<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 0-25323
ALBANY MOLECULAR RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1742717
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21 Corporate Circle
Albany, New York 12203
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(518) 464-0279
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 2000
Common Stock, $.01 par value 32,767,952
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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PART I. -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ALBANY MOLECULAR RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,589 $3,673
Accounts receivable, net 7,481 4,222
Royalty income receivable 7,400 5,382
Investment securities, available-for-sale 14,743 21,172
Inventory 1,389 1,116
Unbilled services 36 76
Prepaid expenses and other current assets 1,977 3,945
---------------- -----------------
Total current assets 49,615 39,586
Property and equipment, net 24,387 15,879
Other assets:
Intangible assets and patents, net 2,372 332
Equity investments in unconsolidated affiliates 15,929 15,033
Convertible subordinated debenture from unconsolidated affiliate 15,000 15,000
Other assets 2,284 2,412
---------------- -----------------
Total other assets 35,585 32,777
---------------- -----------------
Total assets $109,587 $ 88,242
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $6,300 $3,309
Unearned income 781 1,480
Current installments of long-term debt - 87
Other current liabilities 205 278
---------------- -----------------
Total current liabilities 7,286 5,154
Long-term liabilities:
Long-term debt, excluding current installments - 168
---------------- -----------------
Total liabilities 7,286 5,322
---------------- -----------------
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized,
29,764,046 shares issued and outstanding at September 30,
2000, and 29,187,118 shares issued and outstanding at
December 31, 1999 297 292
Additional paid-in capital 60,164 56,927
Retained earnings 41,822 25,716
Accumulated other comprehensive income (loss) 18 (15)
---------------- -----------------
Total stockholders' equity 102,301 82,920
---------------- -----------------
Total liabilities and stockholders' equity $109,587 $88,242
================ =================
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- ----------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net contract revenue $9,890 $5,641 $26,557 $15,373
Recurring royalties 7,469 5,848 20,894 15,882
--------------- -------------- -------------- ---------------
Total revenue 17,359 11,489 47,451 31,255
Cost of contract revenue 5,506 3,238 14,847 8,767
Technology incentive award 747 585 2,089 1,578
Research and development 513 457 1,499 1,387
Selling, general and administrative 1,943 1,675 5,695 4,654
--------------- -------------- -------------- ---------------
Total costs and expenses 8,709 5,955 24,130 16,386
--------------- -------------- -------------- ---------------
Income from operations 8,650 5,534 23,321 14,869
Equity in income of unconsolidated
affiliates 28 - 378 -
Other income, net 702 563 2,047 1,293
--------------- -------------- -------------- ---------------
Income before income tax expense 9,380 6,097 25,746 16,162
Income tax expense 3,554 2,282 9,640 6,055
--------------- -------------- -------------- ---------------
Net income $5,826 $3,815 $16,106 $10,107
=============== ============== ============== ===============
Basic earnings per share $0.20 $0.14 $0.54 $0.38
Diluted earnings per share $0.19 $0.13 $0.51 $0.34
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $16,106 $10,107
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,725 1,305
Tax benefit of stock option exercises 945 1,361
Provision for doubtful accounts - 140
Equity earnings in unconsolidated affiliate (378) -
Deferred income tax expense 292 337
(Increase) decrease in operating assets, net of business acquisition
Accounts receivable (3,160) (2,234)
Royalty income receivable (2,018) (2,531)
Unbilled services 41 68
Inventory, prepaid expenses and other assets (1,385) 5
(Decrease) increase in:
Accounts payable and accrued expenses 6,009 (1,907)
Unearned income (699) 258
Other current liabilities (118) 164
--------------- ---------------
Net cash provided by operating activities 17,360 7,073
INVESTING ACTIVITIES
Proceeds from sale (purchase) of investments 6,396 (34,044)
Purchase of business, net of cash acquired (869)
Purchases of property and equipment (9,345) (1,723)
Payment of deposit - (1,000)
Payments for patent application costs (60) (29)
Purchase of equity in unconsolidated affiliates (684) -
--------------- ---------------
Net cash used in investing activities (4,562) (36,796)
FINANCING ACTIVITIES
Principal payments on long-term debt (838) (14,962)
Proceeds from borrowings on long-term debt - 500
Proceeds from sale of common stock 956 52,965
---------------- ---------------
Net cash provided by financing activities 118 38,503
Increase in cash and cash equivalents 12,916 8,780
Cash and cash equivalents at beginning of period 3,673 5,320
--------------- ---------------
Cash and cash equivalents at end of period $16,589 $14,100
=============== ===============
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and the
Company's Registration Statement filed on October 5, 2000.
NOTE 2 - INVESTMENTS
In June 2000, the Company made an investment in Fluorous Technologies, Inc., a
newly formed company based in Pittsburgh, Pennsylvania. Fluorous Technologies
has licensed from the University of Pittsburgh several patents and pending
patent applications for the use of "fluorous organic chemistry" technology for
chemical synthesis, isolation and purification. Fluorous Technologies was formed
to exploit the potential of this revolutionary technology in pharmaceutical drug
discovery, agrochemical product development, and more environmentally friendly
chemical manufacturing. The Company has invested $650,000 in Fluorous
Technologies representing an initial 69.9% equity ownership. The Company's
ownership interest in Fluorous Technologies is expected to be diluted to less
than 50% upon the issuance of additional common stock by Fluorous Technologies.
As a result of the Company's investment, a proportionate share of Fluorous
Technologies earnings will be included in the Company's financial statements.
NOTE 3 - ACQUISITION
On February 4, 2000, the Company consummated its acquisition of American
Advanced Organics, Inc. (AAO) of Syracuse, New York, for approximately $2.3
million in cash and common stock of the Company. The purchase price has been
allocated to the fair value of assets acquired and liabilities assumed. The net
assets acquired were valued at approximately $200,000, and the excess purchase
price over the net assets acquired, which approximated $2.1 million, is included
in the caption "Intangible assets and patents, net". The excess purchase price
is being amortized over a fifteen-year period. In addition to the $2.3 million
purchase price, the former AAO stockholders may also receive future payments of
up to $800,000 in the aggregate based upon AAO's financial performance as a
division of the Company in 2000 and 2001. The transaction was accounted for as a
purchase business combination. Accordingly, the operating results of AAO have
been included in the Company's results of operations from the date of
acquisition. Pro forma information has not been provided because the acquisition
was immaterial.
6
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 4 - EARNINGS PER SHARE
A summary of the shares used in the calculation of earnings per share is shown
below:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------------------- -----------------------------------------------
AVERAGE PER AVERAGE PER
NET SHARES SHARE NET SHARES SHARE
INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNTS
----------- --------------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $5,826 29,756,425 $ 0.20 $3,815 27,686,172 $0.14
Dilutive effect of stock
options -- 1,616,534 -- -- 2,676,556 --
----------- --------------- ---------- ---------------
Diluted earnings per share $ 5,826 31,372,959 $ 0.19 $3,815 30,362,728 $0.13
=========== =============== ========== ===============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------------------- -----------------------------------------------
AVERAGE PER AVERAGE PER
NET SHARES SHARE NET SHARES SHARE
INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNTS
----------- --------------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 16,106 29,709,360 $ 0.54 $10,107 26,543,490 $0.38
Dilutive effect of stock
options and grants -- 1,646,774 -- -- 2,814,740 --
----------- --------------- ---------- ---------------
Diluted earnings per share $ 16,106 31,356,134 $ 0.51 $ 10,107 29,358,230 $0.34
=========== =============== ========== ===============
</TABLE>
7
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 5 - COMPREHENSIVE INCOME
The Company is required to report comprehensive income and its components in
accordance with the provisions of the Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income."
The following table presents the components of the Company's comprehensive
income for the three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Net income $5,826 $3,815
Other comprehensive income
Change in unrealized gain on available-for-sale securities, net of tax
benefit 23 19
---------------- ----------------
Total comprehensive income $5,849 $3,834
================ ================
</TABLE>
The following table presents the components of the Company's comprehensive
income for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Net income $16,106 $10,107
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale securities, net of
tax benefit 33 (80)
---------------- ----------------
Total comprehensive income $16,139 $10,027
================ ================
</TABLE>
NOTE 6 - FINANCIAL INFORMATION BY CUSTOMER CONCENTRATION AND GEOGRAPHIC AREA
Net contract revenue from the Company's three largest customers represented
approximately 22%, 17% and 13% of total consolidated net contract revenue for
the three months ended September 30, 2000, and approximately 26%, 11% and 10% of
total consolidated net contract revenue for the three months ended September 30,
1999. Net contract revenue from the Company's three largest customers
represented approximately 22%, 13% and 11% of total consolidated net contract
revenue for the nine months ended September 30, 2000, and approximately 22%, 11%
and 10% of total consolidated net contract revenue for the nine months ended
September 30, 1999.
The Company's net contract revenue for the three months ended September 30, 2000
and 1999 and the nine months ended September 30, 2000 and 1999 was recognized
from customers in the following geographic regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------ ----------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------- ---------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
United States 95% 89% 92% 90%
Europe 3% 11% 6% 10%
Other 2% -- 2% --
---------------------- ---------------------- --------------------- --------------------
Total 100% 100% 100% 100%
====================== ====================== ===================== ====================
</TABLE>
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (as amended by
SAFS No. 138) which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement was amended by SFAS
No. 137 to defer the effective date to fiscal quarters of fiscal years beginning
after September 15, 2000. Management does not anticipate that the adoption of
this statement will have a material effect on the Company's financial statements
because the Company does not presently utilize derivative instruments or engage
in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "SAB 101",
"Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 in
the fourth quarter of 2000. Management does not expect the adoption of SAB 101
to have a material effect on the Company's financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
has applied the applicable provisions of FIN 44.
NOTE 8 - SUBSEQUENT EVENT
On October 5, 2000 the Company completed a follow-on public offering of its
common stock. The Company sold 3,000,000 shares of common stock at an offering
price of $42.25. Net proceeds, after the underwriters discount and offering
expenses, were approximately $119 million.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The following discussion of our results of operations and financial condition
should be read in conjunction with the accompanying Condensed Consolidated
Financial Statements and the Notes thereto included within this report. This
Form 10-Q contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Our actual results could differ materially from those contained in the
forward-looking statements and therefore, prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, our ability to attract and
retain experienced scientists, a decline in the use of our services by
pharmaceutical and biotechnology companies, the loss of a major customer, the
continuation of royalties from our Allegra-TM-/Telfast license agreement with
Aventis S.A., our ability to produce proprietary technology, to protect our
intellectual property and to license technologies from others, and our ability
to manage our growth, as well as the factors set forth under the caption "Risk
Factors and Certain Factors Affecting Forward-Looking Statements," in our
Registration Statement on Form S-3, filed with the Securities and Exchange
Commission on October 5, 2000, the discussion set forth below and the matters
set forth in this Form 10-Q generally.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999
REVENUES
NET CONTRACT REVENUE. 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 netted
against gross contract revenue. Reimbursed expenses vary from contract to
contract. Accordingly, we view net contract revenue as our primary measure of
revenue growth rather than licensing fees and royalties, which are dependent
upon our licensee's sales. Net contract revenue for the third quarter of 2000
increased 75.3% to $9.9 million, compared to $5.6 million for the same period in
1999. This increase was due principally to a greater number of projects under
contract, primarily for medicinal chemistry and chemical development services,
which was facilitated through an increase in the number of scientific staff to
208 as of September 30, 2000, from 137 as of September 30, 1999.
RECURRING ROYALTY REVENUE. Recurring royalty revenue consists of royalties from
Aventis under a license agreement based on sales of fexofenadine HCl, marketed
as Allegra in the Americas and Telfast elsewhere. Royalty payments are due
within 45 days after the end of a calendar quarter and are determined based on
sales in that quarter. Royalty revenue for the third quarter of 2000 increased
27.7% to $7.5 million, compared to $5.8 million in 1999. The increase was
attributable to increased sales of fexofenadine HCl by Aventis.
TOTAL REVENUE. Total revenue consists of net contract revenue and recurring
royalty revenue. Total revenue for the third quarter of 2000 increased 51.1% to
$17.4 million, compared to $11.5 million for the same period in 1999.
COSTS AND EXPENSES
COST OF CONTRACT REVENUE. Our cost of contract revenue, from which we derive
gross profit from net contract revenue, consists primarily of compensation and
associated fringe benefits for employees and other direct project related costs.
Cost of contract revenue increased 70.0% to $5.5 million in the third quarter of
2000 from $3.2 million for the same period in 1999. Our net contract revenue
margin increased to 44.3% in the third quarter of 2000 from 42.6% for the same
period in 1999, primarily from higher fees generated from our contract services
and leveraging our fixed overhead costs.
TECHNOLOGY INCENTIVE AWARD. We maintain a Technology Development Incentive Plan,
the purpose of which is to stimulate and encourage novel innovative technology
development by our employees. This plan allows eligible participants to share in
a percentage of the net revenue earned by us relating to patented technology
with respect to which the eligible
10
<PAGE>
participant is named as an inventor. The technology incentive award expense
incurred under our Technology Development Incentive Plan increased 27.7% to
$747,000 in the third quarter of 2000 compared to $585,000 for the same period
in 1999. The increase was directly attributable to the increase in recurring
royalties.
RESEARCH AND DEVELOPMENT. Research and development expense consists of payments
in connection with collaborations with academic institutions, compensation and
benefits for scientific personnel for work performed on proprietary research
projects and costs of supplies and related chemicals. Research and development
expense increased 12.3% to $513,000 for the third quarter of 2000 compared to
$457,000 for the same period in 1999. The increase was due primarily to an
increase in internally-funded research efforts.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense
consists of compensation and related fringe benefits for marketing and
administrative employees, professional services, marketing costs and all costs
related to facilities and information services. Selling, general and
administrative expenses increased 16.0% to $1.9 million for the third quarter of
2000 from $1.7 million for the corresponding period of 1999. The dollar increase
was primarily attributable to an increase in administrative and marketing
staffing to support the expansion of our operations, and an increase in expenses
related to recruitment of scientists. Selling, general and administrative
expenses represented 19.6% of net contract revenue in the third quarter of 2000
as compared to 29.7% in the third quarter of 1999.
TOTAL COSTS AND EXPENSES. Total costs and expenses consists of cost of contract
revenue, technology incentive awards, research and development expense, and
selling, general and administrative expenses. Total costs and expenses for the
third quarter of 2000 increased 46.2% to $8.7 million, compared to $6.0 million
for the same period in 1999.
INCOME TAX EXPENSE. Income tax expense increased to $3.6 million during the
third quarter of 2000 from $2.3 million in the third quarter of 1999. The
effective rate for our provision for income taxes was 38.0% in the third quarter
of 2000 and 37.4% for the same period in 1999.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
REVENUES
NET CONTRACT REVENUE. Net contract revenue for the nine months ended September
30, 2000 increased 72.8% to $26.6 million, compared to $15.4 million for the
same period in 1999. This increase was due principally to a greater number of
projects under contract, primarily for medicinal chemistry and chemical
development services, which was facilitated through an increase in the number of
scientific staff to 208 as of September 30, 2000, from 137 as of September 30,
1999.
RECURRING ROYALTY REVENUE. Royalty revenue for the nine months ended September
30, 2000 increased 31.6% to $20.9 million, compared to $15.9 million in 1999.
The increase was attributable to increased sales of fexofenadine HCl by Aventis.
TOTAL REVENUE. Total revenue for the first nine months of 2000 increased 51.8%
to $47.5 million, compared to $31.3 million for the same period in 1999.
COSTS AND EXPENSES
COST OF CONTRACT REVENUE. Cost of contract revenue increased 69.4% to $14.8
million in the nine months ended September 30, 2000 from $8.8 million for the
same period in 1999. Our net contract revenue margin increased to 44.1% in the
nine months ended September 30, 2000 from 43.0% for the same period in 1999,
primarily from higher fees generated from our contract services.
TECHNOLOGY INCENTIVE AWARD. The technology incentive award expense incurred
under our Technology Development Incentive Plan increased 32.4% to $2.1 million
in the nine months ended September 30, 2000 compared to $1.6 million for the
same period in 1999. The increase was directly attributable to the increase in
recurring royalties.
11
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense increased 8.1% to
$1.5 million for the nine months ended September 30, 2000 compared to $1.4
million for the same period in 1999. The increase was due primarily to an
increase in internally funded research efforts.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 22.4% to $5.7 million for the nine months ending September
30, 2000 from $4.7 million for the corresponding period of 1999. The increase
was primarily attributable to an increase in administrative and marketing
staffing to support the expansion of our operations, an increase in expenses
related to recruitment of scientists and certain costs associated with becoming
a publicly-traded company. Selling, general and administrative expenses
represented 21.4% of net contract revenue in the nine months ending September
30, 2000 as compared to 30.3% in the same period in 1999.
TOTAL COSTS AND EXPENSES. Total costs and expenses for the first nine months of
2000 increased 47.3% to $24.1 million, compared to $16.4 million for the same
period in 1999.
INCOME TAX EXPENSE. Income tax expense increased to $9.6 million during the nine
months ending September 30, 2000 from $6.1 million in the same period of 1999.
The effective rate for our provision for income taxes was 38.0% in the nine
months ending September 30, 2000 and 37.5% for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our business through operating cash flows, proceeds
from borrowings and the issuance of equity securities. During the first nine
months of 2000, we generated cash of $17.4 million from operating activities, of
which approximately $869,000 was used in the acquisition of American Advanced
Organics, $650,000 was used to acquire an equity interest in Fluorous
Technologies, Inc. and approximately $9.3 million was used in expansion-related
projects, including the purchase of a building in Syracuse, New York for $1.0
million. During the first nine months of 2000, we generated $118,000 from
financing activities, consisting of $838,000 in payments on outstanding debt
offset by cash generated of approximately $956,000 from the exercise of stock
options for common stock and the sale of common stock under the Employee Stock
Purchase Plan. Working capital was approximately $42.3 million at September 30,
2000 as compared to $34.4 million as of December 31, 1999. We have available a
$25 million credit facility to supplement our liquidity needs. There were no
borrowings under this credit facility at September 30, 2000. Additionally, in
October 2000 we completed a secondary offering from which we raised
approximately $119 million, net of offering costs.
We continue to expand our operations at our Rensselaer, New York site. This
expansion will accommodate additional medicinal chemistry and chemical
development laboratories. The total construction and equipment cost of this
expansion is estimated to be $7.0 million to $9.0 million, payable over
approximately 18 to 24 months. We have received initial approval of over $2.0
million in state grants to assist in funding the expansion. We will begin the
renovation and reconstruction of our new facility in Syracuse, New York in the
fourth quarter of 2000 and expect to complete the facility in the second half of
2000. The total construction and equipment cost of this expansion is estimated
to be $4.5 million to $5.5 million. We expect to fund the remaining cost of the
expansion through cash on hand, funds from operations, and, if necessary, our
credit facility.
We are pursuing the expansion of our operations through internal growth and
strategic acquisitions. We expect that such activities will be funded from
existing cash and cash equivalents, cash flow from operations, the issuance of
debt or equity securities and borrowings. Future acquisitions, if any, could be
funded with cash from operations, 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 us or will be
available at prices and upon such other terms that are attractive to us. We
regularly evaluate potential acquisitions of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions. As
a general rule, we will publicly announce such acquisitions only after a
definitive agreement has been signed. In addition, in order to meet our
long-term liquidity needs or consummate future acquisitions, we may incur
additional indebtedness or issue additional equity and debt securities, subject
to market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to us or at all. The failure to
raise the funds necessary to finance our future cash requirements or consummate
future acquisitions could adversely affect our ability to pursue our strategy
and could negatively affect our operations in future periods.
In February 2000, we purchased American Advanced Organics, a provider of rapid
scale-up manufacturing services, for approximately $2.3 million in cash and
stock. We may also be required to pay up to an additional $800,000 in the
aggregate to former AAO stockholders in 2000 and 2001 based on the financial
performance of AAO.
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In September 2000, we made an investment in Fluorous Technologies, Inc., a newly
formed company based in Pittsburgh, PA. Fluorous Technologies has licensed from
the University of Pittsburgh several patents and pending patent applications for
the use of "fluorous organic chemistry" technology for chemical synthesis,
isolation and purification. Fluorous Technologies was formed to exploit the
potential of this revolutionary technology in pharmaceutical drug discovery,
agrochemical product development, and more environmentally friendly chemical
manufacturing. We have invested $650,000 in Fluorous Technologies representing
an initial 69.9% ownership interest. Our ownership interest in Fluorous
Technologies is expected to be diluted to less than 50% upon the issuance of
additional common stock by Fluorous Technologies. As a result of our investment,
a proportionate share of Fluorous Technologies earnings will be included in the
Company's financial statements.
On August 7, 2000 our Board of Directors approved a two-for-one stock split of
the Company's outstanding shares of common stock. The stock split entitled each
stockholder of record at the close of business on August 8, 2000, to receive a
stock dividend of one additional share for every share of common stock held on
that date. The additional shares resulting from the stock split were distributed
on August 24, 2000. As a result of the split, the number of outstanding shares
of our common stock increased to approximately 29.8 million shares as of
September 1, 2000.
In September 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement was amended by SFAS No. 137 to defer the
effective date to fiscal quarters of fiscal years beginning after September 15,
2000. Management does not anticipate that the adoption of this statement will
have a material effect on our financial statements because we do not presently
utilize derivative instruments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "SAB 101",
"Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. We are required to adopt SAB 101 in the
fourth quarter of 2000. Management does not expect the adoption of SAB 101 to
have a material effect on our financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We have
applied the applicable provisions of FIN 44.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART II - OTHER INFORMATION
Item 1. 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 likely either individually or in the aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
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Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALBANY MOLECULAR RESEARCH, INC.
Date: November 13, 2000 By: /s/ Thomas E. D'Ambra, Ph.D.
-----------------------------------------
Thomas E. D'Ambra, Ph.D.
Chairman and Chief Executive Officer
Date: November 13, 2000 By: /s/ David P. Waldek
-----------------------------------------
David P. Waldek
Treasurer and Chief Financial Officer
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