<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1998
REGISTRATION STATEMENT NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
ALBANY MOLECULAR RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 2833 14-1742717
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
--------------
21 CORPORATE CIRCLE, ALBANY, NEW YORK 12203
(518) 464-0279
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
--------------
THOMAS E. D'AMBRA, PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ALBANY MOLECULAR RESEARCH, INC.
21 CORPORATE CIRCLE
ALBANY, NEW YORK 12203-5154
(518) 464-0279
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
STUART M. CABLE, ESQ. ALEXANDER D. LYNCH, ESQ.
GOODWIN, PROCTER & HOAR LLP BABAK YAGHMAIE, ESQ.
EXCHANGE PLACE BROBECK, PHLEGER & HARRISON LLP
BOSTON, MASSACHUSETTS 02109-2881 1633 BROADWAY
(617) 570-1000 NEW YORK, NEW YORK 10019
(212) 581-1600
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share....... 2,530,000 Shares $17.00 $43,010,000 $12,688
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 330,000 shares of Common Stock which the underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 9, 1998
PROSPECTUS
2,200,000 SHARES
[ALBANY MOLECULAR RESEARCH, INC. LOGO APPEARS HERE]
COMMON STOCK
All of the 2,200,000 shares of Common Stock offered hereby are being sold by
Albany Molecular Research, Inc. ("Albany Molecular Research" or the "Company").
Prior to this offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $15.00 and $17.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for the quotation of the Common Stock
on the Nasdaq National Market upon completion of this offering under the symbol
"AMRI."
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
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Total(3)...................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 330,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters subject to receipt
and acceptance by them and to their right to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock will be made
at the offices of ING Baring Furman Selz LLC, New York, New York, on or about
, 1998.
ING BARING FURMAN SELZ LLC HAMBRECHT & QUIST
-----------
The date of this Prospectus is , 1998
<PAGE>
[INSIDE COVER OF PROSPECTUS]
[FOUR PHOTOGRAPHS OF THE COMPANY'S LABORATORY FACILITIES AND ONE PHOTOGRAPH OF
THE EXTERIOR OF THE COMPANY'S ALBANY FACILITY.]
THE COMPANY'S NAME WITH THE COMPANY'S LOGO AND THE COMPANY'S LOGO ARE
REGISTERED TRADEMARKS OF THE COMPANY. ALL OTHER TRADEMARKS AND TRADENAMES
REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK BY
CERTAIN METHODS INCLUDING ENTERING STABILIZING BIDS, IMPOSING PENALTY BIDS OR
EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Investors should carefully consider the risk factors
contained in this Prospectus related to the purchase of Common Stock of the
Company. See "Risk Factors." Except for the historical information contained
herein, the discussion contained in this Prospectus contains "forward-looking
statements" that involve risk and uncertainties. The Company's actual results
could differ materially from those discussed in this Prospectus. Important
factors that could cause or contribute to such differences include those
discussed under the caption "Risk Factors," as well as those discussed
elsewhere herein.
THE COMPANY
Albany Molecular Research is an integrated chemistry outsourcing company that
offers a broad range of chemistry research and development services to
pharmaceutical and biotechnology companies involved in drug discovery and
development. The Company offers services traditionally provided by chemistry
divisions within pharmaceutical companies, including medicinal chemistry,
chemical development, analytical chemistry services and small-scale
manufacturing. The Company's services are designed to permit pharmaceutical and
biotechnology companies to reduce overall drug development time and cost and to
pursue simultaneously a greater number of drug discovery and development
opportunities. Since its inception in 1991, the Company has conducted over 400
projects for more than 100 customers. The Company achieved a 66% compound
annual growth rate in net contract revenue from 1993 to 1997. In addition to
its contract services, the Company conducts a limited amount of proprietary
research and development. The Company has developed and patented a
substantially pure form of, and a manufacturing process for, the active
ingredient in a new, non-sedating antihistamine marketed by Hoechst Marion
Roussel, Inc. ("HMR") as Allegra in the Americas and as Telfast elsewhere.
Pursuant to a licensing agreement between the Company and HMR, the Company has
received since October 1996 $12.8 million in milestones and royalties from HMR
and is entitled to receive ongoing royalties based upon a percentage of sales
of the product.
The pace of drug discovery has accelerated significantly in recent years.
Fueled by advances in disciplines such as molecular biology, genomics and high-
throughput screening, opportunities to develop therapeutics for previously
unmet or undermet medical needs are greater than ever before. In addition,
pharmaceutical and biotechnology companies are under increasing pressure to
quickly deliver new drugs to market. In order to take advantage of these
opportunities and to respond to these pressures, many pharmaceutical companies
have augmented their internal research and development capacity through
outsourcing. Similarly, many biotechnology companies, constrained by cost
pressures, have elected to outsource rather than develop certain research and
development functions in-house. While outsourcing has traditionally been
limited to the later stages of drug development, such as clinical trial
management and manufacturing, many pharmaceutical and biotechnology companies
are utilizing contract chemistry service providers to supplement, or in some
cases, replace internal chemistry expertise.
Chemistry and biology are at the center of the drug discovery and development
process, which includes lead discovery, lead optimization, preclinical testing,
clinical trials and product commercialization. During the critical discovery
phases of this process, chemists and biologists typically work together to
prepare and deliver new chemical substances, develop laboratory models of
disease, test compounds to identify agents which demonstrate desired activity
and finally, create a marketable drug. In recent years, pharmaceutical and
biotechnology companies have sought to outsource chemistry services related to
lead discovery and lead optimization. Currently, only a few companies provide
chemistry services for drug discovery and development. Those that do provide
such services have typically focused only on selected portions of the process.
Albany Molecular Research believes significant opportunities exist for a
company that provides a broad range of outsourced chemistry services.
3
<PAGE>
Albany Molecular Research is one of the first companies to offer a broad
range of outsourced chemistry services for drug discovery and development. The
Company's service offerings include medicinal chemistry, chemical development,
analytical chemistry services and small-scale manufacturing. Medicinal chemists
synthesize small quantities of new and potentially patentable compounds for
biological testing to assist customers in the lead development and optimization
stages of their drug discovery and development efforts. The Company's medicinal
chemists use tools such as computational and combinatorial chemistry in
conjunction with traditional medicinal chemistry techniques. Chemical
development scientists design novel or improved methods, processes and
purification techniques suitable for medium to large scale production of a drug
candidate. The Company's analytical chemistry services consist of identity and
purity testing, method development, validation, stability testing and
regulatory documentation and consulting. Albany Molecular Research also
provides chemical synthesis and manufacturing services for its customers under
cGMP guidelines and has the capacity to produce laboratory scale amounts of
compound.
The Company's objective is to be the leading provider of comprehensive
outsourced chemistry research services to the pharmaceutical and biotechnology
industries. Key elements of the Company's business strategy include (i)
expanding its range of service offerings, (ii) increasing capacity in each of
its service offerings, (iii) leveraging its customer relationships, (iv)
expanding its customer base, and (v) leveraging proprietary technology, both by
seeking opportunities to obtain contractual terms with its customers which may
entitle the Company to milestones and/or royalties and by independently
identifying and developing possible proprietary compounds or processes.
----------------
The Company was incorporated under the laws of New York on June 20, 1991. The
Company's principal executive offices are located at 21 Corporate Circle,
Albany, New York 12203, and its telephone number is (518) 464-0279.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,200,000 shares
Common Stock to be outstanding after the
offering(1).................................... 9,476,114 shares
Use of Proceeds................................. To repay a portion of indebtedness, for
expansion of existing facilities, for
additional capital expenditures and for
working capital and other general
corporate purposes, including possible
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... AMRI
</TABLE>
- ----------
(1) Excludes: (i) 1,377,904 shares of Common Stock issuable upon the exercise
of outstanding stock options at a weighted average exercise price of $2.82
per share as of July 9, 1998; and (ii) 919,847 and 200,000 additional
shares of Common Stock reserved for issuance under the Company's 1998 Stock
Option and Incentive Plan (the "1998 Stock Plan") and the Company's 1998
Employee Stock Purchase Plan (the "Purchase Plan"), respectively. See
"Management--Employee Stock and Other Benefit Plans--1998 Stock Option and
Incentive Plan," "--1992 Stock Option Plan" and "--1998 Employee Stock
Purchase Plan."
----------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
reflect (i) a 3-for-2 stock split of the Common Stock to be effective in August
1998; (ii) the conversion of all outstanding shares of the Company's Series A
Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), into 30,000 shares of Common Stock, immediately prior to completion of
this offering; and (iii) the amendment and restatement of the Company's
Certificate of Incorporation in connection with this offering. Unless the
context otherwise requires, all references to "Albany Molecular Research" or
the "Company" mean Albany Molecular Research, Inc., together with its
subsidiary.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net contract revenue............... $2,959 $5,261 $8,104 $1,509 $2,873
Cost of revenue.................... 1,350 2,835 4,334 928 1,508
------- ------- ------- ------ ------
Gross profit....................... 1,609 2,426 3,770 581 1,365
Operating Expenses:
Research and development.......... 37 245 627 100 209
Selling, general and
administrative................... 809 1,219 2,246 380 883
------- ------- ------- ------ ------
Total operating expenses......... 846 1,464 2,873 480 1,092
------- ------- ------- ------ ------
Income from operations............. 763 962 897 101 273
Other income (expense):
Licensing fees, milestones and
royalties, net................... -- 900 2,278 -- 7,289
Interest income (expense), net.... 37 (11) (13) (15) 26
Other non-operating income (ex-
pense), net...................... (68) 20 (26) 4 (196)
------- ------- ------- ------ ------
Total other income (expense)..... (31) 909 2,239 (11) 7,119
------- ------- ------- ------ ------
Income before income taxes......... 732 1,871 3,136 90 7,392
Income tax expense................. 252 637 947 15 2,853
------- ------- ------- ------ ------
Net income......................... $ 480 $1,234 $2,189 $ 75 $4,539
======= ======= ======= ====== ======
Basic earnings per share........... $ 0.07 $ 0.17 $ 0.31 $ 0.01 $ 0.63
Diluted earnings per share......... $ 0.06 $ 0.16 $ 0.28 $ 0.01 $ 0.56
Weighted average common shares
outstanding, basic................ 6,842 7,137 7,174 7,170 7,186
Weighted average common shares
outstanding, diluted.............. 7,380 7,711 7,863 7,853 8,035
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 7,460 $
Working capital.......................................... 8,315
Total assets............................................. 19,173
Long-term debt, less current maturities.................. 1,666
Total shareholders' equity............................... 11,497
</TABLE>
- ----------
(1) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $16.00 per
share and the receipt and application of the estimated net proceeds
therefrom. See "Use of Proceeds," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information in this Prospectus before purchasing the Common Stock
offered by this Prospectus. Except for the historical information contained
herein, the discussion contained in this Prospectus contains "forward-looking
statements" that involve risk and uncertainties. The Company's actual results
could differ materially from those discussed in this Prospectus. Important
factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
Competitive Market for Experienced Scientists. The Company's future success
will depend to a significant extent on its ability to attract, retain and
motivate highly skilled chemists and other scientists. The Company's ability
to maintain, expand or renew existing engagements with its customers, enter
into new engagements and provide additional services to its existing customers
depends, in large part, on its ability to hire and retain scientists with the
skills necessary to keep pace with continuing changes in drug discovery and
development technologies. The Company believes that there is a shortage of,
and significant competition for, scientists with the skills and experience in
chemistry necessary to perform the services offered by the Company. The
Company competes with the research departments of pharmaceutical companies,
biotechnology companies, combinatorial chemistry companies, contract research
companies and research and academic institutions for new personnel. The
inability to hire additional qualified personnel may materially adversely
affect the Company's future growth. In addition, the Company's inability to
hire additional qualified scientists may require an increase in the level of
responsibility for both existing and new personnel. There can be no assurance
that the Company will be successful in attracting, retaining or motivating its
scientific personnel. Failure to attract, retain or motivate such personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition."
Dependence on Pharmaceutical and Biotechnology Industries and Clients; Risk
of Cost Overruns. The Company has benefitted to date from the increasing trend
of pharmaceutical and biotechnology companies to outsource chemical research
and development projects. A reversal or slowing of this trend could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's contract revenues are highly dependent on
research and development expenditures by the pharmaceutical and biotechnology
industries. The Company's operations could be materially adversely affected by
general economic downturns in its clients' industries, the impact of the
current trend toward consolidation in the pharmaceutical industry or any
decrease in research and development expenditures. In addition, historically,
a substantial portion of the Company's revenue has been derived from contracts
with a limited number of significant customers. For the year ended December
31, 1997, net contract revenue from the Company's three largest customers
represented approximately 29%, 11% and 9% of total net contract revenue,
respectively. For the three months ended March 31, 1998, net contract revenue
from the Company's three largest customers represented approximately 19%, 17%
and 17% of total net contract revenue, respectively. The Company's contracts
generally are terminable upon 30 days' notice by the customer. The Company's
contracts may be terminated for a number of reasons, many of which may be
beyond the Company's control, such as reduction or reallocation of a
customer's research and development budget or change in a customer's overall
financial condition. The loss of a large contract or multiple smaller
contracts, or a significant decrease in revenue derived from such contracts,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain of the Company's
contracts for the provision of its services are fixed price or subject to a
maximum fee. As a result, the Company bears the risk of cost overruns with
respect to such contracts. There can be no assurance that the Company will be
able to perform its obligations with respect to any such contracts within the
prescribed fixed fees or applicable maximum fees. Significant cost overruns
with respect to such contracts could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Customers."
Risks Related to the Allegra Royalty. Under the terms of a license
agreement, the Company has granted HMR, formerly Marion Merrell Dow Inc., an
exclusive, worldwide license in exchange for milestones and royalties to use
the Company's patents relating to fexofenadine HCl, which is the active
ingredient in a new,
7
<PAGE>
non-sedating antihistamine marketed and sold by HMR as a prescription
medicine. Fexofenadine HCl is marketed under the brand name Allegra in the
Americas and under the brand name Telfast elsewhere. For the year ended
December 31, 1997, the Company's milestones and royalties from fexofenadine
HCl were $2.5 million, or 22.3% of the Company's aggregate net contract
revenue plus other income, and for the three months ended March 31, 1998, the
Company's milestones and royalties from fexofenadine HCl were $8.1 million, or
72.6% of the Company's aggregate net contract revenue plus other income. The
Company does not participate in the manufacturing, marketing or sale of
fexofenadine HCl by HMR and relies entirely on the efforts of HMR to
manufacture, market and sell this product. There can be no assurance that HMR
will continue to be successful in marketing and selling fexofenadine HCl, that
fexofenadine HCl will continue to receive market acceptance or that the
Company will continue to receive significant royalties from HMR in accordance
with the license agreement. In addition, there can be no assurance that a
comparable or superior antihistamine to fexofenadine HCl will not be developed
or that fexofenadine HCl will not be found to have unintended side effects
which could cause the United States Food and Drug Administration (the "FDA")
or other government regulatory authorities to require that HMR withdraw
fexofenadine HCl from the market in the U.S. or other countries or could
adversely affect market acceptance of fexofenadine HCl. The failure of
fexofenadine HCl to be marketed successfully, to continue to receive market
acceptance or to generate significant royalties would have a material adverse
effect on the Company's business, financial condition and results of
operations. In the event any of the Company's patents relating to fexofenadine
HCl are subjected to successful challenge, royalties under the license
agreement would be materially and adversely affected. See "--Proprietary
Technology; Unpredictability of Patent Protection" and "Business--Allegra
Royalty and Licensing Agreement."
Proprietary Technology; Unpredictability of Patent Protection. The
Company's success will depend, in part, on its ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary, and conduct its 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. There can be no assurance 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 those
of the Company, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office (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
the Company, such proceedings could result in substantial cost to the Company.
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. There can be no assurance that in the event that
any claims with respect to any of the Company's 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 the Company to
lose exclusivity afforded by the disputed rights. If a third party is found to
have rights covering products or processes used by the Company, the Company
could be forced to cease using the technologies covered by such rights, could
be subject to significant liability to such third party, and could be required
to license technologies from such third party. Furthermore, even if the
Company's patents are determined to be valid, enforceable, and broad in scope,
there can be no assurance that competitors will not be able to design around
such patents and compete with the Company and its licensees using the
resulting alternative technology. See "Business--Patents and Proprietary
Rights."
Management of Growth and Expansion. The Company's operations have grown
rapidly and substantially in recent years. Such growth has placed and will
continue to place a significant strain on the Company's operational, human and
financial resources. The Company's ability to compete effectively will depend,
in large part, upon its ability to hire, train and assimilate additional
management, professional, scientific and technical operating personnel and its
ability to expand, improve and effectively utilize its operating, management,
marketing and financial systems to accommodate its expanded operations. The
physical expansion of the
8
<PAGE>
Company to accommodate growth may lead to significant expansion costs and
divert management and business development resources. The failure by the
Company's management to effectively anticipate, implement and manage the
changes required to sustain the Company's growth may have a material adverse
effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel. The Company's performance is highly dependent
on the principal members of its senior management and scientific staff,
including, in particular, Dr. Thomas E. D'Ambra, the Company's Chairman and
Chief Executive Officer, Dr. Harold Meckler, the Company's Vice President,
Chemical Development, and Dr. Michael P. Trova, the Company's Vice President,
Medicinal Chemistry. Although the Company has entered into agreements
containing non-competition restrictions with its senior scientific and
management personnel and into employment agreements with Drs. D'Ambra, Meckler
and Trova, the Company does not have employment agreements with all of its key
personnel. No assurance can be given that the Company will be able to retain
such personnel. The Company maintains key person life insurance on Dr.
D'Ambra. The loss of one or more members of the Company's senior management or
scientific staff could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Employees."
Competition. The Company faces 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. The Company competes 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 the
Company. Smaller companies may also prove to be significant competitors,
particularly through arrangements with large corporate collaborators.
Historically, pharmaceutical companies have maintained close control over
their research and development activities, including the synthesis, screening
and optimization of chemical compounds and the development of chemical
processes. Many of these companies, which represent a significant potential
market for the Company's products and services, are developing or already
possess in-house technologies and services offered by the Company. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company provides services either
independently or through collaborative efforts.
The Company anticipates that it will face increased competition in the
future as new companies enter the market and advanced technologies become
available. The Company's services and expertise may be rendered obsolete or
uneconomical by technological advances or novel approaches developed by one or
more of the Company's competitors. The existing approaches of the Company's
competitors or new approaches or technologies developed by the Company's
competitors may be more effective than those developed by the Company. There
can be no assurance that the Company's competitors will not develop more
effective or more affordable technologies or services, thus rendering the
Company's technologies and/or services obsolete, uncompetitive or
uneconomical. There can be no assurance that the Company will be able to
compete successfully with existing or potential competitors or that
competitive factors will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Business--
Competition."
Variation in Quarterly Operating Results; Seasonality. The Company's results
of operations historically have fluctuated on a quarterly basis and can be
expected to continue to be subject to quarterly fluctuations. Quarterly
operating results can fluctuate as a result of a number of factors, including
the commencement, delay, cancellation or completion of contracts; risks
associated with fixed price contracts; the mix of services provided; seasonal
slowdowns; the timing of start-up expenses for new services and facilities;
and the timing and integration of acquisitions. In particular, quarterly
fluctuations in the Company's royalty revenue relating to fexofenadine HCl, an
anti-histamine subject to seasonal demand, may produce stronger fluctuations
in the Company's results of operations than those which have occurred over
prior periods. The Company believes that quarterly comparison of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, fluctuations in quarterly
results could affect the market price of the
9
<PAGE>
Common Stock in a manner unrelated to the longer term operating performance of
the Company. See "--Absence of Public Trading Market; Offering Price; Possible
Volatility of Future Stock Price" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
Limited Marketing Experience; Expansion of Sales Activities. To date, the
Company has sold its services and products primarily through the efforts of
the Company's senior management. The Company anticipates that it will need to
retain additional sales and marketing personnel and expand its sales and
marketing activities in order to achieve significant long-term growth. There
can be no assurance that the Company will be able to build and maintain an
efficient and effective sales and marketing organization or that such an
organization will be successful in attracting new customers. The failure to
build a successful sales organization could have a material adverse effect on
the Company's business, financial condition and results of operations.
Potential Liability and Risks of Operations. The Company develops, tests
and, to a very limited extent, manufactures pharmaceutical products intended
for use in humans. Such activities could expose the Company to the risk of
liability for personal injury or death to persons using such products,
although the Company does not manufacture in bulk, market or sell such
products. No assurance can be given that the Company will not be required to
pay damages or incur defense costs in connection with any such claim. In
addition, the Company could be held liable for errors and omissions in
connection with the services it performs. The Company currently maintains
product liability and errors and omissions insurance with respect to these
risks. No assurance can be given that such insurance will be adequate or can
be maintained at acceptable costs or at all. The failure of such
indemnification provisions and insurance policies to protect the Company from
such claims or liabilities could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risk of Interruption of Operations. The Company's results of operations are
dependent upon the continued use of its highly specialized laboratories and
equipment. The Company's operations are primarily concentrated in a single
facility in Albany, New York. Although the Company has contingency plans in
effect for certain natural disasters, as well as other unforeseen events which
could damage the Company's laboratories or equipment, no assurance can be
given that any such events will not materially interrupt the Company's
business. The Company maintains business interruption insurance to cover lost
revenues caused by such occurrences. However, such insurance would not
compensate the Company for the loss of opportunity and potential adverse
impact on relations with existing customers created by an inability to
complete its customer contracts in a timely manner.
Risks Associated with Acquisitions. The Company from time to time reviews
potential acquisition candidates in the ordinary course of its business. No
assurance can be given that acquisition candidates will be available or will
be available on terms and conditions acceptable to the Company. Acquisitions
involve numerous risks, including among others, difficulties and expenses
incurred in connection with the consummation of such acquisitions by the
Company and the subsequent assimilation of the operations, personnel and
services or products of the acquired companies, the difficulty of operating
new businesses, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired company.
Acquisitions of foreign companies may also involve the additional risks of
assimilating differences in business practices and overcoming language
barriers. To date, the Company has grown entirely through internal expansion,
and there can be no assurance that any acquisition will be identified or
completed or, if completed, will be successfully integrated into the Company's
operations. The Company presently has no agreements or commitments with
respect to any acquisition.
Broad Management Discretion in Use of Proceeds. The principal purposes of
the offering are to increase the Company's equity capital, to create a public
market for the Company's Common Stock, to increase the visibility of the
Company in the marketplace and to facilitate future access by the Company to
public equity markets. The Company expects to use the net proceeds from the
offering to repay a portion of its indebtedness, for expansion of existing
facilities, for additional capital expenditures and for working capital and
other general corporate purposes. Although the Company has no plans,
commitments or agreements with respect to any material acquisitions as of the
date of this Prospectus, the Company may seek acquisitions of businesses,
10
<PAGE>
products or technologies that are complementary to those of the Company, and a
portion of the net proceeds may be used for such acquisitions. Accordingly,
the Company will have significant flexibility in applying the net proceeds of
the offering. See "Use of Proceeds."
Potential Adverse Impact of Pharmaceutical and Health Care Reform. The
Company expects that a substantial portion of its contract revenues in the
foreseeable future will be derived from services provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's future
success is directly dependent upon the success of the companies within those
industries and their continued demand for the Company's services. The levels
of revenues and profitability of pharmaceutical and biotechnology companies
may be affected by the continuing efforts of governmental and third party
payors to contain or reduce the costs of health care through various means and
the initiatives of third party payors with respect to the availability of
reimbursement. For example, in certain foreign markets pricing or
profitability of pharmaceuticals is subject to government control. In the
United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. It is uncertain what legislative proposals may be adopted
or what actions federal, state or private third party payors for health care
goods or services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the businesses, financial condition, results of operations
and profitability of pharmaceutical and biotechnology companies that are
actual or prospective customers for the Company's services and products, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
Potential Liability Regarding Hazardous Materials. The research and
development processes of the Company involve the controlled use of hazardous
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any such liability could exceed the resources of the
Company. In addition, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations related to the handling or disposal of such materials or waste
products in the future, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
Effective Control by Principal Shareholders. After giving effect to the sale
of the shares of Common Stock offered hereby, Thomas E. D'Ambra, the Company's
Chairman and Chief Executive Officer, Chester J. Opalka, the Company's Vice
President, Senior Research Chemist and a Director, and Harold M. Armstrong,
Jr., the Company's Executive Vice President, Chief Financial Officer and a
Director, will beneficially own in the aggregate approximately 52.7%, 51.0%
assuming exercise of the Underwriters' over-allotment option in full) of the
outstanding Common Stock. As a result, these shareholders will be able to
exert significant influence over the outcome of fundamental corporate
transactions requiring shareholder approval, including, but not limited to,
mergers and sales of assets and the election of the members of the Company's
Board of Directors. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Principal
Shareholders" and "Shares Eligible for Future Sale."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the
market price of the Common Stock. In addition to the 2,200,000 shares of
Common Stock offered hereby, up to approximately shares of Common Stock
owned by current shareholders of the Company will be eligible for sale in the
public market pursuant to Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), at various times beginning 90 days after the
date of this Prospectus. All executive officers and directors and shareholders
of the Company, who in the aggregate will hold shares of Common Stock and
options to purchase shares of Common Stock, have agreed, pursuant to
certain Lock-up Agreements (the "Lock-up Agreements"), that until 180 days
after the date of this Prospectus, they will not, directly or indirectly,
offer, sell, assign, transfer, encumber, contract to sell, grant an option to
purchase, make a distribution of, or otherwise dispose of, any shares of
Common Stock, or any securities convertible into or exchangeable for shares of
Common Stock, otherwise than (i) as a bona fide gift or
11
<PAGE>
gifts, provided that the donee or donees thereof agree in writing as a
condition precedent to such gift or gifts to be bound by the terms of the
Lock-up Agreements, or (ii) with the prior written consent of ING Baring
Furman Selz LLC. Sales of substantial amounts of Common Stock (including
shares issued in connection with future acquisitions which may be issued with
registration rights), or the availability of such shares for sale, may
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to obtain additional capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
Absence of a Public Trading Market; Offering Price; Possible Volatility of
Future Stock Price. Prior to this offering, there has been no public market
for the Common Stock, and there can be no assurance that an active market will
develop or be sustained following the consummation of this offering.
Consequently, the offering price of the Common Stock will be determined by
negotiation between the Company and the representatives of the several
Underwriters based on several factors and will not necessarily reflect the
market price of the Common Stock after this offering or the price at which the
Common Stock may be sold in the public market after this offering. See
"Underwriting" for a description of the factors to be considered in
determining the initial public offering price. Following the completion of
this offering, the trading price of the Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, changes in earnings estimates by analysts, material
announcements by the Company or its competitors, governmental regulatory
action, or other events or factors, many of which are beyond the Company's
control. The stock market has experienced extreme price and volume
fluctuations which have affected market prices of smaller capitalization
companies and which often have been unrelated to the operating performance of
such companies. In addition, the Company's operating results in future
quarters may be below the expectations of securities analysts and investors.
In such event, the price of the Common Stock would likely decline, perhaps
substantially. See "Underwriting."
Computer Systems and Year 2000 Issues. The "Year 2000" issue concerns the
potential exposures related to the automated generation of business and
financial misinformation resulting from the application of computer programs
which have been written using two digits, rather than four, to define the
application year of business transactions. The Company does not anticipate any
significant costs, problems or uncertainties associated with becoming Year
2000 compliant and is currently developing a plan to ensure that its computer
systems are modified to be compliant on a timely basis. Failure of the
Company, its software providers or the Company's customers or suppliers to
adequately address the Year 2000 issue could result in misstatement of
reported financial information or otherwise materially and adversely affect
the Company's business, financial condition and results of operations.
Dividend Policy. The Company has not declared cash dividends on its Common
Stock since its inception and the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Under New York law,
the Company is permitted to pay dividends only out of its surplus, or, if
there is no surplus, out of its net profits. Although the Company's current
credit facility permits the Company to pay cash dividends, the payment of cash
dividends may be prohibited under agreements governing debt which the Company
may incur in the future. See "Dividend Policy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
Anti-takeover Provisions. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation (the "Certificate") and By-laws (the
"By-laws"), certain sections of the New York Business Corporation Law, and the
ability of the Board of Directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms thereof, may be
deemed to have an anti-takeover effect and may discourage takeover attempts
not first approved by the Board of Directors (including takeovers which
shareholders may deem to be in their best interests). Such provisions include,
among other things, a classified Board of Directors serving staggered three-
year terms, the elimination of shareholder voting by written consent, the
removal of directors only for cause, the vesting of exclusive authority in the
Board of Directors to determine the size of the Board of Directors and
(subject to certain limited exceptions) to fill vacancies thereon, the vesting
of exclusive authority in the Board of Directors (except as otherwise required
by law) to call special meetings of shareholders and certain advance notice
requirements for shareholder proposals and nominations for election to
12
<PAGE>
the Board of Directors. These provisions, and the ability of the Board of
Directors to issue preferred stock without further action by shareholders,
could delay or frustrate the removal of incumbent directors or the assumption
of control by shareholders, even if such removal or assumption of control
would be beneficial to shareholders, and also could discourage or make more
difficult a merger, tender offer or proxy contest, even if such events would
be beneficial to the interest of shareholders. The Company will be subject to
Section 505 of the New York Business Corporation Law which, in general,
imposes restrictions upon certain acquirors (including their affiliates and
associates) of 20% or more of the Company's Common Stock. See "Description of
Capital Stock--Certain Provisions of Certificate of Incorporation and By-Laws"
and "--Statutory Business Combination Provision."
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
offering will incur immediate and substantial dilution in the net tangible
book value per share of Common Stock. At an assumed initial public offering
price of $16.00 per share, investors in this offering will incur dilution of
$11.08 per share. To the extent outstanding options to purchase the Company's
Common Stock are exercised, there will be further dilution to investors
participating in this offering. Moreover, there can be no assurance that the
Company will not require additional funds to support its working capital
requirements or for other purposes, in which case the Company may seek to
raise such additional funds through public or private equity financing or from
other sources. Any such financing would result in additional dilution to the
Company's shareholders. See "Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$16.00 per share, after deducting the underwriting discounts and estimated
offering expenses payable by the Company, are estimated to be $ ($ if
the Underwriters' over-allotment option is exercised in full). The Company
expects to use the net proceeds as follows: (i) approximately $5.0 million
will be used to repay a portion of the Company's outstanding indebtedness
under its existing credit facility with Fleet Bank, N.A. (the "Credit
Facility"), including fees and accrued and unpaid interest; (ii) approximately
$5.0 million for expansion of existing facilities; and (iii) the balance will
be used for additional capital expenditures and for working capital and other
general corporate purposes. The Company routinely evaluates potential
acquisitions of businesses and products that would complement or expand the
Company's business. The Company may use a portion of the net proceeds from
this offering for one or more acquisitions; however, it currently has no
commitments or agreements with respect to such transactions. Pending such use,
the balance of the net proceeds will be invested in short-term, investment
grade, interest bearing obligations.
The Credit Facility consists of a $15 million, three-year, revolving line of
credit, which thereafter converts into a five-year term loan. The Credit
Facility will expire in July 2006. As of July 1, 1998, the Company had drawn
an aggregate of $5.0 million under the Credit Facility. Amounts outstanding
under the Credit Facility bear interest at variable rates which are based
upon, at the option of the Company, the lender's prime rate or LIBOR. The
interest rate on such indebtedness at June 30, 1998 was approximately 6.5% per
annum. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has not declared any cash dividends on its Common Stock since
its inception. The Company currently intends to retain its earnings for future
growth and, therefore, does not anticipate paying cash dividends in the
foreseeable future. Under New York law, the Company is permitted to pay
dividends only out of its surplus, or, if there is no surplus, out of its net
profits. Although the Company's current Credit Facility permits the Company to
pay cash dividends, the payment of cash dividends may be prohibited under
agreements governing debt which the Company may incur in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) as adjusted to give effect to the
sale of the 2,200,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $16.00 per share and the receipt and
application by the Company of the estimated net proceeds therefrom as
described in "Use of Proceeds." This table should be read in conjunction with
the Financial Statements of the Company and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1).................... $ 443 $
Long-term debt, net of current maturities(1)............... 1,666
Series A Convertible Preferred Stock, par value $0.01 per
share: 100,000 shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, as adjusted................................ 1 --
Preferred Stock, par value $0.01 per share: 900,000
shares authorized, no shares issued or outstanding,
actual; 2,000,000 shares authorized, no shares issued or
outstanding, as adjusted................................ -- --
Common Stock, par value $0.01 per share: 10,000,000
shares authorized, 7,216,044 shares issued and
outstanding, actual; 50,000,000 shares authorized,
9,446,044 shares issued and outstanding, as
adjusted(2)............................................. 72 --
Additional paid-in capital............................... 2,950
Accumulated other comprehensive income................... 52 52
Retained earnings........................................ 8,422 8,422
------- -----
Total shareholders' equity............................. 11,497
------- -----
Total capitalization....................................... $13,606 $
======= =====
</TABLE>
- ----------
(1) See Note 3 of Notes to Financial Statements for information concerning
long-term debt obligations.
(2) Excludes: (i) 1,348,504 shares of Common Stock currently issuable upon
exercise of outstanding stock options as of the balance sheet date; (ii)
919,847 additional shares of Common Stock available for future grants
under the 1998 Stock Plan; and (iii) 200,000 additional shares of Common
Stock available for future sales under the Purchase Plan. See
"Management--Employee Stock and Other Benefit Plans--1998 Stock Option and
Incentive Plan," "--1992 Stock Option Plan" and "--1998 Employee Stock
Purchase Plan."
15
<PAGE>
DILUTION
The net tangible book value of the Common Stock as of March 31, 1998 was
approximately $11.1 million or $1.54 per share. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding,
including all outstanding stock grants and excluding all outstanding stock
options. After giving effect to the sale of the 2,200,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $16.00 per
share and the receipt and application by the Company of the net proceeds
therefrom, the pro forma net tangible book value of the Common Stock as of
March 31, 1998 would have been approximately $46.3 million or $4.92 per share.
This represents an immediate increase in pro forma net tangible book value of
$3.38 per share to existing shareholders and an immediate dilution of $11.08
per share to purchasers of Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $16.00
Net tangible book value per share .......................... $1.54
Increase per share attributable to new investors............ $3.38
Pro forma net tangible book value per share after the
offering..................................................... $ 4.92
------
Dilution per share to new investors........................... $11.08
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998
after giving effect to the conversion of all outstanding shares of Series A
Preferred Stock, the differences between existing shareholders and the new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 7,216,044 76.6% $ 2,993,835 7.8% $ 0.42
New investors........... 2,200,000 23.4 35,200,000 92.2 16.00
--------- ----- ----------- -----
Total................. 9,416,044 100.0% $38,193,835 100.0%
========= ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after March 31, 1998 or the Underwriters' over-
allotment option. See "Use of Proceeds." As of June 30, 1998, options to
purchase 1,377,904 shares of Common Stock were outstanding with a weighted
average exercise price of $2.82 per share. To the extent these options or the
Underwriters' over-allotment option are exercised, there will be further
dilution to new investors. See "Underwriting" for information concerning the
Underwriters' over-allotment option.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for each of the years
ended December 31, 1995, 1996 and 1997 and selected balance sheet data at
December 31, 1996 and 1997 are derived from the financial statements of the
Company which have been audited by KPMG Peat Marwick LLP, independent
auditors, and are included elsewhere herein. The selected statement of
operations data for the years ended December 31, 1993 and 1994 are derived
from audited financial statements not included herein. The balance sheet data
at December 31, 1993, 1994 and 1995, is derived from audited financial
statements not included herein. The selected statement of operations data for
the three month periods ended March 31, 1997 and 1998 and the balance sheet
data at March 31, 1998 are derived from unaudited financial statements also
included elsewhere in the Prospectus. The unaudited financial statements for
such three month periods have been prepared by the Company on a basis
consistent with the Company's audited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations for these periods. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results for the year ending December 31, 1998 or any future
period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net contract revenue.... $1,071 $1,116 $2,959 $5,261 $ 8,104 $1,509 $2,873
Cost of revenue......... 818 742 1,350 2,835 4,334 928 1,508
------ ------ ------ ------ ------- ------ -------
Gross profit............ 253 374 1,609 2,426 3,770 581 1,365
Operating expenses:
Research and
development........... 54 152 37 245 627 100 209
Selling, general and
administrative ....... 225 253 809 1,219 2,246 380 883
------ ------ ------ ------ ------- ------ -------
Total operating
expenses.............. 279 405 846 1,464 2,873 480 1,092
------ ------ ------ ------ ------- ------ -------
Income (loss) from
operations............. (26) (31) 763 962 897 101 273
Other income (expense):
Licensing fees,
milestones and
royalties, net........ -- -- -- 900 2,278 -- 7,289
Interest income
(expense), net........ (13) (30) 37 (11) (13) (15) 26
Other non-operating
income (expense),
net................... -- -- (68) 20 (26) 4 (196)
------ ------ ------ ------ ------- ------ -------
Total other income
(expense)............. (13) (30) (31) 909 2,239 (11) 7,119
------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... (39) (61) 732 1,871 3,136 90 7,392
Income tax expense
(benefit).............. (4) (48) 252 637 947 15 2,853
------ ------ ------ ------ ------- ------ -------
Net income (loss)....... $ (35) $ (13) $ 480 $1,234 $ 2,189 $ 75 $4,539
====== ====== ====== ====== ======= ====== =======
Basic earnings (loss)
per share.............. $(0.01) $ -- $ 0.07 $ 0.17 $ 0.31 $ 0.01 $ 0.63
Diluted earnings (loss)
per share.............. $(0.01) $ -- $ 0.06 $ 0.16 $ 0.28 $ 0.01 $ 0.56
Weighted average common
shares outstanding,
basic.................. 5,615 5,904 6,842 7,137 7,174 7,170 7,186
Weighted average common
shares outstanding,
diluted................ 5,645 6,009 7,380 7,711 7,863 7,853 8,035
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 179 $ 45 $ 35 $1,260 $ 1,262 $ 7,460
Working capital......... 284 87 2,171 3,011 4,407 8,314
Total assets............ 1,044 1,059 5,108 8,501 10,629 19,173
Long-term debt, less
current maturities..... 255 203 744 2,374 1,776 1,666
Total shareholders'
equity................. 578 566 3,156 4,411 6,654 11,497
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements. Discussions
containing such forward-looking statements may be found in the material set
forth below and under "Business," as well as in this Prospectus generally.
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 risk factors set forth under "Risk Factors," the discussion
set forth below and the matters set forth in this Prospectus generally.
OVERVIEW
The Company was founded in 1991 and its mission has always been to provide a
broad range of chemistry services throughout the drug discovery and
development process. As the needs of the Company's customers have expanded and
chemistry research outsourcing has increased, the Company has expanded its
service offerings. In January 1994, the Company added its first current Good
Manufacturing Practices ("cGMP") manufacturing facility and in May 1996, the
Company added analytical chemistry services. The Company has expanded its
facility in Albany, New York, on several occasions and currently is
undertaking its largest expansion to date, which it expects to be completed by
December 1998.
Net contract revenue consists primarily of fees earned under contracts with
third party customers, net of reimbursed expenses. Reimbursed expenses consist
of laboratory supplies, chemicals and other costs reimbursed by customers and,
in accordance with industry practice, are included in contract revenue.
Reimbursed expenses vary from contract to contract. Accordingly, the Company
views net contract revenue as its primary measure of revenue growth. In
general, the Company provides services to customers on (i) a full-time
equivalent ("FTE") basis that establishes the number of FTEs contracted for a
project, the duration of the contract period, the fixed price per FTE, plus an
allowance for out-of-pocket expenses which may or may not be incorporated in
the FTE rate, (ii) a time and materials ("T&M") basis under which the Company
charges its customers based on an hourly rate plus out-of-pocket expenses or
(iii) a fixed price basis. Typically, FTE and T&M contracts are entered into
for two to three year periods. FTE and T&M contracts provide for annual
adjustments in billing rates for the scientists assigned to the contract.
Generally, the Company's contracts may be terminated by the customer upon 30
days' prior notice. The Company recognizes 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. Research and development expense consists of payments
in connection with collaborations with academic institutions, compensation and
benefits for scientific personnel for work performed on proprietary research
projects and costs of supplies and chemicals related thereto. 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,
which are based on contract revenue in each quarter.
Net licensing fees, milestones and royalties consist of licensing fees,
milestones and royalties net of technology incentive award expense incurred
under the Company's Technology Development Incentive Plan. The Company
maintains 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 ten percent (10%) of the net
revenue earned by the Company relating to patented technology with respect to
which the eligible participant is named as an inventor.
The Company earns royalties from HMR under a license agreement based on
sales of fexofenadine HCl, marketed as Allegra in the Americas and as Telfast
elsewhere. Although the Company entered into the license agreement with HMR in
1995, the Company began to recognize royalty revenue related to U.S. sales
under that
18
<PAGE>
agreement in February 1998, due to the significant time taken for issuance of
the Company's patents and the resolution of related patent interference
claims. Royalty payments are due within 45 days after the end of a calendar
quarter and determined based on such quarter's sales.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data as a percentage of net contract revenue:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net contract revenue............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.................. 45.6 53.9 53.5 61.5 52.5
------- ------- ------- ------ ------
Gross profit..................... 54.4 46.1 46.5 38.5 47.5
Operating expenses:
Research and development........ 1.2 4.7 7.7 6.6 7.3
Selling, general and
administrative................. 27.4 23.1 27.7 25.2 30.7
------- ------- ------- ------ ------
Total operating expenses........ 28.6 27.8 35.5 31.8 38.0
------- ------- ------- ------ ------
Income from operations........... 25.8 18.3 11.1 6.7 9.5
Other income (expense):
Licensing fees, milestones and
royalties, net................. -- 17.1 28.1 -- 253.7
Interest income (expense), net.. 1.3 (0.2) (0.2) (0.9) 0.9
Other non-operating income (ex-
pense), net.................... (2.3) 0.4 (0.3) 0.3 (6.8)
------- ------- ------- ------ ------
Total other income (expense).... (1.0) 17.3 27.6 (0.7) 247.8
------- ------- ------- ------ ------
Income before income taxes....... 24.7 35.6 38.7 6.0 257.3
Income tax expense............... 8.5 12.1 11.7 1.1 99.3
------- ------- ------- ------ ------
Net income....................... 16.2% 23.5% 27.0% 4.9% 158.0%
======= ======= ======= ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Net contract revenue. Net contract revenue increased 90.4% to $2.9 million
in the first three months of 1998 from $1.5 million in the first three months
of 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 57 at March 31, 1998 from 36 at March 31, 1997.
Gross profit. Gross profit increased 134.9% to $1.4 million in the first
three months of 1998 from $581,000 in the first three months of 1997. Gross
profit increased as a percentage of net contract revenue to 47.5% from 38.5%,
reflecting an increase in overall employee utilization during the first three
months of 1998 and a change in the mix of contract types from several fixed
price contracts, which generally had lower gross profit, to FTE and T&M
contracts. Additionally, the gross profit for the first three months of 1997
reflected higher costs related to laboratory supplies and reagents in the
first full quarter of operations in the Company's newly constructed chemical
development and analytical laboratories and dedicated cGMP manufacturing
facility.
Research and development. Research and development expense increased to
$209,000 in the first three months of 1998 from $100,000 in the first three
months of 1997. The increase was due primarily to expenses related to
biological assay study agreements with third parties pertaining to the
Company's proprietary research programs which commenced in February 1997 and
July 1997, respectively.
Selling, general and administrative. Selling, general and administrative
expense increased 132.7% to $883,000 for the first three months of 1998 from
$380,000 in the first three months of 1997 and represented 30.7% of net
contract revenue for the first three months of 1998 compared to 25.2% for the
first three months of 1997. The increase was due to a general increase in
administrative and marketing staff to support the expansion of the Company's
operations, increased expenses for recruitment of scientists and increased
rent expense related to the ongoing expansion of the Company's Albany
facility.
19
<PAGE>
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties were $7.3 million in the first three months of 1998.
There were no net licensing fees, milestones and royalties in the first three
months of 1997. As a result of the February 1998 PTO decision, the Company met
all prerequisites of the licensing agreement with HMR 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. The Company recognized
$1.8 million in royalties on all sales of fexofenadine HCl in the United
States for the first three months of 1998. All licensing fees, milestones and
royalties associated with the HMR license are subject to the Technology
Development Incentive Plan.
Other non-operating income (expense), net. Other non-operating expense, net
was $196,000 in the first three months of 1998. Other non-operating income,
net was $4,000 in the first three months of 1997. This change was due to a
one-time expense incurred in the first three months of 1998 as a result of the
Company's partial reimbursement for expenses incurred by the Company's
landlord in relocating other tenants in order to facilitate the Company's
expansion.
Income tax expense. Income tax expense increased to $2.9 million in the
first three months of 1998 from $16,000 in the first three months of 1997. The
effective rate was 38.6% in the first three months of 1998 and 34.1% in the
first three months of 1997. The increase in income tax expense was primarily a
result of the increase in royalty and licensing fees.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net contract revenue. Net contract revenue increased 54.0% to $8.1 million
in 1997 from $5.3 million in 1996. The increase was due principally to the
performance of a greater number of contracts, primarily for medicinal and
chemical development services, which were enabled through an increase in the
number of scientific staff to 43 at December 31, 1997 from 31 at December 31,
1996.
Gross profit. Gross profit increased 55.4% to $3.8 million in 1997 from $2.4
million in 1996. Gross profit remained relatively constant as a percentage of
net contract revenue at 46.5% in 1997 compared to 46.1% in 1996, reflecting a
fairly consistent mix of the type of contracts during the two years.
Research and development. Research and development expense increased to
$627,000 in 1997 from $245,000 in 1996. The increase was due primarily to
expenses related to biological assay development study agreements with third
parties pertaining to the Company's proprietary research programs, which
commenced in February 1997 and July 1997, respectively.
Selling, general and administrative. Selling, general and administrative
expense increased 84.3% to $2.2 million in 1997 from $1.2 million in 1996, and
represented 27.7% of net contract revenue in 1997 compared to 23.2% in 1996.
The increase was due to a general increase in administrative and marketing
staff due to the continued growth of the Company, an increase in executive
compensation, higher accruals for incentive compensation, increased recruiting
expenditures for scientific staff and an increase in the provision for
doubtful accounts.
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties increased 153.1% to $2.3 million in 1997 from
$900,000 in 1996. The increase in net licensing fees, milestones and royalties
was due principally to the difference in prescribed milestones due to the
Company from HMR upon the issuance of non-U.S. patents to the Company with
respect to fexofenadine HCl in 1997 and 1996. As a result of these patent
issuances, the Company became entitled to receive royalties on all sales of
fexofenadine HCl in those countries in which these patents were issued.
20
<PAGE>
Income tax expense. Income tax expense increased to $947,000 in 1997 from
$637,000 in 1996. The effective tax rate was 30.2% in 1997 and 34.1% in 1996.
The increase in income tax expense was primarily a result of the increase in
licensing fees, milestones and royalties.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net contract revenue. Net contract revenue increased 77.8% to $5.3 million
in 1996 from $3.0 million in 1995. The increase was principally due to the
performance of a greater number of projects under contract, primarily for
medicinal chemistry and chemical development services, which were enabled
through an increase in the number of scientific staff to 31 at December 31,
1996 from 15 at December 31, 1995.
Gross profit. Gross profit increased 50.8% to $2.4 million in 1996 from $1.6
million in 1995. Gross profit decreased as a percentage of net contract
revenue to 46.1% in 1996 from 54.4% in 1995, reflecting an increase in the
Company's occupancy expenses in 1996 as a result of the 1996 construction of
chemical development and analytical laboratories and a cGMP manufacturing
facility, which resulted in higher charges for depreciation, utilities, and
rent. Additionally, the Company incurred higher payroll and related costs
because of the higher overall compensation required to attract and retain
scientific staff.
Research and development. Research and development expense increased to
$245,000 in 1996 from $37,000 in 1995. The increase was primarily due to the
initiation of a research collaboration and the commencement of a related
biological assay study in February 1996.
Selling, general and administrative. Selling, general and administrative
expense increased 50.6% to $1.2 million in 1996 from $809,000 in 1995, and
represented 23.2% of net contract revenue in 1996 compared to 22.5% in 1995.
The increase was principally due to an increase in number of administrative
staff due to the continued growth of the Company and increased recruiting
expenditures for scientific staff.
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties were $900,000 in 1996. There were no net licensing
fees, milestones and royalties in 1995. The increase in net licensing fees,
milestones and royalties was due to the achievement of the first prescribed
milestone upon issuance of the first non-U.S. patent to the Company with
respect to fexofenadine HCl in 1996. As a result of this patent issuance, the
Company became entitled to receive royalties on all sales of fexofenadine HCl
in the country in which the patent was issued.
Other non-operating income (expense), net. Other non-operating income, net
was $20,000 in 1996. Other non-operating expense, net was $68,000 in 1995.
This expense was primarily due to an expense related to a write-off of
licensing costs previously capitalized.
Income tax expense. Income tax expense increased to $637,000 in 1996 from
$253,000 in 1995. The effective tax rate was 34.1% in 1996 and 34.5% in 1995.
The increase in income tax expense was primarily a result of the increase in
royalty and licensing fees.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly operating results for
each of the Company's last nine quarters. This information has been prepared
by the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, that management considers necessary for a fair presentation of
the data. These quarterly results are not necessarily indicative of future
results of operations. This information should be read in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
MAR. 31 JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net contract revenue.... $1,290 $1,417 $1,373 $1,181 $1,509 $2,099 $2,212 $2,284 $2,873
Cost of revenue......... 423 609 748 1,055 928 1,026 1,173 1,208 1,508
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 867 808 625 126 581 1,073 1,039 1,076 1,365
Operating expenses:
Research and
development........... 5 86 25 128 100 180 163 183 209
Selling, general and
administrative........ 195 243 338 444 380 513 507 846 883
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses............... 200 329 363 572 480 693 670 1,029 1,092
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. 667 479 262 (446) 101 380 369 47 273
Other income (expense):
Licensing fees,
milestones and
royalties, net........ -- -- -- 900 -- 450 1,801 27 7,289
Interest income
(expense), net........ 7 10 (7) (21) (15) (2) (8) 9 26
Other non-operating
income (expense),
net................... 2 5 1 12 4 0 (19) (11) (196)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total other income
(expense)............ 9 15 (6) 891 (11) 448 1,774 27 7,119
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 676 494 256 445 90 828 2,143 74 7,392
Income tax expense
(benefit).............. 234 172 80 151 15 319 734 (121) 2,853
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 442 $ 322 $ 176 $ 294 $ 75 $ 509 $1,409 $ 195 $4,539
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly operating results can fluctuate as a result of a
number of factors, including the commencement, delay, cancellation or
completion of contracts; risks associated with fixed price contracts; the mix
of services provided; seasonal slowdowns; the timing of start-up expenses for
new services and facilities; and the timing and integration of acquisitions.
In particular, quarterly fluctuations in the Company's royalty revenue
relating to fexofenadine HCl, an anti-histamine subject to seasonal demand,
may produce stronger fluctuations in the Company's results of operations than
those which have occurred over prior periods. See "Risk Factors--Variation in
Quarterly Operating Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its business through cash flows from operations,
proceeds from borrowings and the issuance of equity securities to HMR in March
1995. During the three months ended March 31, 1998 and the years ended
December 31, 1997, 1996, and 1995, the Company generated $7.3 million, $1.6
million, $2.1 million and $200,000, respectively, in cash flow from operations
and raised $1.6 million and $1.0 million in its 1996 and 1995 borrowings,
respectively. The increase in cash flow for the three months ended March 31,
1998 was principally due to an increase in net licensing fees, milestones and
royalties.
During the three months ended March 31, 1998 and the years ended December
31, 1997, 1996, and 1995, total capital expenditures were $1.0 million,
$870,000, $2.6 million and $1.2 million, respectively. Capital expenditures
were incurred predominantly in connection with the Company's expansion of
service offerings (computational chemistry and analytical services) in 1997,
and in connection with the Company's 1998, 1996 and 1995 facilities
expansions. In December 1997, the Company began its most recent phase of
expansion at its
22
<PAGE>
main location in Albany, New York. The expansion will add 60,000 square feet
to its existing 30,000 square feet of laboratory and administrative space. The
expansion is estimated to cost $8.5 million for construction and an additional
$4.0 million for the purchase of laboratory supplies, instrumentation,
software and equipment upgrades. A total of $885,000 for the expansion had
been incurred through March 31, 1998. The expansion is anticipated to be
completed by December 1998.
Working capital was $8.3 million at March 31, 1998, compared to $4.4 million
at December 31, 1997, and $3.0 million at December 31, 1996. The increase in
working capital for the three month period ended March 31, 1998 was primarily
attributable to the milestones and royalties earned by the Company on its
license agreement with HMR, less the associated technology incentive
compensation expense and income taxes. The increase in working capital from
December 31, 1997 compared to December 31, 1996, was attributable primarily to
an increase in the number of scientific staff working on a greater number of
projects, resulting in a substantial increase in billings at December 31, 1997
compared to December 31, 1996.
The Company has available a Credit Facility to supplement its liquidity
needs. The Credit Facility consists of a $15 million, three-year, revolving
line of credit, which converts thereafter into a five-year term loan. The
Credit Facility expires in July 2006. As of June 30, 1998, the Company had
drawn an aggregate of $5.0 million under the Credit Facility. Amounts
outstanding under the Credit Facility bear interest at variable rates which
are based upon, at the option of the Company, the lender's prime rate or
LIBOR. The interest rate on such indebtedness at June 30, 1998 was 6.5% per
annum. The Credit Facility restricts or prohibits the Company from incurring
indebtedness, incurring liens, disposing of assets and requires the Company to
maintain certain financial ratios on an ongoing basis. The Credit Facility is
secured by a lien on substantially all of the assets of the Company, other
than its patents, and the assignment of the right to receive royalty payments
from HMR under the license agreement.
The Company will use a portion of the net proceeds from this offering to
repay a portion of the outstanding indebtedness under the Credit Facility. The
Company believes that the remaining net proceeds from this offering, together
with cash generated from operations and borrowings under the Credit Facility,
will be sufficient to fund its anticipated working capital needs and capital
expenditures (other than financing necessary to complete future acquisitions,
if any) for at least the next 24 months. Future acquisitions, if any, could be
funded with cash from operations, the net proceeds of this offering,
borrowings under the Credit Facility and/or the issuance of debt or equity
securities. There can be no assurance that attractive acquisition
opportunities will be available to the Company or will be available at prices
and upon such other terms that are attractive to the Company. The Company
regularly evaluates potential acquisitions of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions.
As a general rule, the Company will publicly announce such acquisitions only
after a definitive agreement has been signed. The Company currently has no
commitments or agreements with respect to any acquisition. In addition, in
order to meet its long-term liquidity needs or consummate future acquisitions,
the Company may incur additional indebtedness or issue additional equity and
debt securities, subject to market and other conditions. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company or at all. The failure to raise the funds necessary to finance
its future cash requirements or consummate future acquisitions could adversely
affect the Company's ability to pursue its strategy and could negatively
affect its operations in future periods. See "Risk Factors--Risks Associated
with Acquisitions."
YEAR 2000 COMPLIANCE
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the application year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to ensure that its computer systems are modified to be compliant on a
timely basis.
23
<PAGE>
BUSINESS
OVERVIEW
Albany Molecular Research is an integrated chemistry outsourcing company
that offers a broad range of chemistry research and development services to
pharmaceutical and biotechnology companies involved in drug discovery and
development. The Company offers services traditionally provided by chemistry
divisions within pharmaceutical companies, including medicinal chemistry,
chemical development, analytical chemistry services and small-scale
manufacturing. The Company's services are designed to permit pharmaceutical
and biotechnology companies to reduce overall drug development time and cost
and to pursue simultaneously a greater number of drug discovery and
development opportunities. Since its inception in 1991, the Company has
conducted over 400 projects for more than 100 customers. The Company achieved
a 66% compound annual growth rate in net contract revenue from 1993 to 1997.
In addition to its contract services, the Company conducts a limited amount of
proprietary research and development. The Company has developed and patented a
substantially pure form of, and a manufacturing process for, the active
ingredient in a new, non-sedating antihistamine marketed by HMR as Allegra in
the Americas and as Telfast elsewhere. Pursuant to a licensing agreement
between the Company and HMR, the Company has received since October 1996 $12.8
million in milestones and royalties from HMR and is entitled to receive
ongoing royalties based upon a percentage of sales of the product.
INDUSTRY OVERVIEW
The pace of drug discovery has accelerated significantly in recent years.
Fueled by advances in disciplines such as molecular biology, genomics and
high-throughput synthesis and screening, opportunities to develop therapeutics
for previously unmet or undermet medical needs are greater than ever before.
In addition, pharmaceutical and biotechnology companies are under increasing
pressure to deliver new drugs to market and reduce the time required for drug
development. In order to take advantage of these opportunities and to respond
to these pressures, many pharmaceutical companies have augmented their
internal research and development capacity through outsourcing. Similarly,
many biotechnology companies, constrained by cost pressures, have elected to
outsource rather than develop certain research and development functions in-
house. As a result of these factors, many pharmaceutical and biotechnology
companies are utilizing contract research organizations ("CROs"). The CRO
industry has grown dramatically over the last several years to meet these
needs. Industry analysts estimate that outsourcing represents approximately
10%, or $3.5 billion, of the $35 billion of research and development
expenditures made by pharmaceutical and biotechnology companies in 1996. While
outsourcing has traditionally been limited to the later stages of drug
development, such as clinical trial management and manufacturing, many
pharmaceutical and biotechnology companies are utilizing contract chemistry
service providers to supplement or, in some cases, replace internal chemistry
expertise. Currently, only a few companies provide chemistry services for drug
discovery and development, and have typically focused only on selected
portions of the process. Albany Molecular Research believes that significant
opportunities exist for a company that provides a broad range of outsourced
chemistry services throughout the drug discovery and development process.
24
<PAGE>
The Importance of Chemistry in the Drug Discovery and Development Process
Although many scientific disciplines are required for new drug discovery and
development, chemistry and biology are at the center of this process. Chemists
and biologists typically work together to prepare and deliver new chemical
substances, develop laboratory models of disease, test compounds to identify
agents that demonstrate the desired activity and finally create a marketable
drug. Chemistry is an integral part of the drug discovery and development
process, which includes: (i) lead discovery -- the identification of a compound
that may be developed into a new drug; (ii) lead optimization -- an iterative
process of modifying the structure of a lead compound to optimize its
therapeutic properties; (iii) preclinical testing -- the testing of the
compound in increasingly complex animal models; (iv) clinical trials -- the
multi-phase testing of the compound for safety and efficacy in humans; and (v)
product commercialization -- the manufacture, marketing and sale of commercial
quantities of the approved drug.
DRUG DISCOVERY AND DEVELOPMENT PROCESS
- ----------- -------------- ------------- ---------- -------------------
LEAD LEAD PRECLINICAL CLINICAL PRODUCT
DISCOVERY OPTIMIZATION TESTING TRIALS COMMERCIALIZATION
- ----------- -------------- ------------- ---------- -------------------
Lead Discovery. The first major hurdle in drug discovery is the
identification of one or more lead compounds that interact with a biological
target, such as an enzyme, receptor or other protein, that may be associated
with a disease. A biological test or assay based on the target is developed and
used to test or "screen" chemical compounds. Medicinal chemistry is used to
synthesize these compounds rapidly and study the interaction between the three
dimensional molecular structures of the compounds and biological targets (i.e.,
structure-activity relationships (SARs)). The objective of lead discovery is to
identify a lead compound for further research and development.
Lead Optimization. Once a lead compound has been discovered, medicinal
chemistry is used to optimize that lead by modifying and synthesizing analogs
of active lead candidates with improved potency, selectivity and/or
pharmacokinetics (improved absorption, solubility, half-life and metabolism) in
order to identify a more promising drug candidate. This iterative process
involves the synthesis of compounds for biological testing, the analysis of the
screening results and the further design and synthesis of additional compounds
based upon the analysis of structure-activity relationships.
During lead optimization, specialists in chemical development perform the
scale up synthesis of a lead compound as that compound is advanced through the
drug discovery and development process. These scientists are experts in the
preparation of chemicals on a larger scale and focus on the efficiency,
economics, simplicity and safety of the preparation of such chemicals. Chemical
development is also an iterative process which may require progressive
improvements in chemical synthesis as subsequent repeat batches are prepared.
In addition to providing repeat synthesis, significant process research may be
required to refine existing or develop new synthesis processes. Also during the
lead optimization stage, analytical chemistry services are required for
identity and purity testing and method development.
Preclinical Testing. Following the selection of a lead compound during the
lead optimization stage, advanced preclinical testing is conducted in order to
evaluate the efficacy and safety of the lead compound prior to initiating human
clinical trials. The lead compound must demonstrate a scientifically proven
benefit in controlled and well defined biological tests in animal models, and
must exhibit this benefit at doses much lower than those at which side effects
would occur. During the lead optimization and preclinical testing phases, the
synthesis of additional analogs of the lead compound using medicinal chemistry
continues. Often a second compound, referred to as a backup compound or second
generation analog, is synthesized and enters the drug development cycle. In
addition, continued synthesis is desirable in order to prepare compounds of
significant diversity to broaden potential patent coverage. As a result, the
advancement of a lead compound into preclinical
25
<PAGE>
testing is often a catalyst which increases, rather than reduces, the need for
additional medicinal chemical synthesis. During this phase, specialists in
chemical development continue to conduct significant process research to
optimize the production of a compound.
Clinical Trials. During clinical trials several phases of studies are
conducted to test the safety and efficacy of a drug candidate. As study
populations increase and trial durations lengthen, larger quantities of the
active ingredient are required. The bulk active ingredient, and the formulated
drug product, must be prepared under cGMP guidelines. Analytical chemistry
services are critical to cGMP manufacturing. Additional preparations provide
an opportunity to further refine the manufacturing process, with the ultimate
goal of maximizing the cost effectiveness and safety of the synthesis prior to
commercialization.
Trends Toward Outsourcing of Chemistry Services
Pharmaceutical and biotechnology companies have in recent years increasingly
turned to CROs to manage their drug development processes more efficiently.
Most CROs have traditionally provided services to assist in the later stages
of drug development ranging from animal testing through clinical trials,
manufacturing, marketing and sales. In recent years, pharmaceutical and
biotechnology companies have sought to outsource services at progressively
earlier stages of drug discovery and development, including early-stage
chemistry. The Company believes the following trends have led and will
continue to lead to an increase in chemistry services outsourcing in drug
discovery and development:
Technological innovation in drug development. New technologies, such as
genomics, combinatorial chemistry and high-throughput screening, have
resulted in the identification of a larger number of promising biological
targets and associated active compounds, which has increased the demand for
chemistry services for lead discovery and optimization. Pharmaceutical and
biotechnology companies are increasingly turning toward chemistry
outsourcing to pursue the opportunities made possible by the use of these
new technologies.
Time to market pressures. Pharmaceutical and biotechnology companies are
under increasing pressure to reduce the time to bring new drugs to market
in order to maximize patent life and capture the benefits of being first to
market. Chemistry outsourcing permits pharmaceutical and biotechnology
companies to run multiple projects, and multiple phases of a particular
project, simultaneously.
Reallocation of resources between variable and fixed costs. Over the last
several years, drug companies have centralized their research and
development efforts, streamlined their internal operations and outsourced
certain functions, thereby converting previously fixed costs to variable
costs. Outsourcing chemistry services allows pharmaceutical and
biotechnology companies to use variable resources to maximize productivity
during periods of rapid growth or in response to cost containment
pressures.
Increasing complexity and purity requirements of new drug candidates. Many
drug candidates are technically demanding to synthesize, particularly in
commercial quantities. In addition, increased regulatory pressures for high
purity molecules earlier in the development process have led to more
complex chemistry requirements. Pharmaceutical companies are moving towards
outsourcing to third-party service providers to gain early access to
scalable manufacturing processes.
Need for chemistry expertise in the biotechnology industry. Many
biotechnology and emerging pharmaceutical companies lack the broad range of
expertise needed for the chemistry component of drug discovery and
development. These companies have elected to outsource their needs to third
party service providers rather than make the investment required to perform
these functions in-house.
26
<PAGE>
BUSINESS STRATEGY
The Company's objective is to be the leading provider of comprehensive
outsourced chemistry research and development services to the pharmaceutical
and biotechnology industries. Key elements of the Company's business strategy
include the following:
Expand Service Offerings. The Company, since its inception, has expanded
its service offerings across a number of phases of drug discovery and
development to keep pace with the needs of its customers. In 1995, the
Company began offering analytical chemistry services derived from its
medicinal chemistry and chemical development capabilities and has recently
begun to provide combinatorial chemistry services. The Company has also
recently entered into a collaboration with a manufacturer in order to offer
its customers large-scale cGMP manufacturing services. The Company may
expand its service capabilities through strategic acquisitions of companies
or technologies that complement the Company's capabilities.
Increase Capacity. The Company will seek to support its future growth by
increasing capacity both in terms of the number of scientists and the size
of its facilities within each of its service offerings. The Company has
added 31 scientists since January 1, 1997 and continually seeks to recruit
and hire additional experienced scientists. The Company is expanding its
Albany facility to more than triple its current laboratory space and
intends to expand its facilities to increase capacity and accommodate
additional scientists as necessary.
Leverage Customer Relationships. The Company seeks to leverage its customer
relationships by providing chemistry-related services across many phases of
drug discovery and development prior to bulk manufacturing. In 1997, four
of the Company's five largest customers utilized more than one of its
service offerings. The Company believes that its existing customer base
also provides an excellent source of referrals.
Expand Customer Base. The Company is seeking to expand its customer base in
both domestic and international markets. The Company believes there are
significant opportunities for growth in geographic areas in which the
Company has not conducted significant marketing efforts to date.
Accordingly, the Company has recently expanded its U.S. and international
marketing efforts and will consider adding a physical presence in
additional locations as appropriate.
Leverage Proprietary Technology. Chemistry technology, such as that offered
by the Company, lies at the core of the proprietary aspects of drug
development. In connection with its contract chemistry services, the
Company seeks opportunities to obtain contractual terms which may entitle
the Company to milestones and/or royalties with respect to compounds or
processes developed in conjunction with its customers. Independent of its
contract chemistry services, the Company seeks to identify and develop
possible proprietary compounds or processes. The Company currently is
investigating a number of compounds for their development potential.
SERVICE OFFERINGS
The Company is an integrated chemistry outsourcing company that offers a
broad range of chemistry research and development services to pharmaceutical
and biotechnology companies involved in drug discovery and development. The
Company's service offerings include medicinal chemistry, chemical development,
analytical chemistry services and cGMP manufacturing. The significant
experience and expertise of the Company's scientists enable the Company to
provide high-quality, sophisticated chemistry services tailored to its
customers' specific needs. The Company's services are designed to permit
pharmaceutical and biotechnology companies to reduce overall drug development
time and costs and to pursue simultaneously a greater number of drug discovery
and development opportunities.
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<PAGE>
The chart below sets forth the types of chemistry services which typically
are employed in the different phases of drug discovery and development and
those which are offered by the Company.
[CHART WITH FIVE STAGES OF DRUG DISCOVERY AND DEVELOPMENT ON THE
HORIZONTAL AXIS AND THE COMPANY'S FOUR SERVICE OFFERINGS ON THE VERTICAL
AXIS, WITH BARS INDICATING (I) THE CURRENT SERVICES OFFERED BY THE
COMPANY, (II) SERVICES PROVIDED BY COLLABORATIONS, AND (III) SERVICES
NOT PROVIDED BY THE COMPANY]
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. The
Company's medicinal chemistry group assists its customers in the pursuit of
new drug leads as well as in lead development and optimization using modern
structure-based drug design. The Company's 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 the Company 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.
The following is an example of services provided by the Company's medicinal
chemistry group:
A customer recently engaged the Company's medicinal chemistry group to
pursue a novel therapeutic compound for cardiovascular disease. Scientists at
the Company designed and synthesized over 400 compounds which were
subsequently screened by the customer. After a lead compound was identified
from that series, the customer engaged the Company's chemical development
group to perform scale up and process development for the lead compound. The
Company then synthesized a batch of the compound for use in clinical trials,
which are
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<PAGE>
ongoing. During the course of this project, the Company's analytical chemistry
staff performed analytical method development, validation and release testing,
as well as provided regulatory support for the synthesis of the cGMP batch.
The customer has filed a patent application in which two of the three named
inventors were Albany Molecular Research scientists.
As of June 30, 1998, the Company had 37 employees, including 25 Ph.D.
scientists, working in its medicinal chemistry department. The four most
senior scientists in the medicinal chemistry department together have 62 years
of experience in chemistry research and development. As of June 30, 1998, the
Company was working on 19 active medicinal chemistry projects for eight
customers, including Astra AB, Bausch & Lomb Incorporated, Pfizer Inc. and
Sphinx Pharmaceuticals, a division of Eli Lilly and Company ("Sphinx").
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. The Company's
chemical development scientists design novel or improved methods and processes
suitable for medium to large scale production. The Company's 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 the Company 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.
The following is an example of the services provided by the Company's
chemical development group:
A customer recently engaged the Company's chemical development group for a
project in which the Company's scientists reduced the time and improved the
safety and overall yield of a customer's manufacturing process. The original
process involved 15 steps and several dangerous high-temperature, high-
pressure reactions, noxious reagents and difficult crystallizations. The
Company's scientists shortened the process to ten steps, eliminated the
undesirable reactions, reagents and crystallizations and doubled the overall
yield. The Company prepared a total of 11 kilograms of final product,
including three kilograms produced under cGMP guidelines for use in clinical
trials.
As of June 30, 1998, the Company had 25 employees, including 19 Ph.D.
scientists, working in its chemical development department. The four most
senior scientists in the chemical development department together have 72
years of experience in chemistry research and development. As of June 30,
1998, the Company was working on 19 active chemical development projects for
five customers, including AtheroGenics, Inc., Pfizer Inc. and Triangle
Pharmaceuticals, Inc.
Analytical Chemistry Services
The Company's analytical chemistry services include identity and purity
testing, method development and validation, and stability testing. The Company
also provides 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. The Company's analytical services are
designed to support its customers' compliance with these guidelines. The
Company typically provides these services at several stages throughout drug
discovery and development starting with lead optimization.
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<PAGE>
Analytical services provided by the Company include:
. Test method development and validation;
. Quality control testing;
. High performance liquid and/or gas chromatography (including purity
assessment), separation of enantiomers and identification of impurities;
. Spectroscopic and nuclear magnetic resonance services;
. 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.
As of June 30, 1998, the Company had 11 employees, including two Ph.D.
scientists, working in its analytical chemistry department. The four most
senior scientists in the Company's analytical services department together
have 70 years of experience in analytical chemistry and regulatory affairs.
cGMP Manufacturing Services
The Company provides chemical synthesis and manufacturing services for its
customers under cGMP guidelines. The Company's Albany facility has production
facilities, and quarantine and restricted access storage necessary for cGMP
manufacturing. The Company currently has the capacity to produce laboratory
scale amounts (1 to 10 kilograms) of chemical compounds.
ALLEGRA ROYALTY AND LICENSING ARRANGEMENT
Fexofenadine HCl (marketed as Allegra in the Americas and as Telfast
elsewhere), a new, non-sedating antihistamine, was developed to address
certain rare side effects associated with its predecessor, Seldane. In 1992,
Seldane was the leading antihistamine on the market with annual sales
approaching $800 million. Seldane, a pro-drug, was rapidly converted by the
liver into its active form, a metabolite of terfenadine carboxylic acid
("TAM"). A very small percent of Seldane users exhibited ventricular
arrhythmias, a side effect sometimes associated with Seldane. A desire to
eliminate the side effect caused Marion Merrell Dow Inc. (now HMR) to develop
a synthetic form of the Seldane active metabolite.
Independent of HMR's development of TAM, the Company developed a new process
to prepare TAM in a purer form. The Company subsequently filed a patent
application in which this process chemistry, and the substantially pure TAM it
produced, fexofenadine HCl, were claimed. The Company has obtained several
U.S. and foreign patents relating to this technology. The Company's issued
patents relating to TAM expire between 2013 and 2015. In March 1995, the
Company entered into a license agreement with HMR. Under the terms of the
license agreement, the Company granted HMR an exclusive, worldwide license to
any patents issued to the Company related to its original TAM patent
applications. In connection with the licensing arrangement, HMR made a $2.0
million equity investment in the Company. Pursuant to the license agreement,
HMR has paid the Company $6.5 million in milestone payments and $6.3 million
in royalties through June 30, 1998 and is obligated to pay ongoing royalties
to the Company based upon sales of fexofenadine HCl. Sales of fexofenadine HCl
in the U.S. were approximately $212 million for the year ended December 31,
1997 and approximately $86 million for the quarter ended March 31, 1998. See
"Risk Factors--Risks Related to the Allegra Royalty" and "--Proprietary
Technology; Unpredictability of Patent Protection."
CURRENT COLLABORATIONS; CUSTOMERS
The Company has entered into a number of collaborations with biotechnology
and pharmaceutical companies that provide services or possess technology
complementary to those provided or possessed by the Company. These
collaborations are focused on particular aspects of the drug development
process.
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<PAGE>
In January 1998, the Company entered into an arrangement with Sphinx whereby
the Company will use Sphinx technology to resynthesize the Sphinx
combinatorial chemistry library. The Company has been granted a non-exclusive
license to use certain parts of the Sphinx technology, excluding the Lilly
Combinatorial Library (as defined in the Sphinx agreement), after certain
milestones have been met and subject to the payment of royalties by the
Company.
In February 1997, the Company began a collaboration with Cambrex Corporation
("Cambrex"), a New Jersey-based specialty chemistry manufacturing company
which provides large-scale synthesis of pharmaceutical intermediates and
active pharmaceutical ingredients. Cambrex currently has five cGMP
manufacturing facilities in the United States and Europe. The Company, through
Cambrex, can offer its customers the ability to move from small to full-scale
production with minimal disruption and delay. In addition, Cambrex has engaged
the Company to develop processes specifically designed to fit its large-scale
cGMP manufacturing capabilities.
Since its inception, the Company has conducted over 400 projects for more
than 100 customers. The Company's customers include pharmaceutical companies,
biotechnology companies, agricultural companies, fine chemical companies and
contract chemical manufacturers. Contract revenue from Astra AB accounted for
24.1% of the Company's aggregate net contract revenue plus other income
(including licensing fees, milestones and royalties) for the year ended
December 31, 1997. No other customers accounted for more than 10% of the
Company's aggregate net contract revenue plus other income (including
licensing fees, milestones and royalties) for such period. For the year ended
December 31, 1997, net contract revenue from the Company's three largest
customers represented approximately 29%, 11% and 9% of total net contract
revenue, respectively. For the three months ended March 31, 1998, net contract
revenue from the Company's three largest customers represented approximately
19%, 17% and 17% of total net contract revenues, respectively.
MARKETING
Since the Company's inception, its senior management and department heads
have marketed its services. Because its customers are typically highly skilled
scientists, the Company's use of its technical experts in marketing has
allowed it to establish strong customer relationships. In addition to
marketing by senior management, the Company has relied on the marketing
efforts of consultants, both in the United States and abroad. The Company
markets its 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 selected advertisements in scientific and trade
journals. The Company has also received a significant amount of business from
customer referrals.
COMPETITION
The Company believes that the successful recruitment and retention of
qualified Ph.D., masters and bachelor level scientists is a key element in
achieving its strategic goals. The Company believes that as competitive
pressures in the pharmaceutical industry to produce lead compounds increase,
the recruitment and retention of chemists will become increasingly
competitive. In order to meet this challenge, the Company actively recruits
scientists at colleges and universities, through third-party recruitment firms
and through contacts of the Company's employees. The Company believes the
sophisticated chemistry performed in the course of its business will assist it
in attracting and retaining qualified scientists. As an incentive directed
toward the recruitment and retention of highly skilled scientists, the Company
has a program which provides that any scientist or scientists employed by the
Company named as an inventor on a patent will receive in the aggregate 10% of
any net revenues received by the Company with respect to such patent. The
Company offers competitive salaries and benefits to its scientists.
The Company faces 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. The Company competes 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 the Company. Smaller companies may
also prove to be significant competitors, particularly through arrangements
with large corporate collaborators.
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<PAGE>
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 the Company's products and services, are developing or already
possess in-house technologies and services offered by the Company. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company provides services either on
their own or through collaborative efforts.
The Company anticipates that it will face increased competition in the
future as new companies enter the market and advanced technologies become
available. The Company's services and expertise may be rendered obsolete or
uneconomical by technological advances or entirely different approaches
developed by one or more of the Company's competitors. The existing approaches
of the Company's competitors or new approaches or technologies developed by
the Company's competitors may be more effective than those developed by the
Company. There can be no assurance that the Company's competitors will not
develop more effective or more affordable technologies or services thus
rendering the Company's technologies and/or services obsolete, uncompetitive
or uneconomical.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in part, on its ability to obtain and
enforce patents, protect trade secrets, obtain licenses to technology owned by
third parties when necessary, and conduct its 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. There can be no assurance 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 those
of the Company, the Company 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 the Company, such proceedings could result in
substantial cost to the Company. 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.
There can be no assurance that in the event that any claims with respect to
any of the Company's 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 the Company to lose exclusivity
afforded by the disputed rights. If a third party is found to have rights
covering products or processes used by the Company, the Company could be
forced to cease using the technologies covered by such rights, could be
subject to significant liability to such third party, and could be required to
license technologies from such third party. Furthermore, even if the Company's
patents are determined to be valid, enforceable, and broad in scope, there can
be no assurance that competitors will not be able to design around such
patents and compete with the Company and its licensees using the resulting
alternative technology.
The Company has a policy of seeking patent protection for patentable aspects
of its proprietary technology. The Company owns six United States patents
relating to fexofenadine HCl and certain related manufacturing processes. The
Company's issued patents expire between 2013 and 2015. The Company seeks
patent protection with respect to products and processes developed in the
course of its activities when it believes such protection is in its best
interest and when the cost of seeking such protection is not inordinate.
However, no assurance can be given that any patent application will be filed,
that any filed applications will result in issued patents or that any issued
patents will provide the Company 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 the Company's patents.
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<PAGE>
The Company may also enter into collaborations or other arrangements with
its customers whereby the Company retains certain ownership rights or may be
entitled to receive milestones and royalties with respect to proprietary
technology developed by the Company during the contract period. However, many
of the Company's contracts with its customers provide that ownership of
proprietary technology developed by the Company in the course of work
performed under the contract is vested in the customer, with the Company
retaining little or no ownership interest.
The Company also relies upon trade secrets and proprietary know-how for
certain unpatented aspects of its technology. To protect such information, the
Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such
information. There can be no assurance that these agreements provide
meaningful protection or that they will not be breached, that the Company
would have adequate remedies for any such breach, or that the Company's trade
secrets, proprietary know-how, and technological advances will not otherwise
become known to others. In addition, there can be no assurance that, despite
precautions taken by the Company, others have not and will not obtain access
to the Company's proprietary technology. Further, there can be no assurance
that third parties will not independently develop substantially equivalent or
better technology.
GOVERNMENT REGULATION
Although the manufacture, transportation and storage of the Company's
products are subject to certain laws and regulations discussed in the last
paragraph of this section, the sale of the Company's products is not subject
to significant government regulation. However, the Company's future
profitability is dependent on the sales of pharmaceuticals and other products
developed by the Company's customers and collaborators. 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 a customer of the Company, or in the event
the Company decides to develop a drug beyond the preclinical phase. The nature
and the extent to which such regulation may apply to the Company's customers
will vary depending on the nature of any such pharmaceutical products.
Virtually all pharmaceutical products developed by the Company's 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
result of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, the Company or its 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, the Company or its
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 and effort and there can be no assurance 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, the
Company will also be subject to foreign regulatory requirements governing
human clinical trials and marketing approval for pharmaceutical products. The
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<PAGE>
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. The Company's facilities are subject to scheduled period
regulatory inspections to ensure compliance with cGMP requirements. Failure on
the part of the Company 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 the Company had
materially violated cGMP requirements could result in additional regulatory
sanctions and, in severe cases, could result in a mandated closing of the
Company's facilities which would materially and adversely affect the Company's
business.
The research and development processes of the Company involve the controlled
use of hazardous materials. The Company is 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 the Company
believes that its 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, the
Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. In addition, there can be
no assurance that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future.
EMPLOYEES
As of June 30, 1998, the Company had 122 employees, 47 of whom have obtained
a Ph.D. degree in chemistry. Of such employees, 37 were engaged primarily in
medicinal chemistry services (including 25 Ph.D.s), 25 were engaged primarily
in chemical development services (including 19 Ph.D.s), 11 were engaged
primarily in analytical services (including two Ph.D.s), three were engaged
primarily in cGMP manufacturing services and 36 were engaged in management and
administration. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its relations with its employees
to be good.
PROPERTIES
The Company has two operating locations. The Company leases a facility in
Albany, New York, of which it currently occupies 30,000 square feet, and has
an additional 60,000 square feet under construction including the addition of
a second floor. The lease for this facility has a 10 year term, which expires
on November 30, 2007, and provides the Company an option to purchase the
building within the next five years for $3.5 million and another option to
renew the lease for an additional 10 year term. The Company's Albany facility
currently has two medicinal chemistry, two chemical development and two
analytical laboratories, two dedicated GMP manufacturing suites, three
analytical instrumentation rooms, and a stability cabinet room. The expansion
of the Company's Albany facility will add six medicinal chemistry and two
chemical development laboratories, three cGMP manufacturing suites, four
segregated cGMP dryer rooms, one analytical chemistry laboratory, one
stability cabinet room, and an additional analytical instrumentation room. The
expansion is estimated to cost $12.5 million and is expected to be completed
by December 1998. The Company also leases approximately 18,000-square feet of
laboratory facilities in Rensselaer, New York. The lease for these
laboratories expires June 30, 2001. The Company has the option to renew this
lease on a year-to-year basis. The Company's Rensselaer facility has three
medicinal chemistry, one combinatorial chemistry and three chemical
development laboratories. In 1997, the Company had total operating lease costs
of $240,000.
LEGAL PROCEEDINGS
The Company, from time to time, may be involved in various claims and legal
proceedings arising in the ordinary course of its business. The Company is not
currently a party to any such claims or proceedings which, if decided
adversely to the Company, would either individually or in the aggregate have a
material adverse effect on the Company's business, financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas E. D'Ambra, Ph.D. ...... 42 Chairman of the Board of Directors and
Chief Executive Officer
Donald E. Kuhla, Ph.D. ........ 56 President, Chief Operating Officer and
Director
Harold M. Armstrong, Jr. ...... 42 Executive Vice President, Chief Financial
Officer, Secretary, Treasurer and Director
Chester J. Opalka.............. 50 Vice President, Senior Research Chemist and
Director
Vice President, Commercial Operations and
Lawrence D. Jones, Ph.D. ...... 47 Quality
Harold Meckler, Ph.D. ......... 41 Vice President, Chemical Development
Michael P. Trova, Ph.D. ....... 37 Vice President, Medicinal Chemistry
James J. Grates................ 37 Director of Human Resources
Anthony M. Tartaglia,
M.D.(1)(2).................... 65 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Thomas E. D'Ambra, Ph.D. co-founded the Company in 1991 and currently serves
as the Company's Chairman of the Board and Chief Executive Officer. Prior to
co-founding the Company, Dr. D'Ambra served as the Vice President, Chemistry
and co-founder of Coromed, Inc., a contract clinical company, from 1989 to
1991 and Group Leader and Senior Research Chemist with Sterling Winthrop,
Inc., a pharmaceutical company, from 1982 to 1989. Dr. D'Ambra holds a B.A.
degree in chemistry from the College of the Holy Cross and a Ph.D. in organic
chemistry from the Massachusetts Institute of Technology.
Donald E. Kuhla, Ph.D. has served as the Company's President and Chief
Operating Officer since July 1998 and as a Director of the Company since
October 1995. Prior to joining the Company as an employee, Dr. Kuhla served as
the Vice President and Chief Technical Officer of Plexus Ventures, Inc., a
biotechnology investment and consulting company, from February 1994 to June
1998, the Chief Operating Officer of Hybridon, Inc., a pharmaceutical company,
and Enzymatics, Inc., a medical diagnostics company, from November 1990 to
February 1994, in various positions with Rorer Group, Inc., a pharmaceutical
company, from 1981 to 1990 and in various positions with Pfizer Inc., a
pharmaceutical company, from 1968 to 1981. Dr. Kuhla has a B.A. degree in
chemistry from New York University and a Ph.D. in organic chemistry from Ohio
State University.
Harold M. Armstrong, Jr., CPA currently serves as the Company's Executive
Vice President, Chief Financial Officer, Secretary and Treasurer, has served
as a Director of the Company since September 1992 and has been with the
Company since August 1992. Prior to joining the Company, Mr. Armstrong served
as an accountant in various positions, including Senior Manager, with Ernst &
Young LLP, an international accounting firm, from September 1986 to January
1992 and as a manager with Urbach, Kahn & Werlin LLP, an accounting firm, from
1981 to 1986. Mr. Armstrong holds a B.S. degree in business and accounting
from Syracuse University.
Chester J. Opalka co-founded the Company in 1991, currently serves as a Vice
President and Senior Research Chemist of the Company and has served as a
Director of the Company since its inception. Prior to co-founding the Company,
Mr. Opalka served as a Senior Research Chemist with Coromed, Inc. from January
1991 to September 1991 and in various positions with Sterling Winthrop, Inc.
from 1970 to 1991. Mr. Opalka holds a B.S. degree in chemistry from Niagara
University.
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Lawrence D. Jones, Ph.D. has served as the Company's Vice President,
Commercial Operations and Quality since June 1998 and served as the Company's
Vice President, Operations from March 1998 to June 1998. Prior to joining the
Company, Dr. Jones served as the Executive Vice President and co-founder of
Inhalon Pharmaceuticals, Inc., a manufacturer and distributor of generic
inhalation anesthetics, from August 1991 to February 1998, the Director of
Marketing and Development for Kaneka America Corporation, a manufacturer and
distributor of chemical intermediates, from 1988 to 1991, and a Sales and
Marketing Manager with Johnson Matthey, Inc., a pharmaceutical manufacturer,
from 1980 to 1998. Dr. Jones holds a B.A. degree in chemistry from Cornell
University and a Ph.D. in organic chemistry from Duke University.
Harold Meckler, Ph.D. has served as the Company's Vice President, Chemical
Development since May 1997 and served as the Company's Director of Chemical
Development from August 1995 to May 1997. Prior to joining the Company, Dr.
Meckler served as Manager, Organic Chemistry of Telor Ophthalmic
Pharmaceuticals, Inc., a biopharmaceutical company, from March 1994 to August
1995, in various capacities with Ciba-Geigy Corporation, a pharmaceutical
company, from 1984 to March 1994, and Senior Research Chemist, Chemical
Development with Sterling Winthrop, Inc. from 1982 to 1984. Dr. Meckler holds
a B.S. degree in chemistry from the University of Maryland, College Park and a
Ph.D. in organic chemistry from the State University of New York, Buffalo.
Michael P. Trova, Ph.D. has served as the Company's Vice President,
Medicinal Chemistry since March 1998 and served as the Company's Director of
Medicinal Chemistry from August 1996 to March 1998 and as the Company's
Assistant Director of Chemical Development from August 1995 to August 1996.
Prior to joining the Company, Dr. Trova was a staff scientist with American
Cyanamid, Lederle Laboratories, a pharmaceutical company, from 1989 to August
1995 and a post-doctoral researcher at the Massachusetts Institute of
Technology from 1987 to 1989. Dr. Trova holds a B.S. degree in chemistry from
Rensselaer Polytechnic Institute and a Ph.D. in organic chemistry from Ohio
State University.
James J. Grates has served as the Company's Director of Human Resources
since December 1996. Prior to joining the Company, Mr. Grates was Executive
Vice President, Corporate Services with Corporate Health Dimensions, a health
care service provider company, from April 1995 to December 1996 and Manager of
Human Resources with Norton Performance Plastics, Inc., a plastic
manufacturer, from 1990 to September 1995. Mr. Grates holds a B.S. degree in
business administration from Syracuse University and an A.A.S. degree in
marketing from Herkimer County Community College.
Anthony M. Tartaglia, M.D. has served as a Director of the Company since
October 1995. Dr. Tartaglia served as a physician with Albany Medical Center
from 1984 until his retirement in June 1998 and also served as Dean of Albany
Medical College from 1990 to June 1995. Dr. Tartaglia previously served as
Executive Director of the Albany Medical Center Hospital from 1987 to 1990,
Senior Vice President for Patient Care of the Albany Medical Center from 1984
to 1987 and as Chief of Medicine at St. Peter's Hospital in Albany from 1975
to 1984. Dr. Tartaglia is also a director of Albank Financial Corporation, a
bank holding company. Dr. Tartaglia holds a B.S. degree in biology from Union
College and a M.D. from the University of Rochester Medical School.
BOARD OF DIRECTORS
The Company currently has five directors. The Company's Board of Directors
is divided into three classes, with the members of each class of directors
serving for staggered three-year terms. The Board consists of one Class I
Director (Mr. Opalka), two Class II Directors (Mr. Armstrong and Dr. Kuhla)
and two Class III Directors (Drs. D'Ambra and Tartaglia), whose initial terms
will expire at the 1999, 2000 and 2001 annual meetings of shareholders,
respectively. Within 90 days after the completion of this offering, the
Company intends to expand the Board of Directors and elect one additional
Class I Director and one additional Class II Director, neither of whom will be
officers or employees of the Company.
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends the independent accounting firm to be appointed to
audit the Company's financial statements and to perform services related to
such audit, reviews the scope and results of such audit with the independent
accountants, reviews the Company's year-end operating results with management
and the independent accountants, considers the adequacy of the internal
36
<PAGE>
accounting procedures and considers the effect of such procedures on the
accountants' independence. The Audit Committee currently consists of Dr.
Tartaglia, who is not an officer or an employee of the Company. One of the
directors added within 90 days following the offering will be appointed to
serve on the Audit Committee. The Compensation Committee reviews and
recommends the compensation arrangements for officers and other senior level
employees, reviews general compensation levels for other employees as a group,
determines the options or stock to be granted to eligible persons under the
1998 Stock Plan and takes such other action as may be required in connection
with the Company's compensation and incentive plans. The Compensation
Committee currently consists of Dr. Tartaglia. One of the directors added
within 90 days following the offering will be appointed to serve on the
Compensation Committee. See "--Compensation Committee Interlocks and Insider
Participation."
Directors receive such compensation for their services as the Board of
Directors may from time to time determine. Further, each director is
reimbursed for reasonable travel and other expenses incurred in attending
meetings. Prior to joining the Company in June 1998, Dr. Kuhla also received a
consulting fee of $2,500 per quarter.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company for the year ended December 31, 1997
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
1997 ANNUAL COMPENSATION COMPENSATION
------------------------ ------------------
NUMBER OF SHARES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS GRANTED(#) COMPENSATION($)
- --------------------------- ------------ ----------- ------------------ ---------------
<S> <C> <C> <C> <C>
Thomas E. D'Ambra, 178,333 97,125 30,573 253,093(1)
Ph.D. ..................
Chairman and Chief
Executive Officer
Harold M. Armstrong, 126,667 48,750 21,492 --
Jr. ....................
Executive Vice
President, Chief
Financial
Officer, Secretary,
Treasurer and Director
Harold Meckler, Ph.D. ... 106,333 25,200 31,365 --
Vice President, Chemical
Development
Michael P. Trova, 95,878 21,635 15,540 9,709(2)
Ph.D. ..................
Vice President,
Medicinal Chemistry
</TABLE>
- ----------
(1) Constitutes payments to Dr. D'Ambra under the Company's Technology
Development Incentive Plan.
(2) Constitutes reimbursement of moving expenses.
37
<PAGE>
Option Grants, Exercises and Holdings. The following table sets forth
information regarding stock options granted during the year ended December 31,
1997 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN OR BASE PRICE EXPIRATION ------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10%
- ---- ---------- ---------------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. D'Ambra,
Ph.D. ................. 16,518 5.9% $4.59 01/01/02 $ 52,494 $ 133,031
14,055 5.1 5.27 12/15/02 51,208 129,771
Harold M. Armstrong,
Jr. ................... 11,607 4.2 4.59 01/01/07 33,529 84,970
9,885 3.6 5.27 12/15/07 32,741 82,972
Harold Meckler, Ph.D. .. 7,845 2.8 4.59 01/01/07 22,662 57,430
15,000 5.4 4.74 05/01/07 44,714 113,315
8,520 3.1 5.27 12/15/07 28,220 71,514
Michael P. Trova,
Ph.D. ................. 8,235 3.0 4.59 01/01/07 23,789 60,285
7,305 2.6 5.27 12/15/07 24,195 61,316
</TABLE>
- ----------
(1) Vesting of options is subject to the continuation of such employee's
service relationship with the Company. The options terminate ten years
after the grant date, subject to earlier termination in accordance with
the 1992 Stock Option Plan and the applicable option agreement.
(2) The exercise price equals the fair market value of the stock as of the
grant date as determined by the Board of Directors after consideration of
a number of factors, including, but not limited to, the Company's
financial performance, the Company's status as a private company at the
time of grants, the minority interests represented by the option shares
and the price of shares of equity securities sold to or purchased by
outside investors.
(3) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 5% and 10% appreciation rates established in regulations of the
Securities and Exchange Commission, compounded annually. The following
table sets forth the potential realizable value of the options held by the
Named Executive Officers using the assumed initial public offering price
of $16.00 per share at the 5% and 10% appreciation rates:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE APPRECIATION
UNDERLYING FOR OPTION TERM
OPTIONS ------------------------------
GRANTED 5% 10%
---------- -------------- ---------------
<S> <C> <C> <C>
Thomas E. D'Ambra, Ph.D. ........... 16,518 $166,209 $421,207
14,055 141,426 358,401
Harold M. Armstrong, Jr. ........... 11,607 116,793 295,977
9,885 99,466 252,066
Harold Meckler, Ph.D. .............. 7,845 78,939 200,047
15,000 150,935 382,500
8,520 85,731 217,259
Michael P. Trova, Ph.D. ............ 8,235 82,863 209,992
7,305 73,505 186,277
</TABLE>
The potential realizable value is not intended to predict future
appreciation of the price of the Common Stock. The values shown do not
consider non-transferability, vesting or termination of the options upon
termination of such employee's employment with the Company.
38
<PAGE>
Option Exercises and Year-End Holdings. The following table sets forth
information concerning the number and value of unexercised options to purchase
Common Stock held by the Named Executive Officers. None of the Named Executive
Officers exercised any stock options during the year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas E. D'Ambra, Ph.D. .. -- 30,573 $ -- $339,272
Harold M. Armstrong, Jr. .. 112,500 21,492 1,762,500 238,496
Harold Meckler, Ph.D. ..... 36,000 31,365 476,880 349,833
Michael P. Trova, Ph.D. ... 36,000 15,540 476,880 172,341
</TABLE>
- ----------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $16.00 per share, less the
applicable exercise price.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1998 Stock Option and Incentive Plan. The 1998 Stock Plan will be adopted by
the Board of Directors and submitted for approval to the Company's
shareholders in August 1998. The following discussion gives effect to such
adoption and approval. The 1998 Stock Plan permits (i) the grant of Incentive
Options, (ii) the grant of Non-Qualified Options, (iii) the issuance or sale
of Common Stock with or without vesting or other restrictions ("Restricted
Stock") or without restrictions ("Unrestricted Stock" collectively with
Restricted Stock, "Stock Grants"), (iv) the grant of Common Stock upon the
attainment of specified performance goals ("Performance Share Awards"), (v)
the grant of the right to receive cash dividends with the holders of the
Common Stock as if the recipient held a specified number of shares of the
Common Stock ("Dividend Equivalent Rights") and (vi) the grant of the right to
receive the value of the excess of the fair market value of the Common Stock
over the exercise price of the Common Stock ("Stock Appreciation Rights" or
"SARs"). These grants may be made to officers and other employees, directors,
advisors, consultants and other key persons of the Company and its
subsidiaries. The 1998 Stock Plan currently provides for the issuance of
919,847 shares of Common Stock plus an additional number of shares of Common
Stock equal to fifteen percent (15%) of the shares of stock issued by the
Company in the previous six months (measured as of June 30 and December 31 of
each year). Of the shares reserved for issuance under the 1998 Stock Plan, no
shares were subject to outstanding options or grants as of July 1, 1998. On
and after the date the 1998 Stock Plan becomes subject to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), options with
respect to no more than shares of Common Stock may be granted to any one
individual in any calendar year.
The 1998 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1998 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1998
Stock Plan the individuals to whom grants will be granted, the combination of
grants to participants and the specific terms of each grant, including
vesting. Incentive Options may be granted only to officers or other full-time
employees of the Company or its subsidiaries, including members of the Board
of Directors who are also full-time employees of the Company or its
subsidiaries. The Compensation Committee may delegate the power to grant
options to non-executive employees to the Company's Chief Executive Officer.
The exercise price of options granted under the 1998 Stock Plan is
determined by the Compensation Committee. In the case of Incentive Options,
the exercise price may not be less than 100% of the fair market value of the
underlying shares on the date of grant. If any employee of the Company or any
subsidiary owns (or
39
<PAGE>
is deemed to own) at the date of grant shares of stock representing in excess
of 10% of the combined voting power of all classes of stock of the Company or
any parent or subsidiary, the option exercise price for Incentive Options
granted to such employee may not be less than 110% of the fair market value of
the underlying shares on that date. Non-Qualified Options may be granted at
prices which are less than the fair market value of the underlying shares on
the date granted. Options typically are subject to vesting schedules,
terminate 10 years from the date of grant and may be exercised for specified
periods subsequent to the termination of the optionee's employment or other
service relationship with the Company. At the discretion of the Compensation
Committee, any option may include a "reload" feature pursuant to which an
optionee exercising an option receives in addition to the number of shares of
Common Stock due on the exercise of such an option an additional option with
an exercise price equal to the fair market value of the Common Stock on the
date such additional option is granted. Upon the exercise of options, the
option exercise price must be paid in full either in cash or by certified or
bank check or other instrument acceptable to the Compensation Committee or, in
the sole discretion of the Compensation Committee, by delivery of shares of
Common Stock already owned by the optionee. The exercise price may also be
delivered to the Company by a broker pursuant to irrevocable instructions to
the broker selling the underlying shares from the optionee.
The 1998 Stock Plan also permits Stock Grants, Performance Share Awards,
grants of Dividend Equivalent Rights and SARs. Stock Grants may be made to
persons eligible under the 1998 Stock Plan, subject to such conditions and
restrictions as the Compensation Committee may determine. Prior to the vesting
of shares, recipients of Stock Grants generally will have all the rights of a
stockholder with respect to the shares, including voting and dividend rights,
subject only to the conditions and restrictions set forth in the 1998 Stock
Plan or in any agreement. The Compensation Committee may also make Stock
Grants to persons eligible under the 1998 Stock Plan in recognition of past
services or other valid consideration, or in lieu of cash compensation. In the
case of Performance Share Awards, the issuance of shares of Common Stock will
occur only after the conditions and restrictions set forth in the grant
agreement are satisfied. SARs may be granted in tandem with, or independently
of, Incentive Options or Non-Qualified Options. The Compensation Committee may
also grant Dividend Equivalent Rights in conjunction with any other grant made
pursuant to the 1998 Stock Plan or as a free standing grant. Dividend
Equivalent Rights may be paid currently or deemed to be reinvested in
additional shares of Common Stock, which may thereafter accrue further
dividends.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1998 Stock Plan may be exercised or vest. Generally, upon a dissolution,
liquidation or sale of a majority of the outstanding voting stock or
substantially all of the assets of the Company, all unvested options, SARs and
other awards shall become vested as of the effective date of such transaction,
except as the Compensation Committee may otherwise specify with respect to
particular awards. Options generally provide for acceleration of vesting in
the event the optionee's employment with the Company is terminated by the
Company without cause or by the optionee for good reason within 18 months
following a change-in-control transaction. To the extent not fully vested and
exercised, options granted under the 1998 Stock Plan terminate upon the
dissolution, liquidation or sale of a majority of the outstanding voting stock
or substantially all of the assets of the Company, except as the parties to
any such transaction may otherwise agree in their discretion.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the "1992
Stock Option Plan") was initially approved by the Board of Directors in August
1992 and was subsequently approved by the Company's shareholders. The 1992
Stock Option Plan provides for the issuance of 1,500,000 shares of Common
Stock. The 1992 Stock Option Plan permits the grant of stock options intended
to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, ("Incentive Stock Options") and options not
intended to so qualify ("Non-qualified Stock Options"). As of July 9, 1998,
options to purchase 1,377,904 shares of Common Stock were outstanding at a
weighted average exercise price of $2.82 per share. Options granted under the
1992 Stock Option Plan (i) generally vest 60% on the third anniversary of the
date of grant and an additional 20% on each of the next two anniversaries and
(ii) terminate on the tenth anniversary of the date of grant. In connection
with this offering, the number of shares of Common Stock reserved for issuance
under the
40
<PAGE>
1992 Stock Option Plan will be reduced to 1,377,904. The Company does not
intend to make grants under the 1992 Stock Option Plan after the effective
date of this offering.
The 1992 Stock Option Plan is administered by a committee of the Board of
Directors (the "Option Committee"). The Option Committee has the power to
amend outstanding stock options so long as such amendment does not adversely
affect the holder of the option. The Option Committee may, in its sole
discretion, accelerate the vesting of any outstanding stock option, including
in the event of a merger, liquidation or sale of substantially all of the
assets of the Company.
1998 Employee Stock Purchase Plan. The Purchase Plan was adopted by the
Board of Directors and subsequently approved by the Company's shareholders in
May 1998. Up to 200,000 shares of Common Stock may be issued under the
Purchase Plan. The Purchase Plan is administered by the Compensation
Committee.
The first offering under the Purchase Plan will begin on January 1, 1999 and
end on June 30, 1999. Subsequent offerings will commence on each January 1 and
July 1 thereafter and will have a duration of six months. Generally, all
employees who are customarily employed for more than 20 hours per week as of
the first day of the applicable offering period are eligible to participate in
the Purchase Plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of
stock of the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his cash compensation
during the offering period. The maximum number of shares which may be
purchased by any participating employee during any offering period is limited
to shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his
accumulated payroll deductions will be used to purchase Common Stock on the
last business day of the period at a price equal to 85% of the fair market
value of the Common Stock on the first or last day of the offering period,
whichever is lower. Under applicable tax rules, an employee may purchase no
more than $25,000 worth of Common Stock in any calendar year. No Common Stock
has been issued to date under the Purchase Plan.
Technology Development Incentive Plan. The Company maintains 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 ten percent (10%) of the net revenue earned by the
Company relating to patented technology with respect to which the eligible
participant is named as an inventor.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company has entered into agreements containing non-competition
restrictions with each of its Named Executive Officers and intends to enter
into employment agreements with each of these officers prior to the
effectiveness of this offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Tartaglia currently serves as the only member of the Compensation
Committee. Dr. Tartaglia is not an executive officer of the Company. Prior to
joining the Company in June 1998, Dr. Kuhla served as a member of the
Compensation Committee. One of the directors added within 90 days following
the offering will be appointed to serve on the Compensation Committee.
41
<PAGE>
CERTAIN TRANSACTIONS
In March 1995, the Company entered into a license agreement with HMR. Under
the terms of the license agreement, the Company granted HMR an exclusive,
worldwide license to any patents issued to the Company related to its original
1993 TAM U.S. patent application. Pursuant to the license agreement, HMR paid
the Company $8.1 million, $2.5 million, $1.0 million and $200,000 in
milestones and royalties in the three months ended March 31, 1998, and the
years ended December 31, 1997, 1996 and 1995, respectively. HMR is also
obligated to pay ongoing royalties to the Company based upon sales of
fexofenadine HCl. In connection with the transactions contemplated by the
license agreement, HMR purchased 1,084,821 shares of Common Stock for a total
purchase price of $2.0 million. The Company granted HMR demand registration
rights with respect to such shares whereby HMR has the right (i) on any one
occasion beginning six months after completion of this offering to require the
Company to register its shares under the Securities Act for resale to the
public (provided that the aggregate offering price of such shares must be at
least $3.0 million), (ii) to require the Company to register its shares on a
"shelf" registration statement in the event the Company registers shares held
by Dr. D'Ambra and or Mr. Opalka under certain specified circumstances and
(iii) to require the Company to include shares held by HMR on registration
statements independently filed by the Company, subject to certain
restrictions. In addition, the Company has agreed to indemnify HMR, its
subsequent transferees, and any underwriters and each of their controlling
persons, against claims and liabilities, including claims and liabilities
arising under the securities laws.
Dr. D'Ambra is entitled to payments under the Company's Technology
Development Incentive Plan for amounts paid to the Company under the license
agreement with HMR. Under this plan, the Company paid Dr. D'Ambra $810,000,
$253,000, $100,000 and $200,000 in the three months ended March 31, 1998, and
the years ended December 31, 1997, 1996 and 1995, respectively. Pursuant to
the Company's Technology Development Incentive Plan, Dr. D'Ambra is entitled
to receive 10% of all royalties paid to the Company under the HMR license
agreement.
The Company is a party to an agreement with Stiefel Laboratories, Inc.
("Stiefel"), the beneficial holder of 10.9% of the outstanding shares of
Common Stock prior to giving effect to the offering, whereby the Company
granted Stiefel participation rights with respect to certain future issuances
of securities by the Company. This agreement will terminate upon completion of
this offering. The Company received $65,000 from Stiefel for services rendered
in the ordinary course of business during 1996.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i)
be approved by a majority of the members of the Company's Board of Directors
and by a majority of the disinterested members of the Company's Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1998 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby of (i) each
person known by the Company to own beneficially five percent or more of the
outstanding shares of Common Stock, (ii) each director and the Named Executive
Officers of the Company and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY OWNED(1)
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER(2) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING(3)
- --------------------------- ------------------ --------------- -----------------
<S> <C> <C> <C>
Thomas E. D'Ambra,
Ph.D.(4)................. 2,890,252 39.7% 30.5%
Chester J. Opalka(5)...... 1,431,819 19.7 15.1
Hoechst Marion Roussel,
Inc. .................... 1,084,821 14.9 11.4
Stiefel Laboratories,
Inc.(6).................. 840,000 10.9 8.9
Harold M. Armstrong,
Jr.(7)................... 733,396 9.9 7.7
Harold Meckler, Ph.D.(8).. 21,600 * *
Michael P. Trova,
Ph.D.(9)................. 21,600 * *
Anthony P. Tartaglia,
M.D.(10)................. 15,753 * *
Donald E. Kuhla,
Ph.D.(11)................ 15,228 * *
All executive officers and
directors as a group (9
persons)................. 5,129,648 68.8 53.1
</TABLE>
- ----------
* Less than 1%.
(1) All percentages have been determined as of June 30, 1998 in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). For purposes of this table, a person or group of
persons is deemed to have "beneficial ownership" of any shares of Common
Stock which such person has the right to acquire within 60 days after the
date of this Prospectus. For purposes of computing the percentage of
outstanding shares of Common Stock held by each person or group of
persons named above, any security which such person or persons has or
have the right to acquire within 60 days after the date of this
Prospectus is deemed to be outstanding, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person. As of June 30, 1998, a total of 7,276,114 shares of Common
Stock were issued and outstanding and 1,377,904 options to acquire Common
Stock were exercisable within 60 days of the estimated effective date of
this offering.
(2) The address of all listed shareholders other than Hoechst Marion Roussel,
Inc. and Stiefel Laboratories, Inc. is c/o Albany Molecular Research,
Inc., 21 Corporate Circle, Albany, New York 12203. The address of Hoechst
Marion Roussel, Inc. is 10236 Marion Park Drive, Kansas City, Missouri
64137. The address of Stiefel Laboratories, Inc. is 255 Alhambra Circle,
Suite 1000, Coral Gables, Florida 33134.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Includes 1,146,109 shares held by the Thomas E. D'Ambra GRAT I trust of
which Dr. D'Ambra serves as the trustee. By virtue of his position as
trustee, Dr. D'Ambra may be deemed to be the beneficial owner of all
shares held by such trust. Excludes 30,572 shares subject to options not
exercisable within 60 days.
(5) Includes 273,330 shares held by the Chester T. Opalka 1997 Retained
Annuity Trust of which Mr. Opalka serves as a co-trustee. By virtue of
his position as a co-trustee, Mr. Opalka may be deemed to be the
beneficial owner of all shares held by such trust. Excludes 10,470 shares
subject to options not exercisable within 60 days.
(6) Includes 420,000 shares subject to options exercisable within 60 days.
(7) Includes 225,000 shares held by the Harold M. Armstrong, Jr. Family Trust
I of which Mr. Armstrong serves as the trustee and 112,500 shares subject
to options exercisable within 60 days. By virtue of his position as
trustee, Mr. Armstrong may be deemed to be the beneficial owner of all
shares held by such trust. Excludes 21,492 shares subject to options not
exercisable within 60 days.
(8) Includes 21,600 shares subject to options exercisable within 60 days.
Excludes 45,765 shares subject to options not exercisable within 60 days.
(9) Includes 15,600 shares subject to options exercisable within 60 days.
Excludes 29,940 shares subject to options not exercisable within 60 days.
(10) Includes 13,750 shares subject to options exercisable within 60 days and
excludes 8,749 shares subject to options not exercisable within 60 days.
(11) Includes 13,750 shares subject to options exercisable within 60 days and
excludes 8,749 shares subject to options not exercisable within 60 days.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
There are currently 100,000 shares of Series A Preferred Stock outstanding
and 7,276,114 shares of Common Stock outstanding. In connection with and
subject to this offering, each ten shares of Series A Preferred Stock will
convert into three shares of Common Stock. The Series A Preferred Stock will
be retired subsequent to such conversion.
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, of which 9,476,114
shares will be issued and outstanding, and 2,000,000 shares of undesignated
preferred stock issuable in one or more series by the Board of Directors
("Preferred Stock"), of which no shares will be issued and outstanding.
Common Stock. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by Shareholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred
Stock with a dividend preference over Common Stock could adversely affect the
dividend rights of holders of Common Stock. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to any voting rights of the holders of any
then outstanding Preferred Stock. The holders of Common Stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to the Common Stock. All
outstanding shares of Common Stock, including the shares offered hereby, are,
or will be upon completion of the offering, fully paid and non-assessable.
The Company's Amended and Restated Certificate of Incorporation, as amended
(the "Certificate") and By-laws, which will be effective upon completion of
this offering provide, subject to the rights of the holders of any Preferred
Stock then outstanding, that the number of directors shall be fixed by the
Board of Directors. The directors, other than those who may be elected by the
holders of any Preferred Stock, are divided into three classes, as nearly
equal in number as possible, with each class serving for a three-year term.
Subject to any rights of the holders of any Preferred Stock to elect
directors, and to remove any director whom the holders of any Preferred Stock
had the right to elect, any director of the Company may be removed from office
only with cause and by the affirmative vote of at least two-thirds of the
total votes which would be eligible to be cast by Shareholders in the election
of such director.
Undesignated Preferred Stock. The Board of Directors of the Company is
authorized, without further action of the Shareholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereon as set forth in the Company's Certificate
of Incorporation. Any such Preferred Stock issued by the Company may rank
prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into
shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding
Common Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of shareholders. Certain of these provisions, as
well as the ability of the Board of Directors to issue shares of Preferred
Stock and to set the voting rights, preferences and other terms thereof, may
be deemed to have an anti-takeover effect and may discourage takeover attempts
not first approved by the Board of Directors, including takeovers which
shareholders may deem to be in their best interests. To the extent takeover
attempts are discouraged, temporary fluctuations in the market price
44
<PAGE>
of the Common Stock, which may result from actual or rumored takeover
attempts, may be inhibited. These provisions, together with the classified
Board of Directors and the ability of the Board to issue Preferred Stock
without further shareholder action, also could delay or frustrate the removal
of incumbent directors or the assumption of control by shareholders, even if
such removal or assumption would be beneficial to shareholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if favorable to the interests of shareholders,
and could depress the market price of the Common Stock. The Board of Directors
believes that these provisions are appropriate to protect the interests of the
Company and all of its shareholders. The Board of Directors has no present
plans to adopt any other measures or devices which may be deemed to have an
"anti-takeover effect."
Meetings of Shareholders. The By-laws provide that a special meeting of
shareholders may be called only by the Chairman or a majority of Board of
Directors unless otherwise required by law. The By-laws provide that only
those matters set forth in the notice of the special meeting may be considered
or acted upon at that special meeting unless otherwise provided by law. In
addition, the By-laws set forth certain advance notice and informational
requirements and time limitations on any director nomination or any new
proposal which a shareholder wishes to make at an annual meeting of
shareholders.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by New York law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of shareholders or
otherwise. The Certificate contains a provision permitted by New York law that
generally eliminates the personal liability of Directors to the Company or its
shareholders for any breach of duty in such capacity except that the foregoing
shall not eliminate or limit liability where such liability is specifically
imposed under the Business Corporation Law of the State of New York. This
provision does not alter a director's liability under the federal securities
laws and does not affect the availability of equitable remedies, such as an
injunction or rescission, for breach of fiduciary duty. The Company also
entered into indemnification agreements with each of its directors reflecting
the foregoing and requiring the advancement of expenses in proceedings
involving the directors in most circumstances.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and
(with certain exceptions) thereafter approved by a majority (or 80% in the
case of any proposed amendment to the provisions of the Certificate relating
to the composition of the Board or amendments of the Certificate) of the total
votes eligible to be cast by holders of voting stock with respect to such
amendment.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the shareholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the shareholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an
annual meeting of shareholders or a special meeting called for such purpose
unless the Board of Directors recommends that the shareholders approve such
amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting shares with respect to such amendment
or repeal.
Ability to Adopt Shareholder Rights Plan. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically creates voting or other impediments which are intended to discourage
persons seeking to gain control of the Company by means of a merger, tender
offer, proxy contest or otherwise if such change in control is not in the best
interest of the Company and its shareholders. The Board of Directors has no
present intention of adopting a shareholder rights plan and is not aware of
any attempt to obtain control of the Company.
45
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 912 of the New York Business Corporation Law ("Section
912"). Section 912 provides, with certain exceptions, that a New York
corporation may not engage in any of a broad range of business combinations
with a person or affiliate, or associate of such person, who is an "interested
shareholder" for a period of five years from the date that such person became
an interested shareholder unless: (i) the transaction resulting in a person
becoming an interested shareholder, or the business combination, is approved
by the board of directors of the corporation before the person becomes an
interested shareholder; (ii) the business combination is approved by a
majority of the holders of the outstanding voting stock not beneficially owned
by the interested shareholder at a meeting called for such purpose no earlier
than five years after such person became an interested shareholder; or (iii)
the business combination meets certain "fair price" provisions set forth in
Section 912. Under Section 912, an "interested shareholder" is defined (with
certain limited exceptions) as any person that is (i) the owner of 20% or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and was the owner of 20% or more of the
outstanding voting stock of the corporation at any time within the five-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested shareholder.
A corporation may, at its option, exclude itself from the coverage of
Section 912 by amending its certificate of incorporation or by-laws by action
of its shareholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 18 months after the date
it is adopted. Neither the Certificate nor the By-laws contains any such
exclusion.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of 9,476,114
shares of Common Stock outstanding. Of these shares, the 2,200,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of
the Company, as defined in the Securities Act, who would be required to sell
such shares under Rule 144 under the Securities Act. The remaining shares
of Common Stock outstanding will be "restricted securities" as that term is
defined by Rule 144 (the "Restricted Shares"). The Restricted Shares were
issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act.
Of the Restricted Shares, shares of Common Stock owned by current
shareholders of the Company will be eligible for sale in the public market
pursuant to Rule 144 under the Securities Act beginning 90 days after the date
of this Prospectus, and shares of Common Stock owned by current
shareholders of the Company will be eligible for sale in the public market in
accordance with Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. In addition shares subject to sale under Rule
701 are subject to vesting provisions and will become eligible for sale in the
public market at various times as they become vested. In addition, shares
acquired upon exercise of vested options as described below are eligible for
resale under Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 94,761 shares upon completion
of the offering) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at the time during 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate),
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of options outstanding prior to this
offering or the grant of Common Stock prior to this offering pursuant to
written compensation plans or contracts may be resold by persons other than
affiliates beginning 90 days after the date of this Prospectus, subject only
to the manner of sale provisions of Rule 144, and by affiliates, beginning 90
days after the date of this Prospectus, subject to all provisions of Rule 144
except its one-year minimum holding period requirement.
The Company's executive officers and directors and Shareholders, who in the
aggregate hold shares of Common Stock and options to purchase shares
of Common Stock, have agreed, pursuant to certain Lock-up Agreements, that
until 180 days after the date of this Prospectus, they will not, directly or
indirectly, offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase, make a distribution of, or otherwise dispose of, any
shares of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock, otherwise than (i) as a bona fide gift or gifts,
provided that the donee or donees thereof agree in writing as a condition
precedent to such gift or gifts to be bound by the terms of the Lock-up
Agreements, or (ii) with the prior written consent of ING Baring Furman Selz
LLC. In addition, the Company has agreed that, without the prior written
consent of ING Baring Furman Selz LLC on behalf of the Underwriters, the
Company will not, directly or indirectly, sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities,
convertible into or
47
<PAGE>
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock, or enter into any swap or other agreement that transfers, in whole or
in part any of the economic consequences or ownership of Common Stock, during
the 180-day period following the date of this Prospectus, except that the
Company may issue, and grant options to purchase, shares of Common Stock under
its current stock option and purchase plans and may issue, and grant options
to purchase, shares of Common Stock under its current stock option and
purchase plans and may issue shares of Common Stock in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
Lock-up Agreement.
As of June 30, 1998, 919,847 shares of Common Stock were reserved for
issuance under the 1998 Stock Plan, of which no shares were issuable upon the
exercise of outstanding stock options, 1,500,000 shares of Common Stock were
reserved for issuance under the 1992 Stock Option Plan, of which 1,377,904
shares were issuable upon the exercise of outstanding stock options and
shares had been issued upon the exercise of stock options, and 200,000 shares
of Common Stock were reserved for issuance under the Purchase Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--Employee Stock and Other Benefit Plans--1998 Stock
Option and Incentive Plan," "--1992 Stock Option Plan" and "--1998 Employee
Stock Purchase Plan." The Company intends to file a registration statement on
Form S-8 under the Securities Act to register all shares of Common Stock
issuable pursuant to the 1998 Stock Plan or the Purchase Plan. The Company
expects to file this registration statement within approximately 90 days
following the date of this Prospectus, and such registration statement will
become effective upon filing. Shares covered by this registration statement
will thereupon be eligible for sale in the public markets, subject to Rule 144
limitations applicable to affiliates and the Lock-up Agreements described
above.
Prior to this offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom ING Baring Furman Selz LLC and Hambrecht &
Quist LLC are acting as representatives (the "Representatives") has severally
agreed to purchase from the Company the respective number of shares of Common
Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
---- ------------
<S> <C>
ING Baring Furman Selz LLC. .................................
Hambrecht & Quist LLC. ......................................
------
Total......................................................
======
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 330,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover over-
allotments, if any, in connection with the sale of the 2,200,000 shares of
Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of ING Baring Furman Selz
LLC, except for the shares of Common Stock offered hereby and except that the
Company may issue securities pursuant to the Company's stock plans and upon
exercise of outstanding options and warrants. In addition, the Company's
executive officers and directors and shareholders, who in the aggregate hold
shares of Common Stock and options to purchase shares of Common
Stock, have agreed, pursuant to certain Lock-up Agreements, that until 180
days after the date of this Prospectus, they will not, directly or indirectly,
offer, sell, assign, transfer, encumber, contract to sell, grant an option to
purchase, make a distribution of, or otherwise dispose of, any shares of
Common Stock, or any securities convertible into or exchangeable for shares of
Common Stock, otherwise than (i) as a bona fide gift or gifts, provided that
the donee or donees thereof agree in writing as a condition precedent to such
gift or gifts to be bound by the terms of the Lock-up Agreements, or (ii) with
the prior written consent of ING Baring Furman Selz LLC.
The Representatives of the Underwriters have informed the Company that they
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover
49
<PAGE>
syndicate short positions created in connection with this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Common
Stock. Syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Common Stock than they are required to purchase
from the Company in this offering. The Underwriters also may impose a penalty
bid, whereby the syndicate may reclaim selling concessions allowed to
syndicate members or other broker-dealers in respect of the Common Stock sold
in this offering for their account if the syndicate repurchases the shares in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock, which may be higher
than the price that might otherwise prevail in the open market. These
transactions may be affected on Nasdaq, in the over-the-counter market or
otherwise, and may, if commenced, be discontinued at any time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, are the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
The Company has applied to list the Common Stock for quotation and trading
on the Nasdaq National Market under the symbol "AMRI."
The Company has agreed to indemnify the several Underwriters against or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar llp, Boston, Massachusetts.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The financial statements of Albany Molecular Research, Inc. as of December
31, 1996 and 1997, and for each of the years in the three-year period ended
December 31, 1997 have been audited by KPMG Peat Marwick LLP and have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The statements in this Prospectus under the captions "Risk Factors--
Proprietary Technology; Unpredictability of Patent Protection" and "Business--
Allegra Royalty and Licensing Arrangement" and "--Patents and Proprietary
Rights" have been reviewed and approved by , patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
50
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. The Company has filed with the Commission a Registration
Statement (which term shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference. For further information
with respect to the Company and the Common Stock, reference is made to the
Registration Statement, including the exhibits and schedules thereto, copies
of which may be examined without charge at the Commission's principal office
at 450 Fifth Street, N.W., Washington, D.C. 20549 and the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its public reference facilities in New York, New
York, and Chicago, Illinois, at prescribed rates. The Commission also
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants (which, after this
offering, will include the Company) that file electronically with the
Commission (at http://www.sec.gov).
Immediately following this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act.
As long as the Company is subject to such periodic reporting and information
requirements, it will file with the Commission all reports, proxy statements,
and other information required thereby. The Company intends to furnish holders
of the Common Stock with annual reports containing financial statements
audited by an independent certified public accounting firm.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ALBANY MOLECULAR RESEARCH, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Public Accountants........... F-2
Balance Sheets at December 31, 1996 and 1997 and March 31, 1998
(unaudited).............................................................. F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and the Three Months Ended March 31, 1997 and 1998 (unaudited)...... F-4
Statements of Shareholders' Equity (Deficit) for the Years Ended December
31, 1995, 1996 and 1997 and for the Three Months Ended March 31, 1998
(unaudited).............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1997 and 1998 (unaudited)...... F-6
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Albany Molecular Research, Inc.:
We have audited the accompanying balance sheets of Albany Molecular
Research, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Albany Molecular Research,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Albany, New York
April 2, 1998, except for note 15
which is as of July 7, 1998
F-2
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $1,259,555 $ 1,261,518 $ 7,460,063
Certificate of deposit.................. 52,551 -- --
Accounts receivable, (net of allowance
of for doubtful accounts of $0 and
$114,000 at December 31, 1996 and
1997, respectively, and $143,000 at
March 31, 1998)........................ 851,959 1,976,637 1,998,043
Current installment of notes receivable
(Note 14).............................. -- -- 20,000
Royalty income receivable............... -- -- 1,729,680
Investment securities, available-for-
sale (Note 5).......................... 1,734,899 1,949,546 1,946,611
Interest receivable..................... 25,156 25,961 27,883
Inventory............................... 266,208 317,789 419,226
Unbilled services....................... 202,122 192,822 129,845
Refundable income taxes................. -- 312,377 --
Prepaid expenses........................ 38,132 131,798 155,289
---------- ----------- -----------
Total current assets.................. 4,430,582 6,168,448 13,886,640
Property and equipment:
Laboratory equipment and fixtures....... 2,981,155 3,323,232 3,602,818
Office equipment........................ 453,823 840,256 983,669
Leasehold improvements.................. 983,264 1,000,120 1,001,220
---------- ----------- -----------
4,418,242 5,163,608 5,587,707
Accumulated depreciation and
amortization.......................... (591,698) (1,265,255) (1,458,751)
---------- ----------- -----------
Net property and equipment............ 3,826,544 3,898,353 4,128,956
Construction-in-progress................. -- 76,574 685,272
Other assets:
Patents and patent application costs.... 127,145 212,291 231,657
Licensing rights........................ 26,513 23,567 22,830
Customer list........................... -- -- 118,000
Notes receivable, excluding current
installment (Note 14).................. -- -- 80,000
Deposits................................ 16,810 16,810 16,810
Deferred income tax benefit (Note 6).... 68,142 230,000 --
Other assets............................ 4,909 3,291 2,927
---------- ----------- -----------
Total other assets.................... 243,519 485,959 472,224
---------- ----------- -----------
Total assets.......................... $8,500,645 $10,629,334 $19,173,092
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses... $ 322,754 $ 898,256 $ 2,007,072
Income taxes payable (Note 6)........... 338,684 -- 2,282,112
Unearned income......................... 135,377 212,008 637,253
Customer deposits....................... 165,000 202,293 202,293
Current installments of obligation
under capital lease.................... 3,550 1,256 317
Current installments of long-term debt
(Note 3)............................... 454,683 448,005 443,008
---------- ----------- -----------
Total current liabilities............. 1,420,048 1,761,818 5,572,055
Long-term liabilities:
Obligation under capital lease,
excluding current installments......... 1,256 -- --
Long-term debt, excluding current
installments (Note 3).................. 2,373,708 1,775,703 1,666,076
Deferred income taxes (Note 6).......... 295,119 437,631 438,384
---------- ----------- -----------
Total liabilities..................... 4,090,131 3,975,152 7,676,515
Commitments (Notes 7, 9 and 11)
Shareholders' equity:
Preferred stock, $0.01 par value,
Authorized 1,000,000 shares, issued
and outstanding 100,000 shares in 1996
and 1997............................... 1,000 1,000 1,000
Common stock, $0.01 par value,
Authorized 10,000,000 shares; issued
and outstanding 7,170,225 at December
31, 1996, 7,180,518 shares at December
31, 1997 and 7,216,045 shares at March
31, 1998............................... 71,855 71,924 72,161
Additional paid-in capital.............. 2,619,850 2,643,376 2,949,436
Retained earnings....................... 1,694,164 3,883,379 8,422,042
Accumulated other comprehensive
income................................. 23,645 54,503 51,938
---------- ----------- -----------
Total shareholders' equity............ 4,410,514 6,654,182 11,496,577
---------- ----------- -----------
Total liabilities and shareholders'
equity............................... $8,500,645 $10,629,334 $19,173,092
========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-3
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Contract revenue........ $3,315,930 $6,177,371 $8,805,066 $1,724,727 $3,060,687
Reimbursed expenses..... (356,664) (916,027) (701,034) (215,986) (187,679)
---------- ---------- ---------- ---------- ----------
Net contract revenue.... 2,959,266 5,261,344 8,104,032 1,508,741 2,873,008
Cost of revenue......... 1,350,158 2,834,760 4,334,245 928,041 1,507,721
---------- ---------- ---------- ---------- ----------
Gross profit............ 1,609,108 2,426,584 3,769,787 580,700 1,365,287
Operating expenses:
Research and
development.......... 36,628 244,812 626,471 100,079 208,794
Selling, general and
administrative....... 809,487 1,219,144 2,246,391 379,583 883,189
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 846,115 1,463,956 2,872,862 479,662 1,091,983
---------- ---------- ---------- ---------- ----------
Income from operations.. 762,993 962,628 896,925 101,038 273,304
Other income (expense):
Licensing fees,
milestones and
royalties (Note 9)... 200,000 1,000,000 2,530,871 -- 8,098,601
Technology incentive
award (Note 11)...... (200,000) (100,000) (253,093) -- (809,860)
Lease relocation
incentive fee........ -- -- -- -- (200,000)
Interest expense...... (53,882) (137,967) (175,969) (48,808) (39,760)
Interest income....... 91,532 126,474 163,051 34,298 65,464
Realized gain on sale
of investment
securities........... 6,053 3,895 -- -- --
Write off of licensing
costs................ (73,083) -- -- -- --
Other income
(expense)............ (1,262) 16,235 (25,629) 4,281 3,525
---------- ---------- ---------- ---------- ----------
Total other income
(expense).......... (30,642) 908,637 2,239,231 (10,229) 7,117,970
---------- ---------- ---------- ---------- ----------
Income before income tax
expense................ 732,351 1,871,265 3,136,156 90,809 7,391,274
Income tax expense (Note
6)..................... 252,805 637,476 946,941 15,489 2,852,611
---------- ---------- ---------- ---------- ----------
Net income.............. $ 479,546 $1,233,789 $2,189,215 $ 75,320 $4,538,663
========== ========== ========== ========== ==========
Basic earnings per
share.................. $ 0.07 $ 0.17 $ 0.31 $ 0.01 $ 0.63
Diluted earnings per
share.................. $ 0.06 $ 0.16 $ 0.28 $ 0.01 $ 0.56
</TABLE>
See Accompanying Notes to Financial Statements.
F-4
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH
31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ----------------------------
ACCUMULATED
NUMBER $0.01 NUMBER $0.01 ADDITIONAL OTHER RETAINED
COMPREHENSIVE OF PAR OF PAR PAID-IN COMPREHENSIVE EARNINGS
INCOME SHARES VALUE SHARES VALUE CAPITAL INCOME (DEFICIENCY) TOTAL
------------- -------- ------- --------- ------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 (Note 15).. $ -- 100,000 $ 1,000 5,904,047 $63,415 $ 520,303 $ -- $ (19,171) $ 565,547
Issuance of common
stock............. -- -- -- 1,157,354 7,715 2,067,858 -- -- 2,075,573
Net unrealized gain
on securities
available-for-
sale, net of tax.. 30,067 -- -- -- -- -- 30,067 -- 30,067
Tax effect of
incentive stock
options held less
than one year..... -- -- -- -- -- 5,030 -- -- 5,030
Net income for
1995.............. 479,546 -- -- -- -- -- -- 479,546 479,546
---------- -------- ------- --------- ------- ---------- ---------- ---------- -----------
Balance at December
31, 1995............ $ 509,613 100,000 $ 1,000 7,061,401 $71,130 $2,593,191 $ 30,067 $ 460,375 $ 3,155,763
Issuance of common
stock............. -- -- -- 108,825 725 23,962 -- -- 24,687
Change in
unrealized gain on
securities
available-for-
sale, net of tax.. (6,422) -- -- -- -- -- (6,422) -- (6,422)
Tax effect of
incentive stock
options held less
than one year..... -- -- -- -- -- 2,697 -- -- 2,697
Net income for
1996.............. 1,233,789 -- -- -- -- -- -- 1,233,789 1,233,789
---------- -------- ------- --------- ------- ---------- ---------- ---------- -----------
Balance at December
31, 1996............ $1,227,367 100,000 $ 1,000 7,170,226 $71,855 $2,619,850 $ 23,645 $1,694,164 $ 4,410,514
Issuance of common
stock............. -- -- -- 10,293 69 23,526 -- -- 23,595
Change in
unrealized gain on
securities
available-for-
sale, net of tax.. 30,858 -- -- -- -- -- 30,858 -- 30,858
Net income for
1997.............. 2,189,215 -- -- -- -- -- -- 2,189,215 2,189,215
---------- -------- ------- --------- ------- ---------- ---------- ---------- -----------
Balance at December
31, 1997............ $2,220,073 100,000 $ 1,000 7,180,519 $71,924 $2,643,376 $ 54,503 $3,883,379 $ 6,654,182
Issuance of common
stock............. -- -- -- 35,526 237 306,060 -- -- 306,297
Change in
unrealized gain on
securities
available-for-
sale, net of tax.. (2,565) -- -- -- -- -- (2,565) -- (2,565)
Net income for
period............ 4,538,663 -- -- -- -- -- -- 4,538,663 4,538,663
---------- -------- ------- --------- ------- ---------- ---------- ---------- -----------
Balance at March 31,
1998................ $4,536,098 100,000 $ 1,000 7,216,045 $72,161 $2,949,436 $ 51,938 $8,422,042 $11,496,577
========== ======== ======= ========= ======= ========== ========== ========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 479,546 $ 1,233,789 $ 2,189,215 $ 75,320 $ 4,538,663
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization......... 127,358 379,327 689,472 172,321 194,597
Net realized gain on
security
transactions......... (6,053) (3,895) -- -- --
Net loss on sale of
assets............... -- 1,578 9,398 (805) --
Provision for doubtful
accounts............. -- -- 114,000 -- 29,000
Deferred income tax
(benefit) expense.... 94,131 164,927 (39,919) 31,793 2,464
Tax effect of stock
sale from stock
options held less
than one year........ 5,030 2,697 -- -- --
Write-off of licensing
costs................ 73,083 -- -- -- --
(Increase) decrease
in:
Accounts
receivable......... (759,876) 35,622 (1,215,678) (31,927) (50,407)
Royalty income
receivable......... -- -- -- -- (1,729,680)
Inventory, prepaid
expenses and
refundable income
taxes.............. (118,682) (88,425) (457,624) (129,208) 187,449
Interest
receivable......... (17,540) (7,616) (805) 554 (1,922)
Due from
shareholder........ 5,197 -- -- -- --
Unbilled services... (114,426) (6,009) 9,300 (136,609) 62,977
Increase (decrease)
in:
Accounts payable and
accrued expenses... 241,861 (14,055) 575,502 53,717 1,108,817
Customer deposits... 135,000 30,000 37,293 34,300 --
Unearned income..... 70,623 44,754 76,631 102,799 425,245
Income taxes
payable............ -- 338,684 (338,684) (363,325) 2,512,111
----------- ----------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............. 215,252 2,111,378 1,648,101 (191,070) 7,279,314
----------- ----------- ----------- --------- -----------
INVESTING ACTIVITIES
(Increase) decrease in
certificate of
deposit.............. (51,080) (1,472) 52,551 -- --
Purchases of
investment
securities........... (3,040,166) (274,146) (163,216) (1,217) (1,341)
Proceeds from sales of
investment
securities........... 1,183,303 445,467 -- -- --
Purchases of property
and equipment........ (1,204,907) (2,596,060) (869,954) (199,447) (1,032,797)
Proceeds from sale of
equipment............ -- 1,500 4,265 1,500 --
Payments for
deposits............. (1,022) -- -- -- --
Purchase of customer
list................. -- -- -- -- (118,000)
Payments for patent
application costs.... (97,518) (39,185) (85,146) (15,047) (19,366)
----------- ----------- ----------- --------- -----------
Net cash used in invest-
ing activities......... (3,211,390) (2,463,896) (1,061,500) (214,211) (1,171,504)
----------- ----------- ----------- --------- -----------
</TABLE>
F-6
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Principal payments on
long-term debt and
notes payable........ $ (83,090) $(2,163,883) $ (604,683) $ (113,111) $ (114,624)
Principal payments
under capital lease
obligations.......... (4,771) (3,478) (3,550) (859) (938)
Proceeds from
borrowings under
long-term debt and
notes payable........ 1,000,000 3,720,000 -- -- --
Payment for deferred
financing costs...... (1,750) -- -- -- --
Disbursements on notes
receivable........... -- -- -- -- (100,000)
Proceeds from sale of
common stock......... 2,075,573 24,687 23,595 62 306,297
---------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities............. 2,985,962 1,577,326 (584,638) (113,908) 90,735
---------- ----------- ---------- ---------- ----------
Increase (decrease) in
cash and cash
equivalents............ (10,176) 1,224,808 1,963 (519,189) 6,198,545
Cash and cash
equivalents at
beginning of period.... 44,923 34,747 1,259,555 1,259,555 1,261,518
---------- ----------- ---------- ---------- ----------
Cash and cash
equivalents at end of
period................. $ 34,747 $ 1,259,555 $1,261,518 $ 740,366 $7,460,063
========== =========== ========== ========== ==========
NONCASH ITEMS:
Common stock issued
for purchase of
customer list........ $ -- $ -- $ -- $ -- $ 100,000
Common stock issued
for relocation
incentive............ $ -- $ -- $ -- $ -- $ 200,000
Property acquired
under capital lease.. $ 10,059 $ -- $ -- $ -- $ --
Increase (decrease) in
net unrealized gain
on securities
available-for-sale,
net of tax........... $ 30,067 $ (6,422) $ 30,858 $ (14,595) $ (2,585)
ADDITIONAL DISCLOSURES
RELATIVE TO CASH FLOWS:
Interest paid......... $ 53,882 $ 120,058 $ 175,616 $ 39,759 $ 48,806
Income taxes paid..... $ 153,643 $ 91,800 $1,637,921 $ 347,021 $ 5,420
Depreciation expense.. $ 124,395 $ 368,738 $ 684,909 $ 171,916 $ 193,497
</TABLE>
See Accompanying Notes to Financial Statements.
F-7
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is an integrated chemistry outsourcing company that offers a
broad range of chemistry research and development services to pharmaceutical
and biotechnology companies involved in drug discovery and development. The
Company offers services traditionally provided by the chemistry divisions
within pharmaceutical companies, including medicinal chemistry, chemical
development, analytical chemistry services and small-scale manufacturing. In
addition to these contract services, the Company conducts a limited amount of
proprietary research and development.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results can vary from these estimates.
Revenue Recognition
The Company recognizes net revenue from its contracts on a percentage-of-
completion or per diem basis as work is performed. In general, contractual
provisions including predetermined payment schedules, the achievement of
contractual milestones or submission of appropriate billing detail
establishing prerequisites for billings. Unbilled services arise when services
have been rendered under these contracts but customers have not been billed.
Similarly, unearned income represents prebilling for services that have not
yet been rendered.
Credit Risk
The Company provides credit in the normal course of business to its
customers, substantially all of which are in the pharmaceutical and
biotechnology industries. To reduce credit risk, the Company generally
requires advance payments on contracts.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and consist primarily of organic chemicals used as raw
materials in the production process.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-
line method over their estimated lives, generally three to seven years. The
Company utilizes accelerated depreciation methods for tax purposes over the
minimum statutory period allowed.
Organization Costs
Organization costs are amortized over 60 months.
F-8
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
Patents and Patent Application Costs
The costs of patents issued and acquired are being amortized on the
straight-line method over the estimated remaining lives of the issued patents,
generally 17 years. Patent application and processing costs are capitalized
and will be amortized over the estimated life once a patent is acquired or
expensed in the period the patent application is denied.
Licensing Rights
The costs of licensing rights are being amortized on the straight-line
method over the term of the license agreement, but not in excess of fifteen
years. Licensing costs are accumulated and amortized once the license
agreement is executed. Licensing costs are written off in the period the
licensing rights are canceled or are determined not to provide future
benefits.
Deferred Financing Costs
The costs of acquiring long-term debt obligations are being amortized on the
straight-line method over the term of the obligation, ranging from five to
seven years.
Research and Development
Research and development costs are charged to operations when incurred and
are included in operating expenses.
Income Taxes
The Company applies the asset/liability method of accounting for income
taxes, in which deferred income taxes are recognized for the tax consequences
of temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Marketable investment securities
at December 31, 1997 consisted of state and political subdivision obligations,
corporate debt obligations, and bond mutual funds, with the Company holding
all of these securities as available-for-sale.
Unrealized holding gains and losses, net of related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders' equity until realized. Interest income is
recognized when earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings and are determined using the
specific identification method.
Interim Financial Data (unaudited)
The interim financial data for the three months ended March 31, 1997 and
1998 included in the accompanying financial statements is unaudited; however,
in the opinion of the Company, the interim financial
F-9
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. The
interim financial data are not necessarily indicative of the results of
operations for a full fiscal year.
Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes the
reported net income of a company adjusted for items that are currently
accounted for as direct entries to equity, such as the mark-to-market
adjustment on securities available for sale, foreign currency items and
minimum pension liability adjustments. In the case of the Company,
comprehensive income represents net income plus other comprehensive income,
which consists of the net change in unrealized gains and losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gain on securities available-for-sale as of the
balance sheet dates. All periods for which the Company has presented financial
information contain the prescribed disclosures.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the presentation in the 1997 financial statements.
Preferred Stock
The Company's preferred stock is convertible at the option of the holder at
ten preferred shares to three common shares. For purposes of diluted earnings
per share calculations, all preferred shares are assumed converted to their
common stock equivalents.
2. LEASE COMMITMENTS
The Company has a long-term operating lease for its office and laboratory
facilities with a shareholder of the Company. The present lease commenced in
December 1997 and expires in November 2007, with average monthly rental
payments of $23,000. The lease contains a ten-year renewal option with six
months' prior notice. The Company currently holds an option to purchase the
property for $3.5 million. The Company is responsible for paying for the cost
of utilities, operating costs, and property taxes.
The Company also leases laboratory facilities under a separate agreement
with a non-related party that expires June 1999 at a monthly rate of $12,000.
Minimum future payments under noncancelable operating leases as of December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998......................................................... $ 426,724
1999......................................................... 360,928
2000......................................................... 289,946
2001......................................................... 286,399
2002......................................................... 283,652
Thereafter................................................... 1,353,435
----------
Total minimum future lease payments.......................... $3,001,084
==========
</TABLE>
F-10
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
Rental expense amounted to approximately $93,000, $173,000 and $240,000
during 1995, 1996 and 1997, respectively, and $66,000 and $161,000, for the
three months ended March 31, 1997 and 1998, respectively.
3. LONG-TERM DEBT
Long-term debt is comprised as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
MARCH 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Note payable to a bank in monthly installments
of $29,762, through October 2003, plus
interest at the London Interbank Offered Rate
plus 1.75% (7.44% at December 31, 1997 and
7.38% at March 31, 1998)..................... $2,440,478 $1,933,333 $1,844,048
Note payable to the New York Job Development
Authority in monthly installments of $4,747
including interest at 5.25%, through June 1,
2001......................................... 227,841 181,747 169,841
Subordinated note payable to the Albany Local
Development Corporation in monthly
installments of $2,970 including interest at
7.00%, through December 1, 2000.............. 124,035 96,194 88,925
Subordinated note payable to the Albany Local
Development Corporation in monthly
installments of $2,115 including interest at
7.00%, through June 1, 1998.................. 36,037 12,434 6,270
---------- ---------- ----------
Total long-term debt.......................... 2,828,391 2,223,708 2,109,084
Less payments due within one year............. 454,683 448,005 443,008
---------- ---------- ----------
Total long-term debt, net..................... $2,373,708 $1,775,703 $1,666,076
========== ========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 and thereafter, are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 448,005
1999.......................................................... 440,341
2000.......................................................... 445,409
2001.......................................................... 385,191
2002.......................................................... 357,143
Thereafter.................................................... 147,619
----------
Total long-term debt........................................ $2,223,708
==========
</TABLE>
In connection with the above bank notes, the Company has entered into a
general security agreement in which all assets now owned and hereafter
acquired by the Company collateralize the notes.
4. NOTE PAYABLE
The Company maintained a line of credit from a bank with unused borrowing
capacity of $500,000 at both December 31, 1997 and March 31, 1998. The line is
collateralized by a first security interest in all accounts receivable and
inventory. Interest is payable monthly at the London Interbank Offered Rate,
plus 1.75% (7.44% at December 31, 1997 and 7.38% at March 31, 1998).
Borrowings under the line of credit are payable on demand.
F-11
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
5. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value for available-for-sale securities by major security type at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions.... $1,619,987 $39,409 $ -- $1,659,396
Bond mutual funds.......... 75,503 -- -- 75,503
---------- ------- ------- ----------
$1,695,490 $39,409 $ -- $1,734,899
========== ======= ======= ==========
</TABLE>
Proceeds from the sale of investment securities were $1,183,303 and $445,467
in 1995 and 1996, respectively, resulting in realized gains of $6,053 and
$3,895 for the years then ended.
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value for available-for-sale securities by major security type at December 31,
1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions.... $1,619,987 $88,726 $ -- $1,708,713
Corporate debt
obligations............... 158,073 2,113 -- 160,186
Bond mutual funds.......... 80,647 -- -- 80,647
---------- ------- ------- ----------
$1,858,707 $90,839 $ -- $1,949,546
========== ======= ======= ==========
</TABLE>
There were no sales of available-for-sale securities during 1997.
Maturities of debt securities classified as available-for-sale at December
31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due after one year through five years............. $ 611,598 $ 631,857
Due after five years through ten years............ 770,097 812,375
Due after ten years............................... 396,365 424,667
---------- ----------
Total debt securities............................. $1,778,060 $1,868,899
========== ==========
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value for available-for-sale securities by major security type at March 31,
1998 were as follows:
<TABLE>
<CAPTION>
GROSS
GROSS UNREALIZED
AMORTIZED UNREALIZED HOLDING
COST HOLDING GAINS LOSSES FAIR VALUE
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions........ $1,619,987 $84,807 $ -- $1,704,794
Corporate debt obligations..... 158,073 1,756 -- 159,829
Bond mutual funds.............. 81,988 -- -- 81,988
---------- ------- ------- ----------
$1,860,048 $86,563 $ -- $1,946,611
========== ======= ======= ==========
</TABLE>
There were no sales of investment securities during the three-month periods
ended March 31, 1997 and 1998.
F-12
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
6. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal..................... $146,692 $437,800 $ 916,288 $(16,918) $2,451,902
State....................... 11,982 34,749 70,572 614 167,245
-------- -------- --------- -------- ----------
158,674 472,549 986,860 (16,304) 2,619,147
-------- -------- --------- -------- ----------
Deferred:
Federal..................... 94,131 159,052 102,117 26,625 2,063
State....................... -- 5,875 (142,036) 5,168 231,401
-------- -------- --------- -------- ----------
94,131 164,927 (39,919) 31,793 233,464
-------- -------- --------- -------- ----------
Total income tax expense.... $252,805 $637,476 $ 946,941 $ 15,489 $2,852,611
======== ======== ========= ======== ==========
</TABLE>
The differences between the income tax expense and income taxes computed
using a federal statutory rate of 34% for the years ended December 31, 1995,
1996, and 1997, and for the three months ended March 31, 1997, and 35% for the
three months ended March 31, 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Amount computed using
statutory rate.......... $248,999 $636,230 $1,066,293 $30,875 $2,586,946
Increase (reduction) in
taxes resulting from:
Tax-free interest
income................ (23,254) (31,940) (30,171) (14,573) (7,450)
Alternative minimum
tax................... 5,785 (5,540) -- -- --
State taxes, net of
federal benefit....... 7,668 22,914 46,577 405 111,042
State investment tax
credits............... -- -- (161,858) -- 151,800
Others, net............ 13,607 15,812 26,100 (1,218) 10,273
-------- -------- ---------- ------- ----------
Total income tax
expense............... $252,805 $637,476 $ 946,941 $15,489 $2,852,611
======== ======== ========== ======= ==========
</TABLE>
Temporary differences giving rise to the Company's deferred tax liability
consist primarily of the excess of depreciation for tax purposes over the
amount for financial reporting purposes.
The Company had available New York State investment tax credits of
approximately $68,000 and $230,000, at December 31, 1996 and 1997,
respectively. These credits have a ten-year carryforward period, with
expiration dates ranging from 2002 to 2007.
At December 31, 1997, the Company had recorded a deferred tax asset of
approximately $230,000; representing New York State investment tax credits.
The estimated annual effective tax rate for the three months ended March 31,
1998 includes the anticipated realization of these tax credits.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a savings and profit sharing plan under section 401(k)
of the Internal Revenue Code covering all eligible employees. Employees must
complete six months of service and be over 20 1/2 years of age as of the
plan's entry dates. Participants may contribute up to 15% of their
compensation, limited to
F-13
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
$9,500 per annum in 1997. The Company makes matching contributions equal to
25% of the participant's contributions (up to a limit of 4% of the
participant's compensation). In addition, the Company has reserved the right
to make discretionary profit sharing contributions to employee accounts.
Employer matching contributions vest at a rate of 20% per year beginning after
2 years of participation in the plan. Employer matching contributions were
$8,000, $10,000 and $21,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Employer matching contributions were $4,000 and $10,000,
for the three months ended March 31, 1997 and 1998, respectively.
8. STOCK OPTION PLAN
The Company has a 1992 Stock Option Plan, through which the Company may
issue incentive stock options or non-qualified stock options. Incentive stock
options granted to employees may be granted at prices not less than 100
percent of the fair market value at the date of option grant. Non-qualified
stock options may be granted at prices established at the date of grant, and
may be less than the fair market value at the date of grant. All incentive
stock options may be exercised at any time, after vesting, over a ten-year
period subsequent to the date of grant. Non-qualified stock option terms will
be established at the date of grant, but shall have a duration of not more
than ten years.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997: no dividend yield for all
years; zero expected volatility for all years; risk-free interest rates of
5.69%, 6.80%, and 6.80%, respectively, and expected lives of five years and
four years for the incentive options for all years and three years and four
years for the non-qualified options for all years.
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" in accounting for its incentive and non-qualified stock
compensation plan. Accordingly, no compensation cost has been recognized for
either plan in 1995, 1996 or 1997. Had compensation cost been determined on
the basis of fair value pursuant to Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation," net income would
have been reduced as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
NET INCOME
As Reported................................... $479,546 $1,233,789 $2,189,215
======== ========== ==========
Pro forma..................................... $459,057 $1,208,938 $2,146,820
======== ========== ==========
EARNINGS PER SHARE
Basic as reported............................. $ 0.07 $ 0.17 $ 0.31
Diluted as reported........................... $ 0.06 $ 0.16 $ 0.28
Basic pro forma............................... $ 0.07 $ 0.17 $ 0.30
Diluted pro forma............................. $ 0.06 $ 0.16 $ 0.27
</TABLE>
F-14
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
Following is a summary of the status of incentive and non-qualified options
during 1995, 1996, and 1997:
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED
------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995......... 614,250 $0.31 435,000 $3.23
Granted.............................. 72,000 2.75 45,000 2.75
Exercised............................ (30,000) 0.16 -- --
Forfeited............................ -- -- -- --
-------- ----- ------- -----
Outstanding at December 31, 1995....... 656,250 $0.58 480,000 $3.19
======== ===== ======= =====
Options exercisable at December 31,
1995.................................. 404,250 $0.34 435,000 $3.23
======== ===== ======= =====
<CAPTION>
INCENTIVE NON-QUALIFIED
------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996......... 656,250 $0.58 480,000 $3.19
Granted.............................. 63,750 3.45 11,250 3.27
Exercised............................ (108,825) 0.23 -- --
Forfeited............................ -- -- -- --
-------- ----- ------- -----
Outstanding at December 31, 1996....... 611,175 $0.58 491,250 $3.19
======== ===== ======= =====
Options exercisable at December 31,
1996.................................. 475,425 $0.33 435,000 $3.23
======== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997.......... 611,175 $0.58 491,250 $3.19
Granted............................... 240,807 4.99 52,293 4.92
Exercised............................. (5,861) 0.44 -- --
Forfeited............................. (15,000) 4.48 -- --
------- ----- ------- -----
Outstanding at December 31, 1997........ 831,121 $2.07 543,543 $3.35
======= ===== ======= =====
Options exercisable at December 31,
1997................................... 541,565 $0.65 435,000 $3.00
======= ===== ======= =====
</TABLE>
Following is a summary of the status of employee incentive options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
----------- ------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$0.165 - 0.33 408,750 5.22 years $0.25 408,750 $ 0.25
0.83 60,814 5.83 years 0.83 60,814 0.83
2.73 - 3.24 105,750 7.81 years 2.80 72,000 2.75
4.44 - 5.21 255,807 9.51 years 4.97 -- --
</TABLE>
F-15
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
The Company estimates that based on a five-year vesting period at December
31, 1997, on a weighted average basis, approximately 87% of such options will
eventually vest.
Following is a summary of the status of non-qualified options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
----------- ------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$0.33 15,000 1.52 years $0.33 15,000 $ 0.33
2.75 - 3.33 476,250 5.52 years 3.28 420,000 3.33
4.59 - 5.27 52,293 9.40 years 4.92 -- --
</TABLE>
The Company estimates that based on a three-year vesting period at December
31, 1997, on a weighted average basis, approximately 77% of such options will
eventually vest.
9. ROYALTY & LICENSING ARRANGEMENT
On March 15, 1995, the Company entered into a License Agreement and a Stock
Purchase Agreement with Marion Merrell Dow Inc., now known as Hoechst Marion
Roussel, Inc. ("HMR"). Under the terms of the Stock Purchase Agreement, the
Company sold 1,084,821 shares of the Company's Common Stock to HMR for
$2.0 million. Under the terms of the License Agreement, the Company granted
HMR an exclusive, worldwide license, with the right to grant sublicenses, upon
the prior written consent of the Company, to any patents issued to the Company
related to its original terfenadine carboxylic acid metabolite patent
application. Terfenadine carboxylic acid metabolite is the active ingredient
in the new non-sedating antihistamine fexofenadine HCl, marketed as a
prescription medicine by HMR. In return for the license, HMR agreed to pay the
Company up to $6.5 million based upon the achievement of five patenting
milestones and future royalties based on sales of fexofenadine HCl. The five
patenting milestones consist of:
.Issuance of a U.S. "Intermediate Process Claim";
.Issuance of a U.S. "Process Manufacturing Claim";
.Issuance of an ex-U.S. "Process Manufacturing Claim";
.Issuance of a U.S. "Substantially Pure Claim"; and
.Issuance of an ex-U.S. "Substantially Pure Claim".
In October 1996, the Company was awarded a patent in Australia that
satisfied the ex-U.S. "Process Manufacturing Claim" milestone. In accordance
with the terms of the Agreement, the Company received a milestone payment and
will receive a royalty on all sales of fexofenadine HCl in that country. HMR
began selling a product using fexofenadine HCl in January, 1997 in Australia.
In November 1996, the Company was awarded a U.S. patent that satisfied the
U.S. "Substantially Pure Claim." However, under the terms of the Agreement,
HMR had the right to institute action to provoke an interference claim and,
upon successfully doing so, was not obligated to pay any milestones or
royalties until, and if, the interference was resolved in favor of the
Company. In February 1998, the United States Patent and Trademark Office
("PTO") Board of Patent Appeals and Interferences rendered a decision that the
Company was first to make the invention and confirming that the Company was
properly awarded the aforementioned
F-16
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
patent. Accordingly, in the first three months of 1998, the Company received
and recognized the associated milestone payment and royalties on all sales of
fexofenadine HCl (Allegra) in the United States from November 26, 1996 through
December 31, 1997, as stipulated in the Agreement. The total payment was $6.3
million. Because of the decision that the Company was first to make the
invention, the Company will be entitled to receive royalties on all sales of
fexofenadine HCl in the United States.
In December 1996, the PTO informed the Company that the Company's patent
application containing a U.S. "Process Manufacturing Claim" was in
interference with a patent application of HMR. In May 1997, the PTO Board of
Patent Appeals and Interferences rendered a decision that the Company was
first to make the invention. Under the terms of the Agreement, no milestones
or royalties are due to the Company until a patent issued. Under the
procedures of the PTO, a patent is not issued until the PTO publishes it. The
patent is scheduled to be published in May 1998. Upon the patent publication,
the Company will be entitled to receive the milestone payment for a U.S.
"Process Manufacturing Claim." Additionally, the Company will be entitled to
receive a royalty on worldwide "Sales" of fexofenadine HCl from the date of
patent issuance until expiration of the patent. In January 1997, the Company
was awarded a patent that satisfied the U.S. "Intermediate Process Claim"
milestone. In accordance with the terms of the Agreement, the Company received
a milestone payment. There are no royalties associated with this patent.
In July 1997, the Company was awarded a New Zealand patent that satisfied
the ex-U.S. "Substantially Pure Claim" milestone. In accordance with the terms
of the Agreement, the Company received a milestone payment and will receive
royalties on all sales of fexofenadine HCl in that country.
10. CONCENTRATION OF BUSINESS
For the year ended December 31, 1997, net contract revenue from the
Company's three largest customers represented approximately 29%, 11% and 9% of
total net contract revenue, respectively. For the three months ended March 31,
1998, net contract revenue from the Company's three largest customers
represented approximately 19%, 17% and 17% of total net contract revenues,
respectively. In the majority of circumstances, there are agreements in force
with these entities that guarantee the Company's continued involvement in
present research projects. However, there regularly exists the possibility
that the Company will have no further association with these entities once
these projects conclude.
11. TECHNOLOGY DEVELOPMENT INCENTIVE PLAN
In 1993, the Company adopted a Technology Development Incentive Plan to
provide a method to stimulate and encourage novel innovative technology
development. To be eligible to participate, the individual must be an employee
of the Company and must be the inventor or co-inventor of novel technology
that results in new revenues generated for, or by, the Company. Eligible
participants will share in awards based on ten percent (10%) of the "Net
Technology Revenue," as defined by the Plan.
In 1995, 1996 and 1997, the Company awarded Technology Incentive
Compensation to the inventor of the terfenadine carboxylic acid metabolite
technology. The inventor is a director, officer and shareholder of the
Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the financial
instruments is made in accordance with the requirements of Statement of
Financial Standards No. 107 "Fair Value of Financial Instruments." Although
the estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies,
estimates presented are not necessarily indicative of the amounts that the
Company could realize in current market exchanges.
F-17
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
The Company is estimating its fair value disclosures for financial
instruments used the following methods and assumptions:
Cash and short-term investments, receivables, and accounts payable: The
carrying amounts reported in the consolidated balance sheets approximate their
fair value.
Available-for-sale securities and other investments: The fair value of all
securities and investments are estimated from market prices (see Note 5).
The carrying value of long-term debt including current portion, was
approximately $2,828,389 and $2,223,708 at December 31, 1996 and 1997,
respectively, and $2,109,084 at March 31, 1998 while the estimated fair value
was $2,811,378 and $2,208,293 at December 31, 1996 and 1997, respectively, and
$2,094,712 at March 31, 1998 based upon interest rates available to the
Company for issuance of similar debt with similar terms and remaining
maturities.
13. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share
calculations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------ ------------------------------
AVERAGE PER SHARE AVERAGE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share.................. $479,546 6,841,844 $0.07 $1,233,789 7,137,476 $0.17
Dilutive effect of stock
options and grants..... -- 507,773 -- -- 543,057 --
Dilutive effect of
assumed preferred stock
conversion............. -- 30,000 -- -- 30,000 --
-------- --------- ----- ---------- --------- -----
Diluted earnings per
share.................. $479,546 7,379,617 $0.06 $1,233,789 7,710,533 $0.16
======== ========= ===== ========== ========= =====
</TABLE>
Not included in the December 31, 1995 shares above were 537,000 shares that
were anti-dilutive for earnings per share purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------
AVERAGE PER SHARE
NET INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
Basic earnings per share.................... $2,189,215 7,173,884 $0.31
Dilutive effect of stock options and
grants..................................... -- 658,689 --
Dilutive effect of assumed preferred stock
conversion................................. -- 30,000 --
---------- --------- -----
Diluted earnings per share.................. $2,189,215 7,862,573 $0.28
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
1997 1998
------------------------------ ------------------------------
AVERAGE PER SHARE AVERAGE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share.................. $75,320 7,170,300 $0.01 $4,538,663 7,185,680 $0.63
Dilutive effect of stock
options and grants..... -- 653,095 -- -- 819,657 --
Dilutive effect of
assumed preferred stock
conversion............. -- 30,000 -- -- 30,000 --
------- --------- ----- ---------- --------- -----
Diluted earnings per
share.................. $75,320 7,853,395 $0.01 $4,538,663 8,035,337 $0.56
======= ========= ===== ========== ========= =====
</TABLE>
F-18
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
14. NOTES RECEIVABLE
The notes receivable represents advances to two senior officers of the
Company. The notes receivable and accrued interest will not be repaid provided
the officers remain in the employ of the Company. If employment is terminated
within the five year amortization period, a pro-rata portion of the principal
and interest shall be repayable to the Company.
15. SUBSEQUENT EVENTS
On July 7, 1998, the Board of Directors declared a 3-for-2 split of its
common stock to be effective in August 1998. The accompanying financial
statements have been adjusted to give effect to the stock split as if it had
occurred on December 31, 1994.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 35
Certain Transactions..................................................... 42
Principal Shareholders................................................... 43
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Additional Information................................................... 51
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,200,000 SHARES
[ALBANY MOLECULAR RESEARCH, INC. LOGO APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
ING BARING FURMAN SELZ LLC
HAMBRECHT & QUIST
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the estimated expenses payable by the Company
in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- -------
<S> <C>
SEC Registration Fee................................................ $12,688
NASD Filing Fee..................................................... 4,801
Nasdaq Listing Fee.................................................. *
Accounting Fees and Expenses........................................ *
Legal Fees and Expenses............................................. *
Printing Expenses................................................... *
Blue Sky Qualification Fees and Expenses............................ 10,000
Transfer Agent's Fee................................................ 25,000
Miscellaneous....................................................... *
-------
TOTAL............................................................. $
=======
</TABLE>
- ----------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into indemnification agreements with each of its
directors reflecting the provisions of its By-laws and requiring the
advancement of expenses in proceedings involving such directors in most
circumstances.
Under Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant for the past three years
beginning in July 1995. Further included is the consideration, if any,
received by the Registrant for such shares, and information relating to the
section of the Securities Act of 1933, as amended (the "Securities Act"), or
rule of the Securities and Exchange Commission under which exemption from
registration was claimed. The following transactions give effect to the
Company's 3-for-2 stock split of its Common Stock, which will become effective
in August 1998.
(1) In August 1995, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 72,000 shares of
the Registrant's Common Stock to employees of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
(2) In October 1995, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 45,000 shares of
the Registrant's Common Stock to directors of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
II-1
<PAGE>
(3) In February 1996, the Registrant issued 52,500 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $11,550 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(4) In May 1996, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 45,000 shares of
the Registrant's Common Stock to employees and directors of the
Registrant in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
(5) In May 1996, the Registrant issued 30,075 shares of the Registrant's
Common Stock upon the exercise of outstanding stock options for an
aggregate exercise price of $5,063 to employees of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(6) In July 1996, the Registrant issued 22,500 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $4,950 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(7) In July 1996, the Registrant issued 3,750 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $3,125 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(8) In October 1996, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 15,000 shares of
the Registrant's Common Stock to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(9) In December 1996, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 15,000 shares of
the Registrant's Common Stock to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(10) In January 1997, pursuant to stock option agreements, the Registrant
granted options to purchase an aggregate of 22,743 shares of the
Registrant's Common Stock to employees of the Registrant in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(11) In January 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 56,232 shares of
the Registrant's Common Stock to employees of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
(12) In January 1997, the Registrant issued 75 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $63 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(13) In February 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 15,000 shares of
the Registrant's Common Stock to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(14) In April 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 11,250 shares of
the Registrant's Common Stock to directors of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
(15) In May 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 45,000 shares of
the Registrant's Common Stock to employees of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
II-2
<PAGE>
(16) In May 1997, the Registrant issued 1,435 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $1,196 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(17) In June 1997, the Registrant granted an aggregate of 4,431 shares of the
Registrant's Common Stock to directors of the Registrant in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(18) In July 1997, the Registrant issued 600 shares of the Registrant's Common
Stock upon the exercise of an outstanding stock option for an aggregate
exercise price of $500 to an employee of the Registrant in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(19) In December 1997, pursuant to stock option agreements, the Registrant
granted options to purchase an aggregate of 18,300 shares of the
Registrant's Common Stock to employees of the Registrant in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(20) In December 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 109,575 shares of
the Registrant's Common Stock to employees of the Registrant in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
(21) In December 1997, the Registrant issued 3,750 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $825 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(22) In February 1998, the Registrant issued 4,500 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $990 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(23) In February 1998, the Registrant issued 3,825 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $638 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(24) In March 1998, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 22,500 shares of
the Registrant's Common Stock to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(25) In March 1998, the Registrant issued 1,251 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $3,444 to the estate of a former director of
the Registrant in reliance upon the exemption from registration under
Rule 701 promulgated under the Securities Act.
(26) In March 1998, the Registrant issued 3,450 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $575 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(27) In March 1998, the Registrant issued 15,000 shares of the Registrant's
Common Stock to Hoffman Enterprises, the Registrant's landlord, as
partial reimbursement for expenses incurred by Hoffman Enterprises in
relocating other tenants in order to facilitate the Company's expansion
in reliance upon the exemption from registration under Section 4(2) of
the Securities Act.
(28) In April 1998, the Registrant issued 17,400 shares of the Registrant's
Common Stock upon the exercise of outstanding stock options for an
aggregate exercise price of $5,300 to employees of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
II-3
<PAGE>
(29) In May 1998, the Registrant issued 7,500 shares of the Registrant's
Common Stock to Michael J. Sherrod in consideration of his interest in
his regulatory consulting business in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
(30) In May 1998, the Registrant issued 6,000 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $16,520 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(31) In June 1998, the Registrant issued 6,000 shares of the Registrant's
Common Stock upon the exercise of outstanding stock options for an
aggregate exercise price of $2,240 to employees of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(32) In June 1998, the Registrant granted 525 shares of the Registrant's
Common Stock to a director of the Registrant in reliance upon the
exemption from registration under Rule 701 promulgated under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation.
*3.2 Amendment to Amended and Restated Certificate of Incorporation.
*3.3 Form of Second Amended and Restated Certificate of Incorporation (to be
filed immediately prior to effectiveness of the Registration Statement).
*3.4 Form of Restated Certificate of Incorporation (to be filed following the
closing of the Offering referred to in the Registration Statement).
*3.5 By-Laws.
*3.6 Form of Amended and Restated By-laws (to be effective upon effectiveness
of the Registration Statement).
*4.1 Specimen certificate for shares of Common Stock, $0.01 par value, of the
Registrant.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the
securities being offered.
*10.1 Lease dated as of October 9, 1992 by and between the Registrant and
Hoffman Enterprises.
*10.2 1998 Stock Option and Incentive Plan of the Registrant, as amended.
*10.3 1992 Stock Option Plan of the Registrant.
*10.4 1998 Employee Stock Purchase Plan of the Registrant.
*10.5 Form of Indemnification Agreement between the Registrant and each of its
directors.
*10.6 Form of Stock Option Agreement
*10.7 License Agreement dated March 15, 1995 by and between the Registrant and
Marion Merrell Dow Inc. (now Hoechst Marion Roussel, Inc.) (excluding
certain portions which have been omitted as indicated based upon a
request for confidential treatment, but which have been filed separately
with the Commission).
*10.8 Principles of Cooperation Between Albany Molecular Research and Cambrex
Corporation dated February 1, 1997 by and between the Registrant and
Cambrex Corporation (excluding certain portions which have been omitted
as indicated based upon a request for confidential treatment, but which
have been filed separately with the Commission).
*10.9 Agreement dated December 15, 1997 by and between the Registrant and Eli
Lilly and Company (excluding certain portions which have been omitted as
indicated based upon a request for confidential treatment, but which
have been filed separately with the Commission).
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
*10.10 Description of Technology Development Incentive Plan
*11.1 Computation of income per common share.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1
hereto).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (included on pages II-4).
27.1 Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment to this Registration Statement.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ALBANY, STATE OF NEW
YORK, ON JULY 9, 1998.
Albany Molecular Research, Inc.
Thomas E. D'Ambra
By: _________________________________
Thomas E. D'Ambra
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of Thomas E. D'Ambra and Harold M.
Armstrong, Jr. such person's true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement (or to any other registration statement for the same offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act), and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that any said
attorney-in-fact and agent, or any substitute or substitutes of any of them,
may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Thomas E. D'Ambra, Ph.D. Chairman of the July 9, 1998
- ------------------------------------- Board, Chief
THOMAS E. D'AMBRA, PH.D. Executive Officer
and Director
(Principal
Executive Officer)
Donald E. Kuhla, Ph.D. President and July 9, 1998
- ------------------------------------- Director
DONALD E. KUHLA, PH.D.
Harold M. Armstrong, Jr. Executive Vice July 9, 1998
- ------------------------------------- President, Chief
HAROLD M. ARMSTRONG, JR. Financial Officer,
Secretary,
Treasurer and
Director (Principal
Accounting Officer)
Chester J. Opalka Vice President, July 9, 1998
- ------------------------------------- Senior Research
CHESTER J. OPALKA Chemist and
Director
Anthony M. Tartaglia, M.D. Director July 9, 1998
- -------------------------------------
ANTHONY M. TARTAGLIA, M.D.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation.
*3.2 Amendment to Amended and Restated Certificate of Incorporation.
*3.3 Form of Second Amended and Restated Certificate of Incorporation
(to be filed immediately prior to effectiveness of the
Registration Statement).
*3.4 Form of Restated Certificate of Incorporation (to be filed
following the closing of the Offering referred to in the
Registration Statement).
*3.5 By-Laws.
*3.6 Form of Amended and Restated By-laws (to be effective upon
effectiveness of the Registration Statement).
*4.1 Specimen certificate for shares of Common Stock, $0.01 par
value, of the Registrant.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the
securities being offered.
*10.1 Lease dated as of October 9, 1992 by and between the Registrant
and Hoffman Enterprises.
*10.2 1998 Stock Option and Incentive Plan of the Registrant, as
amended.
*10.3 1992 Stock Option Plan of the Registrant.
*10.4 1998 Employee Stock Purchase Plan of the Registrant.
*10.5 Form of Indemnification Agreement between the Registrant and
each of its directors.
*10.6 Form of Stock Option Agreement
*10.7 License Agreement dated March 15, 1995 by and between the
Registrant and Marion Merrell Dow Inc. (now Hoechst Marion
Roussel, Inc.) (excluding certain portions which have been
omitted as indicated based upon a request for confidential
treatment, but which have been filed separately with the
Commission).
*10.8 Principles of Cooperation Between Albany Molecular Research and
Cambrex Corporation dated February 1, 1997 by and between the
Registrant and Cambrex Corporation (excluding certain portions
which have been omitted as indicated based upon a request for
confidential treatment, but which have been filed separately
with the Commission).
*10.9 Agreement dated December 15, 1997 by and between the Registrant
and Eli Lilly and Company (excluding certain portions which have
been omitted as indicated based upon a request for confidential
treatment, but which have been filed separately with the
Commission).
*10.10 Description of Technology Development Incentive Plan
*11.1 Computation of income per common share.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1
hereto).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (included on pages II-4).
27.1 Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment to this Registration Statement.
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
Albany Molecular Research, Inc.:
We consent to the use of our report included herein and the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Albany, New York
July 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 1,261,518 7,460,063
<SECURITIES> 1,949,546 1,946,611
<RECEIVABLES> 1,976,637 1,998,043
<ALLOWANCES> 114,000 143,000
<INVENTORY> 317,789 419,226
<CURRENT-ASSETS> 6,168,448 13,886,640
<PP&E> 5,240,182 6,272,979
<DEPRECIATION> 1,265,255 1,458,751
<TOTAL-ASSETS> 10,629,334 19,173,092
<CURRENT-LIABILITIES> 1,761,818 5,572,055
<BONDS> 0 0
0 0
1,000 1,000
<COMMON> 71,924 72,161
<OTHER-SE> 6,581,258 11,423,416
<TOTAL-LIABILITY-AND-EQUITY> 10,629,334 19,173,092
<SALES> 8,104,032 2,873,008
<TOTAL-REVENUES> 10,797,954 11,040,598
<CGS> 4,334,245 1,507,721
<TOTAL-COSTS> 7,207,107 2,599,704
<OTHER-EXPENSES> 278,722 1,009,860
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 175,969 39,760
<INCOME-PRETAX> 3,136,156 7,391,274
<INCOME-TAX> 946,941 2,852,611
<INCOME-CONTINUING> 2,189,215 4,538,663
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,189,215 4,538,663
<EPS-PRIMARY> .31 .63
<EPS-DILUTED> .28 .56
</TABLE>
