<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1996
REGISTRATION NO. 333-5535
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3781 04-2687849
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5051 NEW CENTRE DRIVE
WILMINGTON, NORTH CAROLINA 28403
TEL: (910) 392-1606
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
R. FORREST WALDON
VICE PRESIDENT AND GENERAL COUNSEL
APPLIED ANALYTICAL INDUSTRIES, INC.
5051 NEW CENTRE DRIVE
WILMINGTON, NORTH CAROLINA 28403
TEL: (910) 392-1606
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
PETER C. BUCK JEAN E. HANSON
STEPHEN M. LYNCH FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
ROBINSON, BRADSHAW & HINSON, P.A. ONE NEW YORK PLAZA
1900 INDEPENDENCE CENTER NEW YORK, NEW YORK 10004
CHARLOTTE, NORTH CAROLINA 28246 TEL: (212) 859-8000
TEL: (704) 377-2536
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(e)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) FEE
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<S> <C> <C>
Common Stock, $.001 par value............................. $43,470,000 $14,990(3)
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</TABLE>
(1) Includes (i) $37,800,000 aggregate offering price of shares of Common Stock
to be initially offered for sale in the offering described herein and (ii)
$5,670,000 aggregate offering price of shares of Common Stock that the
Underwriters will have an option to purchase to cover overallotments, if
any, in connection with the offering. An indeterminate number of shares of
Common Stock is being registered for resale by a dealer in connection with
market-making transactions. See "Explanatory Note".
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely
for the purpose of calculating the registration fee.
(3) Such amount was paid in connection with the initial filing on June 7, 1996.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
APPLIED ANALYTICAL INDUSTRIES, INC.
CROSS-REFERENCE SHEET
BETWEEN ITEMS IN PART I OF FORM S-1 AND THE PROSPECTUS
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<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Outside Front Cover Page; Prospectus
Summary; Underwriting
9. Description of Securities to be
Registered................................. Outside Front Cover Page; Prospectus
Summary; Capitalization; Description of
Capital Stock; Shares Eligible for Future
Sale
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant................................. Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Dilution;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement covers the registration of $43,470,000 maximum
aggregate offering price of shares of Common Stock, $.001 par value per share
(the "Shares"), of Applied Analytical Industries, Inc. (the "Company") for sale
in the offering referred to below. This Registration Statement also covers the
registration of an indeterminate number of shares of Common Stock, $.001 par
value per share, for resale by Goldman, Sachs & Co., in connection with
market-making transactions. The complete Prospectus relating to the initial
public offering (the "IPO Prospectus") follows immediately after this
Explanatory Note. Following the IPO Prospectus are certain pages of the
Prospectus relating solely to such market-making transactions (together with the
remainder of the Prospectus as modified as indicated below, the "Market-making
Prospectus"), including alternate front and back cover pages and a section
entitled "Plan of Distribution". The Market-making Prospectus will not include
the stabilization legend, which will be deleted from the inside front cover
page, or the section entitled "Underwriting". All other sections of the IPO
Prospectus are to be used in the Market-making Prospectus.
The Cross Reference Sheet refers to items in the IPO Prospectus. The
Market-making Prospectus incorporates the IPO Prospectus in its entirety, except
for the following items of Form S-1, which are replaced in their entirety in the
Market-making Prospectus:
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FORM S-1 ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
- --------------------------------------------- ---------------------------------------
<S> <C> <C>
4. Use of Proceeds........................ "Wrap-around" cover pages of Market-
making Prospectus
8. Plan of Distribution................... "Wrap-around" cover pages of Market-
making Prospectus; Plan of Distribution
</TABLE>
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996
2,700,000 SHARES
APPLIED ANALTYICAL LOGO
APPLIED ANALYTICAL INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------------
All of the 2,700,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price per share will be between $12.00 and $14.00. For factors to be
considered in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "AAII".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 405,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
COWEN & COMPANY
LEHMAN BROTHERS
---------------------
The date of this Prospectus is , 1996.
<PAGE> 5
DESCRIPTIVE APPENDIX FOR INSIDE FRONT COVER
The picture is a blended collage of eight images. The image in the top left
corner shows a tablet press machine; the image below the tablet press shows two
people working with analytical equipment; the image below the analytical
equipment shows a person in a laboratory using a safety hood; the picture to the
right of the hood shows a fully-gowned person using another safety hood; the
picture in the far right corner shows a person working on chromatagraphic
equipment; above the chromatagraphic equipment is a person with blue gloves
pulling a sample out of a freezer; the image in the top right shows two people
working with a mass spectometer unit; the image to the left of the mass
spectometer shows a conical piece of stainless steel equipment.
<PAGE> 6
[PHOTOS]
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by its independent auditors and with quarterly reports for the first
three quarters of each fiscal year containing unaudited summary condensed
financial information.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. ANY SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share data in this Prospectus have been adjusted to reflect (i) the conversion
of all outstanding shares of the Company's Series A Preferred Stock (the
"Preferred Stock") and Class B Non-voting Common Stock (the "Class B Common
Stock") into shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock"), which will occur upon the closing of this offering (this
"Offering"), (ii) a 200-for-one split of the Common Stock and Class B Common
Stock effective May 31, 1996 and (iii) a one-for-.6325 reverse split of the
Common Stock and Class B Common Stock effective June 7, 1996.
THE COMPANY
Applied Analytical Industries, Inc. ("AAI" or the "Company") is a leading
provider of product development and support services to the worldwide
pharmaceutical and biotechnology industries, offering a broad range of
integrated, value-added services that span the drug life cycle, from new
compound characterization and synthesis to marketed-product compliance and
quality control testing. In addition, through its internal development program,
the Company leverages its expertise to generate additional revenue by licensing
internally developed drugs and drug technologies to third parties. To date, AAI
has contributed to the submission, approval or continued marketing of more than
1,250 client products worldwide. As part of its internal development program,
the Company has licensed ten products to clients, including four products
approved by the United States Food and Drug Administration (the "FDA"), and
patented ten drug technologies. Since 1991, the Company's annual net sales have
increased from $18.3 million to $34.6 million and annual net income has
increased from $602,000 to $3.2 million. AAI believes that its reputation for
high quality, innovative and efficient services, skilled professional staff,
state-of-the-art facilities and equipment and expertise in performing critical
development and support services, as well as its focus on internal drug and drug
technology development, position it for continued growth.
The Company competes in the contract research and development industry
(commonly referred to as the contract research organization, or CRO, industry)
which provides independent product development and marketed-product support
services to the drug industry. These research and development services include
compound synthesis/extraction, screening and pharmacological testing,
toxicology/safety testing, formulation development, laboratory testing, clinical
trials management, regulatory and compliance and quality control testing. The
Company estimates that 1994 drug industry research and development expenditures
exceeded $30 billion and that approximately $13 billion was spent on the type of
services offered by the Company. The Company estimates that in 1994
approximately $3.5 billion of research and development spending was outsourced
by the drug industry and that the factors influencing increased outsourcing are
applicable across the range of services offered by the CRO industry. Certain
segments of this industry with low barriers to entry, such as clinical trials
management, have significantly grown in terms of size and number of competitors.
In contrast, the Company believes that its industry segment, which has high
barriers to entry such as large capital investment and scientific and technical
expertise, has few firms that offer a broad range of services. The Company
believes that significant market opportunities exist for service providers in
its industry segment and that it is well positioned to compete.
The Company provides a broad range of integrated, value-added services,
including chemical analysis, synthesis and other laboratory services; drug
formulation development; clinical supply and niche manufacturing; and regulatory
and compliance consulting. Over the past five years, AAI has provided services
to 24 of the top 25 pharmaceutical companies in the world as ranked by 1994
research and development spending. In 1995, the Company provided services under
approximately 850 contracts to approximately 220 clients, including some of the
largest U.S., European and Japanese drug companies.
3
<PAGE> 8
The Company is currently providing critical development services for 44 products
(including 14 products in its internal development program) intended for
submission to or under review by the FDA.
In addition to its core fee-for-service business, AAI is leveraging its
expertise by allocating a significant proportion of its technical resources and
operating capacity to internal drug and drug technology development, in which
the Company shares in the expense of development and participates in the
benefits of any potential commercial success through licensing arrangements.
Internal drug development is focused primarily on generic products. The Company
anticipates that the sales growth in the U.S. generic drug market from
approximately $3.5 billion in 1990 to approximately $6.4 billion in 1994 will
continue as managed care organizations continue policies favoring generic
substitution and patents on many high revenue products expire over the next
several years. The Company's internal drug development efforts have resulted in
12 generic product applications filed with the FDA. Applications for six of
those products have been approved in its clients' names, of which four products
are currently licensed to clients and two products have been sold. Licensing
arrangements for these products vary as to amounts of initial and milestone
payments, as well as methods and extent of revenue participation. The Company's
proprietary technology includes nine patents and three pending patent
applications on formulations and methods, including liquid formulations for
improved delivery of nonsteroidal anti-inflammatory drugs or NSAIDs, such as
ibuprofen, and chewable formulations to mask the otherwise bitter taste of
certain ulcer drugs. The Company has three licensing arrangements for its
proprietary technologies and is seeking licensing partners for its other
recently developed technologies.
Since 1993, the Company has allocated a growing proportion of its technical
resources and operating capacity to its internal drug and technology development
program and because of the significant time required for development and
approval of pharmaceutical products, the Company has only recently begun to
recognize license revenue from its internal development efforts. In 1994, as
part of its internal development program, the Company organized Endeavor
Pharmaceuticals, Inc. ("Endeavor") to develop certain generic hormone
pharmaceutical products, focusing initially on several such products then under
development by AAI. The Company owns approximately 40% of the fully diluted
common equity of Endeavor.
The Company's strategy is to continue to invest in the personnel,
facilities, technology and information systems necessary to continue to provide
high quality services spanning the development process and to continue to
leverage its development expertise to expand internal development of drugs and
technologies. By continuing to expand the scope of services offered, the Company
intends to cover most aspects of pharmaceutical and biotechnology product
development, offering clients an opportunity to use one service provider for
seamless product development and support. The Company intends to establish a
presence in certain domestic and international markets to access additional
pools of talented professional and technical personnel and to reduce regulatory
or logistical obstacles in performing certain client services. The Company plans
to continue its commitment to expand its information systems technology and is
currently operating a pilot-phase system with certain domestic and international
clients to provide secure, on-line access to in-progress laboratory data to
enhance clients' efficiency in monitoring and changing the scope and format of
projects. Finally, the Company will continue to invest a significant proportion
of its capabilities in internal drug and technology development with the
objective of licensing marketing rights to third parties. Although there is a
risk that any particular development project may not produce revenues, the
Company believes that the profit margins from successful drug and technology
development projects potentially exceed the margins on standard fee-for-service
engagements.
The Company's principal executive offices are located in Wilmington, North
Carolina, and the Company maintains operating facilities in Wilmington and
Research Triangle Park, North Carolina and sales offices in Chicago, Illinois;
Boston, Massachusetts; San Francisco, California; Elmwood Park, New Jersey and
San Juan, Puerto Rico. The Company also maintains sales offices in Copenhagen,
Denmark; London, England and Milan, Italy to better serve and develop its
European client base.
4
<PAGE> 9
THE OFFERING(A)
<TABLE>
<S> <C>
Common Stock offered......................... 2,700,000 shares
Common Stock outstanding after the
offering................................... 15,880,902 shares
Proposed Nasdaq National Market symbol....... AAII
Use of proceeds.............................. For capital expenditures, geographic
expansion, implementation of additional
services, possible future acquisitions,
working capital and other general corporate
purposes.
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................... $18,251 $21,846 $26,378 $32,882 $34,639 $16,601 $20,774
Cost of sales............... 8,213 8,989 9,731 14,533 14,259 7,270 8,815
Selling expense............. 2,815 2,871 3,654 4,390 4,913 2,350 3,127
General and administrative
expense................... 5,519 7,329 8,738 8,485 8,171 3,992 4,656
Research and development
expense................... 375 207 1,273 2,394 3,326 1,355 1,792
Other expense, net.......... 727 199 156 440 1,130 404 21
------- ------- ------- ------- ------- ------- -------
Income before income
taxes..................... 602 2,251 2,826 2,640 2,840 1,230 2,363
Income taxes................ -- -- -- -- 39 -- 967
Equity income (loss)(b)..... -- -- -- (444) 444 (414) --
------- ------- ------- ------- ------- ------- -------
Net income.................. $ 602 $ 2,251 $ 2,826 $ 2,196 $ 3,245 $ 816 $ 1,396
======= ======= ======= ======= ======= ======= =======
PRO FORMA DATA(C):
Pro forma income taxes...... $ 247 $ 878 $ 1,125 $ 1,118 $ 1,129 $ 504
Pro forma net income........ 355 1,373 1,701 1,078 2,116 312
Pro forma earnings per
common share.............. $ .18 $ .12
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(A)(D)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $12,072 $43,815
Property and equipment, net..................................... 12,400 12,400
Total assets.................................................... 35,774 67,517
Long-term debt, less current maturities......................... 3,115 3,115
Total stockholders' equity...................................... 23,410 55,153
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL DATA:
Income before research and
development expense(e)........ $ 977 $ 2,458 $ 4,099 $ 5,034 $ 6,166 $ 2,585 $ 4,155
</TABLE>
5
<PAGE> 10
(a) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting".
(b) Relates to equity accounting for the Company's investment in Endeavor. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and Note 3 of Notes to Consolidated Financial
Statements.
(c) Prior to November 17, 1995, the Company was treated as an S corporation for
federal and state income tax purposes. The pro forma data sets forth the
pro forma income taxes, pro forma net income and pro forma earnings per
common share of the Company as if the Company had been subject to corporate
income taxes commencing as of January 1, 1991. The pro forma earnings per
common share data also reflects the capitalization of the Company on a pro
forma basis to give effect to the 200-for-one split of the Common Stock and
Class B Common Stock effected on May 31, 1996 and the one-for-.6325 split
of the Common Stock and Class B Common Stock effected on June 7, 1996 as if
such events had occurred on the first day of the period presented.
(d) Gives effect to the sale of shares offered hereby. The estimated net
proceeds at an assumed offering price of $13.00 per share have been added
to working capital pending their use. See "Use of Proceeds".
(e) Income before research and development expense represents net sales less the
cost of sales, selling expense, general and administrative expense and
other expense, net. While this is not a measure of performance under
generally accepted accounting principles, the Company has included income
before research and development expense data because such data are used by
certain investors and permit evaluation of the profitability of the
Company's operations throughout the period without taking account of
research and development expense. In 1993, the Company began allocating a
significant portion of its technical resources and operating capacity to
internal development of generic drugs and proprietary technology. The
Company has only recently begun to recognize license revenue from these
internal development efforts due to the significant time required for
development and approval of pharmaceutical products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Internal Drug and Technology
Development".
6
<PAGE> 11
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing the Common Stock offered hereby.
DEPENDENCE ON AND EFFECT OF GOVERNMENT REGULATION
The design, development, testing, manufacturing and marketing of
pharmaceutical compounds, biotechnology products, medical nutrition and
diagnostic products and medical devices are subject to regulation by
governmental authorities, including the FDA and comparable regulatory
authorities in other countries. The Company's business depends in part on strict
government regulation of the drug development process, especially in the United
States. Proposed legislation has been recently introduced in the U.S. Congress
to substantially modify regulations administered by the FDA governing the drug
approval process. Under the proposed legislation, applications for approval of
drugs could be made to private, accredited facilities in lieu of the FDA, the
number of clinical trials of new drugs would be reduced and other rules
administered by the FDA would be simplified. Any change in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures could adversely affect the Company's business. See
"Business -- Government Regulation".
The drug approval process is generally lengthy, expensive and subject to
unanticipated delays. Currently, the Company is assisting in the development of
a number of products subject to regulatory approval for which it has the right
to receive license fees or otherwise participate in sales revenues, including
through its investment in Endeavor. Continued growth in AAI's revenues and
profits will depend, in part, on the successful introduction of some or all of
such products. There can be no assurance as to when or whether such approvals
from regulatory authorities will be received. In addition, the continued
development and manufacture of generic drug products is dependent upon the
availability of specific FDA-approved bulk drug ingredients, and accordingly the
Company's license revenue from such products depends upon the continued
availability of such ingredients. There can be no assurance that such
FDA-approved ingredients will be available in sufficient quantities. See
"Business -- Internal Drug and Technology Development" and "-- Endeavor".
All facilities and manufacturing techniques used in the manufacture of
products for clinical use or for sale in the United States must be operated in
conformity with current Good Manufacturing Practices ("GMP") regulations, FDA
regulations and guidelines governing the development and production of
pharmaceutical products. The Company's facilities are subject to scheduled
periodic regulatory inspections to ensure compliance with GMP requirements.
Failure on the part of the Company to comply with applicable requirements could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. A finding that the Company had
materially violated GMP requirements could result in additional regulatory
sanctions and, in severe cases, could result in a mandated closing of the
Company's facilities which would materially and adversely affect the Company.
See "Business -- Industry Overview" and "-- Government Regulation".
MANAGEMENT OF GROWTH AND ACQUISITION RISKS
The Company has experienced rapid growth over the past ten years. The
Company believes that this growth may strain operational, human and financial
resources. In order to manage internal growth, AAI must continue to improve its
operating and administrative systems and to attract and retain qualified
management and professional, scientific and technical operating personnel.
Failure to manage growth effectively could have a material adverse effect on the
Company's business.
The Company reviews acquisition opportunities in the ordinary course of its
business. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent assimilation
of operations and services, the diversion of management's attention from other
business concerns and the potential loss of key employees of the acquired
company. Acquisitions of foreign companies also
7
<PAGE> 12
may involve the additional risks of, among others, assimilating differences in
foreign business practices and regulations, overcoming language barriers and
managing currency exchange risk. There can be no assurance that the Company's
acquisitions will be successfully integrated into the Company's operations. In
addition, there can be no assurance that the Company will complete any future
acquisitions or that acquisitions will contribute favorably to the Company's
operations and financial condition. See "Business -- Strategy".
DEPENDENCE ON CERTAIN INDUSTRIES AND CLIENTS
The Company's revenues are highly dependent on research and development
expenditures and production-related compliance testing expenditures by the
pharmaceutical and biotechnology industries. AAI has benefited from the growing
tendency of pharmaceutical and biotechnology companies to engage independent
organizations to conduct development and testing projects. The Company's
business could be materially and adversely affected by a general economic
decline in these industries or by any reduction in the outsourcing of research,
development and testing activities.
The Company believes that concentration of business in its industry is not
uncommon. AAI has experienced such concentration in the past and may experience
such concentration in the future. During 1995, Aesgen, Inc. (an affiliate of the
Company) ("Aesgen"), a major U.S.-based pharmaceutical company and Endeavor (a
venture approximately 40% owned by the Company) accounted for approximately
16.0%, 12.1% and 10.2%, respectively, of the Company's net sales. During the
first six months of 1996, one client (Endeavor) accounted for more than 10% of
the Company's net sales (approximately 14.6%), with Aesgen accounting for
approximately 9.3% of net sales. There can be no assurance that the Company's
business will not continue to be dependent on certain clients or that annual
results would not be dependent upon performance of a few large projects for
specific clients. In addition, due to the project nature of the Company's
business, there can be no assurance that significant clients in any one period
will continue to be significant clients in other periods, and accordingly the
Company does not currently anticipate that the client representing 12.1% of 1995
net sales will represent 10% or more of annual net sales in the future.
Generally, the Company's fee-for-service contracts are terminable by the client
upon notice of 30 days or less. Contracts may be terminated for a variety of
reasons, including the client's decision to forego a particular study, failure
of products to satisfy safety requirements and unexpected or undesired product
results. The loss of business from a significant client could have a material
adverse effect on the Company. Aesgen and Endeavor are early-stage development
companies and their revenues are dependent upon product approvals. Neither
Aesgen nor Endeavor has received any product approvals to date, and continued
product development by these firms is dependent upon their obtaining product
approvals or additional capital funding. See "Business -- Factors Influencing
Increased Outsourcing," "-- Endeavor" and "-- Clients".
VARIATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly results can fluctuate as a result of a number of
factors, including the commencement, completion or cancellation of large
contracts, progress of ongoing contracts, recognition of licensing revenue,
acquisitions, the timing of start-up expenses for new facilities and changes in
the mix of services. The Company believes that quarterly comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. In addition, fluctuations in quarterly
results could affect the market price of the Common Stock in a manner unrelated
to the longer term operating performance of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results".
DEPENDENCE ON KEY PERSONNEL
The Company relies on a number of key executives, including Frederick D.
Sancilio, Ph.D., its President and Chairman of the Board. In addition to his
duties at AAI, Dr. Sancilio serves as a senior
8
<PAGE> 13
management employee of Endeavor, a company in which AAI owns approximately 40%
of the common equity on a fully diluted basis. Dr. Sancilio does not maintain an
office or have day-to-day responsibilities at Endeavor and devotes a substantial
majority of his time to the management of AAI. The Company maintains key man
life insurance on Dr. Sancilio in the amount of $3.0 million. The Company's
performance depends on its ability to attract and retain qualified management
and professional, scientific and technical operating staff. The loss of the
services of any of AAI's key executives could have a material and adverse effect
on the Company. There also can be no assurance that AAI will be able to continue
to attract and retain qualified staff. See "Business -- Endeavor" and
"-- Employees".
POTENTIAL LIABILITY AND RISKS OF OPERATIONS
AAI develops, formulates, tests and, to a limited extent, manufactures
pharmaceutical products intended for use by the public. Such activities could
expose the Company to risk of liability for personal injury or death to persons
using such products, although the Company does not commercially market or sell
the products. The Company is currently involved in the commercial manufacture of
one pharmaceutical product and may manufacture pharmaceutical products for
third-party commercial distribution on a limited basis or as a service to its
clients transitioning to internal production. Such activities could increase the
Company's risk of personal injury liability. The Company seeks to reduce its
potential liability through measures such as contractual indemnification
provisions with clients (the scope of which may vary from client to client and
the performances of which are not secured) and insurance maintained by clients.
The Company could be materially and adversely affected if it were required to
pay damages or incur defense costs in connection with a claim that is outside
the scope of the indemnification agreements, if the indemnity, although
applicable, is not performed in accordance with its terms or if the Company's
liability exceeds the amount of applicable insurance or indemnity. In addition,
the Company could be held liable for errors and omissions in connection with the
services it performs. The Company currently maintains product liability and
errors and omissions insurance with respect to these risks. In addition, the
Company's proposed expansion of services to include clinical trials of products
in humans and introduction of proprietary products in clinical trials may expose
it to additional risk of liability. See "Business -- Potential Liability and
Insurance".
COMPETITION
The Company competes primarily with the in-house research, development,
quality control and other support service departments of pharmaceutical and
biotechnology companies and with university research laboratories, many of which
have substantially greater resources than the Company. In addition, the CRO
industry is highly fragmented, consisting of several hundred small, limited
service providers and a few large, global firms. The Company competes against
these companies, some of which may have substantially greater resources than the
Company. As a result of competitive pressures, the CRO industry is
consolidating. This trend is likely to produce increased competition for both
clients and acquisition candidates. Increased competition may lead to increased
price and other forms of competition that may adversely affect the Company.
Competitive factors include reliability, turn-around time, reputation for
innovative and quality science, capacity to perform numerous required services,
financial viability and price. See "Business -- Competition".
DEPENDENCE ON THIRD-PARTY MARKETING AND DISTRIBUTION
The Company has developed, and intends to continue internal development of,
drugs to be licensed to third parties for marketing and distribution. The
Company does not intend to market or commercially distribute such products.
Accordingly, the success of internal development activities depends upon the
Company's ability to enter into marketing arrangements with third parties. There
can be no assurance that such arrangements can be successfully negotiated or
that any such arrangements will be available on commercially reasonable terms.
Even if acceptable and timely marketing arrangements are available, there can be
no assurance that products developed by the Company will be accepted in the
marketplace. In addition, because the Company's marketing licensee will in many
cases make all or many material
9
<PAGE> 14
marketing and other commercialization decisions regarding such products, a
significant number of the variables that may affect the Company's license fees
and royalties, and therefore net income, will not be within the Company's
control.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT; PRICING PRESSURE
The Company's license fees, royalties and other revenue may depend, in
part, on the availability of reimbursement from third-party payors, such as
government health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. There can be no assurance
that adequate third-party reimbursement will be available to achieve or maintain
price levels sufficient to realize an appropriate return on the Company's
investment in product development.
In addition, global efforts to contain healthcare costs, particularly among
managed care organizations, continue to exert downward pressure on product
pricing. Further, a number of regulatory and legislative proposals aimed at
changing the healthcare industry in the United States and other countries have
been proposed. There can be no assurance that private sector reform or
governmental healthcare reform measures, if adopted, will not have a negative
impact upon the Company and its operations.
PROPRIETARY TECHNOLOGY; UNPREDICTABILITY OF PATENT PROTECTION
The Company's success will depend, in part, on its ability to obtain
patents in various jurisdictions on its current and future technologies and
products, to defend its patents and protect its trade secrets and to operate
without infringing on the proprietary rights of others. There can be no
assurance that the Company's patents will not be challenged by third parties
and, if challenged, will be held valid. In addition, there can be no assurance
that any technologies or products developed by AAI will not be challenged by
third parties owning patent rights and, if challenged, will be held to not
infringe such patent rights. The expense involved in any patent litigation can
be significant and cannot be estimated by the Company. Finally, if the Company
relies on unpatented, proprietary technology, there can be no assurance that
others will not independently develop or obtain similar products or
technologies.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has developed a substantial scientific and technical
infrastructure to provide a broad array of services to the pharmaceutical and
biotechnology industries. The Company expects capital and operating expenditures
to increase over the next several years as it continues to pursue its growth
strategy. Although the Company believes that the net proceeds from this
Offering, existing cash and investment securities and anticipated cash flow from
operations will be sufficient to support the Company's operations for the
foreseeable future, the Company's actual future capital requirements will depend
on many factors, including acquisitions made by the Company, the rate of
internal growth and the amount and timing of revenue from proprietary products
and technology. The Company may require significant additional financing in the
future, which it may seek to raise through public or private equity offerings or
debt financings. No assurance can be given that additional financing will be
available when needed, or that, if available, such financing will be obtained on
terms favorable to the Company or its stockholders. To the extent the Company
raises additional capital by issuing equity securities, ownership dilution to
stockholders will result. See "Use of Proceeds", "Business -- Strategy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
TRANSACTIONS WITH AFFILIATES; CONFLICTS OF INTEREST
The Company provides product development and other services to Aesgen,
which develops generic pharmaceutical products, and in June 1996 the Company
licensed to Aesgen marketing rights to a product being developed by the Company.
Approximately 30% of Aesgen's outstanding common stock is held by the holders of
substantially all of the Company's outstanding shares of capital stock. The
10
<PAGE> 15
Company holds a $1.6 million non-convertible, non-voting preferred stock
investment in Aesgen. In addition, Frederick D. Sancilio, a director of the
Company and its President, and James L. Waters and Charles D. Moseley, Jr.,
non-employee directors of the Company, serve as three of the ten directors of
Aesgen. In addition, under the development agreement between Aesgen and the
Company, the Company has agreed in certain circumstances not to develop a
formulation for its own account or for any other person of any generic
pharmaceutical product that the Company has agreed and agrees to develop for
Aesgen. The Company also provides development services to Endeavor.
Approximately 44% of Endeavor's fully diluted common equity is beneficially
owned by certain holders of the Company's Preferred Stock which is convertible
into approximately 19% of the Company's Common Stock. The Company owns
approximately 40% of the fully diluted common equity of Endeavor. Dr. Sancilio
and William H. Underwood, executive officers and directors of the Company, and
two other executive officers of AAI serve on the nine-member board of directors
of Endeavor (which, as of the date of this Prospectus, includes one temporary
vacancy). In addition, Mr. Moseley, an outside director of the Company, serves
on Endeavor's board of directors. The Company leases its headquarters facility
from a company in which each of Dr. Sancilio and Mr. Waters owns a one-third
interest. Rental fees under the lease are subject to adjustment for increases in
certain expenses in operating and insuring the facility. Various conflicts of
interest could arise between such related parties and the Company. The Company's
Restated Certificate of Incorporation, which will become effective upon
completion of this Offering, includes certain provisions addressing potential
conflicts of interest between the Company and entities in which a director or
executive officer has a financial interest. See "Certain Transactions" and
"Description of Capital Stock -- Delaware Law and Certain Provisions of the
Company's Restated Certificate of Incorporation and By-laws".
CONCENTRATION OF OWNERSHIP
Upon the completion of this Offering, assuming that the Underwriters'
over-allotment option is not exercised, certain of the Company's executive
officers will beneficially own approximately 34.7% of the outstanding shares of
Common Stock, and certain of the Company's non-employee directors will
beneficially own approximately 17.2% of the outstanding shares of Common Stock.
Accordingly, such persons will be in a position to influence the election of the
Company's directors and the outcome of corporate actions requiring stockholder
approval. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
Stockholders".
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this Offering. The initial public offering price
will be determined through negotiations between AAI and the Underwriters and may
not represent prices that will prevail in the trading market. The market price
of the Company's Common Stock could be subject to wide fluctuations in response
to variations in operating results from quarter to quarter, changes in earnings
estimates by analysts, market conditions in the industry and general economic
conditions. Furthermore, the stock market has experienced significant price and
volume fluctuations unrelated to the operating performance of particular
companies. These market fluctuations may have an adverse effect on the market
price of the Company's Common Stock. See "Underwriting".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in
the public market after this Offering could adversely affect the market price of
the shares of Common Stock. Of the 15,880,902 shares of Common Stock to be
outstanding upon completion of this Offering, assuming the Underwriters'
over-allotment option is not exercised, the 2,700,000 shares offered hereby will
be freely tradeable without restriction unless held by affiliates of the
Company. Taking into consideration the effect of lock-up
11
<PAGE> 16
agreements entered into by certain stockholders of the Company, 10,439,875
shares will become eligible for sale beginning 180 days after the date of
effectiveness of the registration statement of which this Prospectus is a part,
subject to the provisions of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), or Rule 701 under the Securities Act. The
remaining 2,635,524 shares of Common Stock will become eligible for sale under
Rule 144 at various dates thereafter as the holding period provisions of Rule
144 are satisfied. The Company has granted outstanding options to purchase a
total of 444,425 shares of Common Stock, which are subject to vesting in
installments over 42 months. Certain holders of the Company's capital stock are
entitled to rights with respect to the registration under the Securities Act of
all shares of Common Stock (13,076,206 shares) currently held or to be acquired
upon conversion of shares of Preferred Stock and Class B Common Stock. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale".
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the net proceeds of this Offering for capital
expenditures (including expansion of facilities, acquisition of equipment and
improvement of information systems technology), geographic expansion, possible
future acquisitions, working capital and other general corporate purposes. Most
of the net proceeds will be available for projects that are not yet identified,
and the management of the Company will have broad discretion with respect to the
application of such proceeds. Pending such uses, the Company intends to invest
the net proceeds from this Offering in short-term, investment-grade,
interest-bearing securities. See "Use of Proceeds".
CERTAIN ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Restated Certificate of Incorporation and By-laws, which will
become effective upon the completion of this Offering, contain certain
provisions that may have the effect of deterring a future takeover of the
Company, including the classification of the Board of Directors into three
classes. These provisions could limit the price that certain investors might be
willing to pay in the future for shares of Common Stock. In addition, 10,000,000
shares of the Company's preferred stock may be issued in the future without
further stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors of the Company may
determine. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the market price of shares of Common Stock and
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, a majority of the outstanding
voting stock of the Company. AAI has no present plans to issue any shares of
preferred stock. In addition, Section 203 of the Delaware General Corporation
Law, to which the Company will be subject upon completion of this Offering,
restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may delay, defer or prevent a change in
control of the Company. See "Description of Capital Stock".
DILUTION
Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock. See "Dilution".
12
<PAGE> 17
THE COMPANY
AAI is a leading integrated contract research and development resource to
the worldwide pharmaceutical and biotechnology industries, offering an
efficient, variable-cost alternative to its clients' internal drug development,
compliance and quality control programs. The Company provides a broad array of
value-added services, including chemical analysis, synthesis and other
laboratory services; drug formulation development; clinical supply and niche
manufacturing; and regulatory and compliance consulting. Since it was founded in
1979, AAI has contributed to the submission, approval or continued marketing of
more than 1,250 client products worldwide, encompassing a wide range of
therapeutic categories and technologies. The Company is currently providing
critical development services for 44 products (including 14 products in its
internal development program) intended for submission to or under review by the
FDA. The Company believes that its ability to offer an extensive portfolio of
high quality drug development and support services enables it to effectively
compete as pharmaceutical and biotechnology companies look for integrated drug
development solutions that offer cost-effective results on an accelerated basis.
In addition to its core fee-for-service business, AAI is leveraging its
expertise by allocating a significant proportion of its technical resources and
operating capacity to internal drug and drug technology development, in which
the Company shares in the expense of development and participates in the
benefits of any potential commercial success through licensing arrangements.
Internal drug development is focused primarily on generic products. The
Company's internal product development efforts have resulted in 12 generic
product applications filed with the FDA. Applications for six of those products
have been approved in its clients' names, of which four products are currently
licensed to clients and two products have been sold. The Company's proprietary
technology includes nine patents and three pending patent applications on
formulations and methods, including liquid formulations for improved delivery of
nonsteroidal anti-inflammatory drugs or NSAIDs, such as ibuprofen, and chewable
formulations to mask the otherwise bitter taste of certain ulcer drugs. Since
1993, the Company has allocated a growing proportion of its technical resources
and operating capacity to its internal drug and drug technology development
program, and because of the significant time required for development and
approval of pharmaceutical products, the Company has only recently begun to
recognize license revenue from its internal development efforts.
In 1994, as part of its internal development program, the Company organized
Endeavor to develop certain hormone pharmaceutical products, focusing initially
on several such products then under development by AAI. The Company owns
approximately 40% of the fully diluted common equity of Endeavor.
The Company was incorporated in 1986, although its corporate predecessor
was founded in 1979. The Company's principal executive offices are located at
5051 New Centre Drive, Wilmington, North Carolina 28403, and its telephone
number at that address is (910) 392-1606.
As used in this Prospectus, the terms "Company" and "AAI" include Applied
Analytical Industries, Inc., its corporate predecessors and its subsidiaries,
except where the context indicates otherwise.
13
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered by the Company hereby are estimated to be $31,743,000
($36,639,450 if the Underwriters' over-allotment option is exercised in full),
assuming the shares offered hereby are sold at an initial public offering price
of $13.00 per share and after deducting the estimated underwriting discount and
offering expenses. The Company intends to use the net proceeds of this Offering
for capital expenditures (including expansion of facilities, acquisition of
equipment and improvement of information systems technology), geographic
expansion, possible future acquisitions, working capital and other general
corporate purposes. Pending such uses, the Company intends to invest the net
proceeds from this Offering in short-term, investment-grade, interest-bearing
securities.
The Company intends to pursue opportunities to acquire businesses offering
services similar or complementary to those offered by the Company. While the
Company regularly evaluates acquisition opportunities, the Company has no
present understandings, agreements or commitments that would require the use of
the net proceeds from this Offering with respect to any such transaction. On May
28, 1996, the Company entered into a six-month option agreement to acquire a
European contract research and development organization subject to satisfaction
of material contingencies. Significant uncertainties exist whether such
conditions could be satisfied prior to the expiration of the option. The Company
does not intend to exercise the option if such conditions are not satisfied. In
addition, the Company may elect not to exercise the option even though such
conditions may be satisfied. The purchase of this firm upon exercise of the
option would not require the use of any of the net proceeds from this Offering,
and the Company does not intend to apply any of the net proceeds from this
Offering to purchase such firm, if such acquisition is completed. There can be
no assurance that this or any other future acquisitions will be consummated. See
"Risk Factors -- Management of Growth and Acquisition Risks" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
DIVIDEND POLICY
Prior to November 17, 1995, the Company was an S corporation for federal
income tax purposes and prior to such time periodically declared and paid cash
dividends to its stockholders in amounts approximately sufficient to permit its
stockholders to pay their income taxes on earnings of the Company that were
treated as having been earned by the Company's stockholders and in 1995 paid an
additional monthly dividend totaling $14,000 per month. In addition, in
connection with the termination of the Company's status as an S corporation, the
Company declared a cash dividend in the aggregate amount of approximately $7.1
million, approximating the Company's accumulated adjustments account for federal
income tax purposes as of such date. Of such dividend, $5.8 million was paid to
stockholders prior to December 31, 1995 and the remainder will be paid prior to
the completion of this Offering.
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
decision whether to pay cash dividends will be made by the Board of Directors of
the Company in the light of conditions then existing, including the Company's
results of operations, financial condition and requirements, business conditions
and other factors.
14
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996,
assuming the conversion of all outstanding shares of Preferred Stock and Class B
Common Stock into shares of Common Stock and the exercise of all stock options
outstanding on the date of this Prospectus, as if such options had been
exercised on June 30, 1996, was $24.6 million, or $1.84 per share of Common
Stock. "Pro forma net tangible book value per share" is determined by dividing
the pro forma number of outstanding shares of Common Stock into the net tangible
book value of the Company (total tangible assets less total liabilities). After
giving effect to the sale by the Company of the 2,700,000 shares of Common Stock
offered hereby (based upon an assumed initial public offering price of $13.00
per share and after deducting the estimated underwriting discount and offering
expenses), the as adjusted net tangible book value of the Company as of June 30,
1996 would have been $56.4 million, or $3.50 per share. This represents an
immediate increase in net tangible book value of $1.66 per share to existing
stockholders and an immediate dilution of $9.50 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share as of June 30,
1996......................................................... $1.84
-----
Increase in net tangible book value per share attributable to
new investors................................................ $1.66
-----
As adjusted net tangible book value per share after Offering...... 3.50
------
Dilution per share to new investors............................... $ 9.50
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders and by the investors purchasing shares of Common Stock in
this Offering, based upon an assumed initial public offering price of $13.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 13,389,646 83.2% $23,205,000 39.8% $ 1.73
New investors................... 2,700,000 16.8 35,100,000 60.2 13.00
---------- ----- ----------- ----- ------
Total................. 16,089,646 100.0% $58,305,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes (i) the conversion of all outstanding shares of
Preferred Stock and Class B Common Stock into shares of Common Stock as of June
30, 1996, (ii) the exercise of options to purchase 444,425 shares of Common
Stock outstanding on the date of this Prospectus, as if such options had been
exercised on June 30, 1996 net of the effect of options to purchase 235,681
shares of Common Stock that, pursuant to the 1995 Option Plan (as defined
herein), would be satisfied by shares of Common Stock to be repurchased from
existing stockholders and (iii) no exercise of the Underwriters' over-allotment
option. See "Capitalization", "Management -- Stock Option and Restricted Stock
Award Plans" and Note 6 of Notes to Consolidated Financial Statements.
15
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the short-term debt and actual
capitalization of the Company as of June 30, 1996, (ii) the capitalization of
the Company on a pro forma basis to give effect to the conversion into Common
Stock of all outstanding shares of Preferred Stock and Class B Common Stock and
(iii) the pro forma capitalization of the Company as adjusted to give effect to
the sale of the 2,700,000 shares of Common Stock offered hereby (at an assumed
initial public offering price of $13.00 per share and after deducting the
estimated underwriting discount and offering expenses).
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt.............................................. $ 2,245 $ 2,245 $ 2,245
======= ======== ========
Long-term debt............................................... $ 3,115 $ 3,115 $ 3,115
Stockholders' equity(a):
Preferred Stock, $.01 par value, 1,000 shares authorized, 883
shares issued and outstanding actual; no shares issued and
outstanding pro forma; no shares issued and outstanding as
adjusted(a)(b):............................................ -- -- --
Class A Common Stock, $.001 par value, 50,000,000 shares
authorized, 446,799 shares issued and outstanding actual;
13,180,902 shares issued and outstanding pro forma; $.001
par value, 50,000,000 shares authorized, 15,880,902 shares
issued and outstanding as adjusted(c):..................... -- 13 16
Class B Non-voting Common Stock, $.001 par value; 30,000,000
shares authorized, 10,097,772 shares issued and outstanding
actual; no shares issued and outstanding pro forma; no
shares issued and outstanding as adjusted(c)(d):........... 10 -- --
Additional paid-in capital................................... 22,311 22,308 54,048
Retained Earnings............................................ 1,948 1,948 1,948
Class A Common Stock held in treasury; 40,480 shares, at
cost....................................................... (244) (244) (244)
Stock subscription receivable................................ (149) (149) (149)
Deferred compensation........................................ (466) (466) (466)
------- -------- --------
Total stockholders' equity................................. 23,410 23,410 55,153
------- -------- --------
Total long-term debt and stockholders' equity...... $26,525 $ 26,525 $ 58,268
======= ======== ========
</TABLE>
- ---------------
(a) See Note 6 of Notes to Consolidated Financial Statements.
(b) Upon completion of the Offering, the Company will amend its Restated
Certificate of Incorporation to authorize 10 million shares of preferred
stock, $.001 par value, and 50 million shares of Common Stock.
(c) Does not include 444,425 shares of Class B Common Stock, or following
completion of this Offering 444,425 shares of Common Stock, issuable upon
exercise of stock options outstanding under the Company's stock option
plans as of the date of this Prospectus.
(d) See Note 11 of Notes to Consolidated Financial Statements.
16
<PAGE> 21
SELECTED FINANCIAL DATA
The selected financial data for the three years ended December 31, 1995
have been derived from the Company's consolidated financial statements, which
have been audited by Price Waterhouse LLP, independent accountants. The selected
historical financial data for the two years ended December 31, 1992 have been
derived from the Company's financial statements, which have been audited by
another independent accounting firm. The selected financial data for the six
months ended June 30, 1995 and 1996, have been derived from the Company's
unaudited consolidated financial statements and include, in the opinion of
management, all normal recurring adjustments necessary to present fairly the
data for such periods. The operating results for the six months ended June 30,
1996, are not necessarily indicative of the results that may be expected for the
full fiscal year ending December 31, 1996. This information should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................... $18,251 $21,846 $26,378 $32,882 $ 34,639 $16,601 $ 20,774
Cost of sales................ 8,213 8,989 9,731 14,533 14,259 7,270 8,815
Selling expense.............. 2,815 2,871 3,654 4,390 4,913 2,350 3,127
General and administrative
expense.................... 5,519 7,329 8,738 8,485 8,171 3,992 4,656
Research and development
expense.................... 375 207 1,273 2,394 3,326 1,355 1,792
Other expense, net........... 727 199 156 440 1,130 404 21
------- ------- ------- ------- ---------- ------- ----------
Income before income taxes... 602 2,251 2,826 2,640 2,840 1,230 2,363
Income taxes................. -- -- -- -- 39 -- 967
Equity income (loss)......... -- -- -- (444) 444 (414) --
------- ------- ------- ------- ---------- ------- ----------
Net income................... $ 602 $ 2,251 $ 2,826 $ 2,196 $ 3,245 $ 816 $ 1,396
======= ======= ======= ======= ========== ======= ==========
PRO FORMA DATA
(UNAUDITED)(A):
Pro forma income taxes....... $ 247 $ 878 $ 1,125 $ 1,118 $ 1,129 $ 504
Pro forma net income......... 355 1,373 1,701 1,078 2,116 312
Pro forma earnings per common
share...................... $ .18 $ .12
Weighted average common
shares outstanding......... 11,578,079 11,578,079
BALANCE SHEET DATA
(AT PERIOD END)
Working capital.............. $(1,289) $ (549) $ 601 $(1,181) $ 12,374 $ 12,072
Property and equipment,
net........................ 6,454 8,477 9,121 10,782 10,904 12,400
Total assets................. 12,434 14,179 18,443 22,402 39,156 35,774
Long-term debt, less current
maturities................. 2,214 3,526 3,273 2,738 3,378 3,115
Total stockholders' equity... 2,228 3,649 5,549 5,856 21,990 23,410
ADDITIONAL DATA(B):
Income before research and
development expense........ $ 977 $ 2,458 $ 4,099 $ 5,034 $ 6,166 $ 2,585 $ 4,155
</TABLE>
- ---------------
(a) Pro forma data reflect the application of corporate income taxes to the
Company's net income as if termination of the Company's S corporation status
had occurred on January 1, 1991.
17
<PAGE> 22
(b) Income before research and development expense represents net sales less the
cost of sales, selling expense, general and administrative expense and other
expense, net. While such data are not a measure of performance under
generally accepted accounting principles, the Company has included income
before research and development expense data because such data are used by
certain investors and permit evaluation of the profitability of the
Company's operations throughout the period without taking account of
research and development expense. In 1993, the Company began allocating a
significant portion of its technical resources and operating capacity to
internal development of generic drugs and proprietary technology. The
Company has only recently begun to recognize license revenue from these
internal development efforts due to the significant time required for
development and approval of pharmaceutical products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Internal Drug and Technology
Development".
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenue primarily from performing contract product
development and support services for the pharmaceutical and biotechnology
industries, including chemical analysis, synthesis and other laboratory
services; drug formulation development; clinical supply and niche manufacturing;
and regulatory and compliance consulting. In general, the Company provides
services to a client under an estimate that establishes the anticipated price
and scope of a project, although estimates may be adjusted during the term of
the project. The terms of the Company's engagements vary, ranging from less than
one month to several years, and generally may be terminated upon notice of 30
days or less by the client. Although occasionally the Company has entered into
fixed-price contracts, such contracts have not constituted a material portion of
its business and historically have not affected the Company's operating margins.
The Company recognizes revenue on the percentage of completion basis as work is
performed.
In addition to its core fee-for-service business, the Company has allocated
a growing proportion of its technical resources and operating capacity to its
internal drug and drug technology development projects. These projects are
either internally funded or shared-risk projects with development partners. The
Company has applied a portion of the net proceeds from its issuance of Preferred
Stock in November 1995 and intends to use a portion of the net proceeds from
this Offering to expand its capacity to enable growth in its internal
development program, as well as its core fee-for-service business. Internal
development projects are undertaken to develop targeted drugs and proprietary
drug technologies with the intention of licensing the marketing rights to third
parties. The Company has also entered into selective shared-risk development
projects, reducing its fees for development services in return for license fees,
typically paid upon performance of certain milestones, and royalties based on a
percentage of product sales or profit. Substantially all of the Company's
research and development expenses are the result of internal development and
shared-risk projects.
The Company has only recently begun to recognize license revenue from its
internal development efforts due to the significant time required for
development and approval of pharmaceutical products. Historically, as the
Company expanded its internal development program, less capacity was available
for fee-for-service work to generate more immediate revenue. The Company
anticipates that licensing revenue, including royalties, from internal drug and
technology development will represent a larger proportion of its revenue,
although there can be no assurance that internal development projects will yield
products that will be approved by the appropriate regulatory authorities or will
be attractive to potential clients. The Company believes that the profit margins
from internal drug and technology development potentially exceed the margins on
its standard core fee-for-service engagements.
In 1994, the Company and private investors organized Endeavor to fund the
development of generic hormone pharmaceutical products, which initially focused
on certain products then under development by the Company. The Company owns
approximately 40% of the fully diluted common equity of Endeavor and continues
the development of these products under agreements with Endeavor. The Company's
net sales to Endeavor were approximately $1.9 million, $3.5 million and $3.0
million in 1994, 1995 and the six months ended June 30, 1996, respectively. The
Company also provides development services to Aesgen, an affiliate, and
recognized net sales to Aesgen of $5.6 million and $1.9 million in 1995 and for
the six months ended June 30, 1996, respectively. See "Risk Factors --
Dependence on Certain Industries and Clients" and "Certain Transactions --
Transactions Involving Management".
The Company accounts for its investment in Endeavor under the equity method
which limits the recognition of losses to the amount invested or committed for
investment and financial support. The Company acquired its equity interest in
Endeavor in return for its contribution of existing formulations and technology
developed by the Company that had been fully expensed. Other investors' cash
contribution to Endeavor created a gain for AAI that was deferred. In connection
with its investment, the Company
19
<PAGE> 24
extended a $1.5 million revolving credit facility to Endeavor. Because of this
financial support commitment under the credit facility, the Company recognized a
liability during 1994 and the first three quarters of 1995 equal to its
proportionate share of Endeavor's operating losses, net of amortization of the
deferred gain on the original investment. In connection with a cash investment
in Endeavor by new investors in November 1995, loans under this facility were
repaid during the fourth quarter of 1995, and the Company's obligation to make
further loans was terminated. As a result of the termination of the Company's
obligation to make further loans to Endeavor under the credit facility, the
previously recorded liability was reversed in the fourth quarter of 1995. See
Note 3 of Notes to Consolidated Financial Statements.
Effective November 17, 1995, upon the issuance of the Preferred Stock the
Company ceased to be treated as an S corporation for federal and state income
tax purposes.
This Prospectus contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in those forward-looking statements. Factors that
might cause such differences include those discussed in "Risk Factors".
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 36.9 44.2 41.2 43.8 42.4
Selling expense......................... 13.9 13.4 14.2 14.2 15.1
General and administrative expense...... 33.1 25.8 23.6 24.0 22.4
Research and development expense........ 4.8 7.3 9.6 8.2 8.6
Other expense, net...................... 0.6 1.3 3.3 2.4 0.1
Income before income taxes.............. 10.7 8.0 8.2 7.4 11.4
Equity income (loss).................... -- (1.4) 1.3 (2.5) --
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales increased $4.2 million, or 25%, to $20.8 million in the first six
months of 1996 compared to the first six months of 1995. The increase was
principally due to the performance of a greater number of projects, primarily
for laboratory services, and to the recognition of licensing revenue.
Cost of sales increased by $1.5 million, or 21%, to $8.8 million for the
first six months of 1996 compared to the first six months of 1995. Cost of sales
decreased as a percentage of net sales to 42.4% from 43.8%, reflecting the
recognition of licensing revenue in 1996, the associated cost of which primarily
had been recognized in prior periods.
Selling expense increased by $777,000, or 33%, to $3.1 million in the first
six months of 1996 compared to the first six months of 1995. The increase was
primarily attributable to the opening of sales offices in Boston, Massachusetts;
San Francisco, California; Copenhagen, Denmark and London, England, as well as
higher commission expense associated with increased sales. General and
administrative expense increased by $664,000, or 17%, to $4.7 million in the
first six months of 1996 compared to the first six months of 1995. The increase
in general and administrative expense is primarily due to higher accruals for
incentive compensation and professional fees. As a percentage of sales, the
Company's general and administrative expense continued its downward trend,
decreasing to 22.4% for the first six months of 1996 from 24.0% for the first
six months of 1995.
20
<PAGE> 25
Research and development expense increased by $437,000, or 32%, to $1.8
million in the first six months of 1996 compared to the first six months of
1995, and represented 8.6% of net sales for the 1996 period compared to 8.2% of
net sales in the 1995 period. The increase in research and development expense
reflects the Company's decision to allocate an increasing proportion of its
development capabilities to its internal development program. The Company
anticipates that, consistent with its business strategy, investments in research
and development will continue to increase over the next several years.
Other expense, net, which was primarily interest expense, decreased by
$383,000, or 95%, to $21,000 in the first six months of 1996 compared to the
first six months of 1995 due to the reduced borrowing levels during the 1996
period compared to 1995. In addition, interest income from marketable
securities, purchased with a portion of the net proceeds of the issuance of the
Preferred Stock, offset expense incurred with respect to the Company's remaining
interest-bearing liabilities.
As a result of the termination of the Company's obligations under the
credit facility to Endeavor during the fourth quarter of 1995, the Company
recognized no loss associated with its investment in Endeavor during the first
six months of 1996, compared with a loss of $414,000 for the comparable period
in 1995.
Income taxes for the first six months of 1996 were $967,000. No income
taxes were recognized for the first quarter of 1995 because the Company was
treated as an S corporation for federal and state income tax purposes throughout
such period.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $1.8 million, or 5%, to $34.6 million in 1995
compared to 1994. The increase in net sales was primarily attributable to a
greater number of fee-for-service projects undertaken by the Company. These
increases were partially offset by a $1.8 million reduction of net sales to a
single customer from the winding down of one project and by the Company's
decision to allocate an increasing proportion of its technical resources and
operating capacity to internal research and development projects.
Cost of sales declined by $274,000, or 2%, to $14.3 million in 1995
compared to 1994. Cost of sales as a percentage of net sales decreased to 41.2%
in 1995 from 44.2% in 1994. This decrease is primarily attributable to the high
level of cost of sales in 1994 associated with increases in professional
staffing in 1994 and with the opening of the Company's Research Triangle Park
facility in 1994.
Selling expense increased by $523,000, or 12%, to $4.9 million in 1995
compared to 1994. Such increase is primarily the result of the full-year impact
of increases in the sales and marketing personnel implemented in 1994. Selling
expense as a percent of net sales increased to 14.2% in 1995 compared to 13.4%
in 1994 reflecting the delay in productivity as new sales personnel were trained
and established relationships with prospective clients.
General and administrative expense decreased by $314,000, or 4%, to $8.2
million in 1995 compared to 1994 primarily as a result of reductions in the
level of executive compensation and the departure in 1995 of certain employees
to manage an affiliate. General and administrative expense as a percentage of
net sales continued its downward trend, decreasing to 23.6% in 1995 from 25.8%
in 1994. The Company believes that such trend reflects the compensation
reductions discussed above and the utilization of administrative leverage during
the period, with the expansion of operating facilities requiring no significant
increase in administrative staffing or management information systems. Such
trend may not continue in the near term, as management anticipates selected
increases in administrative staffing and information technology spending to
support the Company's continued growth.
Research and development expense increased $932,000, or 39%, to $3.3
million in 1995 compared to 1994. Research and development expense represented
9.6% of net sales in 1995 compared to 7.3% of net sales in 1994. The increase in
research and development expense reflects the Company's decision to allocate an
increasing proportion of its development capabilities to proprietary products.
21
<PAGE> 26
Other expense increased by $690,000 to $1.1 million in 1995 compared to
1994, reflecting higher interest expense from increased borrowing levels during
1995 and a provision of $363,000 established in connection with litigation,
currently under appeal, with a former employee of the Company terminated in
1992.
Equity income of $444,000 was recognized in 1995 with respect to the
Company's investment in Endeavor, reversing equity losses of $444,000 in 1994,
due to the termination in 1995 of the Company's obligation to provide Endeavor
funding under the credit facility. See Note 3 of Notes to Consolidated Financial
Statements.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased by $6.5 million, or 25%, to $32.9 million in 1994
compared to 1993. The increase is attributable to an increase in the number of
projects performed by the Company in 1994, as well as a $2.6 million increase in
net sales resulting from a multi-year, quality control project commenced in mid-
1993 for a single client.
Cost of sales increased by $4.8 million, or 49%, to $14.5 million in 1994
compared to 1993 principally due to the costs associated with the opening of the
Company's Research Triangle Park facility in 1994. These costs included the cost
of hiring and training additional staff, validation of the new facilities and
increased lease expense.
Selling expense increased by $736,000, or 20%, to $4.4 million in 1994
compared to 1993, primarily as a result of increases to the sales and marketing
personnel made in 1994 and higher promotional spending.
General and administrative expense decreased by $253,000, or 3%, to $8.5
million in 1994 compared to 1993. The reduction in general and administrative
expense was primarily due to decreases in the level of executive compensation in
1994 compared to 1993, partially offset by increased staffing in several
administrative departments.
Research and development expense increased by $1.1 million, or 88%, to $2.4
million in 1994 compared to 1993, as the Company continued its 1993 initiative
to increase internal proprietary product and technology development activities.
Research and development expense as a percentage of net sales increased to 7.3%
in 1994 from 4.8% in 1993, reflecting the initiation of several new product
development programs and increased spending for continuing technology
development programs.
Other expense, primarily interest expense, increased by $284,000 to
$440,000 in 1994 compared to 1993 primarily due to increased borrowing levels in
1994 compared to 1993.
Equity losses of $444,000 in 1994 were attributable to the Company's
investment in Endeavor.
QUARTERLY RESULTS
The Company's quarterly results have been, and are expected to continue to
be, subject to fluctuations. Quarterly results can fluctuate as a result of a
number of factors, including the commencement, completion or cancellation of
large contracts, progress of ongoing contracts, recognition of licensing
revenue, acquisitions, the timing of start-up expenses for new facilities and
changes in the mix of services. Since a large percentage of the Company's
operating costs are relatively fixed, variations in the timing and progress of
large contracts or the recognition of licensing revenue (on projects for which
associated expense was recognized in prior periods) can materially affect
quarterly results. In addition, recognition of equity income or loss from the
Company's investment in Endeavor in any quarter could substantially affect net
income. To the extent the Company's international business increases, exchange
rate fluctuations may also influence these results. The Company believes that
comparisons of its quarterly financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. See "Risk
Factors -- Variation in Quarterly Operating Results".
22
<PAGE> 27
The following sets forth certain unaudited quarterly statement of income
data for the quarters indicated below, and certain of such data as a percentage
of net sales:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................... $ 8,309 $ 8,292 $ 8,932 $ 9,106 $ 9,925 $ 10,849
Cost of sales................ 3,626 3,644 3,476 3,513 4,118 4,697
Selling expense.............. 1,269 1,081 1,305 1,258 1,544 1,583
General and administrative
expense.................... 2,097 1,895 1,959 2,221 2,273 2,383
Research and development
expense.................... 651 704 939 1,032 852 940
Other expense (income),
net........................ 172 232 220 505 29 (8)
-------- ------- ---------- --------- -------- --------
Income before income taxes... 494 736 1,033 577 1,109 1,254
Income taxes................. -- -- -- 39 454 513
Equity income (loss)......... (462) 48 55 803 -- --
-------- ------- ---------- --------- -------- --------
Net income................... 32 784 1,088 1,341 655 741
Income before income taxes as
a percentage of net
sales...................... 5.9% 8.9% 11.6% 6.3% 11.2% 11.6%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its business through operating cash flows, proceeds
from borrowings and the issuance of shares of Preferred Stock in November 1995.
During 1993, 1994 and 1995, the Company generated $544,000, $4.9 million and
$3.8 million, respectively, in cash flow from operations and raised $21.5
million in net proceeds in 1995 from the issuance of shares of Preferred Stock.
Total capital expenditures were $2.3 million in 1993, $3.1 million in 1994,
$1.7 million in 1995 and $2.5 million in the first six months of 1996. Capital
expenditures were incurred predominantly in connection with the opening of the
Company's Research Triangle Park facility and with improvements made to existing
facilities. The Company anticipates capital expenditures in 1996 to be
approximately $8.4 million, to be used in part for the expansion of clinical
supply and niche manufacturing facilities scheduled to be completed in the
second half of 1996 and the first half of 1997.
At December 31, 1995, the Company's working capital was $12.4 million
compared to a negative $1.2 million at December 31, 1994. The increase in
working capital is attributable primarily to the receipt of approximately $21.5
million in net proceeds from the issuance in November 1995 of shares of
Preferred Stock and the application of a portion of the net proceeds to repay
certain outstanding debt and to partially fund a $7.1 million dividend declared
in connection with the termination of the Company's status as an S corporation.
The portion of the net proceeds from the issuance of the shares of Preferred
Stock not yet applied for use is invested in investment-grade, interest-bearing,
marketable debt securities. At June 30, 1996, working capital was $12.1 million,
reflecting the application of a portion of the net proceeds from the issuance of
the Preferred Stock for capital expenditures and other corporate purposes.
Clients are invoiced either as work is performed or in keeping with
contractual provisions. Such contractual billing arrangements have not
historically adversely affected the Company's liquidity or cash flows.
The Company has used credit facilities to fund certain capital expenditures
and its short-term liquidity needs. The Company's credit facility with
NationsBank, N.A. (the "Credit Facility") consists of two term loans with a
total of $3.6 million outstanding as of June 30, 1996 and two lines of credit
totaling $5.0 million. The interest rate on loans under the Credit Facility is
30-day LIBOR plus a variable margin based on the Company's debt-to-equity ratio.
At June 30, 1996 the interest rate was 6.44%. Indebted-
23
<PAGE> 28
ness under the Credit Facility is secured by substantially all of the assets of
the Company and is subject to a number of covenants and restrictions relating
to, among other things, financial ratios, other liabilities and indebtedness. Of
the $3.6 million in outstanding term loans at June 30, 1996, approximately $2.6
million matures in December 1997, with monthly payments of $34,167 plus
interest, and $1.0 million matures in December 2000, with monthly payments of
$16,663 plus interest. The amount available for borrowing under the $5.0 million
revolving credit lines is based upon the amount of certain accounts receivable
pledged to secure the indebtedness. At June 30, 1996, the Company was eligible
to borrow $5.0 million, with no balance outstanding, under the revolving lines
of credit. The revolving lines of credit are scheduled to expire in November
1996 and are expected to be renewed for an additional one-year term.
In 1988, the Company obtained $3.5 million in financing through the
issuance of variable-rate industrial revenue bonds backed by a letter of credit.
Interest on the Company's obligation under the bonds varies and the rate at June
30, 1996 was 3.5%. The Company's obligations under the bonds and to the bank
that issued the letter of credit supporting the bonds mature in November 2000,
with monthly payments on the bonds of $25,000 plus interest and annual letter of
credit fees equal to 1% of the outstanding amount of the bonds. At June 30,
1996, $1.6 million was outstanding under this facility.
In May 1996, the Company acquired an option to purchase the outstanding
stock of a European contract research and development organization. The Company
paid approximately $1.0 million to acquire such option, which amount is held in
escrow and will be applied to the purchase price if the Company elects to
exercise such option or returned to the Company if, prior to the expiration of
the option, certain substantial conditions are not satisfied. Significant
uncertainties exist whether such conditions could be satisfied prior to the
option expiration date, November 28, 1996. The Company does not intend to
exercise such option if these conditions are not satisfied and can make no
prediction whether such conditions will be satisfied by November 28, 1996. In
addition, the Company may elect not to exercise such option even if such
conditions are satisfied, in which case it would forfeit the $1.0 million option
payment.
The Company expects to continue expanding its operations through internal
growth and strategic acquisitions. The Company expects such activities will be
funded from existing cash and cash equivalents, cash flow from operations, the
net proceeds from the Offering and borrowings under its Credit Facility. The
Company believes that such sources of cash will be sufficient to fund operations
for the current and foreseeable future and to pay existing debt as it becomes
due and other capital obligations. Although the Company has no present
acquisition agreements or arrangements other than described above, there may be
acquisition or other growth opportunities that require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities. There can be no
assurances that such financings will be available on terms acceptable to the
Company.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse effect on its results of operations or financial condition.
24
<PAGE> 29
BUSINESS
AAI is a leading integrated contract research and development resource to
the worldwide pharmaceutical and biotechnology industries, offering an
efficient, variable-cost alternative to its clients' internal drug development,
compliance and quality control programs. The Company provides a broad array of
value-added services, including chemical analysis, synthesis and other
laboratory services; drug formulation development; clinical supply and niche
manufacturing; and regulatory and compliance consulting. Since it was founded in
1979, AAI has contributed to the submission, approval or continued marketing of
more than 1,250 client products worldwide, encompassing a wide range of
therapeutic categories and technologies. The Company is currently providing
critical development services for 44 products (including 14 products in its
internal development program) intended for submission to or under review by the
FDA. The Company believes that its ability to offer an extensive portfolio of
high quality drug development and support services enables it to effectively
compete as pharmaceutical and biotechnology companies look for integrated drug
development solutions that offer cost-effective results on an accelerated basis.
In addition to its core fee-for-service business, AAI is leveraging its
expertise by allocating a significant proportion of its technical resources and
operating capacity to internal drug and drug technology development, in which
the Company shares in the expense of development and participates in the
benefits of any potential commercial success through licensing arrangements.
Internal drug development is focused primarily on generic products. The
Company's internal product development efforts have resulted in 12 generic
product applications filed with the FDA. Applications for six of those products
have been approved in its clients' names, of which four products are currently
licensed to clients and two products have been sold. The Company's proprietary
technology includes nine patents and three pending patent applications on
formulations and methods, including liquid formulations for improved delivery of
nonsteroidal anti-inflammatory drugs or NSAIDs, such as ibuprofen, and chewable
formulations to mask the otherwise bitter taste of certain ulcer drugs. Since
1993, the Company has allocated a growing proportion of its technical resources
and operating capacity to its internal drug and drug technology development
program and because of the significant time required for development and
approval of pharmaceutical products, the Company has only recently begun to
recognize license revenue from its internal development efforts.
In 1994, as part of its internal development program, the Company organized
Endeavor to develop certain generic hormone pharmaceutical products, focusing
initially on several such products then under development by AAI. The Company
owns approximately 40% of the fully diluted common equity of Endeavor.
The Company's principal executive offices are located in Wilmington, North
Carolina, and the Company maintains operating facilities in Wilmington and
Research Triangle Park, North Carolina and sales offices in Chicago, Illinois;
Boston, Massachusetts; San Francisco, California; Elmwood Park, New Jersey and
San Juan, Puerto Rico. The Company also maintains sales offices in Copenhagen,
Denmark; London, England and Milan, Italy to better serve and develop its
European client base.
INDUSTRY OVERVIEW
The contract research and development industry (commonly referred to as the
contract research organization, or CRO, industry) provides independent product
development and marketed-product support services to the pharmaceutical and
biotechnology industries. These research and development services include
compound synthesis/extraction, screening and pharmacological testing,
toxicology/safety testing, formulation development, laboratory testing, clinical
trials management, regulatory and compliance and quality control testing. The
Company estimates that in 1994 pharmaceutical and biotechnology companies spent
approximately $30 billion worldwide on research and development. The Company
estimates that in 1994 approximately $13 billion was spent on the type of
research and development services offered by the Company, including chemical
characterization, analysis, synthesis and other laboratory services; drug
formulation development; clinical trials production and manufacturing process
development; and regulatory affairs. In addition, the Company estimates that
worldwide 1994
25
<PAGE> 30
drug company expenditures on compliance and quality assurance activities was
approximately $3.6 billion. These product development and marketed-product
support services, which are the primary focus of AAI's fee-for-service business,
require extensive technical expertise, significant investment in capital
equipment, and extensive experience in drug development processes, GMP
compliance and in regulatory affairs.
The CRO industry consists of several hundred service providers operating in
various segments of the market, with many of the larger companies focusing
primarily on managing clinical trials and only a few, such as AAI, offering a
broad array of services. There are significant barriers to entry to providing an
extensive portfolio of services, particularly in the segment of the CRO market
that does not focus primarily on clinical management. These barriers include the
capital investment required for state-of-the-art equipment and facilities, the
employment of skilled and experienced professionals and the development of
expertise in and reputation for performing critical development and support
services consistent with clients' time demands and FDA regulatory requirements.
The Company also participates in the generic drug market through licensing
revenues on internally developed products and its partial ownership of Endeavor.
The U.S. generic drug market has expanded sales from approximately $3.5 billion
in 1990 to approximately $6.4 billion in 1994. Generic drugs accounted for an
estimated 38% of prescriptions dispensed in the United States in 1994. The
Company anticipates that the growth in the generic drug market will continue as
managed care organizations continue policies favoring generic substitution and
patents on many high dollar-volume products expire over the next several years.
FACTORS INFLUENCING INCREASED OUTSOURCING
The Company estimates that approximately $33 billion was spent on drug
development, compliance and quality control worldwide in 1994 and that
approximately $3.5 billion was outsourced to independent contract service
providers. The Company believes that historically the majority of outsourcing
has been for clinical trials management and that pharmaceutical and
biotechnology companies are increasing outsourcing in non-clinical areas to
control costs and to leverage all aspects of internal development and product
support capabilities. The Company believes that the following factors will
contribute to a continuing increase in outsourcing activities:
COST CONTAINMENT PRESSURES. Market forces, including a shift toward
managed care, and governmental initiatives have placed significant pressure on
drug companies to limit and reduce drug prices. Pricing pressures have arisen
from increased competition as a result of "me too" drugs, patent expirations,
generic substitution and increased purchasing power of large buyer groups. The
Company believes that the pharmaceutical and biotechnology industries are
responding to these pressures by downsizing and rationalizing internal research
and development programs, favoring outsourcing as a variable-cost alternative.
Although these factors are driving drug companies to contain costs, drug
companies' needs for development capacity continue. In particular, the need for
additional capacity to increase the speed of new product development, maximizing
the period of marketing exclusivity, and to increase economic returns has driven
the need for outsourced services. In addition, market forces, including the
demand arising from an aging population and the incidence of chronic disorders
and life-threatening conditions such as infectious diseases, including AIDS,
have increased the pressure to develop new products. AAI believes that firms
with an extensive, integrated portfolio of drug development and support services
will have a competitive advantage in the market, as pharmaceutical and
biotechnology companies look for integrated drug development solutions offering
cost-effective results on an accelerated basis.
PATENT EXPIRATIONS. Patents for products representing $10.5 billion of
1994 U.S. drug sales are scheduled to expire by December 31, 2000. These patent
expirations are forcing drug companies to develop new products or modify
existing products to maintain market share against generic product competition.
The Company believes that the pressure to develop new products and modify
existing products, combined with internal capacity constraints, is leading
companies to outsource these activities.
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Further, the Company believes that these patent expirations are providing
generic drug companies with more product opportunities than their internal
development capacity can sustain, resulting in increased outsourcing. AAI
believes that firms offering integrated formulation development services and
expertise in a broad variety of dosage forms will benefit from this trend.
CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY. The pharmaceutical industry
is consolidating as companies seek to reduce costs and increase revenue through
business combinations. Once consolidated, many pharmaceutical companies
aggressively manage costs by eliminating jobs, decentralizing the research and
development process and outsourcing in an effort to reduce the fixed costs
associated with internal drug development and product support.
BIOTECHNOLOGY INDUSTRY AND "VIRTUAL" DRUG COMPANY GROWTH. The
biotechnology industry has grown rapidly over the last ten years and has
introduced a significant number of new compounds for development. Many
biotechnology companies do not have the necessary in-house resources to conduct
required development and testing. In addition, as a result of recent product
development setbacks encountered by some biotechnology companies, the Company
believes that many biotechnology companies are turning to experienced
development firms for analytical and regulatory expertise. Furthermore, the
number of "virtual" drug development companies with little or no internal
development or support resources have increased substantially over the past five
years. Accordingly, these companies must outsource development and support
services. The Company believes firms with formulation development and
biotechnology expertise will benefit from this trend.
INCREASING GENERIC PRODUCT DEVELOPMENT. Market opportunities arising with
the large number of impending patent expirations and market forces favoring
generic substitution have recently led many pharmaceutical companies to form
divisions focused exclusively on the development of generic products. These
generic product divisions are often allocated limited internal development
capabilities and must outsource some or all of their development and product
support needs. The Company believes that firms offering a broad array of
integrated development and support services will benefit the most from this
trend.
NEED FOR TECHNICAL EXPERTISE. Certain new compounds present complex
challenges in drug development, including acceptable profiles for stability,
delivery and other formulation parameters. Given the extensive expertise of
certain independent drug development firms, pharmaceutical and biotechnology
companies increasingly look to these firms for innovative solutions to complex
issues. AAI believes that firms with a reputation for high quality, innovative,
solution-driven contract work will have a key role in the area of difficult drug
development.
NEED FOR DATA MANAGEMENT EXPERTISE. Regulatory agencies are increasing the
volume of data required for regulatory filings, as well as requesting increased
access to these data. Furthermore, the FDA is encouraging the use of
computer-assisted filings in an effort to expedite the approval process.
Resource allocations and priorities may lead drug companies to outsource to
firms with automated data management capabilities. The Company believes that
firms that stay abreast of technological innovations and changing regulatory
requirements will have a competitive advantage.
GLOBALIZATION OF THE MARKETPLACE. Foreign pharmaceutical companies,
particularly firms in Japan and Europe, are increasingly seeking to obtain
approval to market their existing products in the United States. Due to a lack
of familiarity with the complex U.S. regulatory system and the difficulty in
bringing their operating facilities into FDA-required GMP compliance, foreign
firms are increasingly relying on independent development companies with
experience in the United States to provide integrated services through all
phases of product development and to assist in preparing regulatory submissions.
The Company believes that domestic firms with established regulatory expertise
and a broad range of integrated development services will benefit from this
trend.
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THE DRUG DEVELOPMENT PROCESS
Under the U.S. regulatory system, the development process for new
pharmaceutical products can be divided into three distinct phases. The
preclinical phase involves the discovery, characterization, product formulation
and animal testing necessary to prepare an Investigational New Drug ("IND")
exemption for submission to the FDA. The IND must be accepted by the FDA before
the drug can be tested in humans. The second, or clinical, phase of development
follows a successful IND submission and involves the activities necessary to
demonstrate the safety, tolerability, efficacy and dosage of the substance in
humans, as well as the ability to produce the substance in accordance with the
FDA's GMP regulations. Data from these activities are compiled in a New Drug
Application ("NDA"), or for biotechnology products, a Product License
Application ("PLA"), for submission to the FDA requesting approval to market the
drug. The third phase, or post-approval phase, follows FDA approval of the NDA,
or PLA, and involves the production and continued analytical and clinical
monitoring of the drug. The post-approval phase also involves the development
and regulatory approval of product modifications and line extensions, including
improved dosage forms, of the approved product, as well as for generic versions
of the approved drug, as the product approaches expiration of patent or other
exclusivity protection.
The following figure illustrates the drug development process and the
component activities involved in each of the three phases. The figure also
illustrates the areas of AAI's service offerings. The process is described in
more detail below.
FIGURE 1
THE DRUG DEVELOPMENT PROCESS
[DRUG DEVELOPMENT PROCESS CHART]
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DESCRIPTIVE APPENDIX FOR FIGURE 1:
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: The figure is separated into three broad vertical fields,
with each field separated by a narrow column. The left hand field is entitled
"The Preclinical Phase" with three vertical columns of boxes. The left hand
column contains two vertically descending boxes, captioned "Discovery" and "Drug
Screening". The center column contains four vertically descending boxes,
captioned "Scale Up", "Chemistry", "Analysis" and "Formulation", with arrows
pointing in both horizontal directors from the "Analysis" and "Formulation"
boxes, spanning the entire field. The right hand column contains two vertically
descending boxes, captioned "Regulation" and "Stability". Below the boxes is a
row of three broad arrows, aligned under the three columns, captioned, from left
to right, "Discovery", "Animal Toxicology" and "Animal Pharmacology". To the
right of such field is a narrow column with the vertical caption, "IND
Submission and Review". To the right of such column is the broad center vertical
field with the caption, "The Clinical Phase", with three vertical columns of
boxes. The left hand column contains five vertically descending boxes with the
captions, "Phase I Clinical Trials", "Bulk Chemicals", "Dosage Development",
"Clinical Supplies" and "Bioanalytical and Metabolism". The center column
contains four vertically descending boxes with the captions, "Phase II Clinical
Trials", "Clinical Supplies", "Analytical" and "Stability", with arrows pointing
in both directions from the "Stability" box, spanning the entire field. The
right hand column contains four vertically descending boxes, captioned "Phase
III Clinical Trials", "Production Validation", "SOP's Generated" and
"Regulatory". Below the boxes is a row of three broad arrows, aligned under the
three columns, captioned, from left to right, "Human Toxicology", "Human
Pharmacology" and "Efficacy". To the right of such field is a narrow column with
the vertical caption, "NDA Submission and Review". To the right of such column
is the broad right hand vertical field with the caption, "The Post-Approval
Phase", with three vertical column of boxes. The left hand column contains three
vertically descending boxes with the captions, "Phase IV Clinical Trials",
"Production" and "QA/QC". The center column contains three vertically descending
boxes with the captions, "Product Improvements", "Stability" and "Analytical",
with arrows pointing in both horizontal directions from the "Stability" and
"Analytical" boxes, spanning the entire field. The right hand column contains
four vertically descending boxes with the captions, "Production", "Formulation",
"Regulatory" and "Bioequivalence", with the "Bioequivalence" box shifted
one-half column to the left and arrows pointing in both horizontal directions
from the "Bioequivalence" box spanning to the center and right hand columns.
Below the boxes is a row of three broad arrows, aligned under the three columns,
captioned, from left to right, "Production Introduction", "Line Extensions" and
"Generic Competition". The following boxes are shaded to indicate areas of
services currently provided by AAI: left hand field "Chemistry", "Analysis",
"Formulation", "Regulatory" and "Stability"; center field, "Dosage Development",
"Bioanalytical and Metabolism", "Analytical", "Stability", "Production
Validation", "SOP's Generated", "Regulatory" and both "Clinical Supplies" boxes;
right hand field, "QA/QC", "Product Improvement", "Stability", "Analytical",
"Formulation", "Regulatory" and "Bioequivalence".]
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THE PRECLINICAL PHASE
The development of a new pharmaceutical agent begins with the discovery or
synthesis of a new molecule. These agents are screened for pharmacological
activity using various animal and tissue models, with the goal of selecting a
lead agent for further development. Additional studies are conducted to confirm
pharmacological activity, to generate safety data and to evaluate prototype
dosage forms for appropriate release and activity characteristics. Protocols for
these studies are designed in anticipation of fulfilling regulatory
requirements. Once the pharmaceutically active molecule is fully characterized,
an initial purity profile of the agent is established. During this and
subsequent stages of development, the agent is analyzed to confirm the integrity
and quality of material produced. In addition, development and optimization of
the initial dosage forms to be used in clinical trials are completed, together
with analytical models to determine product stability and degradation. Upon
successful completion of preclinical safety and efficacy studies in animals, an
IND submission is prepared and provided to the FDA for review prior to human
clinical trials. The IND submission consists of the initial chemistry,
analytical, formulation and animal testing data generated during the preclinical
phase. The review period for an IND submission is 30 days, after which, if no
comments are made by the FDA, the product candidate can be studied in Phase I
clinical trials.
The process for the development of biotechnology products parallels the
process outlined above. Biotechnology products frequently are large proteins,
with activity that is different from the activity of small, organic molecules.
Proteins may be coupled with other biologically active molecules, such as lipids
or sugars, for enhanced or modified biological activity. Biotechnology products
may be composed of the building blocks of DNA. Because of the diversity of the
nature of biotechnology products and their substantial molecular size (usually
hundreds of times larger than small, organic molecules), special technology is
required for their production, as well as their subsequent analysis. In
addition, highly sophisticated analytical techniques are required to
characterize the structure of these molecules.
Biotechnology products, especially proteins, may be produced with living
cells. Purity testing can be complex since living cells may harbor viruses and
other agents. The potential presence of these agents, and the requirement to
establish degradation profiles and identify impurities associated with
production and purification, further require establishing, validating and
conducting specialized tests and assays. Formulation development in this area is
often more complex than for small, organic drug substances. Generally, molecules
produced using recombinant DNA technology are inherently less stable than their
organic counterparts because structural integrity must be maintained through
administration and distribution of the product. Accordingly, certain aspects of
the development process for biotechnology products may be more challenging than
similar aspects encountered in the development of small, organic molecules.
THE CLINICAL PHASE
Following successful submission of an IND application, the sponsor is
permitted to conduct Phase I human clinical trials in a limited number of
healthy individuals to determine the drug's safety and tolerability which
analyses include bioanalytical assays to determine the availability and
metabolization of the active ingredient following administration. Prior to
conducting these early stage toxicology trials, the drug sponsor must secure
bulk supply of the active ingredient to support the necessary dosing of the
Phase I trials.
Phase II clinical trials involve administering the drug to individuals who
suffer from the target disease or condition to determine the drug's potential
effectiveness and ideal dose. These pharmacology trials require scale up for
manufacture of increasingly larger batches of bulk chemical. These batches
require validation analysis to confirm the consistent composition of the
product. When further safety (toxicology), tolerability and an ideal dosing
regimen have been established, Phase III clinical trials involving large numbers
of patients are conducted to verify the efficacy and long-term safety of the
drug. Throughout the clinical phase, samples of the product made in different
batches are tested for stability to establish shelf life constraints. In
addition, large-scale production protocols and written standard
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operating procedures ("SOPs") for each aspect of commercial manufacture and
testing must be developed.
After the successful completion of Phase III clinical trials, the sponsor
of the new drug submits an NDA, or PLA, to the FDA requesting that the product
be approved for marketing. An NDA, or PLA, is a comprehensive, multi-volume
application that includes, among other things, the results of all preclinical
and clinical studies, information about the drug's composition and the sponsor's
plans for producing, packaging and labeling the drug. The FDA's review may be
accelerated from a few months, for drugs related to life-threatening
circumstances, to many years, with the average review lasting two and one-half
years. Prior to granting approval, the FDA generally conducts an inspection of
the facilities, including outsourced facilities, that will be involved in the
manufacture, packaging, testing and control of the drug product for GMP
compliance. Drugs that successfully complete NDA or PLA review may be marketed
in the United States, subject to all conditions imposed by the FDA.
THE POST-APPROVAL PHASE
Following NDA or PLA approval, the drug manufacturer must comply with
quality assurance and quality control requirements throughout production and
must continue chemical analytical and stability studies of the drug in
commercial production to continue to validate production processes and confirm
product shelf life. Raw materials must be analyzed prior to use in production,
and samples from each manufactured batch must be tested prior to release of the
batch for distribution to the public. Failure to comply with FDA regulations in
manufacturing or testing during this phase could result in severe sanctions,
including product recalls or closing of facilities.
PATENT EXPIRATION AND GENERIC DEVELOPMENT
Typically, a drug sponsor obtains patent protection for a new chemical
entity commencing upon initial discovery. Due to the length of the development
and regulatory review processes, a significant portion of the patent exclusivity
period expires prior to the initial marketing of the product. As patent
expiration ensues, the sponsor may extend the brand life of the product by
developing new formulations, including line extensions and improved or extended
dosage forms or strengths, improved taste of an orally administered product,
modifications to drug absorption to reduce the time of onset of therapeutic
activity and improvements to the stability of the product. The new product must
be tested for stability, and additional clinical toxicology studies may be
performed. Upon completion of all necessary studies, a supplemental NDA is filed
with the FDA requesting approval to market the modified product. In certain
circumstances, the sponsor may obtain three years of additional marketing
exclusivity for the modified product.
As a drug's patent expires, the drug is subject to generic competition.
Generic products must be approved by the FDA through the submission of an
Abbreviated New Drug Application ("ANDA"). In general, a generic product is
developed with the goal of being classified by the FDA as therapeutically
equivalent to an FDA-approved reference product (i.e., the innovator's product).
Such a rating would permit the substitution of the generic product by pharmacies
for the prescribed reference product. To establish therapeutic equivalence, the
generic product must contain the same active ingredients, be of the same dosage
form and provide the same strength and route of administration as the reference
product. In addition, the generic formulation must also satisfy prescribed
standards of strength, quality, purity and identity and must be shown in
bioequivalency studies with healthy individuals to produce a rate and extent of
absorption of active ingredients not significantly different from those of the
reference product. The FDA does not require the generic drug sponsor to
separately demonstrate the safety or efficacy of the generic form if it is shown
to be therapeutically equivalent to an existing FDA-approved product.
Accordingly, the development period for generic products is typically shorter
when compared to the review period for new drug products. In addition, the
regulatory review of an ANDA is generally considerably shorter than for an NDA.
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As the foregoing figure and discussion illustrate, the drug development
process requires multiple services often conducted in parallel. Any capacity
constraints in any area of the process could severely limit the ability of a
drug company to develop a pipeline of products.
STRATEGY
The Company's objective is to be the leading provider of drug development
and support services to the worldwide pharmaceutical and biotechnology
industries and to continue to leverage its development expertise to expand its
internal development of drugs and drug technologies. The Company believes that
its customer-focused approach enables it to serve as a value-added partner in
solving complex product development problems, providing cost-effective results
on an accelerated basis. Further, its broad services assist clients with
virtually all aspects of product support and GMP compliance during commercial
manufacture. The Company believes that its reputation for high quality,
innovative, reliable and efficient services, its capital investment in
state-of-the-art equipment and facilities, skilled and experienced professional
staff, and expertise in performing critical development and support services
represent barriers to entry in its market. The Company believes that these
factors provide the Company with an opportunity to continue to compete
successfully in this growing market. The Company's strategy is to:
OFFER BREADTH OF HIGH QUALITY SERVICES
The Company consistently invests in personnel, facilities, technology and
information systems to provide its clients with a broad range of high quality
development and support services. AAI has built the internal technical expertise
to address difficult product challenges spanning the drug development process.
For each development project, the Company assigns a team of highly qualified
scientists and technicians that interacts with clients throughout a project's
duration. The Company intends to expand its development capabilities by adding
services that are complementary to its existing product development and support
services. The Company intends to cover most significant aspects of
pharmaceutical and biotechnology product development, offering clients a source
for seamless product development and support.
INVEST IN STATE-OF-THE-ART FACILITIES
The Company intends to continue to invest in state-of-the-art equipment and
facilities to further increase the quality and breadth of its services, as well
as to improve productivity. For example, the Company is currently adding a
containment suite to permit the development of potent compounds which is
scheduled to be completed in the third quarter of 1996. The Company also plans
to enhance its bioanalytical skills by acquiring advanced analytical equipment,
to expand its biotechnology expertise by adding virology capabilities and to
increase its clinical supply manufacturing capabilities by adding facilities for
manufacturing sterile injectable products. The Company intends to invest on an
ongoing basis in advanced and automated equipment and facilities to improve
productivity and quality and maintain its competitive position.
EXPAND GEOGRAPHICALLY
The Company believes that establishing a presence in certain domestic and
international regions will enable the Company to more effectively compete for
services that require rapid turnaround and for certain biotechnology business.
In addition, the Company believes that geographic expansion will offer it access
to additional pools of talented professional and technical staff. Further,
adding facilities outside the United States also permits the Company to provide
services without certain regulatory restrictions applicable to delivery and
testing of substances in the United States. The Company intends to add
facilities in the northeast and on the west coast, as well as in targeted
international markets. Geographic expansion may be accomplished by internal
growth, acquisitions or joint ventures.
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LEAD IN INFORMATION TECHNOLOGY
The Company believes that superior information technology is essential to
expand operations geographically and to provide innovative services to clients
to enable clients to better monitor their projects and expedite FDA review.
Accordingly, the Company operates a customized data management system which
connects approximately 125 analytical instruments, permitting automated data
capture. In addition, the Company's proprietary laboratory tracking system
("LTS") tracks the status of each project being performed by the Company,
including the time expended by Company personnel for each step of the project,
permitting the Company to quantify capacity issues and schedule additional
projects.
The Company is currently operating a pilot-phase system providing certain
domestic and international clients secure access to in-progress laboratory data.
This system will allow a client to monitor directly the status of its project,
enabling the client to make immediate changes to the scope and format of the
project. The Company believes this system will allow development to be completed
more efficiently and, accordingly, at a lower cost to its clients. In addition,
the Company intends to offer its clients secure, on-line access through the
Internet to review all of the data generated through the development process on
their individual projects. The Company anticipates that this data management
system may lead to shortened FDA-review periods for products submitted by
clients using the Company's system because the FDA will have on-line access to
client data in support of an application. The Company intends to introduce this
service to a broader client group in the first half of 1997.
EXPAND INTERNAL DEVELOPMENT PROGRAM
The Company intends to dedicate a significant proportion of its development
capabilities to internal product and technology development with the objective
of licensing marketing rights to third parties. As part of this strategy, the
Company has entered into selected shared-risk development projects providing for
license payments and royalties following successful completion of the project
based upon net sales or profits. The Company does not intend to independently
commercialize products developed internally or otherwise directly compete with
its clients in the marketing or distribution of products and, accordingly,
believes that its internal development efforts are complementary to its clients'
development needs. Because of the significant time required for development and
approval of pharmaceutical products, the Company has only recently begun to
recognize significant license revenue from its internal drug and technology
development efforts.
SERVICES
The Company provides a broad array of drug development services, including
chemical analysis, synthesis and other laboratory services; formulation
development; clinical supply and niche manufacturing; and regulatory and
compliance consulting. The Company assigns project management teams consisting
of customer service representatives and technical employees that meet with
clients at frequent intervals to monitor and guide projects through the
development process. Continual client interaction allows the Company to
efficiently manage the drug development process.
In general, the Company's laboratory services account for approximately one
half of its fee-for-service revenue, although relative amounts vary from year to
year. Formulation development projects and clinical supply and niche
manufacturing generally contribute the major portions of remaining annual fee-
for-service revenue.
LABORATORY SERVICES
In support of drug development and compliance programs, the Company offers
laboratory services to characterize and measure drug components and impurities.
The Company has over 16 years' experience in providing analytical testing
services dedicated exclusively to the drug industry and has developed the
scientific expertise, state-of-the-art equipment and broad range of scientific
methods to accurately and quickly analyze almost any compound or product. The
Company's laboratory services include method development and validation;
stability studies; raw materials and release testing;
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biotechnology, microbiology and bioanalytical testing; product characterization
and organic synthesis. In 1995, the Company performed more than 90,000
laboratory tests.
METHOD DEVELOPMENT AND VALIDATION. The Company develops and validates
methods used in a broad range of laboratory testing necessary to determine
physical or chemical characteristics of compounds. Analytical methods are
developed to demonstrate potency, purity, stability or physical attributes.
These methods are validated to ensure the data generated by these methods are
accurate, precise, reproducible and reliable and are used throughout the drug
development process and in product support testing. Of the Company's 459
employees as of June 30, 1996, more than 100 of the Company's scientists
(including 22 who hold Ph.D. degrees) are experienced with method development
and validation.
STABILITY STUDIES. The Company provides stability testing and secure
storage facilities necessary to establish and confirm product purity, potency
and other shelf-life characteristics. Stability testing is required at all
phases of product development, from dosage form development through commercial
production, to confirm shelf life of each manufactured batch. The Company
maintains a 27-chamber, state-of-the-art controlled climate GMP facility to
determine the range of storage conditions the product can withstand. FDA
regulations require that samples of clinical and commercial products placed in
stability chambers be analyzed in a timely fashion after scheduled "pull points"
occur, based on the date of manufacture. The Company's proprietary LTS system
tracks client products maintained at the Company's stability storage facilities
and automatically schedules required testing as pull points occur. As of June
30, 1996, the Company maintained samples for 700 stability studies for clinical
supplies and commercial products.
RAW MATERIALS AND PRODUCT RELEASE TESTING. The Company offers testing
required by the FDA to confirm that raw materials used in production and
resulting finished products are consistent with established specifications. Due
to the incorporation of "just in time" inventory control systems and variations
in client production schedules, release testing for both raw materials and the
finished product often cannot be scheduled by clients in advance, yet must be
performed immediately. The Company believes that its internal scheduling
systems, analytical laboratory expertise and systems for prompt testing provide
it with a competitive advantage in providing both raw material and batch release
testing. The Company believes that this service enhances its client's confidence
in adopting cost-saving "just in time" inventory control systems.
BIOTECHNOLOGY ANALYSIS AND SYNTHESIS. Although the types of analytical
investigations of biotechnology products are similar to those required for more
traditional pharmaceutical products, the complex molecular structure of many
biotechnology products requires different technology and expertise. The Company
provides a broad array of biotechnology services, including both analytical and
biological testing and method development and validation. AAI's breadth of
services allows the Company to rapidly deduce and characterize the complex
structure of the biotechnology product and measure the molecule or its
metabolites in human blood plasma to support clinical trial evaluation. The
Company has expertise in a broad spectrum of biochemical and immunochemical
methods for characterization and analysis of biotechnology drugs. These methods
include amino acid sequencing, amino acid analysis, peptide mapping,
carbohydrate and lipid analysis and electrophoresis. The Company also has
expertise in developing chromatographic methods that precisely evaluate the
purity and stability of biotechnology products. This service breadth and
diversity of analytical skills and technologies position the Company to assist
its clients from early product development through the IND and PLA stages and
commercial production.
MICROBIOLOGICAL TESTING. Microbiological testing is an essential indicator
to ensure that a drug product, whether raw material or finished product, does
not contain harmful micro-organisms. The Company has significant experience
conducting various microbial tests to identify and quantify micro-organisms that
may be present, including limulus amebocyte lysate (LAL) testing, which measures
toxic byproducts of micro-organisms, and particulate matter testing to determine
the presence of foreign matter in injectable drug products. The Company also
performs sterility testing to identify the genus and
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species of any micro-organisms that are present. In addition, the Company
performs tests to determine the effectiveness of antibiotics against
micro-organisms and the minimum levels of preservatives necessary in product
formulations.
The Company also assists clients with environmental monitoring, including
water and air systems testing, using an automated biochemical system to identify
micro-organisms present and determine whether such systems are within applicable
microbial limits. The Company assists clients in validating their environmental
control systems to ensure compliance with GMP regulations.
BIOANALYTICAL TESTING. The Company offers bioanalytical testing services
to support clinical trials, analyzing plasma samples to characterize the
metabolized forms of the drug and determine the rate of absorption.
Bioanalytical studies of new drugs often present challenging and complex issues,
with products being metabolized into multiple active and inactive forms, each of
which must be measured. The Company works with its clients to develop and
validate analytical methods to permit detection and measurement of the various
components to trace levels.
PRODUCT CHARACTERIZATION. The Company has the expertise and instruments
required to identify and characterize a broad range of chemical entities.
Characterization analysis identifies the chemical composition, structure and
physical properties of a compound, and characterization data forms a significant
portion of a regulatory application. The Company uses numerous techniques to
characterize the compound, including spectroscopy, chromatographic analysis and
other physical chemistry techniques. Additionally, the Company uses such
information for control testing to be performed throughout development and
marketing to confirm consistent drug composition. Once appropriate test methods
are developed and validated, and appropriate reference standards (highly pure
samples) are characterized and certified, the Company can assist clients by
routinely testing compounds for clinical and commercial use.
ORGANIC SYNTHESIS. The Company develops synthesis methods for producing
experimental quantities of new compounds needed for analytical characterization,
toxicological studies, formulation development and clinical trials. Through
organic synthesis techniques, the Company can produce reference standards of the
active compound, specific impurities, degradation by-products, bioassay
reference standards or molecular analogs to permit sufficient quantities of such
compounds to be separately characterized and studied.
FORMULATION DEVELOPMENT SERVICES
The Company provides integrated formulation development services, enabling
the Company to take a client's compound and develop a safe and stable product
with desired characteristics. The Company believes its formulation expertise and
extensive analytical capabilities enable it to provide an efficient, seamless
development program, with a dedicated project team tracking the product through
all stages of formulation development. The Company provides formulation
development services to its clients during each phase of the drug development
process, from new compounds and modifications of existing products to generic
versions of branded products. The Company's formulation development projects may
support a small segment of critical development activities or may last for
several years going from early formulation development to optimized and
validated production-scale, packaged product. Currently, the Company is
providing critical development services for 44 products (including 14 products
in its internal development program) for submission to or under review by the
FDA.
The Company's formulation development expertise spans a broad spectrum of
therapeutic areas. The Company works with clients to develop products with
desired characteristics, including dosage form, strength, release rate,
absorption properties, stability and appearance. The Company has developed
significant product and process "know-how" that enable it to more efficiently
solve the complex problems that arise in developing formulations with targeted
characteristics and has developed a range of proprietary product technologies
that allow it to better achieve desired results in product design and
development.
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In providing formulation services, the Company works closely with clients
to design and conduct feasibility studies to chart the potential of formulating
a drug using a combination of active drug ingredients and inert "filler"
materials called excipients. Using experimental designs, initial prototype
formulations are prepared to identify potential problems in stability,
bioavailability and manufacturing. Generally, formulation development is an
iterative process, with numerous initial formulations being modified as problems
are encountered. The Company believes its experience and expertise in
formulation development, as well as certain proprietary technologies, permit it
to design efficient protocols for identifying and optimizing prototypes with the
greatest potential.
Upon selection of the final product prototypes, the Company develops
protocols to scale the product batch size from development stage (hundreds to
thousands of units) to clinical scale (thousands to millions of units). During
the clinical phase the Company refines the formulation in response to clinical,
bioanalytical and stability data. The manufacturing scale-up process involves
identifying and resolving manufacturing problems to facilitate an efficient
transfer to the full-scale production equipment of the Company's clients.
Throughout the development process, the Company develops and validates the
analytical methods necessary to test the product to establish and confirm
product specifications.
In addition to new drug development, the Company offers product
modification and line extension services to clients, generally for marketed
products facing patent expiration. Modifications of existing products offer the
Company's clients an opportunity to improve product characteristics, increasing
product market viability. Improved product characteristics include enhancement
of stability, absorption profiles (e.g., quick or sustained release), taste and
appearance. Product line extensions may include new dosage forms such as solids,
liquids and chewables, as well as new dosage strengths. Product modifications
and line extensions offer clients the opportunity to target new patient
subpopulations and improve patient compliance. The Company also offers
formulation services to clients seeking to develop generic products.
CLINICAL SUPPLY AND NICHE MANUFACTURING
The Company provides clinical trials materials for Phase I through IV
clinical trials, as well as bioequivalency studies of generic products. In the
two years ended December 31, 1995, the Company produced more than 40 million
units of more than 100 products in its clinical supply facilities. The Company
has expertise in manufacturing tablets, capsules, sachets, liquids and
suspensions, creams, gels, lotions and ointments. The Company believes that
outsourcing of clinical supply manufacturing is particularly attractive to
pharmaceutical companies that maintain large, commercial-quantity, batch
facilities, where clinical supply manufacturing would divert resources from
revenue-producing manufacturing. Similarly, pharmaceutical companies often seek
to outsource commercial manufacturing of small quantity products. In addition,
the Company provides its clients assistance in scaling up production of clinical
supply quantities to commercial quantity manufacturing, and manufactures
inventory on behalf of clients for commercial sale while client production
facilities are being built and validated.
The Company's manufacturing facilities and equipment are qualified and
validated to operate under GMP regulations.
The Company currently maintains a five-room manufacturing facility, which
has been operating at or near capacity. The Company is completing the
construction of four additional processing rooms scheduled to be completed in
the third quarter of 1996 and an additional ten processing rooms scheduled to be
completed in the first half of 1997. In addition to clinical supply
manufacturing, the Company is currently manufacturing one commercial product for
a client.
REGULATORY AND COMPLIANCE CONSULTING
The Company assists in the preparation of regulatory submissions, audits a
client's vendors and client operations, conducts seminars, provides training
courses, and advises clients on applicable regulatory requirements. The Company
also assists international clients in designing development programs for new or
existing drugs intended to be marketed in the United States. At the client's
request,
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the Company will either review client prepared submissions or draft sections and
assemble IND, NDA, PLA and ANDA packages and attend FDA meetings with clients.
The Company assists clients in preparation for FDA inspections and assists
them in correcting any deficiencies noted in FDA inspections. In preparation for
an FDA inspection, the Company's regulatory affairs specialists conduct mock
inspections to anticipate FDA observations and advise clients of appropriate
remedial actions. The Company also audits manufacturers of active and excipient
ingredients used in the drug product, as well as packaging components, on behalf
of clients to ensure that the manufacturers' facilities are in compliance with
GMP regulations. Such audits generally include review of the vendor drug master
files, analysis of standard operating procedures, review of production records,
and observation of operations to ensure SOPs are being followed. Audit reports
include recommendations to address any deficiencies. The Company also advises
clients on validation issues concerning their systems and processes and audits
client facilities to assist them in validating their processes, cleaning, water
and air handling systems.
The Company leverages its in-house laboratory training programs by
providing training to clients' employees. Training programs scheduled in 1996
include GMP training, pharmaceutical testing techniques, metrology and quality
assurance topics. In addition, the Company organizes and conducts seminars
worldwide on a number of topical industry issues. In 1996, the Company has
conducted seven seminars, with an additional five seminars scheduled for the
remainder of the year, covering stability issues, validation requirements in
analytical laboratories, cleaning validation and microbiology.
PHASE I/BIOEQUIVALENCY STUDIES
The Company is scheduled to open a 48-bed clinical trial facility at its
Research Triangle Park location in the third quarter of 1996. The clinical trial
unit will be located in the same facility as the Company's bioanalytical
laboratory and will permit time-sensitive and rapid-response analysis in
clinical trials. The clinical trial unit is initially intended for use in
bioequivalency studies of generic drug products and is intended to be available
for Phase I clinical trials by the first quarter of 1997. When opportunities
arise and the economics are attractive, the Company intends to expand its
service offerings into other phases of clinical trials in the future to assist
its clients in moving product development seamlessly between clinical and
nonclinical activities, providing consistency, continuity and quality throughout
the development process and avoiding fragmentation of the process.
INTERNAL DRUG AND TECHNOLOGY DEVELOPMENT
The Company intends to dedicate a significant proportion of its technical
resources and operating capacity to internal drug and technology development
with the objective of licensing marketing rights to third parties. The Company
does not intend to independently commercialize products developed internally or
otherwise directly compete with its clients in the marketing or distribution of
products and, accordingly, believes that its internal development efforts are
complementary to its clients' development needs. The Company's internal product
and technology development program has resulted in 12 generic product
applications filed with the FDA. Applications for six of those products have
been approved in its clients' names, of which four products are currently
licensed and two have been sold. The Company's current development pipeline
consists of ten unlicensed products in multiple dosage forms. The internal
development program has also resulted in 12 patents covering drug technology and
three pending patent applications.
Since 1993, the Company has spent over $8.7 million on research and
development, all related to its internal drug and technology development
program. Because of the significant time required for development and approval
of pharmaceutical products, the Company has only recently begun to recognize
license revenue from its internal drug and technology development efforts. The
Company anticipates that licensing revenue, including royalties and milestone
payments, from internal drug and technology development will represent a larger
proportion of its revenue, although there can be no assurance that internal
development projects will yield products that will be approved by the
appropriate
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<PAGE> 42
regulatory authorities or will be attractive to potential clients. In 1996, the
FDA approved a generic product licensed by the Company to a client which is the
first approved generic version of a branded product that had over $100 million
in sales in 1995. The Company expects to receive royalties on this product
beginning in the fourth quarter of 1996, although there can be no assurance that
such product will be marketed. Although there is a risk that any particular
development project may not produce revenues, the Company believes that the
profit margins from successful drug and technology development projects
potentially exceed the margins on standard fee-for-service engagements.
INTERNAL DRUG DEVELOPMENT
In 1993, the Company began allocating a significant portion of its
technical resources and operating capacity to internal development of generic
drugs. The U.S. generic drug market has expanded sales from approximately $3.5
billion in 1990 to approximately $6.4 billion in 1994. Generic drugs accounted
for an estimated 38% of prescriptions dispensed in the United States in 1994.
The Company anticipates that the growth in the generic drug market will continue
as managed care organizations pursue policies favoring generic substitution and
as patents on many high revenue products expire over the next several years.
The Company's research and development committee, composed of
representatives from the formulations development, marketing and legal
departments, identifies potential generic drug development candidates for the
program. The committee selects development candidates after reviewing market
size and trends, current therapies and potential advances and patent and
formulation issues. In certain instances, the committee has also invited outside
consultants and medical panels to review selections.
The first group of products in the Company's internal product development
program involved generic versions of certain hormone products. In 1994, as part
of its internal development program, the Company organized Endeavor with certain
financial investors and an affiliate of Berlex Laboratories, Inc. to continue
the development of certain generic hormone products then under development by
AAI. The Company assigned its rights to such products to Endeavor in return for
approximately 47% of Endeavor's equity during a private placement of Endeavor
stock, and the Company entered into a development contract with Endeavor to
continue product development and clinical supply manufacture. AAI currently owns
approximately 40% of the fully diluted common equity of Endeavor, and the
Company's net sales to Endeavor were approximately $2.0 million, $3.5 million
and $3.0 million in 1994, 1995 and the six months ended June 30, 1996,
respectively. Endeavor is currently developing two products in multiple dosage
strengths, although there can be no assurance that such products will ultimately
be approved by the FDA. See "Business -- Endeavor" and "Certain
Transactions -- Transactions Involving Management".
In 1995 the Company entered into an agreement with Aesgen, a company
organized by the Company with an affiliate of Mayo Clinic, MOVA Pharmaceutical
Corporation and certain financial investors, to develop certain generic
products. AAI recognized net sales to Aesgen of $5.6 million and $1.9 million in
1995 and for the six months ended June 30, 1996, respectively. In June 1996, the
Company sold to Aesgen marketing rights to a product being developed by the
Company. Under the agreement, Aesgen will pay license fees and additional
royalties upon marketing the product, although there can be no assurance that
the product will be approved by the FDA or marketed. AAI continues to hold a
$1.6 million non-voting, non-convertible preferred stock investment in Aesgen.
See "Certain Transactions -- Transactions Involving Management".
In addition to its development work for Endeavor and Aesgen, the Company
has continued its internal development of products to be licensed to third
parties that have marketing and distribution capabilities. The Company has
entered into four license agreements of products which are currently in
development. The terms of the license agreements vary as to amounts of initial
and milestone payments, as well as methods and extent of revenue participation.
In 1996, the Company has continued to increase the number of internal projects
and currently has 14 products, in addition to the already licensed products, at
various stages of development. While the Company anticipates that most of its
product license agreements will provide that prospective clients will sponsor
the approved ANDA, the Company
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has made two ANDA submissions for internally developed products in its own name
which are currently under review at the FDA.
Continuing to leverage its development capabilities, the Company is moving
beyond generic drug development and has also begun reviewing new compounds that
are chemically similar to currently marketed products with proven therapeutic
and safety profiles, and that offer improved characteristics over the marketed
product. Such improved characteristics would include enhanced therapeutic
indices, reduced side effects, improved bioavailability and improved
pharmacokinetics. Because considerable toxicity data already exist for the
marketed product, the Company believes that new compound modifications or
pro-drugs generally could be developed with less risk of failure and in a
shorter time frame than new chemical entity development. The Company believes
that virtual and limited-resource drug companies provide opportunities to enter
into collaborative ventures to identify and develop this type of compound. The
Company has completed preliminary analyses of five such compounds and has
entered discussions with two pharmaceutical companies to enter into shared-risk
development projects with each company, although there can be no assurance that
the Company will enter into shared-risk agreements for these products.
TECHNOLOGY DEVELOPMENT PROGRAM
As an adjunct to the internal development program, the Company has sought
to protect certain intellectual property it has developed relative to the drug
development process. The Company has established a patent committee which meets
quarterly to review employee-generated submissions of possible patentable
subject matter. The patent committee reviews the novelty and usefulness of the
submission and, with input from the marketing department as to commercial
viability, determines to either pursue a patent application or designate the
submission as a trade secret.
The Company's technology development program has yielded 12 issued patents
and has three pending applications. For example, the Company's patented
Pro-Sorb(TM) formulation technology has been shown to facilitate the oral
absorption of a number of non-steroidal anti-inflammatory drugs or NSAIDs, such
as ibuprofen, to reduce gastric irritation and speed the onset of therapeutic
activity. In addition, the Company has patented a novel oral delivery system for
certain biotechnology compounds that may currently be administered only by
injection.
The Company has one licensing agreement for a patented technology for the
manufacture of low-dose products which are typically difficult to uniformly
blend and an additional licensing arrangement for its patented chewable
formulations to mask the otherwise bitter taste of certain ulcer drugs. In June
1996, the Company assigned to a third party certain of its patented technology
for the production of a high-purity active ingredient for a generic drug
product. The Company is seeking licensing partners for its other recently
developed technologies.
ENDEAVOR
The Company owns shares of convertible preferred stock of Endeavor,
representing approximately 40% of the fully diluted common equity. AAI also
provides development services to Endeavor at terms that the Company believes are
no less favorable than terms that would be obtained from an unrelated third
party.
As of the date of this Prospectus, Endeavor has submitted an ANDA for one
product in multiple dosage strengths and has received notice from the FDA citing
certain major deficiencies with the application. Endeavor is pursuing the ANDA.
Endeavor is currently developing one other product in multiple dosage strengths.
Endeavor does not market any products, has not received approval of any product
and there can be no assurance that the FDA will approve any of its products.
Endeavor's revenues are dependent upon approval of its products, and continued
product development by Endeavor is dependent upon it obtaining product approvals
or additional capital funding. The Company believes that Endeavor intends to
market its products through licensing to third parties.
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In addition to his duties at AAI, Frederick D. Sancilio, President of the
Company, serves as a senior management employee and director of Endeavor. Dr.
Sancilio does not maintain an office or have day-to-day responsibilities at
Endeavor and devotes a substantial majority of his time to the management of the
Company. In addition, three other executive officers of AAI serve on Endeavor's
nine-member board of directors, which includes one temporary vacancy as of the
date of this Prospectus. See "Certain Transactions -- Transactions Involving
Management".
INFORMATION TECHNOLOGY
The Company has made significant investments in information technology. The
Company's LTS system tracks laboratory workflow and enables the Company to
effectively monitor and plan work through the Company's laboratories. The LTS
system monitors the progress of a client's project, records time expended by
laboratory personnel, tracks sample locations and controls document revisions.
The Company's customized data management system connects approximately 125
analytical instruments with multiple software architectures permitting automated
data capture. In addition, the Company is currently conducting a pilot test of a
system allowing certain domestic and international clients secured access to
review in-progress laboratory data. This system will allow a client to
efficiently monitor the immediate status of the project and make changes to the
scope and format of its project. The Company intends to introduce this system to
a broader client group in 1997.
The Company believes that superior information technology will enable it to
expedite the development process by designing innovative services for individual
client needs, providing project execution, monitoring and control capabilities
that exceed a client's internal capabilities, streamlining and enhancing data
presentation to the FDA and enhancing its own internal operational productivity
while maintaining its quality. The Company is committed to taking a leadership
position in the competitive use of information to enhance the pharmaceutical
development process. The Company has begun to develop a database of client
information integrating data, documents, electronic messages, and reference
services. The Company intends to make this database available with secured
on-line access through the Internet which would permit client access to data on
its projects at any location worldwide and facilitate FDA on-line access to the
extensive data necessary to support the chemistry, manufacturing and control
section of a regulatory application. The Company also believes that this service
will allow clients to avoid delays currently incurred in FDA staff audits of
paper-copy data stored at the Company's or clients' facilities.
CLIENTS
Over the past five years, the Company has provided services to 24 of the
top 25 pharmaceutical companies in the world as ranked by 1994 research and
development spending. In 1995, the Company provided services under approximately
850 contracts to approximately 220 clients, including some of the largest U.S.,
European and Japanese drug companies.
The Company believes that concentration of business among certain large
clients is not uncommon in the CRO industry. The Company has experienced such
concentration in the past and may experience such concentration in the future.
During 1995, Aesgen, a major U.S.-based pharmaceutical company and Endeavor
accounted for 10% or more (approximately 16.0%, 12.1% and 10.2% respectively) of
the Company's net sales. During the first six months of 1996, one client
(Endeavor) accounted for more than 10% of the Company's net sales (approximately
14.6%), with Aesgen accounting for approximately 9.3% of net sales. Although AAI
strives to reduce its reliance on a limited number of major clients, there can
be no assurance that the Company's business will not be dependent upon certain
major clients, the loss of which could have a material adverse effect on the
Company. In addition, due to the project nature of the Company's business, there
can be no assurance that significant clients in any one period will continue to
be significant clients in other periods, and accordingly the Company does not
currently anticipate that the client representing 12.1% of 1995 net sales will
represent 10% or more of annual net sales in the future. See "Risk
Factors -- Dependence on Certain Industries and Clients".
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MARKETING AND BUSINESS DEVELOPMENT
Since its inception, the Company has taken a customer-focused approach in
marketing its services, often placing the Company's technical personnel with its
clients' development teams to participate in planning meetings for the
development of a product. The Company assigns sales and technical personnel as
contacts for its larger clients, understanding that technical personnel may be
better able to identify the full scope of the client's needs and suggest
innovative approaches before the client formally develops the parameters of an
anticipated project. Generally, the Company also hosts more than ten technical
seminars per year for the pharmaceutical and biotechnology industries addressing
a variety of formulation development issues, stability testing and other topics.
The Company employs 11 sales personnel and 12 customer service
representatives, many with technical backgrounds, with offices in Wilmington and
Research Triangle Park, North Carolina; Chicago, Illinois; Boston,
Massachusetts; San Francisco, California; Elmwood Park, New Jersey and San Juan,
Puerto Rico. The Company also maintains sales offices in Copenhagen, London and
Milan to better serve and develop its European client base.
CONTRACTUAL ARRANGEMENTS
The Company's fee-for-service contracts are typically evidenced by signed
service estimates establishing an estimated fee for identified services. During
the Company's performance of a project, clients often adjust the scope of
services to be provided by the Company in light of interim project results, at
which time the amount of fees is adjusted accordingly.
Generally, the Company's fee-for-service contracts are terminable by the
client upon notice of 30 days or less, although certain major formulation
development and manufacturing agreements are not unilaterally terminable by the
client. Although the contracts typically permit payment of certain fees for
winding down a project, the loss of a large contract or the loss of multiple
contracts could adversely affect the Company's future revenue and profitability.
Contracts may be terminated for a variety of reasons, including the client's
decision to forego a particular study, the failure of product prototypes to
satisfy safety requirements and unexpected or undesired results of product
testing. See "Risk Factors -- Dependence on Certain Industries and Clients".
BACKLOG
Backlog consists of anticipated net sales from signed service estimates and
other fee-for-service contracts that have not been completed and provide for a
readily ascertainable price. Once contracted work begins, net sales are
recognized as the service is performed on the percentage of completion basis. In
certain cases, the Company begins work for a client before a contract is signed.
Accordingly, backlog does not include anticipated net sales for which the
Company has begun work but for which the Company does not have a signed service
estimate, or for any variable-priced contracts. In addition, during the course
of a project the client may substantially adjust the requested scope of services
and corresponding adjustments are made to the price of services under the
contract.
The Company believes that its backlog as of any date is not a meaningful
predictor of future results because backlog can be affected by a number of
factors, including variable size and duration of contracts and adjustments in
the scope of a contracted project as interim results become available.
Additionally, contracts generally are subject to termination by clients upon 30
days notice or less. Moreover, the scope of a contract can change over the
course of a project. At December 31, 1995, backlog was approximately $19.7
million, as compared to $12.7 million at December 31, 1994.
COMPETITION
The Company competes primarily with in-house research, development, quality
control and other support service departments of pharmaceutical and
biotechnology companies, as well as university research laboratories. In
addition, the Company believes that although there are numerous competitors in
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its industry, there are few competitors that offer the broad array of services
that it provides. The largest competitor offering these services is Corning Lab
Services, Inc., a subsidiary of Corning, Inc. Certain of the Company's
competitors, including Corning Lab Services, Inc., may have significantly
greater resources than the Company. Competitive conditions for service areas
vary.
Competitive factors include reliability, turn-around time, reputation for
innovative and quality science, capacity to perform numerous required services,
financial viability and price. The Company believes that it competes favorably
in these areas.
POTENTIAL LIABILITY AND INSURANCE
The Company maintains product liability and professional errors and
omissions liability insurance, providing $5 million in coverage on a claims-made
basis. In addition, in certain circumstances the Company seeks to manage its
liability risk through contractual provisions with clients requiring the Company
to be indemnified by the client or covered by clients' product liability
insurance policies. In addition, in certain types of engagements, the Company
seeks to limit contractual liability to its clients to the amount of fees
received by the Company. The contractual arrangements are subject to negotiation
with clients and the terms and scope of such indemnification, liability
limitation and insurance coverage vary from client to client and from project to
project. Although most of the Company's clients are large, well-capitalized
companies, the financial performance of these indemnities is not secured.
Therefore, AAI bears the risk that the indemnifying party may not have the
financial ability to fulfill its indemnification obligations or that liability
would exceed the amount of applicable insurance. In addition, the Company could
be held liable for errors and omissions in connection with the services it
performs. There can be no assurance that the Company's insurance coverage will
be adequate or that insurance coverage will continue to be available on terms
acceptable to the Company. See "Risk Factors -- Potential Liability and Risks
of Operations".
GOVERNMENT REGULATION
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the Federal Food, Drug and Cosmetic Act and associated
GMP regulations which are administered by the FDA in accordance with current
industry standards. These regulations apply to all phases of drug manufacture,
testing and record keeping, including personnel, facilities, equipment, control
of materials, processes and laboratories, packaging, labelling and distribution.
Noncompliance with GMP by the Company in a project could result in
disqualification of data collected by the Company in the project. Material
violation of GMP requirements could result in additional regulatory sanctions,
and in severe cases could result in a mandated closing of the Company's
facilities which would materially and adversely affect the Company's business.
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other GMP compliance parameters. In addition, FDA regulations and guidelines
serve as a basis for the Company's standard operating procedures. Certain of the
Company's development and testing activities are subject to the Controlled
Substances Act, administered by the Drug Enforcement Agency (the "DEA"), which
regulates strictly all narcotic and habit-forming substances. The Company
maintains separate, restricted-access facilities and heightened control
procedures for projects involving such substances due to the level of security
and other controls required by the DEA.
The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held
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liable for any damages that result which could materially and adversely affect
the financial condition of the Company.
EMPLOYEES
At June 30, 1996, the Company had 459 full-time equivalent employees, of
which 34 hold Ph.D. degrees and approximately 50 others who hold masters or
other post-graduate degrees. The Company believes that its relations with its
employees are good. None of the Company's employees is represented by a union.
The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. The Company believes that
its employee benefit plans, including its health benefit, profit-sharing and
employee stock option plans, enhance employee morale, professional commitment
and work productivity and provide an incentive for employees to remain with the
Company. In addition, the Company operates a 65-child, employee day-care
facility at its Wilmington, North Carolina campus as a benefit to its employees
and is expanding this facility. While the Company has not experienced any
significant problems in attracting or retaining qualified staff, there can be no
assurance that the Company will be able to avoid these problems in the future.
All employees enter into confidentiality agreements protecting the
Company's proprietary information, as well as client-confidential material. New
technical employees are generally required to sign non-competition agreements,
prohibiting the employee from engaging in activities in competition with the
Company for a period of one year after termination of employment.
LEGAL PROCEEDINGS
The Company is currently appealing a judgment in an action, Kurtzman v.
Applied Analytical Industries, Inc., involving a claim by a former management
employee for damages arising from his termination of employment. In such matter,
the former employee alleged that a contract of employment existed between him
and the Company for a term of years. In 1995, a judgment for approximately
$363,000 was entered against the Company following a jury trial. The Company has
recorded the full amount of such judgment as an expense on its 1995 consolidated
statement of income. The matter is currently being appealed by the Company
before the North Carolina Court of Appeals, and the former employee is appealing
the court's decision not to award prejudgment interest. In connection with the
investment in November 1995 by the holders of the Preferred Stock, James L.
Waters and Frederick D. Sancilio (directors and significant stockholders of the
Company) have agreed to indemnify the Company for the $363,000 judgment in the
event that the Company is ultimately required to pay such amount. See "Certain
Transactions -- Transactions Involving Management".
FACILITIES
The Company's principal executive offices are located in Wilmington, North
Carolina, in a 17,000-square foot leased facility. The Company's primary
facilities are located in Wilmington and Research Triangle Park, North Carolina
constituting approximately 150,000 square feet of operational and administrative
space. The Company maintains sales offices in Chicago, Illinois; Boston,
Massachusetts; San Francisco, California; Elmwood Park, New Jersey and San Juan,
Puerto Rico and European sales offices in Copenhagen, Denmark; London, England
and Milan, Italy. The Company believes that its facilities are adequate for the
Company's operations and that suitable additional space will be available when
needed.
The Company is completing the construction of a 48-bed clinical trial
facility at its Research Triangle Park facility to conduct Phase I and
bioequivalency studies. The clinical facility is scheduled to open in the third
quarter of 1996. In addition, the Company is expanding its clinical supply and
niche manufacturing capacity more than threefold, with additional processing
rooms scheduled to be completed throughout the second half of 1996 and the first
half of 1997.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and titles of the
individuals who are directors and executive officers of the Company:
<TABLE>
<CAPTION>
OFFICER OR DIRECTOR AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Frederick D. Sancilio, Ph.D............ 46 Chairman of the Board of Directors and
President
William H. Underwood................... 48 Executive Vice President, Chief
Operating Officer and Director
Anthony F. Arato....................... 48 Vice President, Manufacturing and
Engineering
Mark P. Colonnese...................... 40 Vice President, Chief Financial
Officer, Treasurer
Martin S. Hunicutt..................... 45 Vice President, Marketing and Sales
James Swarbrick, Ph.D.................. 62 Vice President, Research and
Development
R. Forrest Waldon...................... 34 Vice President, General Counsel and
Secretary
Joseph H. Gleberman.................... 38 Director
Charles D. Moseley, Jr................. 53 Director
John M. Ryan........................... 51 Director
James L. Waters........................ 70 Director
</TABLE>
Frederick D. Sancilio, Ph.D., is Chairman of the Board of Directors and
President of the Company. With more than 20 years' experience in the
pharmaceutical industry, Dr. Sancilio worked with Burroughs-Wellcome Co.,
Schering-Plough Corporation, and Hoffmann-LaRoche, Inc. before founding the
Company in 1979. He has published more than 30 scientific articles discussing
various aspects of pharmaceutical chemistry and regularly makes scientific
presentations at pharmaceutical seminars and meetings worldwide.
William H. Underwood has served as Chief Operating Officer since 1995, as
Executive Vice President of the Company since 1992, as Vice President from 1986
to 1992, and as a director since January 1996. He has held positions in the
pharmaceutical and cosmetic industries for more than 17 years, in positions
including Director of Quality Assurance and Director of Manufacturing at Mary
Kay Cosmetics, Inc. and Group Leader of Bacteriological Quality Control at
Burroughs-Wellcome Co.
Anthony F. Arato joined AAI in 1981 and currently serves as Vice President
of Manufacturing and Engineering. Over the past decade he has served in numerous
capacities and management positions. Prior to joining AAI, Mr. Arato was
employed for eight years as a field engineer for Perkin-Elmer Corporation.
Mark P. Colonnese joined AAI in 1993 and currently serves as Vice
President, Chief Financial Officer and Treasurer. Prior to joining AAI, Mr.
Colonnese worked as a financial executive at Schering-Plough Corporation for ten
years, most recently as Senior Director of Planning and Business Analysis.
Martin S. Hunicutt joined AAI in 1994 as Vice President of Marketing and
Sales. Prior to joining AAI, Mr. Hunicutt worked for 19 years in a variety of
capacities for Burroughs-Wellcome Co. Mr. Hunicutt's experience includes service
as marketing project director for a major pharmaceutical product, director of
marketing with responsibilities for both marketed and pre-launch products, and
product manager with commercial management responsibilities.
James Swarbrick, Ph.D., joined the Company in 1993 as Vice President of
Research and Development. Prior to joining the Company, Dr. Swarbrick was
Professor and Chairman of the Division of
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Pharmaceutics and Director of Graduate Studies in the School of Pharmacy at the
University of North Carolina at Chapel Hill. Dr. Swarbrick serves on the FDA's
Generic Drugs Advisory Committee and serves as Chairman of the Pharmaceutical
Research and Manufacturers Association Foundation's Pharmaceutics Advisory
Committee and is a member of that organization's Scientific Advisory Committee.
Dr. Swarbrick has published extensively in areas of pharmaceutics and product
development with more than 60 research publications to date and is co-author of
Physical Pharmacy, a graduate text, and senior co-author of the Encyclopedia of
Pharmaceutical Technology, which is used throughout the pharmaceutical industry.
R. Forrest Waldon has served as the Company's General Counsel and Secretary
since 1989 and as a Vice President since 1993. Prior to joining AAI, Mr. Waldon
was a corporate attorney with the Atlanta, Georgia law firm of Thrasher &
Whitley, P.C.
Joseph H. Gleberman joined the Company's Board of Directors in 1995. Mr.
Gleberman has been employed by Goldman, Sachs & Co. since 1982 and has been a
Partner of Goldman, Sachs & Co. since 1990. Mr. Gleberman serves as a director
of BCP Essex Holdings, Inc., Biofield Corporation and Diagnostic Holdings, Inc.
Charles D. Moseley, Jr. has served as a director of the Company since
January 1996. Since 1983, Mr. Moseley has been a partner of Noro-Moseley
Partners, a venture capital firm. Mr. Moseley is also a director of One Price
Clothing Stores, Inc. and several privately held companies.
John M. Ryan has served as a director of the Company since January 1996.
Mr. Ryan serves as managing partner of Ryan Partners, a business advisory and
venture capital firm he founded in July 1996. Prior to founding Ryan Partners,
Mr. Ryan served as a partner of Coopers & Lybrand, L.L.P., an accounting firm,
with which he was associated from 1972 to 1996. Mr. Ryan has served as a
director of numerous private companies and as an officer and director of several
not-for-profit corporations.
James L. Waters has served as a director of the Company since 1981 and as a
non-employee officer from 1982 until 1996. Mr. Waters is a private investor in
numerous companies and was the founder of Waters Associates, Inc., now known as
Waters Corporation, a scientific instrumentation manufacturer. Mr. Waters served
as a director of Millipore Corporation and several privately held companies.
All directors are elected at the annual meeting of stockholders and hold
office until the election and qualification of their successors at the next
annual meeting of stockholders. Pursuant to a Stockholder Agreement among the
Company and its stockholders entered into in November 1995 in connection with
the purchase by GS Capital Partners II, L.P., GS Capital Partners II Offshore,
L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street Fund 1995, L.P. and
Bridge Street Fund 1995, L.P. (the "Goldman Investors") and others of the
Preferred Stock, the Goldman Investors have the right to designate one member of
the Board of Directors for so long as the Goldman Investors and their affiliates
(which includes Goldman, Sachs & Co.) beneficially own 10% or more of the
outstanding shares of the Common Stock. Mr. Gleberman currently serves on the
Board of Directors as the Goldman Investors' designee. Immediately following the
completion of this Offering, and assuming no additional shares of Common Stock
are acquired by the Goldman Investors or their affiliates in this Offering, such
persons would beneficially own 14.3% of the outstanding shares of Common Stock.
Pursuant to the employment agreement between the Company and Dr. Sancilio, the
Company is required to use its best efforts to cause Dr. Sancilio to be
re-elected to the Board of Directors during the term of his employment. See "--
Employment and Compensation Agreements". In addition, certain stockholders have
entered into agreements under which certain of them have the right to designate
members of the Board of Directors, which agreements will expire upon completion
of this Offering.
The Company's Restated Certificate of Incorporation, which will become
effective upon completion of this Offering, provides that the Board of Directors
shall be divided into three classes, as nearly equal in number as may be, to
serve in the first instance for terms expiring at the first, second and third
annual meeting of stockholders, respectively, following the first annual meeting
of stockholders to be held
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following the completion of this Offering. See "Description of Capital
Stock -- Delaware Law and Certain Provisions of the Company's Restated
Certificate of Incorporation and By-laws".
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of the Company
and reviewing with the independent auditors the scope and results of the audits,
the internal accounting controls of the Company, audit practices and the
professional services furnished by the internal auditors. Messrs. Gleberman,
Moseley and Ryan serve on the Audit Committee. The Compensation Committee is
responsible for reviewing and approving all compensation arrangements for the
officers of the Company and for administering the Company's 1995 Restricted
Stock Plan, the 1995 Stock Option Plan and the 1996 Stock Option Plan (all as
defined herein). Messrs. Moseley and Ryan serve on the Compensation Committee.
Directors of the Company receive no compensation for serving on the Board
of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities in 1995 by: (i) the
Company's chief executive officer and (ii) the Company's next four most highly
compensated executive officers who were serving as executive officers at the end
of 1995 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1995 ANNUAL COMPENSATION
NAME AND ----------------------------- ALL OTHER
PRINCIPAL POSITION SALARY ($)(A) BONUS ($) COMPENSATION ($)(C)
- ------------------------------------------ ------------- --------- -------------------
<S> <C> <C> <C>
Frederick D. Sancilio, Ph.D............... 306,580(b) 79,217 2,882
President
William H. Underwood...................... 166,343 -- 2,882
Executive Vice President
Martin S. Hunicutt........................ 130,000 -- 1,825
Vice President
James Swarbrick........................... 130,000 -- 2,497
Vice President
Mark P. Colonnese......................... 121,448 -- 37,478(d)
Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(a) Includes amounts deferred pursuant to the Company's 401(k) plan.
(b) Includes $12,500 in salary paid by Endeavor.
(c) Such amounts include the Company's contributions under its 401(k) and
profit sharing plans in the following amounts: Dr. Sancilio, $2,882; Mr.
Underwood, $2,882; Mr. Hunicutt, $1,825; Mr. Swarbrick, $2,497 and Mr.
Colonnese, $2,882.
(d) Of such amount, $34,596 was paid as relocation expense in 1995 in
connection with Mr. Colonnese's acceptance of employment in 1993.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and President of the
Company. The Employment Agreement has an initial three-year term that is
automatically extended for an additional one-year period on each anniversary of
the Signing Date unless either party gives the other notice prior to the
anniversary date of its intention not to extend the term of the Employment
Agreement. Under the Employment Agreement, Dr. Sancilio will serve as the
Company's Chairman of the Board, President and chief executive officer, and the
Company is required to use its best efforts to cause Dr. Sancilio to be
re-elected to the Company's Board of Directors and to the boards of directors of
affiliates of the Company on which boards of directors Dr. Sancilio was
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<PAGE> 51
serving on the Signing Date and to be elected a director of any majority-owned
subsidiary of the Company acquired after the Signing Date.
The Employment Agreement provides that Dr. Sancilio will receive an annual
salary of $250,000, which amount may be increased by the Board of Directors and
once increased may not be reduced. The Employment Agreement provides that Dr.
Sancilio will be eligible to receive bonus compensation of up to 50% of his
annual salary if the Company attains certain performance objectives set jointly
by the Board of Directors and Dr. Sancilio. In addition, Dr. Sancilio will be
eligible to participate in employee benefit plans made available generally to
the Company's executive officers and any other Company compensation or incentive
plans of a long or short-term nature and to receive other perquisites not to
exceed, in the aggregate, $10,000 per year.
Under the Employment Agreement, the Company may terminate Dr. Sancilio's
employment at any time, with or without cause, as defined in the Employment
Agreement. In the event that the Company terminates Dr. Sancilio's employment
without cause or in the event that Dr. Sancilio terminates his employment within
90 days of an event of constructive discharge (defined in the Employment
Agreement to include, among other things, the removal of Dr. Sancilio from, or
the failure of Dr. Sancilio to be elected to, the positions of Chairman of the
Board or President, a reduction in Dr. Sancilio's responsibilities or relocation
of the Company's principal executive offices by more than 30 miles from its
current location), Dr. Sancilio would be entitled to receive payments
aggregating three times his then current annual salary to be paid in monthly
installments over two years, during which time Dr. Sancilio would continue to
receive medical and life insurance benefits. The Employment Agreement requires
Dr. Sancilio to refrain from certain activities in competition with the Company
for a period of two years after the termination of his employment for any
reason.
The Employment Agreement also provides Dr. Sancilio with the right to
require the Company to purchase a portion of the Common Stock owned by him upon
the termination of his employment in certain circumstances, which right will
expire upon completion of this Offering. The Employment Agreement also obligates
the Company to use its reasonable best efforts to cause Endeavor to employ Dr.
Sancilio as a senior management employee at an annual salary of at least
$100,000 with bonus compensation of up to 50% of annual salary to be paid if
performance targets are attained and greater amounts if targets are exceeded.
Endeavor has employed Dr. Sancilio on such terms, and should Endeavor fail to
continue to employ him on such terms, it is anticipated that Dr. Sancilio's
annual salary and bonus paid by AAI would be increased by similar amounts. See
"Certain Transactions -- Transactions Involving Management".
On November 20, 1995, the Company agreed to a cash bonus plan for Mr.
Colonnese pursuant to which he would receive a cash bonus of $50,000 upon the
closing of an initial public offering of the Common Stock and an additional
$50,000 one year later. In addition, in the event that the trading price per
share of the Common Stock exceeds $12.525 for 90 consecutive days, Mr. Colonnese
shall receive a $50,000 bonus and an additional $50,000 bonus one year
thereafter.
STOCK OPTION AND RESTRICTED STOCK AWARD PLANS
Under the Company's 1995 Restricted Stock Award Plan (the "Restricted Stock
Plan") and the 1995 Stock Option Plan (the "1995 Option Plan") and the 1996
Stock Option Plan (the "1996 Option Plan"; collectively with the 1995 Option
Plan, the "Option Plans"), the Company is authorized to award up to 105,453
restricted shares of Class B Common Stock and options to purchase up to 738,165
shares of Class B Common Stock. Upon completion of this Offering all outstanding
shares of Class B Common Stock issued under the Restricted Stock Plan will be
converted into one share of Common Stock and each option to purchase one share
of Class B Common Stock will be converted into an option to purchase one share
of Common Stock at the same price per share. The following summary descriptions
of the principal terms of the Restricted Stock Plan and Option Plans do not
purport to be complete and are qualified in their entirety by the full text of
the Restricted Stock Plan and Option Plans, which have been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
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<PAGE> 52
RESTRICTED STOCK PLAN
The purpose of the Restricted Stock Plan is to promote the growth and
profitability of the Company by increasing the personal participation of certain
employees in the financial performance of the Company, to compensate such
employees for their contributions to the success of the Company and to assure
the continued participation of such employees in the growth of the Company
through the grant of restricted stock awards.
The Restricted Stock Plan is administered by a committee (the "Committee")
composed solely of members of the Board of Directors who are both "disinterested
persons" (as defined in Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and "outside directors" (as defined in
Section 162(m) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder). The Committee has the authority to interpret the terms
and provisions of, and adopt, amend and rescind general and special rules
relating to, the Restricted Stock Plan.
The Restricted Stock Plan permits the award of shares of Class B Common
Stock to long-term employees of the Company and other key employees as selected
by the Committee. Awards of shares under the Restricted Stock Plan vest over
time, and in the event of termination of a participant's employment with the
Company other than as a result of death, disability or retirement all unvested
shares are forfeited to the Company. Prior to the completion of this Offering
such shares would vest five years after the date of the award. However, pursuant
to the Restricted Stock Plan, upon completion of this Offering, 50% of the
shares awarded under the Restricted Stock Plan will vest on the first
anniversary of the date of completion of this Offering and the remaining shares
will vest on the second anniversary. Unvested shares will vest immediately upon
completion of certain transactions involving a change in control of the Company
or a sale by the Company of all or substantially all of its assets. Shares that
have not vested may not be transferred other than pursuant to certain domestic
relations orders.
Of the 105,453 shares available under the Restricted Stock Plan, 104,696
shares have been awarded and were outstanding as of June 30, 1996. Such awards
were made to 119 employees, including all employees of the Company who had been
with the Company for six years or more and had maintained satisfactory job
performance levels. Any shares forfeited by participants under the Restricted
Stock Plan are available for future awards. No director or executive officer of
the Company has been granted shares of Class B Common Stock under the Restricted
Stock Plan.
OPTION PLANS
The purpose of the Option Plans is to promote the growth and profitability
of the Company and its subsidiaries by increasing the personal participation of
officers and key employees in the financial performance of the Company. The
Option Plans are administered by the Committee. The Committee has the authority
to interpret the terms and provisions of, and adopt, amend and rescind general
and special rules relating to the administration of, the Option Plans and to
make all other determinations necessary and advisable for the administration of
the Option Plans. All of the Company's employees are eligible to receive stock
options to purchase shares of Class B Common Stock ("Options") pursuant to the
Option Plans.
Awards of Options may be made to officers and other key employees of the
Company or its subsidiaries ("Optionees"). The Option Plans permit awards of
Options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code and nonqualified options. The Committee is authorized to
establish the exercise price of Options, although the per share exercise price
for Options intended to qualify as incentive stock options may not be less than
100% of the fair market value of a share of Class B Common Stock on the date of
grant (110% for certain 10% stockholders). The exercise price per share of any
Option awarded under the Option Plans may not be less than 100% of the fair
market value of a share of Class B Common Stock on the date of grant of the
Option (the "Grant Date") unless all members of the Committee agree, and in no
event may it be less than 75% of the fair market value on the Grant Date. In
addition, pursuant to an agreement among the Company and its stockholders
entered into in connection with the issuance of the Preferred Stock the exercise
price for Options granted under the 1996 Option Plan may be no less than the per
Common Share equivalent price paid by the
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<PAGE> 53
purchasers of the Preferred Stock in November 1995 ($8.35). The Committee is
authorized to set the term of the Options, which may be no longer than 10 years
(5 years for certain Options intended to qualify as incentive stock options).
Options awarded under the Option Plans become exercisable with respect to
25% of the total shares under the option six months after the grant date, 50% of
the total shares 18 months after the grant date, 75% of the total shares 30
months after the grant date and 100% of the total shares 42 months after the
grant date. The Options become immediately exercisable upon completion of
certain transactions involving a change in control of the Company or a sale by
the Company of all or substantially all of its assets. Unexercised Options
expire upon termination of the Optionee's employment, other than as a result of
death, disability or retirement, in which cases Options may be exercised for a
specified period after termination of employment. Options may not be transferred
other than by will or the laws of descent and distribution or pursuant to
certain qualified domestic relations orders.
Of the 242,538 shares of Class B Common Stock authorized under the 1995
Option Plan, Options to purchase 235,681 shares had been issued to 12 employees
and were outstanding on June 30, 1996. The exercise price of such Options is
$8.35 per share, except for Options to acquire 2,214 shares granted in June 1996
at $9.10 per share. Under the terms of the plan, the Company will purchase from
Dr. Sancilio and Mr. Waters, upon the exercise of Options, a number of shares of
Class B Common Stock (or Common Stock following mandatory conversion of Class B
Common Stock) equal to the number of shares subject to the exercised Options, at
an exercise price equal to the exercise price of such Options (or Common Stock
following the mandatory conversion of Class B Common Stock) to provide the
shares for issuance.
Of the 495,627 shares authorized under the 1996 Option Plan, Options to
purchase 208,744 shares had been issued to 83 employees and were outstanding on
June 30, 1996. The exercise price of such Options is $8.35 per share. The 1996
Option Plan permits the award of Options to purchase no more than 210,876 shares
prior to January 1, 1997, and no person may be awarded Options to purchase more
than 189,750 shares of Class B Common Stock under the 1995 Option Plan or more
than 253,000 shares of Class B Common Stock under the 1996 Option Plan. Options
for the following numbers of shares have been granted under the 1995 Option Plan
to the following Named Executive Officers of the Company at an exercise price
per share equal to $8.35: Mr. Colonnese, 88,093 shares, Mr. Swarbrick, 79,871
shares and all executive officers as a group, 167,964 shares. Options for the
following numbers of shares have been granted under the 1996 Option Plan to the
following Named Executive Officers of the Company at an exercise price per share
equal to $8.35: Mr. Hunicutt, 101,376 shares, Mr. Underwood, 7,680 shares and
all executive officers as a group, 124,416 shares.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
brief summary of the principal United States federal income tax consequences
under current federal income tax laws relating to Options awarded under the
Stock Option Plans. This summary is not intended to be exhaustive and, among
other things, does not describe state, local or foreign income and other tax
consequences.
An Optionee will not recognize any taxable income upon the grant of a
nonqualified option, and the Company will not be entitled to a tax deduction
with respect to such grant. Upon exercise of a nonqualified option, the excess
of the fair market value of the shares on the exercise date over the exercise
price will be taxable as compensation income to the Optionee. Subject to the
Optionee including such excess amount in income or the Company satisfying
applicable reporting requirements, the Company should be entitled to a tax
deduction in the amount of such compensation income. The Optionee's tax basis
for the shares received pursuant to such exercise will equal the sum of the
compensation income recognized and the exercise price.
In the event of a sale of shares received upon the exercise of a
nonqualified option, any appreciation or depreciation after the exercise date
generally will be taxed as capital gain or loss and will be long-term gain or
loss if the holding period for such stock was more than one year.
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<PAGE> 54
Generally, an Optionee should not recognize taxable income at the time of
grant or exercise of an incentive stock option and the Company should not be
entitled to a tax deduction with respect to such grant or exercise. The exercise
of an incentive stock option generally will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
Optionee.
A sale or other disposition by an Optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such Optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain or loss
to the Optionee with no deduction being allowed to the Company. Upon a sale or
other disposition of shares acquired upon the exercise of an incentive stock
option within one year after the transfer of the shares to the Optionee or
within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the lesser
of (i) the fair market value of the shares at the time of exercise of the Option
and (ii) the amount realized on such disqualifying sale or other disposition of
the shares over (b) the exercise price of such shares, should constitute
ordinary income to the Optionee and the Company should be entitled to a
deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market value of the shares at the
time of the exercise of the Option generally will constitute short-term or
long-term capital gain and will not be deductible by the Company. Special rules
may apply to Optionees who are subject to Section 16 of the Exchange Act.
Under certain circumstances the accelerated vesting or exercise of Options
in connection with a change of control of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
section 280G of the Internal Revenue Code. To the extent it is so considered,
the Optionee may be subject to a 20% excise tax and the Company may be denied a
tax deduction.
SECTION 162(M). Section 162(m) of the Internal Revenue Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1 million in any taxable year to the chief
executive officer or any of the four other most highly compensated executive
officers who are employed by the Company on the last day of the taxable year.
Compensation attributable to Options granted under the Option Plans should not
be subject to such deduction limitations.
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING MANAGEMENT
The Company leases its headquarters facility from 5051 New Centre Drive,
LLC ("New Centre"), an entity in which each of Mr. Waters and Dr. Sancilio owns
a one-third interest. Pursuant to the lease agreement between the Company and
New Centre, the Company pays rent at an annual base rate of $12.50 per square
foot of space leased, subject to adjustment for increases in the landlord's
expense in maintenance and insurance of the facility. The effective rate per
square foot was increased to the current rate of $13.30 commencing in June 1995
to reflect such increased expenses. Under the agreement, the Company may lease
portions of the entire facility as needed and upon agreement of New Centre. At
June 30, 1996, the Company leased approximately 17,000 square feet of space
under the agreement. The initial term of the lease agreement expires in March
1999, but the agreement will extend for successive one-year periods unless
either party provides the other, at least 90 days prior to the scheduled
expiration of the agreement, notice of its intent not to renew the lease. The
lease rate for any renewal term is to be set by mutual agreement of the parties.
Approximately 40% of the capital stock of Endeavor on a fully diluted basis
is held by the Company, and certain directors of the Company serve as directors
and officers of Endeavor. Pursuant to an agreement among the Endeavor
stockholders, the Company has the right to designate four of the nine members of
the Endeavor board of directors, although in the event that AAI fails to achieve
certain development milestones it may designate only two of the directors. As of
the date of this Prospectus, there is one temporary vacancy on Endeavor's
nine-member board of directors. AAI realized $3.5 million
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<PAGE> 55
and $3.0 million in net sales to Endeavor in 1995 and the first six months of
1996, respectively. The Company made a $1.5 million revolving credit facility
available to Endeavor at a 10% annual interest rate that was repaid in the
fourth quarter of 1995 and was terminated. In 1995, the maximum amount
outstanding under the credit facility was approximately $1.1 million.
The Company provides product development services pursuant to an agreement
with Endeavor in connection with hormone pharmaceutical products that Endeavor
is developing. The Company has agreed to manufacture products developed by
Endeavor at the Company's manufacturing facility located at 1726 North 23rd
Street, Wilmington, North Carolina, until Endeavor achieves a specified
development milestone, which the Company anticipates will occur in the third
quarter of 1996. The Company has agreed that at such time, it will grant to
Endeavor a lease/purchase option to either lease for 15 years or purchase the
portion of such facility intended for use by AAI in manufacturing Endeavor's
products. Upon achievement of the milestone by Endeavor, the Company will also
sell to Endeavor the equipment and inventory of raw materials, assign to
Endeavor its raw materials supply agreements relating to Endeavor's products and
make available certain personnel to Endeavor so that Endeavor can assume its
manufacturing operations. Upon exercise of either the option to lease or the
option to purchase, Endeavor is required to pay an exercise price of $2 million
to the Company in addition to lease payments or a purchase price based on the
fair market value of the facility. If Endeavor exercises the option to lease but
does not subsequently exercise the option to purchase and does not achieve
certain development milestones by a specified date, AAI must repay the option
exercise price to Endeavor. The facility subject to the option is currently used
by the Company for clinical supply and niche manufacturing operations. The
Company is presently expanding its clinical supply and niche manufacturing
facilities which could be used to manufacture Endeavor's products currently
under development or, if Endeavor exercises its option to manufacture such
product itself, for other client work. The Company has also agreed to permit
Endeavor under certain circumstances the first right to purchase additional
proprietary hormone pharmaceutical products developed by AAI at a price equal to
the amount of development work expended by AAI at its standard hourly rates and
out-of-pocket expenses, and AAI would continue the development work with respect
to such product under the agreement with Endeavor.
In addition to his duties at AAI, Dr. Sancilio is employed by Endeavor as a
senior management employee. Pursuant to his employment agreement with Endeavor,
Dr. Sancilio is to be based at AAI's principal executive offices and does not
have day-to-day responsibilities in the operation of Endeavor and is assigned
responsibilities from time to time by Endeavor's board of directors. Dr.
Sancilio receives an annual salary of $100,000 and is eligible for bonus
compensation of up to 50% of salary. Dr. Sancilio's employment agreement with
Endeavor has an initial two-year term expiring on November 17, 1997 and renews
for successive one-year periods unless either party elects not to renew the
agreement. Dr. Sancilio devotes the substantial majority of his time to the
management of AAI.
In addition, the Company provided management and administrative services to
Endeavor at an annual fee of $120,000 through April 1996 when this agreement was
terminated by Endeavor. The Company believes that the terms of each of the
foregoing agreements are no less favorable than terms that would be obtained in
an agreement with an unrelated third party.
The Company provides product development services to Aesgen, which develops
generic pharmaceutical products. Approximately 30% of Aesgen's outstanding
common stock is held by the holders of substantially all of AAI's currently
outstanding shares of capital stock. In addition, Mr. Waters and Dr. Sancilio
serve on the ten-member board of directors of Aesgen. AAI realized $5.6 million
and $1.9 million in net sales to Aesgen in 1995 and the first six months of
1996, respectively. AAI has the right under its development agreement with
Aesgen to provide certain product development and support services to Aesgen
with respect to the four generic drugs with multiple dosage forms currently
being developed by Aesgen, provided that AAI's fees for such services are
comparable to those of a reasonably comparable firm. In addition, under such
development agreement, the Company has agreed, absent certain circumstances, not
to develop for its own account or for any other person, any formulation of a
product intended to be therapeutically equivalent to the same reference product
for any of the products currently under development by Aesgen and any additional
drugs that AAI agrees to develop for Aesgen
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<PAGE> 56
under the development agreement. The Company believes that the terms of such
agreement are no less favorable than terms that would be obtained in a
transaction with an unrelated third party.
In June 1996, the Company sold to Aesgen marketing rights to a product
being developed by the Company. Under the agreement, Aesgen will pay license
fees and additional royalties upon marketing of the product, although there can
be no assurance that the product will be approved by the FDA or marketed.
While incorporated in July 1994, Aesgen was formally organized and funded
in April 1995 via issuance of approximately $11 million of nonconvertible,
non-voting, mandatorily redeemable, preferred stock. As the Company did not
intend to hold an equity interest, the Company entered a series of related
transactions commencing in December 1995 in which the Company transferred to a
corporation ("Aesgen Holding") owned by the holders of substantially all of the
currently outstanding capital stock of the Company approximately 30% of the
outstanding Aesgen common stock in return for $50,000 (the amount paid by AAI
for such shares) and Aesgen Holding's assumption of and AAI's release from an
obligation to invest an additional $1.2 million in Aesgen. The Company retains a
$1.6 million nonconvertible, non-voting preferred stock investment in Aesgen.
Aesgen Holding has distributed all shares of Aesgen common stock held by it to
its stockholders. Accordingly, the Company's executive officers beneficially own
the following percentages of the fully diluted common equity of Aesgen: Dr.
Sancilio, 12.1%, Mr. Underwood, 0.7%, Mr. Arato, 0.2% and Mr. Waldon, 0.2%.
In November 1995, in connection with the purchase by the Goldman Investors
and certain other investors of shares of Preferred Stock described below, Mr.
Waters purchased shares of Preferred Stock (convertible into 119,833 shares of
Common Stock), on substantially the same terms and conditions, including price,
as other purchasers of shares of Preferred Stock. In connection with such
transaction, the Company granted certain stockholders, including Mr. Waters and
Dr. Sancilio, rights to cause the Company to register for sale shares of Common
Stock acquired upon conversion of the Preferred Stock. See "Description of
Capital Stock -- Registration Rights". In addition, in connection with the
Company's issuance of shares of Preferred Stock, Mr. Waters and Dr. Sancilio
agreed to indemnify the Company against certain matters including the imposition
of certain federal income tax liabilities, if any, in connection with the
Company's election to be treated as an S corporation, final resolution of
certain litigation brought by a former employee of AAI in which a judgment for
approximately $363,000 has been entered against the Company and which is
currently being appealed by the Company, and the payment of any amount due in
connection with the resolution of an assessment against the Company of a North
Carolina use tax deficiency of approximately $340,000 plus penalties and
interest assessed against the Company. In addition, and as part of the same
transaction, Mr. Waters and Dr. Sancilio have agreed to sell to AAI up to a
total of 242,539 shares of Common Stock to provide the shares for issuance
pursuant to the 1995 Stock Option Plan. Such shares are required to be sold by
Mr. Waters and Dr. Sancilio upon the exercise of options under the 1995 Plan at
the exercise price of such options. As of June 30, 1996, options to acquire
235,681 shares of Common Stock granted under the 1995 Stock Option Plan at an
exercise price per share of $8.35, except for options for 2,214 shares at an
exercise price of $9.10, were outstanding.
In 1988, the Company secured financing with variable rate North Carolina
industrial revenue bonds which are supported by a letter of credit issued by a
bank. Dr. Sancilio and Mr. Waters guaranteed the Company's obligation to repay
amounts drawn under such letter of credit. As of June 30, 1996, the amount of
the letter of credit was approximately $1.7 million. In March 1996, the bank
released Dr. Sancilio and Mr. Waters from such guarantees.
The Company loaned $9,991 to Dr. Sancilio in 1993 and $158,305 in 1994,
which loans were repaid in full in November 1995. Such personal loans were
evidenced by two promissory notes, at annual interest rates of 6.5% and 8%,
respectively.
The Company loaned $82,775 to Mr. Underwood in 1993 in connection with a
purchase of shares of Class B Common Stock, all of which was outstanding in
1995. Such loan is evidenced by a promissory note, which bears interest at an
annual rate of 6.15% and is payable, if not paid sooner, on March 30, 1998. At
June 30, 1996, the outstanding principal amount of such promissory note was
$82,775.
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<PAGE> 57
The Company loaned $168,865 to Mr. Waldon in connection with his purchase
of 105,453 shares of Class B Common Stock in November 1995 for $30,000 and with
the income tax liabilities arising in such transaction. Such loan is evidenced
by a promissory note that bears interest at an annual rate of 6.48%, and
interest is payable biweekly. Mr. Waldon's shares of Class B Common Stock are
pledged to secure such loan, and Mr. Waldon has granted the Company an option to
repurchase such shares at the initial purchase price plus a formula amount,
which option will terminate upon the completion of this Offering. At June 30,
1996, the outstanding aggregate principal amount of such loan was $168,865.
CERTAIN BUSINESS RELATIONSHIPS
In November 1995, the Goldman Investors and certain other investors
purchased shares of Preferred Stock of the Company. After giving effect to the
conversion of all outstanding shares of Preferred Stock and Class B Common Stock
into shares of Common Stock, which will occur upon the completion of the
Offering, the Goldman Investors will own 2,276,832 shares of Common Stock, which
were purchased at $8.35 per share. In connection with such transaction, the
Company granted the Goldman Investors certain rights to cause the Company to
register for sale shares of Common Stock acquired upon conversion of the
Preferred Stock. See "Description of Capital Stock -- Registration Rights".
Pursuant to a Stockholder Agreement entered into in November 1995 in connection
with the purchase of Preferred Stock, the Goldman Investors have the right to
designate one member of the Board of Directors for so long as the Goldman
Investors and their affiliates (which include Goldman, Sachs & Co.) beneficially
own 10% or more of the outstanding shares of Common Stock. Pursuant to such
Agreement, Mr. Gleberman, a general partner of Goldman, Sachs & Co., serves as
one of the Company's directors. See "Management".
In connection with the purchase by the Goldman Investors and certain other
investors of shares of Preferred Stock in November 1995, the Company agreed that
so long as the Goldman Investors beneficially own 5% or more of the outstanding
shares of Common Stock, the Company will retain Goldman, Sachs & Co. or an
affiliate to perform all investment banking services for the Company for which
an investment banking firm is retained and to serve as managing underwriter of
any offering of the Company's capital stock, including this Offering, on
customary terms, consistent with an arm's-length transaction. In the event that
the Company and Goldman, Sachs & Co. or their affiliates cannot agree to the
terms of such engagement after good faith discussions, the agreement permits the
Company to engage any other investment banking firm, although Goldman, Sachs &
Co. are entitled to serve as co-managing underwriter in any underwritten
offering of the Company's capital stock. The Company has agreed to indemnify
Goldman, Sachs & Co. and their affiliates against certain liabilities, including
liabilities under the Securities Act.
Approximately 14.2% of the capital stock of Endeavor on a fully diluted
basis and 4.1% of the common equity of Aesgen on a fully diluted basis is held
by the Goldman Investors. Mr. Gleberman, a general partner of Goldman, Sachs &
Co., serves on the three-member board of directors of Aesgen Holding.
In November 1995, Noro-Moseley Partners III, L.P. ("Noro-Moseley"), a
venture capital limited partnership, purchased shares of Preferred Stock. After
giving effect to the conversion of all outstanding shares of Preferred Stock and
Class B Common Stock into shares of Common Stock, which will occur upon
completion of this Offering, Noro-Moseley will own 119,833 shares of Common
Stock, which were purchased at a $8.35 per share. In connection with such
transaction, the Company granted Noro-Moseley certain rights to cause the
Company to register for sale shares of Common Stock acquired upon conversion of
the Preferred Stock. See "Description of Capital Stock -- Registration Rights".
The holders of Preferred Stock were granted the right to designate one director,
which right expires upon completion of the Offering. Such holders have agreed
that as long as the Goldman Investors beneficially own 10% or more of the
outstanding shares of Common Stock they will vote their shares in favor of the
Goldman Investors' designee. Noro-Moseley also currently owns 14.8% of the
capital stock of Endeavor on a fully diluted basis and 8.2% of the common equity
of Aesgen on a fully diluted basis. Charles D. Moseley, Jr., a member of the
limited liability company which is the general partner of Noro-Moseley, serves
as a director on the boards of directors of AAI, Endeavor and Aesgen.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of June
30, 1996 and as adjusted to give effect to the sale of shares of Common Stock in
the Offering by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director, (iii)
each Named Executive Officer (see "Management -- Executive Compensation") and
(iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
-------------------------------------
NUMBER OF SHARES BEFORE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(A) OFFERING AFTER OFFERING(B)
- ---------------------------------------- --------------------- --------------- -----------------
<S> <C> <C> <C>
Frederick D. Sancilio, Ph.D.(c)......... 5,053,044 38.3% 31.8%
James L. Waters(d)...................... 2,617,703 19.9% 16.5%
The Goldman Sachs Group, L.P.(e)........ 2,276,832 17.3% 14.3%
Waters Family Limited Partnership(f).... 810,118 6.1% 5.1%
Joseph H. Gleberman(g).................. -- -- --
Charles D. Moseley, Jr.(h).............. 119,833 * *
John M. Ryan............................ -- -- --
William H. Underwood.................... 232,909 1.8% 1.5%
Anthony F. Arato........................ 73,646 * *
Mark P. Colonnese....................... 22,023 -- --
Martin S. Hunicutt...................... 25,344 -- --
James Swarbrick, Ph.D. ................. 19,968 -- --
R. Forrest Waldon....................... 107,373 * *
All executive officers and directors as
a group (11 persons).................. 8,271,843 63.0% 51.8%
</TABLE>
- ---------------
* Less than 1%
(a) Assumes that all outstanding shares of Preferred Stock and Class B Common
Stock are converted to Common Stock. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable. Information in the table reflects
options granted under the 1995 Option Plan and the 1996 Option Plan to the
extent such options are or become exercisable within 60 days. Accordingly,
the totals for the following executive officers and all executive officers
and directors as a group includes the following shares represented by
options: Mr. Underwood, 1,920 shares; Mr. Arato, 1,920 shares; Mr.
Colonnese, 22,023 shares; Mr. Hunicutt, 25,344 shares; Dr. Swarbrick,
19,968 shares; Mr. Waldon, 1,920 shares; and all executive officers and
directors as a group, 73,095 shares.
(b) Assumes that the Underwriter's over-allotment option to purchase up to
405,000 shares from the Company is not exercised.
(c) Dr. Sancilio's address is 5051 New Centre Drive, Wilmington, North Carolina
28403.
(d) Includes 496,133 shares of Common Stock beneficially owned by Mr. Waters'
spouse. Mr. Waters' address is 47 New York Avenue, Framingham,
Massachusetts 01701.
(e) Represents 2,276,832 shares owned by certain investment partnerships, of
which affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or general manager. Includes
1,428,549 shares held of record by GS Capital Partners II, L.P.; 567,908
shares held of record by G.S. Capital Partners II Offshore, L.P.; 120,552
shares held of record by Bridge Street Fund 1995, L.P.; 107,132 shares held
of record by Stone Street Fund 1995, L.P.; and 52,691 shares held of record
by Goldman, Sachs & Co. Verwaltungs GmbH, as nominee for GS Capital
Partners II Germany Civil Law Partnership. GS Group disclaims beneficial
ownership of the shares owned by such investment partnerships to the extent
attributable to partnership interests therein held by persons other than GS
Group and its affiliates. Each of such investment partnerships
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<PAGE> 59
shares voting and investment power with certain of its respective
affiliates. The address of the GS Group is 85 Broad Street, New York, New
York 10004.
(f) The address of the Waters Family Limited Partnership is 266 Deacon Hayes
Road, Concord, Massachusetts 01742.
(g) Does not include 2,276,832 shares which may be deemed to be beneficially
owned by GS Group as described in note (e) above. The general partners of
Goldman, Sachs & Co. may be deemed to share beneficial ownership of the
shares shown as beneficially owned by certain affiliates of GS Group. Mr.
Gleberman, a general partner of Goldman, Sachs & Co., disclaims beneficial
ownership of such shares.
(h) Represents 119,833 shares beneficially owned by Noro-Moseley. Mr. Moseley
disclaims beneficial ownership of such shares.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this Offering, the authorized capital stock of the
Company will consist of 100 million shares of Common Stock, $.001 par value per
share, and 5 million shares of preferred stock, $.001 par value per share. As of
June 30, 1996, and assuming the conversion of each outstanding share of
Preferred Stock into 2,985.653 shares of Common Stock (a total of 2,636,331
shares) and each outstanding share of Class B Common Stock into one share of
Common Stock, there were outstanding 13,180,902 shares of Common Stock held of
record by 139 stockholders and in April and June 1996, the Company issued
outstanding options to purchase a total of 444,425 shares of Common Stock.
The following summary of certain provisions of the Common Stock and
preferred stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate of
Incorporation, which shall become effective upon completion of this Offering,
which is included as an exhibit to the Registration Statement on Form S-1
(including all schedules, exhibits and amendments thereto, the "Registration
Statement"), and by, the provisions of applicable law.
COMMON STOCK
Upon the completion of this Offering, the Company's Restated Certificate of
Incorporation will authorize the issuance of up to 100 million shares of Common
Stock, $.001 par value per share. Holders of Common Stock are entitled to one
vote for each share held on all matters submitted to a vote of stockholders and
do not have cumulative voting rights. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Company's
Board of Directors out of funds legally available therefor and subject to any
preferential dividend rights of any then outstanding preferred stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to any
preferential dividend rights of any then outstanding preferred stock. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in this Offering will be, when issued and paid for, fully paid and
nonassessable.
PREFERRED STOCK
Upon the completion of this Offering, all outstanding shares of the
Preferred Stock will be converted into shares of Common Stock. See Note 11 of
Notes to Consolidated Financial Statements for a description of the Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of additional shares of
preferred stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the powers, designations,
preferences and rights of the shares of each wholly unissued series and any
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<PAGE> 60
qualifications, limitations or restrictions thereon and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding) without any further vote or action by the
stockholders. The Board of Directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of Common Stock. Such issuance could have
the effect of decreasing the market price of the Common Stock. Thus, the
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current plan
to issue any shares of preferred stock.
OPTIONS
As of June 30, 1996, there were outstanding options to purchase an
aggregate of 444,425 shares of Common Stock awarded under the Company's 1995
Stock Option Plan and 1996 Stock Option Plan, of which options for 442,211
shares are at an exercise price of $8.35 per share and options for 2,214 shares
are at an exercise price of $9.10 per share. See "Management -- Stock Option and
Restricted Stock Award Plans". Dr. Sancilio and Mr. Waters have granted the
Company an option to purchase shares of Class B Common Stock (or Common Stock
following the completion of this Offering) to fund the purchase of the 242,538
shares under the 1995 Option Plan at the price per share for each option under
the 1995 Option Plan.
REGISTRATION RIGHTS
Upon the completion of this Offering, the holders of approximately
13,076,206 shares of Common Stock (which include Dr. Sancilio, Mr. Waters and
the Goldman Investors), including up to 12,629,407 shares issuable upon the
conversion of outstanding shares of Class B Common Stock and Preferred Stock
(the "Registrable Securities"), will have certain rights with respect to the
registration of those shares under the Securities Act. If requested by any of
such stockholders, including Dr. Sancilio, Mr. Waters or the Goldman Investors,
the Company must file a registration statement under the Securities Act covering
all Registrable Securities requested to be included by such holders of
Registrable Securities. The Company may be required to effect up to three such
registrations at its expense (other than underwriting discounts and commissions)
and thereafter may be required to effect additional registrations upon
reimbursement for expenses by participating stockholders. The Company has the
right to delay any such registration for up to 180 days under certain
circumstances. Such stockholders' demand registration rights will expire when
such stockholder, together with its affiliates, cease to beneficially own
Registrable Securities (i) equal to 10% of the then outstanding shares of Common
Stock or (ii) having an aggregate market value of at least $30 million.
In addition, if the Company proposes to register any of its shares of
Common Stock under the Securities Act other than in connection with a Company
employee benefit plan or a corporate reorganization, the holders of Registrable
Securities may require the Company to include all or a portion of their shares
in such registration, subject to certain priorities among them, although a
co-managing underwriter of any such offering unaffiliated with any holder of
Registrable Securities may limit the number of shares in such registration. All
expenses incurred in connection with such registrations (other than underwriting
discounts and commissions) will be borne by the Company.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
Upon completion of this Offering, the Company will be subject to the
provisions of Section 203 of the General Corporation Law of Delaware (the
"Delaware General Corporation Law"). Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a
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<PAGE> 61
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock.
The Restated Certificate of Incorporation, which will be effective upon the
completion of this Offering, provides for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. In addition, the Restated Certificate of Incorporation provides that
directors may be removed only for cause by the affirmative vote of the holders
of two-thirds of the shares of capital stock of the Company entitled to vote.
Under the Restated Certificate of Incorporation, any vacancy on the Board of
Directors, however occurring, including a vacancy resulting from an enlargement
of the Board of Directors, may be filled only by vote of a majority of the
directors then in office. The classification of the Board of Directors and the
limitations on the removal of directors and filling of vacancies could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless the certificate of incorporation or by-laws, as the case may be, requires
a greater percentage. The Restated Certificate of Incorporation and the By-laws,
which will be effective upon the completion of this Offering, require the
affirmative vote of the holders of at least 75% of the shares of capital stock
of the Company issued and outstanding and entitled to vote to amend or repeal
any of the provisions described in the prior paragraph.
The Restated Certificate of Incorporation contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. The provisions eliminate a director's liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions that involve intentional misconduct or a knowing violation of
law. The limitation of liability described above does not alter the liability of
directors and officers of the Company under federal securities laws.
Furthermore, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the Delaware General Corporation Law. These provisions do not limit or
eliminate the right of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach by a
director or an officer of a duty owed to the Company. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
In addition, the Restated Certificate of Incorporation contains certain
provisions addressing potential conflicts of interest between the Company and
any entity in which any directors of the Company have a financial interest (a
"Related Entity"). Under these provisions, any contract, agreement, arrangement
or transaction between the Company and a Related Entity (a "Related
Transaction") shall not be void or voidable solely for the reason that the
Company and a Related Entity are parties thereto, if: (i) the material facts of
the Related Transaction are disclosed or are known to the Board of Directors (or
a committee thereof) and the Board (or committee) in good faith authorizes,
approves or ratifies the Related Transaction by the affirmative vote of a
majority of the disinterested directors on the Board of Directors (or such
committee), even though the disinterested directors may be less than a quorum;
(ii) the material facts of the Related Transaction are disclosed or are known to
the holders of the then outstanding voting shares of the Company entitled to
vote thereon, and the Related Transaction is specifically approved or ratified
in good faith by the affirmative vote of the holders of a majority of the then
outstanding voting shares not owned by the interested directors or Related
Entity, as the case may be, even though such holders may be less than a quorum;
(iii) such Related Transaction is effected pursuant to and consistent with terms
and conditions specified in any arrangements, standards or guidelines that are
in good faith authorized, approved or ratified, after disclosure or knowledge of
the material facts related thereto, by the affirmative vote of a majority of the
disinterested directors on the Board of Directors (or committee thereof), or by
the affirmative vote of the holders of a majority of the then outstanding voting
shares of the Company not owned by the interested directors or Related Entity,
as the
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<PAGE> 62
case may be, even though the disinterested directors or such holders may be less
than a quorum; or (iv) such Related Transaction was fair to the Company.
The Restated Certificate of Incorporation also provides that any such
contract, agreement, arrangement or transaction authorized, approved or
effected, and each of such arrangements, standards or guidelines so authorized
or approved, as described in (i), (ii) or (iii) above, shall be conclusively
deemed to be fair to the Company and its stockholders. If, however, such
authorization or approval is not obtained, or such contract, agreement,
arrangement or transaction is not so effected, no presumption shall arise that
such contract, agreement, arrangement or transaction, or such arrangements,
standards or guidelines, are not fair to the Company and its stockholders.
The By-laws of the Company establish an advance notice procedure for
stockholder proposals to be brought before a meeting of stockholders of the
Company and for nominations by stockholders of candidates for election as
directors at an annual meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of stockholders as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors or by a
committee of the Board of Directors designated to make nominations, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected, will
be eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to stockholders.
The notice of any stockholder proposal or nomination for election as a
director must set forth the various information required under the By-laws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,880,902 shares
of Common Stock outstanding (16,285,902 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,700,000
shares offered hereby will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), which will be subject to the resale limitations
imposed by Rule 144, as described below. All of the remaining 13,180,902 shares
of Common Stock outstanding will be "restricted securities" within the meaning
of Rule 144. Taking into consideration the effect of lock-up agreements
described below (the "Lock-Up Agreements"), 10,439,875 shares will become
eligible for sale beginning 180 days after the date of effectiveness of the
Registration statement of which this Prospectus is a part, subject to the
provisions of Rule 144 under the Securities Act or Rule 701 under the Securities
Act ("Rule 701"). The remaining 2,636,331 restricted securities will not be
eligible for resale under Rule 144 until after the expiration of a two-year
holding period from the date such restricted securities were acquired from the
Company or an affiliate, and may be resold in the public market only in
compliance with the registration requirements of the Securities Act or pursuant
to a
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<PAGE> 63
valid exemption therefrom; all of these shares are subject to the Lock-Up
Agreements. Of such 13,180,902 restricted shares, 13,076,206 shares are
beneficially owned by stockholders who have the right to have their shares
registered by the Company under the Securities Act. The remaining 104,696 shares
were awarded pursuant to the Restricted Stock Plan and, as discussed below, are
subject to certain vesting requirements and may not be transferred prior to
vesting.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) whose restricted securities have
been outstanding for at least two years, including a person who may be deemed an
"affiliate" of the Company, may only sell a number of shares within any
three-month period that does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock (approximately 158,809
shares after the completion of this Offering assuming the Underwriters'
overallotment option is not exercised) or (ii) the average weekly trading volume
in the Company's Common Stock in the four calendar weeks immediately preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice and the availability of current public information
about the Company. A person who is not an affiliate of the issuer, has not been
an affiliate within three months prior to the sale and has owned the restricted
securities for at least three years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above. The Securities
and Exchange Commission (the "Commission") recently has proposed amendments to
Rule 144 to reduce the holding periods. If adopted such amendments would have a
material effect on the timing of when shares of Common Stock will become
eligible for resale.
Certain shares issued or issuable upon the exercise of options granted by
the Company or acquired pursuant to the Company's Restricted Stock Award Plan,
the Option Plans and other plans prior to the date of this Prospectus may be
eligible for sale in the public market pursuant to Rule 701 under the Securities
Act. In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144, but without compliance with certain restrictions of Rule 144,
including the holding period requirements. As of June 30, 1996, the Company has
granted outstanding options covering 444,425 shares of Common Stock, all of
which become exercisable at various times in the future and 104,696 restricted
shares of Common Stock, a portion of which are subject to forfeiture by the
holder in certain events, do not vest until two years after the completion of
this Offering, subject to immediate vesting upon certain change-in-control
transactions, and may not be transferred prior to vesting. Any shares of Common
Stock issued upon the exercise of these options and such restricted shares will
be eligible for sale pursuant to Rule 701, subject to Lock-Up Agreements.
In addition to shares issuable pursuant to the exercise of outstanding
options, the Company has reserved 293,740 additional shares for issuance under
the Option Plans. When issued, these shares may only be sold within the
limitations of Rule 701 and Rule 144 or pursuant to registration under the
Securities Act. The Company intends to file a registration statement covering
shares of Common Stock to be acquired upon the exercise of options granted under
the Option Plans. Once such a registration statement becomes effective, persons
acquiring shares pursuant to the exercise of options granted under the Option
Plans, including affiliates, will be able to sell the shares in the public
market without regard to the two-year holding period of Rule 144.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of the Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible or
exchangeable into securities which are substantially similar to the shares of
Common Stock without the prior written consent of the representatives, except
for the shares of Common Stock offered in connection with this Offering. The
Company has also agreed that during such 180-day period it will not accelerate
the vesting of any shares of Common Stock awarded under the Restricted Stock
Plan or deliver certificates representing any shares awarded under the
Restricted Stock
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Plan. All other stockholders and all option holders will agree that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than on the conversion or exchange of convertible or exchangeable
securities or exercise of options outstanding on the date of this Prospectus)
that are substantially similar to the shares of Common Stock or that are
convertible or exchangeable into securities that are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives. Certain stockholders have registration rights relating to the
Common Stock, but such rights will not be exercisable until after such 180-day
period. For a discussion of these matters, see "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale".
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Robinson, Bradshaw & Hinson, P.A., Charlotte, North
Carolina. Certain legal matters in connection with this Offering will be passed
upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1994
and for each of the three fiscal years in the period ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C., a Registration
Statement on Form S-1 under the Securities Act, with respect to the shares of
Common Stock offered in this Offering. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to herein are
not necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matters involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at 7 World Trade Center, New York, New York 10048.
Copies of such material or any part thereof may be obtained from such offices,
upon payment of the fees prescribed by the Commission. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
59
<PAGE> 65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Statement of Income for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 (unaudited)......................... F-3
Consolidated Balance Sheet as of December 31, 1994 and 1995 and June 30, 1996
(unaudited) and Pro Forma Stockholders' Equity at June 30, 1996 (unaudited)......... F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995 and the six months ended June 30, 1996 (unaudited).......... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996 (unaudited).................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Applied Analytical Industries, Inc. (AAI)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Applied Analytical Industries, Inc. and subsidiaries at December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Raleigh, North Carolina
April 30, 1996,
except for Note 11, which
is as of August 20, 1996
F-2
<PAGE> 67
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- ---------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (includes related party net
sales of $1,991, $9,088, $3,069 and
$4,968 for the years ended December
31, 1994 and 1995 and the six months
ended June 30, 1995 and 1996,
respectively)......................... $26,378 $32,882 $34,639 $16,601 $20,774
------- ------- ---------- ------- ----------
Operating expenses:
Cost of sales......................... 9,731 14,533 14,259 7,270 8,815
Selling............................... 3,654 4,390 4,913 2,350 3,127
General and administrative............ 8,738 8,485 8,171 3,992 4,656
Research and development.............. 1,273 2,394 3,326 1,355 1,792
------- ------- ---------- ------- ----------
23,396 29,802 30,669 14,967 18,390
------- ------- ---------- ------- ----------
Income from operations:................. 2,982 3,080 3,970 1,634 2,384
------- ------- ---------- ------- ----------
Other income (expense)
Interest.............................. (453) (766) (1,004) (477) (240)
Other................................. 297 326 (126) 73 219
------- ------- ---------- ------- ----------
(156) (440) (1,130) (404) (21)
------- ------- ---------- ------- ----------
Income before income taxes.............. 2,826 2,640 2,840 1,230 2,363
Income taxes............................ -- -- 39 -- 967
------- ------- ---------- ------- ----------
Income after income taxes............... 2,826 2,640 2,801 1,230 1,396
Equity income (loss).................... -- (444) 444 (414) --
------- ------- ---------- ------- ----------
Net income.............................. $ 2,826 $ 2,196 $ 3,245 $ 816 $ 1,396
======= ======= ========== ======= ==========
Pro forma data (unaudited):
Net income, as reported............... $ 2,826 $ 2,196 $ 3,245 $ 816
Pro forma income taxes................ 1,125 1,118 1,129 504
------- ------- ---------- -------
Pro forma net income.................. $ 1,701 $ 1,078 $ 2,116 $ 312
======= ======= ========== =======
Pro forma earnings per share............ $ .18 $ .12
========== ==========
Pro forma weighted average number of
shares outstanding.................... 11,578,079 11,578,079
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 68
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
DECEMBER 31, PRO FORMA
----------------- STOCKHOLDERS'
1994 1995 ACTUAL EQUITY
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 473 $13,081 $ 4,035
Accounts receivable:
Trade and other............................................... 7,148 7,302 8,873
Related parties............................................... 607 73 1,848
Work-in-progress................................................ 2,307 4,134 3,797
Prepaid and other current assets................................ 489 1,238 2,435
------- ------- -------
Total current assets..................................... 11,024 25,828 20,988
------- ------- -------
Property and equipment:
Land............................................................ 298 298 298
Buildings and improvements...................................... 6,808 6,919 7,051
Machinery and equipment......................................... 10,941 12,468 14,665
Construction-in-progress........................................ 483 454 541
------- ------- -------
18,530 20,139 22,555
Less: accumulated depreciation.................................. (7,748) (9,235) (10,155)
------- ------- -------
10,782 10,904 12,400
------- ------- -------
Other assets...................................................... 596 2,424 2,386
------- ------- -------
Total assets.................................................. $22,402 $39,156 $35,774
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving and other current loan obligations.................... $ 5,307 $ 4,081 $ 1,600
Current maturities of long-term debt............................ 459 645 645
Accounts payable................................................ 1,114 2,311 1,822
Customer advances............................................... 2,186 1,677 1,356
Dividends payable............................................... -- 1,300 249
Other accrued liabilities....................................... 3,139 3,440 3,244
------- ------- -------
Total current liabilities................................ 12,205 13,454 8,916
Stockholder note payable.......................................... 1,159 -- --
Long-term debt.................................................... 2,738 3,379 3,115
Equity investment................................................. 444 -- --
Deferred tax liability............................................ -- 333 333
------- ------- -------
Total liabilities........................................ 16,546 17,166 12,364
------- ------- -------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock; $.01 par value: authorized
1,000 shares; issued 883 shares; no shares issued pro forma... -- -- -- --
Class A voting common stock, no par value 1994 and 1995, $.001
par value June 30, 1996; authorized 1,000,000 shares, issued
and outstanding 446,799 shares actual; authorized 50,000,000
shares, issued and outstanding 13,180,902 shares pro forma.... 566 150 -- $ 13
Class B non-voting common stock, no par value 1994 and 1995,
$.001 par value June 30, 1996; authorized 30,000,000 shares;
issued and outstanding 9,887,620, 9,993,076 and 10,097,772
shares actual; no shares issued pro forma..................... 317 171 10 --
Additional paid-in-capital...................................... -- 21,510 22,311 22,308
Retained earnings............................................... 5,333 552 1,948 1,948
------- ------- ------- ----------
6,216 22,383 24,269 24,269
Class A voting common stock held in treasury; 40,480 shares, at
cost.......................................................... (244) (244) (244) (244)
Stock subscriptions receivable.................................. (116) (149) (149) (149)
Deferred compensation........................................... -- -- (466) (466)
------- ------- ------- ----------
Total stockholders' equity............................... 5,856 21,990 23,410 $23,410
==========
------- ------- -------
Total liabilities and stockholders' equity............... $22,402 $39,156 $35,774
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 69
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON STOCK
SERIES A CLASS A CLASS B ADDITIONAL
--------------- ---------------- -------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------ ------ ------- ------ ---------- ------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992..... -- -- 446,799 $566 9,477,380 $ 201 -- $ 3,126 $ (244)
Net income..................... -- -- -- -- -- -- -- 2,826 --
Dividends...................... -- -- -- -- -- -- -- (926 ) --
Sale of stock to officer....... -- -- -- -- 306,889 83 -- -- --
--- ---- ------- ---- ---------- ------ ------- ------- -------
Balance at December 31, 1993..... -- -- 446,799 566 9,784,269 284 -- 5,026 (244)
Net income..................... -- -- -- -- -- -- -- 2,196 --
Dividends...................... -- -- -- -- -- -- -- (1,889 ) --
Sale of stock to officer....... -- -- -- -- 103,351 33 -- -- --
--- ---- ------- ---- ---------- ------ ------- ------- -------
Balance at December 31, 1994..... -- -- 446,799 566 9,887,620 317 -- 5,333 (244)
Net income..................... -- -- -- -- -- -- -- 3,245 --
Sale of preferred stock........ 883 -- -- -- -- -- $21,510 -- --
Sale of stock to officer....... -- -- -- -- 105,456 305 -- -- --
Dividends...................... -- -- -- (416) -- (451) -- (8,026 ) --
--- ---- ------- ---- ---------- ------ ------- ------- -------
Balance at December 31, 1995..... 883 -- 446,799 150 9,993,076 171 21,510 552 (244)
Stock award (unaudited)........ -- -- -- -- 104,696 490 -- -- --
Compensation earned
(unaudited).................. -- -- -- -- -- -- -- -- --
Establish common stock par
value of $.001 per share..... -- -- -- (150) -- (651) 801 -- --
Net income (unaudited)......... -- -- -- -- -- -- -- 1,396 --
--- ---- ------- ---- ---------- ------ ------- ------- -------
Balance at June 30, 1996
(unaudited).................... 883 -- 446,799 -- 10,097,772 $ 10 $22,311 $ 1,948 $ (244)
=== ==== ======= ==== ========== ====== ======= ======= =======
<CAPTION>
STOCK TOTAL
SUBSCRIPTIONS DEFERRED STOCKHOLDERS'
RECEIVABLE COMPENSATION EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1992..... -- -- $ 3,649
Net income..................... -- -- 2,826
Dividends...................... -- -- (926)
Sale of stock to officer....... $ (83) -- --
----- --------- -------
Balance at December 31, 1993..... (83) -- 5,549
Net income..................... -- -- 2,196
Dividends...................... -- -- (1,889)
Sale of stock to officer....... (33) -- --
----- --------- -------
Balance at December 31, 1994..... (116) -- 5,856
Net income..................... -- -- 3,245
Sale of preferred stock........ -- -- 21,510
Sale of stock to officer....... (33) -- 272
Dividends...................... -- -- (8,893)
----- --------- -------
Balance at December 31, 1995..... (149) -- 21,990
Stock award (unaudited)........ -- $ (490) --
Compensation earned
(unaudited).................. -- 24 24
Establish common stock par
value of $.001 per share..... -- -- --
Net income (unaudited)......... -- -- 1,396
----- --------- -------
Balance at June 30, 1996
(unaudited).................... $(149) $ (466) $23,410
===== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 70
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 2,826 $ 2,196 $ 3,245 $ 816 $ 1,396
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.................... 1,311 1,515 1,591 787 939
Equity (income) loss............................. -- 444 (444) 414 --
Compensation for stock purchase.................. -- -- 272 -- 25
Other............................................ 9 -- 6 4 (1)
Changes in assets and liabilities:
Deferred taxes................................. -- -- (16) -- --
Trade and other receivables.................... (2,129) (1,157) (154) 865 (1,749)
Accounts receivable from related parties....... -- (606) 534 (2,194) (1,596)
Work-in-progress............................... (906) (224) (1,827) (333) 336
Prepaid and other current assets............... (225) 38 (400) (303) (1,287)
Other assets................................... (113) (82) 15 (52) (68)
Accounts payable............................... 262 (61) 1,197 729 (490)
Customer advances.............................. (810) 1,456 (509) 283 (320)
Other accrued liabilities...................... 319 1,382 301 160 (107)
------- ------- ------- ------- -------
Net cash provided (used) by operating activities..... 544 4,901 3,811 1,176 (2,922)
------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment....... 397 -- 30 14 1
Purchase of property and equipment................. (2,321) (3,091) (1,720) (887) (2,419)
Purchase of preferred stock........................ -- -- (1,593) (1,593) --
Purchase of intangible assets...................... -- (290) (279) -- 40
Proceeds from sale (purchase) of investee stock.... -- (50) -- -- 50
------- ------- ------- ------- -------
Net cash used by investing activities................ (1,924) (3,431) (3,562) (2,466) (2,328)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net (payments) proceeds on line of credit.......... 1,997 1,260 (926) 1,126 (2,331)
Proceeds from long-term borrowings................. 3,550 1,165 1,505 1,373 --
Payments on long-term borrowings................... (3,099) (1,996) (978) (379) (414)
Payment of stockholder note payable................ -- -- (1,159) -- --
Sale of preferred stock............................ -- -- 21,510 -- --
Dividends.......................................... (926) (1,889) (7,593) (1,155) (1,051)
------- ------- ------- ------- -------
Net cash provided (used) by financing activities..... 1,522 (1,460) 12,359 965 (3,796)
------- ------- ------- ------- -------
Net increase (decrease) in cash...................... 142 10 12,608 (325) (9,046)
Cash and cash equivalents, beginning of period....... 321 463 473 473 13,081
------- ------- ------- ------- -------
Cash and cash equivalents, end of period............. $ 463 $ 473 $13,081 $ 148 $ 4,035
======= ======= ======= ======= =======
Supplemental information -- cash paid for:
Interest........................................... $ 405 $ 669 $ 938 $ 401 $ 264
Income taxes....................................... -- -- $ 146 -- $ 946
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 71
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of the Business
Operations of Applied Analytical Industries, Inc. (the "Company" or "AAI")
consist primarily of contract product development and support services for the
pharmaceutical and biotechnology industries. Activities include formulation
development, drug physicochemical analysis and synthesis, clinical supply and
niche manufacturing, and regulatory and compliance consulting.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Applied Analytical Industries Italy, S.r.I.
and Applied Analytical Industries Learning Center, Inc. All material
intercompany accounts and transactions are eliminated in consolidation. The
Company has a 43% ownership (40% on a fully diluted basis) in Endeavor
Pharmaceuticals, Inc. ("Endeavor") which is accounted for under the equity
method (Note 3).
Cash and cash equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts receivable
Unbilled accounts receivable represent specific invoices that, in keeping
with certain client billing arrangements, are mailed to clients approximately 15
days after the month during which the work was completed.
Property and equipment
Property and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred and costs of improvements and renewals are
capitalized. Depreciation is recognized using the straight-line method over the
estimated useful lives of the assets. Buildings and improvements have estimated
useful lives of 31.5 years. Machinery and equipment have estimated useful lives
ranging from 3 to 10 years.
Intangible assets
Intangible assets include deferred loan costs, patents and other intangible
assets. Loan costs are amortized over the term of the related loan. Patents are
recorded at cost and are amortized over seventeen years commencing when the
patent is granted. Other intangible assets are amortized over seven and fifteen
years utilizing the straight-line method. Intangible assets are included in
other assets in the accompanying financial statements.
Long-term investment
Long-term investment includes nonconvertible, non-voting, mandatorily
redeemable preferred stock of a related party (Note 7) which is carried at
original cost. Write-downs are taken for impairment in the carrying value
considered to be other than temporary. Long-term investment is included in other
assets in the accompanying financial statements. Management monitors its
investment for impairment based on the performance of Aesgen. Performance
considerations include the rate of expenditures as compared to
F-7
<PAGE> 72
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
initial budgets and progress toward viability of its products, as well as the
availability of additional capital and market conditions.
Revenue recognition
Revenues from contract pharmaceutical product development and support
services are related to both fixed priced and hourly based customer contracts
and are recognized on a percentage of completion basis. Work-in-progress
represents revenues recognized before amounts may be billed under contract
terms. Contracts in progress are reviewed quarterly; sales and earnings are
adjusted in current accounting periods based on revisions in contract sales
value and estimated costs to complete. Provisions for estimated losses on
contracts are recorded in the quarter identified.
Licensing revenues from Company funded development projects are primarily
recognized as significant contract requirements are met. Royalty revenues are
recognized as earned in accordance with contract terms. Licensing and royalty
revenues were not material during the income statement periods presented.
Income taxes
The financial statements of the Company do not include a provision for
income taxes for the years ended December 31, 1993 and 1994 because the taxable
income or loss of the Company, until November 17, 1995, passed directly to the
stockholders under the S corporation election. As a result of the November 17,
1995 preferred stock issuance described in Note 6, the Company no longer
qualified as an S corporation and became subject to federal and state income
taxes. Accordingly, the Company began accounting for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting For Income Taxes." SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in different periods
in the Company's financial statements and tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other than
enactment of changes in tax law or rates. If it is "more likely than not" that
some portion or all of a deferred tax asset will not be realized, a valuation
allowance is recorded.
For informational purposes, the statement of income includes a pro forma
income tax provision on taxable income for financial reporting purposes using
federal and state income tax rates that would have resulted if the Company had
been subject to corporate income taxes during these periods.
Unaudited pro forma earnings per share and unaudited pro forma balance sheet
The Company's historical capital structure is not indicative of its
prospective structure given (i) the conversion of the Series A convertible
preferred stock and Class B common stock into Class A common stock concurrent
with the closing of the Company's anticipated initial public offering (see Note
11). Accordingly, historical net earnings per common share is not considered
meaningful and has not been presented herein. The calculation of the shares used
in computing pro forma net earnings per share includes the effect of the
conversion of the convertible preferred stock and Class B common stock described
in Note 6 into shares of Class A common stock concurrent with the closing of the
Company's anticipated initial public offering as if they were converted as of
January 1, 1995. Also, pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock or equivalent shares from convertible
preferred stock or stock options and awards sold or issued at prices below the
anticipated initial public offering price per share in the twelve months
preceding the initial filing have been included in the calculation as if
outstanding for all periods presented.
F-8
<PAGE> 73
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interim financial information
Interim financial information for the six month periods ended June 30, 1995
and 1996 included herein is unaudited; however, in the opinion of the Company,
the interim financial information includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. The results of operations for the six months ended June
30, 1996 are not necessarily indicative of the results to be expected for the
year.
Fair value of financial instruments
The carrying values of cash and cash equivalents, accounts receivable,
current liabilities and mandatorily redeemable preferred stock investment
approximate the fair value. Substantially all of the Company's long-term debt is
subject to variable interest rates; because these variable rates approximate a
market rate of interest at December 31, 1995, the carrying amount of long-term
debt approximates fair value at that date. It is not practicable to estimate the
fair value of the Company's equity investment as there exists no readily
determinable market for investments in such entities.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New accounting pronouncements
In 1995, the Financial Accounting Standards Board issued two new
statements, which the Company will adopt in the fiscal year ending December 31,
1996, related to accounting for impairment of long-lived assets and accounting
for stock compensation. The Company intends to adopt the disclosure alternative
for stock compensation and does not expect the effect of adoption of either
statement to result in a material impact to the Company's financial position or
results of operations.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
------ ------
<S> <C> <C>
Billed....................................................... $6,435 $5,978
Unbilled..................................................... 1,445 1,467
------ ------
7,880 7,445
Allowance for doubtful accounts.............................. (125) (70)
------ ------
$7,755 $7,375
====== ======
</TABLE>
3. EQUITY INVESTMENT
In April 1994, AAI organized Endeavor with Berlex Laboratories, Inc. and
several other investors to fund the development of hormone pharmaceutical
products, initially focusing on several generic hormone products already under
development by AAI. AAI obtained a 47% equity interest in Endeavor through
contribution of its accumulated product research and development and technical
know-how. The other
F-9
<PAGE> 74
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
investors contributed cash in exchange for their interests which, for all
investors, was in the form of convertible preferred stock. Based on a subsequent
cash infusion by a new investor in November 1995, the Company's interest in
Endeavor was diluted to 43% (40% on a fully diluted basis).
AAI accounts for its investment in Endeavor under the equity method. AAI's
initial investment was recorded at zero, with gain for its share of the cash
contributed to Endeavor by the other investors deferred over the period the
proceeds from such equity are expended by Endeavor. Due to a commitment to
provide financial support under a line of credit, AAI recognized a liability for
its proportionate share of Endeavor's losses, net of amortization of the
deferred gain. As a result of the November 1995 cash infusion from a third
party, the Company was repaid all amounts outstanding under the line of credit
and AAI's obligation to provide any further funding under the line of credit
terminated in the fourth quarter of 1995. Since the Company has no requirement
to provide any additional funding to Endeavor, the previously recorded liability
was reversed in the fourth quarter of 1995.
The following is a summary of certain financial information for Endeavor:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
------ ------
<S> <C> <C>
Current assets............................................... $1,525 $7,878
Noncurrent assets............................................ 351 301
Current liabilities.......................................... (532) (1,149)
Noncurrent liabilities....................................... -- (3,176)
------ ------
Stockholders' equity.................................... $1,344 $3,854
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1995
------ ------
<S> <C> <C>
Net revenues................................................. $ 250 $ 250
Net loss..................................................... $2,767 $4,217
Excess of AAI's equity in net assets over carrying value..... $1,076 $1,652
</TABLE>
AAI recognized net sales from Endeavor, for product development services
provided, on terms and conditions management believes are comparable to those
afforded unrelated entities, of approximately $1,991 and $3,530 for the years
ended December 31, 1994 and 1995, respectively. AAI had approximately $607 and
$21 in accounts receivable due from Endeavor and approximately $320 and $948 in
work-in-progress balances at December 31, 1994 and 1995, respectively.
F-10
<PAGE> 75
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
4. DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
<S> <C> <C>
Term loan payable to bank, interest at 30-day LIBOR plus a
margin based on the Company's debt to equity ratio (6.66% at
December 31, 1995), payable in monthly installments of $34
plus interest through December 31, 1997, with remaining
principal due at that date....................... $2,966 $2,869
Capital expenditures loan payable to bank, interest at 30-day
LIBOR plus a margin based on the Company's debt to equity
ratio (6.66% at December 31, 1995), payable in monthly
installments of $17 plus interest through December 31, 2000,
with remaining principal due at that date........ -- 998
Other.......................................................... 231 157
Subordinated note payable to stockholder, interest at prime
plus 1%...................................................... 1,159 --
------ ------
4,356 4,024
Current maturities............................................. (459) (645)
------ ------
$3,897 $3,379
====== ======
</TABLE>
In December 1992, the Company and a bank entered into an agreement, as
amended March 28, 1996, providing for a credit facility comprised of two
revolving loans, a term loan and a capital expenditure loan (the "Loan
Agreement"). Amounts outstanding under this Loan Agreement are secured by
substantially all of the Company's assets, excluding equity investments. There
is an annual fee of 1/5% applied to the unutilized revolving loan commitment.
At December 31, 1994 and 1995, the Company had outstanding borrowings of
$3,257 and $2,331, respectively, on the revolving loans. The revolving loans are
due November 1996. At December 31, 1995, the Company had approximately $2,669
available borrowing capacity under the revolving loans. The average interest
rate on revolving loan borrowings was 8.86% during 1995.
During 1988, the Company secured financing for the acquisition and
construction of facilities and equipment with variable rate North Carolina
Industrial Revenue Bonds ("IRB") in the amount of $3,500. At December 31, 1994
and 1995, the Company had outstanding borrowings of $2,050 and $1,750,
respectively, on the IRB. The variable rate is adjusted annually up to a maximum
of 15% (5.45% at December 31, 1995). The bonds are payable in monthly
installments of $25 plus interest through November 2000 or at the option of the
bondholders. A bank is responsible for paying the bondholders under a standby
letter of credit in the amount of $1.8 million expiring in June 1997. An annual
commitment fee of 1% is charged on the commitment amount. Because the letter of
credit, if drawn upon, requires immediate repayment, the bonds have been
classified as short term; however the Company has entered into a bond
remarketing agreement with the bank to remarket, on a best efforts basis, any
bonds presented for early redemption.
Under the terms of the Loan Agreement and irrevocable letter of credit
agreement, the Company is required to comply with various covenants including,
but not limited to, those pertaining to working
F-11
<PAGE> 76
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
capital, maintenance of certain financial ratios, purchase of property and
equipment and incurring additional indebtedness. The Company was in compliance
with these covenants at December 31, 1995 and June 30, 1996.
Scheduled maturities of long-term debt as of December 31, 1995 were as
follows:
<TABLE>
<S> <C>
1996........................................................................ $ 645
1997........................................................................ 2,716
1998........................................................................ 248
1999........................................................................ 200
2000........................................................................ 200
Thereafter.................................................................. 15
------
$4,024
======
</TABLE>
Interest expense incurred on the stockholder note payable was $82, $101 and
$98 for the years ended December 31, 1993, 1994 and 1995, respectively.
5. INCOME TAXES
The income tax provision (benefit) for the period from November 17, 1995 to
December 31, 1995 consists of the following (see Note 1):
<TABLE>
<S> <C>
Change in tax status......................................................... $ 31
----
Current:
Federal.................................................................... 44
State...................................................................... 11
----
55
----
Deferred:
Federal.................................................................... (38)
State...................................................................... (9)
----
(47)
----
$ 39
====
</TABLE>
A reconciliation of actual income tax expense to the amount computed by
applying the federal statutory income tax rate yields no material differences.
F-12
<PAGE> 77
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The components of deferred tax liabilities and assets as of November
17, 1995 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities...................................... $ 227 $ 321
Other.................................................... 41 28
--------- ---------
Total deferred tax assets........................ 268 349
--------- ---------
Deferred tax liability:
Excess of tax over book depreciation..................... (299) (333)
--------- ---------
Total deferred tax liability.......................... (299) (333)
--------- ---------
Net deferred tax asset (liability).................... $ (31) $ 16
========= =========
</TABLE>
No valuation allowance has been provided against the deferred tax assets at
either November 17, 1995 or December 31, 1995.
6. STOCKHOLDERS' EQUITY
Preferred stock
On November 17, 1995, the Company issued 883 shares of $.01 par value
Series A Convertible Preferred Stock ("Preferred Stock") for net proceeds of
$21.5 million. The Preferred Stock has a liquidation preference of $22.0
million. Each share is entitled to receive dividends equivalent to dividends
received by holders of common stock based on the number of shares of common
stock into which the Preferred Stock is convertible. Each share is convertible,
at the option of the holder, into units consisting of 126.5 shares of Class A
Voting Common Stock ("Class A Stock") and 2,859 shares of Class B Non-voting
Common Stock ("Class B Stock"). The Preferred Stock is mandatorily convertible
into common stock upon the closing of an initial public stock offering ("IPO")
that meets certain conditions. Prior to any conversion, the holders of the
Preferred Stock have voting rights consistent with holders of Class A Stock;
special voting rights to approve certain defined transactions relating to
capital expenditures, additional borrowings, granting of certain stock options
and issuing common stock; one Board seat appointment; and certain
transferability rights less stringent than those stipulated by the Company's
Stockholders' Agreement. The Company has reserved 111,700 and 2,524,434 shares
of Class A Stock and Class B Stock, respectively, for issuance upon conversion
of the Preferred Stock.
Common stock
The Company sold 306,889, 103,351 and 105,456 shares of Class B Stock to
officers in 1993, 1994 and 1995, respectively. The purchase price for the
105,456 shares acquired in 1995 by an officer of the Company was determined to
be approximately $272 below the estimated market value of the Class B Stock and
such difference has been recognized as compensation expense in the accompanying
1995 consolidated statement of income.
Any offer to sell outstanding Class B Stock by a stockholder must first be
made to the Company and then to other stockholders. Certain other restrictions,
some of which lapse concurrent with an IPO, also exist with respect to
transferability and forfeiture of Class B Stock.
F-13
<PAGE> 78
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Dividends
Concurrent with the Company's change to a C corporation in November 1995,
the Company elected to distribute its S corporation retained earnings. 1995
dividends of $7,593 represent S corporation retained earnings distributed. Upon
filing of the final S corporation tax return for the period January 1, 1995 to
November 17, 1995, the final S corporation dividend will be paid during the
second quarter of 1996.
Stock option and award plans
In November 1995, the Company's Board of Directors approved the
implementation of the 1995 Restricted Stock Award Plan ("1995 Award Plan"), the
1995 Stock Option Plan ("1995 Plan") and the 1996 Stock Option Plan ("1996
Plan").
1995 Award Plan
Under the 1995 Award Plan the Company's Board of Directors may issue up to
105,453 shares of Class B Stock. The Board of Directors shall establish the
issue price at its sole discretion. On March 26, 1996 the Company issued 105,453
shares of Class B Stock to certain employees and officers of the Company which
had a fair value of $4.66 per share. As a result, unearned compensation of
approximately $490 was recorded as of the date of grant. Such compensation
expense will be recognized for book purposes over the vesting period of five
years or two years following an IPO.
1995 Plan
Under the 1995 Plan, the Board of Directors may grant options to purchase
up to 242,538 shares of Class B Stock. However, the Company has no obligation to
issue the shares of Class B Stock upon exercise of such options until it has
purchased an equal number of shares from certain existing stockholders. The
exercise price of options granted cannot be less than 75% of the estimated fair
market value of the Company's shares of common stock on the date of grant.
On April 26, 1996, the Company issued options to purchase 241,700 shares of
Class B Stock to employees and officers of the Company at an exercise price of
$8.35 per share, such price being the minimum allowable under the provisions of
the 1995 Plan. In June 1996, 8,233 previously issued options were forfeited by
an employee, and the Company issued 2,214 options to another employee at an
exercise price of $9.10 per share. The Company recorded no compensation expense
for the options issued in April 1996, since the options were granted at an
exercise price at or above fair value of the underlying shares. The Company
accrued compensation expense in the six-month period ended June 30, 1996 with
respect to the options issued in June 1996, for the elapsed portion of the
vesting period, based on a fair market value per share of $13.00. The shares
vest 25% at each of the six-month, eighteen-month, thirty-month and forty-two
month anniversaries of the grant date. The Company has not yet purchased any
Class B Stock from the existing stockholders.
1996 Plan
Under the 1996 Plan, the Board of Directors may grant options to purchase
up to 495,627 newly issued shares of Class B Stock (no more than 210,876 shares
prior to January 1, 1997). The exercise price of options granted cannot be less
than 75% of the estimated fair market value of the Company's shares of common
stock on the date of grant. On April 26, 1996, the Company issued options to
purchase 208,744 shares of Class B Stock to employees and officers of the
Company at an exercise price of $8.35 per share, such price being the minimum
allowable under the provisions of the 1996 Plan. The
F-14
<PAGE> 79
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Company recorded no compensation expense, since the options were granted at an
exercise price at or above fair value of the underlying shares in order to
satisfy contractual requirements of the Preferred Stock investment.
7. RELATED PARTY TRANSACTIONS
Aesgen, Inc.
While incorporated in July 1994, Aesgen Inc. ("Aesgen") was formally
organized with an affiliate of the Mayo Clinic and MOVA Pharmaceutical
Corporation and funded in April 1995 via issuance of approximately $11 million
of nonconvertible, non-voting, mandatorily redeemable, preferred stock. As the
Company did not intend to hold an equity interest in Aesgen, the Company entered
a series of related transactions commencing in December 1995 to transfer to a
corporation owned by the holders of substantially all of the outstanding capital
stock of the Company, all of its shares of Aesgen common stock in return for $50
(amount paid by AAI for such shares) and such corporation's assumption of an
obligation to invest an additional $1.2 million in Aesgen. The Company retains a
$1.6 million nonconvertible, non-voting, mandatorily redeemable, preferred stock
investment in Aesgen as a result of an April 1995 cash investment. This
investment, which is carried at cost, is included in other noncurrent assets on
the balance sheet.
The Company provides product development services to Aesgen at terms and
conditions that management believes are similar to those afforded unrelated
entities. AAI recognized approximately $5,558 of net revenues from Aesgen for
the year ended December 31, 1995. AAI also had trade receivables of
approximately $51 from Aesgen and a work-in-process balance of approximately
$1,044 at December 31, 1995. AAI has the right under its development agreement
with Aesgen to provide certain product development and support services to
Aesgen with respect to some generic drugs currently being developed by Aesgen,
provided that AAI's fees for such services are comparable to those of a
competitor. In addition, under such development agreement, the Company has
agreed not to develop, for its own account or any other person, a formulation of
any of the generic products currently under development for Aesgen and any
additional drugs that AAI agrees to develop in the future for Aesgen under the
development agreement.
Endeavor
The Company has agreed, upon the completion of a specified development
milestone, to grant Endeavor an option to lease for 15 years approximately
20,000 square feet of production space intended for use by AAI in manufacturing
Endeavor's products or to purchase that part of the facility. Upon exercise of
the option to lease, Endeavor would be required to pay $2 million to the Company
and may purchase that portion of the facility at its fair market value. If the
option is exercised but AAI fails to perform certain development milestones by a
specified date, AAI must repay the option exercise price to Endeavor. The
facilities subject to the option are currently used by the Company for its
clinical supply and niche manufacturing operations. The Company is expanding its
clinical supply and niche manufacturing facilities to maintain necessary
capacity in the event Endeavor exercises its option. The Company anticipates
that the milestone triggering the commencement of such option will occur in the
third quarter of 1996. The Company has also agreed to permit Endeavor under
certain circumstances the first right to purchase additional proprietary hormone
pharmaceutical products developed by AAI.
Pharmaceutical Seminars, Inc.
On December 29, 1994, the Company purchased, for $290, certain assets of
Pharmaceutical Seminars, Inc. ("PSI"), a company that organized seminars
addressing various pharmaceutical industry
F-15
<PAGE> 80
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
topics. PSI was wholly-owned by the spouses of two of the Company's officers and
directors. The Purchase agreement provided for additional consideration
contingent upon the paid attendance at seminars organized by PSI for conduct in
1995. A total of approximately $84 was paid as additional consideration. In
addition, PSI's previous owners executed consulting agreements for approximately
$5 each to assist the Company in conducting the seminars scheduled through April
1995.
PharmComm, Inc.
In March 1996, the Company retained PharmComm, Inc. ("PharmComm") to
provide computer software development and related services. PharmComm has both
stockholders and directors that are common to those of the Company. In addition,
the Company licensed certain know-how to PharmComm for $1 million to be paid
from future profits of PharmComm. As PharmComm is not profitable, the Company
has not recognized any licensing revenues in any period presented.
5051 New Centre Drive, LLC
The Company provides accounting services, at no charge, to 5051 New Centre
Drive, LLC, a company affiliated through common ownership. The Company also
leases a portion of a building, at a rate comparable to that of other similar
properties, from 5051 New Centre Drive, LLC.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan covering all employees with
one year of service who have attained the age of eighteen. Participants may
elect to contribute a portion of their compensation annually, subject to
Internal Revenue Service limitations. The Company makes matching contributions
equal to 50% of a participant's contribution up to a certain amount. Additional
Company contributions are at the discretion of the Company's Board of Directors.
Contributions to the Plan were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discretionary contribution...................................... $374 $322 $226
Matching contribution........................................... 45 42 56
---- ---- ----
$419 $364 $282
==== ==== ====
</TABLE>
9. MAJOR CUSTOMERS
The Company had the following customers who accounted for more than 10% of
the Company's net revenue during each of the periods presented:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Customer A...................................................... -- 19% 12%
Aesgen.......................................................... -- -- 16%
Endeavor........................................................ -- -- 10%
</TABLE>
Due to the nature of the Company's business, major customers may vary from
year to year.
F-16
<PAGE> 81
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and equipment under renewable lease
agreements classified as operating leases. Lease expense recognized under these
agreements totaled $418, $1,071 and $1,285 for the years ended December 31,
1993, 1994 and 1995, respectively.
Future minimum rental payments due under these leases as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996........................................................................ $1,268
1997........................................................................ 1,208
1998........................................................................ 979
1999........................................................................ 673
2000........................................................................ 585
Thereafter.................................................................. 1,806
------
$6,519
======
</TABLE>
In 1994, the Company received an assessment purporting underpaid sales and
use taxes for the years 1992 through 1994. The Company believes that it has
properly paid sales and use taxes in accordance with applicable laws and has
contested the assessment. Concurrent with the November 17, 1995 preferred stock
issuance (see Note 6), two of the Company's stockholders agreed to indemnify the
Company for any losses resulting from this contingency. No provision or
indemnification receivable with respect to the above matter has been recorded in
the financial statements. Management expects that the ultimate resolution of
legal contingencies, individually and in the aggregate, will not have a material
adverse effect on results of operations, financial position, or liquidity of the
Company.
The Company entered into a three year employment agreement, automatically
extending one year at each anniversary date, with its Chairman and President on
November 17, 1995. This agreement provides for an annual salary of not less than
$250 plus bonus provisions and other benefits. A termination as defined in the
agreement will require the Company to pay any unpaid salary or prorated bonus
through the termination date plus three years salary and other defined
compensation and benefits. Such additional compensation and benefits will be
paid over a period of two years from the date of termination.
11. SUBSEQUENT EVENTS (UNAUDITED)
Stock transactions
In March, April and June 1996, the Company granted Class B Stock options
and awards pursuant to the related plans approved in November 1995 (see Note 6).
In May 1996, the Company's stockholders approved the establishment of par values
for the Class A Stock and Class B Stock at $.001 per share. As a result of this
change, the Class A Stock and Class B Stock accounts were reduced by $150 and
$651, respectively, and the additional paid-in capital account was increased by
the same amounts.
Option agreement
In May 1996, the Company signed an option agreement with a term of six
months to purchase the outstanding shares of a European contract research and
development organization. The Company will pay $1.0 million, to be deposited in
an escrow account, to acquire such option. Such amount would be applied to the
purchase price if the Company elects to exercise such option or returned to the
Company if, upon expiration of the option, certain material conditions are not
satisfied. Significant uncertainties exist whether such conditions could be
satisfied prior to the expiration of the option. The Company does not intend to
exercise such option if the foregoing conditions are not satisfied and can make
no prediction whether such conditions will be satisfied by November 1996. In
addition, the Company may choose to not
F-17
<PAGE> 82
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
exercise such option even though the option conditions may be satisfied, whereby
the option fee would be forfeited.
Initial public offering
The Company has initiated a plan to complete an IPO of common stock during
the third quarter of 1996. It is anticipated that upon the closing of such IPO
the Company's current classes of common and preferred stock would convert to one
class of voting common stock on a ratio of 1:126.50 for Class A Stock and Class
B Stock and a ratio of 1:2,859.15 for each Preferred Stock share.
Stock split and reverse stock split
On May 31, 1996 the Board of Directors approved (i) an amendment to the
Certificate of Incorporation of the Company increasing the number of authorized
Class A Stock and Class B Stock shares to 1,000,000 and 30,000,000,
respectively, and (ii) a stock split of 200 shares for 1 share for all AAI
common stock. On June 5, 1996, the Board of Directors authorized a one-for-.6325
reverse split of the Common Stock and Class B Common Stock. All numbers of
common shares and per share amounts in the accompanying financial statements
have been retroactively adjusted to reflect this stock split.
Related party transaction
In June 1996, the Company sold to Aesgen marketing rights to a product
under development by the Company. Under the agreement, Aesgen will pay license
fees to the Company and additional royalties upon marketing the product.
F-18
<PAGE> 83
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Cowen & Company and Lehman
Brothers Inc. are acting as representatives, has severally agreed to purchase
from the Company, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
-------------------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co.......................................................
Cowen & Company...........................................................
Lehman Brothers Inc.......................................................
---------
Total...........................................................
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 405,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,700,000 shares of Common
Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of the Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the Offering.
The Company has also agreed that during such 180-day period it will not
accelerate the vesting of any shares of Common Stock awarded under the
Restricted Stock Plan or deliver certificates representing any shares awarded
under the Restricted Stock Plan. All other stockholders and all option holders
have agreed that, during the period beginning from the date of this Prospectus
and continuing to and including the date 180 days after the date of the
Prospectus, they will not offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than on the conversion or exchange of
convertible or exchangeable securities or the exercise of options outstanding on
the date of this Prospectus) which are substantially similar to the shares of
Common Stock or which are convertible into or exchangeable for securities which
are substantially similar to the shares of Common Stock without the prior
written consent of the representatives. Certain stockholders have registration
rights relating to the Common Stock, but such rights will not be exercisable
until after such 180-day period. For a discussion of these matters, see
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale".
U-1
<PAGE> 84
Certain of Goldman, Sachs & Co.'s affiliates own 2,276,832 shares of Common
Stock, representing 17.3% of the outstanding Common Stock of the Company and,
upon completion of the Offering, will own approximately 14.3% of the outstanding
Common Stock. See "Principal Stockholders". Such affiliates are subject to the
180-day lock-up that applies to other stockholders as described above. Subject
to the lock-up provisions described above, Goldman, Sachs & Co. and their
affiliates will be permitted to engage in stabilization, brokerage and ordinary
course of business transactions and will be permitted, pursuant to a
registration statement under the Securities Act maintained by the Company, to
sell Common Stock and related securities in connection with market-making
transactions from time to time, both during and after the 180-day period. See
"Shares Eligible for Future Sale".
Goldman, Sachs & Co. and certain of their affiliates maintain certain
contractual relationships with the Company. See "Certain Transactions". As long
as certain of Goldman, Sachs & Co.'s affiliates beneficially own 10% or more of
the outstanding shares of Common Stock, certain affiliates of Goldman, Sachs &
Co. have the right to designate one member of the Board of Directors of the
Company. Pursuant to such agreement, a general partner of Goldman, Sachs & Co.
serves as one of the Company's directors. After the consummation of the
Offering, such director is expected to continue in office. See "Management".
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to the Company, for which
such Underwriters have received and will receive customary fees and commissions.
The Underwriters have reserved for sale, at the initial public offering
price, shares of Common Stock for employees of the Company who have expressed an
interest in purchasing such shares of Common Stock in the Offering. It is
expected that such persons will purchase, in the aggregate, no more than 5% of
the Common Stock offered in the Offering. The number of shares available for
sale to the general public in the Offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make a
market in the Common Stock following completion of the Offering. However, they
are not obligated to do so and any market-making may be discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained following
the completion of the Offering. See "Risk Factors -- No Prior Market; Possible
Volatility of Stock Price".
The Company and the Underwriters have entered into an agreement with
respect to such market-making activities. Because of the affiliation of Goldman,
Sachs & Co. with the Company, Goldman, Sachs & Co. will be required to deliver a
current prospectus to any purchaser in connection with any such market-making
transactions. The Company has agreed to make from time to time certain
amendments or
U-2
<PAGE> 85
supplements to the Prospectus and to pay certain expenses relating to such
amendments or supplements.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "AAII".
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
U-3
<PAGE> 86
---------------------------------------------------------
---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
The Company............................. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Dilution................................ 15
Capitalization.......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 25
Management.............................. 43
Certain Transactions.................... 49
Principal Stockholders.................. 53
Description of Capital Stock............ 54
Shares Eligible for Future Sale......... 57
Legal Matters........................... 59
Experts................................. 59
Additional Information.................. 59
Index to Consolidated Financial
Statements............................ F-1
Underwriting............................ U-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
2,700,000 SHARES
APPLIED ANALYTICAL
INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
------------------
[LOGO] AAI
------------------
GOLDMAN, SACHS & CO.
COWEN & COMPANY
LEHMAN BROTHERS
REPRESENTATIVES OF THE UNDERWRITERS
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 87
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
[ALTERNATE COVER PAGE]
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996
APPLIED ANALTYICAL LOGO
APPLIED ANALYTICAL INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"AAII".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Prospectus has been prepared for and is to be used by Goldman, Sachs &
Co. in connection with offers and sales of the shares of Common Stock related to
market-making transactions, at prevailing market prices, related prices or
negotiated prices. The Company will not receive any of the proceeds of such
sales. Goldman, Sachs & Co. may act as a principal or agent in such
transactions. The closing of the Offering referred to herein, which constituted
the initial public offering of the shares of Common Stock of the Company,
occurred on , 1996. See "Plan of Distribution".
GOLDMAN, SACHS & CO.
---------------------
The date of this Prospectus is , 1996.
<PAGE> 88
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
This Prospectus may be used by Goldman, Sachs & Co. in connection with
offers and sales related to market-making transactions in shares of Common Stock
effected from time to time after the commencement of the Offering. Goldman,
Sachs & Co. may act as principal or agent in such transactions, including as
agent for the counterparty when acting as principal or as agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
For a description of certain relationships and transactions between
Goldman, Sachs & Co. and their affiliates and the Company, see "Management,"
"Certain Transactions" and "Principal Stockholders".
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make a
market in the Common Stock following completion of the Offering. However, they
are not obligated to do so and any market-making may be discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors -- No Prior Market; Possible Volatility of Stock Price".
Goldman, Sachs & Co. have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority
without the prior specific written approval of such transactions by the
customer.
The Company has agreed to indemnify Goldman, Sachs & Co. with respect to
certain liabilities in connection with this Prospectus, including liabilities
under the Securities Act.
60
<PAGE> 89
[ALTERNATE BACK COVER]
---------------------------------------------------------
---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
The Company............................. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Dilution................................ 15
Capitalization.......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results
Operations............................ 19
Business................................ 25
Management.............................. 43
Certain Transactions.................... 49
Principal Stockholders.................. 53
Description of Capital Stock............ 54
Shares Eligible for Future Sale......... 57
Legal Matters........................... 59
Experts................................. 59
Additional Information.................. 59
Plan of Distribution.................... 60
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
APPLIED ANALYTICAL
INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
------------------
APPLIED ANALTYICAL LOGO
------------------
GOLDMAN, SACHS & CO.
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's costs and expenses in
connection with the sale and distribution of the securities being registered,
other than the underwriting discounts and commissions. All amounts shown are
estimates except for the Commission registration fee, the NASD filing fee and
the Nasdaq National Market entry fee.
<TABLE>
<S> <C>
SEC registration fee............................................................. $ 14,990
NASD filing fee.................................................................. 4,847
Nasdaq National Market System entry fee.......................................... 50,000
Blue Sky fees and expenses....................................................... 25,000
Transfer agent and registrar fees................................................ 5,000
Accounting fees and expenses..................................................... 250,000
Legal fees and expenses.......................................................... 250,000
Printing, engraving and mailing expenses......................................... 150,000
Miscellaneous.................................................................... 150,063
--------
Total.................................................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
When filed, immediately following the completion of this Offering, the
Company's Restated Certificate of Incorporation (the "Restated Certificate of
Incorporation") will provide that no director of the Company shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits
elimination or limitation of liability of directors for breach of fiduciary
duty. The Restated Certificate of Incorporation will provide that a director or
officer of the Company (a) shall be indemnified by the Company against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Company) brought against him by
virtue of his position as a director or officer of the Company if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful and (b)
shall be indemnified by the Company against all expenses (including attorneys'
fees) and amounts paid in settlement incurred in connection with any action by
or in the right of the Company brought against him by virtue of his position as
a director or officer of the Company brought against him by virtue of his
position as a director or officer of the Company if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company, except that no indemnification shall be made with
respect to any matter as to which such person shall have been adjudged to be
liable to the Company, unless a court determines that, despite such adjudication
but in view of all of the circumstances, he is entitled to indemnification of
such expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Company against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Company determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Company that the director or officer
did not meet the applicable standard of conduct required for indemnification, or
if the Company fails to make an indemnification payment within 60 days after
such payment is claimed by
II-1
<PAGE> 91
such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Company notice of the action for which
indemnity is sought and the Company has the right to participate in such action
or assume the defense thereof.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and in any criminal proceeding, if such person had
no reasonable cause to believe his conduct was unlawful; provided that, in the
case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 9 of the Underwriting Agreement, the Underwriters will be
obligated, under certain circumstances, to indemnify directors and officers of
the Company against certain liabilities, including liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common Stock, Class B Common Stock and Preferred Stock issued, and
the number of options granted, by the Company since June 1, 1993. Further
included is the consideration, if any, received by the Company for such shares
and options, and information relating to the section of the Securities Act, or
rule of the Securities and Exchange Commission under which exemption from
registration was claimed. All awards of options did not involve any sale under
the Securities Act and none of these securities was registered under the
Securities Act.
In February 1994, the Company issued 103,351 shares of Class B Common Stock
to an executive officer in consideration of a promissory note in the initial
principal amount of $32,860, payable March 31, 1999 and bearing interest at an
annual rate of 6.0%.
In November 1995, the Company issued 105,453 shares of Class B Common Stock
to an executive officer in consideration of a promissory note in the initial
principal amount of $166,865. The note matures in April 2001, bears interest at
an annual rate of 6.48% and requires bi-weekly payments of $484.34. In
connection with such issuance, the executive officer purchasing such shares
agreed to sell such shares to the Company at a price based on a formula, which
agreement expires upon completion of this Offering. Such executive officer has
pledged such shares to secure the note.
In November 1995, the Company issued 883 shares of Preferred Stock to
certain investors in return for cash payment of $22 million.
In March 1996, AAI awarded 105,453 shares of Class B Common Stock to 120
employees of the Company pursuant to the Company's 1995 Restricted Stock Award
Plan. Each such employee was required to pay $.001 per share in cash as
consideration for such award. Such shares vest over a period of time and
unvested shares are subject to forfeiture upon termination of employment, other
than upon the employee's death, disability or retirement.
In April 1996, the Company granted options to purchase an aggregate of
450,394 shares of Class B Common Stock to 95 employees pursuant to the Company's
1995 Stock Option Plan and 1996 Stock Option Plan at an exercise price per share
of $8.35.
In June 1996, the Company granted an option to purchase 2,214 shares of
Class B Common Stock to one employee pursuant to the Company's 1995 Option Plan
at an exercise price per share of $9.10.
II-2
<PAGE> 92
The shares of capital stock and securities issued in the above transactions
were offered and sold in reliance upon the exemption from registration under
Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated under
the Securities Act, relative to sales by an issuer not involving any public
offering.
Upon the completion of this Offering, the Company will issue approximately
15,434,103 shares of Common Stock upon the conversion of then outstanding shares
of Preferred Stock and Class B Common Stock. Options to purchase shares of Class
B Common Stock then outstanding will automatically become options to purchase
the same number of shares of Common Stock, with no other changes to the terms
and conditions thereof. The securities to be issued in such transactions will be
offered and sold in reliance upon the exemption from registration under Section
3(a)(9) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <S> <C>
1 -- Form of Underwriting Agreement
3.1 * -- Form of Restated Certificate of Incorporation of the Company
</TABLE>
<TABLE>
<C> <S> <C>
3.2 * -- Form of Restated By-laws of the Company
4.1 * -- Articles Fourth, Seventh, Eleventh and Twelfth of the form of Amended and
Restated Certificate of Incorporation of the Company (included in Exhibit 3.1)
4.2 * -- Article II of the form of Restated By-laws of the Company (included in Exhibit
3.2)
4.3 * -- Specimen Certificate for shares of Common Stock, $.001 par value, of the Company
5 * -- Opinion of Robinson, Bradshaw & Hinson, P.A. with respect to the validity of the
securities being offered
10.1 * -- Employment Agreement dated November 17, 1995 between the Company and Frederick
D. Sancilio
10.2 * -- Applied Analytical Industries, Inc. 1995 Restricted Stock Award Plan
10.3 * -- Applied Analytical Industries, Inc. 1995 Stock Option Plan
10.4 * -- Applied Analytical Industries, Inc. 1996 Stock Option Plan
10.5 * -- Stockholder Agreement dated as of November 17, 1995 among the Company, GS
Capital Partners II, L.P., GS Capital Partners II Offshore, L.P., Goldman, Sachs
& Co. Verwaltungs GmbH, Stone Street Fund 1995, L.P., Bridge Street Fund 1995,
L.P., Noro-Moseley Partners III, L.P., Wakefield Group Limited Partnership,
James L. Waters, Frederick D. Sancilio and the parties listed on Schedule 1
thereto
10.6 * -- Preferred Stock Purchase Agreement dated as of November 17, 1995 among the
Company, GS Capital Partners II, L.P., GS Capital Partners II Offshore, L.P.,
Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street Fund 1995, L.P., Bridge
Street Fund 1995, L.P., Noro-Moseley Partners III, L.P., Wakefield Group Limited
Partnership and James L. Waters
10.7 * -- Loan Agreement dated as of December 21, 1992 between NationsBank, N.A.
(formerly, NationsBank of North Carolina, N.A.) and the Company, together with
the First Amendment and Second Amendment thereto and agreement extending the
term thereof
10.8 * -- Loan Agreement dated as of November 1, 1988 between the Company and The New
Hanover County Industrial Facilities and Pollution Control Financing Authority
10.9 * -- Letter of Credit Reimbursement Agreement dated November 1, 1988 between
NationsBank, N.A. (formerly, NCNB National Bank of North Carolina) and the
Company, as amended
10.10* -- Lease Agreement dated as of March 7, 1994 between 5051 New Centre Drive, L.L.C.,
as landlord, and the Company, as tenant
10.11* -- Lease Agreement dated as of December 23, 1993 between I-40 Properties, as
landlord, and the Company, as tenant
</TABLE>
II-3
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <S> <C>
10.12* -- Development Agreement dated as of April 25, 1994 between the Company and
Endeavor Pharmaceuticals, Inc. (formerly, GenerEst, Inc.)
10.13* -- Development Agreement dated as of April 4, 1995 between the Company and Aesgen,
Inc.
10.14+* -- Option Agreement dated May 28, 1996 with respect to an option granted to the
Company to acquire a certain European contract research and development
organization
10.15* -- Letter dated August 22, 1996 from NationsBank, N.A. to the Company extending the
maturity of certain indebtedness
11 * -- Statement Regarding Computation of Per Share Earnings
23.1 -- Consent of Robinson, Bradshaw & Hinson, P.A.
23.2 -- Consent of Price Waterhouse LLP
24 * -- Powers of Attorney (included on signature page of Registration Statement as
initially filed)
27 * -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed.
+ Certain information has been omitted from this exhibit pursuant to a request
for confidential treatment.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Restated Certificate of
Incorporation and Restated By-laws of the Company and the laws of the State of
Delaware, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 94
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) It will file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) It will remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Wilmington, State
of North Carolina, on this 16th day of September, 1996.
By: /s/ R. FORREST WALDON
------------------------------------
R. Forrest Waldon
Vice President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- --------------------
<C> <S> <C>
FREDERICK D. SANCILIO* President and Director September 16, 1996
- --------------------------------------------- (Principal Executive
Frederick D. Sancilio, Ph.D. Officer)
MARK P. COLONNESE* Vice President and Chief September 16, 1996
- --------------------------------------------- Financial Officer
Mark P. Colonnese (Principal Financial
Officer and Principal
Accounting Officer)
WILLIAM H. UNDERWOOD* Executive Vice President September 16, 1996
- --------------------------------------------- and Director
William H. Underwood
JOSEPH H. GLEBERMAN* Director September 16, 1996
- ---------------------------------------------
Joseph H. Gleberman
CHARLES D. MOSELEY, JR.* Director September 16, 1996
- ---------------------------------------------
Charles D. Moseley, Jr.
Director September 16, 1996
JOHN M. RYAN*
- ---------------------------------------------
John M. Ryan
JAMES L. WATERS* Director September 16, 1996
- ---------------------------------------------
James L. Waters
- ---------------
*By: /s/ R. FORREST WALDON
-------------------------------------
(R. Forrest Waldon, Attorney-in-Fact)
</TABLE>
II-6
<PAGE> 96
SCHEDULE
VALUATION AND QUANTIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------- ------------ -------------------------------------- ------------ -------------
ADDITIONS
BALANCE AT --------------------------------------
BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS -- DESCRIBE -- DESCRIBE END OF PERIOD
- -------------------------- ------------ ---------------- ------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1993 Allowance for
doubtful accounts....... 66 123 97(1) 92
1994 Allowance for
doubtful accounts....... 92 114 81(1) 125
1995 Allowance for
doubtful accounts....... 125 23 78(1) 70
</TABLE>
- ---------------
(1) Amounts are write-offs of uncollectible accounts receivable.
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ --------------------------------------------------------------------- -------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement
3.1 * -- Form of Restated Certificate of Incorporation of the Company
</TABLE>
<TABLE>
<C> <C> <S> <C>
3.2 * -- Form of Restated By-laws of the Company
4.1 * -- Articles Fourth, Seventh, Eleventh and Twelfth of the form of Amended
and Restated Certificate of Incorporation of the Company (included in
Exhibit 3.1)
4.2 * -- Article II of the form of Restated By-laws of the Company (included
in Exhibit 3.2)
4.3 * -- Specimen Certificate for shares of Common Stock, $.001 par value, of
the Company
5 * -- Opinion of Robinson, Bradshaw & Hinson, P.A. with respect to the
validity of the securities being offered
10.1 * -- Employment Agreement dated November 17, 1995 between the Company and
Frederick D. Sancilio
10.2 * -- Applied Analytical Industries, Inc. 1995 Restricted Stock Award Plan
10.3 * -- Applied Analytical Industries, Inc. 1995 Stock Option Plan
10.4 * -- Applied Analytical Industries, Inc. 1996 Stock Option Plan
10.5 * -- Stockholder Agreement dated as of November 17, 1995 among the
Company, GS Capital Partners II, L.P., GS Capital Partners II
Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street
Fund 1995, L.P., Bridge Street Fund 1995, L.P., Noro-Moseley Partners
III, L.P., Wakefield Group Limited Partnership, James L. Waters,
Frederick D. Sancilio and the parties listed on Schedule 1 thereto
10.6 * -- Preferred Stock Purchase Agreement dated as of November 17, 1995
among the Company, GS Capital Partners II, L.P., GS Capital Partners
II Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone
Street Fund 1995, L.P., Bridge Street Fund 1995, L.P., Noro-Moseley
Partners III, L.P., Wakefield Group Limited Partnership and James L.
Waters
10.7 * -- Loan Agreement dated as of December 21, 1992 between NationsBank,
N.A. (formerly, NationsBank of North Carolina, N.A.) and the Company,
together with the First Amendment and Second Amendment thereto and
agreement extending the term thereof
10.8 * -- Loan Agreement dated as of November 1, 1988 between the Company and
The New Hanover County Industrial Facilities and Pollution Control
Financing Authority
10.9 * -- Letter of Credit Reimbursement Agreement dated November 1, 1988
between NationsBank, N.A. (formerly, NCNB National Bank of North
Carolina) and the Company, as amended
10.10* -- Lease Agreement dated as of March 7, 1994 between 5051 New Centre
Drive, L.L.C., as landlord, and the Company, as tenant
10.11* -- Lease Agreement dated as of December 23, 1993 between I-40
Properties, as landlord, and the Company, as tenant
10.12* -- Development Agreement dated as of April 25, 1994 between the Company
and Endeavor Pharmaceuticals, Inc. (formerly, GenerEst, Inc.)
10.13* -- Development Agreement dated as of April 4, 1995 between the Company
and Aesgen, Inc.
10.14+* -- Option Agreement dated May 28, 1996 with respect to an option granted
to the Company to acquire a certain European contract research and
development organization
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ --------------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.15* -- Letter dated August 22, 1996 from NationsBank, N.A. to the Company
extending the maturity of certain indebtedness
11 * -- Statement Regarding Computation of Per Share Earnings
23.1 -- Consent of Robinson, Bradshaw & Hinson, P.A.
23.2 -- Consent of Price Waterhouse LLP
24 * -- Powers of Attorney (included on signature page of Registration
Statement as initially filed)
27 * -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed.
+ Certain information has been omitted from this exhibit pursuant to a request
for confidential treatment.
<PAGE> 1
September 16, 1996
APPLIED ANALYTICAL INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-------------
UNDERWRITING AGREEMENT
----------------------
.............., 1996
Goldman, Sachs & Co.,
Cowen & Company,
Lehman Brothers Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Applied Analytical Industries, Inc., a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of ........ shares (the "Firm Shares") and, at the
election of the Underwriters, up to ........ additional shares (the "Optional
Shares") of Common Stock, par value $.001 per share ("Stock"), of the Company
(the Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-05535) (the
"Initial Registration Statement") in respect of the Shares, and as part
thereof the respective forms of prospectus relating to the initial
distribution of the Shares by the Underwriters in an underwritten public
offering and to offers and sales of Stock by Goldman, Sachs & Co. in
secondary transactions, has been filed with the Securities and Exchange
Commission (the "Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered to
you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such form;
other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the
<PAGE> 2
September 16, 1996
"Act") which became effective upon filing, no other document with
respect to the Initial Registration Statement has heretofore been filed
with the Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or
the Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus"; the various parts of the
September 16, 1996 Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed
with the Commission pursuant to Rule 424(b) under the Act in accordance
with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act
to be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration Statement,
if any, which became or hereafter becomes effective, each as amended at
the time such part of the registration statement became effective, is
hereinafter collectively called the "Registration Statement"; and such
forms of final prospectus relating to the initial distribution of the
Shares by the Underwriters in an underwritten public offering in the form
first filed pursuant to Rule 424(b) under the Act and to offers and sales
of Stock by Goldman, Sachs & Co. in secondary transactions in the most
recent form filed pursuant to Rule 424(b) under the Act, are hereinafter
called the "Public Offering Prospectus" and the "Secondary Transactions
Propectus", respectively, and collectively, the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto, and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any entity 50% or more of the outstanding
voting securities of which are owned directly or indirectly by the Company
(each, a "subsidiary"), has sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity,
2
<PAGE> 3
September 16, 1996
whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or any
increase in excess of $250,000 in the long-term debt of the Company or any
of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the Prospectus;
(e) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction or is
subject to no material liability or disability by reason of the failure to
be so qualified in any such jurisdiction; and each subsidiary of the
Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description of the Stock contained in
the Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
3
<PAGE> 4
September 16, 1996
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or qualification of
or with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares, registration of Stock under the Securities Exchange
Act of 1934 (the "1934 Act") and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(j) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party
or by which it or any of its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings (other than pending review by the U.S. Food and
Drug Administration (the "FDA") of any abbreviated new drug application
and related filings submitted by the Company and routine FDA audits of the
Company, its facilities and data supporting filings made by clients of the
Company) pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries
is the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(n) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes; and
(o) Price Waterhouse, LLP, who have certified certain financial
statements of the Company and its subsidiaries, and McGladrey & Pullen,
who have certified certain financial statements of the Company and its
subsidiaries, are each independent public accountants as required by the
Act and the rules and regulations of the Commission thereunder.
4
<PAGE> 5
September 16, 1996
(p) The Company and its subsidiaries are in material compliance with
all current applicable statutes, rules, regulations, standards, guides or
orders administered or issued by the FDA and any agency of any foreign
government, to the extent applicable; neither the Company nor any of its
subsidiaries has received any communication (including, any warning
letter) or is otherwise aware of any action, proceeding or investigation
pending or, to the best knowledge of the Company, threatened, including,
without limitation, any warning letter, prosecution, injunction, seizure,
civil fine or recall, alleging that the Company is not in compliance in
all material respects with any and all applicable laws, regulations or
orders implemented by the FDA, or implemented by the relevant state, local
or international agency responsible for regulating the pharmaceutical
industry, including but not limited to, allegations related to drug
development establishments operated by the Company or its subsidiaries and
drug applications submitted directly by the Company or its subsidiaries,
other than non-material correspondence received from the FDA in connection
with the filing and review of applications; with regard to all abbreviated
new drug applications and related filings by the Company or any of its
subsidiaries in its own name or, to its knowledge, all abbreviated new
drug applications and related filings by third parties in connection with
which the Company expects to receive revenue pending before the FDA, there
is no correspondence or other communications from the FDA questioning the
approvability of such applications other than as would not have a material
adverse effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries;
(q) (A) The Company and its subsidiaries own or have valid, binding,
enforceable licenses or other rights to use any patents, trademarks,
trade names, service marks, service names, copyrights, and other
proprietary intellectual property rights ("Intellectual Property")
necessary to conduct the business of the Company and its subsidiaries in
the manner presently conducted and, to the best knowledge of the Company,
proposed to be conducted, in the United States and to conduct the business
of the Company and its subsidiaries in the manner presently conducted and,
to the best knowledge of the Company proposed to be conducted, outside the
United States other than as would not have a material adverse effect on
the current or future consolidated financial position, stockholders'
equity or results of operations of the Company and its subsidiaries, in
each case without any conflict with the rights of others; and (B) the
information contained in the Registration Statement and Prospectus
concerning patents issued or licensed to, or patent applications filed on
behalf of, the Company and its subsidiaries is accurate in all material
respects; and (C) neither the Company nor its subsidiaries has received
any notice from any other person of infringment of or conflict with (and
knows of no such infringement of or conflict with) asserted rights of
others with respect to any Intellectual Property or any trade secrets,
proprietary information, inventions, know-how, processes and procedures
owned or used by or licensed to the Company or its subsidiaries;
(r) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against losses and risks and in
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries has any
reason to believe that they will not be able to renew their existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue their
businesses at a cost that would not have a material adverse effect on the
current or future consolidated financial position, stockholders' equity or
results of
5
<PAGE> 6
September 16, 1996
operations of the Company and its subsidiaries except as described or
contemplated in the Prospectus;
(s) The Company and its subsidiaries are in compliance with all
applicable existing Federal, state, local, and foreign laws and
regulations relating to protection of human health or the environment or
imposing liability or standards of conduct concerning any Hazardous
Material (as hereinafter defined) ("Environmental Laws"), except where
such noncompliance with Environmental Laws would not, individually or in
the aggregate, have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries. The term "Hazardous
Material" means (1) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, (2) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (3) any petroleum or petroleum
product, (4) any polychlorinated biphenyl, and (5) any pollutant or
contaminant or hazardous, dangerous, or toxic chemical, material, waste or
substance regulated under or within the meaning of any other Environmental
Law; and
(t) There are no debt securities or preferred stock of the Company
which are rated by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $................, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ................... Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery
(as defined in Section 4 hereof) or, unless you and the Company otherwise
agree in writing, earlier than two or later than ten business days after the
date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Public Offering Prospectus.
6
<PAGE> 7
September 16, 1996
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in
such names as Goldman, Sachs & Co. may request upon at least forty-eight
hours' prior notice to the Company, shall be delivered by or on behalf of
the Company to Goldman, Sachs & Co., for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer, payable to the order of the Company in Federal
(same day) funds. The Company will cause the certificates representing
the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with
respect thereto at the office of Goldman, Sachs & Co., 85 Broad Street,
New York, New York 10004 (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30
a.m., New York City time, on ............., 1996 or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing,
and, with respect to the Optional Shares, 9:30 a.m., New York City time,
on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares in accordance with Section 2 hereof, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called
the "Second Time of Delivery", and each such time and date for delivery is
herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(l) hereof, will be delivered at the
offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza,
New York, New York 10004 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at such Time of Delivery. A
meeting will be held at the Closing Location at .......p.m., New York City
time, on the New York Business Day next preceding such Time of Delivery,
at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business
Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which
is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Public Offering Prospectus in a form approved by
you and to file the Public Offering Prospectus pursuant to Rule 424(b)
under the Act not later than the Commission's close of business on the
second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any supplement
to the Registration Statement or the Public Offering Prospectus during the
Public Offering Period (as defined below) which shall be disapproved by
you promptly after reasonable notice thereof; to advise you, promptly
after it receives notice thereof during the Public Offering Period, of the
time when any amendment to the Registration Statement has been filed or
becomes effective during such period or any supplement to the Public
Offering Prospectus or any amended Public Offering Prospectus has been
filed during such period and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof during the Public Offering
7
<PAGE> 8
September 16, 1996
Period, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Public Offering Prospectus
or for additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus or suspending any such qualification during the Public
Offering Period, promptly to use its best efforts to obtain the withdrawal of
such order (the period beginning on the date hereof and continuing for as long
as the delivery of a prospectus is required in connection with the initial
offering and sale of the Shares by the Underwriters as contemplated by the
Public Offering Prospectus, or in connection with any subsequent offer or sale
of Stock by a dealer other than Goldman, Sachs & Co. during the period
specified in Rule 174 under the Act is herein called the "Public Offering
Period");
(b) Promptly during the Public Offering Period from time to time to
take such action as you may reasonably request to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you
may request and to comply with such laws so as to permit the continuance
of sales and dealings therein in such jurisdictions during such period,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service
of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time
during the Public Offering Period, to furnish the Underwriters with copies
of the Public Offering Prospectus in New York City in such quantities as
you may reasonably request, and, if the delivery of a prospectus is
required at any time prior to the expiration of nine months after the time
of issue of the Public Offering Prospectus in connection with any offering
or sale of the Shares by the Underwriters and if at such time any event
shall have occurred as a result of which the Public Offering Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made when such Public Offering Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Public Offering Prospectus in order to
comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may reasonably request of an amended Public Offering
Prospectus or a supplement to the Public Offering Prospectus which will
correct such statement or omission or effect such compliance, and in case
any Underwriter is required to deliver a prospectus in connection with any
offering or sale of any of the Shares by the Underwriters at any time nine
months or more after the time of issue of the Public Offering Prospectus,
upon your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an
amended or supplemented Public Offering Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its
8
<PAGE> 9
September 16, 1996
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations thereunder (including, at the option
of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, (i) not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder any securities of the Company that are substantially similar to the
Shares, including but not limited to any securities that are convertible into
or exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent and (ii) during such 180-day period, not to
accelerate the vesting of any shares of Common Stock awarded under the 1995
Restricted Stock Award Plan and not to deliver certificates representing any
shares of Common Stock under the 1995 Restricted Stock Award Plan;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any inter-dealer
quotation system or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional information
concerning the business and financial condition of the Company as you may from
time to time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), to file a Rule
462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and
at the time of filing to either pay to the Commission the filing fee for the
462(b) Registration Statement or give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
9
<PAGE> 10
September 16, 1996
6. The Company agrees with Goldman, Sachs & Co.:
(a) To prepare the Secondary Transactions Prospectus in a form approved
by Goldman, Sachs & Co. and to file such Prospectus pursuant to Rule 424(b)
under the Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Act; to make no further amendment or any supplement to the Registration
Statement or the Secondary Transactions Prospectus during the Secondary
Transactions Period (as defined below) which shall be disapproved by Goldman,
Sachs & Co. promptly after reasonable notice thereof (it being understood that,
when Form S-2 or S-3 under the Act is available to the Company, the Company may
amend the Registration Statement so as to be on such form, or may file a new
registration statement on such form (in which case any reference herein to the
Registration Statement or the Prospectus shall include such new registration
and the prospectus contained therein in the form first filed pursuant to Rule
424(b) under the Act, respectively), and thereafter any information required to
be included in the Registration Statement or the Secondary Transactions
Prospectus may be incorporated therein by reference as permitted by such form);
to advise Goldman, Sachs & Co., promptly after the Company receives notice
thereof, of the time when the Registration Statement, or any amendment thereto,
has been filed or becomes effective during the Secondary Transactions Period,
or any supplement to the Secondary Transactions Prospectus or any amended
Secondary Transactions Prospectus has been filed during such period, and to
furnish Goldman, Sachs & Co. with copies thereof; to advise Goldman, Sachs &
Co., promptly after the Company receives notice thereof during the Secondary
Transactions Period, of the issuance by the Commission of any stop order or of
any order preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus or suspending any such qualification during the Secondary
Transactions Period, to use promptly its reasonable efforts to obtain the
withdrawal of such order (the period beginning on the date hereof and
continuing for as long as may be required under applicable law, in the
reasonable judgment of Goldman, Sachs & Co. after consultation with the
Company, in order to offer and sell Stock as contemplated by the Secondary
Transactions Prospectus, is herein called the "Secondary Transactions Period");
(b) Promptly from time to time to take such action as Goldman, Sachs &
Co. may reasonably request to qualify the Shares for offering and sale during
the Secondary Transactions Period under the securities laws of such
jurisdictions as Goldman, Sachs & Co. may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in such
jurisdictions during such period, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time during the
Secondary Transactions Period, to furnish Goldman, Sachs & Co. with copies of
the Secondary
10
<PAGE> 11
September 16, 1996
Transactions Prospectus in such quantities as Goldman, Sachs &
Co. may reasonably request, and, if at any time during such period any
event shall have occurred as a result of which the Secondary
Transactions Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Prospectus
is to be delivered during such period, not misleading, or, if for any
other reason it shall be necessary during such period to amend or
supplement the Secondary Transactions Prospectus or to amend the
Registration Statement in order to comply with the Act or to file
under the 1934 Act any document incorporated by reference in such
Prospectus in order to comply with the Act or the 1934 Act, to notify
Goldman, Sachs & Co. and upon its request to file such document and to
prepare and furnish without charge to Goldman, Sachs & Co. as many
copies as it may from time to time during such period reasonably
request of an amended Secondary Transactions Prospectus or a
supplement to the Secondary Transactions Prospectus which will correct
such statement or omission or effect such compliance;
(d) During the Secondary Transactions Period, to furnish to
Goldman, Sachs & Co. copies of all reports or other communications
(financial or other) furnished to stockholders generally, and to
deliver to Goldman, Sachs & Co. (i) as soon as they are available,
copies of any reports and financial statements furnished to or filed
with the Commission or any inter-dealer quotation system or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as Goldman, Sachs &
Co. may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished
to its stockholders generally or to the Commission); and
(e) To use its reasonable efforts to furnish or cause to be
furnished to Goldman, Sachs & Co. upon its request at reasonable
intervals, when the Registration Statement or the Secondary
Transactions Prospectus shall be amended or supplemented during the
Secondary Transactions Period, written opinions of counsel for the
Company, a letter from the independent accountants who have certified
the financial statements included in the Registration Statement as
then amended and certificates of officers of the Company, in each case
in form and substance reasonably satisfactory to you, all to the
effect specified in subsections (c), (d), (e), (f), (g) and (l),
respectively, of Section 8 hereof (as modified to relate to the
Registration Statement and the Secondary Transactions Prospectus as
then amended or supplemented).
Notwithstanding the foregoing provisions, if at any time the Company
determines in the exercise of its reasonable judgment that it is in possession
of material, non-public information that it would not be required to disclose
publicly in the absence of a registration of Stock under the Act, the Company
may, upon notice to Goldman, Sachs & Co., cease to comply with any of its
obligations under this Section 6, but only for a period or periods that the
Company reasonably determines are necessary in order to avoid such premature
disclosure and in any event not to exceed 90 days in the aggregate during any
period of 12 consecutive calendar months. Upon receipt of any such notice,
Goldman, Sachs & Co. shall cease using the Secondary Transactions Prospectus or
any amendment or supplement thereto until it receives notice from the Company
that it may resume using such document.
11
<PAGE> 12
September 16, 1996
7. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum and
closing documents (including any compilations thereof) for the sale of the
Shares by the Underwriters pursuant to the Public Offering Prospectus and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters, and counsel for Goldman, Sachs & Co. during the Secondary
Transactions Period, in connection with such qualification and in connection
with the Blue Sky survey; (iv) all fees and expenses in connection with listing
the Shares on the NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares by the Underwriters pursuant to the Public
Offering Prospectus; (vi) the cost of preparing stock certificates; (vii) the
cost and charges of any transfer agent or registrar; (viii) all reasonable
fees, disbursements and expenses incurred pursuant to Section 6(e) hereof; and
(ix) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section. It is understood, however, that, except as provided in this Section,
and Sections 9 and 12 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected
with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b),
the Rule 462(b) Registration Statement shall have become effective by
10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop
order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, shall have furnished to you such opinion or opinions (a
draft of such opinion is attached as Annex II(a) hereto) dated such Time
of Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus and such other related matters as
you may reasonably request, and such counsel
12
<PAGE> 13
September 16, 1996
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Robinson, Bradshaw & Hinson, P.A., counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and other)
to own its properties and conduct its business as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable, and all of the
Shares have been duly and validly authorized and, when issued and
delivered against payment therefor as provided in this Agreement,
will be duly and validly issued and fully paid and non-assessable;
and the Shares conform to the description of the Stock contained
in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification or is subject to no material liability or disability
by reason of failure to be so qualified in any such jurisdiction
(such counsel being entitled to rely in respect of the opinion in
this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company,
provided that such counsel shall state that they believe that both
you and they are justified in relying upon such opinions and
certificates);
(iv) Each subsidiary of the Company is listed on Annex A to
such opinion (such counsel being entitled to rely in respect of
the opinion in the foregoing clause upon certificates of officers
of the Company or its subsidiaries provided that such counsel
shall state that they believe that both you and they are justified
in relying upon such certificates) and each United States
subsidiary has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation; and all of the issued shares of capital stock of
each such subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable, and (except for
directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities
or claims (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in
respect to matters of fact upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(v) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiarie
is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined
13
<PAGE> 14
September 16, 1996
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect
on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and
its subsidiaries; and, to the best of such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not
(1) conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease,
judgment or other agreement or instrument listed on Annex B to
such opinion or of the provisions of the Certificate of
Incorporation or By-laws of the Company or (2) violate any federal
law of the United States, any law of the State of North Carolina
or the Delaware General Corporation Law applicable to the Company
or any order known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; provided, however, that,
for the purpose of this clause (2), such counsel need not express
an opinion with respect to state securities laws and federal
securities laws, to the extent such federal securities laws are
covered in the opinion in subsection (xi) hereof;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the
Act of the Shares, registration of the Stock under the 1934 Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(ix) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the
caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are
accurate, complete and fair;
(x) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined
in the Investment Company Act; and
(xi) The Registration Statement, as of its effective date,
and the Prospectus and any further amendments and supplements
thereto made by the Company prior to such Time of Delivery, as of
the date thereof, (other than the financial statements and related
schedules or other financial information therein, as to which such
counsel need express no opinion) appear on their face to be
appropriately
14
<PAGE> 15
September 16, 1996
responsive in all material respects to the requirements of the
Act and the rules and regulations thereunder; although they do
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, except for those referred to in the
opinion in subsection (ix) of this section 8(c), nothing has come
to their attention that has caused them to believe that, as of
its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules or other financial information therein, as to which such
counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related
schedules or other financial information therein, as to which such
counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the
financial statements and related schedules or other financial
information therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits
to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and they do not know of any amendment the
Registration Statement required to be filed or of any contracts
or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be described
in the Registration Statement or the Prospectus which are not
filed or described as required;
(d) R. Forrest Waldon, Vice President and General Counsel of the
Company, shall have furnished to you his written opinion (a draft of such
opinion is attached as Annex II(c) hereto), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation
of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement, lease, judgment or other agreement or
instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties;
15
<PAGE> 16
September 16, 1996
(ii) The Company and its subsidiaries have good and
marketable title in fee simple to all real property owned by them,
in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings
held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the
Company and its subsidiaries (in giving the opinion in this
clause, such counsel may state that he is relying upon a general
review of the titles of the Company and its subsidiaries, upon
opinions of local counsel and abstracts, reports and policies of
title companies rendered or issued at or subsequent to the time of
acquisition of such property by the Company or its subsidiaries,
upon opinions of counsel to the lessors of such property and, in
respect to matters of fact, upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall
state that he believes that both you and he are justified in
relying upon such opinions, abstracts, reports, policies and
certificates);
(iii) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or, to his knowledge
after due inquiry, By-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan
agreement, lease, judgment or other agreement or instrument to
which it is a party or by which it or any of its properties may be
bound, except where such a default would not, individually or in
the aggregate, have a material adverse effect on the current or
future consolidated financial position, business prospects,
stockholders' equity or results of operations of the Company and
its subsidiaries; and
(iv) Although he does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to
his attention that has caused him to believe that, as of its
effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules or other financial information therein, as to which
such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related schedules or other financial information
therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment
or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules or other financial information therein, as to which
16
<PAGE> 17
September 16, 1996
such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and he
does not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as
required;
(e) On the date of the Public Offering Prospectus at a time prior to
the execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and during the
Public Offering Period and also at each Time of Delivery, Price
Waterhouse, LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory
to you, to the effect set forth in Annex I hereto (the executed copy of
the letter delivered prior to the execution of this Agreement is attached
as Annex I(a) hereto and a draft of the form of letter to be delivered on
the effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(f) On the date of the Public Offering Prospectus at a time prior to
the execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and during the
Public Offering Period and also at each Time of Delivery, McGladrey &
Pullen, LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory
to you, to the effect set forth in Annex I(c) hereto;
(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the
capital stock or any increase in excess of $250,000 in the long-term debt
of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any such
case described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities
on NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or
17
<PAGE> 18
September 16, 1996
war, if the effect of any such event specified in this Clause (iv)
in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been
duly approved for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of the Stockholders named in
Schedule II hereto, substantially to the effect set forth in Section 5(e)
hereof in form and substance satisfactory to you;
(k) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(l) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, as to the matters set
forth in subsections (a) and (g) of this Section and as to such other
matters as you may reasonably request.
9. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending
any such action or claim as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but
only to the extent,
18
<PAGE> 19
September 16, 1996
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Goldman, Sachs & Co. expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under
such subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under
such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, in connection with any one
action or claim, or separate but substantially similar actions or claims
arising out of the same general allegations, be liable for the fees and
expenses of more than one separate firm of attorneys at any time for all
indemnified parties, except to the extent that local counsel, in addition
to regular counsel, is required in order to defend effectively against
such action or claim. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of,
or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party
is an actual or potential party to such action or claim) unless such
settlement, compromise or judgment (i) includes an unconditional release
of the indemnified party from all liability arising out of such action or
claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other from the offering of the
Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party
failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified
19
<PAGE> 20
September 16, 1996
party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities
(or actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the sale of the Shares (before
deducting expenses) received by the Company in the underwritten public
offering bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares purchased in the
underwritten public offering, in each case as set forth in the table on
the cover page of the Public Offering Prospectus. The relative fault
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d).
The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations in this subsection (d) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section 9 shall be in addition
to any liability which the respective Underwriters may otherwise have and
shall extend, upon the same terms and conditions, to each officer and
director of the Company and to each person, if any, who controls the
Company within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company shall be
entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to you to
20
<PAGE> 21
September 16, 1996
purchase such Shares on such terms. In the event that, within the
respective prescribed periods, you notify the Company that you have so
arranged for the purchase of such Shares, or the Company notifies you that
it has so arranged for the purchase of such Shares, you or the Company
shall have the right to postpone such Time of Delivery for a period of not
more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees to file promptly
any amendments to the Registration Statement or the Prospectus which in
your opinion may thereby be made necessary. The term "Underwriter" as used
in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of
Delivery, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro
rata share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, or if
the Company shall not exercise the right described in subsection (b) above
to require non-defaulting Underwriters to purchase Shares of a
defaulting Underwriter or Underwriters, then this Agreement (or, with
respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 7 hereof
and the indemnity and contribution agreements in Section 9 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for
its default.
11. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
Anything herein to the contrary notwithstanding, the indemnity agreement
of the Company in subsection (a) of Section 9 hereof, the representations and
warranties in subsections (b) and (c) of Section 1 hereof and any
representation or warranty as to the accuracy of the Registration Statement or
the Prospectus contained in any certificate furnished by the Company pursuant
to Section 8
21
<PAGE> 22
September 16, 1996
hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by the Company of expenses incurred or paid in
the successful defense of any action, suit or proceeding) arising under the
Act, shall not extend to the extent of any interest therein of a controlling
person or partner of an Underwriter who is a director, officer or controlling
person of the Company when the Registration Statement has become effective,
except in each case to the extent that an interest of such character shall have
been determined by a court of appropriate jurisdiction as not against public
policy as expressed in the Act. Unless in the opinion of counsel for the
Company the matter has been settled by controlling precedent, the Company will,
if a claim for such indemnification is asserted, submit to a court of
appropriate jurisdiction the question of whether such interest is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
12. If this Agreement shall be terminated pursuant to Section 10 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 7 and 9 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 7 and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 9(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
14. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 9
and 11 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
22
<PAGE> 23
September 16, 1996
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Applied Analytical Industries, Inc.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Cowen & Company
Lehman Brothers Inc.
- ---------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
23
<PAGE> 24
September 16, 1996
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co.
Cowen & Company
Lehman Brothers Inc.
[NAMES OF OTHER UNDERWRITERS]
__________ _____________
Total..................
========== =============
</TABLE>
24
<PAGE> 25
September 16, 1996
ANNEX I
Pursuant to Section 8(e) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations thereunder; and,
if applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected
financial data, pro forma financial information, financial forecasts
and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as
indicated in their reports thereon, copies of which have been separately
furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have been
separately furnished to the Representatives and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations, nothing came to their attention that
cause them to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in
the audited consolidated financial statements for such five fiscal years
which were included or incorporated by reference in the Company's Annual
Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and
on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial
F-1
<PAGE> 26
September 16, 1996
statements and other information referred to below, a reading of the
latest available interim financial statements of the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, or (ii) any material modifications should be made to
the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus for them to be in conformity with
generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause (A)
and any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the basis for
the audited consolidated financial statements included in the
Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements
of the Act and the published rules and regulations thereunder or
the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on the
date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in consolidated
net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the
F-2
<PAGE> 27
September 16, 1996
Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts
of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified procedures,
not constituting an examination in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives, which are derived
from the general accounting records of the Company and its subsidiaries,
which appear in the Prospectus, or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives,
and have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
F-3
<PAGE> 1
EXHIBIT 23.1
[ROBINSON, BRADSHAW & HINSON, P.A. LETTERHEAD]
September 16, 1996
Applied Analytical Industries, Inc.
5051 New Centre Drive
Wilmington, North Carolina 28403
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We hereby consent to be named in the above-captioned Registration
Statement and in the prospectus that constitutes Part I thereof as attorneys
who will pass upon legal matters in connection with the validity of the shares
of common stock, $.001 par value per share, offered thereby and to the
continued inclusion of our opinion dated August 8, 1996 as Exhibit 5.0
thereto.
Sincerely,
ROBINSON, BRADSHAW & HINSON, P.A.
/s/ Stephen M. Lynch
--------------------
Stephen M. Lynch
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 30, 1996, except as
to Note 11 which is as of August 20, 1996, relating to the financial statements
of Applied Analytical Industries, Inc., which appears in such Prospectus. We
also consent to the application of such report to the Financial Statement
Schedule for the three years ended December 31, 1995 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
Price Waterhouse LLP
Raleigh, North Carolina
September 16, 1996
