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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, 1999
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
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, Albany, New York 12203
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (518) 464-0279
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
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, 2000 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, 2000. 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, 2000, there were 14,734,763 outstanding shares of the
Registrant's Common Stock.
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 31, 2000.
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- - -------------------------------------------------------------------------------
ALBANY MOLECULAR RESEARCH, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
Page No.
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Part I.
Item 1. Business.............................................. 2
Item 2. Properties............................................ 9
Item 3. Legal Proceedings..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders... 10
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 10
Item 6. Selected Financial Data............................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 25
Item 8. Financial Statements and Supplementary Data........... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 49
Part III.
Item 10. Directors and Executive Officers of the Registrant.... 49
Item 11. Executive Compensation................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 49
Item 13. Certain Relationships and Related Transactions........ 49
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 49
1
PART I
Item 1. Business.
Overview
We are a leading fully integrated provider of drug discovery and
development, chemistry research and manufacturing services to companies in the
pharmaceutical and biotechnology industries. We believe that we are the only
company providing contract chemistry services to customers across the entire
product development cycle from lead discovery to commercial manufacturing. We
offer 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 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 contract 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 $44.8
million in milestones and royalties through December 31, 1999 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.
Service Offerings
Discovery Technologies
We have recently added discovery technologies to our service offerings to
expand our services for lead discovery and optimization. Our discovery
technologies services employ biocatalysis technology, which uses enzymes to
synthesize new compounds, and the creation of combinatorial chemistry libraries
using development and high throughput synthesis technology. Our development
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 discovery technologies give us the capability to:
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Develop lead extensions from unsuccessful Phase II or Phase III clinical
trials,
Create libraries of potential lead compounds,
Improve chemical compounds for currently marketed drugs,
Widen patent coverage,
Improve solubility and/or bioavailability of drug compounds,
Identify active metabolites, and
Perform process research, consisting of the improvement or modification
of existing processes.
Our combinatorial chemistry library technology exists pursuant to the terms
of a technology transfer arrangement between us and Sphinx Pharmaceuticals, a
division of Eli Lilly and Company. Under that agreement, we have been granted a
non-exclusive license to use specified parts of this technology. We have agreed
to pay Sphinx royalties based upon the compensation received by us under
agreements with third parties for the use of this technology through December
2002. In addition, we are obligated to pay Sphinx ongoing royalties based upon
the sales of products comprising compounds discovered or developed by us using
this technology.
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 uneconomic, environmentally
unacceptable or present safety concerns. Our chemical development scientists
design novel or improved methods and processes suitable for medium to large
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scale production. Our chemical development scientists possess expertise in a
broad range of structural classes 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 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 (CMC) sections of investigational new drug applications (IND), new
drug applications (NDA) 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).
4
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 technology for
the development and high throughput screening of combinatorial libraries. We are
currently exploring opportunities for applying our discovery technologies to
promising drug candidates about which 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. In 1999, we spent $1.8
million on proprietary research and development.
Allegra/Telfast Licensing Agreement
Our proprietary research and development efforts to date have led to the
discovery 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 under the name Allegra in the Americas and as
Telfast elsewhere by Aventis. We have obtained several U.S. and foreign patents
relating to TAM and the process chemistry by which TAM is produced. Our issued
patents relating to TAM expire between 2013 and 2015.
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 its original TAM patent
applications. Through December 31, 1999, we have earned $7.2 million in
milestone payments and $37.6 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 $780 million for the year ended
December 31, 1999.
Customers
Since our inception, we have conducted over 500 projects for more than
125 customers. Our customers include primarily 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 11% of our aggregate net
contract revenue plus other operating revenue (including licensing fees,
milestones and royalties) for the year ended December 31, 1999. No other
customers accounted for more than 10% of our aggregate net contract revenue
plus other operating revenue (including licensing fees, milestones and
royalties) for the year ended December 31, 1999. For the year ended December
31, 1999, net contract revenue from our three largest customers respectively
represented approximately 22%, 10% and 10% of total net contract revenue
(excluding licensing fees, milestones and royalties).
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
5
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 website, participation in trade conferences and shows, and extensive
advertisements in scientific and trade journals. We also receive a significant
amount of business from customer referrals and through expansion of existing
contracts.
Historically, we have focused our marketing efforts in the eastern United
States and western Europe. Recently, we expanded our marketing efforts to
include the western United States and Japan. These efforts include increased
presence at trade shows in such areas, advertising in trade publications, visits
by senior management and business development personnel to potential customers
and the retention of independent marketing consultants.
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. 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 received $2.1
million in payments for 1999 under this program. We offer competitive salaries
and benefits to our scientists.
Since January 1, 1999, we have added 114 additional employees, including 78
scientists. As of March 15, 2000, we had 256 employees, including 163 scientists
of whom 65% 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.
6
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.
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 PTO 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 its licensees using the resulting alternative technology.
We have a policy of seeking patent protection for patentable aspects of its
proprietary technology. We own five United States patents, three New Zealand
patents and one Australian patent relating to fexofenadine HCl and certain
related manufacturing processes. Our United States issued patents expire between
7
2013 and 2015 and New Zealand and Australian patents expire in 2014. Through
our merger with Enzymed, we acquired one United States patent relating to a
process of reacting enzymes in a non-aqueous solvent. 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,
with us retaining 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 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 IND
8
Application 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 an 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 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 within the next two years
for $3.5 million towards which we have made a $1.0 million non-refundable
deposit. Our Albany facility has eight medicinal chemistry, four chemical
development and two analytical laboratories, four dedicated cGMP manufacturing
9
suites, four segregated cGMP dryer rooms, three analytical instrumentation
rooms, and two areas for stability chambers. We also lease approximately
40,000-square feet of laboratory facilities in Rensselaer, New York. The lease
for these laboratories expires November 30, 2007, although we may renew the
lease for eight additional five-year periods at our option. Our Rensselaer
facility has three medicinal chemistry, one combinatorial chemistry and three
chemical development laboratories.
We have signed a letter of intent with respect to a ten-year lease for an
additional 10,900-square foot facility adjacent to our Rensselaer, New York
facility. This facility is currently under renovation and is planned to be
occupied during the first quarter of 2001. We may renew the lease for eight
additional five-year periods at our option.
In 1999, we had total operating lease costs of $768,000.
Item 3. Legal Proceedings.
From time to time, we 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 against
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.
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) $ 25.00 $ 19.50
Second Quarter $ 31.00 $ 22.00
Third Quarter $ 36.50 $ 20.50
Fourth Quarter $ 31.75 $ 23.00
(b) Holders. The number of record holders of the Company's Common Stock as of
March 15, 2000 was approximately 189. 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
10
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.
(a) Recent Sale of Unregistered Securities. Set forth in chronological
order below is information regarding the number of unregistered shares of
capital stock issued by us during the quarter ended December 31, 1999.
Further included is the consideration, if any, received by us for such
shares, and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Commission under
which exemption from registration was claimed.
1. In connection with the merger of EnzyMed, Inc. with and into the
Company which was consummated on October 19, 1999, the Company issued
726,056 shares of Common Stock to the EnzyMed stockholders in partial
consideration for their shares of EnzyMed preferred and common stock.
Such shares of Common Stock were issued in reliance on an exemption
from registration under Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder. Pursuant to
information obtained by the Company in connection with the merger, the
Company believes that it may rely on such exemption.
2. In October 1999, the Company issued 168,875 shares of Common Stock
upon the exercise of outstanding stock options under the Company's
1992 Stock Option Plan for an aggregate exercise price of $26,703 to
employees of the Company in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
3. In November 1999, the Company issued 8,257 shares of Common Stock
upon the exercise of outstanding stock options under the Company's
1992 Stock Option Plan for an aggregate exercise price of $4,541 to
employees of the Company in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(b) Use of Proceeds from Registered Securities.
(1) The effective date of the Securities Act registration statement for which
the use of proceeds information is being disclosed was February 3, 1999, and the
Commission file number assigned to the registration statement is 333-58795.
(2) The offering commenced as of February 4, 1999.
(3) The offering did not terminate before any securities were sold.
(4)(i) As of the date of the filing of this report, the offering has
terminated and 2,815,000 of the securities registered were sold.
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(ii) The names of the managing underwriters were ING Baring Furman Selz LLC
and Hambrecht & Quist LLC.
(iii) The Company's Common Stock, par value $0.01 per share, was the class of
securities registered.
(iv) The Company registered 2,875,000 shares of its Common Stock (which
includes 375,000 solely to cover over-allotments), having an aggregate price of
the offering amount registered of $57.5 million. As of the date of the filing of
this report, 2,815,000 of the total shares registered have been sold at an
aggregate offering price of $56.3 million.
(v) From February 4, 1999 to the date hereof, the amount of expenses incurred
by the Company in connection with the issuance and distribution of the
securities totaled $4.9 million, which consisted of direct payments of: (i) $0.8
million in legal, accounting and printing fees; (ii) $3.9 million in
underwriters discount, fees and commissions; and (iii) $0.2 million in
miscellaneous expenses. No payments for such expenses were made to (i) any of
the Company's directors, officers, general partners or their associates, (ii)
any person(s) owning 10% or more of any class of equity securities of the
Company or (iii) the Company's affiliates.
(vi) The net offering proceeds to the Company after deducting our total
expenses was $51.4 million.
(vii) We used the net proceeds as follows: (i) approximately $7.9 million was
used to repay indebtedness incurred in connection with the repurchase by the
Company on October 28, 1998 of a total of 1,131,903 shares of Common Stock from
our former chief financial officer and a trust for the benefit of his family for
an aggregate purchase price of approximately $9.9 million (the "Share
Repurchase"); (ii) approximately $5.0 million was used to repay the Company's
outstanding indebtedness under its existing credit facility with Fleet Bank,
N.A., including fees and accrued and unpaid interest; and (iii) approximately
$30 million was used for the purchase of common stock and convertible
subordinated debentures of Organichem Corporation. Other than in connection with
the Share Repurchase, no such payments were made to (i) any of our directors,
officers, general partners or their associates, (ii) any person(s) owning 10% or
more of any class of equity securities of the Company or (iii) our Company's
affiliates.
(viii) The uses of proceeds described do not represent a material change in
the use of proceeds described in our prospectus.
Item 6. Selected Financial Data.
Year Ended December 31,
-----------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net contract revenue............... $2,984 $ 5,499 $ 8,209 $13,649 $22,027
Cost of contract revenue........... 1,373 3,052 4,430 7,733 12,491
------ ------- ------- ------- -------
Gross profit from contract
revenue........................... 1,611 2,447 3,779 5,916 9,536
Licensing fees, milestones and
12
royalties, net.................... -- 900 2,278 17,823 19,312
Operating expenses:
Research and development........... 579 813 1,520 1,782 1,827
Selling, general and
administrative.................... 1,324 1,786 2,881 5,109 6,873
------ ------- ------- ------- -------
Total operating expenses......... 1,903 2,599 4,401 6,891 8,700
------ ------- ------- ------- -------
Income (loss) from operations...... (292) 748 1,656 16,848 20,148
Other income (expense):
Interest income (expense), net..... 98 25 40 37 2,000
Equity in (net loss) of unconsolidated
affiliate.......................... -- -- -- -- (98)
Other non-operating income
(expense), net.................... 6 20 (28) (36) (81)
------ ------- ------- ------- -------
Total other income (expense)..... 104 45 12 1 1,821
------ ------- ------- ------- -------
Income (loss) before income taxes.. (188) 793 1,668 16,849 21,969
Income tax (benefit) expense....... (239) 244 373 6,352 8,195
------ ------- ------- ------- -------
Net income......................... $ 51 $ 549 $ 1,295 $10,497 $13,774
====== ======= ======= ======= =======
Basic earnings per share........... $ -- $ 0.05 $ 0.11 $ 0.93 $ 1.02
Diluted earnings per share......... $ -- $ 0.05 $ 0.10 $ 0.82 $ 0.93
Weighted average common shares
outstanding, basic................ 10,701 11,185 11,335 11,348 13,566
Weighted average common shares
outstanding, diluted.............. 11,525 12,139 12,409 12,773 14,817
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $1,079 $ 2,942 $ 2,582 $ 5,320 $ 2,672
Investment securities, available-
for-sale.......................... 1,913 1,735 1,950 2,027 21,172
Working capital.................... 3,145 4,588 5,542 9,142 34,432
Total assets....................... 6,838 11,326 13,548 32,630 88,242
Long-term debt, less current
maturities........................ 748 2,375 1,776 13,349 168
Total stockholders' equity......... $4,897 $ 7,456 $ 9,799 $12,824 $82,920
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. 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.
Overview
13
We were founded in 1991 with the mission to provide a broad range of
chemistry services throughout the drug discovery and development process. As our
customers' needs have expanded and contract chemistry research has increased, we
have expanded our service offerings and physical facilities. In January 1994, we
added our first cGMP manufacturing facility and in May 1996, we added analytical
chemistry services. We completed a 60,000 square foot expansion of our Albany,
New York facility in January 1999. We have begun an expansion of our operations
at our Rensselaer, New York site. This expansion will accommodate additional
medicinal chemistry and chemical development laboratories.
Recent Acquisitions. In October 1999, we completed a merger with
EnzyMed, Inc., a provider of combinatorial biocatalysis discovery services in
which the former stockholders of EnzyMed received shares of our stock valued
at $20.6 million. The merger was accounted for as a pooling-of-interests.
EnzyMed provided us with a combinatorial biocatalysis platform for drug
discovery technology. The acquired technology uses enzymes and microbial
systems to produce new synthetic transformations of compounds. This
technology also produces greater diversity of novel compounds suitable for
lead discovery and optimization.
In December 1999, we made an investment in Organichem Corporation, a
Delaware corporation. Organichem was formed through a management buyout of
the Nycomed Amersham, plc chemical manufacturing facility located in
Rensselaer, New York. We acquired shares of common stock of Organichem,
representing 37.5% of Organichem, for an aggregate purchase price of $15.0
million. We also lent $15.0 million to Organichem in the form of a
convertible subordinated debenture. The debenture is convertible at our
option in 2003 into a number of shares sufficient to give us 75% ownership of
Organichem. We can, at that time, acquire the remaining 25% of Organichem for
a price to be determinable based upon Organichem's financial performance,
which can be between $15.0 million and $30.0 million payable in cash or a
combination of cash and stock at our option. In addition, the other holders
of ownership interests in Organichem have the right to require us to purchase
their ownership interests in Organichem in 2004 based on price calculated
using a predetermined formula.
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. An additional $800,000 in the aggregate may be paid out in 2000 and
2001 based on the financial performance of AAO.
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, the duration of the contract period,
14
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 limited extent, a fixed price basis.
Typically, our full-time equivalent contracts have six month to indefinite
time periods and our time and materials contracts have three to twelve month
periods. 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 days' to
one-years' 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, net
Net licensing fees, milestones and royalties consist of licensing fees,
milestones and royalties net of technology incentive award expense incurred
under our Technology Development Incentive Plan. We maintain a Technology
Development Incentive Plan, the purpose of which is to stimulate and encourage
novel innovative technology development, which allows eligible participants to
share in awards based on 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.
We earn royalties from Aventis under a license agreement based on sales of
fexofenadine HCl, marketed as Allegra in the Americas and as Telfast elsewhere.
Although we entered into the license agreement with Aventis in 1995, we began to
recognize royalty revenue related to U.S. sales under that agreement in February
1998, due to the significant time taken for issuance of our patents and the
resolution of related patent interference claims. In 1998, we received $3.7
million in non-recurring milestone payments and $4.4 million in royalties
related to prior periods. Royalty payments are due within 45 days after the end
of a calendar quarter and determined based on such quarter's sales. 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.
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
the discovery of new products which reach the market. To date, we have not
received any milestone or royalty payments under these arrangements, other than
from Aventis.
Research and development
Research and development expense consists of payments in connection with
collaborations with academic institutions, compensation and benefits for
15
scientific personnel for work performed on proprietary research projects and
costs of supplies and chemicals related thereto.
Selling, general and administrative expense
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 consists of interest income, interest expense, our equity
in the net income or loss from our unconsolidated affiliate Organichem,
realized gains or losses on sales of investment securities, and other
non-operating income net of interest expense and non-operating expenses.
Results of Operations
The following table sets forth, for the periods indicated, selected
consolidated statement of operations data for the periods indicated as a
percentage of net contract revenue:
Year ended December 31,
-----------------------
1997 1998 1999
------ ------ ------
Consolidated Statement of Operations Data:
Net contract revenue 100.0% 100.0% 100.0%
Cost of contract revenue 54.0 56.7 56.7
----- ----- -----
Gross profit from contract revenue 46.0 43.3 43.3
Licensing fees, milestones and royalties, net 27.8 130.6 87.7
Operating expenses:
Research and development 18.5 13.1 8.3
Selling, general and administrative 35.1 37.4 31.2
----- ----- -----
Total operating expenses 53.6 50.5 39.5
Income from operations 20.2 123.4 91.5
Other income (expense):
Interest income (expense), net 0.4 0.3 9.1
Equity in net loss of unconsolidated affiliate 0.0 0.0 (0.4)
Other non-operating income (expense), net (0.3) (0.3) (0.3)
----- ----- -----
Total other income (expense), net 0.1 0.0 8.2
Income before income tax expense 20.3 123.4 99.7
Income tax expense 4.5 46.5 37.2
Net income 15.8% 76.9% 62.5%
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
16
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.
Gross profit. Gross profit increased 61.0% to $9.5 million in 1999 from
$5.9 million in 1998. Gross profit remained relatively constant as a percentage
of net contract revenue.
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties increased 8.4% to $19.3 million in 1999 from $17.8
million in 1998. As a result of the February 1998 United States Patent &
Trademark Office ("PTO") 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. We recognized $21.4 million in royalties on sales of
fexofenadine HCl for 1999, reduced by $2.1 million paid under our Technology
Development Incentive Plan. 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.
Research and development. Research and development expense remained
constant at $1.8 million in 1999 and 1998.
Selling, general and administrative. Selling, general and administrative
expense increased 35.3% to $6.9 million in 1999 from $5.1 million in 1998 and
represented 31.4% of net contract revenue in 1999 compared to 37.5% in 1998.
The increased expense was due principally to transaction expenses related to
our merger with EnzyMed as well as a general increase in administrative and
marketing staff to support the expansion of our operations, increased
expenses for recruitment of scientists, increased rent expense related to the
ongoing expansion of our Albany facility and expenses related to being a
publicly traded entity.
Total other income (expense), net. Total net other income was $1.8
million in 1999. 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. Our investment in
Organichem was completed in December 1999. As a result, we expect that our
investment in Organichem will have a more substantial effect on our total
other income in future periods.
Income tax expense. Income tax expense increased to $8.2 million in 1999
from $6.4 million in 1998. The dollar increase in income tax expense was
attributable to an increase in taxable income generated by us, although the
effective tax rate on our net income remained consistent between periods at 37%.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net contract revenue. Net contract revenue increased 66.3% to $13.6 million
in 1998 from $8.2 million in 1997. 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 101 at December 31, 1998 from 55
at December 31, 1997.
17
Gross profit. Gross profit increased 55.3% to $5.9 million in 1998 from
$3.8 million in 1997. Gross profit remained relatively constant as a percentage
of net contract revenue.
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties increased 682.4% to $17.8 million in 1998 from $2.3
million in 1997. As a result of the February 1998 PTO 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. We recognized $19.6
million in milestones and royalties on all worldwide sales of fexofenadine
HCl for 1998. All licensing fees, milestones and royalties associated with
the Aventis license are subject to the Technology Development Incentive Plan.
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.
Research and development. Research and development expense increased 20.0%
to $1.8 million in 1998 from $1.5 million in 1997. The increase was due
primarily to expenses related to biological assay study agreements with third
parties pertaining to two of our proprietary research programs which commenced
in February 1997 and July 1997, respectively.
Selling, general and administrative. Selling, general and administrative
expense increased 82.1% to $5.1 million in 1998 from $2.8 million in 1997 and
represented 37.4% of net contract revenue in 1998 compared to 35.1% in 1997. The
increase was due to a general increase in administrative and marketing staff to
support the expansion of our operations, increased expenses for recruitment of
scientists, increased rent expense related to the ongoing expansion our Albany
facility and a one-time expense of $200,000 incurred in early 1998 as a result
of partial reimbursement to our landlord for expenses incurred by the landlord
in relocating other tenants in order to facilitate our Albany, New York
expansion.
Income tax expense. Income tax expense increased to $6.3 million in 1998
from $0.4 million in 1997. The effective rate was 37.7% in 1998 and 22.4% in
1997. The increase in income tax expense was primarily a result of the
increase in contract revenue, royalty and licensing fees. The change in the
effective income tax rate principally resulted from the utilization of New
York state investment tax credits in 1997, an increase in the minimum
effective federal rate from 34% to 35% due to the fact that our taxable
income was in excess of $10.0 million for 1998, and utilization of net
operating losses generated by EnzyMed.
Liquidity and Capital Resources
We have funded our business through cash flows from operations, proceeds
from borrowings and the issuance of equity securities. During the years ended
December 31, 1999, 1998 and 1997, we generated $13.0 million, $10.2 million and
$381,000, respectively, in cash flow from operations and raised $500,000 and
$7.0 million in borrowings during the years ended December 31, 1999 and 1998,
respectively. We had no additional borrowings during 1997. The increase in our
cash flows for the years ended December 31, 1999 and 1998 were principally due
to an increase in net licensing fees, milestones and royalties.
18
During the years ended December 31, 1999, 1998 and 1997, total capital
expenditures were $2.7 million, $11.6 million and $910,000, respectively.
Capital expenditures were incurred predominantly in connection with the our
expansion of service offerings (computational chemistry and analytical services)
in 1997, and in connection with our 1998 facilities expansions. In January 1999,
we completed our most recent phase of expansion at our location in Albany, New
York. The expansion has added 60,000 square feet to our existing 30,500 square
feet of laboratory and administrative space. The expansion costs were
approximately $11.0 million.
For the year ended December 31, 1999, we generated $38.5 million from
financing activities, consisting of $51.4 million from our February 1999
initial public offering of 2,815,000 shares of common stock, net of $12.9
million of the proceeds used to repay outstanding long-term debt. During the
year ended December 31, 1999, we also used $40.5 million to purchase
additional investment securities. In order to raise cash for our purchase of
an equity interest and convertible subordinated debenture in Organichem, we
sold $21.2 million of investment securities during 1999. The 37.5% equity
investment in Organichem on December 21, 1999 used approximately $15.1
million in cash, while the purchase of the subordinated debenture in
Organichem used approximately $15.0 million in cash. In addition, we used
$2.2 million from operating cash flow to pay outstanding debt.
Our working capital was $34.4 million at December 31, 1999, compared to
$9.1 million at December 31, 1998, and $5.5 million at December 31, 1997. The
increase in our working capital for the years ended December 31, 1999 and
1998 was primarily attributable to the milestones and royalties earned from
our license agreement with Aventis, less the associated technology incentive
compensation expense. Of the $19.6 million in milestones and royalties we
earned under the license agreement during the year ended December 31, 1998,
$3.7 million constituted non-recurring milestone payments and $4.4 million
constituted royalties relating to prior periods. While we will continue to
receive quarterly royalty payments under the Aventis license agreement, no
additional milestone payments are due under the agreement. In addition,
future royalties under the agreement are dependent upon future sales of
fexofenadine HCl. We do not participate in the manufacture, marketing or sale
of fexofenadine HCl by Aventis and rely entirely on the efforts of Aventis to
manufacture, market and sell this product. There can be no assurance that
Aventis will continue to be successful in marketing and selling fexofenadine
HCl, that fexofenadine HCl will continue to receive market acceptance or that
we will continue to receive royalties from Aventis in accordance with the
terms of the license agreement. The occurrence of any one of these events in
the future could have a material adverse impact on our working capital,
liquidity and capital resources.
We have available a bank credit facility to supplement our liquidity needs.
The bank credit facility consists of a $25 million, three-year, revolving line
of credit, which converts thereafter into a five-year term loan. The bank credit
facility expires in June 2006. Amounts outstanding under the bank credit
facility bear interest at variable rates which are based upon, at our option,
the lender's prime rate or LIBOR. As of December 31, 1999, we had no outstanding
indebtedness under our credit facility. The interest rate on the credit facility
at December 31, 1999 was 6.99% per annum. The bank credit facility restricts or
prohibits us from incurring indebtedness, incurring liens, disposing of assets
and requires us to maintain certain financial ratios on an ongoing basis. The
bank credit facility is secured by a lien on substantially all of our assets,
19
other than our patents, and the assignment of the right to receive royalty
payments from Aventis under the license agreement.
We used $5.0 million of the net proceeds from our initial public offering
to repay our outstanding indebtedness under the bank credit facility. On October
28, 1998, we paid $2.0 million in cash from borrowings under the bank credit
facility and issued $7.9 million in promissory notes in connection with our
repurchase of a total of 1,131,903 shares of common stock from our former chief
financial officer and a trust for the benefit of his family. We repaid the
outstanding principal balance under the promissory notes out of the net proceeds
of our initial public offering. We also used $30.1 million of the net proceeds
of the initial public offering for our equity investment in and purchase of a
subordinated debenture from Organichem.
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 above and except for
the historical information contained herein, the discussion contained in this
Form 10-K contains "forward-looking statements" that involve risk and
uncertainties within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. 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 that we
need.
Our future growth and profitability depends upon the research and work of
our highly skilled employees, such as our scientists, and their ability to keep
pace with changes in drug discovery and development technologies. 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. 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.
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 pharmaceutical and
biotechnology companies are generally growing and 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, our
revenues and earnings could be lower than we expect and our revenues may not
grow at historical rates or at all.
Our revenues may decrease if we lose any one of our major customers.
In 1999, we earned approximately 42% of our contract revenues providing
services to three major customers. Many of our major customers may cancel their
contracts with thirty to ninety days notice for a variety of reasons, many of
20
which are out of our control. If any one of our major customers cancels its
contract with us, our contract revenues may decrease.
The royalties we earn on Allegra may decrease.
We have 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 Allegra and
in the rest of the world under the brand name Telfast. For the year ended
December 31, 1999, our revenues from the license were $21.4 million, which
was approximately 49% of our total revenues. However, Allegra sales may
decrease for a variety of reasons, including the introduction of a superior
drug into the marketplace 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 even though we intend
to expend time and money on our research and development efforts.
We intend to expend time and money on research and development with the
intention of producing proprietary technologies in order to patent and then
license it 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 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, efforts to protect our patents and
trade secrets may be costly and time consuming to pursue. To the extent we are
unable to protect intellectual property, our investment in those technologies
will not yield the benefits that we expected.
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 developed by other companies that we license. 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 that 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.
21
Our business has expanded rapidly in the past several years.
However, we cannot assure you that our business will continue to expand.
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 may engage in acquisitions and strategic relationships. 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 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. We may have to devote a
significant amount of time and management and financial resources to do so. Even
with this investment of management and financial resources, an acquisition may
not produce the revenues, earnings or business synergies that we anticipated. 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, from
an accounting perspective, 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.
In October 1999, we merged with EnzyMed, Inc., a provider of
combinatorial biocatalysis discovery services based in Iowa. In February 2000,
we acquired American Advanced Organics, Inc., a contract manufacturer of gram to
multi-kilogram lots of novel compounds, pharmaceutical intermediates, and test
drug substances. We may not be able to successfully integrate either of these
acquisitions with our other operations and the 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 buy-out 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 these interests at a price which is higher than the fair
market value of these interests at the time of purchase, which would negatively
impact our financial condition.
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
22
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 may be affected by the seasonal nature of
allergies.
Allergic reactions to plants, pollens and other airborne allergens
occur only 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 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 us. 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 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 test, develop or manufacture
harms people, we may be required to pay damages to those persons. Although we
carry product liability insurance, we may be required to pay damages in excess
of the amounts of our insurance coverage. Damages awarded in a products
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
23
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 facilities in Albany.
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 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 most of our revenues. We therefore depend upon the ability of pharmaceutical
and biotechnology companies to earn enough on the drugs they market to devote
substantial resources to the research and development of new drugs. We expect
that politicians and others may try to enact laws which would limit the prices
pharmaceutical and biotechnology companies can charge for the drugs they market.
Such laws may have the effect of reducing the 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 affect a change of
control of our company is limited, which may not be in our stockholders' 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.
24
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
25
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Albany Molecular Research, Inc.:
We have audited the accompanying consolidated financial statements of
Albany Molecular Research, Inc. and subsidiary as listed in the accompanying
index on pages 49 and 50. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Albany
Molecular Research, Inc. and subsidiary at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. 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
26
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
1998 1999
---------------- ---------------
Assets
Current assets:
Cash and cash equivalents .......................................................... $ 5,319,872 $ 2,672,848
Short-term investment .............................................................. -- 1,000,000
Accounts receivable (net of allowance for doubtful accounts of $0
and $110,000 at December 31, 1998 and 1999, respectively) .......................... 2,875,898 4,221,745
Current installment of notes receivable - related party ............................ 20,000 20,000
Royalty income receivable .......................................................... 3,256,498 5,382,200
Investment securities, available-for-sale .......................................... 2,026,620 21,172,131
Inventory .......................................................................... 575,526 1,116,312
Unbilled services .................................................................. 105,036 76,140
Income tax prepayments ............................................................. 517,840 3,079,551
Prepaid expenses and other current assets .......................................... 901,587 845,082
------------ ------------
Total current assets ............................................................. 15,598,877 39,586,009
------------ ------------
Property and equipment, net ........................................................... 14,866,298 15,879,404
------------ ------------
Other assets:
Patents and patent application costs ............................................... 326,142 331,912
Notes receivable, excluding current installment - related party .................... 60,000 40,000
Deferred income taxes .............................................................. 1,639,188 1,328,818
Equity investment in unconsolidated affiliate ...................................... -- 15,032,826
Convertible subordinated debenture from unconsolidated affiliate ................... -- 15,000,000
Other assets ..................................................................... 139,143 1,042,770
------------ ------------
Total other assets ............................................................... 2,164,473 32,776,326
------------ ------------
Total assets ..................................................................... $ 32,629,648 $ 88,241,739
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................................... $ 1,501,033 $ 803,527
Unearned income .................................................................... 1,748,358 1,480,020
Customer deposits .................................................................. 182,293 278,292
Accrued compensation ............................................................... 986,496 1,947,703
Accrued expenses ................................................................... 451,493 557,262
Current installments of long-term debt ............................................. 1,587,168 86,953
------------ ------------
Total current liabilities ........................................................ 6,456,841 5,153,757
Long-term liabilities:
Long-term debt, excluding current installments ..................................... 13,348,672 167,515
------------ ------------
Total liabilities ................................................................ 19,805,513 5,321,272
------------ ------------
Commitments and contingencies (Notes 3, 9, 10, 11 and 12)
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 1,000,000 shares, issued
and outstanding 100,000 shares in 1998 and 0 shares in 1999 ..................... 1,000 --
Common stock, $0.01 par value, authorized 50,000,000 shares; issued
11,771,584 shares in 1998 and 14,593,559 in 1999; outstanding
10,639,681 in 1998 and 14,593,559 in 1999 ........................................ 117,715 145,935
Additional paid-in capital ......................................................... 10,758,376 57,073,484
Retained earnings .................................................................. 11,941,947 25,716,331
Accumulated other comprehensive income (loss) ...................................... 66,457 (15,283)
------------ ------------
22,885,495 82,920,467
Treasury stock, at cost ............................................................ (10,061,360) --
------------ ------------
Total stockholders' equity ....................................................... 12,824,135 82,920,467
------------ ------------
Total liabilities and stockholders' equity ......................................... $ 32,629,648 $ 88,241,739
============ ============
See Accompanying Notes to Consolidated Financial Statements.
27
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------
1997 1998 1999
----------------- --------------- --------------
Contract revenue ................................ $ 8,910,011 $ 14,308,220 $ 23,383,615
Reimbursed expenses ............................. (701,034) (658,875) (1,356,796)
------------ ------------ ------------
Net contract revenue ............................ 8,208,977 13,649,345 22,026,819
Cost of contract revenue ........................ 4,430,016 7,733,504 12,491,213
------------ ------------ ------------
Gross profit from contract revenue .............. 3,778,961 5,915,841 9,535,606
------------ ------------ ------------
Other operating revenue:
Non-recurring licensing fees, milestones and
royalties..................................... 2,500,000 8,068,921 --
Recurring royalties .......................... 30,871 11,575,931 21,444,037
Technology incentive award ................... (253,093) (1,821,628) (2,131,839)
------------ ------------ ------------
Other operating revenue, net ............... 2,277,778 17,823,224 19,312,198
------------ ------------ ------------
Operating expenses:
Research and development ..................... 1,520,038 1,782,294 1,827,477
Selling, general and administrative .......... 2,881,059 5,109,002 6,872,734
------------ ------------ ------------
Total operating expenses ................... 4,401,097 6,891,296 8,700,211
------------ ------------ ------------
Income from operations .......................... 1,655,642 16,847,769 20,147,593
------------ ------------ ------------
Other income (expense):
Equity in net loss of unconsolidated
affiliate .................................... -- -- (98,025)
Interest expense ............................. (175,969) (381,821) (158,169)
Interest income .............................. 216,121 419,398 2,158,248
Realized loss on sale of investment securities -- -- (65,794)
Other non-operating expense, net ............. (27,537) (36,555) (14,357)
------------ ------------ ------------
Total other income (expense), net ......... 12,615 1,022 1,821,903
------------ ------------ ------------
Income before income tax expense ................ 1,668,257 16,848,791 21,969,496
Income tax expense .............................. 372,941 6,351,338 8,195,112
------------ ------------ ------------
Net income ...................................... $ 1,295,316 $ 10,497,453 $ 13,774,384
============ ============ ============
Earnings per common share:
Basic ........................................... $ 0.11 $ 0.93 $ 1.02
============ ============ ============
Diluted ......................................... $ 0.10 $ 0.82 $ 0.93
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
28
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years Ended December 31, 1997, 1998 and 1999
Common Stock
-----------------------
Number $0.01 Additional
Preferred of Par Paid-in Retained
Stock Shares Value Capital Earnings
------------------------------------------------------------------------------------
Balances at December 31, 1996, as
previously reported...........................$ 1,000 10,755,327 $ 107,553 $ 2,584,152 $ 1,694,164
EnzyMed pooling of interests .................. -- 573,517 5,735 4,584,661 (1,544,986)
------------------------------------------------------------------------------------
Balances at December 31, 1996, as
restated ...................................... 1,000 11,328,844 113,288 7,168,813 149,178
Comprehensive income:
Net income .................................... -- -- -- -- 1,295,316
Unrealized gain on investment
securities, available-for-sale,
net of tax of $20,572 ......................... -- -- -- -- --
Total comprehensive income ....................
Issuance of common stock in
connection with stock option
plan .......................................... -- 15,440 154 24,484 --
Sale of common stock, net of
issuance expenses of $7,770 ................... -- 40,594 406 991,824 --
------------------------------------------------------------------------------------
Balances at December 31, 1997 ................. 1,000 11,384,878 113,848 8,185,121 1,444,494
Comprehensive income:
Net income .................................... -- -- -- 10,497,453
Unrealized gain on investment
securities, available-for-sale,
net of tax of $7,968 .......................... -- -- -- -- --
Total comprehensive income ....................
Purchase of 1,131,903 shares
for treasury stock ............................ -- -- -- --
Issuance of common stock in
connection with stock option
plan .......................................... -- 298,158 2,981 187,748 --
Accumulated
Other Comprehensive
Comprehensive Treasury Income
Income (Loss) tock Total (Loss)
-----------------------------------------------------------------------
Balances at December 31, 1996, as
previously reported........................... $ 23,645 $ -- $ 4,410,514
EnzyMed pooling of interests ................. -- -- 3,045,410
----------------------------------------------------
Balances at December 31, 1996, as
restated ..................................... 23,645 -- 7,455,924
Comprehensive income:
Net income ................................... -- -- 1,295,316 $ 1,295,316
Unrealized gain on investment
securities, available-for-sale,
net of tax of $20,572 ........................ 30,858 -- 30,858 30,858
------------
Total comprehensive income ................... $ 1,326,174
Issuance of common stock in ============
connection with stock option
plan ......................................... -- -- 24,638
Sale of common stock, net of
issuance expenses of $7,770 .................. -- -- 992,230
----------------------------------------------------
Balances at December 31, 1997 ................ 54,503 -- 9,798,966
Comprehensive income:
Net income ................................... -- -- 10,497,453 $ 10,497,453
Unrealized gain on investment
securities, available-for-sale,
net of tax of $7,968 ......................... 11,954 -- 11,954 11,954
Total comprehensive income ................... $ 10,509,407
Purchase of 1,131,903 shares
for treasury stock ........................... -- (10,061,360) (10,061,360)
Issuance of common stock in
connection with stock option
plan ......................................... -- -- 190,729
29
Number $0.01 Additional
Preferred of Par Paid-in Retained
Stock Shares Value Capital Earnings
------------------------------------------------------------------------------------
Tax benefit from exercise of
stock options ................................. -- -- 742,576 --
Sale of common stock, net of
issuance expenses of $6,182 ................... -- 88,548 886 1,642,931 --
----- ---------- ------- ---------- ----------
Balances at December 31, 1998 ................. 1,000 11,771,584 117,715 10,758,376 11,941,947
Comprehensive income:
Net income .................................... -- -- -- 13,774,384
Unrealized loss on investment
securities, available-for-sale,
net of tax benefit of $54,492 ................. -- -- -- -- --
Total comprehensive income ....................
Conversion of 100,000 shares of preferred stock
. ............................................. (1,000) 45,000 450 550
Issuance of common stock in
connection with stock option
plan .......................................... -- 1,093,871 10,939 1,800,995 --
Tax benefit from exercise of
stock options ................................. -- -- -- 3,204,075
Sale of 1,683,097 shares of
common stock and reissuance of
1,131,903 shares of treasury
stock, net of issuance
expenses of $971,321 .......................... -- 1,683,097 16,831 41,309,488 --
Balances at December 31, 1999 ................. $-- 14,593,552 $ 145,935 $ 57,073,484 $ 25,716,331
Accumulated
Other Comprehensive
Comprehensive Treasury Income
Income (Loss tock Total (Loss)
------------------------------------------------------------------------------------
Tax benefit from exercise of
stock options ................................. -- -- 742,576
Sale of common stock, net of
issuance expenses of $6,182 ................... -- -- 1,643,817
Balances at December 31, 1998 ................. 66,457 (10,061,360) 12,824,135
Comprehensive income:
Net income .................................... -- -- 13,774,384 $ 13,774,384
Unrealized loss on investment
securities, available-for-sale,
net of tax benefit of $54,492 ................. (81,740) -- (81,740) (81,740)
------------
Total comprehensive income .................... $ 13,692,644
============
Conversion of 100,000 shares of preferred stock
. ............................................. -- -- -- --
Issuance of common stock in
connection with stock option
plan .......................................... -- -- 1,811,934
Tax benefit from exercise of
stock options ................................. -- -- 3,204,075
Sale of 1,683,097 shares of
common stock and reissuance of
1,131,903 shares of treasury
stock, net of issuance
expenses of $971,321 .......................... -- 10,061,360 51,387,679
---------- ------------ ----------- ------------
Balances at December 31, 1999 ................. $ (15,283) $ -- $82,920,467
========== ============ =========== ============
See Accompanying Notes to Consolidated Financial Statements.
30
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Operating Activities:
Net income....................................... $ 1,295,316 $ 10,497,453 $ 13,774,384
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 780,582 1,170,631 1,825,179
Net realized loss on sale of investment securities -- -- 65,794
Net loss on sale of assets.................... 9,398 44,005 --
Provision for doubtful accounts............... 114,000 (30,000) 165,208
Equity in net loss of unconsolidated affiliate -- -- 98,025
Provision for deferred taxes.................. (613,919) (394,787) 364,862
Forgiven principal on notes receivable-related
party......................................... -- 20,000 20,000
Change in operating assets and liabilities:
Increase in accounts receivable............... (1,233,543) (895,301) (1,511,052)
Increase in royalty income receivable......... -- (3,256,498) (2,125,702)
Increase in inventory......................... (51,581) (257,737) (540,786)
Decrease in unbilled services................. 9,300 87,786 28,896
Decrease (increase) in income taxes........... (651,061) 261,121 642,364
Decrease (increase) in prepaid expenses and other
current assets................................ (103,511) (360,148) 56,505
Increase (decrease) in accounts payable....... 576,970 560,751 (697,506)
Increase (decrease) in accrued compensation and
accrued expenses.............................. 2,932 1,413,106 1,066,976
Increase (decrease) in customer deposits...... 37,293 (20,000) 95,999
Increase (decrease) in unearned income........ 209,131 1,391,350 (268,338)
----------------- ----------------- -----------------
Net cash provided by operating activities........ 381,307 10,231,732 13,060,808
----------------- ----------------- -----------------
Investing Activities:
Purchases of investment securities............ (163,217) (57,151) (40,530,676)
Proceeds from sales of investment securities.. -- -- 21,183,139
Purchase of equity investment in unconsolidated
affiliate..................................... -- -- (15,130,851)
Purchase of convertible subordinated debenture
from unconsolidated affiliate................. -- -- (15,000,000)
Purchases of property and equipment........... (910,244) (11,614,526) (2,720,981)
Proceeds from sale of equipment............... 4,265 12,625 --
Purchase of customer list..................... -- (18,000) --
Payments for patent application and other related
costs......................................... (80,509) (201,272) (26,704)
Payment for lease deposit..................... -- -- (1,000,000)
Net increase in short-term investment......... -- -- (1,000,000)
----------------- ----------------- -----------------
Net cash used in investing activities......... (1,149,705) (11,878,324) (54,226,073)
----------------- ----------------- -----------------
Financing Activities:
Principal payments on long-term debt.......... (604,683) (2,223,708) (15,181,489)
Principal payments under capital lease obligations (3,550) (1,256) --
Proceeds from borrowings under long-term debt. -- 7,000,000 500,117
Payment to acquire treasury shares............ -- (2,125,520) --
Proceeds from sale of common stock............ 1,016,868 1,734,546 53,199,613
----------------- ----------------- -----------------
Net cash provided by financing activities........ 408,635 4,384,062 38,518,241
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents. (359,763) 2,737,470 (2,647,024)
Cash and cash equivalents at beginning of year... 2,942,165 2,582,402 5,319,872
----------------- ----------------- -----------------
Cash and cash equivalents at end of year......... $ 2,582,402 $ 5,319,872 $ 2,672,848
================= ================= =================
Supplemental disclosure of non-cash investing and
financing activities:
Purchase of treasury stock through issuance
of long-term debt........................... $ -- $ 7,935,840 $ --
Common stock issued for purchase of
customer list............................... $ -- $ 100,000 $ --
Common stock issued for relocation incentive.. $ -- $ 200,000 $ --
Increase (decrease) in net unrealized gain on
securities available-for sale, net of tax... $ 30,858 $ 11,954 $ (81,740)
Tax benefit from exercise of stock options.... $ -- $ 742,576 $ 3,204,075
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................... $ 175,969 $ 381,821 $ 158,169
Income taxes................................ $ 1,637,921 $ 6,209,012 $ 7,187,885
See Accompanying Notes to Consolidated Financial Statements.
31
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
1. Summary of Significant Accounting Policies
Nature of Business:
Albany Molecular Research, Inc. (the "Company") is an integrated
provider of drug discovery and development, chemistry research and
manufacturing services to companies in the pharmaceutical and biotechnology
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. 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 mar