<PAGE>
As filed with the Securities and Exchange Commission on February 2, 1999
Registration Statement No. 333-58795
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Amendment No. 5
To
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
ALBANY MOLECULAR RESEARCH, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2833 14-1806984
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification No.)
of Incorporation or
Organization)
----------------
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.
----------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 in 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 FEBRUARY 2, 1999
PROSPECTUS
2,200,000 Shares
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 $17.00 and $19.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)...................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 $1,000,000.
(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
, 1999.
ING Baring Furman Selz LLC Hambrecht & Quist
-----------
The date of this Prospectus is , 1999
<PAGE>
[Three Photographs Regarding Medicinal Chemistry and Small-Scale Manufacturing]
ALBANY MOLECULAR RESEARCH, INC. IS AN INTEGRATED CHEMISTRY OUTSOURCING
COMPANY THAT OFFERS A BROAD RANGE OF CHEMISTRY RESEARCH AND DEVELOPMENT
SERVICES, INCLUDING MEDICINAL CHEMISTRY, CHEMICAL DEVELOPMENT, ANALYTICAL
CHEMISTRY SERVICES AND SMALL-SCALE MANUFACTURING. MEDICINAL CHEMISTRY AND
SMALL-SCALE MANUFACTURING ARE SHOWN IN THE PICTURES ABOVE.
----------------
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 Consolidated 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. ("HMRI") as Allegra in the Americas and as Telfast elsewhere.
Pursuant to a licensing agreement between the Company and HMRI, the Company has
earned $19.3 million in milestones and royalties from HMRI through September
30, 1998 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 complement, or in some
cases, supplement 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
compounds.
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) expanding the number of service offerings used by
each of its customers, (iv) increasing its customer base, and (v) capitalizing
on 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 and
will be reincorporated by merger under the laws of Delaware immediately prior
to the effectiveness of this offering. 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).................................... 12,215,224 shares
Use of Proceeds................................. To repay a portion of indebtedness, 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) 1,866,006 shares of Common Stock issuable upon the exercise
of outstanding stock options at a weighted average exercise price of $2.47
per share as of November 30, 1998; and (ii) 1,379,771 and 300,000
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. Gives effect to the repurchase by the Company on October 28,
1998 of a total of 1,131,903 shares of Common Stock from the Company's
former chief financial officer and a trust for the benefit of his family
for an aggregate purchase price of approximately $9.9 million (the "Share
Repurchase"). See "Management--Executive Officers, Directors and Key
Employees," "--Employee Stock and Other Benefit Plans--1998 Stock Option
and Incentive Plan," "--1992 Stock Option Plan," "--1998 Employee Stock
Purchase Plan" and "Certain Transactions."
----------------
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 2.25-for-1 stock split of the Common Stock to be effective
immediately prior to the effectiveness of this offering; (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 45,000 shares
of Common Stock, immediately prior to completion of this offering; (iii) the
Company's reincorporation by merger in Delaware to be effective prior to the
effectiveness of this offering; and (iv) 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 Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------ ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net contract revenue............... $ 2,959 $ 5,261 $ 8,104 $ 5,819 $ 9,649
Cost of contract revenue........... 1,350 2,835 4,334 3,126 5,320
------- ------- ------- ------- -------
Gross profit from contract
revenue........................... 1,609 2,426 3,770 2,693 4,329
Licensing fees, milestones and roy-
alties, net....................... -- 900 2,278 2,251 14,212
Operating expenses:
Research and development.......... 37 245 627 443 535
Selling, general and
administrative................... 882 1,219 2,246 1,401 3,162
------- ------- ------- ------- -------
Total operating expenses......... 919 1,464 2,873 1,844 3,697
------- ------- ------- ------- -------
Income from operations............. 690 1,862 3,175 3,100 14,844
Other income (expense):
Interest income (expense), net.... 37 (11) (13) (24) 116
Other non-operating income
(expense), net................... 5 20 (26) (15) 4
------- ------- ------- ------- -------
Total other income (expense)..... 42 9 (39) (39) 120
------- ------- ------- ------- -------
Income before income taxes......... 732 1,871 3,136 3,061 14,964
Income tax expense................. 252 637 947 922 5,664
------- ------- ------- ------- -------
Net income......................... $ 480 $ 1,234 $ 2,189 $ 2,139 $ 9,300
======= ======= ======= ======= =======
Basic earnings per share........... $ 0.05 $ 0.12 $ 0.20 $ 0.20 $ 0.86
Diluted earnings per share......... $ 0.04 $ 0.10 $ 0.18 $ 0.18 $ 0.76
Weighted average common shares
outstanding, basic................ 10,263 10,706 10,761 10,759 10,842
Weighted average common shares
outstanding, diluted.............. 11,289 11,786 12,014 11,947 12,254
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------
Pro Forma
Actual As Adjusted(1)
------- --------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................ $ 2,831 $25,723
Working capital.......................................... 8,712 31,604
Total assets............................................. 25,790 48,682
Long-term debt, less current maturities.................. 5,138 2,122
Total shareholders' equity............................... 16,316 42,224
</TABLE>
- ----------
(1) Adjusted to give effect (i) to the Share Repurchase and (ii) to the sale of
2,200,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $18.00 per share and the receipt and application
of the estimated net proceeds therefrom. See "Use of Proceeds,"
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Transactions" and Note 15 of
Notes to Consolidated Financial Statements.
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 nine months ended September 30, 1998, net contract
revenue from the Company's three largest customers represented approximately
18%, 17% and 15% of total net contract revenue, respectively. The Company's
contracts generally are terminable upon 30, 60 or 90 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 have a fixed
price or are 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--Current Collaborations; Customers."
Risks Related to the Allegra/Telfast Royalty. Under the terms of a license
agreement, the Company has granted HMRI, 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, non-sedating antihistamine marketed and sold by HMRI as a
prescription medicine. Fexofenadine HCl is
7
<PAGE>
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 23.8% of
the Company's aggregate net contract revenue plus other operating revenue, and
for the nine months ended September 30, 1998, the Company's milestones and
royalties from fexofenadine HCl were $15.6 million, or 60.4% of the Company's
aggregate net contract revenue plus other operating revenue. The Company's
milestones and royalties from fexofenadine HCl for the nine months ended
September 30, 1998 include $3.0 million in non-recurring milestone payments
and $4.4 million in royalties related to prior periods and as a result such
milestone payments and royalties may not be indicative of future amounts
earned under the license agreement with HMRI. In particular, no further
milestone payments are required under the agreement. The Company does not
participate in the manufacturing, marketing or sale of fexofenadine HCl by
HMRI and relies entirely on the efforts of HMRI to manufacture, market and
sell this product. There can be no assurance that HMRI 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 HMRI 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 HMRI 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/Telfast 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
8
<PAGE>
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 Company's facilities to
accommodate future growth may lead to significant 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. Donald E. Kuhla, the Company's President and
Chief Operating Officer, Dr. Harold Meckler, the Company's Vice President,
Chemical Development, and Dr. Michael P. Trova, the Company's Vice President,
Medicinal Chemistry. Moreover, the responsibilities of the Company's senior
management and scientific staff have recently increased since the departure in
October 1998 of the Company's chief financial officer. The Company is actively
seeking to hire a permanent chief financial officer. 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, Kuhla, 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 or attract and retain a new
chief financial officer on a timely basis. 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, or the Company's inability to
hire a permanent chief financial officer on a timely basis, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Employees," "Management--Executive
Officers, Directors and Key Employees" and "Certain Transactions."
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
9
<PAGE>
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 Common Stock in a manner unrelated to the longer term
operating performance of the Company. See "--Absence of a 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 of Operations."
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. The
Company currently maintains product liability 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 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.
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 current Good Manufacturing Practices ("cGMP") guidelines as
established by the FDA. The Company's facilities are subject to scheduled
periodic 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, 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
10
<PAGE>
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 additional capital
expenditures and for working capital and other general corporate purposes. The
Company has not, however, identified specific uses for a significant portion
of the net proceeds of the offering. Accordingly, the Company's management
will have significant flexibility in applying the net proceeds of the
offering. 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, products or technologies that are
complementary to those of the Company, and a portion of the net proceeds may
be used for such acquisitions. 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 Stockholders. 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, and Chester J. Opalka, the Company's
Vice President, Senior Research Chemist and a Director, will beneficially own
in the aggregate approximately 53.1% (51.7% assuming exercise of the
Underwriters' over-allotment option in full) of the outstanding Common Stock.
As a result, these stockholders will be able to exert significant influence
over the outcome of fundamental corporate transactions requiring stockholder
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 Stockholders" and "Shares
Eligible for Future Sale."
11
<PAGE>
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 9,979,561 shares of Common
Stock owned by current stockholders 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 stockholders
of the Company, who in the aggregate will hold 9,953,199 shares of Common
Stock and options to purchase 1,787,976 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 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's independent
information technology consultant has conducted a comprehensive assessment of
the Company's computer systems to identify the systems that could be affected
by the Year 2000, and has determined that no material changes are required for
the Company's computer systems to be Year 2000 compliant. As such, the Company
believes that, based upon currently available information, it will incur no
material costs associated with becoming Year 2000 compliant. The Company is
seeking to confirm the Year 2000 readiness of its material customers (such as
Astra AB and Eli Lilly and Company), its key licensees (such as HMRI) and its
material vendors. Failure of the Company, its software providers or the
Company's customers or vendors 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 Delaware 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,
12
<PAGE>
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
Operations."
Anti-takeover Provisions. Certain provisions of the Company's Restated
Certificate of Incorporation (the "Certificate") and Amended and Restated By-
laws (the "By-laws"), certain sections of the Delaware General 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 stockholders 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 stockholder 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 stockholders, and certain advance notice
requirements for stockholder proposals and nominations for election to the
Board of Directors. These provisions, and the ability of the Board of
Directors to issue preferred stock without further action by stockholders,
could delay or limit the removal of incumbent directors or the assumption of
control by stockholders, even if such removal or assumption of control would
be beneficial to stockholders, and also could discourage or make more
difficult a merger, tender offer or proxy contest, even if such events would
be beneficial, in the short term, to the interests of stockholders. The
Company will be subject to Section 203 of the Delaware General Corporation Law
which, in general, imposes restrictions upon certain acquirors (including
their affiliates and associates) of 15% 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 pro forma net
tangible book value per share of Common Stock. At an assumed initial public
offering price of $18.00 per share, investors in this offering will incur
dilution of $14.83 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 may result in additional dilution to
the Company's stockholders. 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
$18.00 per share, after deducting the underwriting discounts and estimated
offering expenses payable by the Company, are estimated to be $35.8 million
($41.4 million if the Underwriters' over-allotment option is exercised in
full). The Company expects to use the net proceeds as follows: (i)
approximately $7.9 million will be used to repay indebtedness incurred in
connection with the Share Repurchase; (ii) 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; and (iii) the balance will be
used for additional capital expenditures and for working capital and other
general corporate purposes. The Company's outstanding indebtedness under the
Credit Facility, which will be partially repaid with a portion of the proceeds
of this offering, was incurred to finance the expansion of the Company's
facilities. 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 November 30, 1998, the Company had an
aggregate outstanding principal balance of $7.0 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
November 30, 1998 was approximately 5.78% per annum. The notes issued in the
Share Repurchase mature on October 28, 2003 and bear interest at the prime
rate, 7.75% at November 30, 1998. See "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Certain Transactions ."
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 Delaware 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
September 30, 1998 (i) on an actual basis, (ii) on a pro forma basis to give
effect to the Share Repurchase, and (iii) on a pro forma as adjusted basis to
give effect to the Share Repurchase and the sale of the 2,200,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$18.00 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 Consolidated Financial Statements of
the Company and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------
Pro Forma,
Actual Pro Forma(1) As Adjusted(2)
------ -------------- --------------
(in thousands)
<S> <C> <C> <C>
Current maturities of long-term debt(3)... $ 82 $ 1,669 $ 82
Long-term debt, net of current
maturities(3)............................ 5,138 13,471 2,122
Series A Convertible Preferred Stock,
par value $0.01 per share: 100,000
shares authorized, issued and
outstanding, actual and pro forma; no
shares authorized, issued or
outstanding, pro forma as adjusted..... 1 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, pro forma and
pro forma as adjusted.................. -- -- --
Common Stock, par value $0.01 per share:
10,000,000 shares authorized,
10,900,444 shares issued and
outstanding, actual; 9,969,099 shares
issued and outstanding and 1,131,903
shares issued but not outstanding, pro
forma; 50,000,000 shares authorized,
12,214,099 shares issued and
outstanding, pro forma as adjusted(4).. 109 111 122
Additional paid-in capital.............. 2,952 3,092 28,848
Accumulated other comprehensive income.. 70 70 70
Retained earnings....................... 13,184 13,184 13,184
Treasury stock, at cost................. -- (10,062) --
------ ------- -------
Total shareholders' equity.......... 16,316 6,396 42,224
------ ------- -------
Total capitalization...................... 21,536 21,536 44,428
====== ======= =======
</TABLE>
- ----------
(1) Represents the September 30, 1998 balances after giving effect to (i) the
Share Repurchase, (ii) the incurrence of $2.0 million of indebtedness
under the Company's Credit Facility to fund the initial payment for the
Share Repurchase, and (iii) the issuance of promissory notes in the
aggregate principal amount of $7.9 million to finance the remainder of the
Share Repurchase. See Note 15 of Notes to Consolidated Financial
Statements.
(2) The pro forma as adjusted column gives effect to (i) the Share Repurchase
and related transactions described in Note 1 above, (ii) the conversion of
the Series A Convertible Preferred Stock into Common Stock, and (iii) the
sale of the 2,200,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $18.00, net of underwriting discount and
estimated offering expenses, and the receipt and application by the
Company of the estimated net proceeds therefrom as described in "Use of
Proceeds."
(3) See Note 3 of Notes to Consolidated Financial Statements for information
concerning long-term debt obligations.
(4) Excludes: (i) 2,055,314 shares of Common Stock issuable upon exercise of
outstanding stock options as of the balance sheet date of which 200,558
have been issued upon exercise of stock options subsequent to the balance
sheet date; (ii) 1,379,771 additional shares of Common Stock available for
future grants under the 1998 Stock Plan; and (iii) 300,000 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." The numbers of issued and outstanding shares of Common
Stock have been adjusted to give effect to a 2.25-for-1 stock split to be
completed immediately prior to the effectiveness of this offering. At such
time, the number of authorized shares of Common Stock will be increased to
50,000,000.
15
<PAGE>
DILUTION
The net tangible book value of the Common Stock as of September 30, 1998 was
approximately $15.9 million or $1.45 per share. The adjusted pro forma net
tangible book value per share (i) 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 the conversion of the
Series A Preferred Stock into Common Stock and excluding all outstanding stock
options, and (ii) gives effect to the Share Repurchase. 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 $18.00 per share and the receipt and
application by the Company of the net proceeds therefrom, the adjusted pro
forma net tangible book value of the Common Stock as of September 30, 1998
would have been approximately $38.8 million or $3.17 per share. This
represents an immediate increase in pro forma net tangible book value of $1.72
per share to existing shareholders and an immediate dilution of $14.83 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............... $18.00
Net tangible book value per share .......................... $1.45
Increase per share attributable to new investors............ $1.72
Adjusted pro forma net tangible book value per share after the
offering..................................................... $ 3.17
------
Dilution per share to new investors........................... $14.83
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1998 after giving effect to the conversion of all outstanding shares of Series
A Preferred Stock, the differences between existing stockholders 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
stockholders(1)........ 10,014,099 82.0% $ 3,007,639 7.1% $ 0.30
New investors........... 2,200,000 18.0 39,600,000 92.9 18.00
---------- ----- ----------- -----
Total................. 12,214,099 100.0% $42,607,639 100.0%
========== ===== =========== =====
</TABLE>
- ----------
(1) Excludes shares repurchased by the Company in connection with the Share
Repurchase.
The foregoing computations assume no exercise of any outstanding stock
options after September 30, 1998 (other than the exercise in connection with
the Share Repurchase of options to purchase 200,558 shares of Common Stock) or
the Underwriters' over-allotment option. See "Use of Proceeds." As of November
30, 1998, options to purchase 1,866,006 shares of Common Stock were
outstanding with a weighted average exercise price of $2.47 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 CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for each of
the years ended December 31, 1995, 1996 and 1997 and selected consolidated
balance sheet data at December 31, 1996 and 1997 are derived from the
consolidated financial statements of the Company which have been audited by
KPMG 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 selected balance sheet data at December 31, 1993, 1994 and 1995, are
derived from audited financial statements not included herein. The selected
consolidated statement of operations data for the nine month periods ended
September 30, 1997 and 1998 and the selected consolidated balance sheet data
at September 30, 1998 are derived from unaudited consolidated financial
statements also included elsewhere in the Prospectus. The unaudited
consolidated financial statements for such nine month periods have been
prepared by the Company on a basis consistent with the Company's audited
consolidated 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 consolidated financial position and
consolidated results of operations for these periods. The consolidated results
of operations for the nine months ended September 30, 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 Consolidated Financial Statements and Notes thereto
included herein.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net contract revenue..... $1,071 $1,116 $2,959 $5,261 $8,104 $5,819 $9,649
Cost of contract
revenue................. 818 742 1,350 2,835 4,334 3,126 5,320
------ ------ ------ ------ ------ ------ ------
Gross profit from
contract revenue........ 253 374 1,609 2,426 3,770 2,693 4,329
Licensing fees,
milestones and
royalties, net.......... -- -- -- 900 2,278 2,251 14,212
Operating expenses:
Research and
development............ 54 152 37 245 627 443 535
Selling, general and
administrative ........ 225 253 882 1,219 2,246 1,401 3,162
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............... 279 405 919 1,464 2,873 1,844 3,697
------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations.............. (26) (31) 690 1,862 3,175 3,100 14,844
Other income (expense):
Interest income
(expense), net......... (13) (30) 37 (11) (13) (24) 116
Other non-operating
income (expense), net.. -- -- 5 20 (26) (15) 4
------ ------ ------ ------ ------ ------ ------
Total other income
(expense).............. (13) (30) 42 9 (39) (39) 120
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes............ (39) (61) 732 1,871 3,136 3,061 14,964
Income tax expense
(benefit)............... (4) (48) 252 637 947 922 5,664
------ ------ ------ ------ ------ ------ ------
Net income (loss)........ $ (35) $ (13) $ 480 $1,234 $2,189 $2,139 $9,300
====== ====== ====== ====== ====== ====== ======
Basic earnings (loss) per
share................... $ -- $ -- $ 0.05 $ 0.12 $ 0.20 $ 0.20 $ 0.86
Diluted earnings (loss)
per share............... $ -- $ -- $ 0.04 $ 0.10 $ 0.18 $ 0.18 $ 0.76
Weighted average common
shares outstanding,
basic................... 8,422 8,856 10,263 10,706 10,761 10,759 10,842
Weighted average common
shares outstanding,
diluted................. 8,687 9,234 11,289 11,786 12,014 11,947 12,254
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------- September 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 179 $ 45 $ 35 $1,260 $ 1,262 $ 2,831
Working capital............. 284 87 2,171 3,011 4,407 8,712
Total assets................ 1,044 1,059 5,108 8,501 10,629 25,790
Long-term debt, less current
maturities................. 258 204 748 2,375 1,776 5,138
Total shareholders' equity.. 578 566 3,156 4,411 6,654 16,316
</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 Consolidated
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 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 January 1999.
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 rather
than licensing fees and royalties, which are dependent upon the Company's
licensee's sales. 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) to a limited extent, a fixed price basis. Typically,
FTE and T&M contracts are entered into for two to three year periods and fixed
price contracts are entered into for much shorter periods of time (generally
two to six months). Because the Company's fixed price contracts relate to
projects that are generally limited in scope and such contracts are of
generally short duration, the Company has not historically experienced cost
overruns under such contracts which have had a material adverse effect on the
Company's results of operations. To the extent the Company were to experience
cost overruns under a particular fixed price contract, the profitability of
such contract would be adversely affected and, if that fixed price contract
were material to the Company, such overruns could have a material adverse
effect on the Company's results of operations for the period during which the
contract was performed. 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, 60 or 90 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.
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 HMRI 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
18
<PAGE>
agreement with HMRI in 1995, the Company began to recognize royalty revenue
related to U.S. sales under that agreement in February 1998, due to the
significant time taken for issuance of 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.
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.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data as a percentage of net contract
revenue:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------- --------------
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 53.7 55.1
------- ------- ------- ------ ------
Gross profit..................... 54.4 46.1 46.5 46.3 44.9
Licensing fees, milestones and
royalties, net.................. -- 17.1 28.1 38.7 147.2
Operating expenses:
Research and development........ 1.3 4.7 7.7 7.6 5.5
Selling, general and
administrative................. 29.8 23.2 27.7 24.1 32.8
------- ------- ------- ------ ------
Total operating expenses........ 31.1 27.9 35.4 31.7 38.3
------- ------- ------- ------ ------
Income from operations........... 23.3 35.4 39.2 53.3 153.8
Other income (expense):
Interest income (expense), net.. 1.3 (0.2) (0.2) (0.5) 1.2
Other non-operating income (ex-
pense), net.................... 0.2 0.4 (0.3) (0.2) 0.1
------- ------- ------- ------ ------
Total other income (expense).... 1.5 0.2 (0.5) (0.7) 1.3
------- ------- ------- ------ ------
Income before income taxes....... 24.8 35.5 38.7 52.6 155.1
Income tax expense............... 8.5 12.1 11.7 15.8 58.7
------- ------- ------- ------ ------
Net income....................... 16.3% 23.4% 27.0% 36.8% 96.4%
======= ======= ======= ====== ======
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Net contract revenue. Net contract revenue increased 65.8% to $9.6 million
in the first nine months of 1998 from $5.8 million in the first nine 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 74 at September 30, 1998 from 51 at September 30, 1997.
Gross profit. Gross profit increased 60.7% to $4.3 million in the first nine
months of 1998 from $2.7 million in the first nine months of 1997. Gross
profit remained relatively constant as a percentage of net contract revenue.
Licensing fees, milestones and royalties, net. Net licensing fees,
milestones and royalties increased to $14.2 million in the first nine months
of 1998 from $2.3 million in the first nine months of 1997. As a result of the
February 1998 PTO decision, the Company met all prerequisites of the licensing
agreement with HMRI and recognized and received in the first three months of
1998 milestone payments and royalties on all sales of
19
<PAGE>
fexofenadine HCl in the United States from November 26, 1996, the date of patent
issuance, through December 31, 1997. The Company recognized $9.6 million in
royalties on all sales of fexofenadine HCl in the United States for the first
nine months of 1998. All licensing fees, milestones and royalties associated
with the HMRI license are subject to the Technology Development Incentive Plan.
The Company's milestones and royalties from fexofenadine HCl for the nine months
ended September 30, 1998 include $3.0 million in non-recurring milestone
payments and $4.4 million in royalties related to prior periods and, as a
result, such milestone payments and royalties may not be indicative of future
amounts earned under the license agreement with HMRI. In particular, no further
milestone payments are required under the agreement.
Research and development. Research and development expense increased to
$535,000 in the first nine months of 1998 from $444,000 in the first nine
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 125.9% to $3.2 million for the first nine months of 1998
from $1.4 million in the first nine months of 1997 and represented 32.8% of
net contract revenue for the first nine months of 1998 compared to 24.1% for
the first nine 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, increased rent
expense related to the ongoing expansion of the Company's Albany facility and
a one-time expense incurred in the first nine months of 1998 as a result of
the Company's partial reimbursement of its landlord for expenses incurred by
the landlord in relocating other tenants in order to facilitate the Company's
expansion.
Income tax expense. Income tax expense increased to $5.7 million in the
first nine months of 1998 from $922,000 in the first nine months of 1997. The
effective rate was 37.9% in the first nine months of 1998 and 30.1% in the
first nine months of 1997. The increase in income tax expense was primarily a
result of the increase in royalty and licensing fees. The change in the
effective income tax rate principally resulted from the utilization of New
York State investment tax credits in 1997, and an increase in the minimum
effective federal rate from 34.0% to 35.0% due to the fact that the Company's
taxable income was in excess of $10 million for the nine months ended
September 30, 1998.
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.
Licensing fees, milestones and royalties, net. Licensing fees, milestones
and royalties, net of the Company's technology incentive award, 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 HMRI 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.
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.
20
<PAGE>
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.
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. The change in the effective income
tax rate principally resulted from the utilization of New York State
investment tax credits in 1997, which were $161,858.
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.
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 as licensing fees, milestones and
royalties were offset by the technology incentive award. The $200,000
technology incentive award in 1995 was based on a $200,000 licensing fee
received from HMRI and the proceeds of a $2.0 million equity investment by
HMRI in the Company, net of costs incurred by the Company in connection with
the licensed technology. 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.
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 38.1% to $1.2 million in 1996 from $882,000 in 1995, and
represented 23.2% of net contract revenue in 1996 compared to 29.8% in 1995.
The increase was principally due to an increase in the number of
administrative staff due to the continued growth of the Company and increased
recruiting expenditures for scientific staff.
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 consolidated operating
results for each of the Company's last ten quarters. This information has been
prepared by the Company on a basis consistent with the Company's audited
consolidated 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 Consolidated Financial Statements and Notes thereto of
the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net contract revenue.... $1,417 $1,373 $1,181 $1,509 $2,099 $2,211 $2,284 $2,873 $3,091 $3,685
Cost of revenue......... 609 748 1,055 928 1,025 1,173 1,208 1,508 1,744 2,068
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit from
contract revenue....... 808 625 126 581 1,074 1,038 1,076 1,365 1,347 1,617
Licensing fees,
milestones and
royalties, net......... -- -- 900 -- 450 1,801 27 7,289 3,959 2,964
Operating expenses:
Research and
development............ 87 25 128 100 181 162 183 209 132 194
Selling, general and
administrative......... 242 338 444 380 513 508 846 1,083 1,025 1,054
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................. 329 363 572 480 694 670 1,029 1,292 1,157 1,248
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations.. 479 262 454 101 830 2,169 74 7,362 4,149 3,333
Other income (expense):
Interest income
(expense), net......... 10 (7) (21) (15) (1) (8) 11 26 71 19
Other non-operating
income (expense), net.. 5 1 12 4 -- (19) (11) 4 1 (1)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total other income
(expense).............. 15 (6) (9) (11) (1) (27) -- 30 72 18
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 494 256 445 90 829 2,142 74 7,392 4,221 3,351
Income tax expense
(benefit).............. 172 80 151 15 319 588 25 2,853 1,463 1,348
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 322 $ 176 $ 294 $ 75 $ 510 $1,554 $ 49 $4,539 $2,758 $2,003
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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 antihistamine subject to seasonal demand, may
produce stronger quarterly fluctuations in the Company's consolidated results
of operations than those which have occurred in prior periods.
Liquidity and Capital Resources
The Company has funded its business through cash flows from operations,
proceeds from borrowings and proceeds from a $2.0 million equity investment by
HMRI in March 1995. During the nine months ended September 30, 1998 and the
years ended December 31, 1997, 1996, and 1995, the Company generated $8.0
million, $1.6 million, $2.1 million and $200,000, respectively, in cash flow
from operations and raised $5.0 million, $1.6 million and $1.0 million in
borrowings during the nine months ended September 30, 1998 and the years ended
December 31, 1996 and 1995, respectively. The Company had no borrowings during
1997. The increase in cash flow for the nine months ended September 30, 1998
was principally due to an increase in net licensing fees, milestones and
royalties.
During the nine months ended September 30, 1998 and the years ended December
31, 1997, 1996, and 1995, total capital expenditures were $9.5 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
22
<PAGE>
(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 main
location in Albany, New York. The expansion has added 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 instrumentation, software and
equipment upgrades. A total of $8.0 million for the expansion had been
incurred through September 30, 1998. The expansion is anticipated to be
completed by January 1999.
Working capital was $8.7 million at September 30, 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 nine month period ended September 30, 1998
was primarily attributable to the milestones and royalties earned by the
Company on its license agreement with HMRI, less the associated technology
incentive compensation expense and income taxes. Of the $15.6 million in
milestones and royalties earned by the Company under the HMRI license
agreement during the nine months ended September 30, 1998, $3.0 million
constituted non-recurring milestone payments. While the Company will continue
to receive quarterly royalty payments under the HMRI license agreement, no
additional milestone payments are due under the agreement. As a result,
amounts earned under the agreement may be materially less than those earned
during the nine months ended September 30, 1998. In addition, future royalties
under the agreement are dependent upon future sales of fexofenadine HCl. The
Company does not participate in the manufacture, marketing or sale of
fexofenadine HCl by HMRI and relies entirely on the efforts of HMRI to
manufacture, market and sell this product. There can be no assurance that HMRI
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 royalties from HMRI in accordance with the
terms of the license agreement. The occurrence of any one of these events in
the future could have a material adverse impact on the Company's working
capital, liquidity and capital resources. 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 September 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 September 30, 1998 was 6.14%
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 HMRI 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
23
<PAGE>
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."
On October 28, 1998, the Company paid $2.0 million in cash from borrowings
under the Credit Facility and issued $7.9 million in promissory notes in
connection with the Share Repurchase. The Company intends to repay the
outstanding principal balance under the notes out of the net proceeds of this
offering.
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's Year 2000 remediation and compliance program (the "Year 2000
Project") is managed by a Task Force consisting of representatives from all
major operational units within the Company. The Year 2000 Project is directed
by the Company's President with oversight provided by the Company's Board of
Directors. The Year 2000 Project Task Force's focus has been the functional
areas of information technology, non-information technology (embedded
processors) and customer/vendor Year 2000 assessment.
Information technology. The Company's independent information technology
consultants have conducted a comprehensive assessment of the Company's main
computer system to identify the company-wide hardware and software impact of
the Year 2000 problem. They determined that no material changes are required
for the Company's hardware and software to be considered Year 2000 compliant.
The Task Force is in the process of identifying the mission critical software
systems that will require Year 2000 compliance determinations. Since
substantially all of the Company's software are purchased "off the shelf"
packages, much of the remediation and testing process is dependent on the
accuracy of work performed by, and the Year 2000 compliance of, such purchased
software. The Company has initiated discussions with its information
technology vendors and will monitor their Year 2000 compliance programs and
compliance of their products or services with required standards.
Non-information technology. The Company's non-information technology systems
consist mainly of embedded processors such as microcontrollers in security,
fire prevention and climate control systems. The Company has initiated
discussions with vendors supplying such equipment and systems in order to
assess the possibility of a Year 2000 failure in such areas. Because of the
Company's recent physical expansion at its Albany, New York facility, a
majority of the centralized microcontroller systems have been either recently
installed or upgraded in capacity. Thus, the Company believes that a majority
of the systems put in place during this expansion either are currently Year
2000 compliant or will become Year 2000 compliant in the next three months.
Customer/vendor relationships. The Task Force is seeking to confirm the Year
2000 readiness of its material customers (such as Astra AB and Eli Lilly and
Company) and its key licensees (such as HMRI), along with the Company's
material vendors. The failure of any of its material customers or vendors to
be Year 2000 compliant could have a material adverse effect on the Company's
business, financial position and results of operations.
Due to the non-proprietary nature of the Company's software systems,
combined with the recent acquisition of a majority of the Company's
information technology hardware, the Company anticipates that it will incur no
material costs to become Year 2000 compliant. Due to the unlikely nature of
internal failures at the Company, no contingency plans have been prepared to
address this problem. The most likely reasonable worst case scenario for the
Company with respect to the Year 2000 problem would be the failure of a
material customer or vendor, including an energy vendor, to be Year 2000
compliant such that the failure would either cause the Company to lose a
revenue stream or to experience a withholding of a vendor's goods or services
because of the situation. In the case of a material customer, this could
result in lost revenue, while in the case of a vendor, this could result in
higher than anticipated expenses, as the Company would be required to seek
alternative suppliers of these goods and services.
24
<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 HMRI as Allegra in
the Americas and as Telfast elsewhere. Pursuant to a licensing agreement
between the Company and HMRI, the Company has earned $19.3 million in
milestones and royalties through September 30, 1998 and is entitled to receive
ongoing royalties from HMRI 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 complement or, in some cases, supplement 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.
25
<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
26
<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 components of drug discovery and
development. These companies have elected to outsource either all or a
portion of their needs to third party service providers rather than make
the investment required to perform these functions in-house.
27
<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 access to use the manufacturer's large-scale cGMP
manufacturing services with minimal disruption and delay. 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 39 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.
Expand Customer Relationships. The Company seeks to expand the number of
service offerings used by each of its customers 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.
Increase Customer Base. The Company is seeking to increase 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. See "--Marketing."
Capitalize on 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.
28
<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
29
<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 November 30, 1998, the Company had 48 employees, including 29 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 November 30, 1998,
the Company was working on 15 active medicinal chemistry projects for eight
customers, including Astra AB, 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 November 30, 1998, the Company had 32 employees, including 21 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 November 30,
1998, the Company was working on 16 active chemical development projects for
eleven customers, including Pfizer Inc., Cambrex Corporation, Triangle
Pharmaceuticals, Inc. and the National Institute on Drug Abuse.
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.
30
<PAGE>
Analytical services provided by the Company include:
. Test method development and validation;
. Quality control and release testing;
. High performance liquid and/or gas chromatography (including purity
assessment), separation of enantiomers and identification of impurities;
. 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 November 30, 1998, the Company had 12 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 59 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. All facilities and manufacturing techniques
used in the manufacture of products for clinical use or for sale in the United
States must be operated in conformity with cGMP guidelines as established by
the FDA. 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
approximately 10 or more kilograms) of bulk active ingredients (chemicals).
Allegra/Telfast 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 known as 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 HMRI) to develop
a synthetic form of the Seldane active metabolite.
Independent of HMRI'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 HMRI. Under the terms of the
license agreement, the Company granted HMRI an exclusive, worldwide license to
any patents issued to the Company related to its original TAM patent
applications. In connection with the licensing arrangement, HMRI made a $2.0
million equity investment in the Company. Pursuant to the license agreement,
HMRI has paid the Company an initial license fee of $200,000 and, through
September 30, 1998, the Company has earned $6.7 million in milestone payments
and $12.6 million in royalties. HMRI is obligated under the license agreement
to pay ongoing royalties to the Company based upon sales of fexofenadine HCl.
The Company is not entitled, however, to receive any additional milestone
payments under the license agreement. Sales of fexofenadine HCl in the U.S.
were approximately $212 million for the year ended December 31, 1997 and
approximately $339 million for the nine months ended September 30, 1998. See
"Risk Factors--Risks Related to the Allegra/Telfast 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 discovery or
development process.
31
<PAGE>
In January 1998, the Company entered into an arrangement with Sphinx
Pharmaceuticals (a division of Eli Lilly and Company) whereby the Company will
use Sphinx technology to resynthesize the Sphinx combinatorial chemistry
library. The Sphinx agreement terminates, in part, upon the completion of the
resynthesis of the Sphinx combinatorial library (which is estimated to occur
in December 1999) and may be terminated by Sphinx upon six months notice. 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. During the three years following the
expiration of the Sphinx research program, the Company will pay Sphinx
royalties based upon the compensation received by the Company under agreements
with third parties for the use of Sphinx technology. In addition, the Company
is obligated to pay Sphinx ongoing royalties based upon the sales of products
comprising compounds discovered or developed by the Company using Sphinx
technology.
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. Pursuant to the agreement
between Cambrex and the Company, Cambrex is obligated to pay the Company
royalties based upon projects referred to Cambrex by the Company. In addition,
Cambrex has engaged the Company to develop processes specifically designed to
fit its large-scale cGMP manufacturing capabilities. According to the
agreement, Cambrex intends to fund such projects to an annual level of at
least $750,000. The agreement between Cambrex and the Company will terminate
on April 1, 2000, unless extended.
In October 1998, the Company entered into an agreement with the National
Institute on Drug Abuse, a division of the National Institutes of Health, one
of eight health agencies under the Federal Department of Health and Human
Services ("NIDA") for the manufacture of bulk drug substances to be used in
NIDA's research for the study and treatment of drug abuse and addiction.
NIDA's scientific research programs address the most fundamental and essential
questions about drug abuse, ranging from its causes and consequences, to its
prevention and treatment. The contract, awarded through a competitive bidding
process, requires that NIDA's potential drug candidates be manufactured by the
Company under the strict requirements of cGMP. The Company was subsequently
awarded task orders under this contract for the production of two such
research compounds.
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
23.7% of the Company's aggregate net contract revenue plus other operating
revenue (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 operating revenue
(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 (excluding licensing fees, milestones and royalties),
respectively. For the nine months ended September 30, 1998, net contract
revenue from the Company's three largest customers represented approximately
18%, 17% and 15% of total net contract revenue (excluding licensing fees,
milestones and royalties), 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.
32
<PAGE>
Historically, the Company has focused its marketing efforts in the eastern
United States and western Europe. Recently, the Company has expanded its
marketing efforts to include the western United States, Japan and the Far
East. Such efforts include increased presence at trade shows in such areas,
advertising in trade publications, visits by senior management to potential
clients and the retention of independent marketing consultants.
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 licensing, milestone and royalty 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.
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
33
<PAGE>
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 five United States patents,
three New Zealand patents and one Australian patent relating to fexofenadine
HCl and certain related manufacturing processes. The Company's United States
issued patents expire between 2013 and 2015 and New Zealand and Australian
patents expire in 2014. 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.
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 services 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. The nature and
the extent to which such regulation may apply to the Company's customers will
vary depending on the nature
34
<PAGE>
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
results of these studies are submitted as a part of an Investigational New
Drug Application ("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, effort and expense 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 requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country.
All facilities and manufacturing techniques used in the manufacture of
products for clinical use or for sale in the United States must be operated in
conformity with cGMP guidelines as established by the FDA. The Company's
facilities are subject to scheduled periodic 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, financial
condition and results of operations.
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.
35
<PAGE>
Employees
As of November 30, 1998, the Company had 134 employees, 57 of whom have
obtained a Ph.D. degree in chemistry. Of such employees, 48 were engaged
primarily in medicinal chemistry services (including 29 Ph.D.s), 32 were
engaged primarily in chemical development services (including 21 Ph.D.s), 12
were engaged primarily in analytical services (including two Ph.D.s), six 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 two-story
facility in Albany, New York, of which it currently occupies 90,000 square
feet. 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. The Company's Albany facility has
eight medicinal chemistry, four chemical development and two analytical
laboratories, five dedicated cGMP manufacturing suites, four segregated cGMP
dryer rooms, three analytical instrumentation rooms, and two areas for
stability chambers. The Company's recent expansion is estimated to cost $12.5
million and is expected to be completed by January 1999. The Company also
leases approximately 15,000-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.
36
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of the Company, and
their ages as of November 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,
Treasurer, Secretary 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
Michael P. Trova, Ph.D. ....... 37 Vice President, Medicinal Chemistry
Harold Meckler, Ph.D. ......... 42 Vice President, Chemical Development
James J. Grates................ 37 Director of Human Resources
Controller and acting Chief Financial
Rodney A. Tillinghast(1)....... 32 Officer
Anthony P. Tartaglia,
M.D.(2)(3).................... 66 Director
Frank W. Haydu(2)(3)........... 51 Director
</TABLE>
- ----------
(1) Mr. Tillinghast, the Company's Controller, has been serving as the
Company's acting Chief Financial Officer since the departure on October
28, 1998 of the Company's former chief financial officer. The Company is
actively searching for a new chief financial officer and expects to fill
this position by the end of the first quarter of 1999.
(2) Member of the Audit Committee.
(3) 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 traditional development CRO, 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.
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.
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
37
<PAGE>
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.
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 Medicinal Chemistry 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.
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.
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.
Rodney A. Tillinghast, CPA has served as the Company's controller since
September 1995 and as acting Chief Financial Officer since October 1998. Prior
to joining the Company, Mr. Tillinghast served as an accountant in various
positions, including senior auditor, with KPMG Peat Marwick LLP from September
1992 to September 1995 and as a cost accountant with AL Tech Specialty Steel
Corporation, a stainless and tool steel manufacturer, from 1988 to 1992. Mr.
Tillinghast holds a B.S. degree in accounting from the State University of New
York, College at Fredonia, and a M.S. in accounting from the State University
of New York, Albany.
Anthony P. 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.
Frank W. Haydu III has served as a Director of the Company since October
1998. Mr. Haydu has served as the Chairman of Haydu & Lind, LLC, a senior
living development company, since co-founding it in June 1996. Mr. Haydu also
recently served as the interim Commissioner of Education of Massachusetts from
February 1998 to July 1998. Prior to co-founding Haydu & Lind, LLC, Mr. Haydu
served as the interim President and Chief Executive Officer of the New England
Medical Center Hospitals, Inc. from October 1995 to May 1996, a Senior Advisor
to Smith Barney, Inc., an investment bank, from August 1994 to August 1995,
and as a Managing Director of Kidder, Peabody & Company, Inc., an investment
bank, from 1990 to August 1994. Mr. Haydu also serves as a director of several
private companies. Mr. Haydu holds a B.A. degree in economics from Muhlenberg
College.
38
<PAGE>
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 two Class I
Directors (Messrs. Opalka and Haydu), one Class II Director (Dr. Kuhla) and
two Class III Directors (Drs. D'Ambra and Tartaglia), whose terms will expire
at the 1999, 2000 and 2001 annual meetings of stockholders, respectively.
Within 90 days after the completion of this offering, the Company intends to
expand the Board of Directors and elect one additional Class II Director, who
will not be an officer or employee 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
accounting procedures and considers the effect of such procedures on the
accountants' independence. The Audit Committee currently consists of Mr. Haydu
and Dr. Tartaglia, neither of whom is an officer or an employee of the
Company. 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 Mr. Haydu and Dr. Tartaglia. 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 July 1998, Dr. Kuhla also received a
consulting fee of $2,500 per quarter for miscellaneous projects and business
development activities.
Executive Compensation
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the other most highly compensated
executive officers of the Company for the year ended December 31, 1998
(the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
1998 Annual Long-Term
Compensation Compensation
------------ ------------------
Number of Shares
Name and Principal Underlying All Other
Position Salary($) Bonus($) Options Granted(#) Compensation($)
- ------------------ --------- -------- ------------------ ---------------
<S> <C> <C> <C> <C>
Thomas E. D'Ambra,
Ph.D. .................. 197,403 105,000 -- 1,434,631(1)
Chairman and Chief
Executive Officer
Donald E. Kuhla,
Ph.D.(2) ............... 84,135 25,000 112,500 75,487(3)
President and Chief
Operating Officer
Harold Meckler, Ph.D. ... 118,615 18,000 -- 10,000(4)
Vice President, Chemical
Development
Michael P. Trova,
Ph.D. .................. 111,738 40,000 -- 10,000(4)
Vice President,
Medicinal Chemistry
Lawrence D. Jones,
Ph.D.(5)................ 108,808 10,350 33,750 30,049(6)
Vice President,
Commercial Operations
and Quality
Harold M. Armstrong,
Jr.(7) ................. 123,462 -- -- 377,430(8)
Former Chief Financial
Officer
</TABLE>
- ----------
(1) Constitutes amounts earned by Dr. D'Ambra under the Company's Technology
Development Incentive Plan through September 30, 1998. The total amount
earned in the 1998 fiscal year is not calculable as of the date of this
Prospectus.
(2) Joined the Company as an officer in July 1998.
(3) Consists of $12,400 in director fees and $5,000 in consulting fees paid to
Dr. Kuhla prior to his employment by the Company and $58,087 as
reimbursement for relocation expenses incurrred when Dr. Kuhla joined the
Company.
(4) Constitutes debt forgiveness under notes payable to the Company.
(5) Joined the Company in March 1998.
(6) Constitutes reimbursement of relocation expenses incurred when Dr. Jones
joined the Company.
(7) Departed from the Company in October 1998. See "Certain Transactions."
(8) Constitutes a severance payment made upon Mr. Armstrong's departure from
the Company.
39
<PAGE>
Option Grants, Exercises and Holdings. The following table sets forth
information regarding stock options granted during the year ended December 31,
1998 to 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>
Donald E. Kuhla,
Ph.D. ................. 112,500 58.1% $8.89 6/25/08 $628,973 $1,593,942
Lawrence D. Jones,
Ph.D. ................. 33,750 17.4 4.91 3/16/08 104,216 264,103
</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 $18.00 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>
Donald E. Kuhla, Ph.D. ......... 112,500 $2,298,387 $4,252,203
Lawrence D. Jones, Ph.D. ....... 33,750 823,841 1,409,986
</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.
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, 1998.
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. .. -- 45,859 $ -- $ 675,647
Donald E. Kuhla, Ph.D. .... 28,125 118,125 450,750 1,110,188
Harold Meckler, Ph.D. ..... 54,000 47,047 911,520 694,881
Michael P. Trova, Ph.D. ... 36,000 23,309 607,680 343,306
Lawrence D. Jones, Ph.D. .. -- 33,750 -- 441,788
</TABLE>
- ----------
(1) There was no public trading market for the Common Stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $18.00 per share, less the
applicable exercise price.
40
<PAGE>
Employee Stock and Other Benefit Plans
1998 Stock Option and Incentive Plan. The 1998 Stock Plan was adopted by the
Board of Directors on August 7, 1998 and was approved by the Company's
stockholders on August 26, 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
1,379,771 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 August 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 200,000 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 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
41
<PAGE>
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 stockholders. The 1992
Stock Option Plan provides for the issuance of 2,250,000 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 November 30,
1998, options to purchase 1,174,443 shares of Common Stock were outstanding
under the 1992 Stock Option Plan. 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. 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 stockholders in
August 1998. Up to 300,000 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 July 1, 1999 and
end on December 31, 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.
42
<PAGE>
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 1,000 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 (as defined
therein) 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 employment agreements with each of the Named
Executive Officers (other than Mr. Armstrong, who departed the Company in
October 1998). The terms of the agreements are substantially similar, except
with respect to minimum annual base salary ($200,000, $175,000, $138,000,
$120,000 and $115,000 for Dr. D'Ambra, Dr. Kuhla, Dr. Jones, Dr. Meckler and
Dr. Trova, respectively) and as set forth below with respect to the
termination of employment upon a "change of control." In addition to their
annual base salary, the Named Executive Officers will be eligible to receive
bonus compensation to be determined at the discretion of the Board of
Directors. The agreements have initial employment terms of three years and
automatically renew for one year periods thereafter. If the Company elects not
to extend an agreement for any reason or if the executive's employment is
terminated by the Company without "cause" (as defined) or by the executive
upon a material breach of the agreement by the Company, the Company will
continue to pay the executive his base salary for one year and will pay to the
Executive in monthly installments over such one year period an amount equal to
the executive's cash bonus received in respect of the immediately preceding
year.
Upon termination by the Company of the executive's employment without
"cause" or upon a resignation by the executive for "good reason" (as defined)
or if an employment agreement is not renewed by the Company within twelve
months following a "change of control" (as defined), such executive will be
entitled to receive a severance amount equal to the sum of (i) a multiple of
the executive's annual base salary, plus (ii) the executive's cash bonus
received in respect of the immediately preceding year. The multiples of base
salary to be paid by the Company to Dr. D'Ambra, Dr. Kuhla, Dr. Jones, Dr.
Meckler and Dr. Trova upon the termination of their employment following a
"change of control" are three, two, one, one and one times, respectively.
On October 28, 1998, the Company's former chief financial officer, Harold M.
Armstrong, departed from the Company. In connection with Mr. Armstrong's
departure, the Company and Mr. Armstrong entered into a letter agreement
pursuant to which the Company paid Mr. Armstrong a severance payment equal to
his annualized base salary for the 1998 fiscal year and bonus for the 1997
fiscal year. The Company also repurchased a total of 1,131,903 shares of
Common Stock from Mr. Armstrong and a trust for the benefit of his family for
an aggregate purchase price of approximately $9.9 million, of which $2.0
million was paid in cash and $7.9 million was paid in promissory notes. Upon
consummation of this offering, the remaining amounts due under these notes
will be repaid from the net proceeds of this offering. The Company is actively
searching for a new chief financial officer and expects to fill this position
by the end of the first quarter of 1999.
The Company has also entered into Employment Innovation, Proprietary
Information and Post-Employment Activity Agreements with its Named Executive
Officers. Each agreement provides that, during the six month period
immediately following the termination of his employment with the Company, the
Named Executive Officer will not engage, directly or indirectly, in the sale
or performance of any services for a customer for whom he performed services
at any time during the twelve month period immediately preceding the
termination of his employment.
43
<PAGE>
Compensation Committee Interlocks and Insider Participation
Mr. Haydu and Dr. Tartaglia are the members of the Compensation Committee.
Neither Mr. Haydu nor Dr. Tartaglia are executive officers of the Company.
Prior to joining the Company in June 1998, Dr. Kuhla served as a member of the
Compensation Committee. While serving as a member of the Compensation
Committee, Dr. Kuhla received a consulting fee of $2,500 per quarter unrelated
to such service.
44
<PAGE>
CERTAIN TRANSACTIONS
In March 1995, the Company entered into a license agreement with HMRI. Under
the terms of the license agreement, the Company granted HMRI 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, HMRI paid
the Company $15.6 million, $2.5 million, $1.0 million and $200,000 in
milestones and royalties in the nine months ended September 30, 1998, and the
years ended December 31, 1997, 1996 and 1995, respectively. HMRI 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, HMRI purchased 1,627,231 shares of Common Stock for a total
purchase price of $2.0 million. The Company granted HMRI demand registration
rights with respect to such shares whereby HMRI 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 HMRI on registration
statements independently filed by the Company, subject to certain
restrictions. In addition, the Company has agreed to indemnify HMRI, 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 HMRI. Under this plan, Dr. D'Ambra has received or is entitled
to receive $1.4 million, $253,000, $100,000 and $200,000 in the nine months
ended September 30, 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 HMRI license agreement.
On October 28, 1998, the Company's former chief financial officer, Harold M.
Armstrong, departed from the Company. In connection with Mr. Armstrong's
departure, the Company and Mr. Armstrong entered into a letter agreement
pursuant to which the Company paid Mr. Armstrong a severance payment equal to
his annualized base salary and bonus for the 1998 fiscal year. The Company
also repurchased a total of 1,131,903 shares of Common Stock from Mr.
Armstrong and a trust for the benefit of his family for an aggregate purchase
price of approximately $9.9 million, of which $2.0 million was paid in cash
and $7.9 million was paid in promissory notes. Upon consummation of this
offering, the remaining amounts due under these notes will be repaid from the
net proceeds of this offering. The Company is actively searching for a new
chief financial officer and expects to fill this position by the end of the
first quarter of 1999.
The Company is a party to an agreement with Stiefel Laboratories, Inc.
("Stiefel"), the beneficial owner of 11.8% of the outstanding shares of Common
Stock prior to giving effect to this 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.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 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)................. 4,335,378 43.3% 35.5%
Chester J. Opalka(5)...... 2,147,728 21.4 17.6
Hoechst
Aktiengesellschaft(6).... 1,627,231 16.2 13.3
Charles W. Stiefel(7)..... 1,260,000 11.8 9.8
Harold Meckler, Ph.D.(8).. 54,000 * *
Michael P. Trova,
Ph.D.(9)................. 54,000 * *
Lawrence D. Jones,
Ph.D.(10)................ -- * *
Anthony P. Tartaglia,
M.D.(11)................. 31,128 * *
Donald E. Kuhla,
Ph.D.(12)................ 30,341 * *
Frank W. Haydu(13)........ 1,125 * *
All executive officers and
directors as a group (10
persons)(14)............. 6,653,700 65.5 54.5
</TABLE>
- ----------
* Less than 1%.
(1) All percentages have been determined as of November 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 November 30, 1998, a total of 10,015,224 shares of
Common Stock were issued and outstanding and 1,258,972 options to acquire
Common Stock were exercisable within 60 days of November 30, 1998.
(2) The address of all listed stockholders other than Hoechst
Aktiengesellschaft and Charles W. Stiefel is c/o Albany Molecular
Research, Inc., 21 Corporate Circle, Albany, New York 12203. The address
of Hoechst Aktiengesellschaft is c/o Hoechst Marion Roussel, Inc., 10236
Marion Park Drive, Kansas City, Missouri 64137. The address of Charles W.
Stiefel is c/o Stiefel Laboratories, Inc., 255 Alhambra Circle, Suite
1000, Coral Gables, Florida 33134.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Includes 1,719,164 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 45,859 shares subject to options not
exercisable within 60 days.
(5) Includes 409,995 shares held by the Chester J. 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 15,704 shares
subject to options not exercisable within 60 days.
(6) Hoechst Aktiengesellschaft is a publicly-held company and the parent of
Hoechst Marion Roussel Aktiengesellschaft, a German corporation ("HMRA").
HMRA, in turn, is the parent of both HMR Pharma, Inc., a Delaware
corporation, and Hoechst Marion Roussel, S.A., a French corporation,
which together own all of the outstanding shares of Hoechst Marion
Roussel, Inc., the holder of record of these shares.
(7) Includes 630,000 shares subject to options exercisable within 60 days.
Charles W. Stiefel may be deemed to be the beneficial owner of all of the
shares beneficially held by Stiefel Laboratories, Inc., the holder of
record of these shares.
(8) Includes 54,000 shares subject to options exercisable within 60 days.
Excludes 47,047 shares subject to options not exercisable within 60 days.
(9) Includes 36,000 shares subject to options exercisable within 60 days.
Excludes 23,309 shares subject to options not exercisable within 60 days.
(10) Excludes 33,750 shares subject to options not exercisable within 60 days.
(11) Includes 28,125 shares subject to options exercisable within 60 days.
Excludes 11,250 shares subject to options not exercisable within 60 days.
(12) Includes 28,125 shares subject to options exercisable within 60 days.
Excludes 118,125 shares subject to options not exercisable within 60
days.
(13) Excludes 5,625 shares subject to options not exercisable within 60 days.
(14) Includes 146,250 shares subject to options exercisable within 60 days.
Excludes 334,756 shares subject to options not exercisable within 60
days.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, of which 12,215,224
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 stockholders 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 Restated Certificate of Incorporation (the "Certificate") and
Amended and Restated By-laws (the "By-laws"), which will be effective upon
completion of this offering, provide that the number of directors shall be
fixed by the Board of Directors, subject to the rights of the holders of any
Preferred Stock then outstanding. 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 stockholders in the
election of such director.
Undesignated Preferred Stock. The Board of Directors of the Company is
authorized, without further action of the stockholders, 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. 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 stockholders. 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
stockholders may deem to be in their best interests. To the extent takeover
attempts are discouraged, temporary fluctuations in the market price 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 stockholder action, also could delay or frustrate the removal of
incumbent directors or the assumption of control by stockholders, even if such
removal or assumption would be beneficial to stockholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy
47
<PAGE>
contest, even if favorable to the interests of stockholders, 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 stockholders. 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 Stockholders. The By-laws provide that a special meeting of
stockholders 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 stockholder wishes to make at an annual meeting of
stockholders.
No Stockholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the stockholders of the Company at
an annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders
in lieu thereof.
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 Delaware 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 stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence
or gross negligence in business combinations, unless the director has breached
his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. 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 stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders 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 stockholders or a special meeting called for such purpose
unless the Board of Directors recommends that the stockholders 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 stockholders. 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.
48
<PAGE>
Statutory Business Combination Provision
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
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
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved
by the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction
that makes it an interested stockholder (excluding shares owned by persons who
are both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested
stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 12 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 will be ChaseMellon
Shareholder Services, L.L.C.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of
12,215,224 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 10,015,224 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, 9,979,561 shares of Common Stock 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 35,663 shares of
Common Stock will become eligible for sale in the public market pursuant to
Rule 144 at various times thereafter.
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 122,152 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 stockholders, who in the
aggregate hold 9,953,199 shares of Common Stock and options to purchase
1,787,976 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 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
50
<PAGE>
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 November 30, 1998, 1,379,771 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, 2,250,000 shares of Common Stock were
reserved for issuance under the 1992 Stock Option Plan, of which 1,174,443
shares were issuable upon the exercise of outstanding stock options, 300,000
shares of Common Stock were reserved for issuance under the Purchase Plan and
691,563 shares were issuable upon the exercise of outstanding stock options
granted pursuant to stand alone option agreements. 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.
51
<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...................................................... 2,200,000
=========
</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 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. In addition, the
Company's executive officers and directors and stockholders, who in the
aggregate hold 9,953,199 shares of Common Stock and options to purchase
1,787,976 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
52
<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 Common Stock has been approved for quotation and trading on the Nasdaq
National Market upon completion of this offering 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 consolidated 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 LLP and have been
included herein and in the Registration Statement in reliance upon the report
of KPMG 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/Telfast Royalty and Licensing Arrangement" and "--Patents and
Proprietary Rights" have been reviewed and approved by Ostrolenk, Faber, Gerb
& Soffen, LLP, patent counsel to the Company, as experts on such matters, and
are included herein in reliance upon that review and approval.
53
<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.
54
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALBANY MOLECULAR RESEARCH, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG LLP, Independent Public Accountants........................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and September
30, 1998 (unaudited)..................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Nine Months Ended September 30, 1997 and 1998
(unaudited).............................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Nine Months Ended September
30, 1998 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Nine Months Ended September 30, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated 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 consolidated balance sheets of Albany
Molecular Research, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Albany Molecular Research, Inc. at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG LLP
Albany, New York
April 2, 1998, except for note 15
which is as of November 30, 1998
F-2
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------- September 30,
1996 1997 1998
---------- ----------- -------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $1,259,555 $ 1,261,518 $ 2,831,019
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 $0 at
September 30, 1998)................... 851,959 1,976,637 2,830,357
Current installment of notes
receivable (Note 14).................. -- -- 104,832
Royalty income receivable.............. -- -- 3,241,317
Investment securities, available-for-
sale (Note 5)......................... 1,734,899 1,949,546 2,030,326
Interest receivable.................... 25,156 25,961 30,571
Inventory.............................. 266,208 317,789 569,346
Unbilled services...................... 202,122 192,822 202,683
Refundable income taxes................ -- 312,377 --
Prepaid expenses....................... 38,132 131,798 672,368
---------- ----------- -----------
Total current assets................. 4,430,582 6,168,448 12,512,819
Property and equipment:
Laboratory equipment and fixtures...... 2,981,155 3,323,232 7,820,403
Office equipment....................... 453,823 840,256 1,634,785
Leasehold improvements................. 983,264 1,000,120 2,710,919
Construction-in-progress............... -- 76,574 2,534,959
---------- ----------- -----------
4,418,242 5,240,182 14,701,066
Accumulated depreciation and
amortization......................... (591,698) (1,265,255) (1,982,935)
---------- ----------- -----------
Net property and equipment........... 3,826,544 3,974,927 12,718,131
Other assets:
Patents and patent application costs... 127,145 212,291 335,214
Licensing rights....................... 26,513 23,567 21,358
Customer list.......................... -- -- 98,333
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 6,877
---------- ----------- -----------
Total other assets................... 243,519 485,959 558,592
---------- ----------- -----------
Total assets......................... $8,500,645 $10,629,334 $25,789,542
========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
expenses.............................. $ 322,754 $ 898,256 $ 2,298,407
Income taxes payable (Note 6).......... 338,684 -- 386,852
Unearned income........................ 135,377 212,008 851,394
Customer deposits...................... 165,000 202,293 182,293
Current installments of obligation
under capital lease................... 3,550 1,256 --
Current installments of long-term debt
(Note 3).............................. 454,683 448,005 81,979
---------- ----------- -----------
Total current liabilities............ 1,420,048 1,761,818 3,800,925
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 5,137,577
Deferred income taxes (Note 6)......... 295,119 437,631 534,824
---------- ----------- -----------
Total liabilities.................... 4,090,131 3,975,152 9,473,326
Commitments (Notes 7, 9 and 11)
Stockholders' equity:
Preferred stock, $0.01 par value,
authorized 1,000,000 shares, issued
and outstanding 100,000 shares........ 1,000 1,000 1,000
Common stock, $0.01 par value,
authorized 10,000,000 shares; issued
and outstanding 10,755,327 at
December 31, 1996, 10,770,767 shares
at December 31, 1997 and 10,900,444
shares at September 30, 1998.......... 107,553 107,707 109,004
Additional paid-in capital............. 2,584,152 2,607,593 2,952,293
Retained earnings...................... 1,694,164 3,883,379 13,183,538
Accumulated other comprehensive
income................................ 23,645 54,503 70,381
---------- ----------- -----------
Total stockholders' equity........... 4,410,514 6,654,182 16,316,216
---------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $8,500,645 $10,629,334 $25,789,542
========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Contract revenue........ $3,315,930 $6,177,371 $8,805,066 $6,322,843 $10,165,244
Reimbursed expenses..... (356,664) (916,027) (701,034) (503,416) (515,900)
---------- ---------- ---------- ---------- -----------
Net contract revenue.... 2,959,266 5,261,344 8,104,032 5,819,427 9,649,344
Cost of contract
revenue................ 1,350,158 2,834,760 4,334,245 3,126,705 5,319,992
---------- ---------- ---------- ---------- -----------
Gross profit from
contract revenue....... 1,609,108 2,426,584 3,769,787 2,692,722 4,329,352
---------- ---------- ---------- ---------- -----------
Other operating revenue:
Non-recurring
licensing fees,
milestones and
royalties (Note 9)... 200,000 1,000,000 2,500,000 2,500,000 7,368,921
Recurring royalties
(Note 9)............. -- -- 30,871 639 8,278,161
Technology incentive
award (Note 11)...... (200,000) (100,000) (253,093) (250,069) (1,434,631)
---------- ---------- ---------- ---------- -----------
Other operating
revenue, net....... -- 900,000 2,277,778 2,250,570 14,212,451
---------- ---------- ---------- ---------- -----------
Operating expenses:
Research and
development.......... 36,628 244,812 626,471 443,009 535,069
Selling, general and
administrative....... 882,570 1,219,144 2,246,391 1,400,711 3,162,339
---------- ---------- ---------- ---------- -----------
Total operating
expenses........... 919,198 1,463,956 2,872,862 1,843,720 3,697,408
---------- ---------- ---------- ---------- -----------
Income from operations.. 689,910 1,862,628 3,174,703 3,099,572 14,844,395
---------- ---------- ---------- ---------- -----------
Other income (expense):
Interest expense...... (53,882) (137,967) (175,969) (133,987) (176,865)
Interest income....... 91,532 126,474 163,051 110,290 292,956
Realized gain on sale
of investment
securities........... 6,053 3,895 -- -- --
Other non-operating
income (expense)..... (1,262) 16,235 (25,629) (14,182) 4,011
---------- ---------- ---------- ---------- -----------
Total other income
(expense).......... 42,441 8,637 (38,547) (37,879) 120,102
---------- ---------- ---------- ---------- -----------
Income before income tax
expense................ 732,351 1,871,265 3,136,156 3,061,693 14,964,497
Income tax expense (Note
6)..................... 252,805 637,476 946,941 922,374 5,664,338
---------- ---------- ---------- ---------- -----------
Net income.............. $ 479,546 $1,233,789 $2,189,215 $2,139,319 $ 9,300,159
========== ========== ========== ========== ===========
Basic earnings per
share.................. $ 0.05 $ 0.12 $ 0.20 $ 0.20 $ 0.86
Diluted earnings per
share.................. $ 0.04 $ 0.10 $ 0.18 $ 0.18 $ 0.76
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1996 and 1997 and the Nine Months Ended
September 30, 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 8,856,059 $ 88,561 $ 495,157 $ -- $ (19,171) $ 565,547
Issuance of
common stock... -- -- -- 1,736,030 17,360 2,058,213 -- -- 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 10,592,089 $105,921 $2,558,400 $ 30,067 $ 460,375 $ 3,155,763
Issuance of
common stock... -- -- -- 163,238 1,632 23,055 -- -- 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 10,755,327 $107,553 $2,584,152 $ 23,645 $ 1,694,164 $ 4,410,514
Issuance of
common stock... -- -- -- 15,440 154 23,441 -- -- 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 10,770,767 $107,707 $2,607,593 $ 54,503 $ 3,883,379 $ 6,654,182
Issuance of
common stock... -- -- -- 129,677 1,297 344,700 -- -- 345,997
Change in
unrealized gain
on securities
available-for-
sale, net of
tax............ 15,878 -- -- -- -- -- 15,878 -- 15,878
Net income for
period......... 9,300,159 -- -- -- -- -- -- 9,300,159 9,300,159
---------- -------- ------- ---------- -------- ---------- ---------- ----------- -----------
Balance at
September 30,
1998............. $9,316,037 100,000 $ 1,000 10,900,444 $109,004 $2,952,293 $ 70,381 $13,183,538 $16,316,216
========== ======== ======= ========== ======== ========== ========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income.............. $ 479,546 $ 1,233,789 $ 2,189,215 $2,139,319 $ 9,300,159
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization......... 127,358 379,327 689,472 507,803 740,621
Net realized gain on
security
transactions......... (6,053) (3,895) -- -- --
Net loss on sale of
assets............... -- 1,578 9,398 9,398 --
Provision for doubtful
accounts............. -- -- 114,000 23,000 (30,000)
Deferred income tax
(benefit) expense.... 94,131 164,927 (39,919) (45,952) 316,609
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) (694,729) (945,483)
Royalty income
receivable......... -- -- -- -- (3,241,317)
Inventory, prepaid
expenses and
refundable income
taxes.............. (118,682) (88,425) (457,624) (168,792) (479,750)
Interest
receivable......... (17,540) (7,616) (805) (2,727) (4,610)
Due from
shareholder........ 5,197 -- -- -- --
Unbilled services... (114,426) (6,009) 9,300 (120,261) (9,862)
Increase (decrease)
in:
Accounts payable and
accrued expenses... 241,861 (14,055) 575,502 283,288 1,400,150
Customer deposits... 135,000 30,000 37,293 17,300 (20,000)
Unearned income..... 70,623 44,754 76,631 92,123 639,386
Income taxes
payable............ -- 338,684 (338,684) 233,905 386,852
----------- ----------- ----------- ---------- -----------
Net cash provided by
operating activities... 215,252 2,111,378 1,648,101 2,273,675 8,052,755
----------- ----------- ----------- ---------- -----------
Investing activities
(Increase) decrease in
certificate of
deposit.............. (51,080) (1,472) 52,551 52,551 --
Purchases of
investment
securities........... (3,040,166) (274,146) (163,216) (162,014) (54,315)
Proceeds from sales of
investment
securities........... 1,183,303 445,467 -- -- --
Purchases of property
and equipment........ (1,204,907) (2,596,060) (869,954) (500,979) (9,460,885)
Proceeds from sale of
equipment............ -- 1,500 4,265 4,265 --
Payments for
deposits............. (1,022) -- -- -- --
Purchase of customer
list................. -- -- -- -- (118,000)
Payments for
organizational
costs................ -- -- -- -- (4,650)
Payments for patent
application costs.... (97,518) (39,185) (85,146) (47,079) (122,923)
----------- ----------- ----------- ---------- -----------
Net cash used in invest-
ing activities......... (3,211,390) (2,463,896) (1,061,500) (653,256) (9,760,773)
----------- ----------- ----------- ---------- -----------
</TABLE>
F-6
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------------------- -----------------------
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) $ (490,446) $(2,004,152)
Principal payments
under capital lease
obligations.......... (4,771) (3,478) (3,550) (2,633) (1,256)
Proceeds from
borrowings under
long-term debt and
notes payable........ 1,000,000 3,720,000 -- -- 5,000,000
Payment for deferred
financing costs...... (1,750) -- -- -- 36,930
Disbursements on notes
receivable........... -- -- -- -- (100,000)
Proceeds from sale of
common stock......... 2,075,573 24,687 23,595 22,769 345,997
---------- ----------- ---------- ---------- -----------
Net cash provided by
(used in) financing
activities............. 2,985,962 1,577,326 (584,638) (470,310) 3,277,519
---------- ----------- ---------- ---------- -----------
Increase (decrease) in
cash and cash
equivalents............ (10,176) 1,224,808 1,963 1,150,109 1,569,501
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 $2,409,664 $ 2,831,019
========== =========== ========== ========== ===========
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 $ (19,378) $ 15,878
Additional disclosures
relative to cash flows:
Interest paid......... $ 53,882 $ 120,058 $ 175,616 $ 133,987 $ 176,865
Income taxes paid..... $ 153,643 $ 91,800 $1,637,921 $ 734,421 $ 4,648,499
Property and equipment
depreciation
expense.............. $ 124,395 $ 368,738 $ 684,909 $ 504,379 $ 717,680
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 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.
Basis of Consolidation
The consolidated financial statements include the accounts of Albany
Molecular Research, Inc. and its wholly-owned subsidiary, Albany Molecular
Research Export, Inc. (formed in April 1998). All intercompany balances and
transactions have been eliminated during consolidation.
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 fixed fee type contracts on a
percentage-of-completion basis, and other types of contracts on a per diem
basis as work is performed. In general, provisions include predetermined
payment schedules, or the submission of appropriate billing detail
establishing prerequisites for billings. Unbilled services arise when services
have been rendered under these contracts but customers have not been billed.
Similarly, unearned income represents prebilling for services that have not
yet been billed. Any losses on contracts are recorded when they are
determinable and estimable.
The Company recognizes revenue from licensing fees, milestones and royalties
when the earnings process has been deemed completed and any uncertainties
regarding potential revenue have been resolved.
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.
F-8
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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.
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.
F-9
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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 nine months ended September 30, 1997 and
1998 included in the accompanying financial statements is unaudited; however,
in the opinion of the Company, the interim financial 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 in connection with and subject
to an initial public offering by the Company at 20 preferred shares to nine
common shares. For purposes of diluted earnings per share calculations, all
preferred shares are assumed converted to their common stock equivalents.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting by public companies
about operating segments of their business. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This Statement is effective for periods beginning
after December 15, 1997. Management does not anticipate that the adoption of
this Statement will have a material effect on the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
F-10
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management does not anticipate that the
adoption of this Statement will have a material effect on the Company's
financial statements.
In 1998, the Accounting Standards Executive Committee (AcSEC) of the AICPA
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires that the costs of start-up
activities including organizational costs, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after
December 15, 1998. Management does not anticipate that the adoption of this
Statement will have a material effect on the Company's financial statements.
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 2001 at a monthly rate of $15,000.
Minimum future payments under noncancelable operating leases as of December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998......................................................... $ 409,687
1999......................................................... 465,103
2000......................................................... 464,488
2001......................................................... 373,670
2002......................................................... 283,652
Thereafter................................................... 1,353,435
----------
Total minimum future lease payments.......................... $3,350,035
==========
</TABLE>
Rental expense amounted to approximately $93,000, $173,000 and $240,000
during 1995, 1996 and 1997, respectively, and $181,000 and $433,000, for the
nine months ended September 30, 1997 and 1998, respectively.
F-11
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
3. Long-Term Debt
Long-term debt is comprised as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
September 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Revolving line of credit from a bank with
a total commitment of $15 million.The
revolving line of credit will convert to
a five year term loan in July 2001.
Interest on the credit facility is
payable monthly at either the bank's
prime rate less 200 basis points or the
London Interbank Offer Rate (LIBOR) plus
50 basis points (the interest rate on the
credit facility was 6.14% at September
30, 1998). Principal payments are due
after the facilities' conversion to the
term loan................................ $ -- $ -- $5,000,000
Note payable to a bank in monthly
installments of $29,762, through October
2003, plus interest at LIBOR plus 1.75%
(7.44% at December 31, 1997) ............ 2,440,478 1,933,333 --
Note payable to the New York Job
Development Authority in monthly
installments of $4,747 including interest
at 5.25%, through June 1, 2001........... 227,841 181,747 145,557
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 73,999
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 --
---------- ---------- ----------
Total long-term debt...................... 2,828,391 2,223,708 5,219,556
Less payments due within one year......... 454,683 448,005 81,979
---------- ---------- ----------
Total long-term debt, net................. $2,373,708 $1,775,703 $5,137,577
========== ========== ==========
</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 December 31, 1997. The line is collateralized by a
first security interest in all accounts receivable and inventory. Interest is
payable monthly at LIBOR, plus 1.75% (7.44% at December 31, 1997). Borrowings
under the line of credit are payable on demand.
F-12
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
5. Investment Securities, Available-for-Sale
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 September
30, 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........ $1,671,577 $114,552 $ -- $1,786,129
Corporate debt obligations..... 158,073 2,749 -- 160,822
Bond mutual funds.............. 83,375 -- -- 83,375
---------- -------- ------- ----------
$1,913,025 $117,301 $ -- $2,030,326
========== ======== ======= ==========
</TABLE>
There were no sales of investment securities during the nine month periods
ended September 30, 1997 and 1998.
F-13
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
6. Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal..................... $146,692 $437,800 $ 916,288 $910,110 $4,917,473
State....................... 11,982 34,749 70,572 58,216 429,255
-------- -------- --------- -------- ----------
158,674 472,549 986,860 968,326 5,346,728
-------- -------- --------- -------- ----------
Deferred:
Federal..................... 94,131 159,052 102,117 83,784 72,869
State....................... -- 5,875 (142,036) (129,736) 244,741
-------- -------- --------- -------- ----------
94,131 164,927 (39,919) (45,952) 317,610
-------- -------- --------- -------- ----------
Total income tax expense.... $252,805 $637,476 $ 946,941 $922,374 $5,664,338
======== ======== ========= ======== ==========
</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 nine months ended September 30, 1997, and 35% for
the nine months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------ ----------------------
1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amount computed using
statutory rate......... $248,999 $636,230 $1,066,293 $1,040,976 $5,237,574
Increase (reduction) in
taxes resulting from:
Tax-free interest
income............... (23,254) (31,940) (30,171) (22,497) (23,260)
Benefit of foreign
sales corporation -- -- -- -- (35,520)
Alternative minimum
tax.................. 5,785 (5,540) -- -- --
State taxes, net of
federal benefit...... 7,668 22,914 46,577 38,422 438,097
State investment tax
credits.............. -- -- (161,858) (161,858) --
Others, net........... 13,607 15,812 26,100 27,331 47,447
-------- -------- ---------- ---------- ----------
Total income tax
expense.............. $252,805 $637,476 $ 946,941 $ 922,374 $5,664,338
======== ======== ========== ========== ==========
</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 nine months ended September
30, 1998 includes the anticipated realization of these tax credits.
F-14
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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 $9,500 per annum in 1997 and $10,000 per annum in
1998. The Company currently makes matching contributions equal to 50% of the
participant's contributions (up to a limit of 6% of the participant's
compensation). In addition, the Company has reserved the right to make
discretionary profit sharing contributions to employee accounts. 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 $17,000 and $39,000, for
the nine months ended September 30, 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 to employees, directors, advisors, consultants
and other key persons of the Company at prices established at the date of
grant, and may be less than the fair market value at the date of grant. All
incentive stock options may be exercised at any time, after vesting, over a
ten-year period subsequent to the date of grant. 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............................. $ 0.05 $ 0.12 $ 0.20
Diluted as reported........................... $ 0.04 $ 0.10 $ 0.18
Basic pro forma............................... $ 0.04 $ 0.11 $ 0.20
Diluted pro forma............................. $ 0.04 $ 0.10 $ 0.18
</TABLE>
F-15
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 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......... 921,375 $0.21 652,500 $2.15
Granted.............................. 108,000 1.12 67,500 1.83
Exercised............................ (45,000) 0.11 -- --
Forfeited............................ -- -- -- --
--------- ----- ------- -----
Outstanding at December 31, 1995....... 984,375 $0.39 720,000 $2.13
========= ===== ======= =====
Options exercisable at December 31,
1995.................................. 606,375 $0.23 652,500 $2.15
========= ===== ======= =====
<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......... 984,375 $0.39 720,000 $2.13
Granted.............................. 95,625 2.30 16,875 2.18
Exercised............................ (163,238) 0.15 -- --
Forfeited............................ -- -- -- --
--------- ----- ------- -----
Outstanding at December 31, 1996....... 916,762 $0.39 736,875 $2.13
========= ===== ======= =====
Options exercisable at December 31,
1996.................................. 713,138 $0.22 652,500 $2.15
========= ===== ======= =====
<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......... 916,762 $0.39 736,875 $2.13
Granted.............................. 361,211 3.33 78,440 3.28
Exercised............................ (8,792) 0.29 -- --
Forfeited............................ (22,500) 2.99 -- --
--------- ----- ------- -----
Outstanding at December 31, 1997....... 1,246,681 $1.32 815,315 $2.23
========= ===== ======= =====
Options exercisable at December 31,
1997.................................. 812,348 $0.34 652,500 $2.00
========= ===== ======= =====
</TABLE>
F-16
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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>
$0.11 - 0.22 613,125 5.22 years $0.17 613,125 $ 0.17
0.56 91,223 5.83 years 0.55 91,223 0.55
1.12 108,000 7.58 years 1.12 108,000 1.12
1.90 - 2.18 50,625 8.36 years 1.93 -- --
2.99 - 3.60 383,708 9.51 years 3.31 -- --
</TABLE>
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>
$0.22 22,500 1.52 years $0.22 22,500 $ 0.22
1.84 - 2.22 714,375 5.52 years 2.19 630,000 2.22
3.06 - 3.51 78,440 9.40 years 3.28 -- --
</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.
Any options issued to non-employees are expensed based upon the fair value
of the options.
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. ("HMRI"). Under the terms of the Stock Purchase Agreement, the
Company sold 1,627,231 shares of the Company's Common Stock to HMRI for
$2.0 million. Under the terms of the License Agreement, the Company granted
HMRI 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 HMRI. In return for the license, HMRI 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".
F-17
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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. HMRI
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,
HMRI had the right to institute action to provoke an interference claim and,
upon successfully doing so, was not obligated to pay any milestones or
royalties until, and if, the interference was resolved in favor of the
Company. In February 1998, the United States Patent and Trademark Office
("PTO") Board of Patent Appeals and Interferences rendered a decision that the
Company was first to make the invention and confirming that the Company was
properly awarded the aforementioned patent. Accordingly, in the first six
months of 1998, the Company received and recognized the associated milestone
payment and royalties on all sales of fexofenadine HCl (Allegra) in the United
States from November 26, 1996 through December 31, 1997, as stipulated in the
Agreement. The total payment was $6.3 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 HMRI. 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 was published in May 1998. Upon the patent publication, the Company was
entitled to and did receive the milestone payment for a U.S. "Process
Manufacturing Claim." Additionally, the Company is entitled to receive a
royalty on worldwide "Sales" of fexofenadine HCl 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 years ended December 31, 1997, 1996 and 1995, net contract revenue
from the Company's three largest customers represented approximately 29%, 11%
and 9% for 1997, 34%, 9% and 9% for 1996, and 42%, 14% and 8% for 1995, of
total net contract revenue for such year, respectively. For the nine months
ended September 30, 1998, net contract revenue from the Company's three
largest customers represented approximately 18%, 17% and 15% of total net
contract revenue, 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
F-18
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
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 SFAS 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.
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 $5,219,556 at September 30, 1998 while the estimated fair
value was $2,811,378 and $2,208,293 at December 31, 1996 and 1997,
respectively, and $5,215,078 at September 30, 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 10,262,766 $0.05 $1,233,789 10,706,214 $0.12
Dilutive effect of stock
options and grants..... -- 981,424 -- -- 1,034,349 --
Dilutive effect of
assumed preferred stock
conversion............. -- 45,000 -- -- 45,000 --
-------- ---------- ----- ---------- ---------- -----
Diluted earnings per
share.................. $479,546 11,289,190 $0.04 $1,233,789 11,785,563 $0.10
======== ========== ===== ========== ========== =====
</TABLE>
F-19
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1996 and 1997
(Information with respect to the Nine Months Ended September 30, 1997 and 1998
is unaudited)
Not included in the December 31, 1995 shares above were 805,500 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 10,760,827 $0.20
Dilutive effect of stock options and
grants.................................... -- 1,207,798 --
Dilutive effect of assumed preferred stock
conversion................................ -- 45,000 --
---------- ---------- -----
Diluted earnings per share................. $2,189,215 12,013,625 $0.18
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 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.................. $2,139,319 10,759,312 $0.20 $9,300,159 10,842,259 $0.86
Dilutive effect of stock
options and grants..... -- 1,142,306 -- -- 1,366,505 --
Dilutive effect of
assumed preferred stock
conversion............. -- 45,000 -- -- 45,000 --
---------- ---------- ----- ---------- ---------- -----
Diluted earnings per
share.................. $2,139,319 11,946,618 $0.18 $9,300,159 12,253,764 $0.76
========== ========== ===== ========== ========== =====
</TABLE>
Not included in the September 30, 1998 shares above were 174,375 shares that
were anti-dilutive for earnings per share purposes.
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 November 30, 1998, the Board of Directors approved a 3-for-2 split of the
Company's common stock that was effective on that date. Also, in connection
with the filing of a registration statement with the Securities and Exchange
Commission for an initial public offering of the Company's common stock, the
Company will effect a reincorporation by merger prior to the effective date of
such registration statement. In connection with such reincorporation, each
share of outstanding common stock of Albany Molecular Research, Inc.
(incorporated in New York) will be exchanged for 1-1/2 shares of common stock
of a new company to be incorporated in Delaware. All share and per share
information included in the accompanying financial statements have been
restated to reflect the 3-for-2 stock split and the reincorporation by merger.
On October 28, 1998, the Company entered into a severance and stock
repurchase agreement with its former chief financial officer ("Former CFO").
In exchange for a release of any and all claims against the Company, the
Former CFO accepted a financial package that included a severance component
equal to one-years' base salary and the prior years' bonus. The Company also
agreed to vest all currently unexercisable stock options of the Former CFO and
to repurchase the shares represented by these options. The Former CFO agreed
to exchange all of his outstanding shares and the shares that were represented
by all of his outstanding stock options for a purchase price of approximately
$9.9 million. In total, the Company repurchased 1,131,903 shares of Common
Stock. The Former CFO received a $2.0 million initial payment together with a
five-year note payable for the remainder of the consideration, with principal
due in annual installments and interest due in quarterly installments at the
prime rate (7.75% at November 30, 1998).
F-20
<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 Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 25
Management............................................................... 37
Certain Transactions..................................................... 45
Principal Stockholders................................................... 46
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1999 (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
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............................................ $ 14,095
NASD Filing Fee................................................. 4,801
Nasdaq Listing Fee.............................................. 84,875
Accounting Fees and Expenses.................................... 200,000
Legal Fees and Expenses......................................... 450,000
Printing Expenses............................................... 150,000
Blue Sky Qualification Fees and Expenses........................ 10,000
Transfer Agent's Fee............................................ 25,000
Miscellaneous................................................... 61,229
-----------
TOTAL......................................................... $ 1,000,000
===========
</TABLE>
- ----------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
Item 14. Indemnification of Directors and Officers
In accordance with Section 145 of the General Corporation Law of the State
of Delaware, Article VII of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") provides that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, or
(iv) for any transaction from which the director derived an improper personal
benefit. In addition, the Certificate provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation
of the liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
Article V of the Company's Amended and Restated By-laws provides for
indemnification by the Company of its officers and certain non-officer
employees under certain circumstances against expenses (including attorneys
fees, judgments, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of
the fact that such person is or was an officer or employee of the Company if
such person acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect to criminal actions or proceedings, if such person had no reasonable
cause to believe his or her conduct was unlawful.
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.
II-1
<PAGE>
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 2.25-for-1 stock split of its Common Stock, which will become
effective in connection with the offering.
(1) In August 1995, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 108,000 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 67,500 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.
(3) In February 1996, the Registrant issued 78,750 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 67,500 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 45,113 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 33,750 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 5,625 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 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.
(9) In December 1996, 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.
(10) In January 1997, pursuant to stock option agreements, the Registrant
granted options to purchase an aggregate of 34,115 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 84,348 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>
(12) In January 1997, the Registrant issued 113 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 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.
(14) In April 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 16,875 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 67,500 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.
(16) In May 1997, the Registrant issued 2,153 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 6,647 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 900 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 September 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase 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.
(20) In December 1997, pursuant to stock option agreements, the Registrant
granted options to purchase an aggregate of 27,450 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, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 164,363 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.
(22) In December 1997, the Registrant issued 5,625 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.
(23) In February 1998, the Registrant issued 6,750 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.
(24) In February 1998, the Registrant issued 5,738 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.
(25) In March 1998, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase an aggregate of 33,750 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.
II-3
<PAGE>
(26) In March 1998, the Registrant issued 1,876 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.
(27) In March 1998, the Registrant issued 5,175 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.
(28) In March 1998, the Registrant issued 22,500 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.
(29) In March 1998, the Registrant issued 11,250 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 April 1998, the Registrant issued 26,100 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.
(31) In May 1997, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase 5,625 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.
(32) In May 1998, the Registrant issued 9,000 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $10,080 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(33) In June 1998, the Registrant issued 9,000 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.
(34) In June 1998, the Registrant granted 788 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.
(35) In July 1998, 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 $5,000 to a consultant of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(36) In August 1998, the Registrant issued 9,000 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $10,080 to an employee of the Registrant in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(37) In October 1998, the Registrant issued 200,558 shares of the Registrant's
Common Stock upon the exercise of an outstanding stock option for an
aggregate exercise price of $141,560 to a former officer of the
Registrant in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
(38) In October 1998, the Registrant issued 1,125 shares of the Registrant's
Common Stock to a director of the Registrant as compensation for his
services as a director in reliance upon the exemption from registration
under Rule 701 promulgated under the Securities Act.
II-4
<PAGE>
(39) In October 1998, the Registrant granted options to purchase 5,625 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.
(40) In December 1998, under the Registrant's 1992 Stock Option Plan, the
Registrant granted options to purchase 2,250 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.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
+3.1 Certificate of Incorporation.
+3.2 Form of Amended and Restated Certificate of Incorporation (to be filed
immediately prior to effectiveness of the Registration Statement).
+3.3 Form of Restated Certificate of Incorporation (to be filed following
the closing of the offering referred to in the Registration Statement).
+3.4 By-Laws.
+3.5 Form of Amended and Restated By-laws (to be effective upon
effectiveness of the Registration Statement).
+3.6 Form of Certificate of Amendment of Certificate of Incorporation.
+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, as amended, by and between the
Registrant and Hoffman Enterprises.
+10.2 1998 Stock Option and Incentive Plan of the Registrant.
+10.3 Amended and Restated 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 Employee Incentive Stock Option Certificate and Agreement for
Amended and Restated 1992 Stock Option Plan.
+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 16, 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 Technology Development Incentive Plan.
+10.11 Form of Employment Agreement between the Registrant and Thomas E.
D'Ambra, Ph.D.
+10.12 Form of Employment Agreement between the Registrant and Harold Meckler,
Ph.D.
+10.13 Form of Employment Agreement between the Registrant and Michael P.
Trova, Ph.D.
+10.14 Form of Employee Innovation, Proprietary Information and Post-
Employment Activity Agreement between the Registrant and each of its
Named Executive Officers.
+10.15 Letter Agreement between the Registrant and Harold M. Armstrong, Jr.
+10.16 Form of Employment Agreement between the Registrant and Donald E.
Kuhla, Ph.D.
10.17 Form of Employment Agreement between the Registrant and Lawrence D.
Jones, Ph.D.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
+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 LLP.
+23.3 Consent of Ostrolenk, Faber, Gerb & Soffen, LLP.
+24.1 Powers of Attorney (included on signature pages).
+27.1 Financial Data Schedule.
</TABLE>
- ----------
+ Previously filed.
(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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Albany, State of New York, on February 2, 1999.
Albany Molecular Research, Inc.
/s/ Thomas E. D'Ambra, Ph.D.
By: _________________________________
Thomas E. D'Ambra, Ph.D.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Signature Title Date
/s/ Thomas E. D'Ambra, Ph.D. Chairman of the February 2,
- ------------------------------------- Board, Chief 1999
Thomas E. D'Ambra, Ph.D. Executive Officer
and Director
(Principal
Executive Officer)
* President and February 2,
- ------------------------------------- Director 1999
Donald E. Kuhla, Ph.D.
/s/ Rodney A. Tillinghast Controller and February 2,
- ------------------------------------- Acting 1999
Rodney A. Tillinghast Chief Financial
Officer (Principal
Accounting Officer)
* Vice President, February 2,
- ------------------------------------- Senior Research 1999
Chester J. Opalka Chemist and
Director
* Director February 2,
- ------------------------------------- 1999
Anthony P. Tartaglia, M.D.
* Director February 2,
- ------------------------------------- 1999
Frank W. Haydu III
*By:/s/ Thomas E. D'Ambra, Ph.D.
----------------------------------
Thomas E. D'Ambra, Ph.D.
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
+1.1 Form of Underwriting Agreement.
+3.1 Certificate of Incorporation.
+3.2 Form of Amended and Restated Certificate of Incorporation (to be
filed immediately prior to effectiveness of the Registration
Statement).
+3.3 Form of Restated Certificate of Incorporation (to be filed
following the closing of the offering referred to in the
Registration Statement).
+3.4 By-Laws.
+3.5 Form of Amended and Restated By-laws (to be effective upon
effectiveness of the Registration Statement).
+3.6 Form of Certificate of Amendment of Certificate of
Incorporation.
+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, as amended, by and between
the Registrant and Hoffman Enterprises.
+10.2 1998 Stock Option and Incentive Plan of the Registrant.
+10.3 Amended and Restated 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 Employee Incentive Stock Option Certificate and
Agreement for Amended and Restated 1992 Stock Option Plan.
+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 16, 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 Technology Development Incentive Plan.
+10.11 Form of Employment Agreement between the Registrant and Thomas
E. D'Ambra, Ph.D.
+10.12 Form of Employment Agreement between the Registrant and Harold
Meckler, Ph.D.
+10.13 Form of Employment Agreement between the Registrant and Michael
P. Trova, Ph.D.
+10.14 Form of Employee Innovation, Proprietary Information and Post-
Employment Activity Agreement between the Registrant and each of
its Named Executive Officers.
+10.15 Letter Agreement between the Registrant and Harold M. Armstrong,
Jr.
+10.16 Form of Employment Agreement between the Registrant and Donald
E. Kuhla, Ph.D.
10.17 Form of Employment Agreement between the Registrant and Lawrence
D. Jones, Ph.D.
+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 LLP.
+23.3 Consent of Ostrolenk, Faber, Gerb & Soffen, LLP.
+24.1 Powers of Attorney (included on signature pages).
+27.1 Financial Data Schedule.
</TABLE>
- ----------
+ Previously filed.
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") is made as of the ____ day of
________, _____, by and between Albany Molecular Research, Inc., a Delaware
corporation (the "Company"), and Lawrence D. Jones, Ph.D. (the "Executive").
WHEREAS, the Executive is an officer and key employee of the Company; and
WHEREAS, the parties hereto desire to assure that the Executive's knowledge
and familiarity with the business of the Company will continue to be available
to the Company after the date hereof.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Employment. Subject to the provisions of Section 6, the Company
----------
hereby employs the Executive and the Executive accepts such employment upon the
terms and conditions hereinafter set forth.
2. Term of Employment. The term of the Executive's employment pursuant
------------------
to this Agreement shall commence on and as of the date hereof (the "Effective
Date") and shall remain in effect for a period of three (3) years from the
Effective Date (the "Term"). The Term shall be renewed automatically for
periods of one (1) year (each a "Renewal Term") commencing at the third
anniversary of the Effective Date and on each subsequent anniversary thereafter,
unless notice that this Agreement will not be extended is given by either the
Executive or the Company not less than sixty (60) days prior to the expiration
of the Term (as extended by any Renewal Term); provided that if the Company
--------
elects not to extend this Agreement for any reason, the Executive shall receive
the payments set forth in Section 6(e); and provided further that if the Company
-------- -------
(or any of its successors) elects not to renew this Agreement at any time during
the one year following a Change in Control (as defined in Section 6(g)), the
provisions of Section 6(g) shall apply. The period during which the Executive
serves as an employee of the Company in accordance with and subject to the
provisions of this Agreement is referred to in this Agreement as the "Term of
Employment."
3. Capacity.
--------
(a) Duties. During the Term of Employment, the Executive shall report
------
directly to the President and Chief Operating Officer of the Company and (i)
shall serve the Company with the title Vice President Commercial Operations and
Quality, (ii) shall perform such duties and responsibilities as may be
reasonably determined by the Chief Executive Officer of the Company consistent
with the Executive's title and position, duties and responsibilities as of the
Effective Date; provided that such duties and responsibilities shall be within
--------
the general area of the Executive's experience and skills, (iii) upon the
request of the Board of Directors of the Company, shall serve as an officer
and/or director of the Company and any of its subsidiaries or affiliates
(provided that the Company shall indemnify the Executive for liabilities
- ---------
incurred as such in accordance with its current practices to the fullest extent
permitted by applicable law); and (iv) shall render all services incident to the
foregoing.
<PAGE>
(b) Extent of Service. The Executive agrees to diligently serve the
-----------------
interests of the Company and shall devote substantially all of his working time,
attention, skill and energies to the advancement of the interests of the Company
and its subsidiaries and affiliates and the performance of his duties and
responsibilities hereunder; provided that nothing in this Agreement shall be
--------
construed as preventing the Executive from (i) investing the Executive's assets
in any entity in a manner not prohibited by Section 7 and in such form or manner
as shall not require any material activities on the Executive's part in
connection with the operations or affairs of the entities in which such
investments are made, or (ii) engaging in religious, charitable or other
community or non-profit activities that do not impair the Executive's ability to
fulfill the Executive's duties and responsibilities under this Agreement.
4. Compensation.
------------
(a) Salary. During the Term of Employment, the Company shall pay the
------
Executive a salary (the "Base Salary") at an annual rate as shall be determined
from time to time by the Board of Directors of the Company or the Compensation
Committee of the Board of Directors consistent with the general policies and
practices of the Company and subject to periodic review in accordance with the
policies and practices of the Company; provided, however, that in no event shall
-------- -------
such rate per annum be less than $138,000. Such salary shall be subject to
withholding under applicable law and shall be payable in periodic installments
in accordance with the Company's usual practice for its senior executives, as in
effect from time to time.
(b) Bonus. Commencing on the first annual compensation determination
-----
date established by the Company during the Term of Employment and on each such
date thereafter, the Company shall review the performance of the Company and of
the Executive during the prior year, and the Company may provide the Executive
with additional compensation as a bonus in accordance with any bonus plan then
in effect from time to time for senior executives of the Company. Any such
bonus plan shall have such terms as may be established in the sole discretion of
the Board of Directors of the Company or the Compensation Committee of the Board
of Directors.
5. Benefits.
--------
(a) Regular Benefits. During the Term of Employment, the Executive
----------------
shall be entitled to participate in any and all medical, dental, pension and
life insurance plans, disability income plans and other employee benefit plans
as in effect from time to time for senior executives of the Company. Such
participation shall be subject to (i) the terms of the applicable plan
documents, (ii) generally applicable policies of the Company and (iii) the
discretion of the Board of Directors of the Company or the administrative or
other committee provided for in, or contemplated by, such plan. Compliance with
this Section 5(a) shall in no
2
<PAGE>
way create or be deemed to create any obligation, express or implied, on the
part of the Company or any subsidiary or affiliate of the Company with respect
to the continuation of any benefit or other plan or arrangement maintained as of
or prior to the Effective Date or the creation and maintenance of any particular
benefit or other plan or arrangement at any time after the Effective Date.
(b) Reimbursement of Expenses. The Company shall promptly reimburse
-------------------------
the Executive for all reasonable business expenses incurred by the Executive
during the Term of Employment in accordance with the Company's practices for
senior executives of the Company, as in effect from time to time.
(c) Vacation. During the Term of Employment, the Executive shall
--------
receive at least two (2) weeks paid vacation annually or such greater amount as
is in accordance with the Company's practices for senior executives of the
Company, as in effect from time to time.
6. Termination of Employment. Notwithstanding the provisions of Section
-------------------------
2, the Executive's employment under this Agreement shall terminate under the
following circumstances set forth in this Section 6.
For purposes of this Agreement, "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by his death as provided in Section 6(c),
the date of his death; (ii) if the Executive's employment is terminated due to
his permanent disability as provided in Section 6(c), the date on which notice
of termination is given; (iii) if the Executive's employment is terminated under
Section 6(e), sixty (60) days after the date on which notice of termination is
given; and (iv) if the Executive's employment is terminated under Section 6(f),
the date on which the applicable cure period expires.
(a) Mutual Consent. The Executive's employment under this Agreement
--------------
may be terminated at any time by the mutual consent of the Executive and the
Company on such terms as both parties shall mutually agree.
(b) Termination by the Company for Cause. The Executive's
------------------------------------
employment under this Agreement may be terminated by the Company for "cause" at
any time upon written notice to the Executive without further liability on the
part of the Company. For purposes of this Agreement, a termination shall be for
"cause" if:
(i) the Executive shall commit an act of fraud, embezzlement,
misappropriation or breach of fiduciary duty against the Company or any of its
subsidiaries or affiliates or shall be convicted by a court of competent
jurisdiction or shall plead guilty or nolo contendere to any felony or any crime
involving moral turpitude;
(ii) the Executive shall commit a material breach of any of the
covenants, terms or provisions of Section 7 or 8 hereof which breach has not
been cured within fifteen (15) days after delivery to the Executive by the
Company of written notice thereof;
3
<PAGE>
(iii) the Executive shall commit a material breach of any of
the covenants, terms or provisions hereof (other than pursuant to Section 7 or 8
hereof) which breach has not been remedied within thirty (30) days after
delivery to the Executive by the Company of written notice thereof; or
(iv) the Executive shall have disobeyed reasonable written
instructions from the Company's President and Chief Operating Officer which are
consistent with the terms and conditions of this Agreement or shall have
deliberately, wilfully, substantially and continuously failed to perform the
Executive's duties hereunder, after written notice and under circumstances
effectively constituting a voluntary resignation of the Executive's position
with the Company.
Upon termination for cause as provided in this Section 6(b), (A) all
obligations of the Company under this Agreement shall thereupon immediately
terminate other than any obligations with respect to earned but unpaid Base
Salary and (B) the Company shall have any and all rights and remedies under this
Agreement and applicable law.
(c) Death; Disability. The Executive's employment under this
-----------------
Agreement may be terminated by the Company upon the earlier of death or
permanent disability (as defined below) of the Executive continuing for a period
of one hundred eighty (180) days. Upon any such termination of the Executive's
employment, all obligations of the Company under this Agreement shall thereupon
immediately terminate other than any obligations with respect to (i) earned but
unpaid salary through the Date of Termination; provided that Base Salary
--------
payments as provided by Section 4(a) shall continue to be made to the Executive
(or his estate) through the Term (as extended by any Renewal Term) but only if
and to the extent payments to the Executive or his estate under any applicable
disability or life insurance policy is less than the amount the Executive would
otherwise receive as Base Salary hereunder, (ii) Bonus payments with respect to
the calendar year within which such termination occurred on the basis of and to
the extent contemplated in any bonus plan then in effect with respect to senior
executive officers of the Company, pro-rated on the basis of the number of days
of the Executive's actual employment hereunder during such calendar year through
the Date of Termination, and (iii) in the case of permanent disability,
continuation at the Company's expense of health insurance benefits (medical and
dental) until the first anniversary of the Date of Termination to the extent
permitted under the Executive's group health insurance policy. As used herein,
the term "permanent disability" or "permanently disabled" means the inability of
the Executive, by reason of injury, illness or other similar cause, to perform a
major part of his duties and responsibilities in connection with the conduct of
the business and affairs of the Company. The Company shall provide written
notice to the Executive of the termination of his employment hereunder due to
permanent disability.
(d) Voluntary Termination by the Executive. At any time during the
--------------------------------------
Term of Employment, the Executive may terminate his employment under this
Agreement upon sixty (60) days' prior written notice to the Company. Upon
termination by the Executive as
4
<PAGE>
provided in this Section 6(d), all obligations of the Company under this
Agreement shall thereupon immediately terminate other than any obligations with
respect to earned but unpaid Base Salary.
(e) Termination by the Company Without Cause. The Executive's
----------------------------------------
employment under this Agreement may be terminated by the Company at any time
without "cause" (as defined in Section 6(b)) by the Company upon sixty (60)
days' prior written notice to the Executive. Upon any such termination of the
Executive's employment, all obligations of the Company under this Agreement
shall thereupon immediately terminate other than any obligations with respect to
earned but unpaid Base Salary and bonus under Section 4. In addition, subject
to the Executive signing a general release of claims in a form and manner
satisfactory to the Company, the Company shall continue to pay the Executive his
Base Salary at the rate then in effect pursuant to Section 4(a) for a period of
one (1) year from the Date of Termination and shall pay to the Executive in
monthly installments over such one-year period, an amount equal to the
Executive's cash bonus, if any, received in respect of the immediately preceding
year pursuant to Section 4(b).
(f) Termination by the Executive upon Company Breach. The Executive
------------------------------------------------
shall have the right to terminate his employment hereunder upon written notice
to the Company in the event of (i) a material adverse change or diminution in
the nature or scope of the powers, functions, titles, duties or responsibilities
of the Executive that is adverse to the Executive or (ii) a breach by the
Company of any of its material obligations hereunder, in each case after the
Executive has given written notice to the Company specifying such default by the
Company and giving the Company a reasonable time, not less than thirty (30)
days, to conform its performance to its obligations hereunder. The failure of
the Executive to give notice of any of the foregoing events shall not under any
circumstances constitute a waiver of the Executive's right to terminate his
employment and receive the amounts payable under this Section 6(f). Upon any
such termination of the Executive's employment, all obligations of the Company
under this Agreement shall thereupon immediately terminate other than any
obligations with respect to earned but unpaid Base Salary and bonus under
Section 4. In addition, subject to the Executive signing a general release of
claims in a form and manner satisfactory to the Company, the Company shall
continue to pay the Executive his Base Salary at the rate then in effect
pursuant to Section 4(a) for a period of one (1) year from the Date of
Termination and shall pay to the Executive in monthly installments over such
one-year period, an amount equal to the Executive's cash bonus, if any, received
in respect of the immediately preceding year pursuant to Section 4(b).
(g) Termination Pursuant to a Change of Control. If there is a Change
-------------------------------------------
of Control, as defined below, during the Term of Employment, the provisions of
this Section 6(g) shall apply and shall continue to apply throughout the
remainder of the Term (as extended by any Renewal Term). If, within one (1)
year following a Change of Control, the Executive's employment is terminated by
the Company without cause (in accordance with Section 6(e) above) or by the
Executive for "Good Reason" (as defined in Section 6(g)(ii) below) or the
Company elects not to renew this Agreement in accordance with Section 2, the
Company shall
5
<PAGE>
pay to the Executive (or the Executive's estate, if applicable) a lump sum
amount equal to the sum of (x) the Executive's Base Salary at the rate then in
effect pursuant to Section 4(a), plus (y) an amount equal to the Executive's
----
cash bonus, if any, received in respect of the immediately preceding year
pursuant to Section 4(b).
(i) "Change of Control" shall mean the occurrence of any one of
-----------------
the following events:
(A) any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Act") (other than the
Company, any of its subsidiaries, or any trustee, fiduciary or other person or
entity holding securities under any employee benefit plan or trust of the
Company or any of its subsidiaries and other than Thomas E. D'Ambra, Ph.D.),
together with all "affiliates" and "associates" (as such terms are defined in
Rule 12b-2 under the Act) of such person, shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Act), directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities having
the right to vote in an election of the Company's Board of Directors ("Voting
Securities") (in such case other than as a result of an acquisition of
securities directly from the Company);
(B) persons who, as of the Effective Date, constitute the Company's
Board of Directors (the "Incumbent Directors") cease for any reason, including,
without limitation, as a result of a tender offer, proxy contest, merger or
similar transaction, to constitute at least a majority of the Board; provided
--------
that any person becoming a director of the Company subsequent to the Effective
Date shall be considered an Incumbent Director if such person's election was
approved by or such person was nominated for election by either (1) a vote of at
least a majority of the Incumbent Directors or (2) a vote of at least a majority
of the Incumbent Directors who are members of a nominating committee comprised,
in the majority, of Incumbent Directors; but provided further that any such
-------- -------
person whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of members of the Board of
Directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board, including by reason of agreement
intended to avoid or settle any such actual or threatened contest or
solicitation, shall not be considered an Incumbent Director; or
(C) the stockholders of the Company shall approve (1) any
consolidation or merger of the Company where the stockholders of the Company,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing in the
aggregate more than fifty percent (50%) of the voting shares of the corporation
issuing cash or securities in the consolidation or merger (or of its ultimate
parent corporation, if any), (2) any sale, lease, exchange or other transfer (in
one transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or
6
<PAGE>
substantially all of the assets of the Company or (3) any plan or proposal for
the liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to
have occurred for purposes of the foregoing clause (A) solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate number of
shares of Voting Securities beneficially owned by any person to twenty-five
percent (25%) or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in this
-------- -------
sentence shall thereafter become the beneficial owner of any additional shares
of Voting Securities (other than pursuant to a stock split, stock dividend, or
similar transaction or as a result of an acquisition of securities directly from
the Company), then a "Change of Control" shall be deemed to have occurred for
purposes of the foregoing clause (A).
(ii) "Good Reason" shall mean the occurrence of any of the
-----------
following:
(A) a material adverse change or diminution in the nature or scope of
the powers, functions, titles, duties or responsibilities of the Executive that
is adverse to the Executive;
(B) a breach by the Company of any of its material
obligations hereunder;
(C) the failure by the Company to obtain an effective agreement from
any successor to assume and agree to perform this Agreement; or
(D) the relocation of the offices at which the Executive is
principally employed as of the Change of Control to a location more than fifty
(50) miles from such offices, which relocation is not approved by the Executive.
(iii) The Executive shall provide the Company with reasonable
notice and an opportunity to cure any of the events listed in Section 6(g)(ii)
and shall not be entitled to compensation pursuant to this Section 6(g) unless
the Company fails to cure within a reasonable period of not less than thirty
(30) days; and
(iv) It is the intention of the Executive and of the Company that no
payments by the Company to or for the benefit of the Executive under this
Agreement or any other agreement or plan, if any, pursuant to which the
Executive is entitled to receive payments or benefits shall be nondeductible to
the Company by reason of the operation of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), relating to parachute payments or any
like statutory or regulatory provision. Accordingly, and notwithstanding any
other provision of this Agreement or any such agreement or plan, if by reason of
the operation of said Section 280G or any like statutory or regulatory
provision, any
7
<PAGE>
such payments exceed the amount which can be deducted by the Company, such
payments shall be reduced to the maximum amount which can be deducted by the
Company. To the extent that payments exceeding such maximum deductible amount
have been made to or for the benefit of the Executive, such excess payments
shall be refunded to the Company with interest thereon at the applicable Federal
rate determined under Section 1274(d) of the Code, compounded annually, or at
such other rate as may be required in order that no such payments shall be
nondeductible to the Company by reason of the operation of said Section 280G or
any like statutory or regulatory provision. To the extent that there is more
than one method of reducing the payments to bring them within the limitations of
said Section 280G or any like statutory or regulatory provision, the Executive
shall determine which method shall be followed; provided that if the Executive
--------
fails to make such determination within forty-five (45) days after the Company
has given notice of the need for such reduction, the Company may determine the
method of such reduction in its sole discretion.
(h) No Mitigation. Without regard to the reason for the termination
-------------
of the Executive's employment hereunder, the Executive shall be under no
obligation to mitigate damages with respect to such termination under any
circumstances and in the event the Executive is employed or receives income from
any other source, there shall be no offset against the amounts due from the
Company hereunder.
7. Non-Competition.
---------------
(a) Because the Executive's services to the Company are special and
because the Executive has access to the Company's confidential information,
during the Term of Employment, the Executive shall not, without the express
written consent of the Company, directly or indirectly, engage, participate,
invest in, be employed by or assist, whether as owner, part-owner, shareholder,
partner, director, officer, trustee, employee, agent or consultant, or in any
other capacity, any Person (as hereinafter defined) other than the Company and
its affiliates in the Designated Industry (as hereinafter defined); provided,
--------
however, that nothing herein shall be construed as preventing the Executive from
- -------
making passive investments in a Person in the Designated Industry if the
securities of such Person are publicly traded and such investment constitutes
less than one percent (1%) of the outstanding shares of capital stock or
comparable equity interests of such Person.
(b) For purposes of this Agreement, the following terms have the
following meanings:
"Person" means an individual, a corporation, an association, a
------
partnership, a limited liability company, an estate, a trust and any other
entity or organization; and
"Designated Industry" means the business of providing chemistry
-------------------
research and development services to pharmaceutical and biotechnology companies
involved in
8
<PAGE>
drug development and discovery and any and all activities related thereto,
including, without limitation, medicinal chemistry, chemical development,
analytical chemistry services and small-scale manufacturing and any other
business conducted by the Company during the Executive's employment with the
Company.
8. Confidentiality. In the course of performing services hereunder and
---------------
otherwise, the Executive has had, and it is anticipated that the Executive will
from time to time have, access to confidential records, data, customer lists,
trade secrets, technology and similar confidential information owned or used in
the course of business by the Company and its subsidiaries and affiliates (the
"Confidential Information"). The Executive agrees (i) to hold the Confidential
Information in strict confidence, (ii) not to disclose the Confidential
Information to any Person (other than in the regular business of the Company),
and (iii) not to use, directly or indirectly, any of the Confidential
Information for any competitive or commercial purpose; provided, however, that
-------- -------
the limitations set forth above shall not apply to any Confidential Information
which (A) is then generally known to the public, (B) became or becomes generally
known to the public through no fault of the Executive, or (C) is disclosed in
accordance with an order of a court of competent jurisdiction or applicable law.
Upon termination of the Executive's employment with the Company, all data,
memoranda, customer lists, notes, programs and other papers and items, and
reproductions thereof relating to the foregoing matters in the Executive's
possession or control, shall be returned to the Company and remain in its
possession. This Section 8 shall survive the termination of this Agreement for
any reason.
9. Conflicting Agreements. The Executive hereby represents and warrants
----------------------
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants which
would affect the performance of his obligations hereunder. As of the Effective
Date, the Executive is not performing any other duties for, and is not a party
to any similar agreement with, any Person competing with the Company or any of
its affiliates.
10. Severability. In case any of the provisions contained in this
------------
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any respect, any such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had been
limited or modified (consistent with its general intent) to the extent necessary
to make it valid, legal and enforceable, or if it shall not be possible to so
limit or modify such invalid, illegal or unenforceable provision or part of a
provision, this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or part of a provision had never been contained in this
Agreement.
9
<PAGE>
11. Litigation and Regulatory Cooperation. During and after the
-------------------------------------
Executive's employment, the Executive shall cooperate fully with the Company in
the defense or prosecution of any claims or actions now in existence or which
may be brought in the future against or on behalf of the Company which relate to
events or occurrences that transpired while the Executive was employed by the
Company. The Executive's full cooperation in connection with such claims or
actions shall include, but not be limited to, being available to meet with
counsel to prepare for discovery or trial and to act as a witness on behalf of
the Company at mutually convenient times. During and after the Executive's
employment, the Executive also shall cooperate fully with the Company in
connection with any investigation or review of any federal, state or local
regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Company.
The Company shall reimburse the Executive for any reasonable out-of-pocket
expenses incurred in connection with the Executive's performance of obligations
pursuant to this Section 11. This Section 11 shall survive the termination of
this Agreement for any reason.
12. Arbitration of Disputes. Any dispute or controversy arising under
--- -----------------------
or in connection with this Agreement shall be settled exclusively by arbitration
in Albany, New York, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered in any court having
jurisdiction. In the event that the Company terminates the Executive's
employment for cause under Section 6(b) and the Executive contends that cause
did not exist, then the Company's only obligation shall be to submit such claim
to arbitration and the only issue before the arbitrator will be whether the
Executive was in fact terminated for cause. If the arbitrator determines that
the Executive was not terminated for cause by the Company, then the only
remedies that the arbitrator may award are (i) payment of amounts which would
have been payable if the Executive's employment had been terminated under
Section 6(e), (ii) the costs of arbitration, (iii) the Executive's attorneys'
fees, and (iv) all rights and benefits granted or in effect with respect to the
Executive under the Company's stock option plans and agreements with the
Executive pursuant thereto, with the vesting and exercise of any stock options
and the forfeitability of any stock-based grants held by the Executive to be
governed by the terms of such plans and the related agreements between the
Executive and the Company. If the arbitrator finds that the Executive's
employment was terminated for cause, the arbitrator will be without authority to
award the Executive anything, and the parties will each be responsible for their
own attorneys' fees, and they will divide the costs of arbitration equally.
Furthermore, should a dispute occur concerning the Executive's mental or
physical capacity as described in Section 6(c), a doctor selected by the
Executive and a doctor selected by the Company shall be entitled to examine the
Executive. If the opinion of the Company's doctor and the Executive's doctor
conflict, the Company's doctor and the Executive's doctor shall together agree
upon a third doctor, whose opinion shall be binding. This Section 12 shall
survive the termination of this Agreement for any reason.
13. Specific Performance. Notwithstanding Section 12 hereof, it is
--------------------
specifically understood and agreed that any breach of the provisions of this
Agreement, including, without limitation, Sections 7 and 8 hereof, by the
Executive is likely to result in irreparable injury to the Company and its
subsidiaries and affiliates, that the remedy at law alone will be an
10
<PAGE>
inadequate remedy for such breach and that, in addition to any other remedy it
may have, the Company shall be entitled to enforce the specific performance of
this Agreement by the Executive and to seek both temporary and permanent
injunctive relief (to the extent permitted by law), without the necessity of
proving actual damages. To the extent that any court action is permitted
consistent with or to enforce Section 7 or 8 of this Agreement, the parties
hereby consent to the jurisdiction of the courts of the State of New York and
the United States District Court for the Eastern District of New York.
Accordingly, with respect to any such court action, the Executive (i) submits to
the personal jurisdiction of such courts, (ii) consents to service of process,
and (iii) waives any other requirement (whether imposed by statute, rule of
court or otherwise) with respect to personal jurisdiction or service of process.
14. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given (i)
when delivered by hand, (ii) when transmitted by facsimile and receipt is
acknowledged, or (iii) if mailed by certified or registered mail with postage
prepaid, on the third business day after the date on which it is so mailed:
To the Company:
Albany Molecular Research, Inc.
21 Corporate Circle
Albany, New York 12203-5154
Facsimile: (518) 464-0289
Attention: Chief Executive Officer
To the Executive:
______________________
______________________
______________________
or to such other address of which any party may notify the other parties as
provided above. Notices shall be effective as of the date of such delivery or
mailing.
15. Amendment; Waiver. This Agreement shall not be amended, modified or
-----------------
discharged in whole or in part except by an Agreement in writing signed by both
of the parties hereto. The failure of either of the parties to require the
performance of a term or obligation or to exercise any right under this
Agreement or the waiver of any breach hereunder shall not prevent subsequent
enforcement of such term or obligation or exercise of such right or the
enforcement at any time of any other right hereunder or be deemed a waiver of
any subsequent breach of the provision so breached, or of any other breach
hereunder.
11
<PAGE>
16. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
successors of the Company by way of merger, consolidation or transfer of all or
substantially all of the assets of the Company, and may not be assigned by the
Executive.
17. Entire Agreement. This Agreement, together with that certain Employee
----------------
Innovation, Proprietary Information and Post-Employment Activity Agreement
executed by the Employee, constitute the entire agreement between the parties
concerning the subjects hereof and thereof and supersede all prior
understandings and agreements between the parties relating to the subject matter
hereof and thereof.
18. Governing Law. This Agreement shall be construed and regulated in all
-------------
respects under the laws of the State of New York.
19. Counterparts. This Agreement may be executed in counterparts, each of
------------
which when so executed and delivered shall be taken to be an original, but such
counterparts shall together constitute one and the same document.
[Remainder of Page Intentionally Left Blank]
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
ALBANY MOLECULAR RESEARCH, INC.
By:
---------------------------------
Name:
Title:
EXECUTIVE:
---------------------------------
Lawrence D. Jones, Ph.D.
13
<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 to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Albany, New York
February 1, 1999
