<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 June 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT AUGUST 10, 2000 (Pre-Split)
----- ------------------------------------------
<S> <C>
Common Stock, $.01 par value 14,879,648
</TABLE>
<PAGE>
ALBANY MOLECULAR RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <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 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
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>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 12,292 $ 3,673
Accounts receivable, net ....................................... 6,207 4,222
Royalty income receivable ...................................... 7,805 5,382
Investment securities, available-for-sale ...................... 16,911 21,172
Inventory ...................................................... 1,118 1,116
Unbilled services .............................................. 107 76
Prepaid expenses and other current assets ...................... 1,567 3,945
--------- ---------
Total current assets ......................................... 46,007 39,586
Property and equipment, net ....................................... 20,709 15,879
Other assets:
Intangible assets and patents, net ............................. 2,385 332
Equity investments in unconsolidated affiliates ................ 15,975 15,033
Convertible subordinated debenture from unconsolidated affiliate 15,000 15,000
Other assets ................................................... 2,300 2,412
--------- ---------
Total other assets ........................................... 35,600 32,777
--------- ---------
Total assets ...................................................... $ 102,376 $ 88,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................... $ 5,222 $ 3,309
Unearned income ................................................ 830 1,480
Current installments of long-term debt ......................... -- 87
Other current liabilities ...................................... 189 278
--------- ---------
Total current liabilities .................................... 6,241 5,154
Long-term liabilities:
Long-term debt, excluding current installments ................. -- 168
--------- ---------
Total liabilities ................................................. 6,241 5,322
--------- ---------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
29,726,148 shares issued and outstanding at June 30, 2000, and
29,187,118 shares issued and outstanding at December 31, 1999 297 292
Additional paid-in capital ..................................... 59,847 56,927
Retained earnings .............................................. 35,996 25,716
Accumulated other comprehensive loss ........................... (5) (15)
--------- ---------
Total stockholders' equity ................................... 96,135 82,920
--------- ---------
Total liabilities and stockholders' equity ........................ $ 102,376 $ 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 SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net contract revenue .............. $ 8,834 $ 5,145 $16,667 $ 9,732
Recurring royalties ............... 7,744 5,850 13,425 10,034
------- ------- ------- -------
Total revenue .................. 16,578 10,995 30,092 19,766
Cost of contract revenue .......... 4,938 2,928 9,324 5,529
Technology incentive award ........ 774 578 1,343 993
Research and development .......... 568 476 986 929
Selling, general and administrative 1,867 1,556 3,769 2,979
------- ------- ------- -------
Total costs and expenses ....... 8,147 5,538 15,422 10,430
------- ------- ------- -------
Income from operations ............ 8,431 5,457 14,670 9,336
Equity in income of unconsolidated
affiliates ................... 243 -- 350 --
Other income, net ................ 632 481 1,345 730
------- ------- ------- -------
Income before income tax expense .. 9,306 5,938 16,365 10,066
Income tax expense ................ 3,444 2,226 6,086 3,773
------- ------- ------- -------
Net income ........................ $ 5,862 $ 3,712 $10,279 $ 6,293
======= ======= ======= =======
Basic earnings per share .......... $ 0.20 $ 0.14 $ 0.35 $ 0.24
======= ======= ======= =======
Diluted earnings per share ........ $ 0.19 $ 0.12 $ 0.33 $ 0.22
======= ======= ======= =======
</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>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................. $ 10,279 $ 6,293
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................... 1,121 866
Tax benefit of stock option exercises ............ 797 --
Provision for doubtful accounts .................. -- 65
Equity earnings in unconsolidated affiliate ...... (350) --
Deferred income tax expense ...................... 139 142
(Increase) decrease in operating assets, net of
business acquisition
Accounts receivable ........................... (1,886) (716)
Royalty income receivable ..................... (2,423) (2,591)
Unbilled services ............................. (31) (54)
Inventory, prepaid expenses and other assets .. 2,237 392
(Decrease) increase in:
Accounts payable and accrued expenses ......... 1,822 (1,049)
Unearned income ............................... (650) 241
Other current liabilities ..................... (69) 352
-------- --------
Net cash provided by operating activities .............. 10,986 3,941
INVESTING ACTIVITIES
Proceeds from sale (purchase) of investments ....... 4,261 (25,397)
Purchase of business, net of cash acquired ......... (869) --
Purchases of property and equipment ................ (5,031) (1,501)
Payment of deposit ................................. -- (1,000)
Payments for patent application costs .............. (5) (9)
Purchase of equity in unconsolidated affiliates .... (674) --
-------- --------
Net cash used in investing activities .................. (2,318) (27,907)
FINANCING ACTIVITIES
Principal payments on long-term debt ............... (838) (14,943)
Proceeds from borrowings on long-term debt ......... -- 300
Proceeds from sale of preferred stock .............. -- 75
Proceeds from sale of common stock ................. 789 51,416
-------- --------
Net cash (used in) provided by financing activities .... (49) 36,848
Increase in cash and cash equivalents .................. 8,619 12,882
Cash and cash equivalents at beginning of period ....... 3,673 5,320
-------- --------
Cash and cash equivalents at end of period ............. $ 12,292 $ 18,202
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
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.
NOTE 2 -- INVESTMENT
In December 1999, the Company made an investment in Organichem Corporation, a
Delaware corporation. Organichem was formed through a management buyout of the
Nycomed Amersham, plc chemical manufacturing facility located in Rensselaer, New
York. The Company acquired shares of common stock of Organichem, representing
37.5% of Organichem common stock as of December 21, 1999, for an aggregate
purchase price of $15.0 million. The Company also lent $15.0 million to
Organichem in the form of a convertible subordinated debenture. The debenture is
convertible at the Company's option on or after December 21, 2002 into that
number of shares sufficient to give the Company 75% equity ownership of
Organichem. The Company can, in 2003, acquire the remaining 25% of Organichem
for a price to be determined based upon Organichem's financial performance,
which would be between $15.0 million and $30.0 million payable at the Company's
option in cash or a combination of cash and stock. In addition, the other
holders of ownership interests in Organichem have the right to require the
Company to purchase their ownership interests in 2004 at a price calculated
using a predetermined formula.
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 $210,000, 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
---------------------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------------- --------------------------------------------
AVERAGE PER AVERAGE PER
SHARES SHARE NET SHARES SHARE
NET INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNTS
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share..... $ 5,862 29,657,753 $ 0.20 $ 3,712 27,136,666 $ 0.14
Dilutive effect of stock
options ..................... -- 1,362,470 -- -- 2,974,154 --
---------- ---------- -------- ---------- ---------- --------
Diluted earnings per share... $ 5,862 31,020,223 $ 0.19 $ 3,712 30,110,820 $ 0.12
========== ========== ======== ========== ========== ========
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------------- --------------------------------------------
AVERAGE PER AVERAGE PER
SHARES SHARE NET SHARES SHARE
NET INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNTS
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share ..... $ 10,279 29,589,750 $ 0.35 $ 6,293 25,907,568 $ 0.24
Dilutive effect of stock
options and grants ........... -- 1,454,858 -- -- 2,839,682 --
---------- ---------- -------- ---------- ---------- --------
Diluted earnings per share ... $ 10,279 31,044,608 $ 0.33 $ 6,293 28,747,250 $ 0.22
========== ========== ======== ========== ========== ========
</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 June 30, 2000 and 1999:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Net income ............................................... $ 5,862 $ 3,712
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale
securities, net of tax benefit .................... 11 (7)
------- -------
Total comprehensive income ...................... $ 5,873 $ 3,705
======= =======
</TABLE>
The following table presents the components of the Company's comprehensive
income for the six months ended June 30, 2000 and 1999:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Net income ............................................... $10,279 $ 6,293
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale
securities, net of tax benefit ..................... 10 (1)
------- -------
Total comprehensive income ...................... $10,289 $ 6,292
======= =======
</TABLE>
NOTE 6 - FINANCIAL INFORMATION BY CUSTOMER CONCENTRATION AND GEOGRAPHIC AREA
Net contract revenue from the Company's three largest customers represented
approximately 22%, 14% and 10% of total consolidated net contract revenue for
the three months ended June 30, 2000, and 20%, 12% and 11% of total consolidated
net contract revenue for the three months ended June 30, 1999. Net contract
revenue from the Company's three largest customers represented approximately
23%, 14% and 9% of total consolidated net contract revenue for the six months
ended June 30, 2000, and 20%, 12% and 11% of total consolidated net contract
revenue for the six months ended June 30, 1999.
The Company's net contract revenue for the three months ended June 30, 2000 and
1999 and the six months ended June 30, 2000 and 1999 was recognized from
customers in the following geographic regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States... 88% 85% 90% 84%
Europe ......... 10% 15% 9% 16%
Other .......... 2% -- 1% --
--- --- --- ---
Total .......... 100% 100% 100% 100%
=== === === ===
</TABLE>
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 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 June 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
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
NOTE 8 - SUBSEQUENT EVENT
On August 7, 2000 the Company announced that its Board of Directors approved a
two-for-one stock split of the Company's outstanding shares of common stock. The
stock split entitles 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 Albany Molecular Research, Inc. Common Stock held on that date. The
additional shares resulting from the stock split will be distributed by the
Company's transfer agent on August 24, 2000. The Company currently has
approximately 14.9 million shares outstanding. Upon completion of the split, the
number will increase to approximately 29.8 million shares. All per share data in
the accompanying financial statements has been retroactively restated to reflect
the two-for-one stock split.
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 Annual
Report on Form 10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 30, 2000, the discussion set forth
below and the matters set forth in this Form 10-Q generally.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE
MONTHS ENDED JUNE 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 second quarter of 2000
increased 71.7% to $8.8 million, compared to $5.1 million for the same period in
1999. This increase was due principally to our performance of 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 189 as of June 30, 2000, from 124 as of June 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 such quarter. Royalty revenue for the second quarter of 2000 increased
32.4% to $7.7 million, compared to $5.9 million in 1999. The increase was
attributable to increased sales of fexofenadine HCl by the licensee.
TOTAL REVENUE. Total revenue consists of net contract revenue and recurring
royalty revenue. Total revenue for the second quarter of 2000 increased 50.8% to
$16.6 million, compared to $11.0 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 68.7% to $4.9 million in the second quarter
of 2000 from $2.9 million for the same period in 1999. Our net contract revenue
margin increased to 44.1% in the second quarter of 2000 from 43.1% for the same
period in 1999, primarily from higher rates generated from our contract
services.
TECHNOLOGY INCENTIVE AWARD. We maintain a Technology Development Incentive Plan,
the purpose of which is to stimulate and encourage novel innovative technology
development, which allows eligible participants to share in awards based on a
percentage of the net revenue earned by us relating to patented technology with
respect to which the eligible participant is named as an inventor. The
technology incentive award expense incurred under our Technology Development
Incentive
10
<PAGE>
Plan increased 34.0% to $774,000 in the second quarter of 2000 compared to
$578,000 for the same period in 1999. The increase was directly attributable to
the increase in royalty revenue.
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 19.3% to $568,000 for the second quarter of 2000 compared to
$476,000 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 20.0% to $1.9 million for the second quarter
of 2000 from $1.6 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 21.1% of net contract revenue in the second
quarter of 2000 as compared to 30.2% in the second 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
second quarter of 2000 increased 47.1% to $8.1 million, compared to $5.5 million
for the same period in 1999.
INCOME TAX EXPENSE. Income tax expense increased to $3.4 million during the
second quarter of 2000 from $2.2 million in the second quarter of 1999. The
effective rate for our provision for income taxes was 38.0% in the second
quarter of 2000 and 37.5% for the same period in 1999.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
REVENUES
NET CONTRACT REVENUE. Net contract revenue for the six months ending June 30,
2000 increased 71.3% to $16.7 million, compared to $9.7 million for the same
period in 1999. This increase was due principally to our performance of 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 189 as of June 30, 2000, from 124 as of June 30,
1999.
RECURRING ROYALTY REVENUE. Royalty revenue for the six months ending June 30,
2000 increased 33.8% to $13.4 million, compared to $10.0 million in 1999. The
increase was attributable to increased sales of fexofenadine HCl by Aventis.
TOTAL REVENUE. Total revenue for the first six months of 2000 increased 52.2% to
$30.1 million, compared to $19.8 million for the same period in 1999.
COSTS AND EXPENSES
COST OF CONTRACT REVENUE. Cost of contract revenue increased 68.6% to $9.3
million in the six months ending June 30, 2000 from $5.5 million for the same
period in 1999. Our net contract revenue margin increased to 44.1% in the six
months ending June 30, 2000 from 43.2% 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 35.3% to $1.3 million
in the six months ending June 30, 2000 compared to $993,000 for the same period
in 1999. The increase was directly attributable to the increase in royalty
revenue.
RESEARCH AND DEVELOPMENT. Research and development expense increased 6.1% to
$986,000 for the six months ending June 30, 2000 compared to $929,000 for the
same period in 1999. The increase was due primarily to an increase in internally
funded research efforts.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 26.5% to $3.8 million for the six months ending June 30, 2000
from $3.0 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 22.6% of net contract revenue in the six months ending June 30, 2000
as compared to 30.6% in the same period in 1999.
TOTAL COSTS AND EXPENSES. Total costs and expenses for the first six months of
2000 increased 47.9% to $15.4 million, compared to $10.4 million for the same
period in 1999.
INCOME TAX EXPENSE. Income tax expense increased to $6.1 million during the six
months ending June 30, 2000 from $3.8 million in the same period of 1999. The
effective rate for our provision for income taxes was 38.0% in the six months
ending June 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 six
months of 2000, we generated cash of $11.0 million from operating activities, of
which approximately $900,000 was used in the acquisition of American Advanced
Organics, $650,000 was used to acquire an equity interest in Fluorous
Technologies, Inc. and approximately $5.0 million was used in expansion-related
projects. During the first six months of 2000, we used $50,000 for financing
activities, consisting of $840,000 in payments on outstanding debt offset by
cash generated of approximately $790,000 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 $39.8 million at June 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 June 30, 2000.
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 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.
In June 2000, the Company 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. The Company has invested $650,000 in Fluorous
Technologies representing an initial 69.9% ownership interest. The
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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.
On August 7, 2000 the Company announced that its Board of Directors has approved
a two-for-one stock split of the Company's outstanding shares of common stock.
The stock split entitles 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 Albany Molecular Research, Inc. Common Stock held on that date. The
additional shares resulting from the stock split will be distributed by the
Company's transfer agent on August 24, 2000. The Company currently has
approximately 14.9 million shares outstanding. Upon completion of the split, the
number will increase to approximately 29.8 million shares.
In June 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 June 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.
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.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities.
During the three months ended June 30, 2000, the Company issued
101,509 shares of Common Stock upon the exercise of outstanding
stock options under the Company's 1992 Stock Option Plan for an
aggregate exercise price of $389,339 to employees of the Company
in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act. In light of the
circumstances under which such shares of Common Stock were issued
and information obtained by the Company in connection with such
transactions, the Company believes that it may rely on such
exemption.
(d) Use of Proceeds from Registered Securities.
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(1) The effective date of the Securities Act registration
statement for which the use of proceeds information is being
disclosed was February 3, 1999, and the Commission file
number assigned to the registration statement is 333-58795.
(2) The offering commenced as of February 4, 1999.
(3) The offering did not terminate before any securities were
sold.
(4) (i) As of the date of the filing of this report, the
offering has terminated and approximately 2,815,000
of the securities registered were sold.
(ii) The names of the managing underwriters were ING
Baring Furman Selz LLC and Hambrecht & Quist LLC.
(iii) The Company's Common Stock, par value $0.01 per
share, was the class of securities registered.
(iv) The Company registered 2,875,000 shares of its Common
Stock (which includes 375,000 shares solely to cover
over-allotments), having an aggregate price of the
offering amount registered of $57.5 million. As of
the date of the filing of this report, 2,815,000 of
the total shares registered have been sold at an
aggregate offering price of $56.3 million.
(v) From February 4, 1999 to the date hereof, the amount
of expenses incurred by the Company in connection
with the issuance and distribution of the securities
totaled $4.9 million, which consisted of direct
payments of: (i) $0.8 million in legal, accounting
and printing fees; (ii) $3.9 million in underwriters'
discounts, fees and commissions; and (iii) $0.2
million in miscellaneous expenses. No payments for
such expenses were made to (i) any of the Company's
directors, officers, general partners or their
associates, (ii) any person(s) owning 10% or more of
any class of equity securities of the Company or
(iii) the Company's affiliates.
(vi) The net offering proceeds to the Company after
deducting its total expenses were $51.4 million.
(vii) The Company used the net proceeds as follows: (i)
approximately $7.9 million was used to repay
indebtedness incurred in connection with the
repurchase by the Company on October 28, 1998 of a
total of 1,131,903 shares of Common Stock from 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"); (ii) approximately $5.0 million
was used to repay a portion of the Company's
outstanding indebtedness under its existing credit
facility with Fleet Bank, N.A., including fees and
accrued and unpaid interest; (iii) approximately $30
million was used for the purchase of common stock and
convertible subordinated debentures of Organichem
Corporation; (iv) approximately $650,000 was used for
the purchase of common stock of Fluorous
Technologies; (v) approximately $900,000 was used in
the acquisition of American Advanced Organics; (vi)
approximately $150,000 was used to repay capital
lease obligations and (vii) approximately $6.8
million was used for renovation and construction
related to the expansion of our facilities. Other
than in connection with the Share Repurchase, no such
payments were made to (i) any of the Company's
directors, officers, general partners or their
associates, (ii) any person(s) owning 10% or more of
any class of equity securities of the Company or
(iii) the Company's affiliates.
(viii) The uses of proceeds described do not represent a
material change in the uses of proceeds described in
the Company's prospectus.
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Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders (the "Annual
Meeting") on June 17, 1999. At the Annual Meeting, stockholders of the
Company voted to elect Chester J. Opalka and Frank W. Haydu, III to
serve as Class I Directors of the company for three-year terms, such
terms to continue until the annual meeting of stockholders in 2002 and
until their respective successors are duly elected and qualified. The
votes cast for, and withheld from, the election of the aforementioned
Directors are listed below:
<TABLE>
<CAPTION>
Votes Votes
Cast For Withheld From
---------- -------------
<S> <C> <C>
Donald E. Kuhla, Ph.D. 12,824,984 1,068,742
Kevin O'Connor 13,787,029 106,694
</TABLE>
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
(1) On April 10, 2000, the Company filed a Current Report on
Form 8-K in connection with its dismissal of KPMG LLP and
engagement of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December
31, 2000.
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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: August 14, 2000 By: /s/ Thomas E. D'Ambra, Ph.D.
-------------------------------------
Thomas E. D'Ambra, Ph.D.
Chairman and Chief Executive Officer
Date: August 14, 2000 By: /s/ David P. Waldek
-------------------------------------
David P. Waldek
Treasurer and Chief Financial Officer
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