Albany Molecular Research
ALBANY MOLECULAR RESEARCH INC (Form: 10-Q, Received: 05/09/2014 14:53:03)

 

 

 

UNITED STATES
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 March 31, 2014

 

¨ 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: 001-3356220

 

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.)

 

26 Corporate Circle

Albany, New York 12212

(Address of principal executive offices)

 

(518) 512-2000

(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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    x   No    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer x  
Non-accelerated filer ¨   Smaller reporting company ¨  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    ¨   No    x

 

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 April 30, 2014
Common Stock, $.01 par value   32,363,770 excluding treasury shares of 5,451,562

 

 

 

 
 

 

ALBANY MOLECULAR RESEARCH, INC.

INDEX

 

Part I.   Financial Information   3
             
    Item 1.   Condensed Consolidated Financial Statements (Unaudited)   3
             
        Condensed Consolidated Statements of Operations   3
        Condensed Consolidated Statements of Comprehensive Income   4
        Condensed Consolidated Balance Sheets   5
        Condensed Consolidated Statements of Cash Flows   6
        Notes to Condensed Consolidated Financial Statements   7
             
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
             
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk   26
             
    Item 4.   Controls and Procedures   26
             
Part II.   Other Information   27
             
    Item 1.   Legal Proceedings   27
             
    Item 1A.   Risk Factors   27
             
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   28
             
    Item 6.   Exhibits   29
             
Signatures       30
             
Exhibit Index        

 

 

2
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

    Three Months Ended  
(Dollars in thousands, except for per share data)   March 31, 2014     March 31, 2013  
             
Contract revenue   $ 51,038     $ 46,493  
Recurring royalties     8,283       12,913  
Total revenue     59,321       59,406  
                 
Cost of contract revenue     41,610       37,822  
Technology incentive award     593       1,114  
Research and development     79       105  
Selling, general and administrative     10,629       9,549  
Postretirement benefit plan settlement gain     (1,285 )      
Restructuring charges     230       879  
Property and equipment impairment charges           534  
Total operating expenses     51,856       50,003  
                 
Income from operations     7,465       9,403  
                 
Interest expense, net     (2,616 )     (137 )
Other (expense) income, net     (40 )     507  
                 
Income before income tax expense     4,809       9,773  
                 
Income tax expense     1,309       3,268  
                 
Net income   $ 3,500     $ 6,505  
                 
Basic and diluted income per share   $ 0.11     $ 0.21  
                 

  See notes to unaudited condensed consolidated financial statements.

 

3
 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

    Three Months Ended March 31,  
    2014     2013  
Net income   $ 3,500     $ 6,505  
Foreign currency translation gain (loss)     644       (683 )
Net actuarial gain related to pension and postretirement benefits     85       125  
Total comprehensive income   $ 4,229     $ 5,947  

 

See notes to unaudited condensed consolidated financial statements.

 

4
 

 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

    March 31,
2014
    December 31,
2013
 
Assets                
Current assets:                
Cash and cash equivalents   $ 166,623     $ 175,928  
Restricted cash     714       714  
Accounts receivable, net     58,111       52,216  
Royalty income receivable     8,367       7,523  
Inventory     35,279       31,991  
Prepaid expenses and other current assets     8,308       7,061  
Deferred income taxes     3,017       3,586  
Total current assets     280,419       279,019  
                 
Property and equipment, net     127,365       127,775  
Notes hedges     78,902       22,654  
Restricted cash     3,631       3,810  
Intangible assets and patents, net     3,033       3,042  
Deferred income taxes     1,452       2,047  
Other assets     6,689       6,921  
Total assets   $ 501,491     $ 445,268  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable and accrued expenses   $ 26,855     $ 30,174  
Deferred revenue and licensing fees     7,319       6,588  
Arbitration reserve     1,351       1,351  
Income taxes payable     1,671       3,954  
Accrued pension benefits     847       811  
Current installments of long-term debt     1,024       1,024  
Total current liabilities     39,067       43,902  
Long-term liabilities:                
Long-term debt, excluding current installments     124,349       123,135  
Notes conversion derivative     78,902       22,654  
Deferred licensing fees     1,444       1,926  
Pension and postretirement benefits     4,535       6,059  
Deferred income taxes     632       631  
Other long-term liabilities     31       1,257  
Total liabilities     248,960       199,564  
Commitments and contingencies                
Stockholders’ equity:                
Preferred stock, $0.01 par value, 2,000 shares authorized, none issued or outstanding            
Common stock, $0.01 par value, 50,000 shares authorized, 37,805 shares issued as of March 31, 2014 and 37,023 shares issued as of December 31, 2013     378       370  
Additional paid-in capital     238,710       235,806  
Retained earnings     91,357       87,857  
Accumulated other comprehensive loss, net     (10,548 )     (11,277 )
      319,897       312,756  
Less, treasury shares at cost, 5,451 shares as of March 31, 2014 and 5,425 shares as of December 31, 2013     (67,366 )     (67,052 )
Total stockholders’ equity     252,531       245,704  
Total liabilities and stockholders’ equity   $ 501,491     $ 445,268  

 

See notes to unaudited condensed consolidated financial statements.

 

5
 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

    Three Months Ended  
(Dollars in thousands)   March 31, 2014     March 31, 2013  
             
Operating activities                
Net income   $ 3,500     $ 6,505  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:                
Depreciation and intangible amortization     3,761       4,063  
Deferred financing amortization     301       54  
Accretion of discount on long-term debt     1,394        
Deferred income tax benefit     458       1,534  
Loss on disposal of property, plant and equipment     48       67  
Property and equipment impairment           534  
Stock-based compensation expense     933       506  
Gain on settlement of post-retirement liability     (1,285 )      
    Excess tax benefit of stock option exercises     (635 )     (352 )
Provision for bad debt           52  
Changes in assets and liabilities that provide (use) cash:                
Accounts receivable     (5,895 )     6,099  
Royalty income receivable     (844 )     (4,798 )
Inventory     (3,288 )     (4,547 )
Prepaid expenses and other assets     (1,163 )     (2,802 )
Accounts payable and accrued expenses     (4,543 )     (1,931 )
Income taxes     (1,015 )     1,541  
Deferred revenue and licensing fees     249       523  
Pension and postretirement benefits     (47 )     125  
Other long-term liabilities     (2 )     (41 )
Net cash (used in) provided by operating activities     (8,073 )     7,132  
                 
Investing activities                
Purchase of property, plant and equipment     (2,952 )     (2,446 )
Payments for patent applications and other costs     (102 )     (116 )
Net cash used in investing activities     (3,054 )     (2,562 )
                 
Financing activities                
Principal payments on long-term debt     (180 )     (1 )
Deferred financing costs     (154 )      
Change in restricted cash     179       (151 )
Proceeds from sale of common stock     1,344       629  
Purchases of treasury stock     (314 )      
Excess tax benefit of stock option exercises     635       352  
Net cash provided by financing activities     1,510       829  
                 
Effect of exchange rate changes on cash     312       (157 )
                 
(Decrease) increase in cash and cash equivalents     (9,305 )     5,242  
                 
Cash and cash equivalents at beginning of period     175,928       23,293  
                 
Cash and cash equivalents at end of period   $ 166,623     $ 28,535  

 

See notes to unaudited condensed consolidated financial statements.

 

6
 

 

(All amounts in thousands, except per share amounts, unless otherwise noted)

 

Note 1 — Summary of Operations and Significant Accounting Policies

 

Nature of Business and Operations

 

Albany Molecular Research, Inc. (the “Company”) provides scientific services, technologies and products focused on improving the quality of life. With locations in the U.S., Europe, and Asia, the Company provides customers with a range of services and cost models. The Company’s core business consists of a fee-for-service contract services platform encompassing drug discovery, development and manufacturing. The Company also owns a portfolio of proprietary technologies which have resulted from its internal programs, including drug discovery and niche generic products and manufacturing process efficiencies, some of which are licensed to third parties, and some of which benefit the Company’s operations.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of March 31, 2014. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Unrealized gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive loss in the accompanying unaudited condensed consolidated balance sheets. When necessary, prior years’ unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

 

Use of Management Estimates

 

The preparation of financial statements in conformity with U.S. 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. The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the valuation of inventory, intangible assets, and long-lived assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension plan, the amount and realizabilty of deferred tax assets, assumptions utilized in determining stock-based compensation, assumptions utilized in determining the value of both the notes hedges and the notes conversion derivative and assumptions related to the collectability of receivables. Actual results can vary from these estimates.

 

Contract Revenue Recognition

 

The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the FASB’s Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated pro rata across the components of the arrangement. If separate selling prices are not available, the Company will use the best estimate of selling price, consistent with the overall pricing strategy and after consideration of relevant market factors.

 

7
 

 

The Company generates contract revenue under the following types of contracts:

 

Fixed-Fee . Under a fixed-fee contract, the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue recognition process is considered complete when project documents have been delivered to the customer, as required under the arrangement, or other customer-specific contractual conditions have been satisfied.

 

Full-time Equivalent (“FTE”).  An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.

 

These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.

 

Time and Materials. Under a time and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

 

Recurring Royalties, Up-Front License Fees and Milestone Revenue Recognition

 

Recurring Royalties Revenue . Recurring royalties include royalties under a license agreement with Sanofi based on the worldwide net sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s authorized or licensed generics and sales by certain authorized sub-licensees. The Company records royalty revenue in the period in which the net sales of Allegra/Telfast occur, because it can reasonably estimate such royalties. Royalty payments from Sanofi are due within 45 days after each calendar quarter and are determined based on net sales of Allegra/Telfast and Teva Pharmaceuticals’ net sales of generic D-12 in that quarter. The Company receives additional royalties in conjunction with a Development and Supply Agreement with Actavis, Inc. (“Actavis”). These royalties, which the Company began receiving in the third quarter of 2012, are earned on Actavis’ net sales of a generic product. The Company records royalty revenue in the period in which the net sales of this product occur. Royalty payments from Actavis are due within 60 days after each calendar quarter and are determined based on sales of the qualifying product in that quarter.

 

Up-Front License Fees and Milestone Revenue . The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.

 

The Company has discovered and conducted the early development of several new drug candidates, with a view to out- licensing these candidates to partners for further development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.

 

On October 20, 2005, the Company entered into a License and Research Agreement with Bristol-Myers Squibb (“BMS”) for a program of compounds that encompass biogenic amine reuptake inhibitors in development for the treatment of depression and other central nervous system disorders. As amended, the agreement is referred to herein as the “BMS Agreement”.

 

8
 

 

On December 20, 2010, the Company entered into a Research Collaboration and License Agreement with Genentech, Inc. (“Genentech”) (the “Genentech Agreement”, and collectively with the BMS Agreement, the “Agreements”) for a family of antibacterial compounds discovered from the Company’s proprietary research of its natural products sample collection.

 

Under the terms of the Agreements, the Company received upfront licensing fees and research funding to further develop the licensed compounds. In addition, the Company is eligible to receive development and regulatory milestones for each licensed compound, as well as royalties on sales of commercialized compounds if any.

 

Under the terms of the Agreements, the Company may receive milestone payments for each compound advanced by BMS and Genentech upon achievement of certain clinical and regulatory milestones as follows:

 

· Up to $14,000 in clinical development milestones; and

 

· Up to $30,000 in regulatory milestones, due upon acceptance and/or approval of new drug application filings with regulatory agencies in various jurisdictions.

 

The Company has determined the milestones contained in these Agreements to be substantive milestones in accordance with ASC 605-28-25. In evaluating the milestones included in the Agreements, the Company considered the following:

 

· The Company considered each individual milestone to be commensurate with the enhanced value of the underlying licensed intellectual property as it is advanced from the development stage to a commercialized product, and considered them to be reasonable when evaluated in relation to the total agreement consideration, including other milestones.

 

· The milestones are deemed to relate solely to past performance, as each milestone is payable to the Company only after the achievement of the related event defined in the agreement, and is not refundable if additional future success events do not occur.

 

No milestone revenue was recognized in the three months ended March 31, 2014 or 2013.

 

Cash, Cash Equivalents and Restricted Cash

 

Cash equivalents consist of money market accounts and overnight deposits. Some of our cash is deposited with financial institutions located throughout the U.S. and at banks in foreign countries where we operate subsidiary offices and at times may exceed insured limits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

Upon entering into a new credit agreement in April 2012, the Company was required to maintain a $5,000 restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement is directly reduced by the amount of principal payments made on the term loan which began in May 2013. The restricted cash balance at March 31, 2014 was $4,345. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating both the term loan liability and restricted cash balances.

 

Long-Lived Assets

 

The Company assesses the impairment of a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, among others, the following:

 

· a significant change in the extent or manner in which a long-lived asset group is being used;

 

· a significant change in the business climate that could affect the value of a long-lived asset group; or

 

· a significant decrease in the market value of assets.

 

If the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of the long-lived assets.

 

9
 

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivatives in accordance with FASB ASC Topic 815, Derivative and Hedging , which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value. Additionally, changes in the derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.

 

Note 2 — Earnings Per Share

 

The shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

 

    Three Months Ended 
March 31,
 
    2014     2013  
Weighted average common shares outstanding - basic     31,282       30,650  
Dilutive effect of share-based compensation     1,073       713  
Weighted average common shares outstanding - diluted     32,355       31,363  

 

The Company has excluded certain outstanding stock options, non-vested restricted stock and warrants from the calculation of diluted earnings per share for the three months ended March 31, 2014 and 2013 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents outstanding (before the effects of the treasury stock method) was 10,000 and 1,020 for the three months ended March 31, 2014 and 2013, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

Note 3 — Inventory

 

Inventory consisted of the following March 31, 2014 and December 31, 2013:

 

    March 31,
2014
    December 31,
2013
 
Raw materials   $ 14,287     $ 13,294  
Work in process     4,690       3,314  
Finished goods     16,302       15,383  
Total inventories, at cost   $ 35,279     $ 31,991  

 

Note 4 –Debt

 

The following table summarizes long-term debt:

 

    March 31,
2014
    December 31,
2013
 
Convertible senior notes, net of unamortized debt discount   $ 118,325     $ 116,931  
Term loan     4,345       4,524  
Industrial development authority bond     2,695       2,695  
Miscellaneous loan     8       9  
      125,373       124,159  
Less current portion     (1,024 )     (1,024 )
Total long-term debt   $ 124,349     $ 123,135  

 

10
 

 

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $31,675 at March 31, 2014, are as follows:

 

2014 (remaining)   $ 844  
2015     1,029  
2016     1,034  
2017     2,711  
2018     150,340  
Thereafter     1,090  
Total   $ 157,048  

 

Convertible Senior Notes

 

On December 4, 2013, the Company completed a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”), dated as of December 4, 2013 between the Company and Wilmington Trust, National Association, as Trustee.  The Notes will mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date and interest will be paid in arrears semiannually on each May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the " Securities Act ").

 

The Notes are not convertible into the Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount in cash equal to the settlement amount, determined in the manner set forth in the indenture.

 

The initial conversion rate is 63.9844   shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment in some events as described in the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in the indenture.

 

The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

 

The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC Topic 815, Derivatives and Hedging , and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the three months ended March 31, 2014, the Company recorded $1,394 of amortization of the debt discount as interest expense based upon an effective rate of 7.69%.

 

11
 

 

The components of the Notes were as follows:

 

    March 31,
2014
    December 31,
2013
 
Principal amount   $ 150,000     $ 150,000  
Unamortized debt discount     31,675       33,069  
Net carrying amount of Notes   $ 118,325     $ 116,931  

 

In connection with the pricing of the Notes, on November 19, 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating to a notional number of shares of the Company's common stock underlying the Notes to be issued by the Company with two counterparties (the " Option Counterparties "). The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that we are required to make upon conversion of the Notes in excess of the principal amount of converted notes if our common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with ASC Topic 815. The aggregate cost of the note hedge transaction was $33,600.

 

At the same time, the Company also entered into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares of the Company's common stock underlying the note hedge transactions. The cash convertible note hedge transactions are intended to offset cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the warrants. The initial strike price of the warrants is $18.9440   per share, which is 60% above the last reported sale price of the Company's common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received from the Option Counterparties from the sale of the warrants.

 

Aside from the initial payment of a $33,600 premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.

 

Neither the Notes Conversion Derivative nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized immediately in the statement of operations. As of March 31, 2014, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal, therefore there was no change in fair market value that was recognized in the statement of operations.

 

The following table summarizes the fair value and the presentation in the consolidated balance sheet:

 

    Location on Balance Sheet   March 31,
2014
    December 31,
2013
 
Notes Hedges   Other assets   $ 78,902     $ 22,654  
Notes Conversion Derivative   Other liabilities   $ (78,902 )   $ (22,654 )

 

Term Loan and Revolving Credit Facility

 

In April 2012, the Company entered into a $20,000 credit facility consisting of a 4-year, $5,000 term loan and a $15,000 revolving line of credit. The Company used a portion of the initial proceeds borrowed under the term loan to repay all amounts due under its prior credit agreement. As of March 31, 2014, the Company had no amounts outstanding on the revolving line of credit and $5,819 of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at March 31, 2014 is $9,181.

 

Borrowings under this agreement bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of March 31, 2014, the interest rate on the term loan was 3.5%.

 

12
 

The credit facility contains financial covenants, including a minimum fixed charge coverage ratio which commenced in 2013 and extends for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations. As of March 31, 2014, the Company was in compliance with its current financial covenants.

 

In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating both the term loan liability and restricted cash balances. The Company continues to maintain the $15,000 revolving line of credit component and the outstanding letters of credit secured by this line.

 

IDA Bonds

 

The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current interest rate of 0.17% at March 31, 2014. The amount outstanding as of March 31, 2014 was $2,695.

 

Note 5 — Restructuring and Impairment

 

In the first quarter of 2014, the Company recorded $230 of restructuring charges in its Discovery, Drug Development and Small Scale Manufacturing (“DDS”) operating segment primarily related to administrative costs associated with finalizing the closure of its Hungarian legal entity.

 

The following table displays the restructuring activity and liability balances for the three month period ended and as of March 31, 2014:

 

    Balance at
January 1,
2014
    Charges/
(reversals)
    Amounts
Paid
    Foreign
Currency
Translation &
Other
Adjustments
    Balance at
March 31,
2014
 
Termination benefits and personnel realignment   $ 323     $ 43     $ (62 )     (4 )   $ 300  
Lease termination and relocation charges     3,582       187       (1,484 )           2,285  
Other     471                         471  
Total   $ 4,376     $ 230     $ (1,546 )   $ (4 )   $ 3,056  

 

Termination benefits and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring. Lease termination charges relate to estimated costs associated with exiting a facility, net of estimated sublease income.

 

Restructuring charges are included under the caption “Restructuring charges” in the consolidated statements of operations for the three months ended March 31, 2014 and 2013 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the consolidated balance sheets at March 31, 2014 and December 31, 2013.

 

Anticipated cash outflow related to the restructuring reserves as of March 31, 2014 for the remainder of 2014 is approximately $3,056.

 

In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $534 in the DDS segment in the first quarter of 2013. These charges are included under the caption “Property and equipment impairment” on the Consolidated Statement of Operations for the three months ended March 31, 2013.

 

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Note 6 —Intangible Assets

 

The components of intangible assets are as follows:

 

    Cost     Accumulated
Amortization
    Net     Amortization
Period
March 31, 2014                            
Patents and Licensing Rights   $ 4,422     $ (1,586 )   $ 2,836     2-16 years
Customer Relationships     815       (618 )     197     5 years
Total   $ 5,237     $ (2,204 )   $ 3,033      
                             
December 31, 2013                            
Patents and Licensing Rights   $ 4,318     $ (1,514 )   $ 2,804     2-16 years
Customer Relationships     815       (577 )     238     5 years
Total   $ 5,133     $ (2,091 )   $ 3,042      

 

Amortization expense related to intangible assets was $111 and $103 for the three months ended March 31, 2014 and 2013, respectively.

 

The following chart represents estimated future annual amortization expense related to intangible assets:

 

Year ending December 31,      
2014 (remaining)   $ 324  
2015     344  
2016     269  
2017     269  
2018     264  
Thereafter     1,563  
Total   $ 3,033  

 

Note 7 — Share-Based Compensation

 

During the three months ended March 31, 2014 and 2013, the Company recognized total share based compensation cost of $933 and $506, respectively.

 

The Company grants share-based compensation, including restricted shares, under its 2008 Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase Plan.

 

Restricted Stock

 

A summary of unvested restricted stock activity during the three months ended March 31, 2014 is presented below:

 

    Number of
Shares
    Weighted
Average Grant Date
Fair Value Per
Share
 
Outstanding, January 1, 2014     509     $ 6.28  
Granted     535     $ 10.96  
Vested     (139 )   $ 5.77  
Forfeited     (9 )   $ 7.20  
Outstanding, March 31, 2014     896     $ 9.15  

 

As of March 31, 2014, there was $7,150 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 3.4 years. Of the 896 restricted shares outstanding, the Company currently expect 875 shares to vest.

 

Stock Options

 

The fair value of each stock option award is estimated at the date of grant using the Black-Scholes valuation model based on the following assumptions:

 

    For the Three Months Ended  
    March 31, 2014     March 31, 2013  
Expected life in years     5       5  
Risk free interest rate     1.52 %     0.82 %
Volatility     53 %     56 %
Dividend yield            

 

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A summary of stock option activity under the Company’s Stock Option and Incentive Plans during the three month period ended March 31, 2014 is presented below:

 

    Number of
Shares
    Weighted Average
Exercise
Price Per Share
    Weighted Average
Remaining
Contractual Term
(Years)
    Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2014     2,046     $ 5.62                  
Granted     326       10.37                  
Exercised     (219 )     4.74                  
Forfeited     (40 )     9.07                  
Expired     (92 )     15.85                  
Outstanding, March 31, 2014     2,021     $ 5.95       7.7     $ 25,550  
Options exercisable, March 31, 2014     970     $ 5.63       6.8     $ 12,572  

 

The weighted average fair value of stock options granted for the three months ended March 31, 2014 and 2013 was $4.85 and $2.86, respectively. As of March 31, 2014, there was $2,813 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.8 years. Of the 2,021 stock options outstanding, the Company currently expect 1,958 options to vest.

 

Employee Stock Purchase Plan

 

During the three months ended March 31, 2014 and 2013, 36 and 100 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan (“ESPP”).

 

During the three months ended March 31, 2014 and 2013, cash received from stock option exercises and employee stock purchases was $1,344 and $629, respectively. The excess tax benefit realized for the tax deductions from share based compensation was $635 and $352 for the three months ended March 31, 2014 and 2013, respectively.

 

Note 8 — Operating Segment Data

 

The Company has organized its sales, marketing and production activities into the DDS and Large-Scale Manufacturing (“LSM”) segments based on the criteria set forth in ASC 280, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s management relies on an internal management accounting system to report results of the segments. The system includes revenue and cost information by segment. The Company’s management makes financial decisions and allocates resources based on the information it receives from this internal system.

 

DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. LSM includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

 

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The following table contains earnings data by operating segment, reconciled to totals included in the unaudited condensed consolidated financial statements:

 

    Contract
Revenue
    Milestone &
Recurring
Royalty
Revenue
    Income
(Loss) 
from
Operations
    Depreciation
and
Intangible
Amortization
 
For the three months ended March 31, 2014                                
DDS   $ 19,501     $ 5,975     $ 8,312     $ 1,751  
LSM     31,537       2,308       9,782       2,010  
Corporate                 (10,629 )      
Total   $ 51,038     $ 8,283     $ 7,465     $ 3,761  
                                 
For the three months ended March 31, 2013                                
DDS   $ 20,096     $ 11,141     $ 11,853     $ 2,092  
LSM     26,397       1,772       7,099       1,971  
Corporate                 (9,549 )      
Total   $ 46,493     $ 12,913     $ 9,403     $ 4,063  

 

The following table summarizes other information by segment as of and for the three month period ended March 31, 2014:

 

    DDS     LSM     Total  
Total assets   $ 309,069     $ 192,422     $ 501,491  
Investments in unconsolidated affiliates     956             956  
Capital expenditures     794       2,158       2,952  

 

The following table summarizes other information by segment as of and for the three month period ended March 31, 2013:

 

    DDS     LSM     Total  
Total assets   $ 118,912     $ 151,085     $ 269,997  
Investments in unconsolidated affiliates     956             956  
Capital expenditures     459       1,987       2,446  

 

Note 9 — Financial Information by Customer Concentration and Geographic Area

 

Total contract revenue from DDS’s three largest customers each represented approximately 9%, 8% and 8% for the three months ended March 31, 2014, and 8%, individually, of DDS’s total contract revenue for the three months ended March 31, 2013. Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 31% and 32% of LSM’s total contract revenue for the three months ended March 31, 2014 and 2013, respectively. GE accounted for approximately 19% and 18% of the Company’s total contract revenue for the three months ended March 31, 2014 and 2013, respectively. LSM’s second largest customer represented 15% and 16% of LSM’s total contract revenue for the three months ended March 31, 2014 and 2013, respectively.

 

The Company’s total contract revenue for the three months ended March 31, 2014 and 2013 was recognized from customers in the following geographic regions:

 

    Three Months Ended March 31,  
    2014     2013  
             
United States     63 %     63 %
Europe     25       21  
Asia     9       13  
Other     3       3  
                 
Total     100 %     100 %

 

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Long-lived assets by geographic region are as follows:

 

    March 31,
2014
    December 31,
2013
 
United States   $ 106,606     $ 107,403  
Asia     17,665       17,449  
Europe     6,127       5,965  
Total long-lived assets   $ 130,398     $ 130,817  

 

Note 10 — Legal Proceedings

 

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below, 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, results of operations or cash flows.

 

Allegra:

 

As of early in the first quarter of 2014, the Company settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and Allegra-D products. All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties. The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and will receive royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid. The Company is also entitled to receive certain royalties from Sanofi and certain approved sub-licensees through mid-2015, unless the relevant patent(s) are earlier determined to be invalid.

 

Other:

 

In 2013, the Company settled litigation that was brought by a former vendor related to a contract cancellation, and the litigation was terminated.  The Company recorded a charge of $1,920 in 2013 representing the payment made upon finalizing the settlement agreement.

 

Note 11 – Fair Value

 

The Company determines its fair value of financial instruments using the following methods and assumptions:

 

Cash and cash equivalents, restricted cash, receivables, and accounts payable:  The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.

 

Convertible senior notes, derivatives and hedging instruments: The fair values of the Company’s Notes, which differ from their carrying values, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs. The estimated fair value of the Notes at March 31, 2014 was $203,250. The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.

 

Long-term debt, other than convertible senior notes:  The carrying value of long-term debt approximated fair value at March 31, 2014 and December 31, 2013 due to the resetting dates of the variable interest rates.

 

The Company uses a framework for measuring fair value in generally accepted accounting principles and making disclosures about fair value measurements.  A three-tiered fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.  

 

These tiers include:  

Level 1 – defined as quoted prices in active markets for identical instruments;

 

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Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

Note 12 – Accumulated Other Comprehensive Income (Loss)

 

The activity related to accumulated other comprehensive income (loss) was as follows:

 

    Pension and
postretirement
benefit plans
    Foreign
currency
adjustments
    Total
Accumulated
Other
Comprehensive
Loss
 
Balance at December 31, 2013, net of tax   $ (4,140 )   $ (7,137 )   $ (11,277 )
Net current period change, net of tax     85       644       729  
Balance at March 31, 2014, net of tax   $ (4,055 )   $ (6,493 )   $ (10,548 )

 

The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive income (loss):

    Three Months
Ended
March 31, 2014
    Three Months
Ended
March 31, 2013
 
Amortization of pension and other postretirement benefits (a)                
Actuarial losses   $ 156     $ 192  
Total before tax effect     156       192  
Tax benefit on amounts reclassified into earnings     (55 )     (67 )
    $ 101     $ 125  

 

(a)     Amounts represent amortization of net actuarial loss from shareholders’ equity into postretirement benefit plan cost. This amount was primarily recognized as cost of contract revenue in the consolidated statement of operations.

 

Note 13 – Employee Benefit Plans

 

In the first quarter of 2014, the union ratified an action to settle the medical component of the post-retirement plan, significantly reducing the level of benefits available to the participants. As a result, the Company recorded $1,285 of operating income in the first quarter of 2014 due to the settlement of this obligation.

 

Note 14 – Subsequent Events

 

In April 2014, the Company announced the completion of the acquisition of Cedarburg Pharmaceuticals, Inc., a contract developer and manufacturer of technically complex active pharmaceutical ingredients (“API’s”) for both generic and branded customers. Total consideration paid, pending the completion of purchase accounting adjustments, was $39,745, including assumption of certain liabilities. AMRI financed the transaction with cash on hand.

 

On April 16, 2014, the Company announced that it will be transitioning DDS activities at its Syracuse, N.Y. site to other sites within the Company and will cease operations in Syracuse by the end of June 2014. The Company estimates that it will incur certain one-time cash and non-cash charges related to the reduction in force and other transition activities between $5,750 and $6,500, which includes $3,750 to $4,250 in non-cash fixed asset impairment charges. Cash charges will consist of $2,000 to $2,250 for employee and other related costs and will primarily be paid during the second half of 2014. The Company expects the majority of these charges to be recorded in the second and third quarters of 2014.

 

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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 quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”) and Genentech, expected benefits from the acquisition of Cedarburg Pharmaceuticals, Inc., future acquisitions or divestitures, earnings, contract revenues, costs and margins, patent protection, Allegra® and Actavis royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, long-lived asset impairment, pension costs, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 17, 2014, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

 

Strategy and Overview

 

We are a global contract research and manufacturing organization uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers. Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large-scale manufacturing projects throughout our global network of research and manufacturing facilities. We believe we have a unique portfolio of service offerings ranging from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia. We believe this product and geographic mix will continue to allow us to increase multi-year strategic relationships and enhance our revenue growth with a variety of customers. In 2014 and beyond, we are targeting growth and increased profitability across the discovery and early development, API manufacturing and formulation manufacturing service offerings.

 

As part of our strategy to accomplish this, we have made investments in our organizational leadership following the announcement of the retirement of our Company founder from his role as President and CEO after 22 years, to Chairman of the Board, effective January 1, 2014. Simultaneously, the Chairman of the Board assumed the role of President and CEO, and stepped down as Chairman of the Board. Also in late 2013, our new Senior Vice President, Drug Discovery joined the Company and in January 2014, our Senior Vice President, Sales and General Manager, API joined the Company. The appointment of other highly experienced, key personnel, underscore AMRI’s dedication to client service, operational excellence, and growth. We have enhanced and unified our sales and marketing organization under this new global leadership to optimize selling opportunities and management of key accounts across our business segments. We believe our strengthened organizational structure, combined with more focused sales and marketing efforts, should enable us to drive long term growth across diversified segments and increased sustainable profitability.

 

Market trends continue to point to outsourcing as an increasingly important part of business strategies for our customers across the discovery, development and API and formulation manufacturing areas, including both generic and branded products. We believe our ability to offer a full service model, which also allows customers to use a combination of our U.S., Europe and Asia based facilities, will result in an increase in demand for our services globally. We also offer our customers the option of insourcing, a strategic relationship that embeds AMRI scientists into the customer’s facility, allowing them to cost-effectively leverage their unused laboratory space.

 

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AMRI’s SMARTSOURCING™ initiative, offering a full range of value-added opportunities, provides customers informed decision-making, enhanced efficiency and more successful outcomes at all stages of the pipeline. This approach maximizes the strengths of both insourcing and outsourcing by leveraging AMRI’s expertise, global facilities and project management to provide strategic relationships and flexible business models for customers.

 

We are also continuing to focus our efforts on other important customer segments: small and large biotech companies, non-profit/government entities and related industries such as the agricultural, nutraceutical and food industries. We believe maintaining a balance within our customer portfolio between large pharmaceutical, non-profit/government, biotech and other companies will help ensure sustained sales and reduce risk.

 

We have made investments to grow our formulation and injectable drug product business at our Burlington, MA facility. We believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated and manufactured on an aseptic basis.

 

The cost base of our manufacturing and research facilities is largely fixed in nature. However, we continue to seek opportunities to minimize these fixed costs, with a focus on gaining flexibility and improving efficiency, cost structure and margin.

 

During 2012, we transitioned certain services from Hungary to India, and in 2013, ceased all activities in Hungary. During 2013, we further transitioned certain biology services from Bothell, WA to Singapore and Albany, NY.  These actions were taken to better align the business to customer demand and current and expected market conditions due to shifting preferences related to the preferred co-localization of integrated drug discovery activities.

 

In April 2014, we announced the transitioning of our DDS activities at our Syracuse, NY site to other sites within the Company and will cease operations in Syracuse by the end of June 2014. These actions are consistent with our ongoing efforts to consolidate our facility resources to more effectively utilize its discovery and development resource pool and to further reduce our facility cost structure.

 

Although we suspended substantial investments and halted proprietary compound R&D activities in 2011, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market. One compound was successfully partnered in early 2013. We are continuing to focus on partnering other programs.

 

We may consider acquisitions that enhance or complement our existing service offerings. In addition to growing the Company organically, any acquisitions would generally be expected to contribute to AMRI’s growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle.

 

Most recently, in April 2014, we announced the completion of the acquisition of Cedarburg Pharmaceuticals, Inc. (“Cedarburg Pharmaceuticals”), a contract developer and manufacturer of technically complex active pharmaceutical ingredients for both generic and branded customers. The transaction is consistent with our strategy to be the preeminent supplier of custom and complex drug development services and product to both the branded and generic pharmaceutical industry. Customers will benefit from access to a greater breadth of resources, including development of complex API, expanded scale-up capabilities and large scale manufacturing in lower cost environments.

 

Our backlog of open manufacturing orders and accepted service contracts was $115.9 million at March 31, 2014 as compared to $110.6 million at March 31, 2013. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

 

We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, contracts vary in duration, and as such the timing and amount of revenues recognized from backlog can vary from period to period. Second, the Company’s manufacturing and services contracts are of a nature that a customer may, at its option, cancel or delay the timing of delivery, which would change our projections concerning the timing and extent to which revenue may be recognized. In addition, the value of the Company’s services contracts that are conducted on a time and materials or full-time equivalent basis are based on estimates, from which actual revenue generated could vary. Finally, there is no assurance that projects included in backlog will not be terminated or delayed at any time by customers or regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.

 

Our total revenue for the quarter ended March 31, 2014 was $59.3 million, which included $51.0 million from our contract service business and $8.3 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis. Consolidated gross margin was 18.5% for the quarter ended March 31, 2014.

 

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During the quarter ended March 31, 2014, cash used in operations was $8.1 million compared to cash provided by operations of $7.1 million for the same period of 2013. Cash used in operations was primarily driven by the manufacturing of inventory for future customer orders, an increase in customer receivables due to the timing of invoicing and cash collections within the quarter, and the payment of accounts payable and other accrued liabilities during the quarter. During the three months ended March 31, 2014, we spent $3.0 million on capital expenditures, primarily related to growth and maintenance of our existing facilities. As of March 31, 2014, we had $166.6 million in cash and cash equivalents and $125.4 million in bank and other related debt, the largest portion of both the cash and the debt are a result of an offering of senior convertible notes sold by us in fourth quarter of 2013.

 

Results of Operations – Three Months ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

Revenues

 

Total contract revenue

 

Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Our contract revenues for each of our Discovery, Drug Development and Small Scale Manufacturing (“DDS”) and Large-Scale Manufacturing (“LSM”) segments were as follows:

 

    Three Months Ended
March 31,
 
(in thousands)   2014     2013  
             
DDS   $ 19,501     $ 20,096  
LSM     31,537       26,397  
Total   $ 51,038     $ 46,493  

 

DDS contract revenues for the three months ended March 31, 2014 decreased from the same period in 2013. This decrease was primarily due to a decrease in U.S. chemistry services and U.S. biology services. These decreases were off-set in part by an increase in U.S. development and small-scale services.

 

We currently expect DDS contract revenue for full year 2014 to increase from amounts recognized in 2013 driven by improved facility utilization at all of our sites.

 

LSM revenue increased for the three months ended March 31, 2014 from the same period in 2013 primarily due to an increase in commercial manufacturing services, as well as in our clinical supply manufacturing services. In addition, we expect to recognize incremental revenues as a result of the acquisition of Cedarburg Pharmaceuticals in the second quarter of 2014.

 

We currently expect continued growth in LSM contract revenue for full year 2014 due to on-going demand for our existing commercial manufacturing services and clinical supply manufacturing services worldwide, as well as incremental revenues expected as a result of the acquisition of Cedarburg Pharmaceuticals.

 

Recurring royalty revenue

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 8,283     $ 12,913  

 

The largest portion of our recurring royalties relates to worldwide sales of Allegra/Telfast and Sanofi over-the-counter (“OTC”) product and authorized generics. Additionally, beginning in the third quarter of 2012 we have earned recurring royalty revenue in conjunction with a Development and Supply Agreement with Actavis at the Company’s Rensselaer, NY manufacturing facility.

 

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Recurring royalties decreased during the three months ended March 31, 2014 from the same period in 2013 primarily due to the incremental effect of the introduction of generic fexofenadine in Japan in the later part of the first quarter of 2013. Additionally, there was a decrease in Allegra royalties as a result of patent expirations that began in late 2013, as well as a slower start to Japan’s allergy season in 2014. These decreases were partially offset by an increase in Actavis royalties.

 

We currently expect full year 2014 recurring royalties to decrease from amounts recognized in 2013, as previously announced, primarily due to patent expirations of Allegra that began in 2013 along with the introduction of generic fexofenadine in Japan during the first quarter of 2013. These decreases will be partially offset by a slight increase in Actavis royalties.

 

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These U.S. patents began to expire in November 2013. The international patents begin to expire in 2014 and most of these patents are covered by our license agreements with Sanofi. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

 

Costs and Expenses

 

Cost of contract revenue

 

Cost of contract revenue consists of compensation and associated fringe benefits for employees, chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:

 

    Three Months Ended March 31,  
Segment   2014     2013  
(in thousands)            
             
DDS   $ 16,287     $ 16,772  
LSM     25,323       21,050  
Total   $ 41,610     $ 37,822  
                 
DDS Gross Margin     16.5 %     16.5 %
LSM Gross Margin     19.7 %     20.3 %
Total Gross Margin     18.5 %     18.6 %

 

DDS contract revenue gross margin percentage for the three months ended March 31, 2014 remained flat with prior year.

 

We currently expect DDS contract margin percentage for 2014 to improve over amounts recognized in 2013 due to improved facility utilization.

 

LSM contract revenue gross margin percentages for the three months ended March 31, 2014 decreased slightly from the same period in 2013 primarily due to sales of higher margin products for our U.S. manufacturing services in 2013.

 

We currently expect improvement in LSM contract margins for full year 2014 as compared to full year 2013 driven by an increase in capacity utilization at all of our large-scale facilities worldwide, including the expected accretive benefit of gross margin percentages from the Cedarburg Pharmaceuticals acquisition in the second quarter of 2014.

 

Technology incentive award

 

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments 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 participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. The incentive awards were as follows:

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 593     $ 1,114  

 

 

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We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods. Technology incentive award expense decreased for the three months ended March 31, 2014 as compared to the same period in the prior year due to the decrease in Allegra recurring royalty revenue as discussed above.

 

Research and development

 

Research and development (“R&D”) expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.

 

During the fourth quarter of 2011, the Company made a decision to cease activities related to its internal discovery research and development programs, excluding generic programs.

 

Research and development expenses were as follows:

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 79     $ 105  

 

R&D expense for the three months ended March 31, 2014 decreased from amounts recognized in the same period in the prior year as a result of our continued strategic decision to limit our R&D activities as described above.

 

We currently expect 2014 R&D expense to increase slightly from amounts recognized in 2013 relating primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants.

 

Selling, general and administrative

 

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 10,629     $ 9,549  

 

The increase in SG&A for the three months ended March 31, 2014 is primarily due to executive transition costs and acquisitions costs for the Cedarburg Pharmaceuticals’ acquisition.

 

We currently expect SG&A expenses for full year 2014 to increase from amounts recognized in 2013 due to investments made to grow the business, including incremental SG&A costs associated with Cedarburg Pharmaceuticals expected to begin in the second quarter of 2014.

 

Postretirement benefit plan settlement gain

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ (1,285 )   $  

 

In the first quarter of 2014, we recognized a gain on settlement of post-retirement liability of $1.3 million.

 

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Restructuring

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 230     $ 879  

 

During the first quarter of 2014, we recorded restructuring charges of $0.2 million primarily related to the administrative costs associated with finalizing the closure of our Hungarian legal entity.

 

During the first quarter of 2013, we recorded $0.9 million of restructuring charges primarily related to the closure of our Bothell, WA facility.

 

Property and Equipment Impairment

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$     $ 534  

 

In the first quarter of 2013, we recorded property and equipment impairment charges of $0.5 million in our DDS segment associated with the Company’s decision to cease operations at our Bothell, Washington facility. There were no similar charges taken in the first quarter of 2014.

 

Interest expense, net

 

    Three Months Ended March 31,  
(in thousands)   2014     2013  
             
Interest expense   $ (2,619 )   $ (138 )
Interest income     3       1  
Interest expense, net   $ (2,616 )   $ (137 )

 

Net interest expense increased for the three months ended March 31, 2014 from the same period in 2013 primarily due to interest on our convertible senior debt entered into in the fourth quarter of 2013.

 

Other (expense) income, net

 

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ (40 )   $ 507  

 

Other expense for the three months ended March 31, 2014 was primarily due to rates associated with foreign currency transactions.

 

Other income for the three months ended March 31, 2013 was primarily related to an insurance demutualization gain of $0.4 million.

 

Income tax expense

Three Months Ended March 31,  
2014     2013  
(in thousands)  
$ 1,309     $ 3,268  
             

Income tax expense for the three months ended March 31, 2014 decreased as compared to the same period in prior year due to a decrease in pre-tax income at the Company’s U.S. locations.

 

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Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first quarter of 2014, we used cash of $8.1 million in operating activities which was primarily driven by the manufacturing of inventory for future customer orders, an increase in customer receivables due to the timing of invoicing and cash collections within the quarter, and the payment of accounts payable and other accrued liabilities during the quarter.

 

During the first quarter of 2014, cash used in investing activities was $3.1 million, resulting primarily from the acquisition of property and equipment. Additionally, during the first quarter of 2014, we generated cash of $1.5 million from financing activities, relating primarily to stock option exercises and ESPP purchases, offset in part by repurchases of treasury stock, and payments made on our credit facilities.

 

Working capital, defined as current assets less current liabilities, was $241.4 million at March 31, 2014 as compared to $235.1 million as of December 31, 2013. This increase primarily relates to increases in accounts receivable, inventory and royalty receivables.

 

In December 2013, we issued $150 million of 2.25% Cash Convertible Senior Notes (the “Notes”), which generated net proceeds of $134.8 million, which includes the associated warrants, convertible note hedges and bank fees. In connection with the offering of these notes, we entered into convertible note hedging transactions with two counterparties. We also entered into warrant transactions in which we sold warrants of our common stock to the counterparties. We paid the counterparties approximately $33.6 million for the convertible note hedge and received approximately $23.1 million from the counterparties for the warrants. See Note 4 for additional information regarding these transactions.

 

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. The Company used a portion of the initial proceeds from borrowings against the term loan to repay all amounts due under its prior credit agreement. As of March 31, 2014, the Company had no amounts outstanding under the line of credit and $5.8 million of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at March 31, 2014 was $9.2 million.

 

Under the terms of the April 2012 credit agreement, the Company is required to maintain a $5.0 million restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement is directly reduced by the amount of principal payments made on the term loan which began in May 2013. The amount of restricted cash collateralizing the revolving line of credit was $4.3 million at March 31, 2014.

 

In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating both the term loan liability and releasing the restricted cash. The Company continues to maintain the $15.0 million revolving line of credit component and the outstanding letters of credit secured by this line.

 

Borrowings under this agreement bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of March 31, 2014, the interest rate on the outstanding term loan was 3.5%.

 

The credit facility contains financial covenants, including a minimum fixed charge coverage ratio commencing in 2013 and extending for the remaining term of the agreement, maximum quarterly and year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations. As of March 31, 2014, the Company was in compliance with its current financial covenants and the $15.0 million revolving line of credit remains available under the terms of the aforementioned credit agreement.

 

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes to our contractual obligations since December 31, 2013, other than the repayment of the principal outstanding under the aforementioned term loan subsequent to March 31, 2014, which was fully collateralized by the restricted cash. As of March 31, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

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We expect that additional future capital expansion and acquisition activities, if any, could be funded with cash on hand, cash from operations, borrowings under our credit facility and/or the issuance of equity or debt 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. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or 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.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, derivative instruments and hedging activities, pension and postretirement benefit plans, income taxes and contingencies, among other effects. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes or modifications to the policies since December 31, 2013.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the Company’s last fiscal quarter our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer regarding the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the Company’s last fiscal quarter, our disclosure controls and procedures were effective in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. We intend to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

26
 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Please refer to Part 1 – Note 10 to the condensed consolidated financial statements for details and history on outstanding litigation.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The following risk factor has been revised or updated since the filing of our annual report on Form 10-K for the year ended December 31, 2013:

 

If we are not successful in selecting and integrating the businesses we acquire, or in managing our current and future divestitures, our business may suffer.

 

In recent years, we have engaged in a number of acquisitions and strategic investments . We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions.

 

Even if completed, acquisitions and alliances involve numerous risks which may include:

 

•    difficulties and expenses incurred in assimilating and integrating operations, services, products or technologies;  

•    challenges with developing and operating new businesses;  

     diversion of management's attention from other business concerns;  

     potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller;  

     acquisitions could be dilutive to earnings,;  

     loss of key employees;  

     risks that disagreements or disputes with prior owners of an acquired business may result in litigation expenses and diversion of our management's attention;  

    challenges with integration and support of preexisting supplier, distribution and customer relationships;  

     the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;  

     difficulties in achieving business and financial success; and  

     new technologies and products may be developed which cause businesses or assets we acquire to become less valuable.

 

In the event that an acquired business or technology or an alliance does not meet our expectations, our results of operations may be adversely affected.

 

We continually evaluate the performance and strategic fit of our businesses. Divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding acceptable exit strategies.

 

27
 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table represents share repurchases during the three months ended March 31, 2014:

 

Period   (a)
Total Number
of Shares
Purchased (1)
    (b)
Average Price
Paid Per
Share
    (c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
  (d)
Maximum
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Program
January 1, 2014 – January 31, 2014     13,145     $ 10.57     N/A   N/A
February 1, 2014 – February 28, 2014     9,297     $ 12.55     N/A   N/A
March 1, 2014 – March 31, 2014     3,582     $ 16.44     N/A   N/A
Total     26,024     $ 12.08     N/A   N/A

 

(1) Consists of shares repurchased by the Company for certain employee’s restricted stock that vested to satisfy minimum tax withholding obligations that arose on the vesting of the restricted stock.

 

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Item 6. Exhibits

 

Exhibit    
Number   Description
     
2.1   Agreement and Plan of Merger by and among Albany Molecular Research, Inc., AICu Acquisition Corp., Cedarburg Pharmaceuticals, Inc. and James Gale, dated March 22, 2014 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 24, 2014, File No. 001-35622).
     
10.1   Employment Agreement, dated as December 13, 2013, by and between the Company and George Svokos (filed herein).
     
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101  

XBRL (eXtensible Business Reporting Language). The following materials from Albany Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial statements. 


 

* This certification is not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.

 

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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: May 9, 2014 By: /s/ Michael M. Nolan  
    Michael M. Nolan
    Senior Vice President, Chief Financial Officer and Treasurer
(Duly Authorized Officer and Principal Financial Officer)

 

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Exhibit 10.1

 

EMPLOYMENT AGREEMENT

 

This EMPLOYMENT AGREEMENT (the “Agreement”) is made this 13 day of December 2013 (the “Effective Date”) by and between Albany Molecular Research, Inc., a Delaware corporation (the “Company”), and George Svokos (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, effective on the Employment Date, and the Executive agrees to accept such employment on the Employment Date upon the terms and conditions hereinafter set forth. The Employment Date is January 6, 2014. In the event that the Executive becomes an employee of the Company on any date other than January 6, 2014, then the actual date of employment shall be considered the Employment Date hereunder.

 

2.            Term of Employment . The term of the Executive’s employment pursuant to this Agreement shall commence on and as of the Employment Date (the “Effective Date”) and shall remain in effect for a period of two (2) years from the Effective Date (the “Term”). The Term shall be renewed automatically for periods of two (2) years (each a “Renewal Term”) commencing at the second 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 one-hundred eighty (180) days prior to the expiration of the Term (as extended by any Renewal Term). 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 to the President and Chief Executive Officer and (i) shall serve as an executive officer of the Company with the title Senior Vice President, Sales and General Manager, API , (ii) shall perform such duties and responsibilities as may be reasonably determined by the President and Chief Executive Officer and the Board of Directors of the Company consistent with the Executive’s title and position, duties and responsibilities as an executive officer of the Company 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.

 

 
 

 

(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 $400,000.00. 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 . Annually, 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. The current bonus plan for senior executives calls for the payment of 20% of base salary upon the attainment of threshold goals; 40% upon the attainment of target goals and 60% upon the attainment of superior goals. This 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. Executive will be paid a sign-on bonus in 2014 equal to $240,000 (the “New Hire Bonus”). The New Hire Bonus will be paid at the same time as annual bonuses are paid to the other members of the senior executive team of the Company in the first quarter of 2014.

 

 
 

 

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 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 four (4) 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.

 

(d)           New Employment Benefits .  During the time that the Executive continues to retain his primary residence in New Jersey, the Executive will commute to whichever AMRI location shall be reasonably necessary to perform the responsibilities of Executive’s position. Executive will be accommodated in hotels that are preferred Company hotels and reserved by the Company travel agent and paid for by AMRI or in a mutually agreeable rental residence at a cost per month to be approved by the Company, not to exceed Three Thousand Five Hundred Dollars ($3,500) per month plus utilities and no such temporary living expenses shall be included in the definition of Relocation Expenses as set forth below. Any time after the Employment Date, the Executive is eligible for the AMRI Relocation Program for executives. This program is explained in detail in the related documents and includes reimbursement or direct payment of all costs associated with the closing costs for both sale of the Executive’s primary residence in New Jersey and the purchase, if any, of a new residence at the agreed upon location. The Company will pay for the physical move of household goods to the new location.  Appropriate tax gross-ups will be made where allowable. Rent and Untility reimbursement for temporary living will be included in the gross up consideration. The provisions of the plan are more specific and are the terms that will be adhered to in the actual reimbursement. It is expected that such residence will be in the proximity of the Company’s Massachusetts facilities, but could be elsewhere if approved by the Vice President of Human Resources or the President and CEO. All such permanent relocation expenses, including the New Hire Bonus, are referred to herein as the “Relocation Expenses”.

 

(e)           Grant of Company Equity . Effective on Employment Date, the Company will grant to Executive Thirty Thousand (30,000) shares of restricted stock and non-qualified stock options to purchase One Hundred Thousand (100,000) shares of the Company’s Common Stock, such restricted stock and stock options to be granted pursuant to the Company’s 2008 Stock Option and Incentive Plan. Such restricted stock and stock options will be evidenced by standard agreements to be entered into between Executive and the Company. The restricted stock and stock options granted pursuant to this Section 5(e) will vest thirty three and one third percent (33.33%) per year on each anniversary of the date of grant. The shares of restricted stock and stock options granted in this Section 5(e) are referred to herein as the New Hire Grant.

 

 
 

 

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 by the Company without Cause under Section 6(e) or Section 6(g), 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), or for Good Reason under Section 6(g), the date on which the applicable cure period expires. In the event that Executive’s employment terminates at any time from the date hereof to the date that is 24 months following the payment of the last to be paid of the Relocation Expenses and such termination is pursuant to Section 6(b) or 6(d); then within 30 days of the Date of Termination Executive shall repay the Relocation Expenses in full to the Company.

 

(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;

 

(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 Board of Directors, Compensation Committee or other appropriate governing committee which are consistent with the terms and conditions of this Agreement or shall have deliberately, willfully, 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), all obligations of the Company under this Agreement shall thereupon immediately terminate other than any obligations with respect to earned but unpaid Base Salary. 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 Base Salary through the Date of Termination, (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 Company’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, after reasonable accommodation by the Company, 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 provided in this Section 6(d), all obligations of the Company under this Agreement shall thereupon immediately terminate.

 

 
 

 

(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 by the Company upon sixty (60) days’ prior written notice to the Executive. Any termination by the Company of the Executive’s employment under this Agreement which does not constitute a termination for Cause under Section 6(b) and is not a termination on account of death or disability under Section 6(c) shall be deemed a termination without Cause. 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 and the lapse of any statutory revocation period, 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 the one (1) year period, an amount equal to the Executive’s cash bonus, if any, received in respect of the year immediately preceding the year of termination pursuant to Section 4(b) beginning with the first payroll date that begins thirty (30) days after the Date of Termination. For purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), each monthly payment shall be considered a separate payment. The Company shall also pay 100% of the costs to provide up to twelve (12) months of outplacement support services at a level appropriate for the Executive’s title and responsibility and provide the Executive with health and dental insurance continuation at a level consistent with the level and type the Executive had in place at the time of termination for a period of twelve (12) months from the Date of Termination. In addition, on or prior to the Date of Termination, Executive will become fully vested in any unvested shares or options granted as part of the New Hire Grant.

 

(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 change in the Executive reporting directly to the Company’s Chief Executive Officer or to the Board of Directors or a material diminution in the nature or scope of the powers, duties or responsibilities of 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 within sixty (60) days of the occurrence of the default and giving the Company a reasonable time, not less than thirty (30) days, to conform its performance to its obligations hereunder. 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 and the lapse of any statutory revocation period, 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 the one (1) year period, an amount equal to the Executive’s cash bonus, if any, received in respect of the year immediately preceding the year of termination pursuant to Section 4(b) beginning with the first payroll date that begins thirty (30) days after the Date of Termination. For purposes of Section 409A of the Code, each monthly payment shall be considered a separate payment. The Company shall also pay 100% of the costs to provide up to twelve (12) months of outplacement support services at a level appropriate for the Executive’s title and responsibility and provide the Executive with health and dental insurance continuation at a level consistent with the level and type the Executive had in place at the time of termination for a period of twelve (12) months from the Date of Termination. In addition, on or prior to the Date of Termination, Executive will become fully vested in any unvested shares or options granted as part of the New Hire Grant.

 

 
 

 

(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). Upon a Change of Control, the Executive will become fully vested in any outstanding stock options, Restricted Stock or other stock grants awarded and become fully vested in all Company contributions made to the Executive’s 401(k), Profit Sharing or other retirement account(s). In addition, within thirty (30) days of the Change of Control, the Company shall pay to the Executive a lump sum equal to the Executive’s pro rata target cash bonus for the year in which the Change of Control occurred (as such may be set forth in the Company’s bonus plan for such year and calculated assuming target achievement of corporate and personal goals); such pro rata amount to be determined based on the actual date of the closing of such Change of Control transaction.

 

If, within two (2) years following a Change of Control, the Executive’s employment is terminated by the Company without Cause (in accordance with Section 5(e) above) or by the Executive for “Good Reason” (as defined in Section 6(g)(ii) below), in lieu of any severance and other benefits payable under Section 6(e) or Section 6(f), subject to the Executive signing a general release of claims in a form and manner satisfactory to the Company and the lapse of any statutory revocation period, the Company shall pay to the Executive (or the Executive’s estate, if applicable) a lump sum amount equal to 1.5 times 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 year immediately preceding the year of termination pursuant to Section 4(b) within thirty (30) days of the Date of Termination. Notwithstanding the foregoing, to the extent the cash severance payment to the Executive is considered deferred compensation subject to Section 409A of the Code, and if the Change of Control does not constitute a “change in control event” within the meaning of Section 409A of the Code, such cash severance shall be payable in installments over the same period as provided in Section 6(e). The Company shall also pay 100% of the costs to provide up to twelve (12) months of outplacement support services at a level appropriate for the Executive’s title and responsibility and provide the Executive with health and dental insurance continuation at a level consistent with the level and type the Executive had in place at the time of termination for a period of twelve (12) months from the Date of Termination.

 

(i)          “ Change of Control ” shall mean the occurrence of any one of the following events: (A) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (B) a merger, reorganization or consolidation in which the outstanding shares of Stock are converted into or exchanged for securities of the successor entity and the holders of the Company’s outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the successor entity immediately upon completion of such transaction, or (C) the sale of all of the Stock of the Company to an unrelated person or entity.

 

(ii)         “ Good Reason ” shall mean the occurrence of any of the following:

 

(A)          a change in the Executive reporting directly to the Company’s Chief Executive Officer or member of the Board of Directors or a material diminution in the nature or scope of the powers, duties or responsibilities of the Executive;

 

(B)         a breach by the Company of any of its material obligations hereunder

 

 
 

 

(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) within sixty (60) days of the occurrence of the event 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.

 

(h)           Additional Limitation . Anything in this Agreement to the contrary notwithstanding, in the event that the amount of any compensation, payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, calculated in a manner consistent with Section 280G of the Code and the applicable regulations thereunder (the “Severance Payments”), would be subject to the excise tax imposed by Section 4999 of the Code, the following provisions shall apply:

 

(A)            if the Severance Payments, reduced by the sum of (1) the Excise Tax and (2) the total of the federal, state, and local income and employment taxes payable by the Executive on the amount of the Severance Payments which are in excess of the Threshold Amount, are greater than or equal to the Threshold Amount, the Executive shall be entitled to the full amount of Severance Payments.

 

(B)            if the Threshold Amount is less than (x) the Severance Payments, but greater than (y) the Severance Payments reduced by the sum of (1) the Excise Tax and (2) the total of the federal, state, and local income and employment taxes on the amount of the Severance Payments which are in excess of the Threshold Amount, then the Severance Payments shall be reduced (but not below zero) to the extent necessary so that the sum of all Severance Payments shall not exceed the Threshold Amount. In such event, the Severance Payments shall be reduced in the following order: (i) cash payments not subject to Section 409A of the Code; (ii) cash payments subject to Section 409A of the Code; (iii) equity-based payments and acceleration; and (iv) non-cash forms of benefits. To the extent any payment is to be made over time (e.g., in installments, etc.), then the payments shall be reduced in reverse chronological order.

 

For the purposes of this Section 6(h) “Threshold Amount” shall mean three (3) times the Executive’s “base amount” within the meaning of Section 280G(b)(3) of the Code and the regulations promulgated thereunder less one dollar ($1.00); and “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, and any interest or penalties incurred by the Executive with respect to such excise tax.

 

The determination as to which of the alternative provisions of this Section 6(h) shall apply to the Executive shall be made by a nationally recognized accounting firm selected by the Company (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or the Executive. For purposes of determining which of the alternative provisions of this Section 6(h) above shall apply, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the determination is to be made, and state and local income taxes at the highest marginal rates of individual taxation in the state and locality of the Executive’s residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Any determination by the Accounting Firm shall be binding upon the Company and the Executive.

 

 
 

 

(i)           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.

 

(j)           Section 409A .

 

(i)          Anything in this Agreement to the contrary notwithstanding, if at the time of the Executive’s separation from service within the meaning of Section 409A of the Code, the Company determines that the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement would be considered deferred compensation subject to the twenty percent (20%) additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (A) six (6) months and one (1) day after the Executive’s separation from service, or (B) the Executive’s death. If any such delayed cash payment is otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six (6)-month period but for the application of this provision, and the balance of the installments shall be payable in accordance with their original schedule. Any such delayed cash payment shall earn interest at an annual rate equal to the prime rate reported by The Wall Street Journal as of the date of separation from service, from such date of separation from service until the payment.

 

(ii)         The parties intend that this Agreement will be administered in accordance with Section 409A of the Code. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A of the Code, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A of the Code. The parties agree that this Agreement may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A of the Code and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to either party.

 

(iii)        To the extent that any payment or benefit described in this Agreement constitutes “non-qualified deferred compensation” under Section 409A of the Code, and to the extent that such payment or benefit is payable upon the Executive’s termination of employment, then such payments or benefits shall be payable only upon the Executive’s “separation from service”. The determination of whether and when a separation from service has occurred shall be made in accordance with the presumptions set forth in Treasury Regulation Section 1.409A-1(h).

 

 
 

 

(iv)         The Company makes no representation or warranty and shall have no liability to the Executive or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A of the Code but do not satisfy an exemption from, or the conditions of, such Section.

 

7.            Non-Competition and No Solicitation .

 

(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 and for a period of twelve (12) months following the termination, 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 research and development services to pharmaceutical and biotechnology companies involved in drug development and discovery and any and all activities related thereto, including, without limitation, biological testing and biological research services, medicinal chemistry, chemical development, biocatalysis, analytical chemistry services and small-scale and large scale and any other business conducted by the Company during the Executive’s employment with the Company that comprises a major portion of the Company’s overall business.

 

(c)          For a period of twelve (12) months following the termination of this Agreement for any reason, the Executive shall not, directly or indirectly, alone or as a member of any partnership or limited liability company or entity, or as an officer, director, shareholder, or employee of any corporation or entity (a) solicit or otherwise encourage any employee or independent contractor of the Company to terminate his/her relationship with the Company, or (b) recruit, hire or solicit for employment or for engagement as an independent contractor, any person who is or was employed by the Company at any time during the Executive’s employment with the Company. This paragraph shall not apply to persons whose employment and/or retention with the Company has been terminated for a period of twelve (12) months or longer.

 

 
 

 

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.

 

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.

 

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 Boston, Massachusetts, 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 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 agree to the sole and exclusive jurisdiction of the Supreme Court of the State of New York (Albany County) and the United States District Court for the Northern District of New York (City of Albany). 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.

26 Corporate Circle

Albany, New York 12212-5154

Facsimile: (518) 867-4375

Attention: Board of Directors

 

To the Executive, at the address on file with the Company, with a copy to:

 

Sills Cummis & Gross PC

One Riverfront Plaza

Newark, NJ 07102

Facsimile: (973) 643-6500

Attn: Ira A. Rosenberg, Esq.

 

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.

 

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. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a material breach of this Agreement.

 

17.          Entire Agreement . This Agreement constitutes the entire agreement between the parties concerning the subjects hereof and supersedes all prior understandings and agreements between the parties relating to the subject matter hereof.

 

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]

 

 
 

 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

 

  ALBANY MOLECULAR RESEARCH, INC.
   
  By: /s/ William S. Marth
   
  EXECUTIVE:
   
  /s/ George Svokos
  George Svokos

 

 

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, William S. Marth certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Albany Molecular Research, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date May 9, 2014 /s/ William S. Marth    
  Name: William S. Marth  
  Title: President and Chief Executive Officer
  Principal Executive Officer

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Michael M. Nolan certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Albany Molecular Research, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 9, 2014 /s/ Michael M. Nolan  
  Name: Michael M. Nolan
  Title: Senior Vice President, Chief Financial Officer and Treasurer
  Principal Financial Officer

  

 

 

Exhibit 32.1

 

CERTIFICATION

 

The undersigned officer of Albany Molecular Research, Inc. (the “Company”) hereby certifies to his knowledge that the Company’s Quarterly Report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

Date: May 9, 2014  
  /s/ William S. Marth  
  Name: William S. Marth
  Title: President and Chief Executive Officer

  

 

 

Exhibit 32.2

 

CERTIFICATION

 

The undersigned officer of Albany Molecular Research, Inc. (the “Company”) hereby certifies to his knowledge that the Company’s Quarterly Report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

Date: May 9, 2014 /s/ Michael M. Nolan  
  Name: Michael M. Nolan
  Title: Senior Vice President, Chief Financial Officer and Treasurer