10-K 1 v370105_10k.htm 10-K
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
 
or
 
¨ 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 001-35622

 
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
 
12203
(Address of principal executive offices)
 
(zip code)
 
(518) 512-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of exchange on which registered
Common Stock, par value $.01 per share
 
The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Each Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨   No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨   No  x
 
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
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  12b-2 of the Exchange Act
 
¨ Large accelerated filer
 
x Accelerated filer
 
¨ Non-accelerated filer
 
¨ Smaller reporting company
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x
 
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 30, 2013 was approximately $282.7 million based upon the closing price per share of the Registrant’s Common Stock as reported on the Nasdaq Global Market on June 30, 2013. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2014, there were 32,327,498 outstanding shares of the Registrant’s Common Stock, excluding treasury shares of 5,436,495.
 

DOCUMENTS INCORPORATED BY REFERENCE
 
The information required pursuant to Part III of this report is incorporated by reference from the Company’s definitive proxy statement, relating to the annual meeting of stockholders to be held on or around June 4, 2013, pursuant to Regulation 14A to be filed with the Securities and Exchange Commission.
 
 
 
 
 
ALBANY MOLECULAR RESEARCH, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
 
 
 
 
 
Page No.
 
 
Cover page
 
 
 
 
Part I.
 
 
Forward-Looking Statements
 
3
Item 1.
 
Business
 
4
Item 1A.
 
Risk Factors
 
14
Item 1B.
 
Unresolved Staff Comments
 
21
Item 2.
 
Properties
 
21
Item 3.
 
Legal Proceedings
 
21
Item 4.
 
Mine Safety Disclosures
 
22
 
 
Part II.
 
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
23
Item 6.
 
Selected Financial Data
 
26
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
27
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
36
Item 8.
 
Financial Statements and Supplementary Data
 
37
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
37
Item 9A.
 
Controls and Procedures
 
37
Item 9B.
 
Other Information
 
38
 
 
Part III.
 
 
Item 10.
 
Directors, Executive Officers and Corporate Governance of the Registrant
 
39
Item 11.
 
Executive Compensation
 
39
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management
 
39
Item 13.
 
Certain Relationships, Related Transactions and Director Independence
 
39
Item 14.
 
Principal Accountant Fees and Services
 
39
 
 
Part IV.
 
 
Item 15.
 
Exhibits and Financial Statement Schedules
 
40
 
 
2

 
Forward-Looking Statements
 
References throughout this Form 10-K to the “Company”, “AMRI”, “we,” “us,” and “our” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole. This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, 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, 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 and postretirement benefit 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. Readers should review carefully the risks and uncertainties identified below under the caption “Risk Factors” and elsewhere in this 10-K. All forward-looking statements are made as of the date of this report and we do not undertake any obligation to update our forward-looking statements, except as required by applicable law.
 
 
3

 
PART I
 
ITEM 1. BUSINESS.
 
Overview
 
Albany Molecular Research, Inc. is a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”) and the manufacturing of drug product for existing and experimental new drugs, as well as research, development and manufacturing for the agrochemical and other industries.  With locations in the United States, Europe, and Asia, AMRI maintains geographic proximity to our customers and flexible cost models. AMRI has also historically leveraged its drug-discovery expertise to execute on several internal drug discovery programs, certain of which have been successfully partnered.  AMRI is actively seeking to out-license the remaining programs to strategic partners for further development and commercialization.
 
Industry Overview and Trends
 
We believe that market trends in the pharmaceutical and biotech industries demonstrate an increasing emphasis towards outsourcing, as companies seek to maintain reduced internal resources in favor of variable models that offer high quality and higher accountability alternatives to meet their drug discovery, development and manufacturing needs.  We believe that ongoing announcements from many large pharmaceutical companies regarding their reorganization plans and strategy changes point to outsourcing as an increasingly important and strategic part of future R&D efforts.  We also believe that announcements from several pharmaceutical companies regarding regulatory scrutiny of their manufacturing facilities, and in some instances, closure or divestiture of these facilities, point to opportunities for AMRI to benefit from increased outsourcing of API and drug product manufacturing services. 
 
Business Strategy
 
AMRI is 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 the fourth quarter of 2013, we successfully managed the operations of the Company to be profitable independent of royalties from the sales of Allegra and we continue to manage the operations with the goal of being profitable independent of all royalties.  In 2014 and beyond, we are targeting growth and increased profitability across the discovery and early development, API manufacturing and formulation manufacturing service offerings.  Our strategy to accomplish this includes the following:
 
· Organizational Leadership
In 2013, we announced 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.
 
· Enhance revenue growth and mix
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 and in 2013 successfully cleared an FDA warning letter.  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. 
 
· Streamline operations to improve margins
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.
 
· Maximize licensing/partnering of proprietary compounds to enhance future cash flow
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.
 
· Acquisitions
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.
 
Our Capabilities
 
The problem-solving abilities of our scientists can provide added value throughout the drug discovery, development and manufacturing process. We also offer certain, limited formulation services, including early phase solid dosage capabilities at our Rensselaer, NY facility and aseptic fill finish for both clinical and commercial products at our Burlington, MA location.  Our comprehensive suite of services allows our customers to contract with a single partner, eliminating the time and cost of transitioning projects among multiple vendors.  We perform services including drug discovery, pharmaceutical development, and manufacturing of active ingredients and pharmaceutical intermediates, and drug product manufacturing for many of the world’s leading healthcare companies. 
 
 
5

 
Business Segments
 
We have organized our activities into two distinct segments: Large Scale Manufacturing (“LSM”) and Discovery, Drug Development and Small-Scale Manufacturing (“DDS”).  Our LSM activities include pilot- to commercial-scale production of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing.  Our remaining activities, including drug lead discovery, in vitro biology and DMPK, lead optimization, drug development, and small-scale commercial manufacturing, represent our DDS business segment.  See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to the Consolidated Financial Statements for financial information on the Company’s business segments.
 
Service Offerings
 
Drug Discovery Services
 
The competitive drug discovery industry continues to face many challenges, including a weakening product pipeline, increasing costs, more complex disease targets and regulatory hurdles.  These challenges have compelled many companies/research organizations to look outside their own R&D function for contract partners to support research and development from the earliest stages of the drug discovery process. 
 
AMRI performs integrated drug discovery programs, harnessing the capabilities and expertise of specialist teams of scientists from individual disciplines under the coordination of experienced project leaders and key employees with decades of experience.  All of the capabilities described below are also offered individually to support customers who have their own capacity in certain areas. 
 
Our Drug Discovery Services include:
 
Assay Development and Design
 
We offer custom assay design and development services to clients in the pharmaceutical, biopharmaceutical and agrochemical industries who are starting from a unique target or who are supporting ongoing lead discovery programs.  This service can be delivered independently to a client, or integrated with our full range of drug discovery services.
 
Screening
 
Our diverse offering of screening capabilities, coupled with access to our range of sample collections, give customers the essential tools to efficiently identify and optimize lead compounds.
 
Screening Libraries
 
We have created a series of unique, high purity, cost effective, small molecule synthetic compound libraries and a complementary collection of natural product extracts from marine, plant and microbial sources designed for screening and hit-to-lead programs.  We are uniquely positioned to fully support active hits from any of these libraries with lead optimization services, analytical services, custom synthesis and/or small or large-scale manufacturing.
 
Natural Product Services
 
We have a longstanding, well established ability to deliver on natural products discovery programs.  Our natural product library and screening capabilities are supported by a team of experts with decades of experience in the field.  We have substantial expertise in natural product isolation, structural identification, fermentation development and biotransformations giving us the ability to rapidly advance a natural product from hit to lead to qualified drug candidate.
 
Custom Synthesis and Library Synthesis
 
In the Hit-Lead phase of drug discovery it is common to require custom designed libraries of compounds relating to specific structural classes of interest.  Our synthetic libraries group is equipped to design and execute the preparation of libraries typically containing hundreds of compounds. AMRI applies the same capabilities to create larger libraries, typically thousands of compounds, for use in the screening phase of drug discovery. AMRI’s custom synthesis capabilities support all stages of drug discovery.
 
 
6

 
Medicinal Chemistry
 
Lead optimization is the complex, iterative process of altering the chemical structure of a confirmed hit to identify an improved drug lead with the goal of progressing to a preclinical candidate.  Well-trained, intuitive and knowledgeable, our medicinal chemists have years of experience working with drug-like compounds.  Our medicinal chemistry capability is fully integrated with our other drug discovery services, allowing for a “one stop shop” approach towards outsourcing lead discovery and optimization efforts, if so desired.
 
Computer-Aided Drug Discovery (“CADD”)
 
Our CADD services use sophisticated computational software and techniques to help identify novel hits or leads against selected therapeutic targets, as well as to support medicinal chemistry lead optimization programs. CADD methods can increase the odds of identifying compounds with desirable characteristics, speed up the hit-to-lead process and improve the chances of getting a compound over the many hurdles of preclinical testing.
 
In vitro ADMET
 
We conduct in vitro ADMET assays to evaluate and improve metabolism, bioavailability, pharmacology and toxicology of compounds.
 
Bioanalytical Services
 
We develop and execute rapid, sensitive, and robust bioanalytical methods for extraction and quantitation of drug and metabolites in biological fluids and tissues to support preclinical and clinical studies.   This service is provided stand-alone or can be coupled directly with services provided by our network of in vivo testing providers.
 
Network of pharmacology service providers
 
We have worked in close collaboration with multiple in vivo pharmacology and preclinical safety assessment providers.  The strong relationships we have developed with several of these providers allow AMRI to effectively coordinate these external services with our own internal capabilities to deliver a fully integrated drug discovery program.
 
Chemical Development
 
Chemical development involves the scale-up synthesis of a lead compound and intermediates. Processes developed for small-scale production of a compound may not be suitable for larger scale production because they may be too expensive, environmentally unacceptable or present safety concerns. With chemical development locations around the globe, we have become a top choice for an increasing number of pharmaceutical and biotechnology companies seeking a partner for the rapid advancement of their drug candidates. Customers throughout the world rely on our proven technical expertise, commitment to the highest quality and regulatory standards, flexibility, and strong customer focus to advance their lead compounds through the drug development process, from bench scale to commercial production.
 
Current Good Manufacturing Practices (“cGMP”) API  Manufacturing
 
Our manufacturing facilities are strategically situated in various locations in the United States, Europe and Asia.  These locations are globally positioned to provide tailored customer solutions and enable the efficient and cost-effective transfer of pre-clinical, clinical and commercial APIs from small-scale to large-scale production.  Additionally, these locations easily integrate with our discovery and pharmaceutical development services.
 
We provide chemical synthesis and manufacturing services for our customers in accordance with cGMP regulations. All facilities and manufacturing techniques used for prescribed steps in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines and regulations as established by the FDA. Our Albany, New York location has production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances sufficient for conducting clinical trials from Phase I through Phase II, and later stages, including commercial API, for selected products, based on volume and other parameters. Our large-scale manufacturing facility in Rensselaer, New York is equipped to provide a wide range of custom chemical development and manufacturing capabilities. We conduct commercial cGMP manufacturing of APIs and advanced intermediates. Our large-scale cGMP manufacturing facilities provide synergies with our small-scale development laboratories, offering our customers services at every scale, from bench to production.  We have special capabilities in high value-added areas of pharmaceutical development and manufacturing, including high potency manufacturing.  Cytotoxic and other highly potent compounds present a number of potential challenges in their production and handling.  We have extensive experience in the cGMP production of these types of compounds, from grams to hundreds of kilograms per year.  Our Rensselaer, NY facility is licensed by the U.S. Drug Enforcement Administration to produce Schedule I, II, III, IV and V controlled substances.  For over 50 years, the facility has produced controlled substances such as analgesics, amphetamines, barbiturates, and anabolic steroids. 
 
 
7

 
Our large-scale manufacturing facility in Aurangabad, India was issued a Good Manufacturing Practice (“GMP”) certificate from the Australian Government Therapeutic Goods Administration (“TGA”) following an inspection in February 2011.  The certificate covers general GMP manufacturing operations, and laboratory controls designed for the production and release of APIs and intermediates.  The successful audit confirms AMRI’s compliance with GMP regulations and further demonstrates the Company’s commitment to operational quality.  Our Aurangabad facility is an approved facility by Indian FDA and World Health Organization (“WHO”) GMP certified with production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances under cGMP regulations sufficient for conducting clinical trials and commercial API, for selected products, based on volume and other parameters. In addition our site was approved by various leading global pharmaceutical companies from Europe and Asia as their API vendor for their generics and drug development requirements.
 
Formulation Development & cGMP Formulation Manufacturing
 
We have added selected focused formulation capabilities to our portfolio.  Our Burlington, MA facility provides contract manufacturing services in sterile syringe and vial filling using specialized technologies including lyophilization.  AMRI Burlington provides these services for both small molecule drug products and biologicals, from clinical phase to commercial scale. 
 
Working in close collaboration with our already established chemical synthesis, analytical development and preformulation groups, we also offer formulation development services for solid dosage, solution, suspension, topicals and injectables, cGMP early clinical phase capsules filling using Xcelodose® technology and cGMP early clinical Powder in Bottle for solution and suspension. 
 
Analytical Chemistry Services
 
We provide broad analytical chemistry services for drug discovery, pharmaceutical development and manufacturing.  With years of industry experience, state-of-the-art technologies and instrumentation, along with close collaboration with synthesis chemists, our analytical services are designed to ensure that the right tools are used to solve even the most difficult problem.
 
Proprietary Research and Development
 
Leveraging our wide array of drug discovery capabilities, we established several internal drug discovery programs with the goal to discover and develop promising drug candidates and license these candidates in return for upfront fees, milestones and downstream royalty payments for commercialized drug products. We identified lead series candidates and optimized these lead series to development candidate status, in some cases pursuing these into early clinical studies.
 
Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is the active ingredient in the non-sedating antihistamine known as fexofenadine HCl, which is sold by Sanofi under the name Allegra in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents relating to TAM and the process chemistry by which TAM is produced. Our issued patents relating to TAM began expiring in 2013, with the last to expire in 2015.
 
More recent drug discovery and development projects have been focused on treatments for irritable bowel disease, central nervous system diseases and obesity.  Our R&D efforts benefited from access to a broad array of our scientific services including capabilities in microbial fermentation, molecular biology, cell culture, gene expression and cloning, scale up synthesis of human metabolites, preformulation, chemical development and cGMP synthesis. Additionally, a portion of our R&D efforts focused on improving the manufacturing process for our generic API products.  In late 2011, we announced that we would cease to invest in most of these internal drug discovery efforts but continue to seek partnership or investment for the advanced programs with the goal of returning value to AMRI.  We continue to place R&D focus on improving our manufacturing processes and development of certain generic products or synthetic routes.  We spent $0.4 million, $0.9 million and $7.9 million on research and development activities in 2013, 2012 and 2011, respectively. 
 
 
8

 
Licensing Agreements
 
AMRI Rensselaer, Inc., a wholly-owned subsidiary of AMRI, and Actavis, Inc. (“Actavis”) are parties to a long term Development and Supply Agreement (the “Supply Agreement”). Under the Supply Agreement, the Company supplies four amphetamine salts (“API”) to Actavis.  In addition to compensation for the supply of API, the Company will receive royalties on Actavis’ sales of any finished drug product that incorporates the API, for a period of five years from the date of the first commercial sale of the last product approved for sale by the Federal Drug Administration.
 
Actavis received FDA approval of its abbreviated new drug application (“ANDA”) for generic Adderall XR® on June 25, 2012. Actavis received FDA approval of its ANDA for extended release formulations of dextroamphetamine sulfate on November 30, 2012. Under the Agreement, the Company will receive royalty payments on sales of both finished drug products, which royalties are expected to continue through at least 2017.
 
In January 2011, we entered into a research and licensing agreement with Genentech.  Under the terms of the agreement, Genentech received an exclusive license to develop and commercialize multiple potential products from our proprietary antibacterial program. Additionally, we have collaborated with Genentech in a research program with the objective of identifying novel antibacterial agents.   In addition to an upfront license fee and research funding of $1.5 million, we will be eligible to receive development and regulatory milestones of up to $40.0 million for each compound to achieve these events and will receive royalties from Genentech on worldwide sales of any resulting commercialized compounds.   
 
In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitor technology and patents identified in one of our proprietary research programs to Bristol-Myers Squibb Company (“BMS”). In conjunction with the licensing agreement, we received a non-refundable, non-creditable up-front payment of $8.6 million, which included the cancellation of outstanding warrants, and a total of $10.8 million for research and development services in the first three years of the agreement. The agreement also set forth milestone events that, if achieved by these products, would entitle the Company to non-refundable, non-creditable milestone payments.  In 2013, BMS announced the cessation of its commercialization activities regarding the assets under the license.  We are engaged in ongoing discussions with BMS as to the disposition of these assets, which may or may not result in future payments to AMRI.  If such potential products are developed by BMS, the Company is entitled to milestone payments of up to $43.5 million for each of the first and second compounds to achieve these events, and up to $22.0 million for each subsequent product to achieve these events.  These milestone events include candidate nomination, IND or equivalent regulatory filings, commencement of middle- and late-stage clinical trials, and regulatory approval of compounds for commercial sale.  The agreement also provides for the Company to receive royalty payments on worldwide sales of any such product that is commercialized.  From the entry into this agreement through December 31, 2013, we have recorded $15.5 million from achieving certain milestones with BMS. 
 
In March 1995, we entered into a license agreement with Sanofi. Under the terms of the license agreement, we granted Sanofi an exclusive, worldwide license to any patents issued to us related to our original TAM patent applications.  From the beginning of the agreement through December 31, 2013, we have had revenues of $7.4 million in milestone payments and approximately $551.8 million in royalties under this license agreement. Sanofi is obligated under the license agreement to pay ongoing royalties to us based upon its net sales of Allegra/Telfast and generic fexofenadine.  Additionally during the fourth quarter of 2008, we entered into an amendment to our licensing agreement with Sanofi to allow Sanofi to sublicense patents related to Allegra and Allegra D-12® to Teva Pharmaceuticals and Barr Laboratories in the United States.  Subsequently, Teva Pharmaceuticals acquired Barr Laboratories.  As a result of this amendment, we received an upfront sublicense fee from Sanofi of $10.0 million and additionally we will receive royalties from Sanofi on the net sale of products in the United States containing fexofenadine hydrochloride and products containing fexofenadine hydrochloride (generic Allegra) and pseudoephedrine hydrochloride (generic Allegra D-12) by Teva Pharmaceuticals through 2015, along with additional consideration. We are not entitled, however, to receive any additional milestone payments under the license agreement.  See “Item 3—Legal Proceedings” for discussion of legal proceedings related to Allegra/Telfast.
 
 
9

 
Customers
 
Our customers include pharmaceutical companies and biotechnology companies, as well as government research entities and non-profit organizations, which are a growing segment of our customer base.  We also sell, to a more limited extent, to companies who are in the businesses of agriculture, fine chemicals, contract chemical manufacturing, medical devices, and flavoring and cosmetics.  For the year ended December 31, 2013, contract revenue from our three largest customers represented 15%, 9% and 5%, respectively, of our contract revenue.  For the year ended December 31, 2012, contract revenue from our three largest customers represented 15%, 12% and 7%, respectively, of our contract revenue.  For the year ended December 31, 2011, contract revenue from our three largest customers represented 16%, 9% and 8%, respectively, of our contract revenue.   In each of these years, the Company’s largest customer was GE Healthcare.  See Note 13 to the Consolidated Financial Statements for information on geographic and other customer concentrations.
 
Our backlog of open manufacturing orders and accepted service contracts was $114.3 million at December 31, 2013, as compared to $115.3 million at December 31, 2012.  Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time, which may be as long as several years. 
 
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.
 
Sales and Marketing
 
Our services are sold primarily by our dedicated sales and business development personnel and senior management. Because our customer contacts are often highly skilled scientists, we believe our use of technical experts in the sales effort has allowed us to establish strong customer relationships. In addition to our internal sales efforts, we also rely on the sales efforts of consultants, both in the United States and abroad. We market our services directly to customers through targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.
 
Employees
 
As of January 31, 2014, we had 1,282 employees. Of these employees, 490 are at our international facilities. Our U.S. large-scale manufacturing hourly work force has 92 employees who are subject to a collective bargaining agreement with the International Chemical Workers Union.  A 3-year collective bargaining agreement was signed in January 2014 with the union and expires in January 2017.  Additionally, we have 51 union employees at our large-scale manufacturing facility at AMRI India that are covered by two collective bargaining agreements.  One agreement expires in April 2015 and the other expires in March 2016.  None of our other employees are subject to any collective bargaining agreement. We consider our relations with our employees and the unions to be good.
 
Competition
 
While a small number of larger outsourcing service providers have emerged as leaders within the industry, the outsourcing market for pharmaceutical and biotechnology contract chemistry and biology services remains fragmented.  We face competition based on a number of factors, including size, relative expertise and sophistication, quality and costs of identifying and optimizing potential lead compounds and speed and costs of optimizing chemical processes. In many areas of our business we also face foreign competition from companies in regions with lower cost structures.  We compete with contract research companies, contract drug manufacturing companies, research and academic institutions and with the internal research departments of biotechnology companies.  We have also historically competed with internal research departments of large pharmaceutical companies; recently, however, competition in this area continued to be reduced, however, as these companies have downsized their internal organizations.
 
 
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We rely on many internal factors that allow us to stay competitive and differentiate us in the marketplace, including:
 
· Our globalization of both research and manufacturing facilities, which allows us to increase our access to key global markets
 
· Our ability to offer a flexible combination of high quality, cost-effective services
 
· Our comprehensive service offerings, which allow us to provide our customers a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market.
 
Patents and Proprietary Rights
 
Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms can be uncertain and involve complex legal and factual questions. We seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is justifiable.  We cannot be assured that any AMRI patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for inventions which conflict with one of ours, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in the loss of any opportunity to secure patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, these proceedings could result in substantial cost to us. The filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. We cannot be certain that in the event that any claims with respect to any of our patents, if issued, are challenged by one or more third parties, a court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity afforded by the disputed rights. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the technologies covered by such rights, could be subject to significant liability to the third party, and could be required to license technologies from the third party. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, we cannot be certain that competitors will not be able to design around such patents and compete with us and our licensees using the resulting alternative technology.
 
We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These United States patents began to expire in November 2013, and the international patents begin to expire in 2014 and most of these patents are covered by our license agreements with Sanofi, described herein. Additionally, our United States patents related to substituted biaryl purines as potent anticancer agents and a series of aryl and heteroaryl tetrahydroisoquinolines related to central nervous system indications begin to expire in 2020.
 
Many of our current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.
 
We also rely upon trade secrets and proprietary know-how for certain unpatented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. We cannot provide assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, we cannot provide assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, we cannot be certain that third parties will not independently develop substantially equivalent or better technology.
 
Government Regulation
 
The manufacture, transportation and storage of our products are subject to certain international, Federal, state and local laws and regulations. Our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by us or our customers. The nature and the extent to which such regulation may apply to us or our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by us or our customers will require regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.
 
 
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Generally, in order to gain U.S. FDA or foreign regulatory approval of a drug product, several years of studies and regulatory filings and review must occur, including laboratory studies, IND filing, several years of clinical trials, NDA filings, and FDA and foreign regulatory authority marketing approval.  Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the United States, we will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
 
All facilities and manufacturing techniques used for prescribed steps in the manufacture of API for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA and International Conference on Harmonization (“ICH”). Our facilities are subject to unscheduled periodic regulatory inspections to ensure compliance with cGMP regulations. Failure on our part to comply with applicable requirements could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities or significant fines, which would materially and adversely affect our business, financial condition and results of operations.  During 2013 an FDA inspection of our large-scale cGMP manufacturing facility in Rensselaer was completed, resulting in the issuance of a Form FDA 483, with one minor observation being cited.  AMRI submitted responses to the observation consistent with the requirements and timeframe of the FDA, resulting in clearance of the Form 483.
 
Additionally, during 2012, the Rensselaer facility was audited by the DEA to assess conformance with the controlled drug legislation for which the facility holds Schedule I, II, III, IV and V licenses.  The audit was successful and no non-conformances were noted.
 
We acquired the AMRI Burlington facility on June 14, 2010.  On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations.  The warning letter did not restrict production or shipment of products from the facility; however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations.  Although we resumed cGMP operations in May 2011, the warning letter, subsequent remediation efforts and suspension of production have had a material adverse effect on our business operations and cash flow.  In November 2013, the warning letter was lifted after investment and remedial efforts by AMRI Burlington.  The Company continues the manufacturing operations currently in place at the Burlington site, including GMP operations. 
 
During 2012 the U.S. Government passed new legislation termed the Generic Drug User Fee Amendments (“GDUFA”) which was effective beginning October 2012.  AMRI has taken required actions, specifically, the self-identification of impacted facilities and the budgeting of required fees.
 
Our manufacturing and research and development processes involve the controlled use of hazardous or potentially hazardous materials and substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials, including radioactive compounds and certain waste products. Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges.  Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated.  Our facilities which are subject to FDA and DEA inspection are currently in full compliance. 
 
 
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Concentration of Business and Geographic Information
 
For a description of revenue and long lived assets by geographic region, please see Note 13 to the Consolidated Financial Statements.
 
Internet Website
 
We maintain an internet website at www.amriglobal.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.
 
 
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ITEM 1A. RISK FACTORS 
 
The following factors should be considered carefully in addition to the other information in this Form 10-K. Except as mentioned under “Item 7A - Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion contained in this Form 10-K contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10-K.  Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein.
 
Failure to manage the business to consistent profitability without Allegra and other royalties will have a significant impact on operations and stock value.
 
The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenue, earnings and operating cash flows.  Recently, we have begun to receive royalties on the sales of other products.  We continue to develop our business and manage our operating costs in order to be in a position to maintain a business that can operate profitably as these royalties decrease significantly in 2014 then further in 2015.  Recurring royalties have a significantly higher gross and operating margin than do our other business activities, resulting in the need to replace a significant amount of margin in order to achieve such profitability.  The Company has taken certain cost cutting steps in order to right size the business operations to support the profitability that is achievable from our core contract research and manufacturing businesses.  In the future, we may need to take additional cost cutting measures if our revenues do not increase or are not profitable enough to support our operations.  In addition, if we are not able to increase operating revenue and decrease operating costs in order to replace Allegra and other royalty income, there will be a material and adverse impact on our business, including negative impacts on our operating cash flow, access to capital and ability to implement required capital improvements to our facilities.
 
If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.
 
All facilities and manufacturing techniques used to manufacture drugs in the United States must conform to standards that are established by the FDA. The FDA conducts unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards.  If the FDA finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or, if the FDA determines that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA or other applicable regulatory bodies could have a material adverse effect on our operations.
 
Our Burlington, MA facility was subject to an FDA warning letter which has resulted in a significant disruption in our business operations at this facility and has had and may continue to have a material adverse effect on our business operations and cash flow.
 
On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations.  A copy of the warning letter is available on the FDA website at www.fda.gov.  The warning letter did not restrict production or shipment of products from the facility; however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations.  Although we resumed cGMP operations in May 2011, the suspension of production has had a material adverse effect on our business operations and cash flow.
 
The warning letter was lifted by the FDA in November 2013 and the facility is now subject to regular FDA and other regulatory inspections, which are expected to be completed yearly.  In the event that further issues are discovered by the FDA in later inspections, any adverse action by the FDA may have a material and adverse effect on our business operations and cash flow.
 
We may experience disruptions in or the inability to source raw materials to support our production processes or to deliver goods to our customers.
 
We rely on independent suppliers for key raw materials, consisting primarily of various chemicals. We generally use raw materials available from more than one source and do not enter into long-term contracts for such materials.  We could experience inventory shortages if we were required to use an alternative manufacturer on short notice, which could lead to raw materials being purchased on less favorable terms than we have with our regular supplier.  Additionally, we rely on various third-party delivery services to transport both goods from our vendors and finished products to our customers.  A disruption in our ability to source or transport materials could delay or halt production and delivery of certain of our products thereby adversely impacting our ability to market and sell such products and our ability to compete. 
 
 
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Our sales forecast and/or revenue projections may not be accurate.
 
We use a backlog system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales backlog. While this process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties.  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.  Any variation in the conversion of the backlog into revenue or the backlog itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.
 
We derive a significant percentage of our revenue from a small group of customers.  We may lose one or more of our major customers.
 
During the year ended December 31, 2013, revenues from our largest customer represented approximately 15% of our contract revenue, or 13% of our total revenue.  During the year ended December 31, 2012, revenues from our largest customer represented approximately 15% of our contract revenue, or 13% of our total revenue.  Our existing agreement with this customer extends through 2016.  In addition, during the year ended December 31, 2013 sales to another customer represented approximately 9% of our contract revenue, or 8% of our total revenue.  In addition, during the year ended December 31, 2013, we provided services to three other major customers, who combined, represent approximately 14% of our contract revenues or 12% of our total revenue. In total, our five largest customers in 2013 represented approximately 38% of our contract revenue and 33% of our total revenue.  These customers, along with most of our other customers, typically may cancel their contracts with 30 days’ to two-years’ prior notice, depending on the size of the contract, for a variety of reasons, some of which are beyond our control.  If any one of our major customers cancels its contract with us, our contract revenues may materially decrease.
 
We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, we may fail to meet our current credit facility’s financial covenants and we may incur additional indebtedness in the future, which could each adversely affect our business, financial condition and results of operations.
 
We have a significant amount of indebtedness, including $150.0 million in aggregate principal with additional accrued interest under our Convertible Senior Notes due 2018.  Our ability to make payments on, and to refinance, our indebtedness, including these notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future.  To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control.  If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of outstanding convertible notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the convertible notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the convertible notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions.  In addition, in the event of a default under the convertible notes, the holders and/or the trustee under the indentures governing the convertible notes may accelerate the payment obligations under the convertible notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.
 
 
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We currently have 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.  As of December 31, 2013, the Company had $6.2 million of outstanding letters of credit secured by this line of credit.  The credit facility contains financial covenants, including a minimum fixed charge coverage ratio, maximum quarterly year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations.  As of December 31, 2013, the Company was in compliance with its current financial covenants.
 
In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:  
· make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
· limit our flexibility in planning for, or reacting to, changes in our business and our industry;
· place us at a disadvantage compared to our competitors who have less debt; and
· limit our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt service requirements, execution of our business strategy or other purposes.
 
Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
 
In addition, under our Convertible Senior Notes due 2018, we are required to offer to repurchase the convertible notes upon the occurrence of a fundamental change, which could include, among other things, any acquisition of us for consideration other than publicly traded securities. The repurchase price must be paid in cash, and this obligation may have the effect of discouraging, delaying or preventing an acquisition of the Company that would otherwise be beneficial to our security holders.
 
Pharmaceutical and biotechnology companies may discontinue or decrease their usage of our services.
 
We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services, as a result of negative economic trends generally and more specifically in the pharmaceutical industry.   
 
We may be adversely affected in future periods as a result of general economic and/or pharmaceutical industry downturns which may result in a diminished availability of liquidity in the marketplace.  If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the overall global economy, our revenues and earnings could be lower than we currently expect and our revenues may decrease or not grow at historical rates.
 
We face increased competition.
 
We compete directly with the in-house research departments of pharmaceutical companies and biotechnology companies, as well as contract research companies, and research and academic institutions. We also experience significant competition from foreign companies operating under lower cost structures, primarily those in China and other Asian countries.  While we operate in certain lower relative cost jurisdictions, such as India and Singapore, we do not have operations in China. Many of our competitors have greater financial and other resources than we have. As new companies enter the market and as more advanced technologies become available, we currently expect to face increased competition. In the future, any one of our competitors may develop technological advances that render the services that we provide obsolete. While we plan to develop technologies, which will give us competitive advantages, our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future, and our competitors may be able to develop such technologies before we do or provide those services at a lower cost. Consequently, we may not be able to successfully compete in the future.
 
 
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We may be required to record additional long-lived asset impairment charges.
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable based on the existence of certain triggering events.
 
Factors we consider important which could result in long-lived asset impairment include 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; and
 
· a significant decrease in the market value of assets.
 
In 2013, we recorded long-lived asset impairment charges of $1.9 million in the DDS segment primarily related to the Company’s decision to cease operations at our Bothell, WA and Budapest, HU facilities.
 
If long-lived assets are determined to be impaired in the future, we would be required to record a charge to our results of operations. 
 
Agreements we have with our employees, customers, consultants and other third parties may not afford adequate protection for our valuable intellectual property, confidential information and other proprietary information.
 
Some of our most valuable assets include patents.  In addition to patent protection, we also rely on trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our customer’s information, such as trade secrets, proprietary information and other customer confidential information, as well as our own, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques causing some technologies that we develop to be patented by other companies. Our failure to protect our proprietary information and techniques may inhibit our ability to compete effectively and our investment in those technologies may not yield the benefits we expected. In addition, we may be subject to claims that we are infringing on the intellectual property of others. We could incur significant costs defending such claims and if we are unsuccessful in defending these claims, we may be subject to liability for infringement.  To the extent that we are unable to protect confidential customer information, we may encounter material harm to our reputation and to our business.
 
We may not be able to effectively manage our international operations.
 
There are significant risks associated with the establishment of foreign operations, including, but not limited to: geopolitical risks, foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates, compliance with local laws and regulations, the protection of our intellectual property and that of our customers, the ability to integrate our corporate culture with local customs and cultures, and the ability to effectively and efficiently supply our international facilities with the required equipment and materials. If we are unable to effectively manage these risks, these locations may not produce the revenues, earnings, or strategic benefits that we anticipate, or we may be subject to fines or other regulatory actions if we do not comply with local laws and regulations, which could have a material adverse effect on our business.
 
 
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Delays in, or failure of, the approval of our customers’ regulatory submissions could impact our revenue and earnings.
 
The successful transition of clinical and preclinical candidates into long term commercial supply agreements is a key component of the LSM business strategy.  If our customers do not receive approval of their FDA regulatory submissions, this could have a significant negative impact on our revenue and earnings.  In addition, the manufacture of controlled substances requires timely approval by the DEA of sufficient controlled substance quota.  If we do not receive sufficient DEA quota to meet our customers’ demands, and/or if our customers do not receive sufficient quota to take delivery of and/or formulate the product at their facilities, this could have a significant negative impact on our revenue and earnings. 
 
We may not be able to recruit and retain the highly skilled employees we need.
 
Our future growth and profitability depends upon the research and efforts of our highly skilled employees, such as our scientists, and their ability to keep pace with changes in drug discovery and development technologies. We compete vigorously with pharmaceutical firms, biotechnology firms, contract research firms, and academic and research institutions to recruit scientists. If we cannot recruit and retain scientists and other highly skilled employees, we will not be able to continue our existing services and will not be able to expand the services we offer to our customers.
 
We may lose one or more of our key employees.
 
Our business is highly dependent on our senior management and scientific staff, including:
 
· William Marth, our Chief Executive Officer and President;
 
· Michael M. Nolan, our Vice President, Chief Financial Officer and Treasurer;
 
· Steven R. Hagen, Ph.D., our Senior Vice President, Manufacturing and Pharmaceuticals;
 
· Lori M. Henderson, our Vice President, General Counsel and Secretary
 
· Michael Luther, Ph.D., our Senior Vice President, Discovery;
 
· Brian D. Russell, our Vice President, Human Resources; and
 
· George Svokos, our Senior Vice President, Sales and General Manager, API
 
The loss of any of our key employees, including our scientists, may have a material adverse effect on our business.
 
We may be held liable for harm caused by drugs that we develop and test. 
 
We develop, test and manufacture drugs that are used by humans. If any of the drugs that we develop, test or manufacture harm people, we may be required to pay damages. Although we carry liability insurance, we may be required to pay damages in excess of the amounts of our insurance coverage. Damages awarded in a product liability action could be substantial and could have a material adverse effect on our financial condition.
 
We may be liable for contamination or other harm caused by hazardous materials that we use.
 
Our manufacturing and research and development processes involve the use of hazardous or potentially hazardous materials and substances. We are subject to Federal, state and local laws and regulation governing the use, manufacture, handling, storage and disposal of such materials, including but not limited to radioactive compounds and certain waste products.  Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges.  Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, we cannot completely eliminate the risk of contamination or injury resulting from these materials.  We may incur liability as a result of any contamination or injury.  In addition, we cannot predict the extent of regulations that might result from any future legislative or administrative actions, therefore we could be required to incur significant costs to comply with environmental laws and regulations and these actions could restrict our operations in the future.  Such expenses, liabilities or restrictions could have a material adverse effect on our operations and financial condition.
 
 
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We completed an environmental remediation assessment associated with groundwater contamination at our Rensselaer, New York location.  This contamination is associated with past practices at the facility prior to 1990, and prior to our investment or ownership of the facility.  Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation.  Under the remediation plan, we are expected to pay for monitoring and reporting into 2014.  Under a 1999 agreement with the facility’s previous owner, our maximum liability under the remediation is $5.5 million.  If the State of New York Department of Environmental Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a material adverse effect on our operations.
 
Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our facilities.
 
We depend on our laboratories and equipment for the continued operation of our business. Our research and development, manufacturing and all administrative functions are primarily conducted at our facilities in Albany and Rensselaer, New York. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event at any of our facilities could have a significant negative impact on our operations.
 
Terrorist attacks or acts of war may seriously harm our business.
 
Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition.  The potential for terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.
 
Domestic governmental policy changes, including health care reform and budgetary policies could reduce the reimbursement rates pharmaceutical and biotechnology companies receive for drugs they sell, which incorporate some of our products, which in turn, could reduce the demand for or amounts that they have available to retain our services.
 
We depend on contracts with pharmaceutical and biotechnology companies for a majority of our revenues.  We therefore depend upon the ability of pharmaceutical and biotechnology companies to earn enough profit on the drugs they market to devote substantial resources to the research and development of new drugs.  Additionally, we rely on our collaborative partners to obtain acceptable prices or an adequate level of reimbursement for our current and potential future products.  Continued efforts of government and third-party payors to contain or reduce the cost of health care through various means, could affect our levels of revenues and earnings.  In certain foreign markets, pricing and/or profitability of pharmaceutical products are subject to governmental control.  Domestically, there have been and may continue to be proposals to implement similar governmental control.  Future legislation may limit the prices pharmaceutical and biotechnology companies can charge for the drugs they market and cost control initiatives could affect the amounts that third-party payors agree to reimburse for those drugs.   There is no assurance that our collaborative partners will be able to obtain acceptable prices for our products which would allow us to sell these products on a competitive and profitable basis.  As a result, such laws and initiatives may have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to the research and development of new drugs.  If pharmaceutical and biotechnology companies decrease the resources they devote to the research and development of new drugs, the amount of services that we perform, and therefore our revenues, could be reduced.
 
The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in every shareholder’s best interests.
 
There are provisions in our certificate of incorporation and bylaws which may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
 
· Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire.
 
 
19

 
· Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control.
 
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock.
 
We have renewed a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of us is made in the future. Under the terms of the Shareholder Rights Plan, the Board can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our Common Stock. Once a shareholder acquires more than 15% of our outstanding Common Stock without Board approval (the “acquiring person”), all other shareholders will have the right to purchase securities from us at a price less than their then fair market value. These subsequent purchases by other shareholders substantially reduce the value and influence of the shares of Common Stock owned by the acquiring person.
 
Our officers and directors have significant control over us and their interests as shareholders may differ from our other shareholders.
 
As of February 28, 2014, our directors and officers beneficially owned or controlled approximately 11.0% of our outstanding common stock. Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.
 
Our stock price is volatile and could experience substantial change.
 
The market price of our common stock has historically experienced and may continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially.
 
Because we do not intend to pay dividends, our shareholders will benefit from an investment in our common stock only if it appreciates in value.
 
We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of our shareholders’ investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchased their shares.
 
We may experience significant increases in operational costs beyond our control.
 
Costs for certain items which are needed to run our business, such as energy and certain materials, have the potential to fluctuate.  As these cost increases are often dependent on market conditions, and although we do our best to manage these price increases, we may experience increases in our costs due to the volatility of prices and market conditions.  Increases in these costs could negatively impact our results of operations to the extent that we are unable to incorporate these increases into the pricing of our goods and services.
 
Our business may be adversely affected if we encounter complications in connection with our information technology systems and infrastructure.
 
We rely to a large extent upon sophisticated information technology systems and infrastructure, with respect to enterprise resource planning, manufacturing, and the storage of business, financial, intellectual property, and other information essential to the effective operation and management of our business.  While we have invested significantly in the operation and protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems.  Prolonged interruptions or significant breaches could result in a material adverse effect on our operations.
 
 
20

 
We are subject to foreign currency risks.
 
Our global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors.  If we fail to effectively manage such risks, it could have a negative impact on our consolidated financial statements.  For a further discussion of our foreign currency risks, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.
 
A reduction or delay in government funding of research and development may adversely affect our business.
 
A portion of our overall revenue is derived either from governmental sources directly, such as the U.S. National Institutes of Health (“NIH”) , or indirectly, from customers whose funding is partially dependent on both the level and timing of funding from government sources.  A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results and there is no guarantee that government funding will be directed towards projects and studies that require use of our services.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
The aggregate square footage of our operating facilities is approximately 987,000 square feet, of which 726,000 square feet are owned and 261,000 square feet are leased. Set forth below is information on our principal facilities:
 
Location
 
Square Feet
 
Primary Purpose
Rensselaer, New York
 
276,000
 
Contract Manufacturing 
Albany, New York
 
198,000
 
Contract Manufacturing, Contract Research and Administration
Aurangabad, India
 
208,000
 
Contract Manufacturing
Holywell, United Kingdom
 
68,000
 
Contract Manufacturing & Contract Research 
East Greenbush, New York
 
64,000
 
Contract Research 
Hyderabad, India
 
62,000
 
Contract Research
Burlington, Massachusetts
 
46,000
 
Contract Manufacturing
Singapore
 
37,000
 
Contract Research 
Syracuse, New York
 
28,000
 
Contract Research 
 
Our Rensselaer, NY, Aurangabad, India, Holywell, United Kingdom and Burlington, MA facilities are used in our Large-Scale Manufacturing (“LSM”) segment as reported in the consolidated financial statements.  All other facilities are used in our Discovery, Drug Development and Small-Scale Manufacturing (“DDS”) segment, as reported in the consolidated financial statements.
 
We believe these facilities are generally in good condition and suitable for their purpose.  We believe that the capacity associated with these facilities is adequate to meet our anticipated needs through 2014.

ITEM 3. 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.
 
Early in the first quarter of 2014, the Company had settled all pending United States and foreign litigation 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. 
 
 
21

 
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 $1.9 million in 2013 representing the payment made upon finalizing the settlement agreement.

ITEM 4.  Mine Safety Disclosures
 
None.
 
 
22

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
(a)    Market Information. The Common Stock of the Company is traded on the NASDAQ Global Market (“NASDAQ”) under the symbol “AMRI.” The following table sets forth the high and low closing prices for our Common Stock as reported by NASDAQ for the periods indicated:
 
Period
 
High
 
Low
 
Year ending December 31, 2013
 
 
 
 
 
 
 
First Quarter
 
$
10.84
 
$
5.45
 
Second Quarter
 
$
12.23
 
$
8.99
 
Third Quarter
 
$
13.72
 
$
10.81
 
Fourth Quarter
 
$
14.28
 
$
9.88
 
 
 
 
 
 
 
 
 
Year ending December 31, 2012
 
 
 
 
 
 
 
First Quarter
 
$
3.20
 
$
2.63
 
Second Quarter
 
$
3.36
 
$
2.30
 
Third Quarter
 
$
3.73
 
$
2.64
 
Fourth Quarter
 
$
5.50
 
$
3.45
 
 
Stock Performance Graph
 
The following graph provides a comparison, from December 31, 2008 through December 31, 2013, of the cumulative total stockholder return (assuming reinvestment of any dividends) among the Company, the NASDAQ Stock Market (U.S. Companies) Index (the “NASDAQ Index”) and the NASDAQ Pharmaceuticals Index (the “Pharmaceuticals Index”). The historical information set forth below is not necessarily indicative of future performance. Data for the NASDAQ Index and the Pharmaceuticals Index were provided by NASDAQ.
 
 
 
23

 
 
 
Albany Molecular
Research, Inc
 
NASDAQ Stock
Market
(U.S. Companies)
Index
 
NASDAQ
Pharmaceuticals
Index
 
December 31, 2008
 
100.000
 
100.000
 
100.000
 
December 31, 2009
 
93.220
 
143.741
 
112.364
 
December 31, 2010
 
57.700
 
170.174
 
121.805
 
December 31, 2011
 
30.082
 
171.081
 
130.379
 
December 31, 2012
 
54.209
 
202.398
 
173.465
 
December 31, 2013
 
103.491
 
281.914
 
285.963
 
 
(b)    Holders.
 
The number of record holders of our Common Stock as of February 28, 2014 was approximately 218.  We believe that the number of beneficial owners of our Common Stock at that date was substantially greater than 218.
 
(c)    Dividends.
 
We have not declared any cash dividends on our Common Stock since our inception in 1991. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future.
 
(d)    Equity Compensation Plan Information.
 
The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2013:
 
Plan Category
 
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants
and rights
 
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
Equity compensation plans
    approved by security
    holders(1)
 
2,045,725
 
$
5.62
 
3,165,490
(2)
Equity compensation plans
    not approved by security
    holders
 
 
 
 
 
Total
 
2,045,725
 
$
5.62
 
3,165,490
 
 
(1) Consists of the Company’s 1998 Stock Option Plan, the Company’s 2008 Stock Option Plan and the Company’s Employee Stock Purchase Plan (“ESPP”). Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period.
 
(2) Includes 2,691,551 shares available under the 2008 Stock Option Plan and 473,939 shares available under the ESPP.
 
 
24

 
(e) Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table represents treasury share repurchases during the three months ended December 31, 2013:
 
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
 
October 1, 2013 – October 31, 2013
 
-
 
$
-
 
N/A
 
N/A
 
November 1, 2013 – November 30, 2013
 
507
 
$
13.11
 
N/A
 
N/A
 
December 1, 2013 – December 31, 2013
 
-
 
$
-
 
N/A
 
N/A
 
Total
 
507
 
$
13.11
 
N/A
 
N/A
 
 
(1)  Consists of shares repurchased by the Company for certain employees’ restricted stock that vested to satisfy minimum tax withholding obligations that arose on the vesting of the restricted stock.
 
 
25

 
ITEM 6. SELECTED FINANCIAL DATA.
 
The selected financial data shown below for the years ended December 31, 2013, 2012 and 2011, and as of December 31, 2013 and 2012, have been derived from our audited consolidated financial statements included in this Form 10-K.  The selected financial data set forth below for the years ended December 31, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 have been derived from our audited consolidated financial statements for those years, which are not included in this Form 10-K. The information should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes and other financial information included herein, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 
 
 
As of and for the Year Ended December 31,
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
(in thousands, except per share data)
 
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract revenue
 
$
210,001
 
$
189,858
 
$
169,611
 
$
163,228
 
$
156,800
 
Recurring royalties
 
 
36,574
 
 
35,988
 
 
35,034
 
 
34,838
 
 
34,867
 
Milestone revenue
 
 
 
 
840
 
 
3,000
 
 
 
 
4,750
 
Total revenue
 
 
246,575
 
 
226,686
 
 
207,645
 
 
198,066
 
 
196,417
 
Cost of contract revenue
 
 
171,923
 
 
168,064
 
 
168,470
 
 
152,673
 
 
138,739
 
Technology incentive award
 
 
2,767
 
 
3,143
 
 
3,557
 
 
3,484
 
 
3,594
 
Research and development
 
 
414
 
 
906
 
 
7,939
 
 
11,090
 
 
14,547
 
Selling, general and administrative
 
 
42,256
 
 
40,904
 
 
41,071
 
 
42,234
 
 
38,036
 
Goodwill impairment
 
 
 
 
 
 
15,812
 
 
36,844
 
 
22,900
 
Property and equipment impairment
 
 
1,857
 
 
8,334
 
 
4,674
 
 
10,848
 
 
 
Intangible asset impairment
 
 
 
 
 
 
856
 
 
 
 
 
Restructuring charges
 
 
7,183
 
 
4,632
 
 
1,271
 
 
3,090
 
 
329
 
Arbitration charge
 
 
 
 
 
 
127
 
 
9,798
 
 
 
Total costs and expenses
 
 
226,400
 
 
225,983
 
 
243,777
 
 
270,061
 
 
218,145
 
Income (loss) from operations
 
 
20,175
 
 
703
 
 
(36,132)
 
 
(71,995)
 
 
(21,728)
 
Interest (expense) income, net
 
 
(1,244)
 
 
(454)
 
 
(583)
 
 
160
 
 
269
 
Other income (expense), net
 
 
772
 
 
(130)
 
 
77
 
 
(1,007)
 
 
(593)
 
Income (loss) before income tax expense (benefit)
 
 
19,703
 
 
119
 
 
(36,638)
 
 
(72,842)
 
 
(22,052)
 
Income tax expense (benefit)
 
 
7,023
 
 
3,896
 
 
(4,342)
 
 
(9,971)
 
 
(5,357)
 
Net income (loss)
 
$
12,680
 
$
(3,777)
 
$
(32,296)
 
$
(62,871)
 
$
(16,695)
 
Basic income (loss) per share
 
$
0.41
 
$
(0.12)
 
$
(1.08)
 
$
(2.05)
 
$
(0.54)
 
Diluted income (loss) per share
 
$
0.40
 
$
(0.12)
 
$
(1.08)
 
$
(2.05)
 
$
(0.54)
 
Weighted average common shares outstanding, basic
 
 
30,912
 
 
30,318
 
 
29,961
 
 
30,657
 
 
31,062
 
Weighted average common shares outstanding, diluted
 
 
31,845
 
 
30,318
 
 
29,961
 
 
30,657
 
 
31,062
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and investment securities -
     unrestricted
 
$
175,928
 
$
23,293
 
$
20,198
 
$
41,481
 
$
111,058
 
Property and equipment, net
 
 
127,775
 
 
135,519
 
 
149,729
 
 
163,212
 
 
166,746
 
Working capital
 
 
235,117
 
 
77,438
 
 
62,584
 
 
79,409
 
 
149,730
 
Total assets
 
 
445,268
 
 
262,862
 
 
263,067
 
 
325,106
 
 
373,692
 
Long-term debt, excluding current installments
 
 
123,135
 
 
7,227
 
 
3,003
 
 
11,737
 
 
13,212
 
Total stockholders’ equity
 
 
245,704
 
 
206,141
 
 
206,432
 
 
243,743
 
 
314,613
 
Other Consolidated Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
11,135
 
$
9,890
 
$
10,837
 
$
11,628
 
$
15,172
 
 
 
26

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview 
 
We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients (“API”) and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.
 
We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs.  Our service offerings range from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia.  We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market.  Compounds discovered and/or developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.  
 
Additionally, we offer our customers a fully integrated manufacturing process for sterile injectable drugs.  This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product.  We continue to make investments to build and recover our formulation business, as 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/manufactured on an aseptic basis.
 
In addition to providing our customers our hybrid services model for outsourcing, we offer the option of insourcing.  With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the customer to cost-effectively leverage their unused laboratory space.
 
As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. AMRI SMARTSOURCING™ is a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI’s people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long term growth and profitability.
 
We have developed certain proprietary compounds and our own intellectual property supportive of these compounds.  Certain of these compounds and the associated proprietary intellectual property have been partnered with third parties.  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 compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.
 
During 2012, we implemented various strategic restructuring plans.  The goal of these restructuring activities was to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing our location footprint. 
 
 
27

 
Our total revenue for 2013 was $246.6 million, including $210.0 million from our contract service business and $36.6 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc (“Actavis”).  We generated $28.2 million in cash from operations, and we used $11.1 million for capital expenditures on our facilities and equipment, primarily related to maintaining and upgrading our U.S. facilities.  Our net income was $12.7 million in 2013, largely the result of increased capacity and facility utilization and cost savings measures.  As of December 31, 2013, we had $175.9 million in cash and cash equivalents and $124.2 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
 
Operating Segment Data
 
We have organized our sales, marketing and production activities into the Discovery, Drug Development and Small-Scale Manufacturing (“DDS”) and Large-Scale Manufacturing (“LSM”) segments.  We rely on an internal management accounting system to report results of these segments. The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system.  The DDS segment includes activities such as drug lead discovery, optimization, drug development and small-scale commercial manufacturing.  The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing. 
 
Contract Revenue
 
Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Our contract revenues for our DDS and LSM segments were as follows:
 
 
 
Year Ended December 31,
 
 
 
2013
 
2012
 
2011
 
 
 
(in thousands)
 
DDS
 
$
77,418
 
$
73,458
 
$
74,032
 
LSM
 
 
132,583
 
 
116,400
 
 
95,579
 
Total
 
$
210,001
 
$
189,858
 
$
169,611
 
 
DDS contract revenues for the year ended December 31, 2013 increased from amounts recognized in 2012 primarily due to an increase in demand for U.S. chemistry services, offset in part, by a decrease in U.S. biology 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.
 
DDS contract revenues for the year ended December 31, 2012 remained consistent with amounts recognized in the same period in 2011.  During 2012, there was lower contract revenue for our biology discovery services and development and small-scale manufacturing services.  This decrease was offset in part by an increase in our U.S. chemistry discovery services.
 
LSM contract revenue significantly increased for the year ended December 31, 2013 from 2012 as a result of an increase in commercial manufacturing services at our large-scale facilities worldwide, as well as an increase in our clinical supply manufacturing services.  We currently expect continued growth in LSM contract revenue for full year 2014 due to on-going demand for our commercial manufacturing services worldwide, as well as in our clinical supply manufacturing services.
 
LSM contract revenue significantly increased for the year ended December 31, 2012 from 2011 as a result of higher commercial manufacturing services at our Rensselaer, NY facility, as well as continued improvement at our UK facility.
 
Recurring royalty revenue
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
 
(in thousands)
 
$
36,574
 
$
35,988
 
$
35,034
 
 
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. 
 
 
28

 
Recurring royalties increased during the year ended December 31, 2013 from 2012 primarily due to incremental Actavis royalties of $4.3 million, offset in part by lower Allegra royalties of $3.7 million.
 
We currently expect full year 2014 recurring royalties to decrease from amounts recognized in 2013 primarily due to patent expirations of Allegra that began in 2013, partially offset by a slight increase in Actavis royalties.
 
Recurring royalties increased during the year ended December 31, 2012 from 2011 due to the receipt of Actavis royalties of $4.7 million.  This increase was offset in part by a $3.7 million decrease in royalties recognized from the sales of prescription Allegra which was primarily due to decreased sales in Japan in the first quarter of 2012 as a result of a less severe allergy season.
 
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. 
 
Milestone revenue
 
Milestone revenue is earned for achieving milestones included in licensing and research agreements with certain of our partners.  Milestone revenues were as follows:
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
 
$
840
 
$
3,000
 
 
No milestone revenue was recorded during the year ended December 31, 2013. 
 
Milestone revenue received during the year ended December 31, 2012 was recognized primarily in conjunction with the Company’s license and research agreement with BMS for advancing a fourth compound into preclinical development. 
Milestone revenue of $3.0 million received during the year ended December 31, 2011 was recognized in conjunction with the Company’s license and research agreement with BMS and was specifically based on meeting a Phase II clinical trial milestone of an AMRI compound licensed exclusively to BMS.
 
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:
 
 
 
Year Ended December 31,
 
 
 
2013
 
 
2012
 
 
2011
 
 
 
(in thousands)
 
DDS
 
$
66,604
 
 
$
70,366
 
 
$
72,758
 
LSM
 
 
105,319
 
 
 
97,698
 
 
 
95,712
 
Total
 
$
171,923
 
 
$
168,064
 
 
$
168,470
 
DDS Gross Contract Margin
 
 
14.0
%
 
 
4.2
%
 
 
1.7
%
LSM Gross Contract Margin
 
 
20.6
%
 
 
16.0
%
 
 
(0.1)
%
Total Gross Contract Margin
 
 
18.1
%
 
 
11.5
%
 
 
0.7
%
 
DDS contract revenue gross margin percentage increased for the year ended December 31, 2013 compared to 2012.  This increase is primarily due to previously announced cost savings initiatives as well as an increase in facility utilization. 
 
We currently expect DDS contract margin percentage for 2014 to improve over amounts recognized in 2013 due to improved facility utilization.
 
 
29

 
DDS contract revenue gross margin percentages increased for the year ended December 31, 2012 compared to 2011.  These increases were primarily due to cost savings initiatives taken in our U.S. chemistry operations in 2011, as well as the impact of the closure of our Hungarian operations in 2012, offset in part by lower demand for our U.S. biology and development services in relation to our fixed costs. 
 
LSM’s contract revenue gross margin percentage improved for the year ended December 31, 2013 compared to 2012.  This increase was primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.
 
We currently expect continued improvement in LSM contract margins for 2014 driven by an increase in capacity utilization at all of our large-scale facilities worldwide.
 
LSM’s contract revenue gross margin percentages improved for the year ended December 31, 2012 compared to 2011.  This increase is primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.
 
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:
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
 
(in thousands)
 
$
2,767
 
$
3,143
 
$
3,557
 
 
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 years ended December 31, 2013 and 2012 as compared to the same periods 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.  Although we ceased our proprietary new compound R&D activities, we continue to believe there are additional opportunities to partner these programs in return for appropriate consideration if our technology results in compounds that are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes. 
 
Research and development expenses were as follows:
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
414
 
$
906
 
$
7,939
 
 
R&D expense for the year ended December 31, 2013 decreased from amounts recognized in 2012 as a result of our strategic decision to limit our R&D activities as described above.
 
 
30

 
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.
 
R&D expense for the year ended December 31, 2012 decreased to $0.9 million as a result of our strategic decision during the fourth quarter of 2011.  R&D expenditures incurred during 2012 related 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:
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
42,256
 
$
40,904
 
$
41,071
 
 
SG&A expenses for the year ended December 31, 2013 increased over amounts recognized in 2012 primarily attributable to a one-time charge of $1.92 million for the settlement of a U.S. litigation matter.  The settlement, which was paid during the third quarter, served to settle the litigation and dismiss all claims between the parties.  Additionally, there were certain expenses recognized in 2013 related to strategic executive employment matters and related transition matters.  These increases were offset in part by ongoing actions related to cost savings. 
 
We currently expect SG&A expenses for 2014 to decrease from amounts recognized in 2013 due to litigation settlement charges recognized in 2013.
 
SG&A expenses for the year ended December 31, 2012 remained relatively flat as compared to the same period in 2011.  Decreases in SG&A resulting from ongoing actions related to cost savings were offset by non-recurring executive transition costs. 
 
Goodwill Impairment
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
 
$
 
$
15,812
 
 
During the fourth quarter of 2011, we recorded a goodwill impairment charge of $15.8 million in our DDS operating segment due to a change in the implied fair value of the segment’s goodwill to below its carrying value.  The change in the fair value of the segment was primarily attributable to significantly lower than forecasted demand for contract services in 2011, which resulted in a decrease in management’s long-term estimates of operating results and cash flows for the segment.
 
Property and Equipment Impairment
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
1,857
 
$
8,334
 
$
4,674
 
 
During 2013, we recorded total long-lived asset impairment charges of $1.9 million in our DDS segment.  Part of the total long-lived asset impairment charge was a result of resolving the termination of the lease at our former Hungary facility, for which we recorded additional property and equipment impairment charges of $1.3 million regarding the disposition of certain moveable equipment located at the former Hungary facility.  Additionally, we recorded property and equipment impairment charges of $0.6 million in our DDS segment associated with the Company’s decision to cease operations at our Bothell, Washington facility.
 
During 2012, we recorded long-lived asset impairment charges of $8.3 million in our DDS segment in order to further optimize the Company’s location footprint and cease operations at our Budapest, Hungary and Bothell, Washington facilities.
 
 
31

 
In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company’s decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company's workforce, right size capacity, and reduce operating costs.
 
Intangible Asset Impairment
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
 
$
 
$
856
 
 
In the fourth quarter of 2011, we identified patent assets relating to technologies that we no longer expect to derive value from as a result of the Company’s decision to cease internal R&D activities.  We recorded an intangible impairment charge of $0.9 million in our DDS segment in conjunction with this review of our patent portfolio.
 
Restructuring Charges
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
7,183
 
$
4,632
 
$
1,271
 
 
During 2012, we approved restructuring plans to cease all operations at our Budapest, Hungary, and Bothell, WA facilities.   The goal of these restructuring activities was to advance our continued strategy of increasing global competitiveness and to remain diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing our location footprint.  Additionally, we intend to expand and better integrate our in vitro biology services with the total drug discovery service platform and to further optimize the Company’s location footprint.  In connection with these actions, we recorded restructuring charges of $6.7 million during 2013 and $4.6 million in the full year of 2012. 
 
We exited the Budapest, Hungary facility in the third quarter of 2012.  During the second quarter of 2013, we reached agreement with the landlord of that facility under which AMRI Hungary was to pay approximately $1.89 million to settle the litigation in Hungary that resulted from the termination of the lease following the cessation of operations in Budapest, Hungary.  Of this amount, $1.1 million was recorded in 2012 as our initial estimate of our liability under this lease.  The remaining $0.8 million was included in the restructuring charge taken during the second quarter of 2013.  This settlement was paid during the second half of 2013.
 
In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation.  The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities.  As a result of the workforce reduction, we have terminated the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility.  As a result of this restructuring, we recorded a restructuring charge in the DDS operating segment of $0.3 million in the fourth quarter of 2011 and $0.3 million in 2012. 
 
Anticipated cash outflow related to the restructuring reserves as of December 31, 2013 for 2014 is approximately $3.2 million.
 
Interest (expense) income, net
 
 
 
Year Ended December 31,
 
(in thousands)
 
2013
 
2012
 
2011
 
Interest expense
 
$
(1,255)
 
$
(463)
 
$
(714)
 
Interest income
 
 
11
 
 
9
 
 
131
 
Interest (expense) income, net
 
$
(1,244)
 
$
(454)
 
$
(583)
 
 
Interest expense increased for the year ended December 31, 2013 as compared with the same period in the prior year primarily due to interest and accretion related to the issuance of $150.0 million of convertible debt in November 2013.  Interest expense decreased for the year ended December 31, 2012 as compared with the same period in the prior year primarily due to lower borrowing costs under the Company’s April 2012 credit agreement. 
 
 
32

 
Interest income remained relatively consistent for the year ended December 31, 2013 as compared with the same period in the prior year.  Interest income decreased for the year ended December 31, 2012 as compared with the same period in 2011 due to a decrease in the amount of interest bearing assets. 
 
Other income (expense), net
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
772
 
$
(130)
 
$
77
 
 
Other income for the year ended December 31, 2013 increased from other expense for the same period in 2012 primarily due to rates associated with foreign currency transactions, as well as an insurance demutualization gain of $0.4 million.  This income was offset in part by deferred financing amortization expense of $0.3 million recognized in 2013.
 
Other expense increased for the year ended December 31, 2012 from income for the same period in 2011 primarily due to rates associated with foreign currency transactions, as well as costs associated with transitioning our financing to a new creditor during 2012.  These amounts were partially offset by income from the settlement of contingencies associated with our 2010 AMRI UK and AMRI Burlington acquisitions, along with income from insurance claims related to the remediation of the FDA warning letter at our Burlington facility.
 
Income tax expense (benefit)
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in thousands)
 
$
7,023
 
$
3,896
 
$
(4,342)
 
 
Income tax expense for the year ended December 31, 2013 increased $3.1 million from 2012 primarily due to improved pre-tax income at the Company’s U.S. locations.  The changes in the Company’s effective tax rates as compared to the prior year are due to changes in pre-tax income and losses in relation to the applicable tax rates at our various locations worldwide.
 
Income tax expense for the year ended December 31, 2012 was $3.9 million as compared to income tax benefit of $4.3 million for 2011 due primarily to improved pre-tax income at the Company’s U.S. locations and the composition of pre-tax income or losses in relation to the applicable tax rates at our various locations worldwide.
 
 
33

 
Liquidity and Capital Resources
 
We have historically funded our business through operating cash flows and proceeds from borrowings. During 2013, we generated cash of $28.2 million from operating activities.
 
During 2013, cash used in investing activities was $11.2 million, primarily for the acquisition and installation of equipment.  We generated cash of $136.9 million from financing activities, relating primarily to the net proceeds from the issuance of convertible debt and associated warrants and convertible note hedges of $134.8 million.
 
Working capital, defined as current assets less current liabilities, was $235.1 million as of December 31, 2013, compared to $77.4 million as of December 31, 2012.  This increase primarily relates to cash generated from the net proceeds from the above mentioned issuance of convertible debt.
 
Total capital expenditures for the year ended December 31, 2013 were $11.1 million as compared to $9.9 million for the year ended December 31, 2012. Capital expenditures in 2013 were primarily related to the growth, maintenance and upgrading of our existing facilities.
 
For 2014, we expect to incur $12.0 to $14.0 million in capital expenditures primarily relating to the growth and maintenance of our existing facilities.
 
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 6 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 December 31, 2013, the Company had no amounts outstanding under the line of credit and $6.2 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 December 31, 2013 was $8.8 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 $4.5 million at December 31, 2013.
 
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 December 31, 2013, 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 December 31, 2013, the Company was in compliance with its current financial covenants.  
 
Working capital, defined as current assets less current liabilities, was $77.4 million as of December 31, 2012, compared to $62.6 million as of December 31, 2011.  This was primarily due to an increase in both accounts receivable and inventories as a result of the growth in our business in 2012.
 
Total capital expenditures for the year ended December 31, 2012 were $9.9 million as compared to $10.8 million for the year ended December 31, 2011.  Capital expenditures in 2012 were primarily related to the growth, maintenance and upgrading of our existing facilities.
 
During 2012, we generated cash of $15.3 million from operating activities and cash used in investing activities was $9.8 million, primarily for the acquisition and installation of equipment.  During 2012, we used $2.5 million for financing activities, which related primarily to pledging $5.0 million of cash to collateralize our revolving line of credit issued in conjunction with our credit facility executed in April 2012 along with principal payments of long-term debt, partially offset by net proceeds from the term loan issued under this agreement.
 
 
34

 
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.
 
Off Balance Sheet Arrangements
 
We do not use special purpose entities or other off-balance sheet financing techniques that we believe have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity or capital resources.
 
Contractual Obligations
 
The following table sets forth our long-term contractual obligations and commitments as of December 31, 2013:
 
Payments Due by Period (in thousands)
 
 
 
Total
 
Under 1 Year
 
1-3 Years
 
4-5 Years
 
After 5  Years
 
Long-Term Debt (principal)
 
$
157,228
 
$
1,024
 
$
2,063
 
$
153,051
 
$
1,090
 
Operating Leases
 
 
11,126
 
 
3,150
 
 
3,452
 
 
2,475
 
 
2,049
 
Purchase Commitments
 
 
33,128
 
 
33,128
 
 
 
 
 
 
 
Restructuring liabilities
 
 
4,376
 
 
3,152
 
 
1,224
 
 
 
 
 
Pension Plan Contributions (1)
 
 
3,469
 
 
811
 
 
1,329
 
 
1,329
 
 
 
 
 
(1) Pension and other postretirement benefits include estimated payments made from Company assets.  No estimate of payments after five years has been provided due to many uncertainties.
 
Critical Accounting Estimates
 
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect our best judgment and are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.   Under different assumptions or conditions, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of inventories, and long-lived assets, as well as increased pension liabilities, the establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects.  Also see Note 1, Summary of Significant Accounting Policies, in Part II, Item 8. “Financial Statements and Supplementary Data” of this report, which discusses the significant accounting policies that we have selected from acceptable alternatives.
 
Inventory
 
Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in our large-scale manufacturing plants.  Large-scale manufacturing inventories are valued on a first-in, first-out (“FIFO”) basis.  Inventories are valued at the lower of cost or market.  We regularly review inventories on hand and record a charge for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The charge for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.  Total inventories recorded on our consolidated balance sheet at December 31, 2013 and 2012 were $32.0 million and $28.2 million, respectively.  We recorded charges to reduce obsolete inventory balances of $0.4 million, $0 and $0.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
 
 
35

 
Income Taxes
 
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties and the need for valuation allowances. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates on our international operations, each of which are subject to local country tax laws and regulations. 
 
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carry-forwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings with focus on our U.S. operations and available tax planning strategies.  These sources of income inherently rely heavily on estimates.  To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.  We use our historical experience and our short and long-range business forecasts to provide insight.  Amounts recorded for deferred tax assets, net of valuation allowances, were $15.2 million and $18.0 million at December 31, 2013 and 2012, respectively.  Such 2013 year-end amounts are expected to be fully recoverable within the applicable statutory expiration periods.
 
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 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.  A change in inputs or estimates, included but not limited to, interest rates and the trading price and implied volatility of the Company’s common stock, may materially impact the resulting fair value measurements of these instruments and may also impact our results of operations.  At December 31, 2013, amounts recorded for both the Note Hedges and the Notes Conversion Derivative were $22.7 million.
 
Long-Lived Assets
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Factors we consider 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; and
· A significant decrease in the market value of assets.
 
Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset group, the useful life over which cash flows will occur, their amount, and the asset group’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience, internal business plans and our understanding of current marketplace valuation estimates. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.
 
During 2013, we recorded long-lived asset impairment charges of $1.9 million in our DDS segment primarily related to further optimizing the Company’s location footprint and cessation of operations at our Budapest, Hungary and Bothell, Washington facilities.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.
 
 
36

 
The Company has facilities and customers in foreign jurisdictions and therefore is subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. The total net assets of non-U.S. operations denominated in non-functional currencies subject to potential loss amount to approximately $33.8 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to approximately $3.4 million. Furthermore, related to foreign currency transactions, the Company has exposure to non-functional currency balances totaling approximately $5.3 million. This amount includes, on an absolute basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $5.1million of foreign currency assets as of December 31, 2013.  As currency rates change, these non-functional currency balances are revalued, and the corresponding adjustment is recorded in the consolidated statement of operations. A hypothetical change of 10% in currency rates could result in an adjustment to the consolidated statement of operations of approximately $0.5 million.
 
With respect to interest rates, the risk is composed of changes in future cash flows due to changes in interest rates on our $5.0 million term loan and $2.7 million industrial development authority bonds.  The potential loss in 2014 cash flows from a 10% adverse change in quoted interest rates would approximate sixteen thousand dollars.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Financial statements and notes thereto appear on pages F-1 to F-39 of this Annual Report on Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
(a) Evaluation of 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 period covered by this Annual Report on Form 10-K, the Company’s management conducted an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation the Company’s management has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013.
 
(b) Management’s Annual Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:
 
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and, that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
 
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed as of December 31, 2013 the effectiveness of the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth in the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, management has concluded that the Company’s internal control over financial reporting as of December 31, 2013 was effective.
 
 
37

 
The Company’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2013, which is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference. 
 
(c) 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 required by Rule 13a-15(d) or Rule 15d-15 under the Exchange Act that occurred during the Company’s fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.
 
 
38

 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The information appearing under the captions “Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics and Business Conduct Guidelines” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 4, 2014 is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
The information appearing under the captions “Compensation of Directors”, “Compensation Committee Interlocks and Insider Participation”, and “Agreements with Named Executive Officers,” and “Corporate Governance and Board Matters” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 4, 2014 is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The information appearing under the caption “Principal and Management Stockholders” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 4, 2014 is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
The information appearing under the caption “Related Party Transactions” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 4, 2014 is incorporated herein by reference.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information appearing under the caption “Independent Registered Public Accounting Firm” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 4, 2014 is incorporated herein by reference.
 
 
39

 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) (1)    Financial Statements.
 
The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.
 
 
 
Page
 
 
Number
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
 
F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011
 
F-4
Consolidated Balance Sheets at December 31, 2013 and 2012
 
F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011
 
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
 
F-7
Notes to Consolidated Financial Statements
 
F-8
 
(a) (2)    Financial Statement Schedules
 
The following financial schedule of Albany Molecular Research, Inc. is included in this annual report on Form 10-K.
 
Schedule II—Valuation and Qualifying Accounts
 
F-38
 
Schedules other than that which is listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes.
 
(a) (3)    Exhibits
 
EXHIBIT INDEX
 
Exhibit
 
 
No.
 
Description
2.1
 
Agreement, dated February 17, 2010, by and among the Company and the shareholders of Excelsyn Limited, for the sale and purchase of Excelsyn Limited and its subsidiary, Excelsyn Molecular Development Limited (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, File No. 000-25323).
2.2
 
Agreement, dated June 14, 2010, by and among the Company and the shareholders of Hyaluron, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 000-25323).
3.1
 
Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
3.2
 
Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
4.1
 
Specimen certificate for shares of Common Stock, $0.01 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
4.2
 
Amended and Restated Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Albany Molecular Research, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on July 31, 2012, File No. 001-35622).
 
 
40

 
Exhibit
 
 
No.
 
Description
4.3
 
Shareholder Rights Agreement, dated as of July 27, 2012, between the Company and Computershare Shareowner Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on July 31, 2012, File No. 001-35622).
4.4
 
Amendment to Shareholder Rights Agreement, dated as of June 1, 2011, between Albany Molecular Research, Inc. and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A/A filed on June 1, 2011.  File no. 000-25323).
4.5
 
Amendment No. 2 to Shareholder Rights Agreement, dated as of July 27, 2012, between Albany Molecular Research, Inc. and Computershare Shareowner Services LLC, as Rights Agent (as successor to Mellon Investor Services LLC) (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A/A filed on July 31, 2012.  File no. 000-25323).
4.6
 
Indenture, dated as of November 25, 2013, by and between Albany Molecular Research, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
4.7
 
Form of 2.25% Cash Convertible Senior Note due 2018 (included in Exhibit 4.6).
10.1*
 
1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1,  File No. 333-58795).
10.2*
 
Amended 1998 Employee Stock Purchase Plan of the Company, approved on June 1, 2011 (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, File No. 000-25323).
10.3*
 
Amended 2008 Stock Option and Incentive Plan, approved on June 1, 2011 (incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, File No. 000-25323).
10.4*
 
Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Bruce J. Sargent, Ph.D. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.5
 
Form of Indemnification Agreement between the Company and each of its directors (incorporated herein by reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.6
 
License Agreement dated March 15, 1995 by and between the Company and Marion Merrell Dow Inc. (now Sanofi) (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been filed separately with the Commission) (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.7*
 
Amendment to 1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, File No. 000-25323).
10.8*
 
Amended and Restated Technology Development Incentive Plan (filed herein).
10.9
 
Form of Employee Innovation, Proprietary Information and Post-Employment Activity Agreement between the Company and each of its executive officers (incorporated herein by reference to Exhibit 10.14 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.10*
 
Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Lori M. Henderson (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.11*
 
Form of Restricted Stock Award Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2005, File No. 000-25323).
10.12*
 
Albany Molecular Research, Inc. Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2005, File No. 000-25323).
 
 
41

 
Exhibit
 
 
No.
 
Description
10.13*
 
Form of Incentive Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
10.14*
 
Form of Non-Qualified Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
10.15
 
Supply Agreement, effective as of January 1, 2012, between AMRI Rensselaer and GE Healthcare AS (incorporated herein by reference to Exhibit 10.15 (with certain information omitted pursuant to a request for confidential treatment and filed with the Securities and Exchange Commission) to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on August 27, 2013, File No. 001-35622).
10.16
 
License and Research Agreement, dated as of October 20, 2005, between Albany Molecular Research, Inc., AMR Technology, Inc. and Bristol-Myers Squibb Company (incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 000-25323).
10.17*
 
Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Thomas E. D’Ambra, Ph.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.18*
 
Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Mark T. Frost (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.19*
 
Separation Agreement, dated September 10, 2012, between Albany Molecular Research, Inc. and Mark T. Frost (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, filed with the Securities and Exchange Commission on November 9, 2012, File No. 001-35622).
10.20
 
Amendment to License Agreement Regarding Sublicensing, dated November 19, 2008, by and between Albany Molecular Research, Inc., AMR Technology, Inc. (formerly a subsidiary of AMRI, which has subsequently been merged into AMRI) and Sanofi U.S. LLC (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 000-25323).
10.21*
 
Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Steven R. Hagen, Ph.D. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.22
 
Research/Manufacturing Agreement between Schering Corporation and Albany Molecular Research, Inc. dated January 13, 2006 (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.1 to the Company’s Amended Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on February 17, 2011, File No. 000-25323).
10.23
 
Seventh Amendment dated July 14, 2010 to the Research/Manufacturing Agreement between Schering Corporation and Albany Molecular Research, Inc. dated January 13, 2006 (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.2 to the Company’s Amended Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on February 17, 2011, File No. 000-25323).
 
 
42

 
Exhibit
 
 
No.
 
Description
10.24
 
Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., AMRI Bothell Research Center, Inc. and Wells Fargo Bank, National Association. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 12, 2012, File No. 000-25323)
10.25
 
First Amendment, dated December 20, 2012, to Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., and AMRI Bothell Research Center, Inc., as the borrower and Wells Fargo Bank, National Association as the lender (incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.26
 
Second Amendment, dated November 13, 2013, to Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., and AMRI Bothell Research Center, Inc., as the borrower and Wells Fargo Bank, National Association as the lender (filed herein).
10.27
 
Development and Supply Agreement between Organichem Corporation (now AMRI Rensselaer, Inc., a wholly-owned subsidiary of the Company) and Purepac Pharmaceuticals Co. (now Actavis, Inc.) effective May 10, 2000 (incorporated herein by reference to Exhibit 10.26 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.28*
 
Separation Agreement, dated October 16, 2013, by and between the Company and Bruce J. Sargent (filed herein).
10.29*
 
Amended Employment Agreement, effective September 17, 2012, as amended on December 27, 2012, between Albany Molecular Research, Inc. and Michael M. Nolan (incorporated herein by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.30*
 
Amended Form of Restricted Stock Award Agreement under the 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.31*
 
Amended Form of Non-Qualified Stock Option Agreement under the 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.32*
 
Employment Agreement, dated September 5, 2013, by and between Albany Molecular Research, Inc. and William S. Marth (incorporated herein by reference to Exhibit 10.1 the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, File No. 001-35622).
10.33*
 
Transition Agreement, dated September 6, 2013, by and between Albany Molecular Research, Inc. and Thomas E. D’Ambra, Ph.D. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, File No. 001-35622).
10.34*
 
Employment Agreement, dated as of October 16, 2013, by and between the Company and Michael Luther, Ph.D. (filed herein).
10.35
 
Call Option Transaction Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.36
 
Call Option Transaction Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
 
 
43

 
Exhibit
 
 
No.
 
Description
10.37
 
Base Warrants Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.38
 
Base Warrants Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.39
 
Amendment to Call Option Transaction Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.40
 
Amendment to Call Option Transaction Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.41
 
Additional Warrants Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.42
 
Additional Warrants Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.43*
 
Second Amended 1998 Employee Stock Purchase Plan of the Company, approved on June 5, 2013 (filed herein).
10.44*
 
Second Amended 2008 Stock Option and Incentive Plan, approved on June 5, 2013 (filed herein).
21.1
 
Subsidiaries of the Company (filed herein).
23.1
 
Consent of KPMG LLP (filed herein).
31.1
 
Rule 13a-14(a)/15d-14(a) certification (filed herein).
31.2
 
Rule 13a-14(a)/15d-14(a) certification (filed herein).
32.1
 
Section 1350 certification (furnished herein). (1)
32.2
 
Section 1350 certification (furnished herein). (1)
101
 
XBRL (extensible Business Reporting Language).  The following materials from Albany Molecular Research, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations , (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
 

* Denotes management contract of compensation plan or arrangement
 
(1) 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 Exchange Act.
 
 
44

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
Dated: March 17, 2014
Albany Molecular Research, Inc.
 
 
 
 
By:
/s/ William S. Marth
 
 
William S. Marth
 
 
President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ William S. Marth
 
President, Chief Executive Officer
 
March 17, 2014
William S. Marth
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Michael M. Nolan
 
Vice President, Chief Financial Officer and Treasurer
 
March 17, 2014
Michael M. Nolan
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
/s/ Thomas E. D’Ambra
 
Chairman of the Board
 
March 17, 2014
Thomas E. D’Ambra, Ph.D.
 
 
 
 
 
 
 
 
 
/s/ Veronica G.H. Jordan
 
Director
 
March 17, 2014
Veronica G.H. Jordan, Ph.D.
 
 
 
 
 
 
 
 
 
/s/ Gabriel Leung
 
Director
 
March 17, 2014
Gabriel Leung
 
 
 
 
 
 
 
 
 
/s/ Kevin O’Connor
 
Director
 
March 17, 2014
Kevin O’Connor
 
 
 
 
 
 
 
 
 
/s/ Arthur J. Roth
 
Director
 
March 17, 2014
Arthur J. Roth
 
 
 
 
 
 
 
 
 
/s/ Una S. Ryan
 
Director
 
March 17, 2014
Una S. Ryan, Ph.D., O.B.E.
 
 
 
 
 
 
45

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALBANY MOLECULAR RESEARCH, INC.
 
 
Page
Report of Independent Registered Public Accounting Firm
F-2
 
 
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
F-3
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011
F-4
 
 
Consolidated Balance Sheets at December 31, 2013 and 2012
F-5
 
 
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011
F-6
 
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
F-7
 
 
Notes to Consolidated Financial Statements
F-8
   
 
F-1

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Albany Molecular Research, Inc.:
 
We have audited the accompanying consolidated balance sheets of Albany Molecular Research, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Albany Molecular Research, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Albany Molecular Research, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
/s/ KPMG LLP
Albany, New York
March 17, 2014 
 
 
F-2

 
ALBANY MOLECULAR RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2013, 2012 and 2011
(In thousands, except per share amounts)
 
 
 
Year Ended December 31,
 
 
 
2013
 
2012
 
2011
 
Contract revenue
 
$
210,001
 
$
189,858
 
$
169,611
 
Recurring royalties
 
 
36,574
 
 
35,988
 
 
35,034
 
Milestone revenue
 
 
 
 
840
 
 
3,000
 
Total revenue
 
 
246,575
 
 
226,686
 
 
207,645
 
Cost of contract revenue
 
 
171,923
 
 
168,064
 
 
168,470
 
Technology incentive award
 
 
2,767
 
 
3,143
 
 
3,557
 
Research and development
 
 
414
 
 
906
 
 
7,939
 
Selling, general and administrative
 
 
42,256
 
 
40,904
 
 
41,071
 
Goodwill impairment
 
 
 
 
 
 
15,812
 
Property and equipment impairment
 
 
1,857
 
 
8,334
 
 
4,674
 
Intangible asset impairment
 
 
 
 
 
 
856
 
Restructuring charges
 
 
7,183
 
 
4,632
 
 
1,271
 
Arbitration charge
 
 
 
 
 
 
127
 
Total costs and expenses
 
 
226,400
 
 
225,983
 
 
243,777
 
Income (loss) from operations
 
 
20,175
 
 
703
 
 
(36,132)
 
Interest expense
 
 
(1,255)
 
 
(463)
 
 
(714)
 
Interest income
 
 
11
 
 
9
 
 
131
 
Other income (expense) net
 
 
772
 
 
(130)
 
 
77
 
Income (loss) before income tax expense (benefit)
 
 
19,703
 
 
119
 
 
(36,638)
 
Income tax expense (benefit)
 
 
7,023
 
 
3,896
 
 
(4,342)
 
Net income (loss)
 
$
12,680
 
$
(3,777)
 
$
(32,296)
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share