 98 (552)
Provision for deferred taxes.............................. (395) 365 1,349
Forgiven principal on notes receivable-related party...... 20 20 20
Change in operating assets and liabilities, net of business
combination:
Increase in accounts receivable........................... (895) (1,511) (3,643)
Increase in royalty income receivable..................... (3,256) (2,126) (2,445)
Increase in inventory..................................... (258) (541) (490)
Decrease in unbilled services............................. 88 29 23
Decrease (increase) in income taxes....................... (482) (2,562) 4,533
Decrease (increase) in prepaid expenses and other current
assets.................................................. (360) 57 (789)
Increase (decrease) in accounts payable................... 561 (697) 1,697
Increase (decrease) in accrued compensation and accrued
expenses................................................ 1,413 1,067 1,278
Increase (decrease) in customer deposits and other current
liabilities............................................. (20) 96 273
Increase (decrease) in unearned income.................... 1,391 (268) (466)
-------- -------- ---------
Net cash provided by operating activities................... 10,232 13,061 26,545
-------- -------- ---------
Investing activities:
Purchases of investment securities........................ (57) (40,531) (6,449)
Proceeds from sales of investment securities.............. -- 21,183 92
Purchase of equity investment in unconsolidated
affiliate............................................... -- (15,131) (696)
Purchase of convertible subordinated debenture from
unconsolidated affiliate................................ -- (15,000) --
Purchases of property and equipment....................... (11,615) (2,721) (16,525)
Purchase of business, net of cash acquired................ (869)
Proceeds from sale of equipment........................... 13 --
Purchase of customer list................................. (18) -- --
Payments for patent application and other related costs... (201) (27) (13)
Payment for lease deposit................................. -- (1,000) --
Net (increase) decrease in short-term investment.......... -- (1,000) 1,000
-------- -------- ---------
Net cash used in investing activities..................... (11,878) (54,227) (23,461)
-------- -------- ---------
Financing activities:
Principal payments on long-term debt...................... (2,224) (15,181) (838)
Principal payments under capital lease obligations........ (1) -- --
Proceeds from borrowings under long-term debt............. 7,000 500 125
Payment to acquire treasury shares........................ (2,126) -- --
Proceeds from sale of common stock, net................... 1,735 53,200 119,454
-------- -------- ---------
Net cash provided by financing activities................... 4,384 38,519 118,741
-------- -------- ---------
Increase (decrease) in cash and cash equivalents............ 2,738 (2,647) 121,825
Cash and cash equivalents at beginning of period............ 2,582 5,320 2,673
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 5,320 $ 2,673 $ 124,498
======== ======== =========
Supplemental disclosure of non-cash investing and financing
activities:
Purchase of treasury stock through issuance of long-term
debt.................................................... $ 7,936 $ -- $ --
Common stock issued for purchase of customer list......... $ 100 $ -- $ --
Common stock issued for relocation incentive.............. $ 200 $ -- $ --
Increase (decrease) in net unrealized gain/loss on
securities available-for-sale, net of tax............... $ 12 $ (82) $ 40
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 382 $ 158 $ 28
Income taxes............................................ $ 6,209 $ 7,188 $ 9,669
See Accompanying Notes to Consolidated Financial Statements.
31
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Albany Molecular Research, Inc. (the "Company") is a leading chemistry
research and drug discovery and development company focused on applications for
the pharmaceutical, biotechnology, and life sciences industries. The Company
offers services traditionally provided by chemistry divisions within
pharmaceutical and biotechnology companies, including drug discovery, medicinal
chemistry, chemical development, analytical chemistry services and small-scale
and pilot plant manufacture and active ingredient bulk manufacturing. The
Company also conducts proprietary research and development which may lead to the
Company receiving up-front service fees and milestone payments for advancing new
products as well as royalties for new drugs successfully reaching the market.
On February 4, 2000 the Company completed its acquisition of the assets of
American Advanced Organics, Inc. (AAO) of Syracuse, New York (renamed the
Syracuse Research Center). The Company's Syracuse Research Center specializes in
the production of pharmaceutical intermediates in quantities ranging from a few
grams to multi-kilogram batches. The Syracuse Research Centers expertise is in
the rapid development and implementation of procedures with a focus on
delivering high quality products on or before their scheduled delivery date. See
Note 2 for discussion of the Company's acquisition of AAO.
On December 21, 1999, the Company completed a $30,000 strategic investment
in Organichem Corporation (formerly the Rensselaer, New York-based chemical
manufacturing facilities of Nycomed Amersham). Organichem Corporation operates a
chemical manufacturing facility in Rensselaer, New York, and performs
large-scale manufacturing of pharmaceutical intermediates and active
ingredients. See note 3 for discussion of the Company's equity and other
investments in Organichem Corporation.
On October 19, 1999, the Company completed a merger with EnzyMed, Inc.
(EnzyMed), an Iowa-based provider of combinatorial biocatalysis discovery
services (renamed the Biocatalysis Division). Utilizing its proprietary
combinatorial biocatalysis technology, EnzyMed specializes in the discovery,
optimization, and derivatization of pharmaceutical and agrochemical lead
compounds. EnzyMed's proprietary technology employs enzymatic and microbial
transformations of core structures to create novel derivatives, which otherwise
might not be accessible via traditional chemical syntheses, for screening and
development in an iterative fashion. This technology has its most immediate
application in the pharmaceutical, animal health, and agrochemical industries.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Albany
Molecular Research, Inc. and its wholly-owned subsidiary, Albany Molecular
Research Export, Inc. All intercompany balances and transactions have been
eliminated during consolidation. The Company has not reported segment
information because the Company operates in only one business segment. The
Company's 39.2% investment in Organichem Corporation (see note 3) is accounted
for using the equity method of accounting.
The Company's acquisition of AAO on February 4, 2000 has been accounted for
as a purchase business combination as further discussed in Note 2. Accordingly,
the operating results of the Syracuse
32
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research Center have been included in the Company's results of operation from
the date of acquisition.
The Company's merger with EnzyMed on October 19, 1999 has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements have been restated to include the results of operations, financial
position and cash flows of EnzyMed.
It is the Company's policy to reclassify prior year consolidated financial
statements to conform to the current year presentation.
REVENUE RECOGNITION:
The Company recognizes net revenue from its full-time equivalent and time
and materials contracts on a per diem basis as work is performed and fixed fee
contracts as projects are completed or on a percentage-of-completion basis,
depending on the length of the project. In general, contract provisions include
predetermined payment schedules, or the submission of appropriate billing detail
establishing prerequisites for billings. Unbilled services arise when services
have been rendered under these contracts but customers have not been billed.
Similarly, unearned income represents prebilling for services that have not yet
been performed. Any losses on contracts are recorded when they are determinable
and estimable.
The Company recognizes revenue from licensing fees, milestones and royalties
when the earnings process has been deemed completed and any uncertainties or
contingencies regarding potential revenue have been resolved.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENT:
Cash equivalents consist of money market accounts and overnight deposits.
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
The Company's short-term investment at December 31, 1999 consisted of a
certificate of deposit which matured on June 26, 2000.
INVENTORIES:
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and consist primarily of organic chemicals used as raw
materials in the research and production process.
INVESTMENT SECURITIES:
The Company accounts for its investment securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investment securities
consist of state and political subdivision obligations, corporate debt
33
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
obligations, and bond mutual funds, with the Company holding all of these
securities as available-for-sale.
Unrealized holding gains and losses, net of related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Interest income is
recognized when earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings and are determined using the
specific identification method.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are expensed when incurred.
Depreciation is determined using the straight-line method over the estimated
useful lives of the individual assets. Accelerated methods of depreciation have
been used for income tax purposes.
The Company provides for depreciation of property and equipment over the
following estimated useful lives:
Laboratory equipment and fixtures........................... 7-18 years
Office equipment............................................ 3-7 years
Leasehold improvements...................................... 18 years
Buildings................................................... 25 years
IMPAIRMENT OF LONG LIVED ASSETS:
Long-lived assets and certain identified intangible assets to be held and
used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposal.
Measurement of an impairment loss for long-lived assets and certain identified
intangible assets that management expects to hold and use are based on the fair
value of the asset. Long-lived assets and certain identified intangible assets
to be disposed of are reported at the lower of carrying amount of fair value
less costs to sell.
PATENTS AND PATENT APPLICATION COSTS:
The costs of patents issued and acquired are being amortized on the
straight-line method over the estimated remaining lives of the issued patents,
generally 17 years. Patent application and processing costs are capitalized and
will be amortized over the estimated life once a patent is acquired or expensed
in the period the patent application is denied.
Accumulated amortization at December 31, 1999 and 2000 was $18 and $23,
respectively.
34
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LICENSING RIGHTS:
Licensing costs are accumulated and amortized once the license agreement is
executed. The costs of licensing rights are being amortized on the straight-line
method over the term of the license agreement. Licensing costs are written off
in the period the licensing rights are canceled or are determined not to provide
future benefits.
Accumulated amortization at December 31, 1999 and 2000 was $12 and $12,
respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations when incurred and
are included in operating expenses.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the income tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
COMPREHENSIVE INCOME:
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on investment securities, available-for-sale, and is
presented in the Consolidated Statements of Stockholders' Equity and
Comprehensive Income. SFAS No. 130 requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations.
STOCK-BASED COMPENSATION:
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded
only if the current market price of the underlying stock exceeded the exercise
price. Any compensation expense would be recognized over the vesting period.
EARNINGS PER SHARE:
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period.
35
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company (such as stock options).
The following tables provide calculations of basic and diluted earnings per
share calculations:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- -------- --------- ----------- -------- ---------
Basic earnings per share.... $10,497 22,696 $0.46 $13,774 27,132 $0.51
===== =====
Dilutive effect of stock
options................... -- 2,761 -- 2,502
Dilutive effect of assumed
preferred stock
conversion................ -- 90
------- ------ ------- ------
Diluted earnings per
share..................... $10,497 25,547 $0.41 $13,774 29,634 $0.46
======= ====== ===== ======= ====== =====
YEAR ENDED DECEMBER 31, 2000
----------------------------------
WEIGHTED
AVERAGE PER SHARE
NET INCOME SHARES AMOUNT
----------- -------- ---------
Basic earnings per share.... $23,593 30,363 $0.78
=====
Dilutive effect of stock
options................... -- 1,700
Dilutive effect of assumed
preferred stock
conversion................ --
------- ------
Diluted earnings per
share..................... $23,593 32,063 $0.74
======= ====== =====
USE OF MANAGEMENT ESTIMATES:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosures 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 can vary
from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133, as amended, establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet and measure those instruments at fair value. The Company's
current business strategy is not to use derivative instruments and the Company
expects the adoption of SFAS 133 to have an immaterial impact on the Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "SAB
101," "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company adopted SAB 101 in the
fourth quarter of 2000 and such adoption did not have a material effect on the
Company's financial condition, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the
36
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting consequence of various modifications to the terms of previously fixed
stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company is in compliance with
the provisions of FIN 44.
2. BUSINESS COMBINATION
On February 4, 2000, the Company consummated its acquisition of American
Advanced Organics, Inc. (AAO) of Syracuse, New York, for approximately $1,000 in
cash and $1,300 in common stock (50,000 shares) and stock options of the
Company. The Company also assumed approximately $740 in liabilities. In addition
to the $2,300 purchase price, the former AAO stockholders may also receive up to
$800 in future payments based upon AAO's financial performance, operating as a
division of the Company, in 2001 and 2002. Subsequent to December 31, 2000, $500
was paid to the former AAO stockholders. The excess purchase price over the net
assets acquired, which approximated $2,100 is being amortized over fifteen
years. Amortization expense for the year ended December 31, 2000 was
approximately $132. Pro forma information has not been provided because the
acquisition is immaterial.
3. INVESTMENT IN ORGANICHEM
(a) Stock Purchase Agreement
On December 21, 1999, the Company completed an equity method investment in
Organichem Corporation ("Organichem"), pursuant to a Stock Purchase Agreement
and purchased convertible subordinated debentures of Organichem pursuant to a
Debenture Purchase Agreement. Under the terms of the Stock Purchase Agreement,
the Company acquired shares of common stock of Organichem representing 37.5% of
Organichem's outstanding common stock, for an aggregate purchase price of
$15,131, which included direct costs of $131 attributable to the Organichem
equity investment. During 2000, Organichem purchased a portion of its common
stock into treasury, increasing the Company's ownership interest in Organichem
to 39.2%. As a result, the Company recorded a one time benefit to earnings of
$159,500, net of taxes of $97,700.
The Company has recorded its investment using the equity method of
accounting and, accordingly, has recorded the Company's proportionate share of
Organichem's income, as adjusted for intercompany interest, for the period since
the initial investment through December 31, 2000, and by amortizing the excess
cost of its investment in the common stock over the underlying equity in the net
assets of Organichem.
The acquisition cost exceeded the Company's share of the underlying equity
in net assets of Organichem by $9,375, which is being amortized over a period of
25 years.
The Stock Purchase Agreement also incorporates a Put/Call Agreement among
the Company, Organichem and its stockholders that permits the Company to
purchase, at the Company's option, all of the outstanding shares of common stock
of Organichem within 90 days subsequent to the year
37
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVESTMENT IN ORGANICHEM (CONTINUED)
ending December 31, 2002. The purchase price is to be determined based on
Organichem's earnings before interest, taxes, depreciation and amortization
("EBITDA"), as defined in the Put/Call Agreement, for the year ending
December 31, 2002, with a minimum and maximum specified purchase price of
$15,000 and $30,000, respectively. In the event that the Company does not
exercise its call option, Organichem stockholders may require the Company to
purchase all of the outstanding shares of common stock of Organichem within
60 days subsequent to the year ending December 31, 2003. The purchase price
under the put option is to be determined consistent with that specified under
the above call option, with the exception that the EBITDA, as defined, shall be
based on Organichem's results for the year ending December 31, 2003.
Summarized financial information of Organichem as of December 21, 1999,
prior to any investment by the Company, and as of and for the year ended
December 31, 2000 is as follows:
DECEMBER 21, DECEMBER 31,
1999 2000
------------ ------------
Current assets...................................... $29,921 $25,046
Property, plant and equipment, net.................. 52,122 43,306
Total assets........................................ 82,043 68,954
Current liabilities................................. 4,930 17,970
Other liabilities................................... 2,553 19,156
Total equity........................................ 74,560 15,391
Total liabilities and equity........................ 82,043 68,954
Net sales........................................... $ -- $56,614
Gross profit........................................ -- 12,827
Operating (loss) income............................. (431) 7,241
Net (loss) income................................... (259) 1,775
During the period from December 21, 1999 (date of initial investment)
through December 31, 1999, Organichem had no net sales or gross profit since
this period corresponded with the company's annual plant-wide shut-down.
(b) Debenture Purchase Agreement
Under the terms of the Debenture Purchase Agreement, the Company purchased
convertible subordinated debentures ("Debentures") for an aggregate purchase
price of $15,000. The Debentures mature on December 21, 2005 and may be
converted into 37.5% of the outstanding common stock of Organichem, on a fully
diluted basis.
The Debentures bear interest, payable semi-annually, on the unpaid principal
amount at margins over specified fixed or variable London Interbank Offer Rate
("LIBOR") as provided for within the Company's credit agreement with Organichem
(9.375% and 9.395% at December 31, 1999 and 2000, respectively). The agreement
provided that the interest payable under the Debentures through December 21,
2000 shall be added to the principal of the Debenture, with semi-annual cash
interest payments to begin subsequent to December 21, 2000, provided that
Organichem is in compliance with the financial covenants of its credit
agreement. Accrued interest through December 21, 2000 totalling
38
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVESTMENT IN ORGANICHEM (CONTINUED)
$1,436 was added to the principal of the Debentures. In addition, pursuant to
the terms of the Debenture Purchase Agreement, the Company and Organichem have
agreed that in the event that either the aforementioned put or call options are
exercised, 62.5% of the accrued interest not paid by Organichem as of the date
of the put or call exercise shall be applied to reduce the purchase price as
determined under the Put/Call Agreement. Accrued interest receivable from
Organichem at December 31, 2000 totaled $47.
The Debentures are convertible, at the Company's option, at any time after
the earliest of (i) December 21, 2002; (ii) notification by Organichem to the
Company that Organichem intends to repay the Debenture prior to its maturity; or
(iii) the occurrence of an event of default as defined in the Debenture Purchase
Agreement.
4. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value for available-for-sale investment securities by major security type were
as follows:
DECEMBER 31, 1999
------------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
-------------- ---------------- ----------------- ----------
Obligations of states and political
subdivisions......................... $ 1,674 $31 $ (4) $ 1,701
Corporate debt obligations............. 19,441 1 (60) 19,382
Bond mutual funds...................... 89 -- -- 89
------- --- ---- -------
$21,204 $32 $(64) $21,172
======= === ==== =======
DECEMBER 31, 2000
------------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
-------------- ---------------- ----------------- ----------
Obligations of states and political
subdivisions......................... $ 1,674 $ 60 $ -- $ 1,734
Corporate debt obligations............. 25,693 100 (1) 25,792
------- ---- ---- -------
$27,367 $160 $ (1) $27,526
======= ==== ==== =======
Proceeds from the sale of an available-for-sale investment security were $92
in 2000, resulting in a realized gain of $3. Proceeds from the sales of
available-for-sale investment securities were $21,183 for 1999, resulting in
realized losses of $66.
39
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE (CONTINUED)
Maturities of corporate debt obligations and obligations of states and
political subdivisions classified as available-for-sale at December 31, 2000
were as follows:
AMORTIZED COST FAIR VALUE
-------------- -----------
Due less than one year..................... $24,944 $25,047
Due after one year through five years...... 1,674 1,691
Due after five years through ten years..... 547 575
Due after ten years........................ 202 213
------- -------
$27,367 $27,526
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-----------------------
1999 2000
-------- --------
Laboratory equipment and fixtures...................... $12,636 $19,547
Office equipment....................................... 2,474 3,576
Leasehold improvements................................. 4,615 9,771
Construction-in-progress............................... 367 1,223
Buildings.............................................. -- 2,985
Land................................................... -- 212
------- -------
20,092 37,314
Less accumulated depreciation.......................... (4,213) (6,400)
------- -------
$15,879 $30,914
======= =======
Depreciation expense of property and equipment was $1,128, $1,708 and $2,207
for the years ended December 31, 1998, 1999 and 2000, respectively.
6. LONG-TERM DEBT
The Company has a revolving line of credit agreement ("Credit Agreement")
with a bank enabling the Company to borrow up to $25,000. The initial proceeds
of the revolving line of credit were used to refinance an existing debt facility
with another bank and for general corporate purposes.
The Credit Agreement provides for an initial draw period in the form of a
revolving line of credit from the date of the note through June 30, 2001. At
that date, the outstanding principal balance, if any, will be converted to a
term loan. The term loan will be repayable in sixty equal monthly installments
plus any accrued interest through June 30, 2006. The interest rates on the
outstanding borrowings are paid monthly and are at either the bank's prime rate
less 2% or LIBOR plus 0.5%, at the Company's option. Any outstanding borrowings
under the Credit Agreement are collateralized by a general lien on all assets
except certain patents as defined in the Credit Agreement.
40
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. LONG-TERM DEBT (CONTINUED)
The Credit Agreement provides for various covenants, including requirements
for the Company to maintain defined financial ratios and the prohibition against
any additional debt, other than in the normal course of business, exceeding $500
in the aggregate, at any time.
At December 31, 1999 and 2000, the Company had no outstanding indebtedness
and borrowing availability of $25,000 under the Credit Agreement.
Long-term debt is comprised as follows:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Loan payable to economic development authority in monthly
installments of $1 through April 2005 including interest.
$95 of the loan may be forgiven if certain employment
targets are met........................................... $ -- $125
Note payable to equipment financing company in monthly
installments of $5 through May 2002, plus interest at
14.3%..................................................... 132 --
Note payable to equipment financing company in monthly
installments of $5 through July 2002, plus interest at
15.1%..................................................... 123 --
---- ----
255 125
Less current portion........................................ 87 5
---- ----
$168 $120
==== ====
The aggregate maturities of long-term debt subsequent to December 31, 2000
are as follows:
2001........................................................ $ 5
2002........................................................ 12
2003........................................................ 12
2004........................................................ 12
2005........................................................ 84
----
$125
====
41
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES
Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current:
Federal................................................... $6,363 $6,880 $12,147
State..................................................... 383 950 593
------ ------ -------
6,746 7,830 12,740
------ ------ -------
Deferred:
Federal................................................... (530) 155 1,190
State..................................................... 135 210 159
------ ------ -------
(395) 365 1,349
------ ------ -------
$6,351 $8,195 $14,089
====== ====== =======
The differences between income tax expense and income taxes computed using a
federal statutory rate of 35% for the years ended December 31, 1998, 1999 and
2000, were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Pre-tax income at statutory rate............................ $5,897 $7,689 $13,188
Increase (reduction) in taxes resulting from:
Tax-free interest income.................................. (31) (102) (32)
State taxes, net of federal benefit....................... 336 754 489
Research and experimentation credit....................... (70) -- --
Other, net................................................ 219 (146) 444
------ ------ -------
$6,351 $8,195 $14,089
====== ====== =======
42
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences giving rise to significant portions
of the deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
1999 2000
-------- --------
Deferred tax assets:
Non-deductible accruals................................... $ 76 $ 125
Non-deductible amortization............................... 41 150
Non-deductible lease costs................................ 67 59
Inventory................................................. 12 196
Interest.................................................. -- 157
Other..................................................... -- 21
Research and experimentation credit carryforwards......... 174 174
Net operating loss carryforwards.......................... 2,488 2,100
------- -------
Deferred tax assets................................... 2,858 2,982
Deferred tax liabilities:
Property and equipment depreciation differences
(accelerated depreciation for tax purposes)............. (1,539) (2,527)
Non-taxable equity earnings............................... -- (483)
------- -------
Net deferred tax asset (liability).................... $ 1,319 $ (30)
======= =======
The preceding table does not include the deferred tax asset (liability) of
$10 and $(56) at December 31, 1999 and 2000, associated with the Company's
unrealized gain (loss) on investment securities, available-for-sale, discussed
in note 4.
The Company's net operating loss carryforwards begin to expire in 2015. As a
result of the change in control related to the EnzyMed merger, the Company's use
of the net operating loss carryforwards is limited to approximately $1,000 per
year.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the taxable income in
the two previous tax years to which tax loss carryback can be applied.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, taxable income in the carryback period and tax
planning strategies in making this assessment. Based upon the level of projected
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of those deductible differences. The amount of the deferred
tax asset considered realizable could be reduced if estimates of future taxable
income during the carryforward period are reduced.
43
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY
On October 5, 2000, the Company completed a follow-on offering of its common
stock by issuing 3,000 shares at a price of $42.25 per share, less the
underwriters discount of $7,290. The net proceeds of the offering, after
deducting applicable direct offering costs of $843 were $118,617. A portion of
the net proceeds have been used in the acquisition of New Chemical Entities,
Inc. (See Note 16).
On July 20, 2000 the Board of Directors approved a 2-for-1 split of the
Company's common stock to stockholders of record as of August 8, 2000. All
shares and per share information included in the accompanying consolidated
financial statements have been restated to reflect the stock splits.
On February 4, 1999, in connection with the Company's initial public
offering of common stock, the Company converted 100 shares of its outstanding
preferred stock in a ratio of twenty (20) preferred shares to nine (9) common
shares. For purposes of diluted earnings per share for the year ended
December 31, 1998, all preferred shares were assumed converted to their common
stock equivalents.
On February 4, 1999, the Company completed the initial public offering of
its common stock by issuing 5,630 shares, 630 of which were issued pursuant to
an underwriters' over-allotment provision, at a price of $10.00 per share. Prior
to the offering, there was no public market for the Company's common stock. The
net proceeds of the offering, after deducting applicable direct offering costs
of $971, were $51,388. The net proceeds were used by the Company to repay
outstanding indebtedness under the revolving line of credit agreement, certain
promissory notes issued in connection with the Company's repurchase of 2,264
shares of common stock from the former CFO and the equity investment in and
purchase of the convertible subordinated debentures from Organichem.
On October 28, 1998, the Company entered into a severance agreement with its
former chief financial officer ("Former CFO"). The Former CFO agreed to exchange
all of his outstanding shares and the shares that were represented by all of his
outstanding stock options for a purchase price of approximately $10,000. In
total, the Company repurchased 2,264 shares of common stock. These treasury
shares, along with 3,366 of shares not previously issued, were sold during the
Company's February 1999 initial public offering.
The Company's 1998 Employee Stock Purchase Plan (the "Plan") was adopted
during August 1998. Up to 600 shares of common stock may be issued under the
Plan, which is administered by the Compensation Committee of the Board of
Directors. It established two stock offering periods per calendar year, the
first beginning on January 1 and ending on June 30, and the second beginning on
July 1 and ending December 31. All employees who work more than 20 hours per
week are eligible for participation in the Plan. Employees who are deemed to own
greater than 5% of the combined voting power of all classes of stock of the
Company are not eligible for participation in the Plan.
During each offering, an employee may purchase shares under the Plan by
authorizing payroll deductions up to 10% of their cash compensation during the
offering period. The maximum number of shares to be issued to any single
employee during an offering period is limited to one thousand. At the end of the
offering period, the accumulated payroll deductions will be used to purchase
common stock on the last business day of the offering period at a price equal to
85% of the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. During the years ended December 31, 1999
and 2000 employees purchased 8 and 23 shares, respectively.
44
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has a Stock Option Plan, through which the Company may issue
incentive stock options or non-qualified stock options. Incentive stock options
granted to employees may not be granted at prices less than 100 percent of the
fair market value of the Company's common stock at the date of option grant.
Non-qualified stock options may be granted to employees, directors, advisors,
consultants and other key persons of the Company at prices established at the
date of grant, and may be less than the fair market value at the date of grant.
All incentive stock options may be exercised at any time, after vesting, over a
ten-year period subsequent to the date of grant. Incentive stock options
generally vest over five years, with a 60% vesting occurring at the end of the
third anniversary of the grant date. Non-qualified stock option vesting terms
are established at the date of grant, but shall have a duration of not more than
ten years.
Following is a summary of the status of stock option programs during 1998,
1999 and 2000 and 2000:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1999 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding, beginning of year............. 4,256 $0.88 4,032 $ 1.31 2,183 $ 3.23
Granted.................................. 494 3.84 331 10.00 572 26.72
Exercised................................ (592) 0.31 (2,170) 0.83 (532) 1.37
Forfeited................................ (126) 1.37 (10) 6.51 (111) 11.34
----- ----- ------ ------ ----- ------
Outstanding, end of year................... 4,032 $1.31 2,183 $ 3.09 2,112 $ 9.56
===== ===== ====== ====== ===== ======
Options exercisable, end of year........... 2,816 838 817
===== ====== =====
Weighted-average fair value of options
granted during the year.................. $0.94 $ 4.25 $26.51
===== ====== ======
45
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1999:
OUTSTANDING OPTIONS
----------------------------------- EXERCISABLE OPTIONS
WEIGHTED-AVERAGE ------------------------------
RANGE OF OPTION NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------- ----------- ---------------- ---------------- ----------- ----------------
$0.06-0.07................ 89 3.8 years $ 0.07 89 $ 0.07
$0.28..................... 108 3.9 years 0.28 108 0.28
$0.56..................... 180 5.5 years 0.56 180 0.56
$0.92-1.24................ 233 5.9 years 1.02 211 1.03
$1.49-1.80................ 775 7.5 years 1.65 53 1.54
$2.46-2.90................ 176 8.1 years 2.73 109 2.90
$4.44..................... 319 8.6 years 4.44 82 4.44
$10.00-14.63.............. 291 9.0 years 10.35 6 10.25
$15.02-15.57.............. 12 5.3 years 15.09 -- --
----- ---
2,183 838
===== ===
The following summarizes information about stock options outstanding as of
December 31, 2000:
OUTSTANDING OPTIONS
----------------------------------- EXERCISABLE OPTIONS
WEIGHTED-AVERAGE ------------------------------
RANGE OF OPTION NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------- ----------- ---------------- ---------------- ----------- ----------------
$0.28..................... 58 2.9 years $ 0.28 58 $ 0.28
$0.56..................... 86 4.6 years 0.56 86 0.56
$0.92-1.24................ 169 5.0 years 0.99 158 0.99
$1.49-1.80................ 618 6.5 years 1.65 357 1.65
$2.46-2.90................ 74 7.3 years 2.50 7 2.90
$4.44..................... 297 7.6 years 4.44 142 4.44
$10.00-14.50.............. 259 8.1 years 10.06 4 10.25
$15.02-15.56.............. 11 3.9 years 15.07 3 15.02
$23.75-35.11.............. 507 9.2 years 25.80 -- --
$36.00-54.00.............. 23 9.2 years 44.93 2 48.63
$54.59-65.44.............. 10 9.9 years 57.70 -- --
----- ---
2,112 817
===== ===
46
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following are the shares of common stock reserved for issuance and the
related exercise prices:
DECEMBER 31, 1999 DECEMBER 31, 2000
------------------------ ------------------------
EXERCISE EXERCISE
NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE
--------- ------------ --------- ------------
Employee Stock Option Plans................... 2,183 $0.06-$15.57 2,112 $0.28-$65.44
Employee Stock Purchase Plan.................. 8 $12.81 10 $23.27
----- -----
Shares reserved for issuance.............. 2,191 2,122
===== =====
Under SFAS No. 123, "Accounting for Stock Based Compensation," compensation
cost for stock option grants would be based on the fair value at the grant date,
and the resulting compensation expense would be shown as an expense on the
consolidated statements of operations. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro-forma amounts:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net income:
As reported............................................... $10,497 $13,774 $23,593
Pro forma................................................. $10,384 $13,469 $22,869
Earnings per share:
Basic as reported......................................... $ 0.46 $ 0.51 $ 0.78
Basic pro forma........................................... $ 0.46 $ 0.50 $ 0.75
Diluted as reported....................................... $ 0.41 $ 0.46 $ 0.74
Diluted pro forma......................................... $ 0.41 $ 0.45 $ 0.71
The per share weighted-average fair value of stock options granted is
determined using the Black-Scholes option-pricing model with the following
weighted-average assumptions.
1998 1999 2000
-------- -------- --------
Expected Life (years):
ISO............................................... 5 4 4
Non-qualified..................................... 4 4 4
Interest rate....................................... 4.45% 5.04% 6.48%
Volatility.......................................... -- 48.0 % 60.6 %
Dividend yield...................................... -- -- --
9. EMPLOYEE BENEFIT PLAN
The Company maintains a savings and profit sharing plan under
section 401(k) of the Internal Revenue Code covering all eligible employees.
Employees must complete six months of service and be
47
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. EMPLOYEE BENEFIT PLAN (CONTINUED)
over 20.5 years of age as of the plan's entry dates. Participants may contribute
up to 15% of their compensation, limited to $10 per annum in 1998 and 1999. The
Company currently makes matching contributions equal to 50% of the participant's
contributions (up to a limit of 6% of the participant's compensation). In
addition, the Company has reserved the right to make discretionary profit
sharing contributions to employee accounts. The Company has made no
discretionary profit sharing contributions. Employer matching contributions vest
at a rate of 20% per year beginning after two years of participation in the
plan. Employer matching contributions were $60, $151 and $272 for the years
ended December 31, 1998, 1999 and 2000, respectively.
10. LEASE COMMITMENTS
The Company leases both facilities and equipment used in its operations and
classifies those leases as operating leases following the provisions of SFAS
No. 13, "Accounting for Leases."
The Company has a long-term operating lease for its Albany, New York office
and laboratory facilities with a shareholder of the Company. The present lease
commenced in December 1997 and expires in November 2007, with average monthly
rental payments of $30. The lease contains a ten-year renewal option at the
option of the Company, with six months' prior notice. The Company currently
holds an option to purchase the property for $3,500 in November 2002. During the
year ended December 31, 1999, the Company reserved the purchase option on the
facility with a $1,000 deposit, which is included in other assets in the
accompanying consolidated balance sheet. The Company is responsible for paying
the cost of utilities, operating costs, and increases in property taxes.
The Company leases additional laboratory facilities under separate
agreements with non-related parties. The Company also leases various equipment
with terms ranging from three to five years.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2000
are as follows:
RELATED
PARTY OTHER TOTAL
Year ending December 31 -------- -------- --------
2001.................................................... $275 $ 880 $1,155
2002.................................................... 275 838 1,113
2003.................................................... 275 699 974
2004.................................................... 275 592 867
2005.................................................... 275 504 779
Thereafter.............................................. 551 2,179 2,730
Rental expense amounted to approximately $593, $768 and $1,048 during the
years ended December 31, 1998, 1999 and 2000, respectively. Included within rent
expense was approximately $413, $373 and $275 that was paid to the
aforementioned related party of the Company during the years ended December 31,
1998, 1999 and 2000, respectively.
48
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. RELATED PARTY TRANSACTIONS
a. Technology Development Incentive Plan
In 1993, the Company adopted a Technology Development Incentive Plan to
provide a method to stimulate and encourage novel innovative technology
development. To be eligible to participate, the individual must be an employee
of the Company and must be the inventor or co-inventor of novel technology that
results in new revenues generated for, or by, the Company. Eligible participants
will share in awards based on a percentage of the licensing, royalty or
milestone revenue recorded by the Company, as defined by the Plan.
In 1998, 1999 and 2000, the Company awarded Technology Incentive
Compensation to the inventor of the terfenadine carboxylic acid metabolite
technology. The inventor is a director, officer and shareholder of the Company.
The amounts awarded and included in the consolidated statements of operations
for the years ended December 31, 1998, 1999 and 2000 are $1,822, $2,132 and
$2,921, respectively. Included in accrued compensation in the accompanying
consolidated balance sheets at December 31, 1999 and 2000 are unpaid Technology
Development Incentive Compensation awards of $538 and $787, respectively.
b. Lease Agreement
As described in note 10, the Company currently has a long-term operating
lease for its Albany, New York office and laboratory facilities with a
shareholder of the Company.
c. Notes Receivable
During January 1998, the Company issued notes receivable to two senior
officers of the Company totaling $100. The notes receivable and accrued interest
will not be repaid to the Company provided the officers remain in the employ of
the Company. If employment is terminated within the five-year period ending
December 31, 2002, a pro-rata portion of the principal and interest shall be
repaid to the Company.
d. Note Payable
In connection with the departure of the Company's former chief financial
officer in 1998, the Company repurchased 2,264 shares of common stock for an
aggregate purchase price of $9,936 of which $2,000 was paid in cash. The
remaining $7,936 of the purchase price was in the form of a note payable (see
note 6). This note was repaid in February 1999 utilizing proceeds from the
Company's initial public offering.
12. ROYALTY & LICENSING ARRANGEMENT
On March 15, 1995, the Company entered into a License Agreement and a Stock
Purchase Agreement with Marion Merrell Dow Inc., now part of Aventis, S.A.
("Aventis"). Under the terms of the Stock Purchase Agreement, the Company sold
3,254 shares of the Company's common stock to Aventis for $2,000. Under the
terms of the License Agreement, the Company granted Aventis an exclusive,
worldwide license, with the right to grant sublicenses, upon the prior written
consent of the
49
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. ROYALTY & LICENSING ARRANGEMENT (CONTINUED)
Company, to any patents issued to the Company related to its original
terfenadine carboxylic acid metabolite patent application. Terfenadine
carboxylic acid metabolite is the active ingredient in the non-sedating
antihistamine fexofenadine HCl, marketed as a prescription medicine by Aventis,
under the brand names "Allegra" in the Americas and "Telfast" in the rest of the
world. In return for the license, Aventis agreed to pay the Company up to $6,500
based upon the achievement of five patenting milestones and future royalties
based on sales of fexofenadine HCl. The five patenting milestones consisted of:
- Issuance of a U.S. "Intermediate Process Claim";
- Issuance of a U.S. "Process Manufacturing Claim";
- Issuance of an ex-U.S. "Process Manufacturing Claim";
- Issuance of a U.S. "Substantially Pure Claim"; and
- Issuance of an ex-U.S. "Substantially Pure Claim". In October 1996, the
Company was awarded a patent in Australia that satisfied the ex-U.S.
"Process Manufacturing Claim" milestone. In accordance with the terms of
the Agreement, the Company received a milestone payment and will receive a
royalty on all sales of fexofenadine HCl in that country. Aventis began
selling a product using fexofenadine HCl in January 1997 in Australia.
In November 1996, the Company was awarded a U.S. patent that satisfied the
U.S. "Substantially Pure Claim." However, under the terms of the Agreement,
Aventis had the right to institute action to provoke an interference claim and,
upon successfully doing so, was not obligated to pay any milestones or royalties
until, and if, the interference was resolved in favor of the Company. In
February 1998, the United States Patent and Trademark Office ("PTO") Board of
Patent Appeals and Interferences rendered a decision that the Company was first
to make the invention and confirming that the Company was properly awarded the
aforementioned patent. Accordingly, in the first six months of 1998, the Company
received and recognized the associated milestone payment and royalties on all
sales of fexofenadine HCl (Allegra) in the United States from November 26, 1996
through December 31, 1997, as stipulated in the Agreement. The total payment was
$6,300. Because of the decision that the Company was first to make the
invention, the Company is entitled to receive royalties on all subsequent sales
of fexofenadine HCl (Allegra) in the United States through the respective patent
expiration in 2013.
50
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. ROYALTY & LICENSING ARRANGEMENT (CONTINUED)
On December 1996, the PTO informed the Company that the Company's patent
application containing a U.S. "Process Manufacturing Claim" was in interference
with a patent application of Aventis. In May 1997, the PTO Board of Patent
Appeals and Interferences rendered a decision that the Company was first to make
the invention. Under the terms of the Agreement, no milestones or royalties are
due to the Company until a patent is issued. Under the procedures of the PTO, a
patent is not issued until the PTO publishes it. The patent was published in
May 1998. Upon the patent publication, the Company was entitled to and did
receive the milestone payment for a U.S. "Process Manufacturing Claim."
Additionally, the Company is entitled to receive a royalty on worldwide sales of
fexofenadine HCl (Allegra and Telfast) from the date of patent issuance until
expiration of the patent in 2015.
In January 1997, the Company was awarded a patent that satisfied the U.S.
"Intermediate Process Claim" milestone. In accordance with the terms of the
Agreement, the Company received a milestone payment. There are no royalties
associated with this patent.
In July 1997, the Company was awarded a New Zealand patent that satisfied
the ex-U.S. "Substantially Pure Claim" milestone. In accordance with the terms
of the Agreement, the Company received a milestone payment and will receive
royalties on all sales of fexofenadine HCl (Telfast) in that country.
Substantially all of the Company's license, milestone and royalty revenue is
derived from milestones and royalties related to its patented fexofenadine HCl
technology.
13. CONCENTRATION OF BUSINESS
For the years ended December 31, 1998, 1999 and 2000, net contract revenue
from the Company's three largest customers represented approximately 15%, 14%
and 12% for 1998, 22%, 10% and 10% for 1999 and 22%, 13% and 12% for 2000, of
total net contract revenue for such years, respectively. In the majority of
circumstances, there are agreements in force with these entities that guarantee
the Company's continued involvement in present research projects. However, there
regularly exists the possibility that the Company will have no further
association with these entities once these projects conclude.
Net contract revenue by country, based on the location of the customer, and
expressed as a percentage of total net contract revenue follows:
YEAR ENDED
DECEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
United States......................................... 86% 89% 93%
Europe................................................ 14 10 6
Other countries....................................... -- 1 1
---- ---- ----
Total................................................. 100% 100% 100%
==== ==== ====
All significant long-lived assets of the Company are located within the
United States.
51
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." Although the estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies, the estimates presented are
not necessarily indicative of the amounts that the Company could realize in
current market exchanges.
The Company is estimating its fair value disclosures for financial
instruments using the following methods and assumptions:
Cash, cash equivalents and short-term investments, receivables, and accounts
payable: The carrying amounts reported in the consolidated balance sheets
approximate their fair value because of the short maturities of these
instruments.
Investment securities, available-for-sale: As disclosed in note 4,
investment securities, available-for-sale are estimated based on quoted market
prices at the balance sheet date.
Equity investment in unconsolidated affiliate and subordinated debenture
bond from unconsolidated affiliate: The fair value of the Organichem investment
is not readily determinable as the company is privately held. At December 31,
2000, management estimates that the fair value of the convertible subordinated
debenture from Organichem approximates the carrying value of $16,436.
Long-term Debt: The carrying value of long-term debt was approximately $254
and $125 at December 31, 1999 and 2000, respectively. Management estimates that
the fair value of long-term debt was approximately $263 and $125 at
December 31, 1999 and 2000, respectively, based upon interest rates available to
the Company for issuance of similar debt with similar terms and remaining
maturities.
52
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following tables present unaudited consolidated financial data, as
restated to reflect the EnzyMed merger discussed in note 2, for each quarter of
1998, 1999 and 2000:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
1998
Net contract revenue....................................... $2,956 $3,154 $3,723 $ 3,817
Gross profit............................................... 1,369 1,368 1,607 1,572
Milestones and royalties................................... 8,099 4,287 3,262 3,997
Income from operations..................................... 7,009 3,739 2,883 3,217
Net income................................................. 4,341 2,525 1,744 1,888
Net income per share:
Basic.................................................... $ 0.19 $ 0.11 $ 0.08 $ 0.09
Diluted.................................................. $ 0.17 $ 0.10 $ 0.07 $ 0.07
1999
Net contract revenue....................................... $4,587 $5,145 $5,641 $ 6,654
Gross profit............................................... 1,985 2,217 2,404 2,930
Milestones and royalties................................... 4,184 5,850 5,848 5,562
Income from operations..................................... 3,878 5,457 5,535 5,278
Net income................................................. 2,580 3,712 3,815 3,667
Net income per share:
Basic.................................................... $ 0.10 $ 0.14 $ 0.14 $ 0.13
Diluted.................................................. $ 0.09 $ 0.12 $ 0.13 $ 0.12
2000
Net contract revenue....................................... $7,833 $8,834 $9,890 $10,820
Gross profit............................................... 3,447 3,896 4,384 4,808
Milestones and royalties................................... 5,680 7,744 7,469 8,333
Income from operations..................................... 6,240 8,431 8,650 9,102
Net income................................................. 4,418 5,862 5,826 7,487
Net income per share:
Basic.................................................... $ 0.15 $ 0.20 $ 0.20 $ 0.23
Diluted.................................................. $ 0.14 $ 0.19 $ 0.19 $ 0.22
53
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. SUBSEQUENT EVENTS
On January 25, 2001 the Company acquired all of the outstanding stock of New
Chemical Entities, Inc. (NCE) of Bothell, Washington, for approximately $23,000
of which $22,400 was in cash and $600 in assumed debt. NCE, renamed AMRI Bothell
Research Center, is now a wholly owned subsidiary of the Company. The
transaction was accounted for as a purchase business combination. The excess
purchase price over the net assets acquired, which approximates $14,500, is
expected to be amortized over fifteen years.
The purchase price of $22,400 which is subject to the completion of a
valuation has been preliminarily allocated as follows:
Cash....................................................... $ 19
Accounts receivable, net................................... 255
Chemical libraries......................................... 5,112
Other assets............................................... 55
Property and equipment..................................... 2,403
Deferred tax assets........................................ 1,926
Intangible assets.......................................... 1,850
Other assets............................................... 420
-------
Total assets............................................... $12,040
-------
Accounts payable and accrued expenses...................... $ 833
Unearned revenue........................................... 235
Long-term debt, current.................................... 1,014
Notes payable, shareholders................................ 600
Long-term debt, less current portion....................... 1,437
-------
Total liabilities.......................................... 4,119
-------
Net assets................................................. 7,921
Purchase price............................................. 22,400
-------
Excess purchase price...................................... $14,479
=======
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information appearing under the captions "Independent Accountants" in
the Company's definitive proxy statement relating to the annual meeting of
stockholders to be held May 22, 2001 is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on May 22, 2001 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Executive
Compensation--Summary Compensation, --Compensation Committee Interlocks and
Insider Participation, and --Agreements with Named Executive Officers," and
"Information Regarding Directors--The Board of Directors and its Committees" in
the Company's definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on May 22, 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Principal and Management
Stockholders" in the Company's definitive proxy statement relating to the Annual
Meeting of Stockholders to be held on May 22, 2001 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Transactions" in the
Company's definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on May 22, 2001 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements.
(1) Financial Statements
The consolidated financial statements and notes are listed under Part II,
Item 8, Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements.
(a) Consolidated balance sheets at December 31, 1999 and 2000.
(b) Consolidated statements of income for the years ended December 31,
1998, 1999 and 2000.
(c) Consolidated statements of stockholders' equity and comprehensive
income for the years ended December 31, 1998, 1999 and 2000.
55
(d) Consolidated statements of cash flows for the Years Ended
December 31, 1998, 1999 and 2000.
(e) Notes to consolidated financial statements.
(2) Financial Statement Schedules
The following financial schedule of Albany Molecular Research, Inc. is
included in this annual report on Form 10-K.
PAGE
NUMBER
--------
Schedule II--Valuation and Qualifying Accounts 58
Schedules other than that which is listed above have been omitted since they
are either not required, are not applicable, or the required information is
shown in the consolidated financial statements or related notes.
(3) Exhibits
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes
to the Consolidated Financial Statements and immediately precedes the exhibits
filed.
(b) Reports on Form 8-K.
On February 9, 2001, the Company filed a Current Report on Form 8-K in
connection with acquisition of New Chemical Entities, Inc.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the
Exhibits listed in the attached Exhibit Index on pages 47 and 48 of this Annual
Report.
(d) Financial Statement Schedules.
The Company hereby files as part of this Annual Report on Form 10-K the
financial statement schedule listed in Item 14(a)(2) set forth above.
56
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.
ALBANY MOLECULAR RESEARCH, INC.
By: /s/ THOMAS E. D'AMBRA, PH.D.
-----------------------------------------
Thomas E. D'Ambra, Ph.D.
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
Dated: March 30, 2001
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
--------- ----- ----
Chairman of the Board,
/s/ THOMAS E. D'AMBRA, PH.D Chief Executive Officer
------------------------------------------- and Director (Principal March 30, 2001
Thomas E. D'Ambra, Ph.D Executive Officer)
Chief Financial Officer and
/s/ DAVID P. WALDEK Treasurer (Principal
------------------------------------------- Financial and Accounting March 30, 2001
David P. Waldek Officer)
/s/ DONALD E. KUHLA, PH.D. President, Chief Operating
------------------------------------------- Officer, Secretary and March 30, 2001
Donald E. Kuhla, Ph.D. Director
/s/ CHESTER J. OPALKA
------------------------------------------- Director March 30, 2001
Chester J. Opalka
/s/ ANTHONY M. TARTAGLIA, M.D.
------------------------------------------- Director March 30, 2001
Anthony M. Tartaglia, M.D.
/s/ FRANK W. HAYDU, III
------------------------------------------- Director March 30, 2001
Frank W. Haydu, III
/s/ KEVIN O'CONNOR
------------------------------------------- Director March 30, 2001
Kevin O'Connor
57
ALBANY MOLECULAR RESEARCH, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1999 AND DECEMBER 31, 2000
DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO CHARGED
BEGINNING COST AND OTHER TO BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES END OF PERIOD
- ----------- ---------- ---------- ---------- ---------- -------------
Allowance for doubtful accounts
1998.................................... $ 30,000 $(30,000) $ -- $ -- $ --
1999.................................... $ -- 165,208 -- (55,208) $110,000
2000.................................... $110,000 -- -- $110,000
Note receivable reserve
1998.................................... $ 84,000 $ -- $ -- $ -- $ 84,000
1999.................................... $ 84,000 -- -- -- $ 84,000
2000.................................... $ 84,000 -- (43,723) $ 40,277
58
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
2.1 Agreement and Plan of Merger, dated as of December 19, 2000,
by and between the Company and NCE Acquisition Corp., New
Chemical Entities, Inc. and Certain Stockholders Thereof
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated January 25, 2001,
File No. 000-25323).
2.2 Stock Purchase Agreement dated as of December 21, 1999 by
and among the Company, Organichem Corporation and the other
parties named therein (incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 21, 1999, File No. 000-25323).
2.3 Debenture Purchase Agreement, dated as of December 21, 1999,
by and among the Company and Organichem Corporation
(incorporated herein by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K/A dated December 21,
1999 and filed on January 5, 2000, File No. 000-25323).
3.1 Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31,1998, File No. 000-25323).
3.2 Amended and Restated By-Laws of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 000-25323).
4.1 Specimen certificate for shares of Common Stock, $0.01 par
value, of the Company (incorporated herein by reference to
Exhibit 4.1 to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (File No. 333-58795)).
10.1 Lease dated as of October 9, 1992, as amended, by and
between the Company and Hoffman Enterprises (incorporated
herein by reference to Exhibit 10.1 to Amendment No. 3 to
the Company's Registration Statement on Form S-1 (File
No. 333-58795)).
10.2 1998 Stock Option and Incentive Plan of the Company
(incorporated herein by reference to Exhibit 10.2 to
Amendment No. 3 to the Company's Registration Statement on
Form S-1 (File No. 333-58795)).
10.3 Amended and Restated 1992 Stock Option Plan of the Company
(incorporated herein by reference to Exhibit 10.3 to
Amendment No. 2 to the Company's Registration Statement on
Form S-1 (File No. 333-58795)).
10.4 1998 Employee Stock Purchase Plan of the Company
(incorporated herein by reference to Exhibit 10.4 to
Amendment No. 2 to the Company's Registration Statement on
Form S-1 (File No. 333-58795)).
10.5 Form of Indemnification Agreement between the Company and
each of its directors (incorporated herein by reference to
Exhibit 10.5 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (File No. 333-58795)).
10.6 License Agreement dated March 15, 1995 by and between the
Company and Marion Merrell Dow Inc. (now Aventis, S.A.)
(excluding certain portions which have been omitted as
indicated based upon an order for confidential treatment,
but which have been filed separately with the Commission)
(incorporated herein by reference to Exhibit 10.7 to
Amendment No. 3 to the Company's Registration Statement on
Form S-1 (File No. 333-58795)).
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.7 Principles of Cooperation Between Albany Molecular Research
and Cambrex Corporation dated February 1, 1997 by and
between the Company and Cambrex Corporation (excluding
certain portions which have been omitted as indicated based
upon an order for confidential treatment, but which have
been filed separately with the Commission) (incorporated
herein by reference to Exhibit 10.8 to Amendment No. 3 to
the Company's Registration Statement on Form S-1 (File
No. 333-58795)).
10.8 Agreement dated December 16, 1997 by and between the Company
and Eli Lilly and Company (excluding certain portions which
have been omitted as indicated based upon an order for
confidential treatment, but which have been filed separately
with the Commission) (incorporated herein by reference to
Exhibit 10.9 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-58795)).
10.9 Technology Development Incentive Plan (incorporated herein
by reference to Exhibit 10.10 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (File
No. 333-58795)).
10.10 Employment Agreement between the Company and Thomas E.
D'Ambra, Ph.D. (incorporated herein by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, File
No. 000-25323).
10.11 Employment Agreement between the Company and Harold Meckler,
Ph.D. (incorporated herein by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, File No. 000-25323).
10.12 Employment Agreement between the Company and Michael P.
Trova, Ph.D. (incorporated herein by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, File
No. 000-25323).
10.13 Form of Employee Innovation, Proprietary Information and
Post-Employment Activity Agreement between the Company and
each of its executive officers (incorporated herein by
reference to Exhibit 10.14 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (File
No. 333-58795)).
10.14 Letter Agreement between the Company and Harold M.
Armstrong, Jr. (incorporated herein by reference o
Exhibit 10.15 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-58795)).
10.15 Employment Agreement between the Company and Donald E.
Kuhla, Ph.D. (incorporated herein by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, File
No. 000-25323).
10.16 Employment Agreement between the Company and Lawrence D.
Jones, Ph.D. (incorporated herein by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, File
No. 000-25323).
10.17 Employment Agreement between the Company and David P. Waldek
(incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, File No. 000-25323).
10.18 Employment Agreement between the Company and James J. Grates
(incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, File No. 000-25323).
10.19 Loan Agreement, dated as of June 29, 1998, by and between
the Company and Fleet National Bank (incorporated herein by
reference to Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, File
No. 000-25323).
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.20 Amendment to Agreements, dated as of February 8, 1999, by
and between the Company and Fleet National Bank
(incorporated herein by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, File No. 000-25323).
10.21 Restated and Revised Lease Agreement, dated as of
December 1, 1999, between the University at Albany
Foundation and the Company (incorporated herein by reference
to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, File
No. 000-25323).
10.22 Amended and Restated Technology Development Incentive Plan
(confidential treatment has been requested as to certain
portions of this Exhibit).
16.1 Letter regarding change in certifying accountant
(incorporated herein by reference to Exhibit 16.1 to the
Company's Current Report on Form 8-K dated April 4, 2000,
File No. 000-25323).
21.1 Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21.1 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (File
No. 333-58795)).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
23.2 Consent of KPMG LLP (filed herewith).