<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3781 04-0287849
(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: / /
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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<CAPTION>
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PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE(2) FEE
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<S> <C> <C> <C>
Common Stock, $.001 par value.................. 3,105,000 $43,470,000 $14,990
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</TABLE>
(1) Includes 405,000 shares subject to the Underwriters' over-allotment option.
An indeterminate number of shares 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.
---------------------
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
<TABLE>
<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; Underwriting
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant................................. Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds; The
Company; Dividend Policy; Dilution;
Capitalization; Selected Consolidated
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:
<TABLE>
<CAPTION>
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 JUNE 7, 1996
2,700,000 SHARES
APPLIED ANALTYICAL LOGO
APPLIED ANALYTICAL INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $.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 of Common Stock offered hereby 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" ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
Application has been made to have the Common Stock 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. See
"Underwriting".
(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]
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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 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 nine products to clients, including four products
approved by the FDA, and patented ten drug technologies. Since 1991, the
Company's annual net income has increased from $602,000 to $3.2 million, an
average compound annual growth rate of 52%. 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, 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. 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 market 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. The Company is currently
providing critical development services for 48 products intended for submission
to or under review by the U.S. 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
3
<PAGE> 8
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 $3.5 billion in 1990 to $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 ten patents and four 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 two 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 significant 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 38% 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 secured, 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................................... 15,881,709 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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
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 $ 8,309 $ 9,925
Cost of sales.............. 8,213 8,989 9,731 14,533 14,259 3,626 4,118
Selling expense............ 2,815 2,871 3,654 4,390 4,913 1,269 1,544
General and administrative
expense.................. 5,519 7,329 8,738 8,485 8,171 2,097 2,273
Research and development
expense.................. 375 207 1,273 2,394 3,326 651 852
Other expense, net......... 727 199 156 440 1,130 172 29
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 602 2,251 2,826 2,640 2,840 494 1,109
Income taxes............... -- -- -- -- 39 -- 454
Equity income (loss)(b).... -- -- -- (444) 444 (462) --
------- ------- ------- ------- ------- ------- -------
Net income................. $ 602 $ 2,251 $ 2,826 $ 2,196 $ 3,245 $ 32 $ 655
======== ======== ======== ======== ======== ======== ========
PRO FORMA DATA(C):
Pro forma income taxes..... $ 247 $ 878 $ 1,125 $ 1,118 $ 1,129 $ 203
Pro forma net income
(loss)................... 355 1,373 1,701 1,078 2,116 (171)
Pro forma earnings per
common share............. $ .18 $ .06
ADDITIONAL DATA:
Income before research and
development
expense(d)............... $ 977 $ 2,458 $ 4,099 $ 5,034 $ 6,166 $ 1,145 $ 1,961
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(A)(E)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $13,679 $45,422
Property and equipment, net..................................... 11,564 11,564
Total assets.................................................... 38,148 69,891
Long-term debt, less current maturities......................... 4,639 4,639
Total stockholders' equity...................................... 22,646 54,390
</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 net income 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 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 and change of par
value on March 31, 1996 from no par value to $.001 per share and to the
conversion into Common Stock of all outstanding shares of Preferred Stock
and Class B Common Stock.
(d) 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.
(e) 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".
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 U.S. Food and Drug Administration (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. 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.
All facilities and manufacturing techniques used for the manufacturing of
products for clinical use or for sale in the United States must be operated in
conformity with current Good Manufacturing Practices ("GMP") regulations, the
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 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 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
7
<PAGE> 12
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
operations 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), a major U.S.-based pharmaceutical company and Endeavor (a venture 38%
owned by the Company) accounted for approximately 16.0%, 11.2% and 10.2%,
respectively, of the Company's net sales. During the first three months of 1996,
one client (Endeavor) accounted for approximately 15.8% of the Company's net
sales, with Aesgen, Inc. accounting for 6.9% 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. 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, Inc. 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" 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 timing of the receipt of licensing revenues, including
royalties, the timing of startup expenses for new ventures or for internal
development projects with outsourced clinical trials, the completion,
commencement or cancellation of significant contracts, progress of ongoing
contracts and 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 management employee of Endeavor,
a company in which AAI owns 38% 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 -- Employees".
8
<PAGE> 13
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 activity 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 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-
9
<PAGE> 14
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 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, Inc.
("Aesgen"), which develops generic pharmaceutical products. Approximately 30% of
Aesgen's outstanding common stock is held by a corporation owned by holders of
substantially all of the Company's outstanding shares of capital stock. The
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 Chief Executive Officer, 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 42% 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 Common Stock. The Company owns approximately 38%
of the fully diluted common equity of Endeavor. Dr. Sancilio and William H.
Underwood, executive officers and directors of the Company, and two other
10
<PAGE> 15
executive officers of AAI serve on the nine-member board of directors of
Endeavor. 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 Dr. Sancilio and Mr. Waters each 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
Following this Offering, assuming that the Underwriters' over-allotment
option is not exercised, certain of the Company's executive officers will
beneficially own approximately 34.4% 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
was determined through negotiations between AAI and the Underwriters and may not
represent prices which 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 and 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 15,881,709 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 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 2,636,331 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
options to purchase a total of 450,444 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".
11
<PAGE> 16
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 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 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 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 48 products 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 ten patents and four 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 committed a growing proportion of its technical resources
on internal development and 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
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 generic hormone products then under development by AAI. The Company
owns approximately 38% of the fully diluted common equity of Endeavor.
The Company was incorporated in 1986, although its corporate predecessor
was initially founded in 1979. The Company's principal executive offices are
located at 5051 New Centre Drive, Wilmington, North Carolina 28403, and its
telephone number 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 of 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 not 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 of this Offering, and the Company
does not intend to apply any of the net proceeds of this Offering to fund such
acquisition, if 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 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 March 31, 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 granted
and exercised on March 31, 1996, was $23.8 million, or $1.78 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 March
31, 1996 would have been $55.6 million, or $3.45 per share. This represents an
immediate increase in net tangible book value of $1.67 per share to existing
stockholders and an immediate dilution of $9.55 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 March 31,
1996......................................................... $1.78
-----
Increase in net tangible book value per share attributable to
new investors................................................ $1.67
-----
As adjusted net tangible book value per share after Offering...... 3.45
------
Dilution per share to new investors............................... $ 9.55
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 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........... 13,390,453 83.2% $23,182,000 39.8% $ 1.73
New investors................... 2,700,000 16.8 35,100,000 60.2 13.00
---------- ------- ----------- ------- -------------
Total................. 16,090,453 100.0% $58,282,000 100.0%
========== ====== ============ ======
</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 March
31, 1996, (ii) the exercise of 450,444 options outstanding on the date of this
Prospectus, as if such options had been granted and exercised on March 31, 1996
net of the effect of 241,700 options that, pursuant to the 1995 Option Plan,
would be satisfied by shares to be repurchased from existing shareholders, and
(iii) no exercise of the Underwriters' over-allotment option. See
"Capitalization" 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 March 31, 1996, (ii) 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, to the one-for-
.6325 split of the Common Stock and Class B Common Stock effected on June 7,
1996, to the change in par value on March 31, 1996 from no par value to $.001
per share and 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>
MARCH 31, 1996
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt.............................................. $ 2,928 $ 2,928 $ 2,928
======== ======== ==========
Long-term debt............................................... $ 4,639 $ 4,639 $ 4,639
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, no par value, 1,000,000 shares
authorized, 446,798 shares issued and outstanding actual;
no par value 13,181,709 shares issued and outstanding pro
forma; $.001 par value, 50,000,000 shares authorized,
15,881,709 shares issued and outstanding as adjusted(c):... 150 13 16
Class B Non-voting Common Stock, no par value; 30,000,000
shares authorized, 10,098,622 shares issued and outstanding
actual; no shares issued and outstanding pro forma; no
shares issued and outstanding as adjusted(c)(d):........... 661 -- --
Additional paid-in capital................................... 21,510 22,308 54,049
Retained Earnings............................................ 1,207 1,207 1,207
Class A Common Stock held in treasury; 40,480 shares, at
cost....................................................... (244) (244) (244)
Stock subscription receivable................................ (149) (149) (149)
Deferred compensation........................................ (489) (489) (489)
------- --------- -----------
Total stockholders' equity................................. 22,646 22,646 54,390
------- --------- -----------
Total long-term debt and stockholders' equity...... $27,285 $27,285 $59,029
======== ======== ==========
</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 450,444 shares of Class B Common Stock, or following
completion of this Offering 450,444 shares of Common Stock, issuable upon
exercise of stock options, all of which were granted after March 31, 1996,
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 three
months ended March 31, 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 three months ended March
31, 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
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 $8,309 $9,925
Cost of sales.............. 8,213 8,989 9,731 14,533 14,259 3,626 4,118
Selling expense............ 2,815 2,871 3,654 4,390 4,913 1,269 1,544
General and administrative
expense.................. 5,519 7,329 8,738 8,485 8,171 2,097 2,273
Research and development
expense.................. 375 207 1,273 2,394 3,326 651 852
Other expense, net......... 727 199 156 440 1,130 172 29
------- ------- ------- ------- -------- ------ --------
Income before income
taxes.................... 602 2,251 2,826 2,640 2,840 494 1,109
Income taxes............... -- -- -- -- 39 -- 454
Equity income (loss)....... -- -- -- (444) 444 (462) --
------- ------- ------- ------- -------- ------ --------
Net income................. $ 602 $ 2,251 $ 2,826 $ 2,196 $ 3,245 $ 32 $ 655
======= ======= ======= ======= ======== ====== ========
PRO FORMA DATA
(UNAUDITED)(A):
Pro forma income taxes..... $ 247 $ 878 $ 1,125 $ 1,118 $ 1,129 $ 203
Pro forma net income
(loss)................... 355 1,373 1,701 1,078 2,116 (171)
Pro forma earnings per
common share............. $ .18 $ .06
Weighted average common
shares outstanding....... 11,578,079 11,578,079
ADDITIONAL DATA(B):
Income before research and
development expense...... $ 977 $ 2,458 $ 4,099 $ 5,034 $ 6,166 $1,145 $ 1,961
BALANCE SHEET DATA
(AT PERIOD END)
Working capital............ $ 1,386 $ 1,801 $ 2,651 $ 569 $13,824 $13,679
Property and equipment,
net...................... 6,454 8,477 9,121 10,782 10,904 11,564
Total assets............... 12,434 14,179 18,443 22,402 39,156 38,148
Long-term debt, less
current
maturities............... 6,048 6,035 6,482 5,647 4,829 4,639
Total stockholders'
equity................... 2,228 3,649 5,549 5,856 21,990 22,646
</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.
(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 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.
17
<PAGE> 22
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 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. 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
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 of 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 expense are the result of internal development and
shared-risk projects.
The Company has only recently begun to recognize significant 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 38% 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 $1.6
million in 1994, 1995 and the three months ended March 31, 1996, respectively.
The Company also provides development services to Aesgen, an affiliate, and
recognized net sales to Aesgen of $5.6 million and $688,000 in 1995 and for the
three months ended March 31, 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 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
18
<PAGE> 23
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 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
---------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
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 43.6 41.5
Selling expense......................... 13.9 13.4 14.2 15.3 15.6
General and administrative expense...... 33.1 25.8 23.6 25.2 22.9
Research and development expense........ 4.8 7.3 9.6 7.8 8.6
Other expense, net...................... 0.6 1.3 3.3 2.1 0.3
Income before income taxes.............. 10.7 8.0 8.2 5.9 11.2
Equity income (loss).................... -- (1.4) 1.3 (5.6) --
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net sales increased $1.6 million, or 19% to $9.9 million in the first
quarter of 1996 compared to the first quarter of 1995. The increase was
primarily due to the recognition of $650,000 in revenue upon the licensing of
formulations and related data and marketing rights for two proprietary
pharmaceutical products in development and to the performance of a greater
number of projects, primarily for analytical services.
Cost of sales increased by $492,000, or 14%, to $4.1 million for the first
quarter of 1996 compared to the first quarter of 1995. Cost of sales decreased
as a percentage of net sales to 41.5% from 43.6%, reflecting the recognition of
the $650,000 in licensing revenue in 1996, the associated cost of which
primarily had been recognized in prior periods.
Selling expense increased by $275,000, or 22%, to $1.5 million in the first
quarter of 1996 compared to the first quarter 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 $176,000, or 8%, to $2.3 million in the
first quarter of 1996 compared to the first quarter of 1995. The increase in
general and administrative expense is primarily due to increased patent research
expenses in support of the Company's research and development program. As a
percentage of sales, the Company's general and administrative expense continued
its downward trend, decreasing to 22.9% for the first quarter of 1996 from 25.2%
for the first quarter of 1995.
19
<PAGE> 24
Research and development expense increased by $201,000, or 31%, to $852,000
in the first quarter of 1996 compared to the first quarter of 1995, and
represented 8.6% of net sales for the 1996 period compared to 7.8% of net sales
in the 1995 quarter. 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
$143,000, or 83%, to $29,000 in the first quarter of 1996 compared to the first
quarter 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
three months of 1996, compared with a loss of $462,000 for the comparable period
in 1995.
Income taxes for the first quarter of 1996 were $454,000. 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.
20
<PAGE> 25
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".
21
<PAGE> 26
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,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.............................. $ 8,309 $8,292 $ 8,932 $9,106 $ 9,925
Cost of sales.......................... 3,626 3,644 3,476 3,513 4,118
Selling expense........................ 1,269 1,081 1,305 1,258 1,544
General and administrative expense..... 2,097 1,894 1,959 2,221 2,273
Research and development expense....... 651 704 939 1,032 852
Other expense, net..................... 172 233 220 505 29
--------- -------- ------------- ------------ ---------
Income before income taxes............. 494 736 1,033 577 1,109
Income taxes........................... -- -- -- 39 454
Equity income (loss)................... (462) 48 55 803 --
--------- -------- ------------- ------------ ---------
Net income............................. 32 784 1,088 1,341 655
Income before income taxes as a
percentage of net sales.............. 5.9% 8.9% 11.6% 6.3% 11.2%
</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 $1.1 million in the first three 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 $13.8 million
compared to $569,000 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 March 31, 1996, working capital was $13.7 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.
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 $3.7 million outstanding as of March 31, 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 March 31, 1996 the interest rate was 6.87%. Indebtedness 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 $3.7
million in outstanding term loans at March 31, 1996, approximately $2.7 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
22
<PAGE> 27
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
March 31, 1996, the Company was eligible to borrow $5.0 million, of which $2.0
million was outstanding, under the revolving lines of credit. The revolving
lines of credit are scheduled to expire in August 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
March 31, 1996 was 3.65%. 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
March 31, 1996, $1.7 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
is obligated to pay approximately $1.0 million by June 27, 1996 to acquire such
option, which amount will be held in escrow and would 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 the
Company's current operations for the foreseeable future. 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.
23
<PAGE> 28
BUSINESS
AAI is a leading integrated contract research and development resource to
the 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 48 products 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 ten patents and four 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 committed a growing proportion of its technical resources
on internal development and 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
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 products then under development by AAI. The Company owns
approximately 38% 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 San Francisco,
California; Elmwood Park, New Jersey; Boston, Massachusetts; Chicago, Illinois
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.
INDUSTRY OVERVIEW
The contract research and development industry (typically referred to as
the contract research organization, or CRO, industry) provides independent
product development and support services to the pharmaceutical and biotechnology
industries. 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 drug company expenditures on compliance and quality assurance
activities exceeded $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.
24
<PAGE> 29
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 $3.5 billion in 1990 to
$6.4 billion in 1994. Generic drugs accounted for an estimated 46% of
prescriptions dispensed in the U.S. 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. 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 consoli-
25
<PAGE> 30
dated, 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 10 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 this 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 U.S. 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 U.S. 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.
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
pre-clinical 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
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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
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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 Pre-Clinical 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", "Bulk Chemicals", "Dosage Development", "Clinical Supplies"
and "Bioanalytical and Metabolism". The center column contains four vertically
descending boxes with the captions, "PHASE II", "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", "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",
"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".]
<PAGE> 33
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 is 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
analysis includes 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 pre-clinical
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
manufacture 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.
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 and
pharmaceutically 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
pharmaceutical 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. The generic formulation must also
satisfy prescribed standards of strength, quality, purity and identity. 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 pharmaceutically equivalent
and 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.
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.
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STRATEGY
The Company's objective is to be the leading provider of drug development
and support services to the pharmaceutical and biotechnology industries
worldwide 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 and 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 the 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 that 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 U.S. also permits the Company to provide services
without certain regulatory restrictions applicable to delivery and testing of
substances in the U.S. 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.
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
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system 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 since 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; 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
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compounds. Analytical methods are developed to demonstrate potency, purity,
stability or physical attributes. These methods are validated to assure 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 463 employees, more than 100 of the Company's scientists (22 of
whom 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 March
31, 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 allow 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 positions 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 species of any
micro-organisms that are present. In addition, the Company performs tests to
determine the effectiveness of antibiotics against micro-organisms and 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
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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 was
providing critical development services for 48 products 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 enables 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.
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
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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 or
thousands of units) to clinical scale (thousands or 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, 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
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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 six seminars, with an additional six 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 ten patents covering drug technology
and four pending patents.
Since 1993, the Company has spent over $7.8 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
significant 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 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 which has 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
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<PAGE> 41
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 $3.5 billion in 1990
to $6.4 billion in 1994. Generic drugs accounted for 46% of prescriptions
dispensed in the U.S. 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, 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 38% 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 $1.6 million in 1994, 1995 and the three months ended March 31, 1996,
respectively. Endeavor has submitted one ANDA to the FDA, and an additional
product is undergoing a bioequivalency study. See "Certain
Transactions -- Transactions Involving Management".
Five of the Company's internal development projects were sold in 1995 to
Aesgen, a company organized by the Company with an affiliate of Mayo Clinic,
MOVA Pharmaceutical Corporation and certain financial investors, to focus on the
development of certain generic products. Aesgen entered into a development
agreement with the Company to continue development of the products initially
sold to Aesgen and other promising candidates identified by Aesgen. AAI
recognized net sales to Aesgen of $5.6 million and $688,000 in 1995 and for the
three months ended March 31, 1996, respectively. 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 ten 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 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. Since considerable
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<PAGE> 42
toxicity data already exists 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
analysis 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 ten issued patents
and has four 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. 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 38% 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 had submitted an ANDA
application for one product in multiple dosage strengths, although there can be
no assurance that such ANDA application will be approved. In addition, Endeavor
is scheduled to submit an ANDA application for an additional generic hormone
product in multiple dosage forms after completing bioequivalency studies
scheduled to conclude in the second half of 1996. Endeavor does not market any
products and has not received approval of any product. Endeavor's revenues are
dependent upon approval of its products. The Company believes that Endeavor
intends to market its products through licensing to third parties.
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. 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 system
monitors the progress of a client's project, records time expended by laboratory
personnel, tracks sample locations and controls document revisions. The
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<PAGE> 43
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. During 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, three of the Company's clients accounted for 10% or more
(approximately 16.0%, 11.2% and 10.2% respectively) of the Company's net sales.
During the first three months of 1996, one client accounted for 10% or more
(approximately 15.8%) of the Company's net sales. Endeavor and Aesgen accounted
for approximately 10.2% and 16.0%, respectively, of net sales in 1995 and 15.8%
and 6.9% of net sales for the first three months of 1996. 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.
See "Risk Factors -- Dependence on Certain Industries and Clients".
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 a technical backgrounds, with offices in Wilmington
and Research Triangle Park, North Carolina; San Francisco, California; Elmwood
Park, New Jersey; Boston, Massachusetts; Chicago, Illinois 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.
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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 against the in-house research, quality control and
other support service departments of pharmaceutical companies, as well as
university research labs. In addition, the Company believes that although there
are numerous competitors in its industry, there are few competitors that offer a
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
39
<PAGE> 45
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, controls
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 liable
for any damages that result which could materially adversely affect the
financial condition of the Company.
EMPLOYEES
At May 31, 1996, the Company had 463 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
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<PAGE> 46
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.
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 San Francisco, California; Elmwood
Park, New Jersey; Boston, Massachusetts; Chicago, Illinois; 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 10
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 nineteen 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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<PAGE> 48
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, China Yu Chai International
Limited 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 numerous privately held companies.
John M. Ryan has served as a director of the Company since January 1996.
Mr. Ryan is a partner of Coopers & Lybrand, L.L.P., an accounting firm. Mr. Ryan
has served as a director of numerous private companies.
James L. Waters has served as 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 Water Associates, Inc., now known as
Waters Corporation, a scientific instrumentation manufacturer. Mr. Waters served
as a director of Millipore Corporation.
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 ten percent 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 "Management -- Employment Agreement". 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 that 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 following this Offering. See "Description of Capital
Stock -- Delaware Law and Certain Provisions of the Company's Restated
Certificate of Incorporation and By-laws".
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<PAGE> 49
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 Award Plan, 1995 Stock Option Plan and 1996 Stock Option Plan. 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 AGREEMENT
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 which 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 serving
on the Signing Date and to be elected a director of any majority-owned
subsidiary of the Company acquired after the Signing Date.
44
<PAGE> 50
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 can 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 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 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 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. See "Certain Transactions -- Transactions with
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.
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
45
<PAGE> 51
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) 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.
All 105,453 shares available under the Restricted Stock Plan have been
awarded to 120 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 Compensation 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 purchasers of the
Preferred Stock in November 1995 ($8.35). The Committee is authorized
46
<PAGE> 52
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 241,700 shares had been issued to 12 employees
and were outstanding on May 1, 1996. The exercise price of such options is $8.35
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
May 1, 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.
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
47
<PAGE> 53
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 Securities and
Exchange Act of 1934, as amended.
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 for 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
March 31, 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 38% 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. AAI
realized $3.5 million and $1.6 million in net sales to Endeavor in 1995 and the
first three months of 1996, respectively. The Company made a $1.5 million
revolving credit facility available to Endeavor at a 10% annual interest rate
48
<PAGE> 54
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. The Company currently anticipates that the milestone
triggering the commencement of such option 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 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 has exercised 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 Endeavor exercises its option to manufacture such product
itself or 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 on 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 a corporation owned by 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 $688,000 in net sales to Aesgen in 1995 and the first three
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 under the development agreement. The
Company believes that the terms of such
49
<PAGE> 55
agreement are no less favorable than terms that would be obtained in a
transaction with an unrelated third party.
While incorporated in July 1994, Aesgen, Inc. ("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, 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.
Dr. Sancilio and Mr. Waters serve on the three-member board of directors of
Aesgen Holding and the Company's executive officers beneficially own the
following percentages of the fully diluted common equity of Aesgen Holding: Dr.
Sancilio, 41.7%, Mr. Waters, 11.4%, Mr. Underwood, 2.3%, Mr. Arato, 0.8% and Mr.
Waldon, 0.8%.
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 May 15, 1996, options to acquire
241,700 shares of Common Stock have been granted under the 1995 Stock Option
Plan at an exercise price per share of $8.35.
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 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
May 31, 1996, the outstanding principal amount of such promissory note was
$82,775.
The Company loaned $113,865 to Mr. Waldon in connection with his purchase
of 105,453 shares of Class B Common Stock in November 1995 for $30,000 and
income tax liabilities arising in such transaction. Such loan is evidenced by
two promissory notes which bear interest at an annual rate of 6.25% and interest
is payable biweekly. Mr. Waldon's shares of Class B Common Stock are pledged to
secure such loans, 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 May 31,
1996 the outstanding aggregate principal amount of such promissory notes was
$113,865.
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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 the Offering, on
customary terms, consistent with an arm's-length transaction. In the event that
the Company and Goldman, Sachs & Co. or their affiliate 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. is 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 its affiliates against certain liabilities, including
liabilities under the Securities Act.
Approximately 17.4% of the capital stock of Endeavor on a fully diluted
basis and 13.6% of the capital stock of Aesgen Holding 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 ("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 14.2% of the capital stock of Endeavor on a
fully diluted basis and 0.9% of the capital stock of Aesgen Holding 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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<PAGE> 57
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 April
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 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%
Joseph H. Gleberman(f).................. -- -- --
Charles D. Moseley, Jr.(g).............. 119,833 * *
John M. Ryan............................ -- -- --
William H. Underwood.................... 230,989 1.8% 1.5%
Anthony F. Arato........................ 71,726 * *
Mark P. Colonnese....................... -- -- --
Martin Hunicutt......................... -- -- --
James Swarbrick......................... -- -- --
R. Forrest Waldon....................... 105,453 * *
All executive officers and directors as
a group (11 persons).................. 8,198,748 62.2% 51.6%
</TABLE>
- ---------------
* Less than 1%
(a) Assumes that all outstanding shares of Preferred 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 does not reflect options granted under
the 1995 Option Plan and the 1996 Option Plan, which options are not
exercisable within 60 days.
(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 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) 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.
(g) Represents 119,833 shares beneficially owned by Noro-Moseley. Mr. Moseley
disclaims beneficial ownership of such shares.
52
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this Offering, the authorized capital
stock of the Company will consist of 50 million shares of Common Stock, $.001
par value per share, and 10 million shares of preferred stock, $.001 par value
per share. As of March 31, 1996, and assuming the conversion of each outstanding
share of Preferred Stock into 2,636,331 shares of Common Stock and each
outstanding share of Class B Common Stock into one share of Common Stock, there
were outstanding 13,181,709 shares of Common Stock held of record by 136
stockholders and in April 1996, the Company issued options to purchase a total
of 450,444 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 closing of this Offering, the Company's Restated Certificate of
Incorporation will authorize the issuance of up to 50 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 closing 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 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 May 31, 1996, there were outstanding options to purchase an aggregate
of 450,444 shares of Common Stock, at an exercise price of $8.35 per share
awarded under the Company's 1995 Stock Option Plan and 1996 Stock Option Plan.
See "Management -- Stock Option and Restricted Stock Award Plans". Dr. Sancilio
and Mr. Waters have granted the Company an option to purchase shares of
53
<PAGE> 59
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
underwriters' 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 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
closing 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 only be filled 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
54
<PAGE> 60
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 immediately 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 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 or a special 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
55
<PAGE> 61
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 15,881,709 shares
of Common Stock outstanding (16,286,709 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, which will be subject to the resale limitations imposed by Rule
144, as described below. All of the remaining 13,181,709 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. 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 valid exemption therefrom; all of these shares
are subject to the Lock-Up Agreements. Of such 13,181,709 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 105,503 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 158,817
shares after 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
56
<PAGE> 62
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 Securities Exchange Act of
1934, as amended (the "Exchange Act"), in reliance upon Rule 144, but without
compliance with certain restrictions of Rule 144, including the holding period
requirements. As of April 30, 1996, the Company has granted options covering
450,444 shares of Common Stock, all of which become exercisable at various times
in the future and 105,503 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 287,721 additional shares for issuance under
the Option Plans. When issued, these shares may only be sold within the
limitations of 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 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 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) 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. Certain stockholders will have registration
rights relating to the Common Stock acquired upon conversion thereof, 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
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<PAGE> 63
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.
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<PAGE> 64
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 three months ended March 31, 1995 and 1996 (unaudited)...................... F-3
Consolidated Balance Sheet as of December 31, 1994 and 1995 and March 31, 1996
(unaudited) and Pro Forma Stockholders' Equity at March 31, 1996 (unaudited)........ F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)....... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 65
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 June 5, 1996
F-2
<PAGE> 66
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ----------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (includes related party net
sales of $1,991, $9,088, $1,331 and
$2,260 for the years ended December
31, 1994 and 1995 and the three
months ended March 31, 1995 and 1996,
respectively)........................ $26,378 $32,882 $ 34,639 $8,309 $ 9,925
------- ------- ----------- ------ -----------
Operating expenses:
Cost of sales........................ 9,731 14,533 14,259 3,626 4,118
Selling.............................. 3,654 4,390 4,913 1,269 1,544
General and administrative........... 8,738 8,485 8,171 2,097 2,273
Research and development............. 1,273 2,394 3,326 651 852
------- ------- ----------- ------ -----------
23,396 29,802 30,669 7,643 8,787
------- ------- ----------- ------ -----------
Income from operations:................ 2,982 3,080 3,970 666 1,138
------- ------- ----------- ------ -----------
Other income (expense)
Interest............................. (453) (766) (1,004) (204) (174)
Other................................ 297 326 (126) 32 145
------- ------- ----------- ------ -----------
(156) (440) (1,130) (172) (29)
------- ------- ----------- ------ -----------
Income before income taxes............. 2,826 2,640 2,840 494 1,109
Income taxes........................... -- -- 39 -- 454
------- ------- ----------- ------ -----------
Income after income taxes.............. 2,826 2,640 2,801 494 655
Equity income (loss)................... -- (444) 444 (462) --
------- ------- ----------- ------ -----------
Net income............................. $ 2,826 $ 2,196 $ 3,245 $ 32 $ 655
======== ======== ============ ====== ============
Pro forma data (unaudited):
Net income, as reported.............. $ 2,826 $ 2,196 $ 3,245 $ 32
Pro forma income taxes............... 1,125 1,118 1,129 203
------- ------- ----------- ------
Pro forma net income (loss).......... $ 1,701 $ 1,078 $ 2,116 $ (171)
======== ======== ============ ======
Pro forma earnings per share........... $ .18 $ .06
============ ============
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> 67
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 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 $10,178
Accounts receivable:
Trade and other............................................... 7,148 7,302 7,689
Related parties............................................... 607 73 1,864
Work-in-progress................................................ 2,307 4,134 3,370
Prepaid and other current assets................................ 489 1,238 1,108
------- ------- -------
Total current assets..................................... 11,024 25,828 24,209
------- ------- -------
Property and equipment:
Land............................................................ 298 298 298
Buildings and improvements...................................... 6,808 6,919 6,959
Machinery and equipment......................................... 10,941 12,468 13,773
Construction-in-progress........................................ 483 454 199
------- ------- -------
18,530 20,139 21,229
Less: accumulated depreciation.................................. (7,748) (9,235) (9,665)
------- ------- -------
10,782 10,904 11,564
------- ------- -------
Other assets...................................................... 596 2,424 2,375
------- ------- -------
Total assets.................................................. $22,402 $39,156 $38,148
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loans................................................. $ 3,257 $ 2,331 $ 1,983
Current maturities of long-term debt............................ 759 945 945
Accounts payable................................................ 1,114 2,311 1,452
Customer advances............................................... 2,186 1,677 2,086
Dividends payable............................................... -- 1,300 1,300
Other accrued liabilities....................................... 3,139 3,440 2,764
------- ------- -------
Total current liabilities................................ 10,455 12,004 10,530
Stockholder note payable.......................................... 1,159 -- --
Long-term debt.................................................... 4,488 4,829 4,639
Equity investment................................................. 444 -- --
Deferred tax liability............................................ -- 333 333
------- ------- -------
Total liabilities........................................ 16,546 17,166 15,502
------- ------- -------
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; authorized 1,000,000
shares, issued and outstanding 446,798 shares actual;
authorized 50,000,000 shares, issued and outstanding
13,181,709 shares pro forma................................... 566 150 150 $ 13
Class B non-voting common stock, no par value; authorized
30,000,000 shares; issued 9,887,620, 9,993,121 and 10,098,622
issued and outstanding actual; no shares issued pro forma..... 317 171 661 --
Additional paid-in-capital...................................... -- 21,510 21,510 22,308
Retained earnings............................................... 5,333 552 1,207 1,207
------- ------- ------- -------------
6,216 22,383 23,528 23,528
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........................................... -- -- (489) (489)
------- ------- ------- -------------
Total stockholders' equity............................... 5,856 21,990 22,646 $22,646
===========
------- ------- -------
Total liabilities and stockholders' equity............... $22,402 $39,156 $38,148
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 68
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..... -- -- 446,798 $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..... -- -- 446,798 566 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..... -- -- 446,798 566 9,887,620 317 -- 5,333 (244)
Net income..................... -- -- -- -- -- -- -- 3,245 --
Sale of preferred stock........ 883 -- -- -- -- -- $21,510 -- --
Sale of stock to officer....... -- -- -- -- 105,501 305 -- -- --
Dividends...................... -- -- -- (416) -- (451) -- (8,026) --
--- ---- ------- ---- ---------- ------ ------- ------ -----
Balance at December 31, 1995..... 883 -- 446,798 150 9,993,121 171 21,510 552 (244)
Stock award (unaudited)........ -- -- -- -- 105,501 490 -- -- --
Compensation earned
(unaudited).................. -- -- -- -- -- -- -- -- --
Net income (unaudited)......... -- -- -- -- -- -- -- 655 --
--- ---- ------- ---- ---------- ------ ------- ------ -----
Balance at March 31, 1996
(unaudited).................... 883 -- 446,798 $150 10,098,622 $ 661 $21,510 $ 1,207 $ (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).................. -- 1 1
Net income (unaudited)......... -- -- 655
----- ----- -------
Balance at March 31, 1996
(unaudited).................... $(149) $ (489) $22,646
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 69
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
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 $ 32 $ 655
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.................... 1,311 1,515 1,591 390 443
Equity (income) loss............................. -- 444 (444) 462 --
Compensation for stock purchase.................. -- -- 272 -- --
Other............................................ 9 -- 6 -- 1
Changes in assets and liabilities:
Deferred taxes................................. -- -- (16) -- --
Trade and other receivables.................... (2,129) (1,157) (154) 1,441 (387)
Accounts receivable from related parties....... -- (606) 534 (1,215) (1,791)
Work-in-progress............................... (906) (224) (1,827) (1,480) 764
Prepaid and other current assets............... (225) 38 (400) (204) 130
Other assets................................... (113) (82) 15 (151) (9)
Accounts payable............................... 262 (61) 1,197 518 (859)
Customer advances.............................. (810) 1,456 (509) 1,793 409
Other accrued liabilities...................... 319 1,382 301 (893) (676)
------- ------- ------- ------- -------
Net cash provided (used) by operating activities..... 544 4,901 3,811 693 (1,320)
------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment....... 397 -- 30 -- --
Purchase of property and equipment................. (2,321) (3,091) (1,720) (837) (1,095)
Purchase of preferred stock........................ -- -- (1,593) -- --
Purchase of intangible assets...................... -- (290) (279) -- --
Proceeds from sale (purchase) of investee stock.... -- (50) -- -- 50
------- ------- ------- ------- -------
Net cash used by investing activities................ (1,924) (3,431) (3,562) (837) (1,045)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net (payments) proceeds on line of credit.......... 1,997 1,260 (926) 676 (348)
Proceeds from long-term borrowings................. 3,550 1,165 1,505 -- --
Payments on long-term borrowings................... (3,099) (1,996) (978) (190) (190)
Payment of stockholder note payable................ -- -- (1,159) -- --
Sale of preferred stock............................ -- -- 21,510 -- --
Dividends.......................................... (926) (1,889) (7,593) (743) --
------- ------- ------- ------- -------
Net cash provided (used) by financing activities..... 1,522 (1,460) 12,359 (257) (538)
------- ------- ------- ------- -------
Net increase (decrease) in cash...................... 142 10 12,608 (401) (2,903)
Cash and cash equivalents, beginning of period....... 321 463 473 473 13,081
------- ------- ------- ------- -------
Cash and cash equivalents, end of period............. $ 463 $ 473 $13,081 $ 72 $10,178
======= ======= ======= ======= =======
Supplemental information -- cash paid for:
Interest........................................... $ 405 $ 669 $ 938 $ 196 $ 182
Income taxes....................................... -- -- $ 146 -- $ 127
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 70
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 (38% 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.
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 ranging from 3 to 31.5 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 permanent. Long-term investment is included in other assets in
the accompanying financial statements.
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.
F-7
<PAGE> 71
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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.
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.
Interim financial information
Interim financial information for the three month periods ended March 31,
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 three months
ended March 31, 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
F-8
<PAGE> 72
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 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% (38% 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
F-9
<PAGE> 73
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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> 74
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 instalments of $34
plus interest through December 31, 1997, with remaining
principal due at that date....................... $2,966 $2,869
Industrial Revenue Bonds, interest at variable rate adjusted
annually up to a maximum of 15% (5.45% at December 31, 1995),
payable in monthly instalments of $25 plus interest through
November 2000.................................... 2,050 1,750
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
instalments 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 --
------ ------
6,406 5,774
Current maturities............................................. (759) (945)
------ ------
$5,647 $4,829
====== ======
</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 1/4% 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 August 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. The bonds are payable
at the option of the bondholders; however, the bonds are classified as long-term
because 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 3/4% is charged on the commitment amount.
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 capital, maintenance of certain
financial ratios, purchase of property and equipment and incurring additional
indebtedness.
F-11
<PAGE> 75
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Scheduled maturities of long-term debt as of December 31, 1995 were as
follows:
<TABLE>
<S> <C>
1996........................................................................ $ 945
1997........................................................................ 3,016
1998........................................................................ 548
1999........................................................................ 500
2000........................................................................ 750
Thereafter.................................................................. 15
------
$5,774
======
</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.
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>
F-12
<PAGE> 76
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 will reserve 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 105,453 shares of Class B Stock to
officers in 1993, 1994 and 1995, respectively. The purchase price for the
105,453 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.
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,
F-13
<PAGE> 77
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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. 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.
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.
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
F-14
<PAGE> 78
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 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.
F-15
<PAGE> 79
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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.
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. No provision with respect to the above matter has been
recorded in the financial statements. In addition, 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.
F-16
<PAGE> 80
APPLIED ANALYTICAL INDUSTRIES, INC. (AAI)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 and April 1996, the Company granted Class B Stock options and
awards pursuant to the related plans approved in November 1995 (see Note 6).
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 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.
F-17
<PAGE> 81
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, 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 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 exercise of options 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. Certain stockholders will have registration
rights relating to the Common Stock acquired upon conversion thereof, 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> 82
Goldman, Sachs & Co. and certain of their 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". Goldman, Sachs & Co.
and such affiliates are subject to the 180-day lock-up that applies to other
stockholders as described above. Notwithstanding such restriction, however,
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 Goldman, Sachs & Co. and certain of their 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 supplements to the Prospectus and to pay certain expenses relating
to such amendments or supplements.
U-2
<PAGE> 83
Application has been made to list the Common Stock 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> 84
---------------------------------------------------------
---------------------------------------------------------
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............................ 18
Business................................ 24
Management.............................. 42
Certain Transactions.................... 48
Principal Stockholders.................. 52
Description of Capital Stock............ 53
Shares Eligible for Future Sale......... 56
Legal Matters........................... 57
Experts................................. 58
Additional Information.................. 58
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 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 $.001 PER SHARE)
------------------
APPLIED ANALTYICAL LOGO
------------------
GOLDMAN, SACHS & CO.
COWEN & COMPANY
LEHMAN BROTHERS
REPRESENTATIVES OF THE UNDERWRITERS
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 85
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 , 1996
APPLIED ANALYTICAL INDUSTRIES, INC.
[AAI LOGO]
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------------
SEE "RISK FACTORS" ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
The Common Stock is quoted in 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> 86
[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".
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.
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.
<PAGE> 87
[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 Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
Operations.......................... 18
Business.............................. 24
Management............................ 42
Certain Transactions.................. 48
Principal Stockholders................ 52
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 56
Plan of Distribution..................
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 58
Index to 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 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 $.001 PER SHARE)
------------------
[APPLIED ANALTYICAL LOGO]
------------------
GOLDMAN, SACHS & CO.
------------------------------------------------------
------------------------------------------------------
<PAGE> 88
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>
- ---------------
* To be supplied by amendment.
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
II-1
<PAGE> 89
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 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.
II-2
<PAGE> 90
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
15,434,910 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
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> 91
<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
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
filed)
27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** 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.
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.
II-4
<PAGE> 92
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 7th day of June, 1996.
By:
/s/ FREDERICK D. SANCILIO
------------------------------------
Frederick D. Sancilio, Ph.D.
President
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Frederick D.
Sancilio, Mark P. Colonnese, R. Forrest Waldon and Albert N. Cavagnaro and each
of them, with full power of substitution, to execute in the name and on behalf
of such person any amendment (including any post-effective amendment) to this
Registration Statement (or any other registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act) and to file the same, with exhibits thereto, and any other
documents in connection therewith, making such changes in this Registration
Statement as the person(s) so acting deems appropriate, and appoints each of
such persons, each with full power of substitution and resubstitution,
attorney-in-fact to sign any amendment (including any post-effective amendment)
to this Registration Statement (or any other registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act) and to file the same with exhibits thereto, and any other
documents in connection therewith.
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>
/s/ FREDERICK D. SANCILIO President and Director June 7, 1996
- --------------------------------------------- (Principal Executive Officer)
Frederick D. Sancilio, Ph.D.
/s/ MARK P. COLONNESE Vice President and Chief June 7, 1996
- --------------------------------------------- Financial Officer (Principal
Mark P. Colonnese Financial Officer and Principal
Accounting Officer)
/s/ WILLIAM H. UNDERWOOD Executive Vice President and June 7, 1996
- --------------------------------------------- Director
William H. Underwood
/s/ JOSEPH H. GLEBERMAN Director June 7, 1996
- ---------------------------------------------
Joseph H. Gleberman
/s/ CHARLES D. MOSELEY, JR. Director June 7, 1996
- ---------------------------------------------
Charles D. Moseley, Jr.
/s/ JOHN M. RYAN Director June 7, 1996
- ---------------------------------------------
John M. Ryan
/s/ JAMES L. WATERS Director June 7, 1996
- ---------------------------------------------
James L. Waters
</TABLE>
II-5
<PAGE> 93
SCHEDULE
VALUATION AND QUANTIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN C
--------------------------------------
COLUMN B
------------ ADDITIONS COLUMN D COLUMN E
COLUMN A 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> 94
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
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.
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------- ---------------------------------------------------------------------- -------------
<C> <C> <S> <C>
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
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 filed)
27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Certain information has been omitted from this exhibit pursuant to a request
for confidential treatment.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
APPLIED ANALYTICAL INDUSTRIES, INC.
PURSUANT TO SECTIONS 242 AND 245
OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
APPLIED ANALYTICAL INDUSTRIES, INC., (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "General Corporation Law"),
hereby certifies as follows:
1. The name of the Corporation is Applied Analytical Industries,
Inc. The original Certificate of Incorporation was filed with the Secretary of
State of Delaware on September 29, 1986.
2. This Restated Certificate of Incorporation: (a) restates and
integrates and further amends the Restated Certificate of Incorporation of the
Corporation that was adopted on November 17, 1995, (b) was duly adopted in
accordance with the provisions of Section 242 and 245 of the General
Corporation Law and (c) was approved by written consent of the stockholders of
the Corporation given in accordance with the provisions of Section 228 of the
General Corporation Law (prompt notice of such action having been given to
those stockholders who did not consent in writing). The text of the
Corporation's Certificate of Incorporation as previously amended, supplemented
or restated is hereby further restated and further amended to read in its
entirety as follows:
FIRST. The name of the Corporation is:
Applied Analytical Industries, Inc.
SECOND. The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 105,000,000 shares, consisting of
(i) 100,000,000 shares of Common Stock, $.001 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.001 par value per
share ("Preferred Stock").
<PAGE> 2
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK
1. General. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one
vote for each share held at all meetings of stockholders (and written actions
in lieu of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law.
3. Dividends. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the
Board of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock that may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law or this Certificate of
Incorporation. Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purposes of voting by classes
unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as shall be stated and expressed in such resolutions,
all to the full extent now or hereafter permitted by the General Corporation
Law. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or be junior to the Preferred Stock of
any other series to the extent permitted
-2-
<PAGE> 3
by law and this Certificate of Incorporation. Except as otherwise provided in
this Certificate of Incorporation, no vote of the holders of the Preferred
Stock or Common Stock shall be a prerequisite to the designation or issuance of
any shares of any series of the Preferred Stock authorized by and complying
with the conditions of this Certificate of Incorporation, the right to have
such vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, the board of directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
EIGHTH. Except to the extent that the General Corporation Law
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any other provision of law
imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment.
NINTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute and this Restated
Certificate of Incorporation, and all rights conferred upon stockholders herein
are granted subject to this reservation.
TENTH: This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.
1. Number of Directors. The number of directors of the
Corporation shall not be less than three (3) nor more than seven (7). The
exact number of directors within the limitations specified in the preceding
sentence shall be fixed from time to time by, or in the manner provided in, the
Corporation's By-Laws.
-3-
<PAGE> 4
2. Classes of Directors. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class
shall have more than one director more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class I, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class I and one of the extra directors
shall be a member of Class II, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
3. Election of Directors. Elections of directors must be by written
ballot.
4. Terms of Office. Each director shall serve for a term ending
on the date of the third annual meeting following the annual meeting at which
such director was elected; provided, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting in 1997; each
initial director in Class II shall serve for a term ending on the date of the
annual meeting in 1998; and each initial director in Class III shall serve for
a term ending on the date of the annual meeting in 1999; and provided further,
that the term of each director shall be subject to the election and
qualification of his successor and to his earlier death, resignation or
removal.
5. Allocation of Directors Among Classes in the Event of
Increases or Decreases in the Number of Directors. In the event of any
increase or decrease in the authorized number of directors, (i) each director
then serving as such shall nevertheless continue as a director of the class of
which he is a member and (ii) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the Board of
Directors among the three classes of directors so as to ensure that no one
class has more than one director more than any other class. To the extent
possible, consistent with the foregoing rule, any newly created directorships
shall be added to those classes whose terms of office are to expire at the
latest dates following such allocation, and any newly eliminated directorships
shall be subtracted from those classes whose terms of offices are to expire at
the earliest dates following such allocation, unless otherwise provided from
time to time by resolution adopted by the Board of Directors.
6. Quorum; Action at Meeting. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. In
the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the
Board of Directors unless a greater number is required by law, by the By-Laws
of the Corporation or by this Restated Certificate of Incorporation.
7. Resignation; Removal. Any director may resign at any time
upon written notice to the attention of the secretary of the corporation.
Directors of the Corporation may be removed only for cause by the affirmative
vote of the holders of at least two-thirds of the shares of the capital stock
of the Corporation issued and outstanding and entitled to vote.
8. Vacancies. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board,
shall be filled only by a vote of a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. A director
elected
-4-
<PAGE> 5
to fill a vacancy shall be elected to hold office until the next election of
the class for which such director shall have been chosen, subject to the
election and qualification of his successor and to his earlier death,
resignation or removal.
9. Amendments to Article. Notwithstanding any other provisions
of law, this Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TENTH.
ELEVENTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, this Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.
TWELFTH. Special meetings of stockholders may be called at any time
by (and only by) the Board of Directors. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting. Notwithstanding any other provision
of law, this Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provisions inconsistent with, this Article
TWELFTH.
THIRTEENTH. In anticipation that the Corporation may enter into
contracts or otherwise transact business with entities in which any directors
of the Corporation own a financial interest ("Related Entities"), the
provisions of this Article THIRTEENTH are set forth to regulate and guide such
contracts or other business. These provisions are in addition to, and not in
limitation of, the provisions of the General Corporation Law and the other
provisions of this Restated Certificate of Incorporation. Any contract or
other business that does not comply with the procedures set forth in this
Article THIRTEENTH shall not by reason thereof be deemed void or voidable or
result in any breach of any duty or the derivation of any improper personal
benefit by any person but shall be governed by the provisions of this Restated
Certificate of Incorporation, the By-laws of the Corporation, the General
Corporation Law and other applicable law.
No contract, agreement, arrangement or transaction between the
Corporation and a Related Entity (a "Related Transaction") shall be void or
voidable solely for the reason that such persons or entities are parties
thereto, if:
(i) the material facts of the Related Transaction are disclosed or
are known to the Board of Directors of the Corporation (or a
committee thereof) and such 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;
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(ii) the material facts of the Related Transaction are disclosed or
are known to the holders of the then outstanding voting shares
of the Corporation 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 Corporation not owned by the
interested directors or Related Entity, as the case may be,
even though the disinterested directors or such holders may be
less than a quorum; or
(iv) The Related Transaction was fair to the Company.
In addition, each Related 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 Corporation and its stockholders; provided, however,
that if such authorization or approval is not obtained, or such Related
Transaction is not so effected, no presumption shall arise that such Related
Transaction, or such arrangements, standards or guidelines, are not fair to the
Corporation and its stockholders.
Any person or entity purchasing or otherwise acquiring any interest in
any shares of the Corporation shall be deemed to have notice of and to have
consented to the provisions of this Article THIRTEENTH.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be affixed hereto and this Restated Certificate of Incorporation to be signed
by its President this ______th day of ____________, 1996.
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
--------------------------------
Frederick D. Sancilio, President
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<PAGE> 1
EXHIBIT 3.2
RESTATED BY-LAWS
OF
APPLIED ANALYTICAL INDUSTRIES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.8 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . 3
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS . . . . . . . . . . . . . . . . . . . . . 4
2.13 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III
DIRECTORS
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.9 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.10 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
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<TABLE>
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ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 COMMITTEE MINUTES8
4.3 MEETINGS AND ACTIONS OF COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V
OFFICERS
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 APPOINTMENT OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.5 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.6 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.7 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.8 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.9 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.10 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.11 ASSISTANT TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.3 SUCCESSFUL DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 DETERMINATION OF CONDUCT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 PAYMENT OF EXPENSES IN ADVANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.6 INDEMNITY NOT EXCLUSIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.7 INSURANCE INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.8 THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<TABLE>
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS 15
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.4 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.5 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.6 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.7 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.8 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.10 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.11 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.12 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IX
AMENDMENTS
</TABLE>
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<PAGE> 5
RESTATED BY-LAWS
OF
APPLIED ANALYTICAL INDUSTRIES, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the
registered agent of the corporation at such location is The Corporation Trust
Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Monday of May of each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
2.3 SPECIAL MEETINGS
Special meetings of the stockholders may be called only by the board
of directors as permitted in the certificate of incorporation (All references
to "certificate of incorporation" herein shall be references to the certificate
of incorporation as amended, supplemented or restated from time to time). The
corporation shall promptly give notice to the stockholders entitled to vote
upon the calling of a special meeting in accordance with the provisions of
SECTIONS 2.4 AND 2.5 hereof.
<PAGE> 6
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and
shall be sent or otherwise given in accordance with SECTION 2.5 of these
by-laws not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder entitled to vote at such meeting. The notice
shall specify the place, date, and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the Secretary or an Assistant Secretary or of the transfer agent
of the corporation that the notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the Chairman of the meeting or
(ii) the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
by-laws otherwise require, notice need not be given of that adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 CONDUCT OF BUSINESS
Subject to any other applicable requirements, only such business
(including the nomination of a person for election as a director) may be
conducted at a meeting of the stockholders as has been brought before the
meeting by, or at the direction of, the corporation's board of directors or by
a stockholder who has given to the secretary of the corporation timely written
notice, as provided below, of the stockholder's intention to bring certain
business before the meeting.
Any stockholder wishing to bring business before a meeting of
stockholders must provide notice to the corporation not more than one hundred
twenty (120) days in advance of the anniversary date of the corporation's proxy
statement for the previous year's annual meeting or, in the case of special
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meetings, at the close of business on the tenth (10th) day following the date
on which notice of such meeting is first given to stockholders, of the business
to be presented by him at the stockholders' meeting. Any such notice shall set
forth the following as to each matter the stockholder proposes to bring before
the meeting: (A) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting
and, if such business includes a proposal to amend the by-laws of the
corporation, the language of the proposed amendment; (B) the name and address,
as they appear (if so appearing) on the corporation's books, of the stockholder
proposing such business (and any person acting in concert with such
stockholder); (C) the class and number of shares of the corporation that are
beneficially owned by such stockholder; (D) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business; and (E) any material interest of the stockholder in such
business. Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section. In the
absence of such notice to the corporation meeting the above requirements, a
stockholder shall not be entitled to present any business at any meeting of
stockholders.
The presiding officer of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including the
regulation of the manner of voting and the conduct of business.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of SECTION 2.12 of these
by-laws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgers
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or
these by-laws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
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prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action that is consented to would have
required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state,
in lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporation action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange or stock or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting, nor more than sixty (60) days prior to any
other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed
by the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether
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<PAGE> 9
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10) days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. Such
list shall presumptively determine the identity of the stockholders entitled to
vote at the meeting and the number of shares held by each of them.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these by-laws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction
of the board of directors.
3.2 NUMBER OF DIRECTORS
The exact number of directors shall be ____________ (___) until
changed, within the limits specified in the certificate of incorporation, by a
by-law amending this SECTION 3.2, duly adopted by the board of directors or by
the stockholders. The directors shall be divided into classes as provided in
the certificate of incorporation.
3.3 ELECTION OF DIRECTORS
Directors shall be elected as provided by the certificate of
incorporation. Only persons who are selected and recommended by the
corporation's board of directors or by a committee of such board designated to
make nominations, or who are nominated by a stockholder who has given timely
written notice in proper form in accordance with SECTION 2.8 hereof, to the
secretary of the corporation prior to a meeting at which directors are to be
elected will be eligible for election as directors, such determination to be
made by the presiding officer of such meeting.
3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
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The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware. Unless
otherwise restricted by the certificate of incorporation or these by-laws,
members of the board of directors, or any committee designated by the board of
directors, may participate in a meeting of the board of directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
3.5 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.6 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty- eight (48) hours
before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice
need not specify the purpose or the place of the meeting, if the meeting is to
be held at the principal executive office of the corporation.
3.7 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these by-laws.
3.8 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these by-laws, any action required or permitted to be taken at any meeting of
the board of directors, or of any committee thereof, may be taken without a
meeting if all members of the board or committee, as the case may be, consent
thereto in writing and the writings are filed with the minutes of proceedings
of the board or committee.
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3.9 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these by-laws, the board of directors shall have the authority to fix the
compensation of directors.
3.10 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of share of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist
of one or more of the directors of the corporation. The board may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors or in the by-laws of the corporation,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers that may
require it; but no such committee shall have the power or authority to (i)
amend the certificate of incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the issuance
of shares of stock adopted by the board of directors as provided in Section
151(a) of the General Corporation Law of Delaware, fix the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of share of any series of stock or authorize the
increase or decrease of the share of any series), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation
Law of Delaware, (iii) recommend to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the by-laws of the corporation; and,
unless the board resolution establishing the committee, the by-laws or the
certificate of incorporation expressly so provide, no such committee shall have
the power
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or authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
4.3 MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of these by-laws and the certificate
of incorporation with such changes in the context thereof as are necessary to
substitute the committee and its members for the board of directors and its
members; provided, however, that the time of regular meetings of committees may
be determined either by resolution of the board of directors or by resolution
of the committee, that special meetings of committees may also be called by
resolution of the board of directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may
adopt rules for the government of any committee not inconsistent with the
provisions of these by-laws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and
a chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one
or more assistant treasurers, and any such other officers as may be appointed
in accordance with the provisions of SECTION 5.3 of these by-laws. Any number
of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be
appointed (including those being appointed to fill any vacancy) in accordance
with the provisions of SECTIONS 5.3 of these by-laws, shall be appointed by the
board of directors, subject to the rights, if any, of an officer under any
contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to
appoint, such other officers and agents as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these by-laws or as the board of
directors may from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board of directors or, except in the case of an officer
chosen by the board of directors, by any officer upon whom such power or
removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these by-laws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
SECTION 5.6 of these by-laws.
5.6 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an officer,
the president shall be the chief executive officer of the corporation and
shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board, at all meetings of the
board of directors. He shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
by-laws.
5.7 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform
all the duties of the president and when so acting shall have all the powers
of, and be subject to all restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these by-laws, the president or the chairman of the board.
5.8 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names
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of those present at directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and the proceedings
thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares held
by each, the number and date of certificates evidencing such shares, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law
or by these by-laws. He shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these
by-laws.
5.9 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the board of directors. He shall disburse
the funds of the corporation as may be ordered by the board of directors,
whenever they request it, an account of all his transactions as chief financial
officer and of the financial condition of the corporation, and shall have other
powers and perform such other duties as may be prescribed by the board of
directors or these by-laws.
The chief financial officer shall be the treasurer of the corporation.
5.10 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his ability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as may be prescribed
by the board of directors or these by-laws.
5.11 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
chief financial officer and shall perform such other duties and have such other
powers as may be prescribed by the board of directors or these by-laws.
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5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
chief financial officer, the secretary or assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent, and exercise
on behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation.
The authority granted herein may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from
time to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement (if such settlement is
approved in advance by the corporation, which approval shall not be
unreasonably withheld) actually and reasonably incurred by him in connection
with such action, suit or proceeding 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
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
and amounts paid in settlement (if such settlement is approved in
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advance by the corporation, which approval shall not be unreasonably withheld)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Notwithstanding any other provision of
this ARTICLE VI, no person shall be indemnified hereunder for any expenses or
amounts paid in settlement with respect to any action to recover short-swing
profits under Section 16(b) of the Securities Exchange Act of 1934, as amended.
6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in SECTIONS 6.1 AND 6.2, or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under SECTIONS 6.1 AND 6.2 (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that the indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in SECTIONS 6.1 AND 6.2. Such
determination shall be made (a) by the board of directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding or (b) or if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by the stockholders. Notwithstanding the foregoing, a
director, officer, employee or agent of the corporation shall be entitled to
contest any determination that the director, officer, employee or agent has not
met the applicable standard of conduct set forth in SECTIONS 6.1 AND 6.2 by
petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
SECTION 6.1 OR 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the director, officer, employee or agent to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this ARTICLE VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this ARTICLE VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of
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stockholders or disinterested directors or otherwise, both as to action in such
persons' official capacity and as to action in another capacity while holding
such office.
6.7 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this ARTICLE VI.
6.8 THE CORPORATION
For purposes of this ARTICLE VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so
that any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under and subject to the provisions of this ARTICLE VI
(including, without limitation the provisions of SECTION 6.4) with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this ARTICLE VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
ARTICLE VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advancement of expenses provided by, or
granted pursuant to, this ARTICLE VI shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive officer or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean
a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing that authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in Delaware or at its principal
place of business.
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, an may be inspected by any
stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of
Chancery in Delaware is hereby vested with the exclusive jurisdiction to
determine whether a director is entitled to the inspection sought. The Court
may summarily order the corporation to permit the director to inspect any and
all books and records, the stock ledger, and the stock list and to make copies
or extracts therefrom. The Court may, in its discretion, prescribe any
limitations or conditions with reference to the inspection, or award such other
and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by
resolution which person or person may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and other the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these by-laws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the
board of directors, every holder of stock represented by certificates and upon
request every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of the corporation by the chairman or
vice-chairman of the board of directors, or the president or vice president,
and by the chief financial officer or an assistant treasurer, or the secretary
or an assistant secretary of such corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
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8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face of back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this SECTION 8.5, no new certificate for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it
on account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the General Corporation Law of Delaware
shall govern the construction of these by-laws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the
certificate of incorporation, may declare and pay dividends upon the shares of
its capital stock. Dividends may be paid in cash, in property, or in shares of
the corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of
the corporation, and meeting contingencies.
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8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock
of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books and the owner of shares to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE IX
AMENDMENTS
The by-laws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
by-laws upon the directors. The fact that such power has been so conferred
upon the directors shall not divest the stockholders of the power, nor limit
their power to adopt, amend or repeal by-laws.
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT BETWEEN
APPLIED ANALYTICAL INDUSTRIES, INC.
AND FREDERICK D. SANCILIO
THIS AGREEMENT made as of the 17th day of November, 1995, by and
between Applied Analytical Industries, Inc., a Delaware corporation
(hereinafter referred to as the "Company"), and Frederick D. Sancilio, Ph.D.
(hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS:
A. Employee is currently employed by the Company as its Chairman
and President, is serving as its chief executive officer and is the founder and
controlling stockholder of the Company; and
B. The Company is raising capital through a private placement of
securities and, in connection with and to facilitate that transaction, wishes
to assure itself and the purchaser(s) of such securities that the Company will
continue to have the benefit of the Employee's extraordinary, unique and
special abilities, experience and services, and Employee is willing to enter
into an agreement to that end, upon the terms and conditions hereinafter set
forth; and
C. Employee acknowledges that but for his agreement to remain in
the Company's employ and to restrict his activities after termination of such
employment, as set forth herein, the purchasers of such securities would be
unwilling to purchase such securities on the present terms and conditions; and
D. Employee acknowledges that in connection with the private
placement of securities to the purchaser(s), Employee, as a shareholder of the
Company, is receiving a significant dividend from the Company's accumulated
adjustment account;
NOW, THEREFORE, in consideration of good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby covenant and agree as follows:
1. Employment Agreement
The Company hereby agrees to continue to employ Employee, and Employee
hereby agrees to remain in the employ of the Company, on the terms and subject
to the conditions set forth in this Agreement.
2. Term of Employment
(a) The term of Employee's employment under this Agreement (the
"Term of Employment") shall commence as of the date hereof (the "Effective
Date") and shall expire at the close of business on the third anniversary of
that date unless sooner terminated in accordance with the terms and conditions
of this Agreement or extended as hereinafter provided in this section 2.
<PAGE> 2
(b) On each anniversary of the Effective Date, the Term of
Employment then remaining shall be extended, automatically and without action
by the Company or Employee, for an additional period of one year, unless prior
to the anniversary in question either party gives the other party written
notice, in the manner set forth in section 15 below, that the party giving the
notice does not wish to extend the Term of Employment then remaining. In the
event of any such extension, the "Term of Employment" shall include the period
of such extension. It is agreed and understood that Employee will not vote in
any vote of the Board of Directors of the Company concerning this Agreement.
3. Position, Duties and Responsibilities
(a) During the Term of Employment, Employee shall serve as, and
with the titles, offices and authority of, Chairman of the Board and President
of the Company, shall report only to the Board of Directors of the Company (the
"Board"), shall be the chief executive officer of the Company and, as such,
shall have effective supervision and control over, and responsibility for, the
strategic direction and general and active day-to-day leadership and management
of the business and affairs of the Company, subject to the authority of the
Board, and shall have all of the powers, authority, duties and responsibilities
usually incident to the positions and offices of Chairman of the Board and
President of the Company, and to the role of chief executive officer of the
Company, including but not limited to the authority to employ and discharge all
employees of the Company subject to approval of the Board with respect to
elected officers of the Company.
(b) During the Term of Employment, the Company shall use its best
efforts to cause Employee to be elected and re-elected (i) as a member of the
Board, (ii) as a member of the board of directors of any affiliate of the
Company on which board of directors Employee is serving on the date of this
Agreement, and (iii) as a member of the board of directors of any entity which
becomes a majority-owned subsidiary of the Company after the date of this
Agreement on which board of directors the Chairman of the Board, President and
chief executive officer of the Company would customarily serve. Employee
agrees to serve on the foregoing boards of directors during the Term of
Employment, without compensation in excess of that provided under this
Agreement.
(c) During the Term of Employment, Employee agrees to devote his
best efforts and substantially all of his business time, efforts and skills to
the performance of his duties and responsibilities under this Agreement, to be
loyal to the Company and to refrain from rendering services for any enterprise
other than the Company and its affiliates.
4. Office Location
During the Term of Employment, Employee shall be based at the
Company's principal executive offices, which shall be located at their present
location or within 30 miles thereof. Employee agrees to travel on business to
the extent reasonably necessary or appropriate for the performance of his
duties hereunder.
5. Compensation and Related Matters
In consideration of all services rendered by Employee in any capacity
during the Term of Employment, the Company shall pay or provide Employee the
amounts and benefits set forth in this section 5.
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(a) Salary. The Company shall pay Employee a salary at an annual
rate which shall be established from time to time by the Board, but which shall
not be less than $250,000. Employee's salary shall be paid in substantially
equal installments at monthly or more frequent intervals, in accordance with
the normal payroll practices of the Company. Employee's salary rate shall be
reviewed by the Board at least annually following the date of this Agreement to
ascertain whether, in the sole, good faith judgment of the Board, such rate
should be increased in light of Employee's performance, competitive pay levels
or such other factors (if any) as the Board may deem relevant. Any increase in
salary shall not limit or reduce any other obligation of the Company under this
Agreement and, once established at an increased specified rate, Employee's
salary shall not thereafter be reduced. Employee's annual salary under this
Agreement, at the rate specified above and including any increases, is
hereafter referred to as his "Salary".
(b) Bonus. The Company shall provide Employee with the
opportunity to earn an annual bonus for each fiscal year, commencing with
fiscal year 1996, that commences within the Term of Employment, equal to at
least 50% of his Salary for such year if the Company attains the target bonus
performance objectives mutually agreed to by the Board and Employee for such
fiscal year; provided that the annual bonus for any fiscal year that does not
terminate within the Term of Employment shall be prorated. It is agreed and
understood that Employee will not vote in any Board vote concerning his own
bonus.
(c) Other Incentive Plans. During the Term of Employment,
Employee shall be eligible to participate in any other compensation or
incentive plans of a long or short term nature in which other senior executives
of the Company are then eligible to participate, subject to the terms and
conditions of such plans. It is agreed and understood that eligibility to
participate is not synonymous with participation. Employee shall participate
in any such plan only if the Board, in its sole discretion, selects Employee
for such participation. It is agreed and understood that Employee will not
vote in any Board vote concerning his participation in any such plan.
(d) Perquisites. During the Term of Employment, Employee shall be
entitled to perquisites of office, including without limitation air travel
privileges, office facilities and secretarial staff, and to fringe benefits,
including, without limitation, payment or reimbursement of membership dues in
one country club and one luncheon club, and of tax return preparation and
advisory fees, at least equal to and on the same terms and conditions as those
provided to Employee on the date of this Agreement (all such fringe benefits,
however, not in the aggregate to exceed $10,000 per year), as well as to
reimbursement, upon proper accounting, of all reasonable expenses and
disbursements incurred by him in the course of his duties, including, without
limitation, membership fees and dues in various professional, trade and civic
organizations, societies and associations which the Company has heretofore paid
or reimbursed. Employee agrees to furnish an appropriate model automobile for
his use for business purposes, for which the Company shall pay Employee a
monthly automobile allowance of $750. The Company shall also pay or reimburse
the airfare of Employee's spouse if she accompanies him on any business trip
that exceeds two weeks' duration, and shall indemnify and hold Employee
harmless against any income tax liability he incurs as a result of such payment
or reimbursement or this indemnity.
(e) Employee Benefits. Employee, his dependents and
beneficiaries, including without limitation any beneficiary of a joint and
survivor or other optional method of payment applicable to the payment of
benefits under the Company's tax-qualified retirement plan(s), if any, shall be
entitled to all payments, benefits and age, pay and service credit for benefits
as a result of employment during the Term of Employment to which other senior
officers of the Company, their dependents and beneficiaries are then
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entitled under the employee benefit plans and practices of the Company,
including without limitation any qualified or non-qualified pension, profit
sharing and savings plans, death benefit plans (including split dollar life
insurance plans and group life insurance plans providing group term life
insurance, accidental death and dismemberment insurance, and travel accident
insurance), sickness and disability benefit plans, vacation pay plans, and
medical, dental, health and welfare plans. Nothing in this Agreement shall
preclude the Company from amending or terminating any employee benefit plan or
practice. In any event, however, Employee shall be entitled to five weeks of
vacation with pay each year. Any provision of this paragraph to the contrary
notwithstanding, Employee shall participate in any employee benefit plan that
is established after the date of this Agreement only if the Board of Directors,
in its sole discretion, permits him to participate.
6. Termination of Employment
(a) Death. The Term of Employment shall terminate upon the death
of Employee.
(b) Disability. The Term of Employment shall terminate in the
event of Disability of Employee. As used in this Agreement, the term
"Disability" means an accident or physical or mental illness which prevents
Employee from substantially performing his duties and responsibilities
hereunder for six months (consecutive or otherwise) within any twelve
consecutive month period. The Term of Employment shall terminate at the close
of business on the last day of such six month period, but without prejudice to
any payments due Employee in respect of disability under any pension or welfare
plan. The amount of any Salary or other compensation payable to Employee
during such six month period as a result of this paragraph may be reduced by
any payments which Employee receives for the same period because of disability
under any disability or pension plan of the Company or any affiliate of the
Company.
(c) Cause. The Company may terminate the Term of Employment for
Cause. For purposes of this Agreement, Employee shall be considered to be
terminated for "Cause" only if (i) Employee has --
(A) willfully failed to comply with any of the material
terms of this Agreement;
(B) willfully and continually failed to perform his
duties hereunder;
(C) willfully engaged in misconduct materially injurious
to the Company; or
(D) been convicted of a felony or a crime of moral
turpitude;
and (ii) a resolution is adopted by a vote of the majority of the members of
the Board (excluding Employee) finding that Employee has engaged in conduct
referred to in (A), (B), (C) or (D) above, specifying the particulars in
reasonable detail, and (iii) Employee received thirty (30) days' advance
written notice that the Board intended to meet to consider Employee's
termination for Cause and Employee was given a reasonable opportunity to be
heard by the Board on the issue prior to the Board's vote on the matter.
(d) Constructive Discharge. Employee may terminate his employment
under this Agreement on 10 days' advance written notice to the Company given
within 90 days after the occurrence of a Constructive Discharge Event. For
purposes of this Agreement, "Constructive Discharge Event" means
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any act or omission identified below in this paragraph 6(d) to which Employee
does not consent in writing and which does not occur in connection with
termination of Employee's employment for Cause or Disability as defined in this
Agreement; provided that no such act or omission shall constitute a
Constructive Discharge Event unless and until Employee gives the Board written
notice describing the act or omission in reasonable detail within 60 days after
the Employee first knows (or should have known) of the act or omission and the
act or omission is not cured within 30 days after the Board receives such
written notice:
(i) Any (A) failure to re-designate Employee as, or (B) removal of
Employee from, or failure to re-elect Employee to, any of the following
positions:
(I) Chairman of the Board, President and chief executive
officer of the Company, or
(II) a member of the Board of Directors of (aa) the
Company, (bb) any affiliate of the Company on whose Board of Directors Employee
now serves, and (cc) any future majority-owned subsidiary of the Company on
whose Board of Directors the Chairman of the Board, President and chief
executive officer of the Company would customarily serve;
(ii) (A) Any conduct by the Board, or
(B) any assignment to Employee of any duties, functions,
authority or responsibilities by the Board,
that in either case (A) or (B) --
(I) calls for Employee to report to anyone other
than the Board, or
(II) deprives Employee of effective supervision
and control over, and responsibility for, the strategic direction and general
and active day-to-day leadership and management of the business and affairs of
the Company, subject to the authority of the Board, or
(III) is substantially inconsistent with or
deprives Employee of any of the material duties, functions, authority or
responsibilities incident to his positions described above, including the
authority to hire and discharge all employees of the Company subject to
approval of the Board in the case of elected officers, or
(IV) substantially interferes with Employee's
ability to substantially perform the duties, functions or responsibilities, or
exercise the authority, of his positions described in section 3 above;
(iii) any material failure by the Company to comply with the
provisions of section 4 above (relating to office location) or section 5 above
(relating to compensation and related matters).
A termination by Employee in accordance with the provisions of this paragraph
6(d) shall not be deemed a voluntary termination of employment by Employee for
the purpose of this Agreement or any plan or practice of the Company or its
affiliates.
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<PAGE> 6
(e) Termination by Company Not for Cause. Notwithstanding any
provision of this Agreement to the contrary, the Board shall have the right to
terminate Employee's employment for any reason other than Cause at any time,
subject to the consequences of such termination as set forth in this Agreement.
(f) Notice of Termination. Any termination by the Company for
Disability or Cause as defined in paragraph 6(b) and (c) or by Employee
pursuant to paragraph 6(d) hereof (relating to Constructive Discharge Events)
shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated. If any dispute concerning
termination of Employee's employment under paragraphs 6(b), (c) or (d) above
results in a final determination that a proper basis for such termination did
not exist, Employee's employment hereunder shall be treated as having been
terminated other than pursuant to paragraph 6(b), (c) or (d), as the case may
be, by the party who gave Notice of Termination.
7. Compensation for Termination and Related Matters
The parties recognize and agree that, if the Company terminates
Employee's employment under this Agreement other than for Disability pursuant
to paragraph 6(b) above or Cause pursuant to paragraph 6(c), or if Employee
terminates his employment in accordance with paragraph 6(d) above following a
Constructive Discharge Event, the actual damages to Employee would be difficult
if not impossible to ascertain. Accordingly, the parties agree that, if the
Company terminates Employee's employment under this Agreement other than for
Disability pursuant to paragraph 6(b) above or Cause pursuant to paragraph
6(c), or if Employee terminates his employment in accordance with paragraph
6(d) above following a Constructive Discharge Event, (any such termination by
the Company or Employee being hereafter referred to as a "Compensable
Termination"), then Employee shall thereupon be relieved of any further
obligation under this Agreement other than sections 9 and 10 hereof (relating
to restrictive covenants and intellectual property) and his sole remedy shall
be a right to receive from the Company, as liquidated damages, severance pay or
both, the payments and benefits provided in paragraphs 7(a) through (and
including) 7(e) below; provided that no provision of this section 7 is intended
to curtail, reduce or otherwise affect adversely any rights Employee may have
in respect of termination of employment under any compensation, incentive or
employee benefit plan or any rights Employee may have under section 8 hereof to
put shares to the Company. Employee shall not be required to mitigate the
amount of any payment or benefit provided for in this section 7 by seeking
other employment or otherwise, nor shall any compensation earned by Employee in
other employment or otherwise reduce the amount of any payment or benefit
provided for in this section.
(a) The Company shall pay Employee his Salary (as defined in
paragraph 5(a) above) prorated through the date of termination;
(b) The Company shall pay Employee any accrued but unpaid bonus
award for Employee's services in the fiscal year preceding the date of
termination, and a prorated bonus award for the fiscal year in which the date
of termination occurs, such prorated bonus award to be determined by
multiplying the "Target Bonus" as defined in paragraph 7(d) below by a fraction
the numerator of which is the number of days in the calendar year of
termination that precede the date of termination and the denominator of which
is the number 365;
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(c) The Company shall pay Employee an amount equal to two times
his Salary (as defined in paragraph 5(a) above), in 24 substantially equal
monthly installments commencing on or before the tenth day after the date of
termination and continuing at monthly intervals thereafter;
(d) The Company shall pay Employee an amount equal to two times
the "Target Bonus" as hereafter defined, in 24 substantially equal monthly
installments commencing on or before the tenth day after the date of
termination and continuing at monthly intervals thereafter. For purposes of
this section 7, the "Target Bonus" shall mean fifty percent (50%) of
Employee's Salary (as defined in paragraph 5(a) above);
(e) The Company shall provide Employee, his dependents and
beneficiaries with the medical insurance benefits and life insurance benefits
which they would receive under paragraph 5(e) of this Agreement if the Term of
Employment were to continue for two years after the date of termination and the
compensation described in paragraphs 7(c) and (d) above were paid to him in the
capacity of an employee (rather than a former employee); provided, however,
that if and to the extent the Company determines that such benefits cannot be
provided under the plans in question due to Internal Revenue Code or other
restrictions, the Company shall provide tax-equivalent benefits through other
means reasonably satisfactory to Employee, and, provided further, that if
Employee obtains full time employment within two years after his date of
termination, any benefits to be provided under this paragraph shall be reduced
to the extent Employee receives benefits under comparable plans of the
successor employer.
8. Employee's Put
If a Compensable Termination (as defined in section 7 above) occurs
before equity securities of the Company or a successor to the Company, or
securities convertible into or exchangeable for such equity securities, are
first sold to the public pursuant to a registration statement complying with
section 5 of the Securities Act of 1933 as amended (an "Initial Public
Offering"), or if the Term of Employment terminates before an Initial Public
Offering by reason of Disability as provided in paragraph 6(b) above, then at
any time within three months after the date on which such Compensable
Termination (or termination by reason of Disability) occurs and before such an
Initial Public Offering occurs Employee may elect to sell to the Company, and
cause the Company to purchase from Employee, any or all shares of Company
common stock (or successor securities) then beneficially owned by Employee, but
in no event more than ten percent of the shares of Company common stock (or
successor securities) then issued and outstanding. In the event such an
election is timely made, the Company shall purchase from Employee the shares to
which the election relates (but in no event more than ten percent of the shares
of Company common stock (or successor securities) then issued and outstanding).
It shall be a condition to the Company's obligation to purchase such shares
that Employee give prior written notice (which shall be irrevocable) to the
Company which shall set forth the number of shares to which the election
relates and the date of such sale, which shall be not less than 90 nor more
than 120 days after the date of the giving of the notice. In the event of any
such sale, the amount which the Company shall pay Employee for the shares being
sold shall be equal to the Fair Market Value of such shares on the date on
which the Compensable Termination or termination for Disability occurred. The
Company shall pay Employee twenty-five percent (25%) of the purchase price (or
such higher percentage thereof as the Company may in its sole discretion
direct) on the sale date. Any balance of the purchase price shall be paid in
three equal annual installments of principal, one of which shall be payable on
each anniversary of the sale date through and including the third anniversary
thereof; provided that the Company may elect to pre-pay any or all such
installments (or any portion of any installment) at any time and without
penalty. Any portion
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of the purchase price which is payable after the sale date pursuant to this
section shall accrue interest at the lowest rate that will avoid imputation of
interest under Federal income tax rules applicable to the sale. Any such
accrued interest shall be paid with each installment of principal. Each
payment to be made to Employee pursuant to this section shall be made by
certified check or bank check drawn on a U.S. bank, payable to the order of
Employee or his designee. For purposes of this section 8, Fair Market Value
shall be determined by averaging the fair market value of a share of common
stock without regard to any control premium, as determined by two independent
appraisers, whose fees and expenses shall be paid by the Company and who shall
be mutually selected by Employee and the Company. If Employee and the Company
are able to mutually agree on only one appraiser, then the second appraiser
shall be selected by the first. If Employee and the Company are unable to
mutually agree on any appraiser within 20 days after Employee gives such
notice, then the two appraisers shall be selected within 10 days thereafter by
an arbitrator designated by the American Arbitration Association, whose fees
and expenses shall be paid by the Company.
9. Restrictive Covenants
(a) Employee covenants and agrees that during the 24 months
following the termination of his employment with the Company for any reason
(including, without limitation, a Compensable Termination, a termination that
is not a Compensable Termination and a termination of employment following the
expiration of the Term of this Agreement), he will not engage in "Competition"
with the Company. For this purpose, "Competition" means --
(i) directly or indirectly, taking or contracting to take
a management, advisory, operational, sales, employment or ownership position
with, or control of, a business engaged in the development, formulation,
testing, manufacturing, marketing, distribution or sale of pharmaceutical
products (including, without limitation, generic drug products, whether
prescription or otherwise) or services to the pharmaceutical industry; provided
that in no event shall ownership of less than 1% of the outstanding equity
securities of any issuer whose securities are registered under the Securities
Exchange Act of 1934, standing alone, be deemed Competition for this purpose
and, provided further, that this provision shall not restrict Employee from
employment or other association with the ethical portion of a pharmaceutical
company or a not-for-profit institution that is not developing generic
pharmaceutical products;
(ii) soliciting any person or business who or which is a
supplier, customer or client of the Company or any of its subsidiaries or
affiliates, on behalf of a competitive business described in clause (i) above
of this subparagraph 9(a), or inducing any such person or business to
terminate, reduce or otherwise alter to the detriment of the Company, its
subsidiaries or affiliates their business with the Company, its subsidiaries or
affiliates; or
(iii) inducing or attempting to persuade any employee of
the Company, its subsidiaries or affiliates to terminate his or her employment
relationship, or offering employment to any employee of the Company, its
subsidiaries or affiliates on behalf of any person or entity other than the
Company, its subsidiaries or affiliates.
Employee further covenants and agrees that during such 24 months' period he
will not otherwise act or conduct himself to the detriment of the Company, its
subsidiaries or affiliates.
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(b) Employee agrees not to disclose, either while in the Company's
employ or at any time thereafter, to any person not employed by the Company, or
not engaged to render services to the Company, except with the prior written
consent of an authorized officer of the Company or as necessary or appropriate
for the performance of his duties hereunder, any confidential information
obtained by him while in the employ of the Company, including, without
limitation, information relating to any of the inventions, processes, formulae,
plans, devices, compilations of information, research, methods of distribution,
suppliers, customers, client relationships, marketing strategies, trade secrets
or other proprietary information of the Company, its subsidiaries or
affiliates; provided, however, that this provision shall not preclude Employee
from use or disclosure of information known generally to the public or from
disclosure required by law or court order. Employee agrees that, in the event
his employment with the Company terminates for any reason, he shall promptly
return to the Company all property of the Company, its subsidiaries and
affiliates in his possession or under his direct or indirect control, including
without limitation any record, list, drawing, blueprint, specification,
material, document, diary or compilation of data, whether printed, typed,
handwritten, on diskette or on any other computer media, relating to its or
their methods of distribution, testing, suppliers, customers, client
relationships, marketing strategies, business plans or any description of any
formulae or secret processes, or which was obtained by him or entrusted to him
during the course of his employment with the Company.
(c) Employee recognizes and agrees that, by reason of his
knowledge, experience, skill and abilities, his services are extraordinary and
unique, that the breach or attempted breach of the restrictions set forth above
in this section will result in immediate and irreparable injury for which the
Company will not have an adequate remedy at law, and that the Company shall be
entitled to a decree of specific performance of those restrictions and to a
temporary and permanent injunction enjoining the breach thereof, and to seek
any and all other remedies to which the Company may be entitled, including,
without limitation, monetary damages, without posting bond or furnishing
security of any kind.
(d) Employee agrees that the Company shall not be obligated to
make any payments or provide any benefits pursuant to this Agreement if
Employee shall, during the period in which such payments are being made or
benefits provided, engage in Competition as defined above or otherwise act or
conduct himself to the detriment of the Company, its subsidiaries or
affiliates. The foregoing provisions of this subparagraph are in addition to
and not by way of limitation of any other rights and remedies available to the
Company.
(e) Employee specifically and expressly represents and warrants
that (i) he has reviewed and agreed to the restrictive covenants contained in
this Agreement and their contemplated operation after receiving the advice of
counsel of his choosing; (ii) he believes, after receiving such advice, that
the restrictive covenants and their contemplated operation are fair and
reasonable; (iii) he will not seek or attempt to seek to have the restrictive
covenants declared invalid, and, after receiving the advice of counsel,
expressly waives any right to do so; and (iv) if the full breadth of any
restrictive covenant and/or its contemplated operation shall be held in any
fashion to be too broad, such covenant or its contemplated operation, as the
case may be, shall be interpreted in a manner as broadly in favor of the
beneficiary of such covenant as is legally permissible. Employee recognizes
and agrees that the restrictions on his activities contained in this section
are required for the reasonable protection of the Company and its investments.
-9-
<PAGE> 10
10. Intellectual Property
Employee agrees that all "Intellectual Property" which is or was at
any time made or conceived by Employee, acting alone or in conjunction with
others, during Employee's employment with the Company, is or shall be the
property of the Company, free of any reserved or other rights of any kind on
Employee's part. During the Term of Employment and thereafter Employee shall
promptly make full disclosure of any such Intellectual Property to the Company
and, at its cost and expense, do all acts and things (including, among others,
the execution and delivery under oath of patent and copyright applications and
instruments of assignment) deemed by the Company to be necessary or desirable
at any time in order to effect the full assignment to the Company of Employee's
right and title, if any, to such Intellectual Property. For purposes of this
Agreement, "Intellectual Property" means any discovery, development, program,
concept, idea, process or improvement, whether or not patentable, relating to
the present or planned future activities, business, products or services of the
Company, its subsidiaries or affiliates.
11. Successors; Binding Agreement
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall entitle Employee to compensation
under section 7 above and to put shares to the Company pursuant to section 8
above, in the same amount and on the same terms as he would be entitled to
hereunder if his employment were terminated by the Company other than for
Disability or Cause, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the
date of termination.
(b) As used in this Agreement, the "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers an agreement provided for in this
section 11 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(c) This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts are due and
payable to him hereunder, all such amounts, unless otherwise provided herein,
shall be paid to Employee's designated beneficiary or, if there be no such
designated beneficiary, whether because none was designated or because none is
alive or in existence at the time any amount becomes payable hereunder, to the
legal representatives of Employee's estate.
(d) Except as to withholding of any tax under the laws of the
United States or any other country, state or locality, neither this Agreement
nor any right or interest hereunder nor any amount payable at any time
hereunder shall be subject in any manner to alienation, sale, transfer,
assignment, pledge, attachment, or other legal process, or encumbrance of any
kind by Employee or the beneficiaries of Employee or by his legal
representatives without the Company's prior written consent, nor shall there be
any right of set-off or counterclaim in respect of any debts or liabilities of
Employee, his beneficiaries or legal representatives; provided, however, that
nothing in this paragraph shall preclude Employee from
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<PAGE> 11
designating a beneficiary to receive any benefit payable on his death, or the
legal representatives of Employee from assigning any rights hereunder to the
person or persons entitled thereto under his will or, in case of intestacy, to
the person or persons entitled thereto under the laws of intestacy applicable
to his estate.
12. Agreement Binding
This Agreement shall be binding upon and shall inure to the benefit of
Employee, his heirs and legal representative(s), and the Company, its
successors and assigns and any person, firm, corporation or other entity which
succeeds to all or substantially all of the business, assets or property of the
Company, as provided in section 11 hereof.
13. General
(a) This Agreement contains the entire understanding of the
parties with respect to the subject matter hereof and cancels and supersedes
any and all other agreements between the parties with respect to the subject
matter hereof, including the employment agreement and the memorandum of
understanding among the parties and James L. Waters dated October 27, 1992.
(b) The Company recognizes that, within 90 days after the
execution of this Agreement, Employee and GenerEst, Inc. ("GenerEst") intend to
amend the Noncompetition Agreement dated November 25, 1994 between Employee and
GenerEst to provide for the employment of Employee by GenerEst in a senior
officer position at an annual salary of $100,000, with the opportunity to earn
an annual bonus amounting to 50% of such salary if target bonus performance
goals mutually agreed to by GenerEst and Employee are attained, or a higher
amount (to be determined by the board of directors of GenerEst, excluding
Employee) if such goals are exceeded, and with other terms and conditions to be
determined by mutual agreement of GenerEst and Employee on a reasonable basis.
The Company agrees that, if such Noncompetition Agreement is not so amended
within 90 days after the execution of this Agreement (for any reason other than
Employee's failure to use his reasonable best efforts to so amend such
Noncompetition Agreement), Employee's annual Salary as defined above in
paragraph 5(a) shall automatically and without further action by the parties
hereto be increased, effective as of the date of this Agreement, by $100,000
for all purposes of this Agreement. The Company agrees to use its reasonable
best efforts to cause GenerEst to so amend such Noncompetition Agreement and to
cause Employee to be elected a senior officer of GenerEst, and agrees that, any
provision of this Agreement to the contrary notwithstanding, neither the
execution by Employee of such amended Noncompetition Agreement as aforesaid nor
the performance by Employee of his obligations thereunder shall be deemed to
constitute a breach of this Agreement in any way.
(c) Any modification of this Agreement shall not be binding unless
in writing and signed by the Company and Employee.
(d) Notwithstanding anything contained in this Agreement to the
contrary, to the extent that the payments and benefits provided under this
Agreement (such payments and benefits are collectively referred to as the
"Payments"), when added to the benefits provided to, or for the benefit of,
Employee under any other Company plan or agreement, would be subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced
(but not below zero) if and to the extent necessary so that no Payment to be
made or provided to Employee shall be subject to the Excise Tax (such reduced
amount is hereinafter
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<PAGE> 12
referred to as the "Limited Payment Amount"). Unless Employee shall have given
prior written notice specifying a different order to the Company to effectuate
the Limited Payment Amount, the Company shall reduce or eliminate the Payments,
by first reducing or eliminating those payments or benefits which are not
payable in cash and then by reducing or eliminating cash payments, in each case
in reverse order beginning with payments or benefits which are to be paid the
farthest in time from the determination (as hereinafter defined). Any notice
given by Employee pursuant to the preceding sentence shall take precedence over
the provisions of any other plan, arrangement or agreement governing Employee's
rights and entitlements to any benefits or compensation.
(e) Enforceability
In the event that any provision of this Agreement is determined to be
invalid or unenforceable, the remaining terms and conditions of this Agreement
shall be unaffected and shall remain in full force and effect, and any such
determination of invalidity or unenforceability shall not affect the validity
or enforceability of any other provision of this Agreement.
(f) Notices
All notices which may be necessary or proper for either the Company or
Employee to give to the other shall be in writing and shall be delivered by
hand or sent by registered or certified mail, return receipt requested, or by
air courier, to Employee at:
Frederick D. Sancilio, Ph. D.
7845 Masonboro Sound Road
Wilmington, NC 28409
with a copy to:
Frederick D. Sancilio, Ph. D.
Applied Analytical Industries, Inc.
5051 New Centre Drive
Wilmington, NC 28403
,and shall be sent in the manner described above to the Company at Applied
Analytical Industries, Inc., 5051 New Centre Drive, Wilmington, NC 28403 Attn:
R. Forrest Waldon, Esq., or delivered by hand to its Secretary, and shall be
deemed given when sent, provided that any Notice of Termination or notice given
pursuant to section 2 hereof shall be deemed given only when received. Any
party may by like notice to the other party change the address at which he or
it is to receive notices hereunder.
E. Arbitration
Any controversy or claim arising out of, or related to, this
Agreement, or the breach thereof, shall be settled by binding arbitration in
the County of New Hanover, State of North Carolina, in accordance with the
rules then obtaining of the American Arbitration Association, and the
arbitrator's decision shall be binding and final, and judgment upon the award
rendered may be entered in any court having jurisdiction thereof.
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<PAGE> 13
1. Governing Law
This Agreement shall be governed by and enforceable in accordance with
the laws of the State of North Carolina without giving effect to the principles
of conflicts of laws thereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its proper representative and Employee has hereunto set his hand as of the
date first above written.
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ R. Forrest Waldon
-------------------------------
[Seal] Title: Vice President and
General Counsel
Attest:
/s/ Albert N. Cavagnaro
- --------------------------------
Secretary
EMPLOYEE
/s/ Frederick D. Sancilio
----------------------------------
Frederick D. Sancilio, Ph.D.
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<PAGE> 1
EXHIBIT 10.2
APPLIED ANALYTICAL INDUSTRIES. INC.
1995 RESTRICTED STOCK AWARD PLAN
AMENDED AND RESTATED
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1995 Restricted
Stock Award Plan (the "Plan") is to promote the growth and profitability of
Applied Analytical Industries, Inc. (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 growth
of the Company. This purpose will be achieved through the grant of restricted
stock awards ("Restricted Stock Awards") consisting of shares of the Company's
Class B Non-Voting Common Stock ("Class B Stock") to participants in the Plan
subject to vesting requirements, restrictions on transfer and risk of
forfeiture upon termination of employment as set forth herein.
2. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board"); provided, however, that from and after the registration of any class
of equity securities of the Company pursuant to Section 12 of the securities
Exchange Act of 1934, as amended, if the Board includes members who are not
"disinterested persons" (as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, or any applicable successor rule
or regulation) or "outside directors" (as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder),
then all authority of the Board under the Plan shall be exercised by a
committee of the Board (the "Committee") composed solely of members thereof who
are both "disinterested persons" and "outside directors" (as so defined).
The Board or the Committee shall have complete authority to: (i) interpret
all terms and provisions of the Plan consistent with law; (ii) select from the
group of employees eligible to participate in the Plan those employees to whom
Restricted Stock Awards shall be granted; (iii) within the limits established
herein determine the number of shares to be subject to any Restricted Stock
Award granted to each of such employees; (iv) prescribe the form of
instrument(s) evidencing Restricted Stock Awards; (v) determine the time or
times at which Restricted Stock Awards shall be granted to employees; (vi)
adopt, amend and rescind general and special rules and regulations for the
Plan's administration; and (vii) make all other determinations necessary or
advisable for the administration of the Plan.
<PAGE> 2
Any action which the Board or the Committee is authorized to take may be
taken without a meeting if all the members of the Board or the Committee sign a
written document authorizing such action to be taken, unless different
provision is made by the By-Laws of the Company or by resolution of the Board
or the Committee.
The Board or the Committee may designate selected Board or Committee
members or certain employees of the Company to assist the Board or the
Committee in the administration of the Plan and may grant authority to such
persons to select from the group of employees eligible to participate in the
Plan those employees to whom Restricted Stock Awards shall he granted within
the limits established herein, determine the number of shares to be subject to
any Restricted Stock Award granted to each of such employees, and execute
documents, including agreements relating to Restricted Stock Awards, on behalf
of the Board or the Committee.
No member of the Board or the Committee or employee of the Company
assisting the Board or the Committee pursuant to the preceding paragraph shall
be liable for any action taken or determination made in good faith.
3. STOCK SUBJECT TO PLAN
The stock to be offered under this Plan shall be authorized but unissued
shares of Class B Stock. An aggregate of 833.62 shares of Class B Stock are
reserved for Restricted Stock Awards under the Plan. The number of shares
reserved under this Plan may be adjusted to reflect any change in the
capitalization of the Company as contemplated by Section 6 hereof and occurring
after the adoption of the Plan. The Board or the Committee will maintain
records showing the cumulative total of all shares subject to Restricted Stock
Awards outstanding under the Plan.
4. RESTRICTED STOCK AWARDS FOR EMPLOYEES
(a) Eligibility and Factors to be Considered in Granting Restricted Stock
Awards
The grant of Restricted Stock Awards under this Section 4 shall be limited
to certain long-term employees of the Company and other employees who have made
key contributions to the Company's success as selected by the Board or the
Committee. In making any determination as to the employees to whom Restricted
Stock Awards shall be granted under this Section 4 and as to the number of
shares to be subject thereto, the Board or the Committee shall take into
account, in each case, the tenure of such employee with the Company and/or the
contributions made by such employee to the Company and such additional factors,
if any, as the Board or the Committee shall deem relevant to the accomplishment
of the purposes of the Plan.
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<PAGE> 3
(b) Allotment of Shares
The Board or the Committee may, in its sole discretion and subject to the
provisions of this Plan, grant to participants eligible under this Section 4,
on or after the date hereof, Restricted Stock Awards. Restricted Stock Awards
granted under this Section 4 may be allotted to participants in such amounts,
subject to the limitations specified in this Plan, as the Board or the
Committee, in its sole discretion, may from time to time determine.
(c) Time Granting Restricted Stock Awards
The date of grant of a Restricted Stock Award under this Section 4 shall,
for all purposes, be the date on which the Board or the Committee makes the
determination of granting Restricted Stock Awards (each such date, a "Grant
Date"). Notice of the determination shall be given to each employee to whom a
Restricted Stock Award is so granted within a reasonable time after the Grant
Date.
(d) Issue Price for Restricted Stock Awards
The Board or the Committee shall establish the issue price for any
Restticted Stock Award. Restricted Stock Awards may be issued for any
consideration or no consideration (other than the par value thereof).
(e) Vesting.
All Restricted Stock Awards shall vest on the fifth anniversary of the
Grant Date, unless vested earlier in the event of a registered initial public
offering ("IPO") of the Company's common stock or an Acquisition Transaction as
discussed below or as otherwise set forth herein.
Restricted Stock Awards shall vest following an IPO as follows:
<TABLE>
<CAPTION>
Aggregate Percentage of
Restricted Stock Award Shares
Date Vested on such Date
---- -------------------
<S> <C>
First Anniversary Date of
the Closing of the IPO 50%,
Second Anniversary Date of
the Closing of the IPO 100%,
</TABLE>
All Restricted Stock Awards shall be deemed fully vested upon an
Acquisition Transaction. For tha purposes of the Plan, an "Acquisition
Transaction" shall mean and include the following:
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<PAGE> 4
(i) The consummation of a tender offer or exchange for the ownership
of securities of the Company representing 51% or more of the
combined voting powers of the Company's then outstanding voting
securities;
(ii) The adoption by the Company's stockholders of a plan of merger or
consolidation providing for the merger or consolidation of the
Company with another corporation (other than an affiliate of the
Company within the meaning of the Securities Exchange Act of
1934, as amended (the "1934 Act")) and as a result of such merger
or consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation would then
be owned in the aggregate by the former stockholders of the
Company; or
(iii) The transfer by the Company of substantially all of its assets to
another corporation or entity which is not a wholly-owned
subsidiary of the Company.
(f) Risk of Forfeiture
Any unvested portion of Restricted Stock Award granted to an employee
shall be automatically forfeited to the Company in the event such employee
shall cease to be an employee of the Company or any of its subsidiaries, unless
(i) (a) such employee shall die while an employee of the Company or such
subsidiary, (b) such employee shall become permanently or totally disabled
within the meaning of section 22(e)(3) of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision) while an employee of the
Company or such subsidiary, or (c) such employee shall retire with the consent
of the Company, and (ii) Within ninety (90) days of such death, disability or
retirement, the Board or the Committee shall determine that such unvested
shares shall not be forfeited, in which case the Restricted Stock Award granted
to such employee shall be deemed fully vested.
The shares subject to any forfeited Restricted Stock Award or portion thereof
shall no longer be charged against the applicable limitation or limitations
provided in Section 3 of the Plan and may again become shares available for the
purposes, and subject to the same applicable limitations, of the Plan.
5. NON-TRANSFERABILITY
To the extent that shares of Class B Stock constituting a Restricted Stock
Award are not vested pursuant to the terms of the Plan such shares may not be
transferred except pursuant to a qualified domestic relations order as defined
by the Code or in
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<PAGE> 5
Title I of the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding common stock of the Company by
reason of a stock dividend, stock split, stock consolidation, recapitalization,
reorganization, merger, split up or the like, the shares available for purposes
of the Plan and the number and kind of shares subject to outstanding Restricted
Stock Awards shall be appropriately adjusted so as to preserve, but not
increase, the benefits of the Plan to the Company and the benefits to the
holders of such Restricted Stock Awards.
Adjustments under this Section shall be made by the Board or the Committee,
whose determination as to what adjustments shall be made and the extent
thereof, shall be final, binding and conclusive.
7. NO RIGHT TO EMPLOYMENT
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon
any employee participant under the Plan any right to continue in the employ of
the Company, or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
this Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if this Plan had not been adopted.
8. AMENDMENT AND TERMINATION
The Board or the Committee may at any time suspend, amend, or terminate the
Plan. The Board or the Committee may make such modifications of the terms and
conditions of a holder's Restricted Stock Award as it shall deem advisable.
Notwithstanding the foregoing sentence, no amendment, suspension or termination
shall, without the consent of the holder of a Restricted Stock Award, alter or
impair any rights or obligations under such Restricted Stock Award.
9. EFFECTIVE DATE OF THE PLAN
The Plan was adopted by the Board on November 16, 1995, and shall be
effective until November 16, 2003, after which time no Restricted Stock Award
shall be granted, but such termination shall not affect any Restricted Stock
Award previously granted under the Plan.
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<PAGE> 1
EXHIBIT 10.3
APPLIED ANALYTICAL INDUSTRIES, INC.
1995 STOCK OPTION PLAN
AMENDED AND RESTATED
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1995 Stock
Option Plan (the "Plan") is to promote the growth and profitability of Applied
Analytical Industries, Inc. (the "Company") and its subsidiaries
("Subsidiaries") from time to time by increasing the personal participation of
officers and key employees in the financial performance of the Company and by
providing such officers and key employees with an equity opportunity in the
Company. This purpose will be achieved through the grant of stock options
("Options") to purchase shares of Class B Non-Voting Common Stock of the
Company (the "Class B Stock") subject to restrictions on transfer or such other
restrictions as the administrators of the Plan may determine.
2. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board"); provided, however, that from and after the registration of any class
of equity securities of the Company pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, if the Board includes members who are not
"disinterested persons" (as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, or any applicable successor rule
or regulation ) or "outside directors" (as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder),
then all authority of the Board under the Plan shall be exercised by a
committee of the Board (the "Committee") composed solely of members thereof who
are both "disinterested persons" and "outside directors" (as so defined).
The Board or the Committee shall have complete authority to: (i)
interpret all terms and provisions of the Plan consistent with law; (ii) select
from the group of officers and key employees eligible to participate in the
Plan the officers and key employees to whom Options shall be granted; (iii)
within the limits established herein, determine the number of shares to be
subject to and the exercise price of, each Option; (iv) prescribe the form of
instruments) evidencing Options granted under the Plan; (v) determine the time
or times at which Options shall be granted to officers or key employees; (vi)
provide, if appropriate, for the exercisability of Options in installments or
subject to specified conditions; (vii) determine the method of exercise of
Options; (viii) adopt, amend and rescind general and special rules and
regulations for the Plan's administration; and (ix) make all other
determinations necessary or advisable for the administration of the Plan.
<PAGE> 2
Any action which the Board or the Committee is authorized to take may
be taken without a meeting if all the members of the Board or the Committee
sign a written document authorizing such action to be taken, unless different
provision is made by the By-Laws of the Company or by resolution of the Board
or the Committee.
The Board or the Committee may designate selected Board or Committee
members or certain employees of the Company to assist the Board or the
Committee in the administration of the Plan and may grant authority to such
persons to execute documents, including Options, on behalf of the Board or the
Committee.
No member of the Board or the Committee or employee of the Company
assisting the Board or the Committee pursuant to the preceding paragraph shall
be liable for any action taken or determination made in good faith.
3. STOCK SUBJECT TO PLAN
The stock to be offered under the Plan shall be shares of Class B
Stock previously issued and thereafter acquired by the Company pursuant to an
agreement entered into by the Company and Frederick D. Sancilio and James L.
Waters in connection with the adoption of the Plan. An aggregate of 1,917.3
shares of Class B Stock may be issued upon exercise of Options granted under
the Plan; provided, however, notwithstanding any other provision of this Plan,
the Corporation shall have no obligation or liability to deliver or issue any
shares of Class B Stock or other capital stock upon the exercise of any Option
to the extent it has not purchased such shares from Frederick D. Sancilio or
James L. Waters for issuance to the Option holder. Any or all of the Options
granted under Section 4 hereof may, at the Board or the Committee's discretion,
be intended to qualify as incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). The number of shares to be issued under the Plan may be adjusted to
reflect any change in the capitalization of the Company as contemplated by
Section 9 hereof and occurring after the adoption of the Plan. The Board or
the Committee will maintain records showing the cumulative total of all shares
subject to Options outstanding under the Plan.
4. OPTION AWARDS
(a) Eligibility and Factors Considered in Granting Options
The grant of Options under this Section 4 shall be limited to those
officers and key employees of the Company or any of its Subsidiaries who have
made the greatest contribution to the Company's long-term performance and are
selected by the Board or the Committee. In making any determination as to the
officer(s) and key employees) to whom Options shall be granted under this
Section 4 and as to the number of shares to be subject thereto, the Board or
the Committee shall take into account, in each case, the level and
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<PAGE> 3
responsibility of the person's position, the level of the person's performance,
the person's level of compensation, the assessed potential of the person and
such additional factors as the Board or the Committee shall deem relevant to
the accomplishment of the purposes of the Plan.
(b) Allotment of Shares
The Board or the Committee, in its sole discretion and subject to the
provisions of the Plan, may grant to participants eligible under this Section
4, on or after the date hereof, Options. Options may be, at the discretion of
the Board or the Committee: (i) Options that are intended to qualify as
Incentive Stock Options; or (ii) Options that are not intended to be Incentive
Stock Options; or (iii) both of the foregoing, if granted separately, and not
in tandem. Each Option granted under the Plan must be clearly identified as to
its status as an Incentive Stock Option or not.
Options granted under this Section 4 may be allotted to participants
in such amounts, subject to the limitations specified in the Plan, as the Board
or the Committee, in its sole discretion, may from time to time determine,
provided that no participant may be granted Options with respect to more than
1,500 shares of Class B Stock.
In the case of Options intended to be Incentive Stock Options, the
aggregate fair market value (determined at the time of such Incentive Stock
Options' respective grants) of the shares with respect to which Incentive Stock
Options are exercisable for the first time by a participant hereunder during
any calendar year (under all plans taken into account pursuant to Section
422(d) of the Code) shall not exceed $100,000. Options under this Section 4
not intended to qualify as Incentive Stock Options may be granted to any Plan
participant without regard to the Section 422(d) limitations.
(c) Time of Granting Options
The date of grant of an Option under this Section 4 shall be, for all
purposes, the date on which the Board or the Committee makes the determination
of granting such Option (each such date, a "Grant Date"). Notice of the
determination shall be given to each officer or key employee to whom an Option
is so granted under this Section 4 within a reasonable time after the Grant
Date.
(d) Exercise Price for Options
The price per share at which each Option granted under this Section 4
may be exercised shall be such price as shall be determined by the Board or the
Committee at the time of grant based on such criteria as may be adopted by the
Board or the Committee at the time of grant in good faith, taking into account,
in each case, the market price of the common stock, the level and
responsibility of the person's position, the level of the person's performance,
the person's level of compensation, the assessed potential of the person, and
-3-
<PAGE> 4
such additional factors as the Board or the Committee shall deem relevant to
the accomplishment of the purposes of the Plan; provided, however, that in no
event shall the exercise price per share of an Option be less than 100% of the
fair market value of the Company's shares of common stock on the Grant Date for
such Option unless such grant is approved by all directors and in no event
shall be less than 75% of the fair market value of the Company's shares of
common stock on the Grant Date for such Option. In the case of an Option
intended to qualify as an Incentive Stock Option, the price per share shall not
be less than 100% (or 110% for owners of more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary) of the
fair market value of the Class B Stock on the Grant Date for such Option.
If the Company's shares of common stock are:
(1) actively traded on any national securities exchange or NASDAQ
system that reports their sales prices, fair market value shall be the average
of the high and low sales prices per share on any Grant Date;
(2) otherwise traded over the counter, fair market value shall be
the average of the final bid and asked prices for the shares of common stock as
reported for any Grant Date; or
(3) not traded, the Board or the Committee shall consider any
factor or factors that it believes affects fair market value, and shall
determine fair market value without regard to any restriction other than a
restriction that by its terms will never lapse.
(e) Term of Options
The term of each Option granted under this Section 4 shall be
established by the Board or the Committee, but shall not exceed 1 0 years (or 5
years for owners of more than 1 0 % of the total combined voting power of all
classes of stock of the Company or of a Subsidiary) from the Grant Date for
such Option.
(f) Cancellation and Replacement of Options
The Board or the Committee may at any time or from time to time permit
the voluntary surrender by the holder of any outstanding Option granted under
this Section 4 where such surrender is conditioned upon the granting under this
Section 4 to such holder of new Option(s) for such number of shares as the
Board or the Committee shall determine, or may require such a voluntary
surrender as a condition precedent to the grant under this Section 4 of new
Option(s) to such holder.
The Board or the Committee shall determine the terms and conditions of
any such new Option(s), including their exercise price and the periods during
which they may be exercised, subject to and in accordance with the provisions
of the Plan, all or any of which
-4-
<PAGE> 5
may differ from the terms and conditions of the Option(s) surrendered. Any
such new Option(s) shall be subject to all the relevant provisions of the Plan.
The shares subject to any Option so surrendered or otherwise
terminated shall no longer be charged against the limitation or limitations
provided in Section 3 of the Plan and may thereafter become the subject of new
Option grants under the Plan.
The granting of new Option(s) in connection with the surrender of
outstanding Option(s) under the Plan shall be considered for the purposes of
the Plan as the grant of new Option(s) and not an alteration, amendment or
modification of the Plan or of the Option(s) being surrendered.
-5-
<PAGE> 6
(f) Vesting
Options shall vest as follows:
<TABLE>
<CAPTION>
Aggregate Percentage of
Shares under Options
Date Vested on such Date
---- -----------------------
<S> <C>
Six months After Grant Date 25%
Eighteen months after Grant Date 50%
Thirty months after Grant Date 75%
Forty-two months after Grant Date 100%
</TABLE>
Notwithstanding the foregoing, an Option shall be deemed fully vested
immediately prior to an Acquisition Transaction. For the purposes of the Plan,
an "Acquisition Transaction" shall mean and include the following:
(i) The consummation of a tender offer or exchange
offer for the ownership of securities of the
Company representing 51% or more of the combined
voting powers of the Company's then outstanding
voting securities;
(ii) The adoption by the Company's stockholders of a
plan of merger or consolidation providing for the
merger or consolidation of the Company with
another corporation (other than an affiliate of
the Company within the meaning of the Securities
Exchange Act of 1934, as amended) and as a result
of such merger or consolidation less than 75% of
the outstanding voting securities of the surviving
or resulting corporation would then be owned in
the aggregate by the former stockholders of the
Company; or
(iii) The transfer by the Company of substantially all
of its assets to another corporation or entity
which is not a wholly owned subsidiary of the
Company.
Notwithstanding any other provision of the Plan, any Option granted to Dr.
James Swarbrick shall become fully vested and exercisable at age 65 (and the
term of such Option shall expire on the earlier of ten years after the Grant
Date and five years after the date Dr. Swarbrick becomes age 65) and upon any
grant of an Option to Dr. James Swarbrick the Company shall enter into an
agreement with Dr. Swarbrick granting Dr. Swarbrick the right to require the
Company to purchase on the date Dr. Swarbrick becomes age 65 and on the
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<PAGE> 7
next four anniversaries of such date an amount of shares of common stock equal
to 10% of the shares initially purchasable under such Option at the fair market
value of such shares (as determined pursuant to Section 4(d)) on the date of
purchase by the Company.
5. NON-TRANSFERABILITY
An Option granted to a participant under the Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of descent
and distribution; or (iii) pursuant to a qualified domestic relations order as
defined by the Code or in Title I of the Employee Retirement Income Security
Act, or the rules thereunder. In the case of an Option intended to be an
Incentive Stock Option, such Option shall not be transferable by a participant
other than by will or the laws of descent and distribution and during the
optionee's lifetime shall be exercisable only by him or her.
6. EXERCISABILITY OF OPTIONS
Subject to the provisions of the Plan, Options granted under Section 4
hereof shall be exercisable at such time or times after the Grant Date to the
extent such Options are vested.
Any Option shall terminate in full (whether or not previously
exercisable) prior to the expiration of its term on the date the optionee
ceases to be an employee of the Company or any Subsidiary of the Company,
unless (i) the optionee shall (a) die while an employee of the Company or such
Subsidiary, in which case the participant's legatee(s) under his or her last
will -or the participant's personal representative or representatives may
exercise all or part of the previously unexercised portion of such Option at
any time within one year, but not beyond the expiration of its term, after the
participant's death to the extent the optionee could have exercised the Option
immediately prior to his or her death, lb) become permanently or totally
disabled within the meaning of section 22(e)(3) of the Code (or any successor
provision) while an employee of the Company or such Subsidiary, in which case
the participant or his or her personal representative may exercise the
previously unexercised portion of such Option at any time within one year, but
not beyond the expiration of its term, after termination of his or her
employment or directorship to the extent the optionee could have exercised the
Option immediately prior to such termination, or (c) resign or retire after age
62 with the consent of the Company, in which case the participant may exercise
the previously unexercised portion of such Option at any time within six
months, but not beyond the expiration of its term, after the participant's
resignation or retirement to the extent the optionee could have exercised the
Option immediately prior to such resignation or retirement, or (ii) the Board
or the Committee shall determine otherwise.
In no event may an Option be exercised after the expiration of its fixed term.
-7-
<PAGE> 8
7. METHOD OF EXERCISE
Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, and (b) shall at the same time tender to the Company payment in full
of the exercise price for the shares for which the Option is exercised, which
payment may be made in cash. The exercise of any option granted under the Plan
may be made subject to the condition that, if at any time the Board or the
Committee shall determine, in its discretion, that the satisfaction of
withholding tax or other withholding liabilities under any state or federal law
is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant thereto, then in such
event, the exercise of the option shall not be effective unless such
withholding tax or other withholding liabilities shall have been satisfied in a
manner acceptable to the Company, which may include the withholding by the
Company of shares of Class B Stock to be issued upon exercise of an Option
having a fair market value equal to the required withholding amount. With
respect to the foregoing sentences, the value of the shares of Class B Stock
shall be the fair market value determined in accordance with Section 4(d) of
the Plan as of the day of such payment or withholding.
No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for the shares has been delivered.
An Option granted under the Plan may be exercised for any lesser number
of shares than the full amount for which it could be exercised. Such a partial
exercise of an Option shall not affect the right to exercise the Option from
time to time in accordance with the Plan for the remaining shares subject to
the Option.
8. TERMINATION OF OPTIONS
An Option granted under the Plan shall be considered terminated in
whole or in part, to the extent that, in accordance with the provisions of the
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Class B Stock of the
Company by reason of a stock dividend, stock split, stock consolidation,
recapitalization, reorganization, merger, split up or the like, the shares
available for purposes of the Plan, or under option in outstanding option
agreements pursuant to the Plan (and the option price under such agreements)
shall be appropriately adjusted so as to preserve, but not increase, the
benefits of the Plan to the Company and the benefits to the holders of such
Options; provided, however, that for any Incentive Stock Options, in the case
of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the excess of the aggregate fair
market value of the shares subject to any Options immediately after such event
over the aggregate option price of such shares is not more than the excess
-8-
<PAGE> 9
of the aggregate fair market value of all shares subject to such Options
immediately before such event over the aggregate option price of such shares.
Adjustments under this Section shall be made by the Board or the
Committee, whose determination as to what adjustments shall be made and the
extent thereof, shall be final, binding and conclusive.
10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS
No certificate(s) for shares shall be executed and delivered upon
exercise of an Option until the Company shall have taken such action, if any,
as is then required to comply with the provisions of the Securities Act of
1933, as amended, the North Carolina Uniform Securities Act, as amended, any
other applicable state securities law(s) and the requirements of any exchange
on which the Class B Stock may, at the time, be listed.
In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance, the Board
or the Committee may require reasonable evidence as to the ownership of the
Option and may require such consents and releases of taxing authorities as it
may deem advisable.
11. NO RIGHT TO EMPLOYMENT
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
employee participant under the Plan any right to continue in the employ of the
Company, or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
the Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if the Plan had not been adopted.
12. EFFECTIVE DATE OF THE PLAN
The Plan was adopted by the Board on November 16, 1995, and shall be
effective until November 16, 2005, after which time no Option shall be granted,
but such termination shall not affect any Option previously granted under the
Plan.
13. Stock Certificate Legend. Each stock certificate issued for options
intended to be Incentive Stock Options shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED PURSUANT TO A
STOCK OPTION PLAN AND WERE INTENDED TO BE A QUALIFIED OPTION AS SET
FORTH IN SECTION 422 OF THE INTERNAL REVENUE CODE. IF THESE SHARES ARE
TRANSFERRED OR SOLD PRIOR TO _________,_____, YOU ARE REQUIRED TO
NOTIFY THE CORPORATION'S HUMAN RESOURCES DEPARTMENT AT 910 392-1606.
-9-
<PAGE> 10
Dear
In accordance with the 1995 Stock Option Plan (the "Plan") of Applied
Analytical Industries, Inc. (the "Company"), you, as an officer or a key
employee of the Company or its subsidiaries, and in order to give you an added
proprietary interest in the Company and an additional incentive to advance the
interest of the Company, were granted on _____________ ____, _____, an option
to purchase shares of the common stock of the Company upon the following terms
and conditions:
(1) The exercise price shall be $_____________ (_____% of the fair
market value of a share as determined in accordance with
Section 4(d) of the Plan on the date of grant - ______________,
_____);
(2) This Option will vest and become exercisable according to the
schedule set forth in the Plan;
(3) Once exercisable, this Option may be exercised until
_________________, _____, subject to the terms and
conditions of the Plan, a copy of which is attached hereto and
incorporated herein by reference. This Option is granted
subject to the Plan and shall be construed in accordance with
the Plan.
(4) This Option is (is not) intended to be treated as an "incentive
stock option" for purposes of Section 422 of the Internal
Revenue Code.
(5) To exercise this Option, the holder must deliver written notice
of the decision to do so and at the same time tender to the
Company payment in full of the exercise price for the shares
for which the Option is exercised, which payment may be made in
cash.
(6) The exercise of this Option shall be subject to the condition
that, if at any time the Board or the Committee (as defined in
the Plan) shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding
liabilities under any state or federal law is necessary or
desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant
thereto, then in such event, the exercise of the option shall
not be effective unless such withholding tax or other
withholding liabilities shall have been satisfied in a manner
acceptable to the Company, which may include the withholding by
the Company of shares of Class B Stock to be issued upon
exercise of an Option having a fair market value equal to the
required withholding amount.
(7) Other terms and conditions: Prior to the issuance of any shares
of Class B Stock upon exercise of an Option, you must agree to
be obligated by the terms
-10-
<PAGE> 11
of the Stockholder Agreement between the Company and the
holders of Class B Stock, as such Stockholder Agreement is then
in effect.
This Option is not transferable except pursuant to the terms and conditions of
the Plan.
Very truly yours,
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
-------------------------------------------
Title:
----------------------------------------
I hereby accept the within Option and
acknowledge receipt of a copy of the Plan.
- -----------------------------------
Optionee
Date:
------------------------------
-11-
<PAGE> 1
EXHIBIT 10.4
APPLIED ANALYTICAL INDUSTRIES, INC.
1996 STOCK OPTION PLAN
AMENDED AND RESTATED
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1996 Stock
Option Plan (the "Plan") is to promote the growth and profitability of Applied
Analytical Industries, Inc. (the "Company") and its subsidiaries
("Subsidiaries") from time to time by increasing the personal participation of
officers and key employees in the financial performance of the Company and by
providing such officers and key employees with an equity opportunity in the
Company. This purpose will be achieved through the grant of stock options
("Options") to purchase shares of Class B Non-Voting Common Stock of the
Company (the "Class B Stock") subject to restrictions on transfer or such other
restrictions as the administrators of the Plan may determine.
2. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board"); provided, however, that from and after the registration of any class
of equity securities of the Company pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, if the Board includes members who are not
"disinterested persons" (as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, or any applicable successor rule
or regulation ) or "outside directors" (as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder),
then all authority of the Board under the Plan shall be exercised by a
committee of the Board (the "Committee") composed solely of members thereof who
are both "disinterested persons" and "outside directors" (as so defined).
The Board or the Committee shall have complete authority to: (i)
interpret all terms and provisions of the Plan consistent with law; (ii) select
from the group of officers and key employees eligible to participate in the
Plan the officers and key employees to whom Options shall be granted; (iii)
within the limits established herein, determine the number of shares to be
subject to and the exercise price of, each Option; (iv) prescribe the form of
instrument(s) evidencing Options granted under the Plan; (v) determine the time
or times at which Options shall be granted to officers or key employees; (vi)
provide, if appropriate, for the exercisability of Options in installments or
subject to specified conditions; (vii) determine the method of exercise of
Options; (viii) adopt, amend and rescind general and special rules and
regulations for the Plan's administration; and (ix) make all other
<PAGE> 2
determinations necessary or advisable for the administration of the Plan.
Any action which the Board or the Committee is authorized to take may
be taken without a meeting if all the members of the Board or the Committee
sign a written document authorizing such action to be taken, unless different
provision is made by the By-Laws of the Company or by resolution of the Board
or the Committee.
The Board or the Committee may designate selected Board or Committee
members or certain employees of the Company to assist the Board or the
Committee in the administration of the Plan and may grant authority to such
persons to execute documents, including Options, on behalf of the Board or the
Committee.
No member of the Board or the Committee or employee of the Company
assisting the Board or the Committee pursuant to the preceding paragraph shall
be liable for any action taken or determination made in good faith.
3. STOCK SUBJECT TO PLAN
The stock to be offered under the Plan shall be authorized but unissued
shares of Class B Stock. An aggregate of 3,918 shares of Class B Stock are
reserved for issuance upon exercise of Options. Any or all of the Options
granted under Section 4 hereof may, at the Board or the Committee's discretion,
be intended to qualify as incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). The number of shares reserved under the Plan may be adjusted to
reflect any change in the capitalization of the Company as contemplated by
Section 9 hereof and occurring after the adoption of the Plan. The Board or
the Committee will maintain records showing the cumulative total of all shares
subject to Options outstanding under the Plan.
4. OPTION AWARDS
(a) Eligibility and Factors Considered in Granting Options
The grant of Options under this Section 4 shall be limited to those
officers and key employees of the Company or any of its Subsidiaries who have
the greatest contribution to the Company's long-term performance and are
selected by the Board or the Committee. In making any determination as to the
officer(s) and key employee(s) to whom Options shall be granted under this
Section 4 and as to the number of shares to be subject thereto, the Board or
the Committee shall take into account, in each case, the level and
responsibility of the person's position, the level of the person's performance,
the person's level of compensation, the assessed potential of the person and
such additional factors as the
-2-
<PAGE> 3
Board or the Committee shall deem relevant to the accomplishment of the
purposes of the Plan.
(b) Allotment of Shares
The Board or the Committee, in its sole discretion and subject to the
provisions of the Plan, may grant to participants eligible under this Section
4, on or after the date hereof, Options; provided, however, that prior to
January 1, 1997, the Board or the Committee may not grant Options pursuant to
the Plan exercisable in the aggregate for more than 1,667 shares of Class B
Stock. Options may be, at the discretion of the Board or the Committee: (i)
Options that are intended to qualify as Incentive Stock Options; or (ii)
Options that are not intended to be Incentive Stock Options; or (iii) both of
the foregoing, if granted separately, and not in tandem. Each Option granted
under the Plan must be clearly identified as to its status as an Incentive
Stock Option or not.
Options granted under this Section 4 may be allotted to participants in
such amounts, subject to the limitations specified in the Plan, as the Board or
the Committee, in its sole discretion, may from time to time determine,
provided that no participant may be granted Options with respect to more than
2,000 shares of Class B Stock.
In the case of Options intended to be Incentive Stock Options, the
aggregate fair market value (determined at the time of such Incentive Stock
Options' respective grants) of the shares with respect to which Incentive Stock
Options are exercisable for the first time by a participant hereunder during
any calendar year (under all plans taken into account pursuant to Section
422(d) of the Code) shall not exceed $100,000. Options under this Section 4
not intended to qualify as Incentive Stock Options may be granted to any Plan
participant without regard to the Section 422(d) limitations.
(c) Time of Granting Options
The date of grant of an Option under this Section 4 shall be, for all
purposes, the date on which the Board or the Committee makes the determination
of granting such Option (each such date, a "Grant Date"). Notice of the
determination shall be given to each officer or key employee to whom an Option
is so granted under this Section 4 within a reasonable time after the Grant
Date.
(d) Exercise Price for Options
The price per share at which each Option granted under this Section 4
may be exercised shall be such price as shall be determined by the Board or the
Committee at the time of grant based on such criteria as may be adopted by the
Board or the Committee at the time of grant in good faith, taking into account,
in each case,
-3-
<PAGE> 4
the market price of the common stock, the level and responsibility of the
person's position, the level of the person's performance, the person's level of
compensation, the assessed potential of the person, and such additional factors
as the Board or the Committee shall deem relevant to the accomplishment of the
purposes of the Plan; provided, however, that in no event shall the exercise
price per share of an Option be less than 100% of the fair market value of the
Company's shares of common stock on the Grant Date for such Option unless such
grant is approved by all directors and in no event shall be less than 75% of
the fair market value of the Company's shares of common stock on the Grant Date
for such Option. In the case of an Option intended to qualify as an Incentive
Stock Option, the price per share shall not be less than 100% (or 110% for
owners of more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary) of the fair market value of the Common
Stock on the Grant Date for such Option.
If the Company's shares of Common Stock are:
(1) actively traded on any national securities exchange or NASDAQ
system that reports their sales prices, fair market value shall be the average
of the high and low sales prices per share on any Grant Date;
(2) otherwise traded over the counter, fair market value shall be
the average of the final bid and asked prices for the shares of Common Stock as
reported for any Grant Date; or
(3) not traded, the Board or the Committee shall consider any
factor or factors that it believes affects fair market value, and shall
determine fair market value without regard to any restriction other than a
restriction that by its terms will never lapse.
(e) Term of Options
The term of each Option granted under this Section 4 shall be
established by the Board or the Committee, but shall not exceed 10 years (or 5
years for owners of more than 10% of the total combined voting power of all
classes of stock of the Company or of a Subsidiary) from the Grant Date for
such Option.
(f) Cancellation and Replacement of Options
The Board or the Committee may at any time or from time to time permit
the voluntary surrender by the holder of any outstanding Option granted under
this Section 4 where such surrender is conditioned upon the granting under this
Section 4 to such holder of new Option(s) for such number of shares as the
Board or the Committee shall determine, or may require such a voluntary
surrender as a condition precedent to the grant under this Section 4 of new
Option(s) to such holder.
-4-
<PAGE> 5
The Board or the Committee shall determine the terms and conditions of
any such new Option(s), including their exercise price and the periods during
which they may be exercised, subject to and in accordance with the provisions
of the Plan, all or any of which may differ from the terms and conditions of
the Option(s) surrendered. Any such new Option(s) shall be subject to all the
relevant provisions of the Plan.
The shares subject to any Option so surrendered or terminated shall no
longer be charged against the limitation or limitations provided in Section 3
of the Plan and may thereafter become the subject of new Option grants under
the Plan.
The granting of new Option(s) in connection with the surrender of
outstanding Option(s) under the Plan shall be considered for the purposes of
the Plan as the grant of new Option(s) and not an alteration, amendment or
modification of the Plan or of the Option(s) being surrendered.
(g) Vesting
Options shall vest as follows:
<TABLE>
<CAPTION>
Aggregate Percentage of
Shares under Options
Date Vested on such Date
---- -----------------------
<S> <C>
Six months after Grant Date 25%
Eighteen months after Grant Date 50%
Thirty months after Grant Date 75%
Forty-two months after Grant Date 100%
</TABLE>
Notwithstanding the foregoing, any Option granted pursuant to this Plan shall
be deemed fully vested immediately prior to an Acquisition Transaction. For
the purposes of the Plan, an "Acquisition Transaction" shall mean and include
the following:
(i) The consummation of a tender offer or exchange offer
for the ownership of securities of the Company
representing 51 % or more of the combined voting
powers of the Company's then outstanding voting
securities;
(ii) The adoption by the Company's stockholders of a plan
of merger or consolidation providing for the merger
or consolidation of the Company with another
corporation (other than an affiliate of the Company
within the meaning of the Securities Exchange Act of
1934, as amended) and as a result of such merger
-5-
<PAGE> 6
or consolidation less than 75% of the outstanding
voting securities of the surviving or resulting
corporation would then be owned in the aggregate by
the former stockholders of the Company; or
(iii) The transfer by the Company of substantially all of
its assets to another corporation or entity which is
not a wholly owned subsidiary of the Company.
5. NON-TRANSFERABILITY
An Option granted to a participant under the Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of descent and
distribution; or (iii) pursuant to a qualified domestic relations order as
defined by the Code or in Title I of the Employee Retirement Income Security
Act, or the rules thereunder. In the case of an Option intended to be an
Incentive Stock Option, such Option shall not be transferable by a participant
other than by will or the laws of descent and distribution and during the
optionee's lifetime shall be exercisable only by him or her.
6. EXERCISABILITY OF OPTIONS
Subject to the provisions of the Plan, Options granted under Section 4
hereof shall be exercisable at such time or times after the Grant Date to the
extent such Options are vested.
Any Option shall terminate in full (whether or not previously
exercisable) prior to the expiration of its term on the date the optionee
ceases to be an employee of the Company or any Subsidiary of the Company,
unless (i) the optionee shall (a) die while an employee of the Company or such
Subsidiary, in which case the participant's legatee(s) under his or her last
will or the participant's personal representative or representatives may
exercise all or part of the previously unexercised portion of such Option at
any time within one year, but not beyond the expiration of its term, after the
participant's death to the extent the optionee could have exercised the Option
immediately prior to his or her death, (b) become permanently or totally
disabled within the meaning of section 22(e)(3) of the Code (or any successor
provision) while an employee of the Company or such Subsidiary, in which case
the participant or his or her personal representative may exercise the
previously unexercised portion of such Option at any time within one year, but
not beyond the expiration of its term, after termination of his or her
employment or directorship to the extent the optionee could have exercised the
Option immediately prior to such termination, or (c) resign or retire after age
62 with the consent of the Company, in which case the participant may exercise
the previously unexercised portion of such Option at any time within six
months, but not beyond the expiration of its term, after the participant's
resignation or retirement to the extent the optionee could have exercised the
Option immediately prior to such
-6-
<PAGE> 7
resignation or retirement, or (ii) the Board or the Committee shall determine
otherwise.
In no event may an Option be exercised after the expiration of its fixed term.
7. METHOD OF EXERCISE
Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, (b) shall at the same time tender to the Company payment in full of
the exercise price for the shares for which the Option is exercised, which
payment may be made in cash, and (c) shall comply with such other reasonable
requirements as the Board or the Committee may establish; provided that in
order to enable an optionee (including but not limited to officers) to exercise
options granted under the Plan, the Board or the Committee may determine, in
the exercise of its discretion, to (i) cause the Company to lend money or-
other property to such optionee upon such terms and conditions and in such
amounts as the Board or the Committee may determine, (ii) grant such optionee
permission to pay the exercise price in installments, or to accept such
optionee's note as whole or partial payment, (iii) permit such optionee to
repay loans made by the Company to such optionee for the exercise of options
with issued and outstanding shares of common stock, (iv) grant such optionee
permission to pay the exercise price by delivering for cancellation Options
having an aggregate value (calculated by subtracting the exercise price per
share from the fair market value of a share of Class B Stock) equal to the
total amount of the exercise price, or (v) provide such financial assistance to
such optionee as the Board or the Committee determines to be desirable. The
exercise of any option granted under the Plan may be made subject to the
condition that, if at any time the Board or the Committee shall determine, in
its discretion, that the satisfaction of withholding tax or other withholding
liabilities under any state or federal law is necessary or desirable as a
condition of, or in connection with, such exercise or the delivery or purchase
of shares pursuant thereto, then in such event, the exercise of the option
shall not be effective unless such withholding tax or other withholding
liabilities shall have been satisfied in a manner acceptable to the Company,
which may include the withholding by the Company of shares of Common Stock to
be issued upon exercise of an Option having a fair market value equal to the
required withholding amount. With respect to the foregoing sentences, the
value of the shares of Common Stock shall be the fair market value determined
in accordance with Section 4(d) of the Plan as of the day of such payment or
withholding.
No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for the shares has been delivered.
-7-
<PAGE> 8
An Option granted under the Plan may be exercised for any lesser
number of shares than the full amount for which it could be exercised. Such a
partial exercise of an Option shall not affect the right to exercise the Option
from time to time in accordance with the Plan for the remaining shares subject
to the Option.
8. TERMINATION OF OPTIONS
An Option granted under the Plan shall be considered terminated in
whole or in part, to the extent that, in accordance with the provisions of the
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Common Stock of the
Company by reason of a stock dividend, stock split, stock consolidation,
recapitalization, reorganization, merger, split up or the like, the shares
available for purposes of the Plan or under option in outstanding option
agreements pursuant to the Plan (and the option price under such agreements)
shall be appropriately adjusted so as to preserve, but not increase, the
benefits of the Plan to the Company and the benefits to the holders of such
Options; provided, however, that for any Incentive Stock Options, in the case
of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the excess of the aggregate fair
market value of the shares subject to any Options immediately after such event
over the aggregate option price of such shares is not more than the excess of
the aggregate fair market value of all shares subject to such Options
immediately before such event over the aggregate option price of such shares.
Adjustments under this Section shall be made by the Board or the
Committee, whose determination as to what adjustments shall be made and the
extent thereof, shall be final, binding and conclusive.
10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS
No certificate(s) for shares shall be executed and delivered upon
exercise of an Option until the Company shall have taken such action, if any,
as is then required to comply with the provisions of the Securities Act of
1933, as amended, the North Carolina Uniform Securities Act, as amended, any
other applicable state securities law(s) and the requirements of any exchange
on which the Class B Stock may, at the time, be listed.
In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance, the Board
or the Committee may require reasonable evidence as to the ownership of the
Option and may require such consents and releases of taxing authorities as it
may deem advisable.
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<PAGE> 9
11. NO RIGHT TO EMPLOYMENT
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
employee participant under the Plan any right to continue in the employ of the
Company, or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
the Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if the Plan had not been adopted.
12. EFFECTIVE DATE OF THE PLAN
The Plan was adopted by the Board on November 16, 1995, and shall be
effective until November 16, 2005, after which time no Option shall be granted,
but such termination shall not affect any Option previously granted under the
Plan.
13. STOCK CERTIFICATE LEGEND. Each stock certificate issued for options
intended to be Incentive Stock Options shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED PURSUANT TO A
STOCK OPTION PLAN AND WERE INTENDED TO BE A QUALIFIED OPTION AS SET
FORTH IN SECTION 422 OF THE INTERNAL REVENUE CODE. IF THESE SHARES
ARE TRANSFERRED OR SOLD PRIOR TO __________, ____, YOU ARE REQUIRED TO
NOTIFY THE CORPORATION'S HUMAN RESOURCES DEPARTMENT AT 910 392-1606.
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<PAGE> 10
Dear
In accordance with the 1996 Stock Option Plan (the "Plan") of Applied
Analytical Industries, Inc. (the "Company"), you, as an officer or a key
employee of the Company or its subsidiaries, and in order to give you an added
proprietary interest in the Company and an additional incentive to advance the
interest of the Company, were granted on __________________, _____, an option
to purchase _____ shares of the common stock of the Company upon the following
terms and conditions:
(1) The exercise price shall be $__________ (___% of the fair
market value of a share as determined in accordance with
Section 4(d) of the Plan on the date of grant - _______,
_____);
(2) This Option will vest and become exercisable according to the
schedule set forth in the Plan;
(3) Once exercisable, this Option may be exercised until
__________, _____, subject to the terms and conditions of the
Plan, a copy of which is attached hereto and incorporated
herein by reference. This Option is granted subject to the
Plan and shall be construed in accordance with the Plan.
(4) This Option is (is not) intended to be treated as an
"incentive stock option" for purposes of Section 422 of the
Internal Revenue Code.
(5) To exercise this Option, the holder must deliver written
notice of the decision to do so and at the same time tender to
the Company payment in full of the exercise price for the
shares for which the Option is exercised, which payment may be
made in cash or as otherwise provided for in accordance with
Section 7 of the Plan.
(6) The exercise of this Option shall be subject to the condition
that, if at any time the Board or the Committee (as defined in
the Plan) shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding
liabilities under any state or federal law is necessary or
desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant
thereto, then in such event, the exercise of the option shall
not be effective unless such withholding tax or other
withholding liabilities shall have been satisfied in a manner
acceptable to the Company, which may include the withholding
by the Company of shares of Class B Stock to be issued upon
exercise of an Option having a fair market value equal to the
required withholding amount.
<PAGE> 11
(7) Other terms and conditions: Prior to the issuance of any
shares of Class B Stock upon exercise of an Option, you must
agree to be obligated by the terms of the Stockholder
Agreement between the Company and the holders of the Class B
Stock as such Stockholder Agreement is then in effect.
This Option is not transferable except pursuant to the terms and conditions of
the Plan.
<TABLE>
<S> <C>
Very truly yours,
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
I hereby accept the within Option and
acknowledge receipt of a copy of the Plan.
- ------------------------------
Optionee
Date:
-------------------------
</TABLE>
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<PAGE> 1
EXHIBIT 10.5
STOCKHOLDER AGREEMENT, dated as of November 17, 1995, by and
among APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Corporation"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership
("GSCP"), 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., each of which is an Affiliate (as defined below) of GSCP (collectively
referred to as the "GSCP Parties"), NORO-MOSELEY PARTNERS III, L.P., a Delaware
limited partnership ("Noro"), WAKEFIELD GROUP LIMITED PARTNERSHIP, a North
Carolina limited partnership ("Wakefield," together with the GSCP Parties and
Noro, the "Investors"), JAMES L. WATERS ("Waters"), FREDERICK D. SANCILIO
("Sancilio") and the parties set forth on Schedule 1 hereto (together with
Waters and Sancilio, the "Current Stockholders").
W I T N E S S E T H :
WHEREAS, the Corporation, the Investors and Waters are parties to that
certain Preferred Stock Purchase Agreement, dated as of November 17, 1995 (the
"Purchase Agreement"), pursuant to which the Investors and Waters have
purchased shares of Series A Convertible Preferred Stock of the Corporation,
par value $.01 per share (the "Series A Preferred Stock"), from the
Corporation.
WHEREAS, the Purchase Agreement contemplates that the parties hereto
will enter into this Stockholder Agreement and the parties hereto deem it to be
in their best interests to establish and set forth their agreement with respect
to certain rights and obligations associated with ownership of shares of Stock
(as hereinafter defined);
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and obligations hereinafter set forth, the parties hereto hereby agree as
follows:
SECTION 1. Certain Definitions. As used herein, the following
terms shall have the following meanings (capitalized terms used herein and not
defined herein shall have the meanings assigned to such terms in the Purchase
Agreement):
1.1. Affiliate shall mean (i) with respect to any Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) with respect to any
individual, shall also mean the spouse, parent, grand parent, uncle, aunt,
father-in-law, mother-in-law, sibling, child, step-child, grandchild, niece or
nephew of such Person, or the spouse thereof, or any trust, charitable
foundation or similar entity of which there are no principal beneficiaries
other than such Person and/or one or more of such relatives or any undesignated
charity, and, when used with respect to Waters, shall include Richard L.
Bennett and, when used with respect to Richard L. Bennett, shall include
Waters. Notwithstanding the foregoing, (i) neither the Corporation nor any
Person controlled by the Corporation shall be deemed to be an Affiliate of any
Stockholder for purposes of this Agreement and (ii) any transfer by any
Investor to its equity investors shall be considered a transfer to an
Affiliate.
1.2. Beneficially Own or Beneficial Ownership shall have the
meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended.
1.3. Common Stock shall mean the Class A Voting Common Stock and
Class B Non-Voting Common Stock, no par value, of the Corporation.
<PAGE> 2
1.4. Common Stock Equivalents shall mean securities convertible
into, or exchangeable or exercisable for, shares of Common Stock.
1.5. Competitor shall mean any Person that provides pharmaceutical
services on a contract basis to the pharmaceutical industry in the areas of
pharmaceutical testing, formulation and/or production.
1.6. Group shall mean two or more Persons who agree to act together
for the purpose of acquiring, holding, voting or disposing of Stock.
1.7. Joint Affiliate shall mean any Affiliate of both Sancilio and
Waters.
1.8. Other Stockholders with respect to any selling Stockholder,
shall mean the Stockholders other than the selling Stockholder.
1.9. Person shall mean any individual, corporation, limited
liability company, limited or general partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivisions thereof.
1.10. Public Sale shall mean a Sale pursuant to a bona fide
underwritten public offering pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "Securities Act") or
pursuant to Rule 144 under the Securities Act.
1.11. Proportionate Percentage shall mean, as to each Stockholder,
the quotient obtained (expressed as a percentage) by dividing (A) the number of
shares of Common Stock owned by such Stockholder on the first day of the
Section 4(b) Acceptance Period (as defined in Section 4(b) below) by (B) the
aggregate number of shares of Common Stock owned on the first day of the
Section 4(b) Acceptance Period by all Stockholders who exercise their option to
purchase Refused Stock (as defined in Section 4(b) below).
1.12. Sell, as to any Stock, shall mean to sell, or in any other way
directly or indirectly transfer, assign, distribute, encumber or otherwise
dispose of, either voluntarily or involuntarily; and the terms Sale and Sold
shall have meanings correlative to the foregoing.
1.13. Stock shall mean (i) any shares of Common Stock, and (ii) any
Common Stock Equivalents, in either case, whether owned on the date hereof or
acquired hereafter (including, without limitation, the Series A Preferred Stock
and the Common Stock issuable thereunder).
1.14. Stockholders shall mean the parties to this Agreement (other
than the Corporation) and any other Person who executes, and agrees to be bound
by the terms of, this Agreement.
1.15. Subsidiary shall mean with respect to any Person, (i) any
corporation, partnership or other entity of which shares of stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other managers of such corporation, partnership or other
entity are at the time owned, or (ii) the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person (for purposes of this subclause (ii) only, Generest, Inc. shall
not be considered a subsidiary of the Corporation).
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<PAGE> 3
1.16. Waters Puts shall mean the agreements entered into by Waters
and each of Sancilio, William H. Underwood and Anthony F. Arato dated November
17, 1995 pursuant to which Waters has granted to each of Sancilio, William H.
Underwood and Anthony F. Arato the right to require Waters to purchase from him
up to 3,200 shares, 600 shares and 250 shares, respectively, of Class B
Non-Voting Common Stock exercisable within 90 days of the date hereof.
1.17. Waters-Sancilio Transactions shall mean (i) the transfers of
shares of Common Stock in the event of the death of Waters or Sancilio to
certain voting trusts pursuant to Sections 4 and 5, respectively, of the
Waters-Sancilio Shareholders' Agreement between Waters and Sancilio dated
November 17, 1995, (ii) the transfer of shares pursuant to Section 10 of the
Voting Trust Agreement the form of which is attached as Exhibit B to the
Waters-Sancilio Shareholders' Agreement, (iii) the transfer of shares of Common
Stock to a different voting trust in the event of the death of Waters as
contemplated by the final paragraph of Section 4 of the Voting Trust Agreement
dated November 17, 1995 between Waters and Sancilio and (iv) the purchase of
shares of Common Stock by Sancilio pursuant to Section 11 of the Voting Trust
Agreement, the form of which is attached as Exhibit D to such Waters-Sancilio
Shareholders' Agreement.
SECTION 2. Methodology for Calculations. For purposes of this
Agreement, the Sale of a Common Stock Equivalent shall be treated as the Sale
of the shares of Common Stock into which such Common Stock Equivalent can be
converted, exchanged or exercised. Except as otherwise provided in this
Agreement, for purposes of all calculations under this Agreement (including,
without limitation, calculations to determine the ownership of Common Stock of
any Stockholder and the percentage of outstanding Common Stock owned by any
Stockholder), all Series A Preferred Stock (but no other Common Stock
Equivalents) shall be treated as having been converted, exchanged or exercised.
SECTION 3. Limitations on Sales of Stock by Stockholders. (a)
Subject to the remaining subsections of this Section 3, each Stockholder shall
not Sell any Stock, whether owned on the date hereof or acquired hereafter,
other than:
(i) by Sale in accordance with Sections 4, 5 and 6
hereof;
(ii) by Sale pursuant to any of the Waters Puts;
(iii) any Waters-Sancilio Transaction;
(iv) by Sale to an Affiliate; or
(v) in a Public Sale.
(b) In addition to the restrictions set forth in paragraph (a)
above, no Investor shall Sell any Stock for a period of two (2) years from the
date hereof (the "Mandatory Holding Period"); provided, however, that the
foregoing restriction shall not apply to any Sale (i) by an Other Stockholder
to a Section 5 Offeror, a Section 6 Offeror or a Buying Stockholder, as the
case may be, pursuant to Section 5, 6 or 7 of this Agreement, (ii) by a GSCP
Party to another GSCP Party or an Affiliate of a GSCP Party (a "GSCP
Affiliate"), (iii) by any other Investor to an Affiliate thereof, or (iv) which
is approved by the Corporation and by the holders of at least 70% of the then
outstanding Voting Shares (as defined below) voting as a single class
(excluding for purposes of this calculation all Voting Shares Beneficially
Owned by the proposed transferor and its Affiliates), which consent may be
granted or withheld in the sole
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<PAGE> 4
discretion of the Corporation and such voting shareholders. "Voting Shares"
shall mean all voting securities of the Corporation (including, without
limitation, any shares of Class A Common Stock and Series A Preferred Stock).
(c) In addition to the restrictions set forth in paragraph (a)
and (b) above, from and after the termination of the Mandatory Holding Period,
no Investor shall Sell any Stock to any Competitor (except for any Sale by an
Other Stockholder to a Section 5 Offeror, a Section 6 Offeror or a Buying
Stockholder, as the case may be, pursuant to Section 5, 6 or 7 of this
Agreement), unless such Sale is approved by the Corporation and by the holders
of 70% of the then outstanding Voting Shares voting as a single class
(excluding for purposes of this calculation all Voting Shares Beneficially
Owned by the proposed transferor and its Affiliates), which consent may be
granted or withheld in the sole discretion of the Corporation and such voting
shareholders.
(d) Anything contained herein to the contrary notwithstanding,
any transferee of Stock (other than a transferee of a Public Sale) who is not a
Stockholder shall upon consummation of, and as a condition to, such Sale (A)
execute, and agree to be bound by the terms of, this Agreement and shall
thereafter be deemed a Stockholder for all purposes of this Agreement, (B)
execute and deliver a certificate in a form reasonably satisfactory to the
Corporation in which such person certifies that (I) it is purchasing the Stock
for its own account, for investment and not with a view to the distribution
thereof and (II) that such Sale is otherwise being made in compliance with all
applicable federal and state law (including, without limitation, federal and
state securities laws and "blue sky" laws), (C) execute and deliver a
certificate to the Corporation substantially in the form of Exhibit A hereto in
which such person certifies either (i) that such person is not a Competitor of
the Corporation or (ii) that such person is purchasing Stock in compliance with
the provisions of Section 3(c) hereof, and (D) execute and deliver a
Non-Competition Agreement substantially in the form of Exhibit B hereto or such
other form which is acceptable to the Corporation (unless such transferee is a
Competitor of the Corporation and such Sale of Stock is made in accordance with
the provisions of Section 3(c), in which case the transferee shall not be
obligated to execute and deliver a Non-Competition Agreement). Notwithstanding
any permitted transfer of Stock to a Person, the Corporation shall not be
obligated to disclose any confidential information relating to the Corporation
to such Person until such Person executes a Non-Disclosure Agreement
substantially in the form of Exhibit C hereto or such other form which is
acceptable to the Corporation.
SECTION 4. Rights of First Offer. In addition to and not in
limitation of any other restrictions on Sales of Stock contained in this
Agreement, any Sale by a Stockholder (other than a Waters-Sancilio Transaction
or pursuant to any of the Waters Puts) shall be solely for cash consideration
and shall be consummated only in accordance with the following procedures:
(a) The selling Stockholder shall first deliver to the
Corporation a written notice (a "Section 4 Offer Notice"), which shall (i)
state the selling Stockholder's intention to sell Stock to one or more Persons,
the amount and type of Stock to be sold (the "Subject Stock"), the purchase
price therefor and a summary of the other material terms of the proposed sale
and (ii) offer the Corporation and the Other Stockholders the option to acquire
all or a portion of such Subject Stock upon the terms and subject to the
conditions of the proposed Sale as set forth in the Section 4 Offer Notice (the
"Section 4 Offer"), provided that such Section 4 Offer may provide that it must
be accepted by the Corporation and the Other Stockholders on an all or nothing
basis (an "All or Nothing Sale"). The Section 4 Offer shall remain open and
irrevocable for the periods set forth below (and, to the extent the Section 4
Offer is accepted during such periods, until the consummation of the sale
contemplated by the Section 4 Offer). The
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<PAGE> 5
Corporation shall have the right and option, for a period of 30 days after
delivery of the Section 4 Offer Notice (the "Section 4(a) Acceptance Period"),
to accept all or any part of the Subject Stock at the purchase price and on the
terms stated in the Section 4 Offer Notice; provided, however, that, if the
Section 4 Offer contemplated an All or Nothing Sale, the Corporation may
accept, during the Section 4(a) Acceptance Period, all, but not less than all,
of the Subject Stock, at the purchase price and on the terms stated in the
Section 4 Offer Notice. Such acceptance shall be made by delivering a written
notice to the selling Stockholder and each of the Other Stockholders within the
Section 4(a) Acceptance Period.
(b) If the Corporation shall fail to accept all of the Subject
Stock offered for sale pursuant to, or shall reject in writing, the Section 4
Offer (the Corporation being required to notify in writing the selling
Stockholder and each of the Other Stockholders of its rejection or failure to
accept in the event of the same), then, upon the earlier of the expiration of
the Section 4(a) Acceptance Period or the giving of such written notice of
rejection or failure to accept such offer by the Corporation, each Other
Stockholder shall have the right and option, for a period of 30 days thereafter
(the "Section 4(b) Acceptance Period"), to accept all or any part of the
Subject Stock so offered and not accepted by the Corporation (the "Refused
Stock") at the purchase price and on the terms stated in the Section 4 Notice;
provided, however, that, if the Section 4 Offer contemplated an All or Nothing
Sale, the Other Stockholders, in the aggregate, may accept, during the Section
4(b) Acceptance Period, all, but not less than all, of the Subject Stock, at
the purchase price and on the terms stated in the Section 4 Offer Notice. Such
acceptance shall be made by delivering a written notice to the Corporation and
the selling Stockholder within the Section 4(b) Acceptance Period specifying
the maximum number of shares such Other Stockholder will purchase (the "First
Offer Shares"). If, upon the expiration of the Section 4(b) Acceptance Period,
the aggregate amount of First Offer Shares exceeds the amount of Refused Stock,
the Refused Stock shall be allocated among the Other Stockholders as follows:
(i) First, each Stockholder shall be entitled to purchase no more than its
Proportionate Percentage of Refused Stock; (ii) Second, if any shares of
Refused Stock have not been allocated for purchase pursuant to (i) above (the
"Remaining Shares"), each Stockholder (an "Oversubscribed Stockholder") which
had offered to purchase a number of shares of Refused Stock in excess of the
amount of stock allocated for purchase to it in accordance with previous
allocations of such shares of Refused Stock, shall be entitled to purchase an
amount of Remaining Shares equal to no more than its Proportionate Percentage
(treating only Oversubscribed Stockholders as Stockholders for these purposes)
of the Remaining Shares; and (iii) Third, the process set forth in (ii) above
shall be repeated with respect to any shares of Refused Stock not allocated for
purchase until all shares of Refused Stock are allocated for purchase.
(c) If effective acceptance shall not be received pursuant to
Sections 4(a) and 4(b) above with respect to all of the Subject Stock offered
for sale pursuant to the Section 4 Offer Notice, then the selling Stockholder
may Sell all or any portion of the Stock so offered for sale and not so
accepted, at a price not less than the price, and on terms not more favorable
to the purchaser thereof than the terms, stated in the Section 4 Offer Notice
at any time within 90 days after the expiration of the Section 4(b) Acceptance
Period (the "Sale Period"). To the extent the selling Stockholder Sells all or
any portion of the Stock so offered for sale during the Sale Period, the
selling Stockholder shall promptly notify the Corporation, and the Corporation
shall promptly notify the Other Stockholders, as to (i) the number of shares of
Stock, if any, that the selling Stockholder then owns, (ii) the number of
shares of Stock that the selling Stockholder has sold, (iii) the terms of such
Sale and (iv) the name of the owner(s) of any shares of Stock sold. In the
event that all of the Stock is not sold by the selling Stockholder during the
Sale Period, the right of the selling Stockholder to Sell such unsold Stock
shall expire and the obligations of this Section 4 shall be reinstated;
provided, however, that, in the event that the selling Stockholder determines,
at any time during the Sale Period, that the sale of all of the Stock on the
terms set forth in
-5-
<PAGE> 6
the Section 4 Offer Notice is impractical, the selling Stockholder may
terminate the offer and reinstate the procedure provided in this Section 4
without waiting for the expiration of the Sale Period.
(d) All Sales of Subject Stock to the Corporation and/or the
Other Stockholders subject to any one Section 4 Offer Notice shall be
consummated contemporaneously at the offices of the Corporation on the later of
(i) a mutually satisfactory business day within 30 days after the expiration of
the Section 4(b) Acceptance Period or (ii) the fifth business day following the
expiration or termination of all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR"), applicable to such
sales, or at such other time and/or place as the parties to such sales may
agree. The delivery of certificates or other instruments evidencing such
Subject Stock duly endorsed for transfer shall be made on such date against
payment of the purchase price for such Subject Stock.
(e) Anything contained herein to the contrary notwithstanding,
the selling Stockholder shall, in addition to complying with the provisions of
this Section 4 in the event of a proposed sale of Stock, comply with the
provisions of Section 5 and 6 (if applicable) hereof.
(f) The requirements of this Section 4 shall not apply to (i) any
Sale of Stock by a Stockholder to an Affiliate of such Stockholder; provided,
however that the requirements of this Section 4 shall apply to any Sale of
Stock by Waters, Sancilio or any of their Affiliates to a Joint Affiliate, (ii)
any Sale of Stock (by an Other Stockholder to a Section 5 Offeror) pursuant to
Section 5 of this Agreement, (iii) any Sale of Stock which is a Public Sale,
and (iv) any other Sale as to which the Corporation and the Stockholders waive
compliance with this Section 4.
SECTION 5. Tag-Along Rights. (a) Subject to Section 5(d) and
except for any Sale of Stock pursuant to clause (ii), (iii), (iv) or (v) of
Section 3(a) hereof or between Waters (or any of Water's Affiliates) and
Sancilio (or any of Sancilio's Affiliates), each Stockholder shall not, alone
or in concert with any other Stockholders, in any transaction or series of
transactions, Sell any Stock to another Person or Group if, after giving effect
to such Sale, such Person or Group together with its Affiliates would
Beneficially Own more than 50% in the aggregate of either of the then total
outstanding (A) Voting Shares or (B) Common Stock, except in accordance with
the following procedures:
(b)(i) The selling Stockholder shall first deliver to each Other
Stockholder a written notice (the "Section 5 Notice"), which shall specifically
identify the identity of the proposed transferee (the "Section 5 Offeror"), the
amount and type of Stock being Sold, the purchase price therefor, and a summary
of the other material terms and conditions of the proposed Sale, and shall
contain an offer (the "Section 5 Offer") by the Section 5 Offeror to each Other
Stockholder, which shall be irrevocable for a period of 15 days after the later
of delivery thereof and the expiration of the Section 4(b) Acceptance Period,
to the extent applicable (the "Section 5 Period"), to purchase all of such
Other Stockholder's Stock at the Section 5 Purchase Price (as such term is
defined below), and upon the other terms offered by the Section 5 Offeror to
the selling Stockholder as set forth in the Section 5 Notice. A copy of the
Section 5 Notice shall promptly be sent to the Corporation. The Section 5
Offer may be accepted in whole or in part at the option of each of the Other
Stockholders. Notice of an Other Stockholder's intention to accept a Section 5
Offer, in whole or in part, shall be evidenced by a writing signed by such
Other Stockholder and delivered to the Section 5 Offeror and the Corporation
prior to the end of the Section 5 Period, setting forth the number of shares
and class of Stock that such Other Stockholder elects to Sell.
(ii) For purposes of this Agreement, the following terms
shall have the meanings set forth below:
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<PAGE> 7
"Per Share Price" means an amount equal to the greater of (i) the
quotient obtained by dividing (A) the aggregate purchase price to be
paid by the Section 5 Offeror in respect of the Stock proposed to be
sold by the selling Stockholder as set forth in the Section 5 Notice
by (B) the number of shares of Common Stock (including shares of
Common Stock obtainable upon the conversion, exchange or exercise of
Common Stock Equivalents) proposed to be sold by the selling
Stockholder as set forth in the Section 5 Notice and (ii) the quotient
of (A) the aggregate purchase price for all of the Stock purchased by
the Section 5 Offeror during the nine-month period immediately prior
to the date of the Section 5 Notice plus the aggregate purchase price
to be paid by the Section 5 Offeror in respect of the Stock proposed
to be sold by the selling Stockholder as set forth in the Section 5
Notice, divided by (B) the aggregate number of shares of Common Stock
(including shares of Common Stock obtainable upon the conversion,
exchange or exercise of Common Stock Equivalents) purchased during
such nine-month period plus the number of shares of Common Stock
(including shares of Common Stock obtainable upon the conversion,
exchange or exercise of Common Stock Equivalents) proposed to be sold
by the selling Stockholder as set forth in the Section 5 Notice.
"Section 5 Purchase Price" shall mean (i) with respect to a share of
Common Stock, the Per Share Price and (ii) with respect to a Common
Stock Equivalent, an amount equal to (A) the Per Share Price
multiplied by (B) the number of shares of Common Stock issuable upon
the conversion, exchange or exercise of such Common Stock Equivalent
(subject to reduction, if appropriate, for the amount per share of the
exercise or purchase price (if any) of such Common Stock Equivalent).
(c) All Sales of Stock to the Section 5 Offeror shall be
consummated contemporaneously at the offices of the Corporation on the later of
(i) a mutually satisfactory business day as soon as practicable, but in no
event more than 30 days after the expiration of the Section 5 Period or (ii)
the fifth business day following the expiration or termination of all waiting
periods under HSR applicable to such sales, or at such other time and/or place
as the parties to such sales may agree. The delivery of certificates or other
instruments evidencing such Stock duly endorsed for transfer shall be made on
such date against payment of the purchase price for such Stock.
(d) Anything contained herein to the contrary notwithstanding,
any selling Stockholder shall, in addition to complying with the provisions of
this Section 5, comply with the provisions of Section 4 and 6 (if applicable)
hereof.
SECTION 6. Sancilio Tag-Along Rights. (a) Subject to Section
6(d) and except for any Sale of Stock pursuant to clause (ii), (iii), (iv) or
(v) of Section 3(a) hereof, Sancilio and his Affiliates shall not, alone or in
concert, in any transaction or series of transactions, Sell to another Person
or Group an amount of Stock equal to 25% of the Common Stock held by Sancilio
as of the date hereof, except in accordance with the following procedures:
(b)(i) Sancilio shall first deliver to each Other Stockholder a
written notice (the "Section 6 Notice"), which shall specifically identify the
identity of the proposed transferee (the "Section 6 Offeror"), the amount and
type of Stock being Sold, the purchase price therefor, and a summary of the
other material terms and conditions of the proposed Sale, and shall contain an
offer (the "Section 6 Offer") by the Section 6 Offeror to each Other
Stockholder, which shall be irrevocable for a period of 15 days after the later
of delivery thereof and the expiration of the Section 4(b) Acceptance Period,
to the extent applicable (the "Section 6 Period"), to purchase the number of
shares of Common Stock
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obtained by multiplying (A) a fraction, the numerator of which is the number of
shares of Common Stock represented by the Stock proposed to be sold (as
indicated in the Section 6 Notice) and the denominator of which is the number
of shares of Common Stock Beneficially Owned by Sancilio as of the date of the
Section 6 Notice, times (B) the number of shares of Common Stock Beneficially
Owned by the Other Stockholder as of the date of the Section 6 Notice, at the
Section 6 Purchase Price (as such term is defined below) and upon the other
terms offered by the Section 6 Offeror to Sancilio as set forth in the Section
6 Notice. A copy of the Section 6 Notice shall promptly be sent to the
Corporation. The Section 6 Offer may be accepted in whole or in part at the
option of each of the Other Stockholders. Notice of an Other Stockholder's
intention to accept a Section 6 Offer, in whole or in part, shall be evidenced
by a writing signed by such Other Stockholder and delivered to the Section 6
Offeror and the Corporation prior to the end of the Section 6 Period, setting
forth the number of shares and class of Stock that such Other Stockholder
elects to Sell.
(ii) The Section 6 Purchase Price shall be calculated in
the same manner as the Section 5 Purchase Price except that references in the
definition of "Per Share Price" to (A) the selling Stockholder shall be a
reference to Sancilio and his affiliates and (B) the Section 5 Offeror and
Section 5 Notice, shall be a reference to the Section 6 Offeror and Section 6
Notice, respectively.
(c) All Sales of Stock to the Section 6 Offeror shall be
consummated contemporaneously at the offices of the Corporation on the later of
(i) a mutually satisfactory business day as soon as practicable, but in no
event more than 30 days after the expiration of the Section 6 Period or (ii)
the fifth business day following the expiration or termination of all waiting
periods under HSR applicable to such sales, or at such other time and/or place
as the parties to such sales may agree. The delivery of certificates or other
instruments evidencing such Stock duly endorsed for transfer shall be made on
such date against payment of the purchase price for such Stock.
(d) Anything contained herein to the contrary notwithstanding,
Sancilio shall, in addition to complying with the provisions of this Section 6,
comply with the provisions of Sections 4 and 5 (if applicable) hereof.
SECTION 7. Bring-Along Rights. (a) From and after the second
anniversary of the date hereof, if one or more Stockholders, whether alone or
in concert with any other Stockholder, propose to Sell to any Person or Persons
who are not, and following such Sale will not be, affiliated with any of such
Stockholder(s) (collectively, a "Buying Stockholder"), in a bona fide
arm's-length transaction or series of transactions, including by way of a
purchase agreement, tender offer, merger or other business combination
transaction or otherwise, 66% or more in aggregate of the then outstanding
Common Stock on a fully diluted basis (treating for purposes of these
calculations all Common Stock Equivalents as having been converted, exchanged
or exercised) (any such transaction being referred to herein as an "Exit
Sale"), then the selling Stockholders may elect to require all Other
Stockholders to Sell all shares of Stock Beneficially Owned by each of them
concurrently with such Exit Sale to such Buying Stockholder at the same
purchase price per share (and, in the case of Common Stock Equivalents, such
purchase price per share multiplied by the number of shares of Common Stock
issuable upon the conversion, exchange or exercise of such Common Stock
Equivalent subject to reduction, if appropriate, for the amount per share of
the exercise or purchase price (if any) of such Common Stock Equivalent) and
upon the same terms and subject to the conditions of the Exit Sale (except that
the Investors shall not be required to make any representations and warranties
relating to the Company or provide any indemnities with respect thereto).
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(b) The rights set forth in Section 7(a) shall be exercised by
giving written notice (the "Section 7 Notice") to each Stockholder setting
forth in detail the terms of the proposed Sale and the proposed closing date of
the Exit Sale, which proposed date shall not be less than 15 or more than 60
days after such Section 6 Notice is delivered to the Stockholders.
(c) All Sales of Stock to the Buying Stockholder pursuant to this
Section 7 shall be consummated contemporaneously at the offices of the
Corporation on the later of (i) a business day not less than 15 or more than 60
days after the Section 7 Notice is delivered to the Stockholders or (ii) the
fifth business day following the expiration or termination of all waiting
periods under HSR applicable to such Sales, or at such other time and/or place
as the parties to such Sales may agree. The delivery of certificates or other
instruments evidencing such Stock duly endorsed for transfer shall be made on
such date against payment of the purchase price for such Stock.
(d) Anything contained herein to the contrary notwithstanding,
the Selling Stockholders shall, in addition to complying with the provisions of
this Section 7, comply with the provisions of Section 4 hereof.
SECTION 8. Preemptive Rights. (a) Except for Excluded
Securities (as hereinafter defined), the Corporation shall not issue, sell or
exchange, or agree to issue, sell or exchange (collectively, "Issue," and any
issuance, sale or exchange resulting therefrom, an "Issuance") (i) any shares
of the Corporation's capital stock, (ii) any other equity security of the
Corporation, including, without limitation, any options, warrants or other
rights to subscribe for, purchase or otherwise acquire any capital stock or
other equity security of the Corporation or (iii) any other security of the
Corporation that is convertible into or exchangeable for any equity security of
the Corporation (collectively, an "Equity Security") unless, in each case, the
Corporation shall have first given written notice (the "Offer Notice") to each
Stockholder which shall (a) state the Corporation's intention to sell any of
the Equity Securities, the amount to be issued, sold or exchanged, the terms of
such securities, the purchase price therefor and a summary of the other
material terms of the proposed issuance, sale or exchange and (b) offer (a
"Preemptive Offer") to Issue to each Stockholder such Stockholder's Pro Rata
Share (as defined below) of such securities (with respect to each Stockholder,
the "Offered Securities") upon the terms and subject to the conditions set
forth in the Offer Notice, which Preemptive Offer by its terms shall remain
open and irrevocable for a period of 30 days from the date it is delivered by
the Corporation to the Stockholder (and, to the extent the Preemptive Offer is
accepted during such 30 day period, until the closing of the sales contemplated
by the Preemptive Offer). "Pro Rata Share" for the purposes of this Section
shall mean, the quotient of (i) the number of shares of Common Stock owned by
the Stockholder on the date of the Preemptive Offer divided by (ii) the total
number of shares of Common Stock issued and outstanding on the date of the
Preemptive Offer.
(b) Notice of a Stockholder's intention to accept a
Preemptive Offer, in whole or in part, shall be evidenced by a writing signed
by the Stockholder and delivered to the Corporation prior to the end of the 30
day period of such Preemptive Offer (each, a "Notice of Acceptance"), setting
forth such portion of the Offered Securities that the Stockholder elects to
purchase.
(c)(i) In the event that a Notice of Acceptance is not
given by a Stockholder in respect of all the Offered Securities, the
Corporation shall have 30 days following the earlier of (A) delivery of the
Notice of Acceptance or (B) the 30 day period referred to in clause (b) above,
if no Notice of Acceptance is delivered, to Issue all or any part of such
remaining Offered Securities not covered by the Notice of Acceptance to any
other person or persons, but only upon terms and conditions in all respects,
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including, without limitation, unit price and interest rates, which are no more
favorable, in the aggregate, to such other person or persons or less favorable
to the Corporation than those set forth in the Preemptive Offer.
(ii) If the Corporation does not consummate the Issuance
of all or part of the remaining Offered Securities to such other person or
persons within such period, the right provided hereunder shall be deemed to be
revived and such securities shall not be offered unless first reoffered to the
Stockholders in accordance with this Section 8.
(iii) Upon the closing of the Issuance to such other
person or persons (the "Other Buyers") of all or part of the remaining Offered
Securities, the Stockholder shall purchase from the Corporation, and the
Corporation shall Issue to the Stockholder, the Offered Securities covered by
the Notice of Acceptance delivered to the Corporation by the Stockholder, on
the terms specified in the Preemptive Offer. The purchase by the Stockholder
of any Offered Securities is subject in all cases to the execution and delivery
by the Corporation and the Stockholder of a purchase agreement relating to such
Offered Securities in form and substance similar in all material respects to
the extent applicable to that executed and delivered between the Corporation
and the Other Buyers.
(d) As used herein, "Excluded Securities" shall mean: (i) up to
6,668 shares of Common Stock issuable or issued to employees of the Corporation
pursuant to the Employee Plans (as defined in the Certificate of
Incorporation); (ii) any shares of Common Stock or Series A Preferred Stock
issuable pursuant to Section 1.4 of the Purchase Agreement and any shares of
Common Stock issuable upon the conversion of any such shares of Series A
Preferred Stock; (iii) shares of Common Stock or Common Stock Equivalents
issued and outstanding on the date hereof or Common Stock issued upon the
conversion or exercise of any such Common Stock Equivalent; (iv) shares of
Common Stock issued or issuable as direct consideration for the acquisition by
the Corporation of another business entity or in connection with a merger or
consolidation as a result of which the holders of the Corporation's outstanding
securities immediately prior to the consummation of such transaction hold
voting securities in excess of fifty percent (50%) of the voting power of the
surviving or resulting entity, which transaction has been approved by the Board
and, so long as a Series A Event has not occurred, by the vote or written
consent of the holders of a majority of the voting power of the issued and
outstanding shares of Series A Preferred Stock, or (v) shares of Common Stock
issued in any public offering of the Corporation's securities.
SECTION 9. Corporate Governance.
9.1. Board of Directors. (a) From and after the date hereof and
until the occurrence of a Section 9.1 Termination Event (as defined below), the
number of members of the Board of Directors of the Corporation (the "Board")
shall be six (6), of whom five (5) shall be designated by Waters and Sancilio
and, subject to Section 9.1(b), one (1) shall be designated by GSCP. For
purposes of this Agreement, a Section 9.1 Termination Event shall occur upon
the earlier of (i) a Qualified IPO and (ii) such time as the GSCP Parties
together with their Affiliates Beneficially Own less than 10% of the
outstanding Common Stock of the Corporation.
(b) From and after a Qualified IPO and until the GSCP parties
together with their Affiliates Beneficially Own less than 10% of the
outstanding Common Stock of the Corporation, GSCP shall have the right, unless
otherwise waived by it in writing, to designate one person to serve as a
director of the Corporation.
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(c) The person designated by GSCP to the Board pursuant to this
Section 9.1 is referred to as the "GSCP Designee." So long as, pursuant to the
Certificate of Incorporation of the Corporation, the holders of Series A
Preferred Stock are entitled to elect a director to the Board, the GSCP
Designee shall be the Series A Director (as defined in and elected as provided
in the Certificate of Incorporation of the Corporation). Simultaneously with
the execution and delivery of this Agreement, the Stockholders have elected
Joseph Gleberman as the GSCP Designee to the Board.
(d) At each meeting of stockholders at which the election of
directors is on the agenda, the Corporation shall recommend to stockholders the
election of the GSCP Designee as a director.
(e) In the event, after receiving proper notice of a meeting of
the Board in accordance with the By-Laws of the Corporation, the GS Designee
determines that he will be unable to be present at such meeting, GSCP shall
have the right to designate a representative to attend and observe such meeting
who shall be entitled to fully participate (other than the right to vote) in
such meeting as if he were a director of the Corporation.
9.2. GSCP Designee. GSCP agrees that the GSCP Designee shall be a
partner or employee of Goldman, Sachs & Co. and shall otherwise be, at the time
he or she is designated by GSCP, reasonably acceptable to Waters and Sancilio.
The GSCP Designee shall have access to all information which is available to
other members of the Board of Directors in their capacity as such.
9.3. Vacancies. So long as GSCP is entitled to nominate a
director pursuant to Section 9.1 of this Agreement, the GSCP Designee shall
hold his office until his death or resignation or until his successor shall
have been duly elected and qualified. If any GSCP Designee shall cease to
serve as a director of the Corporation for any reason, the vacancy resulting
thereby shall be filled by another person designated by GSCP.
9.4. Committees; Subsidiaries. For so long as the GSCP Designee
shall serve on the Board:
(a) The Corporation shall, at the request of GSCP, cause the GSCP
Designee to be appointed to each of the committees of the Board and to the
board of directors or other managing body (and any committee thereof) of any
Subsidiary.
(b) If the GSCP Designee serving on any such committee or any
such Board of Directors of a Subsidiary shall cease to serve as a director of
the Corporation for any reason or otherwise is unable to fulfill his or her
duties on any such committee or Board of Directors, he or she shall be
succeeded by a GSCP Designee determined by GSCP.
9.5. Removal. The Corporation and each Stockholder agrees that no
GSCP Designee shall be removed from office without the consent of GSCP and that
GSCP shall have the right to remove any GSCP Designee, with or without cause,
at any time.
9.6. Directors' Indemnification. (a) The Corporation shall obtain
and cause to be maintained in effect, with financially sound insurers, a policy
of directors' and officers' liability insurance in an amount of $5,000,000 or
more and upon such terms as are reasonably acceptable to GSCP.
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<PAGE> 12
(b) The Corporation's Certificate of Incorporation or By-Laws, or
both, shall to the fullest extent permitted by law provide for indemnification
of, and advancement of expenses to, and limitation of the personal liability
of, the directors of the Corporation or such other person or persons, if any,
who, pursuant to a provision of such Certificate of Incorporation, exercise or
perform any of the powers or duties otherwise conferred or imposed upon such
directors, which provisions shall not be amended, repealed or otherwise
modified in any manner adverse to the directors until at least 6 years
following the date that GSCP is no longer entitled to nominate a director
pursuant to this Section 9.
9.7. Expenses. The Corporation shall pay all reasonable travel
expenses and other out-of-pocket disbursements incurred by any GSCP Designee to
attend meetings of the Board of Directors of the Corporation or any Subsidiary
or of any committees thereof.
9.8. Attendance. GSCP shall use its reasonable best efforts to
cause the GSCP Designee to be present (in person or via telephone) at every
meeting of the Board of Directors and of each committee established by the
Board.
9.9. Voting Arrangement. So long as GSCP is entitled to nominate
one or more persons to serve as a director pursuant to Section 9.1 hereof, each
Stockholder agrees to vote all shares of capital stock of the Corporation
Beneficially Owned by it (including, without limitation, any shares of capital
stock of another Stockholder with respect to which it has voting control
whether as a result of a voting trust or otherwise) with respect to the
election or removal, to or from the Board, of the GSCP Designee in accordance
with the directions of GSCP.
9.10. Board Observer. From and after the date hereof and until a
Qualified IPO, Noro and Wakefield shall have the right to designate a
representative to attend and observe all meetings of the board of directors of
the Corporation (and any committee thereof) who shall be entitled to
participate (other than the right to vote) in any such meeting as if he were a
director of the Corporation.
SECTION 10. Representations and Warranties. (a) Each party
hereto represents and warrants to the other parties hereto as follows:
(i) It has full power and authority to execute, deliver
and perform its obligations under this Agreement.
(ii) This Agreement has been duly and validly authorized,
executed and delivered by it, and constitutes a valid and binding
obligation of it, enforceable against it in accordance with its terms
except to the extent that enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights
generally.
(iii) The execution, delivery and performance of this
Agreement by it does not (x) violate, conflict with, or constitute a
breach of or default under its organizational documents, if any, or
any material agreement to which it is a party or by which it is bound
or (y) violate any law, regulation, order, writ, judgment, injunction
or decree applicable to it.
(iv) No consent or approval of, or filing with, any
governmental or regulatory body is required to be obtained or made by
it in connection with the transactions contemplated hereby.
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(v) It is not a party to any agreement which is
inconsistent with the rights of any party hereunder or otherwise
conflicts with the provisions hereof.
(b) Each Stockholder represents and warrants to the GSCP Parties as
follows:
(i) Schedule 10(b) hereto sets forth a list of all
securities of the Corporation (including, without limitation, shares
of capital stock, convertible securities, debentures, etc.) held of
record or beneficially owned by it immediately after the Closing.
(ii) Except as set forth on Schedule 10(b) hereto, it is
not a party to any contract or agreement, written or oral, (i) with
respect to the securities of the Corporation (including, without
limitation, any voting agreement, voting trust, stockholder's
agreement, registration rights agreement, etc.) or (ii) otherwise with
or relating to the Corporation.
(c) Each GSCP Party represents and warrants to the other parties
hereto that prior to the date hereof it was not a party to any contract or
agreement, written or oral, with respect to the securities of the Corporation.
SECTION 11. No Inconsistent Agreements. Neither the Corporation nor
any Stockholder shall take any action or enter into any agreement which is
inconsistent with the rights of any party hereunder or otherwise conflicts with
the provisions hereof.
SECTION 12. Further Assurances. (a) At any time or from time to time
after the date hereof, the parties agree to cooperate with each other, and at
the request of any other party, to execute and deliver any further instruments
or documents and to take all such further action as the other party may
reasonably request in order to evidence or effectuate the consummation of the
transactions contemplated hereby and to otherwise carry out the intent of the
parties hereunder.
(b) At any time or from time to time, the parties agree to take all
action including, without limitation, voting to approve any amendment to the
Certificate of Incorporation or the By-Laws of the Corporation, required to
increase the authorized number of shares of Common Stock, if necessary to
permit the conversion of all outstanding shares of Series A Preferred Stock.
SECTION 13. Duration of Agreement. The rights and obligations of a
Stockholder under this Agreement shall terminate at such time as such
Stockholder no longer is the beneficial owner of any shares of Stock. This
Agreement shall terminate upon the consummation of a Qualified IPO (as defined
below) except that the terms of Sections 9, 12 and 15 shall survive until, by
their respective terms, they are no longer operative. A "Qualified IPO" shall
mean a bona fide, firm commitment, underwritten public offering of Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended, (i) resulting in at least $20,000,000 of net proceeds to the
Corporation and any selling Stockholders after deducting underwriting discounts
and commissions and offering expenses, and (ii) reflecting a net per share
offering price (after deducting underwriting discounts and commissions and
offering expenses) of at least (A) the Conversion Price (as defined in the
Certificate of Incorporation of the Corporation) in effect immediately prior to
such public offering, from and after the time the GSCP Parties (I) transfer any
of their Series A Preferred Stock to any Person other than a GSCP Affiliate or
(II) exercise any of their demand registration rights under the Registration
Rights Agreement, and (B) otherwise, (I) 125% of the Conversion Price in effect
immediately prior to such public offering, if
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the offering is consummated by November 17, 1996 or (II) 150% of the Conversion
Price in effect immediately prior to such public offering, if the offering is
consummated after November 17, 1996.
SECTION 14. Major Transactions. (a) From and after the date hereof
and until a Qualified IPO, the Corporation shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, take any of the following
actions without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of 70% of the then outstanding Class A Common
Stock (treating for purposes of these calculations all shares of Series A
Preferred Stock but no other Common Stock Equivalents as having been converted
into Common Stock):
(i) consolidate or merge into or with any other person,
sell or transfer all or a substantial portion of its assets to another
person, or enter into any other similar business combination
transaction or effect any transaction or series of transactions in
which more than fifty percent (50%) of its voting securities are
transferred to another person;
(ii) voluntarily liquidate, dissolve or wind up;
(iii) purchase, acquire or obtain any capital stock or
other proprietary interest, directly or indirectly, in any other
entity or all or substantially all of the business or assets of
another Person for consideration (including assumed liabilities) in
excess of $3,000,000;
(iv) enter into or commit to enter any joint ventures
(other than in the ordinary course of business) or any partnerships or
establish any non-wholly-owned subsidiaries, in each case, where the
contributions or investments by the Corporation is in excess of
$3,000,000 in cash or assets;
(v) expand into new lines of business (other than in the
pharmaceutical industry);
(vi) sell, lease, transfer or otherwise dispose of any
asset or group of assets (other than sales of inventory to customers
in the ordinary course of business), in an aggregate amount (as to the
Corporation and all of its Subsidiaries), for consideration in excess
of $10,000,000;
(vii) create, incur, assume or suffer to exist any
indebtedness of the Corporation or any of its Subsidiaries for
borrowed money (which shall include for purposes hereof capitalized
lease obligations and guarantees or other contingent obligations for
indebtedness for borrowed money) in an aggregate amount (as to the
Corporation and all of its Subsidiaries) in excess of $10,000,000
excluding such indebtedness that exists as of the date hereof;
(viii) mortgage, encumber, create, incur or suffer to
exist, liens on its assets, in an aggregate amount (as to the
Corporation and all of its Subsidiaries) in excess of $10,000,000
excluding liens on assets that exist as of the date hereof;
(ix) pay, or set aside any sums for the payment of, any
dividends, or make any distribution on, any shares of its capital
stock or redeem, repurchase or otherwise acquire any outstanding
shares of its capital stock or any other of its outstanding securities
or debt for borrowed money (including capital leases) (except for
indebtedness to the extent it becomes due in accordance with its terms
and except for the repayment of indebtedness in an aggregate
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amount (as to the Corporation and all of its Subsidiaries) of up to
$5,000,000), except in connection with the issuance of Common Stock
upon conversion of the Series A Preferred Stock;
(x) make or commit to make capital expenditures in any
year in an aggregate amount (as to the Corporation and all of its
Subsidiaries) in excess of $5,000,000;
(xi) (A) issue, sell or grant any capital stock or other
securities except for (I) the issuance of or payment of dividends or
other distributions payable on the Common Stock solely in the form of
additional shares of Common Stock, (II) the issuance of Common Stock
and/or Series A Preferred pursuant to Section 1.4 of the Purchase
Agreement, (III) the issuance of Common Stock upon conversion of the
Series A Preferred Stock issued or issuable pursuant to the Purchase
Agreement, (IV) the issuance of no more than 4,418 shares of Common
Stock to employees of the Corporation pursuant to the Corporation's
Employee Plans (as defined in the Corporation's Certificate of
Incorporation), or (V) the issuance of shares of Common Stock upon the
conversion, exchange or exercise of any Common Stock Equivalent
outstanding as of the date hereof, (B) register any securities under
the Securities Act other than the registration of securities pursuant
to the Registration Rights Agreement or (C) grant any registration
rights other than pursuant to the Registration Rights Agreement;
(xii) enter into any transactions (except as expressly
permitted by the Purchase Agreement) with any "affiliate" or
"associate" (as such terms are defined under Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) other than any
transactions existing as of the date hereof, transactions with Pharm
Comm, Inc. or transactions in the ordinary course of business and on
an arm's length basis with Generest, Inc., and Aesgen, Inc.;
(xiii) amend its certificate of incorporation or by-laws,
including, without limitation, any change in the number of directors
comprising its Board of Directors;
(xiv) amend, modify or waive any provision of the Purchase
Agreement or the Documents in any manner which adversely affects the
rights of the Investors, or become a party to any agreement which by
its terms restricts the Corporation's performance of, the terms of the
Documents;
(xv) change its independent certified accountants;
(xvi) appoint or remove any person to or from the position
of Chief Executive Officer or appoint any person to the position of
Chief Financial Officer; or
(xvii) register any securities under the Securities Act in
an initial public offering which is not a Qualified IPO;
(xviii) grant any registration rights which are inconsistent
with the terms of the Registration Rights Agreement; or
(xix) agree or otherwise commit to take any of the actions
set forth in the foregoing subparagraphs (i) through (xviii).
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SECTION 15. PharmComm Option. (a) Schedule 15(a) hereto sets forth a
list of all persons who are currently stockholders of the Corporation and who
shall be issued securities of PharmComm, Inc. upon the capitalizaton thereof to
occur promptly following the date hereof (the "PharComm Stockholders"),
including the number of shares to be issued to such persons.
(b) The PharComm Stockholders are hereby granting the Corporation an
option (the "Option"), exercisable at any time after the date hereof and prior
to the Option Expiration Date (as defined below), to purchase all shares of
capital stock in PharmComm, Inc. to be acquired by them upon the capitalization
of PharmComm, Inc. (the "PharmComm Stock") at a per share price equal to the
Option Exercise Price (as defined below) in accordance with the terms of this
Section 15. The Corporation shall exercise the Option (i) prior to the earlier
of a Qualified IPO and the Option Expiration Date (as defined below) unless,
with the consent of GSCP, it determines not to exercise the Option, and (ii)
from and after a Qualified IPO and prior to the Option Expiration Date, if the
directors of the Corporation (other than Sancilio and Waters) that are neither
employees of the Corporation nor otherwise affiliated with PharmComm, Inc.
determine that such exercise is advisable. The Corporation shall exercise the
option by providing the PharmComm Stockholders written notice of such exercise
and the closing of such sale of shares (the "PharmComm Closing") shall occur
within five days after such exercise. At the PharmComm Closing, each of the
PharmComm Stockholders shall deliver to the Corporation the shares of PharmComm
Stock being sold by them duly endorsed for transfer. The Option shall
terminate on November 17, 1996 (the "Option Expiration Date"). With respect to
any share of PharmComm Stock, the Option Exercise Price shall mean the actual
price paid by the selling PharmComm Stockholder, as the case may be, for such
share of PharmComm Stock together with interest accruing on such amount at an
annual rate of 12% from the date such share of PharmComm stock was purchased
until the PharmComm Closing.
(c) From the date hereof and until the Option Expiration Date, the
PharmComm Stockholders shall cause PharmComm not to (i) pay, or set aside any
sums for the payment of, any dividends or make any distribution on, any shares
of its capital stock, (ii) sell, transfer, redeem, repurchase or otherwise
acquire any outstanding shares of its capital stock or (iii) suffer any
Encumbrance to exist on any outstanding shares of PharmComm Stock.
SECTION 16. Funding of 1995 Stock Options. The Corporation has
adopted a 1995 Stock Option Plan (the "1995 Plan") pursuant to which it may
grant to employees options (each a "1995 Option") to purchase up to 1,917.3
shares of Common Stock. Upon the exercise of any 1995 Option, the Corporation
shall promptly, but in no event later than two days after notice of such
exercise, notify Waters and Sancilio of such exercise (such notice, the "Option
Notice") and shall specify the amount of shares to be purchased under such
Option (the "Option Shares") and the exercise price per share (the "Option
Price"). Waters and Sancilio hereby agree that, within two days after receipt
of the Option Notice, they will sell to the Corporation, for cash, an amount of
shares of Class B Non-Voting Common Stock equal to the Option Shares at a price
per share equal to the Option Price. The obligation of Waters and Sancilio
under this paragraph shall be joint and several, but as between them Waters
shall sell 45% and Sancilio shall sell 55% of the amount of such Option Shares.
SECTION 17. Legends. Each certificate representing shares of Stock
shall bear a legend containing the following words:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
-16-
<PAGE> 17
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SUCH
ACT."
"IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN THE STOCKHOLDER
AGREEMENT DATED AS OF NOVEMBER 17, 1995 BY AND AMONG APPLIED ANALYTICAL
INDUSTRIES, INC. AND THE PARTIES THERETO, A COPY OF WHICH IS ON FILE IN
THE OFFICE OF THE CORPORATION."
The requirement that the above securities legend be placed upon certificates
evidencing any such securities shall cease and terminate upon the earliest of
the following events: (i) when such shares are transferred in an underwritten
public offering, (ii) when such shares are transferred pursuant to Rule 144
under the Securities Act or (iii) when such shares are transferred in any other
transaction if the seller delivers to the Corporation an opinion of its
counsel, which counsel and opinion shall be reasonably satisfactory to the
Corporation, or a "no-action" letter from the staff of the SEC, in either case
to the effect that such legend is no longer necessary in order to protect the
Corporation against a violation by it of the Securities Act upon any sale or
other disposition of such shares without registration thereunder. The
requirement that the above legend regarding the Stockholder Agreement be placed
upon certificates evidencing any such securities shall cease and terminate upon
the termination of this Agreement. Upon the occurrence of any event requiring
the removal of a legend hereunder, the Corporation, upon the surrender of
certificates containing such legend, shall, at its own expense, deliver to the
holder of any such shares as to which the requirement for such legend shall
have terminated, one or more new certificates evidencing such shares not
bearing such legend.
SECTION 18. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid, but
if any provision of this Agreement is held to be invalid or unenforceable in
any respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.
SECTION 19. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the principles of conflicts of law. Each of the parties hereto
hereby irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of New York and of the United States of
America, in each case located in the County of New York, for any action,
proceeding or investigation in any court or before any governmental authority
("Litigation") arising out of or relating to this Agreement and the
transactions contemplated hereby (and agrees not to commence any Litigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. registered mail to its respective
address set forth in this Agreement shall be effective service of process for
any Litigation brought against it in any such court. Each of the parties
hereto hereby irrevocably and unconditionally waives any objection to the
laying of venue of any Litigation arising out of this Agreement or the
transactions contemplated hereby in the courts of the State of New York or the
United States of America, in each case located in the County of New York, and
hereby further irrevocably and unconditionally waives and agrees not to plead
or claim in any such court that any such Litigation brought in any such court
has been brought in an inconvenient forum.
-17-
<PAGE> 18
SECTION 20. Successors and Assigns. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors, assigns, heirs and personal representatives. Except pursuant to a
Sale of Stock permitted by Section 3, no Stockholder shall have the right to
assign its rights and obligations under this Agreement without the consent of
the other Stockholders. Upon any such assignment, such assignee shall have and
be able to exercise all rights of the assigning Stockholder.
SECTION 21. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or by telecopy,
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
(i) if to the Corporation, to:
Applied Analytical Industries, Inc. 5051 New Centre Drive
Wilmington, NC 28403 Telecopy: (910) 392-6557 Attention: R.
Forrest Waldon, Esq.
with a copy to:
Robinson, Bradshaw & Hinson, P.A. 1900 Independence Center 101
North Tryon Street Charlotte, NC 28246 Telecopy: (704)
377-2536 Attention: Stephen M. Lynch, Esq.
(ii) if to the GSCP Parties, to:
GS Capital Partners II, L.P.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3000
Attention: Carla Skodinski
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-8586
Attention: Stuart Z. Katz, Esq.
(iii) If to any other Stockholder, to the notice
information set forth in Schedule 1 hereto.
-18-
<PAGE> 19
[THIS PAGE WAS INTENTIONALLY LEFT BLANK]
-19-
<PAGE> 20
All such notices, requests, consents and other communications shall be deemed
to have been given when received.
SECTION 22. Amendments. The terms and provisions of this Agreement
may be modified or amended, or any of the provisions hereof waived, temporarily
or permanently, pursuant to the written consent of the parties hereto.
SECTION 22A. Headings. The headings of the Sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
SECTION 22B. Nouns and Pronouns. Whenever the context requires, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.
SECTION 22C. Remedies. Without intending to limit the remedies
available to any party hereto, each party (i) acknowledges that breach of this
Agreement will result in irreparable harm for which there is no adequate remedy
at law, and (ii) agrees that any party seeking to enforce this Agreement shall
be entitled to injunctive relief or other equitable remedies upon any such
breach.
SECTION 23. Entire Agreement. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part hereof
contain the entire agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior and contemporaneous agreements
and understandings with respect thereto.
SECTION 24. Purchase Agreement. Waters and Sancilio agree to comply
with the covenants and agreements set forth in Sections 4.8 and 8.2 of the
Purchase Agreement.
SECTION 25. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CORPORATION:
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ Frederick D. Sancilio
-------------------------------
Name:
Title:
GSCP PARTIES:
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ Richard A. Friedman
-------------------------------
Name:
Title: President
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors, II (Cayman), L.P.,
its general partner
By: GS Advisors II, Inc.,
its general partner
By: /s/ Richard A. Friedman
_______________________________
Name:
Title: President
-21-
<PAGE> 22
GOLDMAN, SACHS & CO. VERWALTUNGS
GMBH
By: /s/ Richard A. Friedman
-------------------------------
Name:
Title:
and
By: /s/ C.H. Skodinski
-------------------------------
Name:
Title: VP
STONE STREET FUND 1995, L.P.
By: Stone Street Value Corp.,
General Partner
By: /s/ Richard A. Friedman
-------------------------------
Name:
Title: Vice President
BRIDGE STREET FUND 1995, L.P.
By: Stone Street Value Corp.,
Managing General Partner
By: /s/ Richard A. Friedman
-------------------------------
Name:
Title: Vice President
WAKEFIELD GROUP LIMITED PARTNERSHIP
By: Anna W. Spangler, Inc.
General Partner
By: /s/ William D. Cornwell, Jr.
-------------------------------
Name:
Title: Secretary
NORO-MOSELEY PARTNERS III, L.P.
By: MOSELEY & COMPANY - III L.L.C.
General Partner
By: /s/ Jack R. Kelly, Jr.
-------------------------------
Name:
Title: Member
-22-
<PAGE> 23
/s/ James L. Waters
-----------------------------------
JAMES L. WATERS
/s/ Frederick D. Sancilio
------------------------------------
FREDERICK D. SANCILIO
/s/ Richard C. Waters
------------------------------------
RICHARD C. WATERS
/s/ Patricia B. Waters
------------------------------------
PATRICIA B. WATERS
/s/ Stephen R. Roop
------------------------------------
STEPHEN R. ROOP
/s/ Barbara W. Roop
------------------------------------
BARBARA W. ROOP
/s/ Janet M. Smith
------------------------------------
JANET M. SMITH, TRUSTEE FOR THE
JAMES L. WATERS IRREVOCABLE TRUST
FOR THE BENEFIT OF ANDREW P. WATERS
/s/ Janet M. Smith
------------------------------------
JANET M. SMITH, TRUSTEE FOR THE
JAMES L. WATERS IRREVOCABLE TRUST
FOR THE BENEFIT OF EMILY C. WATERS
/s/ Faith P. Waters
------------------------------------
FAITH P. WATERS
-23-
<PAGE> 24
/s/ Richard L. Bennett
------------------------------------
RICHARD L. BENNETT
/s/ Anthony F. Arato
------------------------------------
ANTHONY F. ARATO
/s/ William H. Underwood
------------------------------------
WILLIAM H. UNDERWOOD
/s/ R. Forrest Waldon
------------------------------------
R. FORREST WALDON
-24-
<PAGE> 1
EXHIBIT 10.6
PREFERRED STOCK PURCHASE AGREEMENT
by and among
APPLIED ANALYTICAL INDUSTRIES, INC.
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
dated as of
November 17, 1995
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. Issuance and Sale of Series A Preferred Stock . . . . . . . . . . . . . . . 2
1.1 The Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Actions at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Additional Issuances; Purchase Price Adjustment . . . . . . . . . . . . . . 4
SECTION 2. Representations and Warranties of the Corporation . . . . . . . . . . . . . 5
2.1 Organization and Good Standing; Power and Authority; Qualifications . . . . 5
2.2 Authorization of the Documents . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 Authorization and Issuance of Capital Stock . . . . . . . . . . . . . . . . 7
2.5 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . 8
2.8 Absence of Material Changes . . . . . . . . . . . . . . . . . . . . . . . . 8
2.9 No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.10 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.11 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . 10
2.12 Equity Investments; Subsidiaries . . . . . . . . . . . . . . . . . . . . . 13
2.13 Corporate Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.14 Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.15 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.16 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.17 Labor Relations; Employees . . . . . . . . . . . . . . . . . . . . . . . . 16
2.18 Litigation; Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.19 Compliance with Laws; Permits . . . . . . . . . . . . . . . . . . . . . . . 17
2.20 Offering Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.21 Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.22 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.23 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.24 Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.25 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.26 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.27 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.28 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.29 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.30 Previous Issuances Exempt . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
2.31 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.32 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.33 Investment Banking Services . . . . . . . . . . . . . . . . . . . . . . . . 27
2.34 FDA Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.35. Closing Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 3. Representations and Warranties of the Investors . . . . . . . . . . . . . . 29
SECTION 4. Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.1 Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.2 Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.4 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.5 Insurance; Patent Clearance . . . . . . . . . . . . . . . . . . . . . . . . 34
4.6. D&O; Key Man Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.7 Repayment of Existing Indebtedness . . . . . . . . . . . . . . . . . . . . 35
4.8 Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.9 Disclosure of Investment . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.11 Investment Banking Services . . . . . . . . . . . . . . . . . . . . . . . . 37
4.12 Share Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 5. Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6. Survival of Representations, Warranties, Agreements and Covenants, etc. . . 38
SECTION 7. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 8. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.1 General Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.2 Tax and Litigation Indemnification . . . . . . . . . . . . . . . . . . . . 40
8.3 Indemnification Principles . . . . . . . . . . . . . . . . . . . . . . . . 41
8.4 Claim Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 9. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 10. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 12. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 13. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 14. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 16. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 17. Nouns and Pronouns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 18. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 19. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 20. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
20.1 Schedules and Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 46
20.2 Knowledge of the Corporation . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBITS SECTION REFERENCE
-------- -----------------
<S> <C> <C>
Exhibit A Dividend Remitter Agreement Recitals
Exhibit B Resolutions Recitals
Exhibit C Form of Stockholder Agreement 1.3(a)
Exhibit D Form of Registration Rights Agreement 1.3(b)
Exhibit E Form of Certificate of President 1.3(c)
Exhibit F Form of Incumbency Certificate 1.3(c)
Exhibit G Certificate of Incorporation 1.3(d)
Exhibit H By-Laws 1.3(d)
Exhibit I Form of Opinion of Counsel to the 1.3(e)
Corporation
Exhibit J Form of Employee Nondisclosure 2.17
Agreement
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
Schedules
Schedule 1.1 Shares Purchased
Schedule 1.3(c) Good Standing
Schedule 1.3(i) Terminated Agreements
Schedule 1.3(j) Agreements
Schedule 2.1 Foreign Qualification
Schedule 2.3(a) Stockholders
Schedule 2.3(b) Preemptive Rights
Schedule 2.6 Financial Statements
Schedule 2.7 Undisclosed Liabilities
Schedule 2.8 Absence of Changes
Schedule 2.10 Contracts
Schedule 2.11(b) Infringement
Schedule 2.11(b)(i)(B) Products Under Development
Schedule 2.11(c) Patents
Schedule 2.11(d) Trademarks
Schedule 2.11(e) Title to Intellectual Property
Schedule 2.11(f) Third Party Intellectual Property
Schedule 2.12(a) Equity Investments
Schedule 2.12(b) Subsidiaries
Schedule 2.13 Corporate Records
Schedule 2.15(a) Encumbrances
Schedule 2.15(b) Condition of Assets
Schedule 2.15(c) Condemnation Proceedings
Schedule 2.16 Employee Benefit Plans and Employment Agreements
Schedule 2.17 Employees
Schedule 2.18 Litigation
Schedule 2.19 Permits
Schedule 2.21(a) Related Transactions
Schedule 2.23(a) Tax Returns
Schedule 2.23(b) Taxes
Schedule 2.23(c) Tax Jurisdictions
Schedule 2.24(a) Environmental Compliance
Schedule 2.24(b) Environmental Permits
Schedule 2.24(c) Environmental Claims
Schedule 2.24(d) Environmental Conditions
Schedule 2.24(e) Storage Tanks
Schedule 2.24(f) Environmental Notices
Schedule 2.24(g) Waste Disposal
Schedule 2.24(h) Liens
</TABLE>
v
<PAGE> 7
<TABLE>
<S> <C>
Schedule 2.24(i) Hazardous Substance Releases
Schedule 2.24(j) Environmental Violations
Schedule 2.25 Consents
Schedule 2.26 Insurance
Schedule 2.29 Proceeds
Schedule 2.31 Real Property
Schedule 2.34(f) FDA Communications
Schedule 4.10 Use of Proceeds
</TABLE>
vi
<PAGE> 8
Index of Defined Terms
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
AAA Recitals
AAI Entity 2.1, 2.23(a)
AAI Italy 2.12(a)
AAI Subsidiary 2.12(a)
Aesgen 2.12(a)
Application Integrity Policy 2.34
Balance Sheet 2.6
Benefit Plan 2.16(a)
Building 4.8.2
By-Laws 1.3(d)
Certificate of Incorporation 1.3(d)
Claim Notice 8.4
Closing 1.2(a)
Closing Actions 1.3
Code Recitals
Common Stock 2.3(b)
Common Stock Equivalents 2.3(b)
Contract 2.10(a)
Conversion Price 6
Conversion Shares 2.5
Corporation Preamble
Credit 4.8.3
Deductible 8.1
Dividend Recitals
Documents 1.3(b)
</TABLE>
1
<PAGE> 9
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Employee 2.16(a)
Employee Agreement 2.16(a)
Employee Nondisclosure Agreements 2.17
Encumbrances 2.15(a)
Environmental Costs 2.24
Environmental Laws 2.24
Environmental Matter 2.24
Environmental Permits 2.24
ERISA 2.16(a)
Exchange Act 2.21(a)
FDA 2.34
Final Conversion Time 1.4(b)
GAAP 2.6
GenerEST 2.12(a)
Goldman Sachs 4.11
GSCP Preamble
GSCP Parties Preamble
Hazardous Substance 2.24
Initial Period 4.2.1
Intellectual Property 2.11
Investor Entity 8.1
Investors Preamble
Leased Real Properties 2.31
Litigation 18
Losses 8.3
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Management Letter 4.2.1
Material Adverse Effect 2.1
Monthly Financials 4.2.1
Noro Preamble
Owned Real Properties 2.31
Permitted Encumbrances 2.31
Preferred Stock 2.3(a)
PTO 2.11(e)
Purchase 1.1
Purchase Price 1.1
Qualified IPO 6
Quarterly Financials 4.2.2
Real Properties 2.31
Registration Rights Agreement 1.3(b)
Return 2.23(a)
Sancilio 1.3(a)
Sancilio Payment 1.3(j)
Section 8 Event 8.1
Securities Act 2.14
Series A Preferred Stock Recitals
Stock 4.8.1
Stock Sales 4.8.1.
Stockholder Agreement 1.3(a)
Taxes 2.23(a)
Threshold 8.1
</TABLE>
3
<PAGE> 11
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Wakefield Preamble
Waters Preamble
Waters-Sancilio Agreement 2.3(b)
</TABLE>
4
<PAGE> 12
APPLIED ANALYTICAL INDUSTRIES, INC.
PREFERRED STOCK PURCHASE AGREEMENT
AGREEMENT, dated as of November 17, 1995, by and among
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Corporation"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership
("GSCP"), 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., (collectively referred to as the "GSCP Parties"), NORO-MOSELEY PARTNERS
III, L.P., a Delaware limited partnership ("Noro"), WAKEFIELD GROUP LIMITED
PARTNERSHIP, a North Carolina limited partnership ("Wakefield") and James L.
Waters ("Waters", together with the GSCP Parties, Noro and Wakefield, the
"Investors")
W I T N E S S E T H :
WHEREAS, on the business day prior hereto, the Corporation
declared, subject to a Dividend Remitter Agreement attached as Exhibit A
hereto, a dividend (the "Dividend") payable to the holders of record of Common
Stock (as defined in Section 2.3(b)) as of such date, upon the terms of the
board resolutions attached as Exhibit B hereto, in an amount intended to
approximate the Corporation's accumulated adjustments account (as defined in
Section 1368(e)(1) of the Internal Revenue Code of 1986, as amended (the
"Code")) (the "AAA") as of the last date of the calendar month preceding the
date hereof, determined as though an election under Section 1362(e)(3) of the
Code were in effect;
WHEREAS, the Dividend is payable by means of (i) the payment
by the Corporation of $5,817,664 at the time of the Closing and (ii) a further
payment at such time as the net increase to the Corporation's AAA for the
period from January 1, 1995 through the last date of the calendar month
preceding the date hereof is finally calculated by Price Waterhouse;
WHEREAS, the Corporation wishes to sell to the Investors and
the Investors wish to purchase from the Corporation shares of Series A
Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock").
<PAGE> 13
ACCORDINGLY, the parties hereto hereby agree as follows:
SECTION 1. Issuance and Sale of Series A Preferred Stock.
1.1 The Purchase. At the Closing (as defined in Section 1.2(a)),
each Investor shall, severally and not jointly, purchase from the Corporation
and the Corporation shall sell to each Investor, the number of shares of Series
A Preferred Stock set forth opposite such Investor's name on Schedule 1.1
(collectively, the "Purchase") at the purchase price set forth opposite such
Investor's name on Schedule 1.1. The aggregate purchase price to be paid by
the Investors for the Series A Preferred Stock purchased by them hereunder is
$22,000,000 (the "Purchase Price").
1.2 The Closing. (a) The closing of the Purchase (the
"Closing") shall take place simultaneously with the execution and delivery of
this Agreement at the offices of Fried, Frank, Harris, Shriver & Jacobson, One
New York Plaza, New York, NY 10004.
(b) At the Closing, the Corporation shall deliver to each
Investor a certificate or certificates representing the shares of Series A
Preferred Stock purchased by such Investor, registered in the name of such
Investor or its nominee. Delivery of such certificates to an Investor shall be
made against receipt at the Closing by the Corporation from such Investor of
the purchase price, which shall be paid by wire transfer to an account
designated at least one business day prior to the Closing by the Corporation.
1.3 Actions at the Closing. Simultaneously with, or prior to,
the execution and delivery of this Agreement, the following actions shall occur
(the "Closing Actions"):
(a) A stockholder agreement (the "Stockholder Agreement") among
the Corporation, the Investors, Frederick D. Sancilio ("Sancilio") and other
persons listed on Schedule 1 thereto substantially in the form of Exhibit C
hereto, shall be duly executed and delivered by the parties thereto.
(b) A registration rights agreement (the "Registration Rights
Agreement," together with this Agreement and the Stockholder Agreement, the
"Documents") among the Corporation, the Investors and Sancilio, substantially
in the form of Exhibit D hereto, shall be duly executed and delivered by the
parties thereto.
(c) The Corporation shall deliver to the Investors: (i)
long-form certificates of good standing from the jurisdictions set forth on
Schedule 1.3(c) under its name, dated as of a date no earlier than ten days
prior to the Closing, (ii) a certificate executed by its President,
substantially in the form attached hereto as Exhibit E, certifying, on behalf
of the Corporation, the accuracy of its representations and warranties and the
performance
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<PAGE> 14
of its covenants, and (iii) an incumbency certificate, substantially in the
form attached hereto as Exhibit F.
(d) The Corporation shall deliver to the Investors certified
copies, as of a date as close as practicable to the Closing, of the Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and the By-Laws of the Corporation (the "By-Laws"), which
Certificate of Incorporation and By-Laws shall be in the form of Exhibits G and
H, respectively.
(e) The Investors shall receive from Robinson, Bradshaw & Hinson,
P.A., counsel for the Corporation, an opinion addressed to the Investors, dated
as of the Closing, satisfactory in form and substance to the Investors, which
shall include the opinions set forth in Exhibit I attached hereto.
(f) Joseph Gleberman shall have been elected to the board of
directors of the Corporation and shall hold such position as of the date
hereof.
(g) The Corporation shall have obtained, with financially sound
and reputable insurers, (i) directors' and officers' liability insurance in the
amount of $5,000,000 or a binder with respect to such insurance and (ii) "key
man" term life insurance on the life of Sancilio in the amount of $2,500,000 or
a binder with respect to such insurance, in each case, in form satisfactory to
the GSCP Parties.
(h) Every certificate representing shares of Common Stock of the
Corporation outstanding as of the date hereof shall bear the legends required
pursuant to Section 14 of the Stockholder Agreement.
(i) The agreements set forth on Schedule 1.3(i) shall have been
terminated.
(j) The agreements set forth on Schedule 1.3(j), copies of which
have previously been provided to the GSCP Parties, shall have been duly
executed and delivered by the parties thereto.
(k) The Corporation shall have repaid to Waters an amount equal
to the aggregate principal amount outstanding under the Note, dated January 1,
1990 issued by the Corporation to Waters in the aggregate principal amount of
$1,158,500, together with all accrued and unpaid interest thereon through the
date hereof (as of November 15 the interest due on the note was equal to
$28,002.09).
(l) Sancilio shall have repaid to the Corporation an amount equal
to $281,438 (the "Sancilio Payment").
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<PAGE> 15
1.4 Additional Issuances; Purchase Price Adjustment.
(a) In addition to and without limitation of all other
indemnities in this Agreement, in the event that the representation and
warranty set forth in the last sentence of Section 2.3 was not true when made,
the Corporation shall issue to the Investors (on a pro rata basis), at no cost
to the Investors, and as an adjustment to the purchase price paid by the
Investors per share of Series A Preferred Stock, an additional amount of Series
A Preferred Stock such that, if such issuance of additional Series A Preferred
Stock were made at the Closing, such representation and warranty would have
been true and accurate in all respects when made.
(b) If at the time of any required purchase price adjustment
pursuant to Section 1.4(a) all shares of Series A Preferred Stock have been
converted into shares of Common Stock (as defined in Section 2.3), the
Corporation shall promptly issue to the Investors (on a pro rata basis), at no
cost to the Investors and as an adjustment to the purchase price paid by the
Investors per share of Series A Preferred Stock, an additional amount and kind
of Common Stock equal to the amount and kind of Common Stock issuable upon the
conversion (based on the conversion ratio in effect at the time the last shares
of Series A Preferred Stock were converted into shares of Common Stock) of the
amount of Series A Preferred Stock which would have been issued with respect to
such purchase price adjustment pursuant to Section 1.4(a) if such purchase
price adjustment had been made immediately prior to the time the last shares of
Series A Preferred Stock were converted into shares of Common Stock (the "Final
Conversion Time").
(c) Any additional shares of Series A Preferred Stock and Common
Stock issued to the Investors pursuant to this Section 1.4 shall be treated as
if they were issued on the date hereof and shall reflect any dividends or other
distributions which would have accrued or have been payable with respect to and
the application of any anti-dilution, ratable treatment or similar provisions
(as set forth in the Certificate of Incorporation, applicable law or otherwise)
which would have been applicable to such shares of Series A Preferred Stock and
Common Stock had they been issued on the date hereof.
(d) In connection with any issuance of Series A Preferred Stock
pursuant to this Section 1.4, the Corporation shall reserve a sufficient number
of shares of Class A Voting Common Stock and Class B Non-Voting Common Stock
for issuance to the Investors upon the conversion of the shares of Series A
Preferred Stock so issued. Any shares of Series A Preferred Stock or Common
Stock issued to the Investors pursuant to this Section 1.4 shall, when issued,
be validly issued and fully paid and nonassessable with no personal liability
attaching to the ownership thereof.
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<PAGE> 16
SECTION 2. Representations and Warranties of the Corporation. The
Corporation hereby represents and warrants to the Investors (other than Waters)
as of the date hereof as follows:
2.1 Organization and Good Standing; Power and Authority;
Qualifications. Each of the Corporation and Applied Analytical Industries
Italy, S.r.l. (collectively, the "AAI Entities" and each individually, an "AAI
Entity") (i) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, (ii) has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as presently conducted and as proposed
to be conducted and (iii) has all requisite corporate power and authority to
enter into and carry out the transactions contemplated by the Documents to
which it is a party. Each AAI Entity is qualified to transact business as a
foreign corporation in, and is in good standing under the laws of, those
jurisdictions listed on Schedule 2.1 under its name, which jurisdictions
constitute all of the jurisdictions wherein the character of the property owned
or leased or the nature of the activities conducted by it makes such
qualification necessary, except jurisdictions in which the failure to be so
qualified would not have a material adverse effect on the condition (financial
or otherwise), results of operations, business or assets of the AAI Entities
taken as a whole (a "Material Adverse Effect").
2.2 Authorization of the Documents. The execution, delivery and
performance by the Corporation of each of the Documents have been duly
authorized by all requisite corporate action on the part of the Corporation,
and each of the Documents constitutes a legal, valid and binding obligation of
the Corporation, enforceable against the Corporation in accordance with its
terms except to the extent that enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally, that
the remedy of specific performance and injunctive and other forms of equitable
relief may be subject to certain equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought and that certain
indemnification provisions included in the Registration Rights Agreement may be
unenforceable as being contrary to public policy.
2.3 Capitalization. The authorized capitalization of the
Corporation immediately following the Purchase consists of:
(a) Preferred Stock. 1,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"), of which (i) 1,000 shares have been
designated Series A Preferred Stock and (ii) 883 shares of Series A Preferred
Stock are issued and outstanding. The shares of Series A Preferred to be
issued and delivered in accordance with the terms of this Agreement will be
validly issued and fully paid and nonassessable when so issued and delivered.
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<PAGE> 17
(b) Common Stock. 155,000 shares of Common Stock, no par value
per share ("Common Stock"), of which (i) 5,000 shares have been designated
Class A Voting Common Stock and 150,000 shares have been designated Class B
Non-Voting Common Stock, and (ii) 3,532 shares of Class A Voting Common Stock
and 79,830.25 shares of Class B Common Voting Stock are issued and outstanding
and all such shares have been validly issued and are fully paid and
nonassessable.
Schedule 2.3(a) hereto contains a list of (i) all holders of record of
capital stock of the Corporation, including the number of shares of capital
stock held by each such holder, and (ii) all outstanding warrants, options,
agreements, convertible securities or other commitments or securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
(including the Series A Preferred Stock issued hereunder, collectively, "Common
Stock Equivalents") pursuant to which the Corporation is or may become
obligated to issue any shares of the capital stock or other securities of the
Corporation, which names all persons entitled of record to receive such shares
or other securities, the shares of capital stock or other securities required
to be issued thereunder as of the date hereof and the price per share, if any,
payable with respect to the issuance of any share of capital stock issuable
thereunder. Except as set forth on Schedule 2.3(b), the Corporation has no
knowledge of the names of any beneficial owners of shares of capital stock who
are not otherwise holders of record. Except as set forth on Schedule 2.3(b) or
as contemplated by the Documents or the Stockholders Agreement of even date
herewith among the Corporation, Waters and Sancilio and the other persons
listed on Schedule 1 thereto (the "Waters-Sancilio Agreement") there are, and
immediately after the Closing, there will be, no Common Stock Equivalents
outstanding and no rights, including preemptive or similar rights, to purchase
or otherwise acquire shares or sell or otherwise transfer shares of the capital
stock of the Corporation pursuant to any provision of law, the Certificate of
Incorporation or the By-laws, any agreement to which the Corporation is a party
or, to the best knowledge of the Corporation, otherwise; and, except as set
forth on Schedule 2.3(b) or as contemplated by the Documents, the Corporation
is not a party to, and, to the Corporation's best knowledge, there are, and
immediately after the Closing, there will be, no agreement, restriction or
encumbrance (such as a right of first refusal, right of first offer, proxy,
voting agreement, voting trust, registration rights agreement, stockholders'
agreement, etc., whether or not the Corporation is a party thereto) with
respect to the purchase, sale or voting of any shares of capital stock of the
Corporation (whether outstanding or issuable upon conversion, exchange or
exercise of outstanding securities). Except as contemplated by the Documents
or the Waters-Sancilio Agreement or except for the right to vote its shares of
Common Stock for the election of directors, no person has the right to nominate
or elect one or more directors of the Corporation. The shares of Common Stock
issuable upon conversion of the Series A Preferred Stock issued to the
Investors on the date of the Closing under this Agreement will represent
(following such issuance of Series A
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<PAGE> 18
Preferred Stock), in the aggregate, 20% of the outstanding Common Stock of the
Corporation on the date of the Closing and the voting power of such issued
shares will represent (following such issuance of Series A Preferred Stock), in
the aggregate, 20% of the total number of votes able to be cast on any matter
by all voting securities of the Corporation (other than any matter to be voted
on by the holders of shares of Series A Preferred Stock as a separate class) on
the date of the Closing (treating for purposes of these calculations (i) all
Common Stock Equivalents outstanding on the date hereof as having been
converted, exchanged or exercised, (ii) any shares of Common Stock or Common
Stock Equivalents issuable pursuant to any Contract (as defined in Section
2.10(a)) entered into by the Corporation prior to the date hereof, or any
preemptive right granted by the Corporation prior to the date hereof, in each
case, as having been issued on the date hereof and (iii) all shares of Common
Stock issuable under the Corporation's 1995 Restricted Stock Award Plan as
having been issued on the date hereof).
2.4 Authorization and Issuance of Capital Stock. The
authorization, issuance, sale and delivery of the Series A Preferred Stock
pursuant to this Agreement and the authorization, reservation, issuance, sale
and delivery of the Conversion Shares (as defined in Section 2.5) have been
duly authorized by all requisite corporate action on the part of the
Corporation, and when issued, sold and delivered in accordance with this
Agreement, the Series A Preferred Stock and the Conversion Shares will be
validly issued and outstanding, fully paid and nonassessable with no personal
liability attaching to the ownership thereof, free of any Encumbrances (as
defined in Section 2.15(a)), other than Encumbrances, if any, arising as a
result of actions taken by the Investors, and not subject to preemptive or
similar rights of the stockholders of the Corporation or others. The terms,
designations, powers, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions, of
any series of Preferred Stock of the Corporation are as stated in the
Certificate of Incorporation and the By-Laws.
2.5 Reservation of Shares. The Corporation has reserved a
sufficient number of shares of (i) Class A Voting Common Stock and Class B
Non-Voting Common Stock for issuance to the Investors upon the conversion of
the Series A Preferred Stock issued to the Investors on the date hereof in
accordance with this Agreement and (ii) Common Stock for issuance upon
conversion or exercise of all other Common Stock Equivalents outstanding on the
date hereof. The shares of Class A Voting Common Stock and Class B Non-Voting
Common Stock issuable upon the conversion of the Series A Preferred Stock
issued or issuable to the Investors hereunder shall be referred to collectively
as the "Conversion Shares."
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<PAGE> 19
2.6 Financial Statements. The Corporation has furnished to the
Investors the audited consolidated statements of income, stockholders' equity
and cash flows of the Corporation for the fiscal years ended December 31, 1993
and 1994 and the audited consolidated balance sheet of the Corporation as of
those dates, and the unaudited consolidated balance sheet of the Corporation as
of September 30, 1995 (the "Balance Sheet") and the related unaudited
consolidated statements of income, stockholders' equity and cash flows of the
Corporation for the nine-month period ended September 30, 1995. Except as set
forth in Schedule 2.6, all such financial statements (i) are in accordance with
the books and records of the Corporation, (ii) have been prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied
(except that such unaudited financial statements do not contain all of the
footnotes required under GAAP and are subject to normal year-end adjustments,
none of which could reasonably be expected to result in a Material Adverse
Effect) and (iii) fairly present the financial position of the Corporation and
its consolidated subsidiaries as of December 31, 1993 and 1994 and September
30, 1995, respectively, and the results of their operations and cash flows for
the years ended December 31, 1993 and 1994 and the results of operations for
the nine months ended September 30, 1995, respectively.
2.7 Absence of Undisclosed Liabilities. Except as disclosed on
Schedule 2.7, neither the Corporation nor any of its consolidated subsidiaries
has any liabilities or obligations (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due) other than (i)
liabilities or obligations reserved against or otherwise disclosed in the
Balance Sheet or the footnotes thereto, (ii) intercompany liabilities among the
Corporation and its consolidated subsidiaries, (iii) other liabilities or
obligations which were incurred after September 30, 1995 in the ordinary course
of business consistent (in amount and kind) with past practice and which do not
exceed $100,000 in the aggregate, (iv) liabilities or obligations under
Contracts listed in the Schedules to this Agreement or under Contracts which
are not required to be disclosed therein (but not liabilities for breaches
thereof), (v) other liabilities and obligations in the aggregate not exceeding
$100,000, (vi) trade accounts payable for goods and services and wages and
salaries, in each case, incurred after September 30, 1995 in the ordinary
course of business consistent (in amount and kind) with past practice, and
(vii) liabilities and obligations (the existence of which does not constitute a
breach of Section 2.24) relating to Environmental Costs.
2.8 Absence of Material Changes. Except as set forth on Schedule
2.8 and except as otherwise expressly contemplated by this Agreement including,
without limitation, the payment of the Dividend, since December 31, 1994, each
AAI Entity has conducted its business in the ordinary course, consistent with
past practice and there has not been (a) any material adverse change in the
condition (financial or otherwise), results of operations, business, assets, or
liabilities of the AAI Entities taken together as a whole
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<PAGE> 20
or any event or condition (other than events or conditions affecting the
Corporation's industry generally and which have been publicly reported) which
could reasonably be expected to have such a material adverse change, (b) any
waiver or cancellation of any right of any AAI Entity to the extent such waiver
or cancellation has had or could reasonably be expected to have a Material
Adverse Effect, or the cancellation of any material debt or claim held by any
AAI Entity, (c) any payment, discharge or satisfaction of any claim, liability
or obligation of any AAI Entity of an amount in excess of $25,000 other than in
the ordinary course of business, (d) any Encumbrance upon the assets of any AAI
Entity other than any Permitted Encumbrance, (e) any payment of dividends on,
or other distribution with respect to, or any direct or indirect redemption or
acquisition of, any securities of any AAI Entity, (f) any issuance of any
stock, bonds or other securities of any AAI Entity, (g) any sale, assignment or
transfer of any tangible or intangible assets of any AAI Entity except in the
ordinary course of business, (h) any loan by any AAI Entity to any officer,
director, employee, consultant or shareholder of such AAI Entity of an amount
in excess of $25,000 (other than advances to such persons in the ordinary
course of business in connection with travel and travel related expenses), (i)
any damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the assets, property, financial condition or
results of operations of the AAI Entities taken together as a whole, (j) any
increase, direct or indirect, in the compensation paid or payable to any
officer or director of any AAI Entity or, other than in the ordinary course of
business, to any other employee, consultant or agent of any AAI Entity, (k) any
change in the accounting methods, practices or policies of any AAI Entity, (l)
any indebtedness incurred for borrowed money by any AAI Entity of an amount in
excess of $25,000 other than in the ordinary course of business, (m) any
amendment to or termination of any material agreement to which any AAI Entity
is a party other than the expiration of any such agreement in accordance with
its terms, (n) to the best knowledge of the Corporation, any change with
respect to the regulation of any AAI Entity or its activities by any
administrative agency or governmental body to the extent such change has had or
could reasonably be expected to have a Material Adverse Effect, (o) any
material change in the manner of business or operations of any AAI Entity, or
(p) any agreement or commitment (contingent or otherwise) by any AAI Entity to
do any of the foregoing.
2.9 No Conflict. The execution, delivery and performance by the
Corporation of its obligations under the Documents and the documentation
relating thereto and the consummation by the Corporation of the transactions
contemplated hereby and thereby (including, without limitation, the issuance,
sale and delivery by the Corporation of the Series A Preferred Stock and the
Conversion Shares) will not (a) assuming the representations and warranties of
the Investors made herein are true and accurate, violate any provision of law,
statute, rule or regulation, or any ruling, writ, injunction, order, judgment
or decree of any court, administrative agency or other governmental body
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<PAGE> 21
applicable to it, or any of its properties or assets, (b) conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute (with due notice or lapse of time, or both) a default (or give rise
to any right of termination, cancellation or acceleration) under, or result in
the creation of any Encumbrance upon any of its properties or assets under, any
Contract to which it is a party or (c) violate its Certificate of Incorporation
or By- laws.
2.10 Agreements. (a) Except as set forth on Schedule 2.10, no
AAI Entity is a party to any indenture, mortgage, guaranty, lease, license or
other contract, agreement or understanding, written or oral (a "Contract"),
other than any Contract which (i) pursuant to its terms, has expired, been
terminated or fully performed by the parties, and in each case, under which no
AAI Entity has any liability, contingent or otherwise, (ii) is cancellable by
such AAI Entity on 30 days' or less notice without any penalty or other
financial obligation and which involves payments to or from such AAI Entity of
less than $100,000 in such 30-day period or (iii) involves annual aggregate
payments to or from such AAI Entity of $100,000 or less, and in each case, is
not material to the business or financial condition of such AAI Entity.
(b) Complete copies (or, if oral, full written descriptions) of
all Contracts required to be listed on Schedule 2.10, including all amendments
thereto, have been made available to the Investors. Each of such Contracts is
legal, valid, binding, enforceable, and in full force and effect against the
AAI Entity party thereto and, to the best knowledge of the Corporation, against
the other parties thereto. There is no breach, violation or default by any AAI
Entity and no event (including, without limitation, the consummation of the
transactions contemplated by the Documents) which, with notice or lapse of time
or both, would (A) constitute a material breach, violation or default by such
AAI Entity under any such Contract or (B) give rise to any lien or right of
termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration against such AAI Entity under any such Contract. To
the best knowledge of the Corporation, except as set forth on Schedule 2.10, no
other party to any of such Contracts is in arrears in respect of the
performance or satisfaction of the terms and conditions on its part to be
performed or satisfied under any of such Contracts, no waiver or indulgence has
been granted by any of the parties thereto and no party to any of such
Contracts has repudiated any provision thereof.
2.11 Intellectual Property Rights. (a) Each AAI Entity owns or
has the right to use pursuant to license, sublicense, agreement or permission
all Intellectual Property (as defined below), individually or in the aggregate,
material to the operation of its business as currently conducted. Each item
of Intellectual Property owned or used by such AAI Entity immediately prior to
the Closing will be owned or available for use by
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<PAGE> 22
such AAI Entity on identical terms and conditions immediately subsequent to the
Closing.
(b) Except as set forth on Schedule 2.11(b), (i) to the best
knowledge of the Corporation after reasonable investigation (including, without
limitation, consulting with patent counsel), (A) no AAI Entity has interfered
with, infringed upon or misappropriated any Intellectual Property rights of
third parties, and (B) the business conducted and proposed to be conducted by
any AAI Entity (which, in the case of the development, marketing and licensing
of proprietary products, shall be limited to the products set forth on Schedule
2.11(b)(i)(B)) will not interfere with, infringe upon or misappropriate any
Intellectual Property rights of third parties, and (ii) no AAI Entity has
received any charge, complaint, claim, demand or notice alleging any such
interference, infringement or misappropriation (including any claim that it
must license or refrain from using any Intellectual Property rights of any
third party). To the best knowledge of the Corporation, no third party has
interfered with, infringed upon or misappropriated any Intellectual Property
rights of any AAI Entity.
(c) Schedule 2.11(c) hereto identifies each patent and each
pending patent application which has been filed by any AAI Entity worldwide.
With respect to each such patent, to the best knowledge of the Corporation,
there is no substantial suggestion or assertion that any claim therein is
invalid or unenforceable. To the best knowledge of the Corporation, the patent
applications identified on Schedule 2.11(c) hereto have been properly prepared
and filed; such applications are presently being diligently pursued by the AAI
Entity making such application.
(d) Schedule 2.11(d) identifies all registered or unregistered
trademarks of each AAI Entity. Schedule 2.11(d) identifies each license,
agreement and other permission which such AAI Entity has granted to any third
party with respect to any of its Intellectual Property with a value, to the
best knowledge of the Corporation, of $10,000 or greater (together with any
exceptions).
(e) The Corporation has made available to the Investors correct
and complete copies of all registrations, patent applications, licenses,
agreements and permissions (as amended), identified in Schedules 2.11(c) and
2.11(d) hereto and has made available to the Investors correct and complete
copies of all other material written documentation evidencing ownership and
prosecution (including all papers filed with or received from the U.S. Patent
and Trademark Office ("PTO") of each such item. With respect to each item of
Intellectual Property required to be identified in Schedule 2.11(c) and 2.11(d)
and except as set forth in Schedule 2.11(e):
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(i) the relevant AAI Entity possesses all right, title
and interest in and to the item, free and clear of any encumbrance,
license or other restriction;
(ii) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling or charge; and
(iii) such AAI Entity has never agreed to indemnify any
Person for or against any interference, infringement, misappropriation
or other conflict with respect to the item.
(f) Schedule 2.11(f) identifies each item of Intellectual
Property (other than any shrink wrap license) that any third party owns and
that any AAI Entity uses pursuant to license, sublicense, agreement or
permission and is material to the business of the AAI Entities taken together
as a whole. No AAI Entity has granted any sublicense or similar right with
respect to any such agreements or Intellectual Property, and, to the best
knowledge of the Corporation, (i) each such item of Intellectual Property is
not subject to any outstanding injunction, judgment, order, decree, ruling or
change and (ii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand is pending or is threatened which challenges the
legality, validity, or enforceability of any such item of Intellectual
Property.
(g) No AAI Entity has disclosed any of its proprietary
information which, if disclosed, would materially adversely affect such AAI
Entity other than (i) in the regular and ordinary course of business, (ii) to
representatives, agents, consultants, accountants, attorneys, financial
advisers of such AAI Entity, (iii) in connection with entering into this
Agreement, (iv) to governmental authorities as from time to time requested or
(v) to other persons subject to agreements regarding the confidential treatment
thereof.
(h) The Corporation has made available to the GSCP Parties copies
of (1) all written opinions of legal counsel issued to any AAI Entity relating
to Intellectual Property and (2) all correspondence it or any other AAI Entity
has received from, or sent to, any third party concerning or relating to any
interference with, infringement upon or misappropriation of such AAI Entity's
or any third party's Intellectual Property.
"Intellectual Property" means (a) all world wide inventions and
discoveries (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent applications and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names and corporate
names, together with all translations, adaptations, derivations and
combinations thereof and including all goodwill associated therewith, and all
applications,
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registrations and renewals in connection therewith, (c) all copyrightable
works, all copyrights and all applications, registrations and renewals in
connection therewith, (d) all mask works and all applications, registrations
and renewals in connection therewith, (e) all know-how, trade secrets and
confidential business information, whether patentable or unpatentable and
whether or not reduced to practice (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production process and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, (h) all copies and tangible
embodiments thereof (in whatever form or medium) and (i) all licenses and
agreements in connection therewith.
2.12 Equity Investments; Subsidiaries. (a) Except for GenerEst,
Inc. ("GenerEst"), Aesgen, Inc. ("Aesgen") and Applied Analytical Industries
Italy, S.r.l. ("AAI Italy") (each, an "AAI Subsidiary"), the Corporation has
never had, nor does it presently have, any subsidiaries, nor has it owned, nor
does it presently own, whether directly or indirectly owned, any capital stock
or other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity, other than
shares of capital stock or ownership interests in any such entity which (i)
were acquired by the Corporation for less than $100,000 and (ii) do not
represent 5% or more of the voting power or economic interest in any such
entity.
(b) Schedule 2.12(b) contains a list of (i) all holders of record
of capital stock of each AAI Subsidiary, including the number of shares of
capital stock held by each such holder, and (ii) all outstanding warrants,
options, agreements, convertible securities or other commitments pursuant to
which an AAI Subsidiary is or may become obligated to issue any shares of its
capital stock or other securities, which names all persons entitled of record
to receive such shares or other securities, the shares of capital stock or
other securities required to be issued thereunder as of the date hereof and the
price per share, if any, payable with respect to the issuance of any share of
capital stock issuable thereunder. The Corporation does not know of the names
of any beneficial owners of shares of capital stock of any AAI Subsidiary who
are not otherwise holders of record. The capital stock of each AAI Subsidiary
held by an AAI Entity is validly issued and outstanding, fully paid and
nonassessable, except as listed on Schedule 2.12(b). Except as set forth on
Schedule 2.12(b), there are, and immediately after the Closing, there will be,
no rights, including preemptive or similar rights, to purchase or otherwise
acquire shares or sell or otherwise transfer shares of the capital stock of any
AAI Subsidiary pursuant to any provision of law, the certificate of
incorporation or the by-laws of such AAI Subsidiary, any agreement to which
such AAI Subsidiary is a party or, to the best knowledge of the Corporation,
otherwise; and, except as set forth on Schedule 2.12(b), no AAI Subsidiary is a
party to, and to the best knowledge of the Corporation, there is,
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and immediately after the Closing, there will be, no agreement, restriction or
encumbrance (such as a right of first refusal, right of first offer, proxy,
voting agreement, voting trust, registration rights agreement, stockholders'
agreement, etc., whether or not any AAI Subsidiary is a party thereto) with
respect to the purchase, sale or voting of any shares of capital stock of any
AAI Subsidiary (whether outstanding or issuable upon conversion or exercise of
outstanding securities). Notwithstanding the foregoing, all of the
representations and warranties contained in this Section 2.12(b) relating to
GenerEst and Aesgen are made to the best knowledge of the Corporation.
(c) The representations and warranties of the Corporation set
forth in the Purchase Agreement, dated as of the date hereof, by and among
GenerEst, the Corporation and the parties listed on Schedule I thereto are true
and correct.
(d) The representations and warranties of the Corporation set
forth in the Stock Purchase Agreement dated as of April 4, 1995 by and among
Aesgen and the persons named on Schedule 1 thereto were true and correct when
made.
2.13 Corporate Minute Books. Other than as set forth on Schedule
2.13, the corporate records of each AAI Entity are correct and complete in all
material respects. True and correct copies of all minutes of meetings or other
actions by the directors, stockholders or incorporators of each AAI Entity
since their respective inceptions have previously been provided to the GSCP
Parties and made available to the Investors.
2.14 Suitability. To the best knowledge of the Corporation, none
of the events described in Item 401(f) of Regulation S-K under the Securities
Act of 1933, as amended (the "Securities Act"), has occurred during the last
five years with respect to any director or officer of any AAI Entity.
2.15 Assets. (a) Each AAI Entity has good and marketable
title to all of its assets and properties, free and clear of any mortgages,
judgments, claims, liens, security interests, pledges, escrows, charges or
other encumbrances of any kind or character whatsoever ("Encumbrances") except
(i) as disclosed in Schedule 2.15(a), (ii) Encumbrances for taxes not yet due
and payable, (iii) Encumbrances set forth on Schedule 2.15(a) for taxes and
charges and other claims, the validity of which it is contesting in good faith,
or (iv) Permitted Encumbrances.
(b) Except as set forth on Schedule 2.15(b), the buildings,
facilities, machinery, equipment, furniture, leasehold and other improvements,
fixtures, vehicles, structures, any related capitalized items and other
tangible property owned by, or leased to any AAI Entity and material to its
operations, as of the date hereof, (i) are in all material respects in good
operating condition and repair (normal wear and tear excepted),
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free (in the case of buildings or structures located on the Real Properties (as
defined in Section 2.31)) of any material structural or engineering defects,
(ii) are in all material respects subject to continued repair and replacement
in accordance with past practice and all applicable regulations, and (iii) are
materially suitable for their current use.
(c) Except as set forth on Schedule 2.15(c), no AAI Entity has
received notice of, or has knowledge of, any pending, threatened or
contemplated condemnation proceeding or similar taking affecting the assets of
such AAI Entity (including the Real Properties).
2.16 Employee Benefit Plans. (a) Schedule 2.16 hereto contains a
true and complete list of (i) each plan, program, policy, contract, agreement
or other arrangement providing for compensation, severance, termination pay,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits of any kind, whether funded or unfunded, written or oral,
which is now sponsored, maintained, contributed to or required to be
contributed to by the any AAI Entity or pursuant to which such AAI Entity has
any liability, contingent or otherwise, including, but not limited to, any
"employee benefit plan" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (each, a "Benefit
Plan") other than employment agreements entered into in the ordinary course of
business and not providing for total compensation in excess of $100,000 on an
annual basis and severance agreements providing for the payment of amounts not
exceeding $20,000; and (ii) each management, employment, bonus, option, equity
(or equity related), severance, consulting, non compete, confidentiality or
similar agreement or contract, pursuant to which an AAI Entity has any
liability, contingent or otherwise, between any AAI Entity and any current,
former or retired employee, officer, consultant, independent contractor, agent
or director of such AAI Entity (an "Employee") other than employment agreements
entered into in the ordinary course of business and not providing for total
compensation in excess of $100,000 on an annual basis and severance agreements
providing for the payment of amounts not exceeding $20,000 (each, an "Employee
Agreement"). Except as identified on Schedule 2,16, no AAI Entity currently
sponsors, maintains, contributes to, or is required to contribute to, nor has
any AAI Entity ever sponsored, maintained, contributed to or been required to
contribute to, or incurred any liability to, (i) any "defined benefit plan" (as
defined in ERISA Section 3(35)); (ii) any "multiemployer plan" (as defined in
ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any
liability to provide, life insurance, medical, severance or other employee
welfare benefits to any Employee upon his or her retirement or termination of
employment, except as required by Section 4980B of the Code.
(b) The Corporation is not (i) a member of a "controlled group of
corporations," under "common control" or an "affiliated service group" within
the
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meaning of Sections 414(b), (c) or (m) of the Code, (ii) required to be
aggregated under Section 414(o) of the Code, or (iii) under "common control,"
within the meaning of Section 4001(a)(14) of ERISA, or any regulations
promulgated or proposed under any of the foregoing Sections, in each case with
any other entity.
(c) The Corporation has made available to the Investors current,
accurate and complete copies of all documents embodying or relating to each
Benefit Plan and each Employee Agreement, including all amendments thereto,
trust or funding agreements relating thereto (if any), the two most recent
annual reports (Series 5500 and related schedules) required under ERISA (if
any), the most recent determination letter (if any) received from the Internal
Revenue Service, the most recent summary plan description (with all material
modifications) (if any), and all material communications to any Employee or
Employees relating to any Benefit Plan or Employee Agreement.
(d) Each Benefit Plan has been established and maintained in
accordance with its terms and in material compliance with all applicable, laws,
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code; and each Benefit Plan intended to qualify under Section 401 of the
Code is, and since its inception has been, so qualified.
(e) The execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any Benefit
Plan or Employee Agreement that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligations to fund benefits
with respect to any Employee.
2.17 Labor Relations; Employees. Schedule 2.17 hereto lists all
employees of any AAI Entity with an annual salary in excess of $100,000.
Except as set forth on Schedule 2.17 hereto, (i) no AAI Entity is delinquent in
payments to any of its employees, for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed by the date hereof or
amounts required to be reimbursed by them to the date hereof, (ii) each AAI
Entity is in material compliance with all applicable federal, state and local
laws, rules and regulations respecting employment, employment practices, labor,
terms and conditions of employment and wages and hours, (iii) no AAI Entity is
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, commitment or arrangement
with any labor union, and no labor union has requested or, to the best
knowledge of the Corporation, has sought to represent any of the employees,
representatives or agents of any AAI Entity, (iv) there is no labor strike,
dispute, slowdown or stoppage actually pending, or, to the best knowledge of
the Corporation, threatened against or involving
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any AAI Entity, (v) to the best knowledge of the Corporation, no salaried key
employee has any plans to terminate his or her employment with any AAI Entity.
Each of the officers of the AAI Entities, each key employee and each other
employee now employed by any AAI Entity who has access to confidential
information of such AAI Entity has executed a confidentiality agreement
substantially in the form of Exhibit J (collectively, the "Employee
Nondisclosure Agreements"), and such agreements are in full force and effect.
2.18 Litigation; Orders. Except as set forth on Schedule 2.18,
there is no civil, criminal or administrative action, suit, claim, notice,
hearing, inquiry, proceeding or investigation at law or in equity by or before
any court, arbitrator or similar panel, governmental instrumentality or other
agency now pending or, to the best knowledge of the Corporation, threatened
against any AAI Entity or the assets or the business of any AAI Entity. Except
as set forth in Schedule 2.18, no AAI Entity is subject to any order, writ,
injunction or decree of any court of any federal, state, municipal or other
domestic or foreign governmental department, commission, board, bureau, agency
or instrumentality.
2.19 Compliance with Laws; Permits. Except as provided in
Schedule 2.19, each AAI Entity (a) has complied in all material respects with
all federal, state, local and foreign laws, rules, ordinances, codes, consents,
authorizations, registrations, regulations, decrees, directives, judgments and
orders materially applicable to it and its business, except where failure to
comply would not have a Material Adverse Effect and (b) has all federal, state,
local and foreign governmental licenses, permits and qualifications material to
and necessary in the conduct of its business as currently conducted, such
licenses, permits and qualifications are in full force and effect, and no
violations (other than violations notice of which has not been received by the
Corporation) have been recorded in respect of any such licenses, permits and
qualifications, and no proceeding is pending or, to the best knowledge of the
Corporation, threatened to revoke or limit any such license, permit or
qualification. Schedule 2.19 sets forth a list of all such licenses, permits
and qualifications, and the expiration dates thereof.
2.20 Offering Exemption. Assuming the accuracy of the
representations and warranties contained in Section 3 hereof, the offer and
sale of the Series A Preferred Stock as contemplated hereby and the issuance
and delivery of the Conversion Shares to the Investors upon the conversion of
the Series A Preferred Stock are each exempt from registration under the
Securities Act and under applicable state securities and "blue sky" laws, as
currently in effect.
2.21 Related Transactions. (a) Except as set forth on Schedule
2.21(a), no current stockholder, director, officer or employee of any AAI
Entity, or any "affiliate"
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or "associate" (as such terms are defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of any of the foregoing
persons or any AAI Entity is presently, or during the past five years has been
or, in the case of any agreement or transaction with respect to which any AAI
Entity currently has any liability (contingent or otherwise) in excess of
$10,000, since the organization of such AAI Entity has been, directly or
indirectly, a party to any agreement, transaction or series of similar
transactions with any AAI Entity pursuant to which payments in excess of
$10,000 are to be or have been made or liabilities in excess of $10,000
currently exist, other than in connection with any such person's duties as a
director, officer or employee of such AAI Entity.
(b) Each ongoing intercompany transaction set forth on Schedule
2.21(a) is on terms that are (i) consistent with the past practice of the AAI
Entity party thereto and (ii) at least as favorable to the such AAI Entity as
would be available with independent third parties dealing at arms' length.
2.22 Disclosure. (a) This Agreement and all certificates,
instruments or written statements furnished or made to the Investors by or on
behalf of the Corporation in connection with this Agreement, taken as a whole,
and including any corrective materials furnished or made available to Investors
prior to the date hereof, do not contain any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading; provided, however, that
to the extent any such certificate, instrument or written statement has been
prepared by a third party, to the best knowledge of the Corporation, such
certificate, instrument or written statement does not contain any untrue
statement or a material fact or omit to state a material fact necessary to make
the statements contained therein not misleading. In addition, the
representations and warranties set forth in this Section 2.22(a) are subject to
the following qualifications: (i) any projections furnished or made available
to the Investors by or on behalf of the Corporation are based on assumptions
that, to the best knowledge of the Corporation, were reasonable as of the date
of preparation of such projections and include assumptions concerning certain
facts and events over which the Corporation does not have control; (ii) any
change in one or more of the assumptions used in such projections could have a
material adverse effect on the projected financial results of the Corporation
or any entity for which such projections were prepared; (iii) there can be no
assurance that such projections will be realized; and (iv) to the extent any
such written statement presents or is based on an anticipated timetable for
obtaining FDA approvals of any products developed or proposed to be developed
by any AAI Entity or any other person, the Corporation advised each Investor,
and each Investor acknowledges, that the time requirements for completing the
development and regulatory processes for FDA approval of any application are
not subject to precise determination and there can be no assurance that any
pharmaceutical products will be approved in any
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estimated time, if at all. Except as expressly set forth in Section 2.34(e),
the parties acknowledge that the limitations contained in (i) the proviso to
the first sentence and (ii) the second sentence of this Section 2.22(a), in
each case, relate solely to the representations and warranties made by the
Corporation in the first sentence of this Section 2.22 and do not modify any
other representation and warranty of the Corporation. The assumptions upon
which the projections dated September 1995 which were provided to the Investors
were based have not changed in any material respect.
(b) There is no fact peculiar to the AAI Entities or their
business which the Corporation has not disclosed to the Investors or their
counsel and of which the Corporation is aware which materially and adversely
affects or which, so far as the Corporation can now reasonably foresee, will
materially and adversely affect its business, financial condition, operations,
property or affairs or the ability of any AAI Entity to perform its obligations
under the Documents.
2.23 Taxes. (a) Except as set forth on Schedule 2.23(a), each of
the AAI Entities has filed all Tax Returns (as such terms are defined below)
required by law to have been filed by it and has paid all Taxes required to be
paid by it including, without limitation, any Tax levied upon any of its
properties, assets, income or franchises. All Tax Returns filed by the AAI
Entities were complete and correct in all material respects and, except as set
forth in Schedule 2.23(a), each such Tax Return was timely filed. All amounts
required to be collected or withheld by each of the AAI Entities, have been
collected or withheld and any such amounts that are required to be remitted to
any taxing authority have been duly remitted. The accruals and reserves for
Taxes in each of the balance sheets referenced in Section 2.6 are adequate in
all material respects to cover any liability of the Corporation for Taxes for
periods through the dates of such balance sheets. The accruals and reserves
for deferred tax liability in each of the balance sheets referenced in Section
2.6 are adequate to cover any such liability in accordance with GAAP. If each
of the AAI Entities files its respective Tax Returns for its taxable year,
which includes the date hereof in conformance with its past practices and tax
reporting, to the best knowledge of the Corporation, there will be no basis for
any material adverse audit adjustments with respect to any of the AAI Entities
under any of the provisions of the Code, or any provisions of state, local or
foreign tax law, with respect to operations and activities of any of the AAI
Entities during the period which began on January 1, 1995 and ends on the date
hereof. "Taxes," for purposes of this Agreement, means any taxes, assessments,
duties, fees, levies, imposts, deductions, withholdings, including, without
limitation, income, gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll, transaction, capital,
net worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility, severance, production, unemployment
compensation, occupation, premium, windfall profits, transfer and gains taxes,
or other governmental charges of any
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nature whatsoever imposed by any government or taxing authority of any country
or political subdivision of any country and any liabilities with respect
thereto, including any penalties, additions to tax, fines or interest thereon,
and includes any liability of any of the AAI Entities arising under any tax
sharing agreement to which any of them is or has been a party. For purposes of
this Agreement, "Return" shall mean any report, return, statement, estimate,
declaration, notice, form or other information required to be supplied to a
taxing authority in connection with Taxes. For purposes of this Section 2.23,
the term "AAI Entity" shall include any corporation or similar entity to which
such entity is a successor by merger, liquidation or otherwise.
(b) For federal income tax purposes, the Corporation is and has
been properly classified as an "S Corporation" under Section 1361(a) of the
Code and the Treasury Regulations promulgated thereunder (and any applicable
predecessor provisions) for all periods ended on or after January 1, 1988 and
has been so classified for state and local purposes pursuant to analogous state
and local provisions for the periods and in the jurisdictions listed on
Schedule 2.23(b).
(c) No taxing authority in a jurisdiction where any of the AAI
Entities do not file Tax Returns has made a claim, assertion or threat that
such non-filing entity is or may be subject to taxation by such jurisdiction.
Schedule 2.23(c) contains a list of states, territories and jurisdictions
(whether foreign or domestic) in which each of the AAI Entities has filed an
income, franchise, sales and use tax return for taxable periods ending on or
after December 31, 1990. All taxable years of each of the AAI Entities for
federal, state and foreign local income tax purposes for periods ended on or
before December 31, 1987 have been closed by expiration of the applicable
statute of limitations (taking into account waivers and extensions).
2.24 Environmental Protection. Except as set forth in Schedule
2.24(a), each AAI Entity at all times has in all material respects been
operated, and in all material respects is, in compliance with all applicable
federal, state, local, and foreign laws, rules, regulations, codes, ordinances,
orders, decrees, directives and judgments relating to Environmental Matters (as
defined below), including all limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
all applicable Environmental Laws (as defined below), except to the extent that
the failure to so comply would not individually or in the aggregate have a
Material Adverse Effect. Except as set forth in Schedule 2.24(b), each AAI
Entity has obtained, and is in material compliance with, all material permits,
licenses, authorizations, registrations and other governmental consents
required by applicable Environmental Laws ("Environmental Permits"), including,
without limitation, those regulating emissions, discharges, or releases of
Hazardous Substances (as defined below), or the use, storage, treatment,
transportation, release, emission and disposal of raw materials, by-products,
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wastes and other substances used or produced by or otherwise relating to its
business. Except as set forth in Schedule 2.24(c), there are no claims,
notices, civil, criminal or administrative actions, suits, hearings,
investigations, inquiries or proceedings pending or, to the best knowledge of
the Corporation, threatened against the Corporation that are based on or
related to any Environmental Matters or the failure to have any required
Environmental Permits. Except as set forth in Schedule 2.24(d), there are no
past or present conditions, events or circumstances (i) that may interfere with
or prevent continued compliance by any AAI Entity with Environmental Laws and
the requirements of Environmental Permits, (ii) that may give rise to any
liability or other obligation under any Environmental Laws that may require any
AAI Entity to incur any actual or potential Environmental Costs, or (iii) that
may form the basis of any claim, action, suit, proceeding, hearing,
investigation or inquiry against or involving any AAI Entity based on or
related to any Environmental Matter or which could require any AAI Entity to
incur any Environmental Costs. Except as set forth in Schedule 2.24(e), there
are no underground or aboveground storage tanks, incinerators or surface
impoundments at, on, or about, under or within any real property or tangible
assets owned, operated or controlled in whole or in part by any AAI Entity.
Schedule 2.24(e) also lists all underground or aboveground storage tanks,
incinerators or surface impoundments that were removed from any such
properties. Except as set forth in Schedule 2.24(f), no AAI Entity has
received any written notice or other communication that it is or may be a
potentially responsible person or otherwise liable in connection with any waste
disposal site allegedly containing any Hazardous Substances, or other location
used for the disposal of any Hazardous Substances, or notice of any failure on
its behalf to comply in any material respect with any Environmental Law or the
requirements of any Environmental Permit. Except as set forth on Schedule
2.24(g), no AAI Entity has used any waste disposal site, or otherwise disposed
of, transported, or arranged for the transportation of, any Hazardous
Substances to any place or location, or in violation of any Environmental Laws.
Except as set forth in Schedule 2.24(h), no lien exists, and no condition
exists which could result in the filing of a lien, against any property of any
AAI Entity under any Environmental Law or relating to any Environmental Matter.
Except as set forth in Schedule 2.24(i), there has been no release or other
dissemination at any time of any Hazardous Substances at, on, or about, under
or within any real property currently or formerly owned or leased by any AAI
Entity or any predecessor of any AAI Entity or any real properties operated or
controlled by any AAI Entity (other than pursuant to and in accordance with
permits held by any AAI Entity or its predecessor). Except as set forth in
Schedule 2.24(j), no AAI Entity has been requested or required by any
governmental authority to perform any investigatory or remedial activity or
other action in connection with any Environmental Matter. Notwithstanding any
other provision set forth herein, and subject to the following qualifications,
each of the representations and warranties set forth in this Section 2.24 is
made to the best knowledge of the Corporation, except that the representations
and warranties set forth in this Section
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2.24 shall be deemed to have been made without the inclusion of the "best
knowledge" qualification with respect to (i) any Environmental Matter arising
from any action taken by any AAI Entity or any action taken with the consent or
on behalf of any AAI Entity, or arising out of the conduct of the business of
any AAI Entity, (ii) any Environmental Matter to the extent any AAI Entity has
received any oral or written notice or other communication in respect thereof,
and (iii) any Environmental Matter that related to any Real Property or
operation conducted thereon prior to or at the time such property was leased or
purchased by such AAI Entity, as the case may be, if the Corporation did not
conduct a reasonable investigation of the environmental issues and conditions
relating to such Real Property, and the operations then and historically
conducted thereon, at the time of such lease or purchase.
For the purposes of this Section 2.24, the following terms shall have
the meanings indicated:
"Environmental Costs" means, without limitation, any actual or
potential cleanup costs, remediation, removal, or other response costs (which,
without limitation, shall include costs to cause any AAI Entity to come into
compliance with Environmental Laws), investigation costs (including, without
limitation, fees of consultants, counsel, and other experts in connection with
any environmental investigation, testing, audits or studies), losses,
liabilities or obligations (including, without limitation, liabilities or
obligations under any lease or other contract), payments, damages (including,
without limitation, any actual, punitive or consequential damages under any
statutory laws, common law cause of action or contractual obligations or
otherwise, including, without limitation, damages (a) of third parties for
personal injury or property damage, or (b) to natural resources), civil or
criminal fines or penalties, judgments, and amounts paid in settlement arising
out of or relating to or resulting from any Environmental Matter.
"Environmental Laws" means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section
Section 9601, et seq.; the Emergency Planning and Community Right-to-Know Act
of 1986, 42 U.S.C. Section Section 11001, et seq.; the Resource Conservation
and Recovery Act, 42 U.S.C. Section Section 6901, et seq.; the Toxic
Substances Control Act, 15 U.S.C. Section Section 2601, et seq.; the Federal
Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section Section 136, et
seq.; the Clean Air Act, 42 U.S.C. Section Section 7401, et seq.; the Clean
Water Act (Federal Water Pollution Control Act), 33 U.S.C. Section Section
1251, et seq.; the Safe Drinking Water Act, 42 U.S.C. Section Section 300f, et
seq.; the Occupational Safety and Health Act, 29 U.S.C. Section Section 641,
et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Section Section
1801, et seq.; as any of the above statutes have been amended from time to
time, all rules and regulations promulgated pursuant to any of the above
statutes, and any other foreign, federal, state or local law, statute,
ordinance, rule or regulation governing Environmental Matters, as the same have
been
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amended from time to time, including any common law cause of action providing
any right of remedy relating to Environmental Matters, all indemnity agreements
and other contractual obligations (including leases, asset purchase and merger
agreements) relating to environmental matters, and all applicable judicial and
administrative decisions, orders, and decrees relating to Environmental
Matters.
"Environmental Matter" means any matter arising out of, relating to,
or resulting from pollution, contamination, protection of the environment,
human health or safety, health or safety of employees, sanitation, and any
matters relating to emissions, discharges, disseminations, releases or
threatened releases, of Hazardous Substances into the air (indoor and outdoor),
surface water, groundwater, soil, land surface or subsurface, buildings,
facilities, real or personal property or fixtures or otherwise arising out of,
relating to, or resulting from the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, handling, release or threatened
release of Hazardous Substances.
"Hazardous Substance" means any substance or material meeting any one
or more of the following criteria: (i) it is or contains a substance
designated as a hazardous waste, hazardous substance, hazardous material,
pollutant, contaminant or toxic substance under any Environmental Law; (ii) its
presence at some quantity requires investigation, notification or remediation
under any Environmental Law; or (iii) it contains, without limiting the
foregoing, asbestos, polychlorinated biphenyls, petroleum hydrocarbons,
petroleum derived substances or waste, crude oil or any fraction thereof,
nuclear fuel, natural gas or synthetic gas.
2.25 Consents. Except as set forth on Schedule 2.25 and assuming
the accuracy of the representations and warranties contained in Section 3
hereof, no permit, authorization, consent or approval of or by, or any
notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery and performance by the
Corporation of the Documents or any documentation relating thereto, the
consummation by the Corporation of the transactions contemplated thereby, or
the issuance, sale or delivery of the Series A Preferred Stock and the
Conversion Shares (other than such notifications or filings required under
applicable federal or state securities laws, if any, which shall be made on a
timely basis).
2.26 Insurance. Substantially all of the assets of each AAI
Entity that are of insurable character (including all material assets of such
AAI Entity that are of insurable character) are covered by insurance with
reputable insurers against risks of liability, casualty and fire and other
losses and liabilities customarily obtained to cover comparable businesses and
assets in amounts, scope and coverage which are consistent with prudent
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industry practice. Schedule 2.26 sets forth a list of all insurance coverage
carried by the AAI Entities, the carrier and the terms and amount of coverage.
2.27 Brokers. Neither the Corporation nor any of its officers,
directors, employees or stockholders has employed any broker or finder in
connection with the transactions contemplated by this Agreement.
2.28 Suppliers and Customers. No supplier of materials or
services to any AAI Entity in an amount in excess of $100,000 per year has
during the last twelve months on such supplier's initiative decreased
materially or, to the best knowledge of the Corporation, threatened to decrease
or limit materially its provision of services or supplies to such AAI Entity,
nor expressed material dissatisfaction with the business relationship between
such AAI Entity and the supplier. The Corporation has no knowledge of any
termination, cancellation or threatened termination or cancellation or
limitation of, or any material modification or change in, or expressed material
dissatisfaction with the business relationship between the any AAI Entity and
any supplier or customer of such AAI Entity of materials or services in an
amount in excess of $100,000 per year.
2.29 Use of Proceeds. Except as set forth on Schedule 2.29 or as
otherwise expressly contemplated by this Agreement, the Corporation is not
required pursuant to any Contract or otherwise to apply the proceeds received
from the Investors pursuant to the transactions contemplated hereby in any
specified manner, including, without limitation, the repayment of any
obligations of the Corporation or any "affiliate" or "associate" (as such terms
are defined in Rule 12b-2 under the Exchange Act) of the Corporation.
2.30 Previous Issuances Exempt. All shares of capital stock and
other securities issued by the Corporation prior to the Closing have been
issued in transactions exempt from registration under the Securities Act, and
all applicable state securities or "blue sky" laws. The Corporation has not
violated the Securities Act or any applicable state securities or "blue sky"
laws in connection with the issuance of any shares of capital stock or other
securities prior to the Closing. The Corporation has not offered any of its
capital stock, or any other securities, for sale to, or solicited any offers to
buy any of the foregoing from the Corporation, or otherwise approached or
negotiated with any other person in respect thereof, in such a manner as to
require registration under the Securities Act.
2.31 Real Property. Schedule 2.31 lists all real property owned
or leased by each AAI Entity. Each AAI Entity has title to its owned real
properties (collectively, the "Owned Real Properties") and leasehold title to
its leased real properties (collectively, the
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"Leased Real Properties," together with the Owned Real Properties, the "Real
Properties"), in each case, free and clear of all imperfections of title and
all Encumbrances, except for (i) those consisting of zoning or planning
restrictions, easements, permits and other restrictions or limitations on the
use of such property or irregularities in title thereto which, individually and
in the aggregate, do not materially impair the use of such property, (ii)
warehousemen's, mechanics', carriers', landlords', repairmen's or other similar
Encumbrances arising in the ordinary course of business and securing
obligations not yet due and payable, (iii) other Encumbrances which arise in
the ordinary course of business and which individually and in the aggregate do
not materially impair its use of such property (encumbrances referenced in
clauses (i), (ii) and (iii), collectively referred to as the "Permitted
Encumbrances") and (iv) Encumbrances listed on Schedule 2.31. To the best
knowledge of the Corporation, other than as described on Schedule 2.31, there
are no intended public improvements which will result in any charge being
levied against, or in the creation of any Encumbrances upon, the Real
Properties or any portion thereof. To the best knowledge of the Corporation,
there are no options, rights of first refusal, rights of first offer or other
similar rights with respect to the Real Properties.
2.32 Accounts Receivable. The accounts receivable reflected on
the Balance Sheet and those accounts receivable of the Corporation acquired or
created after September 30, 1995 through the date hereof (a) were and are bona
fide accounts receivable created in the ordinary and usual course of business
in connection with bona fide transactions and consistent with past practice and
(b) are recorded net of discounts, if any, provided to customers.
2.33 Investment Banking Services. The Corporation is not a party
to any Contract which grants rights to any third party with respect to the
performance of investment banking services for it, including, without
limitation, with respect to its sale or a public offering, including an initial
public offering, of its securities.
2.34 FDA Matters. (a) No AAI Entity has received any
communication (including, any warning letter) or is otherwise aware of any
action or proceeding pending or, to the best knowledge of the Corporation,
threatened, including, without limitation, warning letter, prosecution,
injunction, seizure, civil fine or recall, alleging that such AAI Entity is not
in compliance in all material respects with any and all applicable laws,
regulations or orders implemented by the U.S. Food and Drug Administration
("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 (1) drug development establishments operated
by any AAI Entity and (2) drug applications submitted directly by such AAI
Entity, other than non-material correspondence received from the FDA in
connection with the filing and review of
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applications. To the best knowledge of the Corporation, no employee of any AAI
Entity is or has been the subject of any similar pending or threatened action
or proceeding.
(b) All consultants utilized by any AAI Entity to generate
information to be submitted to the FDA, or any equivalent state, local or
international agency, including, but not limited to contract research
organizations, pre- clinical testing laboratories, clinical investigators and
institutional review boards, are, to the best knowledge of the Corporation, in
compliance with all applicable FDA requirements, as well as the applicable
requirements of relevant state, local and international agencies with regard to
the development of data to be utilized by any AAI Entity as part of the
relevant drug approval process.
(c) No AAI Entity, nor, to the best knowledge of the Corporation,
any employee of any AAI Entity has received any correspondence from the FDA or
is aware of any action or proceeding, pending or, to the best knowledge of the
Corporation, threatened, against any AAI Entity, or any such employee regarding
any debarment action or investigation undertaken pursuant to the Generic Drug
Enforcement Act of 1992, 21 U.S.C. Section 335.
(d) No AAI Entity, nor, to the best knowledge of the Corporation,
any employee of any AAI Entity has been the subject, officially or otherwise,
of any investigation by the FDA pursuant to its Fraud, Untrue, Material Facts,
Bribery, and Illegal Gratuities Final Policy ("Application Integrity Policy").
(e) To the best knowledge of the Corporation, no data generated
by any AAI Entity which has been provided to clients of such AAI Entity is the
subject, either pending or threatened, of any regulatory or other action by the
FDA or by any state, local or international regulatory entity relating to the
truthfulness or scientific adequacy of such data.
(f) All abbreviated new drug applications and related filings to
the FDA by any AAI Entity, and subject to the qualification set forth in
subclause (iv) of the second sentence of Section 2.22(a), all statements
furnished by the Corporation to an Investor applicable to the status of all
abbreviated new drug applications, pending and anticipated, are current and do
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein not
misleading. With regard to all abbreviated new drug applications pending
before the FDA, except as set forth on Schedule 2.34(f), there is no
correspondence or other communications from the FDA questioning the
approvability of such applications.
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(g) Notwithstanding anything in this Agreement to the contrary,
for purposes of this Section 2.34 (i) the term "AAI Entity" shall mean the
Corporation and each AAI Subsidiary and (ii) any representation and warranty
relating to GenerEst and Aesgen is made to the best knowledge of the
Corporation.
2.35. Closing Actions. Subject to the execution and delivery of
the Documents by the Investors, the Closing Actions have been completed.
SECTION 3. Representations and Warranties of the Investors. Each of the
Investors represents and warrants to the Corporation as of the date hereof as
follows:
(a) Such Investor is acquiring the Series A Preferred Stock for
its own account, for investment and not with a view to the distribution thereof
within the meaning of the Securities Act.
(b) Such Investor understands that (i) the Series A Preferred
Stock has not been, and that the Conversion Shares will not be, registered
under the Securities Act or any state securities laws, by reason of their
issuance by the Corporation in a transaction exempt from the registration
requirements thereof and (ii) the Series A Preferred Stock and the Conversion
Shares may not be sold unless such disposition is registered under the
Securities Act and applicable state securities laws or is exempt from
registration thereunder.
(c) Such Investor further understands that the exemption from
registration afforded by Rule 144 (the provisions of which are known to such
Investor) promulgated under the Securities Act depends on the satisfaction of
various conditions, and that, if applicable, Rule 144 may afford the basis for
sales only in limited amounts.
(d) Such Investor has not employed any broker or finder in
connection with the transactions contemplated by this Agreement.
(e) Such Investor is an "Accredited Investor" (as defined in Rule
501(a) under the Securities Act).
(f) Such Investor (other than Waters) is duly organized and
validly existing under the laws of the state of its organization and has all
power and authority to enter into and perform the Documents. Each of the
Documents has been duly authorized by all necessary action on the part of such
Investor. Each of the Documents constitutes a valid and binding agreement of
such Investor enforceable against such Investor in accordance with its terms
except to the extent that enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally.
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(g) The execution, delivery and performance by such Investor of
each of the Documents and the consummation by such Investor of the transactions
contemplated thereby will not (a) violate any provision of law, statute, rule
or regulation, or any ruling, writ, injunction, order, judgment or decree of
any court, administrative agency or other governmental body applicable to it,
or any of its properties or assets or (b) violate its organizational documents
(if any).
(h) No permit, authorization, consent or approval of or by, or
any notification of or filing (including any filing under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended) with, any person (governmental
or private) is required in connection with the execution, delivery and
performance by such Investor of the Documents to which it is a party or any
documentation relating thereto, or the consummation by such Investor of the
transactions contemplated thereby.
(i) Such Investor has been provided the opportunity at reasonable
times prior to the date hereof to conduct an investigation of the AAI Entities
and affiliates of the Corporation and to ask questions and receive answers
regarding the terms and conditions of the offering of the shares of Series A
Preferred Stock; provided, however, the representations and warranties of the
AAI Entities contained in the Documents shall in no way be affected by any
investigation or knowledge of the subject matter thereof by or on behalf of any
Investor.
SECTION 4. Certain Covenants.
4.1 Access to Records. From and after the Closing, the
Corporation shall afford GSCP and its employees, counsel and other authorized
representatives full access, during normal business hours, upon reasonable
advance notice, with due regard to its ongoing operations, to all of its books,
records and properties, and to all of its officers and key employees for any
reasonable purpose whatsoever.
4.2 Financial Reports. From and after the Closing, the
Corporation agrees to furnish to the Investors the following:
4.2.1. For a period of twelve months from the date hereof
(the "Initial Period") within 15 days after the end of each fiscal month, (i)
internal summary financial and operating statements for such month ("Monthly
Financials"), prepared by management for the Chief Executive Officer of the
Corporation and a letter or memorandum discussing the revenues and operations
of the Corporation and summary financial information for such period (a
"Management Letter"), plus (ii) a statement certified by the Chief Financial
Officer of the Corporation, certifying that the financial position and results
of operations of the Corporation for such period as reflected in the
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Monthly Financials are presented fairly and have been prepared in accordance
with GAAP (subject to normal year-end adjustments and the absence of footnotes)
consistently applied.
4.2.2. Within 45 days after the end of each quarterly
fiscal period, (i) unaudited balance sheets and an income statement as of the
end of such period, together with statements of retained earnings and cash flow
for such period ("Quarterly Financials") and a Management Letter, plus (ii) a
statement certified by the Chief Financial Officer of the Corporation,
certifying that the financial position and results of operations of the
Corporation for such period as reflected in the Quarterly Financials are
presented fairly and have been prepared in accordance with GAAP (subject to
normal year-end adjustments and the absence of footnotes) consistently applied.
4.2.3. Within 90 days after the end of each fiscal year,
commencing with the first fiscal year ending after the Closing, (i) audited
balance sheets and an income statement as of the end of such fiscal year,
together with statements of retained earnings and cash flow for such fiscal
year, all in reasonable detail and certified by a recognized "Big Six" national
firm of independent accountants as is selected by the Board of Directors of the
Corporation, as presenting fairly the financial position and results of
operations of the Corporation and as having been prepared in accordance with
GAAP consistently applied, including their opinion thereon, and (ii) the
accounting firm's management letter.
4.2.4. Promptly upon becoming available, (a) copies of all
financial statements, reports, press releases, notices, proxy statements and
other documents sent by the Corporation to its stockholders or released to the
public and copies of all regular and periodic reports, if any, filed by the
Corporation with the Securities and Exchange Commission or any securities
exchange and (b) any other financial information routinely distributed to
management of the Corporation as any of the Investors shall have reasonably
requested on a timely basis.
4.2.5. If for any period the Corporation shall have any
subsidiary or subsidiaries whose accounts are consolidated with those of the
Corporation, then, in respect of such period, the financial statements and
information delivered pursuant to the foregoing Sections 4.2.1, 4.2.2 and 4.2.3
shall be the consolidated and consolidating financial statements of the
Corporation and all such consolidated subsidiaries.
4.2.6. In all cases, the Corporation shall provide to the
Investors all information which it provides or has an obligation to provide to
any other stockholder of the Corporation in such person's capacity as a
stockholder, pursuant to any agreement with such stockholder or otherwise.
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4.2.7. The rights of the Investors, and any assignee of any
Investor in connection with a permitted transfer of Series A Preferred Stock,
and the obligations of the Corporation under this Section 4.2 shall terminate
at such time as (i) the GSCP Parties transfer an amount of shares of Series A
Preferred Stock equal to a majority of the shares of Series A Preferred Stock
outstanding as of the date hereof to an entity primarily engaged in the
pharmaceutical business or (ii) so long as there are any shares of Series A
Preferred Stock outstanding, there is no person which together with its
"affiliates" (as such term is defined in Rule 12b-2 under the Exchange Act)
owns a majority of the outstanding Series A Preferred Stock.
4.3 Confidentiality. Each of the Investors covenants and agrees
that any information provided to the Investors pursuant to or in connection
with this Agreement regarding the operations or prospective operations of any
AAI Entity or affiliate of the Corporation shall be deemed confidential
information and each Investor agrees to use its commercially reasonable best
efforts to prevent the disclosure to any person (excluding its officers,
employees, agents or counsel, but only to the extent it advises such employees,
agents or counsel of the confidential nature of such information and takes
reasonable actions to prevent the subsequent disclosure of such information by
such employees, agents and counsel) of any such confidential information
disclosed to it, except such information may be disclosed (i) to the extent
required by law or by a governmental agency, regulatory or supervisory
authority or court having or claiming jurisdiction over it (in which case such
party shall provide the Corporation notice of such intended disclosure as far
in advance of such disclosure as is possible), (ii) to persons in connection
with potential business transactions between such persons and such Investors
believed by such Investor in good faith to be in the interests of the
Corporation and upon appropriate arrangements obligating such persons to keep
such information confidential and (iii) in connection with the enforcement of
its rights hereunder. Notwithstanding the foregoing, each of the Investors may
provide to its investors summary (x) non-financial information relating to the
Corporation's condition, progress (e.g. business growth) and prospects;
provided, however, such information shall not include non-public information
regarding the products developed by the Corporation, products being examined
for development by the Corporation or the status of any of the Corporation's
development efforts without the Corporation's consent, and (y) financial
information relating to the Corporation's revenues and earnings. The
obligation of confidentiality set forth in this Section 4.3 shall not apply to
information that (i) now or hereafter comes into the public domain without
breach of this Agreement, or (ii) is demonstrated by such Investor to be
previously known to or developed by it prior to the disclosure of said
confidential information, or (iii) is demonstrated by such Investor to have
been received from a third party without similar restrictions and without
breach of this Agreement.
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4.4 Covenants. Any failure by the Corporation to comply with, or
any violation by the Corporation of, any of the covenants or agreements set
forth in this Section 4.4 shall not constitute a breach of such covenant or
agreement unless, at the time of such failure or violation, such failure or
violation has had, or would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect.
4.4.1. System of Accounting. The books of account and
other financial and corporate records of the Corporation and its subsidiaries
shall be maintained in accordance with good business and accounting practices
and the financial condition of the Corporation shall be accurately reflected in
the financial statements referred to in Section 4.2.
4.4.2. Maintenance of Corporate Existence. The Corporation
shall maintain in full force and effect its corporate existence.
4.4.3. Compliance with Laws. The Corporation shall, and
shall cause its subsidiaries to, comply in all material respects with all
applicable laws, rules regulations and orders.
4.4.4. Licenses and Permits. The Corporation shall use its
best efforts to obtain all federal, state, local and foreign governmental
licenses, permits and qualifications material to and necessary in the conduct
of business as proposed to be conducted.
4.5 Insurance; Patent Clearance. Prior to the marketing or
licensing of any product, the Corporation will (i) obtain product liability
insurance in amounts and with terms customary in the pharmaceutical industry,
which insurance may be provided by any Person then a party to any contract or
arrangement with the Corporation by naming the Corporation as an additional
insured on a policy providing such coverage and (ii) conduct a reasonable
investigation to assure itself that the manufacture, use or sale of the product
does not infringe, either directly, indirectly or willfully upon any third
party's patents. In connection with the aforementioned investigation, the
Corporation shall, in addition to any other investigations that it deems
appropriate, obtain opinion letters from patent counsel that provide detailed
factual analysis and claim charts comparing the product to the claims of any
such patents.
4.6. D&O; Key Man Insurance. The Corporation shall maintain the
directors' and officers' liability insurance and the Sancilio "key man" term
life insurance described in Section 1.3(g). Such "key man" term life insurance
policy shall be owned by the Corporation and the Corporation shall be named as
payee of benefits thereunder;
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provided, however, that GenerEst and lenders to the Corporation may be named as
additional loss payees thereunder.
4.7 Repayment of Existing Indebtedness. Without the prior
consent of GSCP, except as contemplated by Section 1.3(k) hereof, the
Corporation shall not repay (and shall not permit any other AAI Entity to
repay) any of its indebtedness outstanding on the date hereof except (i) when
due in accordance with its terms, (ii) for repayments of outstanding amounts
under revolving or working capital lines of credit which do not result in any
reduction of the borrowing capacity of such AAI Entity under such lines of
credit and (iii) in connection with any refinancing of indebtedness on terms
that are at least as favorable to the Corporation as the terms of the
indebtedness being refinanced.
4.8 Related Transactions.
4.8.1. Subsidiaries. Within thirty days after the date
hereof (i) Sancilio shall cause to be sold, to the Corporation, and the
Corporation shall purchase, all of the outstanding capital stock of AAI Italy
not owned by the Corporation for an aggregate consideration of $5,000 and (ii)
Sancilio and Waters shall sell to the Corporation, and the Corporation shall
purchase, all of the outstanding capital stock of the AAI Learning Center for
an aggregate consideration of no more than $10 (the sales of stock contemplated
by clauses (i) and (ii), the "Stock Sales" and the shares of capital stock to
be transferred to the Corporation pursuant to the Stock Sales (the "Stock")).
At the closing of the Stock Sales, Sancilio and Waters shall deliver to the
Corporation the shares of Stock being sold by them duly endorsed for transfer.
4.8.2. Real Estate Appraisal. Waters and Sancilio shall
take such action as is necessary (including causing the amendment of the lease
dated March 7, 1994 between the Corporation and 5051 New Centre Drive, L.L.C.)
to cause the rent payable by the Corporation for the space leased by the
Corporation at 5051 New Centre Drive (the "Building") to, at all times, reflect
a reasonable fair market rent payable by a creditworthy entity for comparable
space in a property which is similar in character to the Building.
4.8.3. Sancilio Payment. The Sancilio Payment represents
the result of (i) the aggregate amount payable by Sancilio to the Corporation
as of the date hereof under Section 5.2 of the employment agreement with
Sancilio which is being terminated on the date hereof pursuant to Section
1.3(i) minus (ii) $22,500 (the "Credit"). In consideration of the Credit
(which is intended in lieu of any bonus payment payable to Sancilio for the
period from November 1, 1995 to December 31, 1995), Sancilio agrees that the
Corporation will not have to pay, and Sancilio waives the right to receive, any
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further bonus payment from the Corporation with respect to the fiscal year
ending December 31, 1995.
4.9 Disclosure of Investment. Each of the Corporation, on the
one hand, and each of the Investors, on the other hand, agrees that it will
not, (i) except as may be necessary or desirable in connection with a request
by a governmental agency, regulatory or supervisory authority or court or as
required by law and other than to potential investors in the Corporation or to
the equity participants in any Investor, disclose the transactions contemplated
by the Documents or any of the terms thereof without the prior consent of the
other party, (ii) use in advertising or publicity the name of any party hereto,
or any partner or employee of such party hereto or any of its respective
affiliates, or any trade name, trademark, trade device, service mark, symbol or
any abbreviation, contraction or simulation thereof owned by the other party
hereto or any of its respective affiliates, in either case without the prior
written consent of such party or (iii) represent, directly or indirectly, any
product or any service provided by the Corporation has been approved or
endorsed by any Investor without the prior written consent of the Investor;
provided, however, the Corporation may orally disclose (or disclose in writing
to any lending institution in connection with any financing), and the Investors
may disclose the following: (i) that the Investors are stockholders of the
Corporation, (ii) the aggregate purchase price paid by each Investor in
connection with the investment contemplated by this Agreement and (iii) the
percentage of the outstanding shares of capital stock of the Corporation held
by each Investor.
4.10 Use of Proceeds. The Corporation shall use the proceeds from
the sale of Series A Preferred Stock hereunder as set forth on Schedule 4.10.
4.11 Investment Banking Services. Goldman, Sachs & Co. ("Goldman
Sachs") or any affiliate of Goldman Sachs shall have the right to perform all
investment banking services for the Corporation for which an investment banking
firm is retained (including, without limitation, with respect to the sale of
the Corporation) and Goldman Sachs shall have the right to act as the lead
managing underwriter with request to any public offering of securities of the
Corporation or any secondary offering of the securities of the Corporation, in
each case, upon customary terms, including compensation, consistent with an
arm's-length transaction. If the Corporation engages Goldman Sachs or any of
its affiliates to be a managing underwriter in connection with any underwriting
of its capital stock and the Corporation desires to engage one or more
investment bankers as co-managing underwriter(s) in connection with such
offerings, the Corporation shall have the right to select such co-managing
underwriter(s). If the Corporation and Goldman Sachs or its affiliate, after
good faith discussions, cannot agree on the terms of any such engagement, the
Corporation may hire such other investment banker as they find acceptable
provided that Goldman Sachs will then be entitled to be a co-managing
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underwriter in connection with any such underwriting of capital stock of the
Corporation. The rights of the GSCP Parties and the obligations of the
Corporation to the GSCP Parties under this Section 4.11 shall terminate at such
time as the GSCP Parties, together with their affiliates, in the aggregate, own
less than 5% of the outstanding Common Stock of the Corporation (treating for
purposes of these calculations all shares of Series A Preferred Stock and all
Common Stock Equivalents as having been converted, exchanged or exercised).
4.12 Share Issuance. The Corporation shall not issue, sell or
grant any capital stock or other equity securities or Common Stock Equivalents
unless as a condition to such issuance, sale or grant the purchaser or grantee
executes and agrees to be bound the Stockholder Agreement.
SECTION 5. Transfer Taxes. The Corporation agrees that it will pay, and
will hold each Investor harmless from any and all liability with respect to any
stamp or similar Taxes which may be determined to be payable in connection with
the execution and delivery and performance of this Agreement, and that it will
similarly pay and hold each Investor harmless from all Taxes in respect of the
issuance of the Series A Preferred Stock and the Conversion Shares to such
Investor.
SECTION 6. Survival of Representations, Warranties, Agreements and
Covenants, etc. All representations and warranties in the Documents shall
survive the Closing until the earlier of (i) the third anniversary of the date
hereof and (ii) the consummation of a Qualified IPO (as defined below) (except
to the extent a Claim Notice (as defined in Section 8.4) shall have been given
prior to such date with respect to a breach of a representation and warranty,
in which case such representation and warranty shall survive until such claim
is resolved) and shall in no way be affected by any investigation or knowledge
of the subject matter thereof made by or on behalf of any Investor; provided,
however, the representations and warranties set forth in Sections 2.1, 2.2,
2.3, 2.4, 2.5, 2.7 (to the extent related to Taxes) and 2.23 shall survive the
Closing indefinitely. All statements contained in any certificate or other
instrument delivered by the Corporation pursuant to this Agreement shall
constitute representations and warranties by the Corporation under this
Agreement. All agreements contained herein shall survive indefinitely until,
by their respective terms, they are no longer operative; provided, however,
that the rights of an Investor and the obligations of the Corporation to such
Investor under Section 4 of this Agreement shall, unless otherwise specified
therein, terminate upon the consummation of a Qualified IPO (as defined below).
"Qualified IPO" shall mean a bona fide, firm commitment, underwritten public
offering of Common Stock pursuant to an effective registration statement under
the Securities Act, (i) resulting in at least $20,000,000 of net proceeds to
the Corporation and any selling stockholders after deducting underwriting
discounts and commissions and offering expenses, and
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(ii) reflecting a net per share offering price (after deducting underwriting
discounts and commissions and offering expenses) of at least (A) $1,055.634
(the "Conversion Price"), from and after the time GSCP Parties (I) transfer any
of their Series A Preferred Stock to any person other than a GSCP Affiliate or
(II) exercise any of their demand registration rights under the Registration
Rights Agreement, and (B) otherwise, (I) $1,319.543, which represents 125% of
the Conversion Price, if the offering is consummated by November 17, 1996 or
(II) $1,583.451, which represents 150% of the Conversion Price, if the offering
is consummated after November 17, 1996.
SECTION 7. Expenses. (a) Except as set forth in Section 7(b), the
Corporation and each Investor shall pay all the costs and expenses incurred by
it or on its behalf in connection with this Agreement and the consummation of
the transactions contemplated hereby.
(b) The Corporation shall pay and shall reimburse the GSCP
Parties at the Closing for their reasonable fees and expenses incurred after
July 1, 1995 in connection with this transaction including, without limitation,
the fees and expenses of counsel retained by the GSCP Parties in connection
with the negotiation and preparation of the Documents and the documentation
relating thereto and the consummation of the transactions contemplated
hereunder; provided, however, in no event shall the liability of the
Corporation under Section 7(b) in the aggregate exceed $125,000.
SECTION 8. Indemnification.
8.1 General Indemnification. The Corporation shall indemnify,
defend and hold each Investor (other than Waters), its affiliates, their
respective officers, directors, employees, agents, representatives, successors
and assigns (each an "Investor Entity") harmless from and against all Losses
(as defined below) incurred or suffered by an Investor Entity (whether incurred
or suffered directly or indirectly through ownership of Common Stock or
Preferred Stock) arising from the breach of any of the representations,
warranties, covenants or agreements made by it in this Agreement or in any
certificate or other instrument delivered pursuant hereto including, without
limitation, the Documents. Each Investor, severally and not jointly, shall
indemnify, defend and hold the Corporation, its affiliates, their respective
officers, directors, employees, agents, representatives, successors and assigns
harmless against all Losses arising from the breach of any of its
representations, warranties, covenants or agreements in this Agreement or in
any certificate or other instrument delivered pursuant hereto, including,
without limitation, the Documents. Notwithstanding anything to the contrary in
this Agreement, (i) any event, fact, matter or circumstance which, but for this
subclause (i), would constitute a breach of any representation and warranty of
any AAI Entity contained in this Agreement (any such event, fact, matter or
circumstance, a "Section 8 Event") shall not
35
<PAGE> 47
be treated as a breach of such representation and warranty (other than Section
8 Events relating to the representations and warranties contained in Sections
2.7, 2.8(c), 2.8(h), 2.8(l), 2.10(a), 2.12(a), 2.16(a), 2.21, 2.28, 2.35, the
last sentence of 2.3(b) and the first sentence of Section 2.17, with respect to
which representations and warranties the Threshold (as defined below) shall not
be applicable to determine whether a breach of such representation and warranty
has occurred) until the Losses to the Corporation arising or resulting from
such Section 8 Event (or in the case of a series of related Section 8 Events
which are based on similar facts or circumstances, arising or resulting from
all such related Section 8 Events) exceed $50,000 (the "Threshold") in which
event the entire amount of the Losses arising from such Section 8 Event(s)
shall be deemed Losses subject to indemnification under this Section 8 (subject
to application of the Deductible), and (ii) no indemnification payment by the
Corporation pursuant to this Section 8 with respect to any Losses otherwise
payable hereunder as a result of a breach of its representations and warranties
(other than any Losses resulting from breaches of the representations and
warranties in Sections 2.21(a), 2.23(b) and 2.35 which shall not be subject to
the Deductible (as defined below)) shall be payable until the time as such
Losses shall aggregate for all Investor Entities to more than $200,000 (the
"Deductible"), and then only to the extent that such Losses, in the aggregate
for all Investor Entities, exceed the Deductible.
8.2 Tax and Litigation Indemnification. Waters and Sancilio
shall jointly and severally indemnify, defend and hold the Corporation harmless
from and against all Losses (including, without limitation, any interest or
penalties) incurred by the Corporation arising from (i) the imposition of any
Income Taxes on the Corporation for any period ending prior to the date hereof
as a result of any failure to make a proper and valid election under Section
1361(a) of the Code and the Treasury Regulations promulgated thereunder, other
than Income Taxes imposed by Illinois, Massachusetts and New Jersey, (ii) final
resolution of the Corporation's liability in respect of the judgment of
approximately $350,000 entered into against the Corporation with respect to a
litigation by Lewis Kurtzman against the Corporation, and (iii) final
resolution of the assessment by the North Carolina Department of Revenue for a
deficiency with respect to use tax in the amount of approximately $340,680.
GSCP is intended to be a third party beneficiary of the terms of this Section
8.2 and may enforce the Company's rights hereunder.
8.3 Indemnification Principles. For purposes of this Section 8,
(i) "Losses" shall mean each and all of the following items: claims, losses,
(including, without limitation, losses of earnings) liabilities, obligations,
payments, damages (actual, punitive or consequential), charges, judgments,
fines, penalties, amounts paid in settlement, costs and expenses (including,
without limitation, interest which may be imposed in connection therewith,
costs and expenses of investigation, actions, suits, proceedings, demands,
assessments and fees, expenses and disbursements of counsel, consultants and
other
36
<PAGE> 48
experts); provided, however, that any Loss to the Corporation of future
earnings arising from any representation and warranty contained in this
Agreement not being true and correct when made shall be computed based on the
present value (discounted at a rate of 10%) of the otherwise expected earnings
stream to the Corporation had such representation and warranty been true and
correct when made; provided, further, that the preceding proviso will not be a
limitation in determining the amount of any Loss to the Corporation or the
Investors (including by reason of any Loss to the Corporation of future
earnings) arising from any breach of the representation and warranty contained
in Section 2.6 of this Agreement and (ii) each of the representations and
warranties made by any party in this Agreement or in any certificate or other
instrument delivered pursuant hereto (other than the representation and
warranty made in subclause (a) of Section 2.8 and in Section 2.22(b)),
including, without limitation, the Documents, shall be deemed to have been made
without the inclusion of limitations or qualifications as to materiality, such
as the words "material adverse affect," "immaterial," "material" and "in all
material respects" or words of similar import. Any indemnification payment by
the Corporation to an Investor pursuant to this Section 8 shall include an
additional amount so that such Investor suffers no Loss as a result of any
diminution in the book value of the stockholder's equity related to its
investment under the Agreement as a result of such indemnification payment.
Any payment by the Corporation to an Investor pursuant to this Section 8, shall
be treated for federal income tax purposes as an adjustment to the price paid
by such Investor for the Series A Preferred Stock pursuant to this Agreement.
8.4 Claim Notice. No party shall be entitled to indemnification
against a Loss arising from the breach of any representations or warranties of
any other party unless the party seeking indemnification shall have given to
the party from whom indemnification is being sought a claim notice relating to
such Loss (a "Claim Notice") prior to expiration of the representation or
warranty upon which the claim is based. The Claim Notice shall be given
reasonably promptly after the party seeking indemnity becomes aware of the
facts indicating that a claim for indemnification may be warranted. Each Claim
Notice shall specify the nature of the claim, the applicable provision(s) of
this Agreement or other instrument under which the claim for indemnity arises,
and, if possible, the amount or the estimated amount thereof. No failure or
delay in giving a Claim Notice (so long as the same is given prior to
expiration of the representation or warranty upon which the claim is based) and
no failure to include any specific information relating to the claim (such as
the amount or estimated amount thereof) or any reference to any provision of
this Agreement or other instrument under which the claim arises shall affect
the obligation of the party from whom indemnity is sought.
SECTION 9. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by any party
hereto, each Investor, with respect to a breach by the Corporation, and the
Corporation, with respect to a
37
<PAGE> 49
breach by an Investor, may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including, but not limited to, an
action for damages as a result of any such breach and/or an action for specific
performance of any such covenant or agreement contained in this Agreement.
Notwithstanding anything contained in this Section 9, any action for money
damages by any party against any other party for breach of any representation,
warranty, covenant or agreement contained in this Agreement shall only be
pursuant to Section 8 of this Agreement.
SECTION 10. Further Assurances. At any time or from time to time after
the Closing, the Corporation, on the one hand, and each Investor, on the other
hand, agree to cooperate with each other, and at the request of the other
party, to execute and deliver any further instruments or documents and to take
all such further action as the other party may reasonably request in order to
evidence or effectuate the consummation of the transactions contemplated hereby
relating to the Purchase and to otherwise carry out the intent of the parties
hereunder.
SECTION 11. Successors and Assigns. This Agreement shall bind and inure
to the benefit of the Corporation and the Investors and the respective
successors, permitted assigns, heirs and personal representatives of the
Corporation and the Investors. This Section 11 shall not constitute a
modification or waiver of any of the terms or conditions relating to the
subject matter hereof which are set forth in the Stockholder Agreement.
SECTION 12. Entire Agreement. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part hereof
contain the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous arrangements or
understandings with respect thereto.
SECTION 13. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
38
<PAGE> 50
(i) if to the Corporation, to:
Applied Analytical Industries, Inc.
5051 New Centre Drive
Wilmington, NC 28403
Telecopy: (910) 392-6557
Attention: R. Forrest Waldon, Esq.
with a copy to:
Robinson, Bradshaw & Hinson, P.A.
1900 Independence Center
101 North Tryon Street
Charlotte, NC 28246
Telecopy: (704) 377-2536
Attention: Stephen M. Lynch, Esq.
(ii) if to the GSCP Parties, to:
GS Capital Partners II, L.P.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3000
Attention: Carla Skodinski
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-8587
Attention: Stuart Z. Katz, Esq.
All such notices, requests, consents and other communications shall be
deemed to have been given when received.
SECTION 14. Amendments. The terms and provisions of this Agreement may
be modified or amended, or any of the provisions hereof waived, temporarily or
permanently, pursuant to the written consent of the Corporation and the holders
of a majority of the outstanding Series A Preferred Stock (and/or Common Stock
issued upon conversion thereof) acquired under this Agreement; provided,
however, that Sections 1,
39
<PAGE> 51
6, 8, 11 and this Section 14 may not be amended with respect to any Investor
without the written consent of such Investor.
SECTION 15. Counterparts. This Agreement may be executed in any number
of counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
SECTION 16. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
SECTION 17. Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice versa.
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the principles of conflicts of law. Each of the parties hereto
hereby irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of New York and of the United States of
America, in each case located in the County of New York, for any action,
proceeding or investigation in any court or before any governmental authority
("Litigation") arising out of or relating to this Agreement and the
transactions contemplated hereby (and agrees not to commence any Litigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. registered mail to its respective
address set forth in this Agreement shall be effective service of process for
any Litigation brought against it in any such court. Each of the parties
hereto hereby irrevocably and unconditionally waives any objection to the
laying of venue of any Litigation arising out of this Agreement or the
transactions contemplated hereby in the courts of the State of New York or the
United States of America, in each case located in the County of New York, and
hereby further irrevocably and unconditionally waives and agrees not to plead
or claim in any such court that any such Litigation brought in any such court
has been brought in an inconvenient forum.
SECTION 19. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid, but
if any provision of this Agreement is held to be invalid or unenforceable in
any respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.
40
<PAGE> 52
SECTION 20. Interpretation.
20.1 Schedules and Exhibits. For purposes of this Agreement, (i)
except as otherwise expressly provided herein, or unless the context otherwise
requires, references to "Sections" or "Schedules" without reference to a
document are to the designated Sections of or Schedules to this Agreement, (ii)
the words "herein," "hereof," "herewith," "hereunder," and other words of
similar import refer to this Agreement as a whole and not to any particular
provision, and (iii) any disclosure made on any Schedule to this Agreement with
respect to any representation and warranty contained in the Agreement and which
discloses any matter that is the subject of any other representation and
warranty contained in this Agreement, shall be deemed to have been disclosed in
the appropriate Schedule modifying such other representation and warranty if it
is clear from the face of the disclosure without doing any further
investigation (including reviewing any document referenced by such disclosure)
that such disclosure relates to such other representation and warranty.
20.2 Knowledge of the Corporation. Except for purposes of the
first sentence of Section 2.11(b), as used herein, the phrases "best knowledge
of the Corporation," "knowledge of the Corporation," "of which the Corporation
is aware" and similar phrases shall mean and be a reference to the actual
knowledge on the date hereof of Sancilio, Waters, William H. Underwood, Mark P.
Colonnese, James Swarbrick, Christopher Smith, R. Forrest Waldon, Albert N.
Cavagnaro, Scot Bannerman, Martin Hunicutt and Charles Deignan (and, for
purposes of Section 2.24, Larry Ferrell) after reasonable inquiry of all
relevant employees of any AAI Entity.
IN WITNESS WHEREOF, the parties hereto have duly executed this
agreement as of the date first above written.
CORPORATION:
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ Frederick D. Sancilio
-------------------------------------
Name:
Title:
GSCP PARTIES:
41
<PAGE> 53
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ Richard A. Friedman, President
--------------------------------------
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors, II (Cayman), L.P.,
its general partner
By: GS Advisors II, Inc.,
its general partner
By: /s/ Richard A. Friedman
--------------------------------------
Name:
Title: President
GOLDMAN, SACHS & CO. VERWALTUNGS GmbH
By: /s/ Richard A. Friedman
--------------------------------------
Name:
Title:
and
42
<PAGE> 54
By: /s/ C.H. Skodinski
------------------------------------
Name:
Title:
STONE STREET FUND 1995, L.P.
By: Stone Street Value Corp.,
General Partner
By: /s/ Richard A. Friedman
--------------------------------------
Name:
Title: Vice President
BRIDGE STREET FUND 1995, L.P.
By: Stone Street Value Corp.,
Managing General Partner
By: /s/ Richard A. Friedman
--------------------------------------
Name:
Title: Vice President
43
<PAGE> 55
WAKEFIELD GROUP LIMITED PARTNERSHIP
By: Anna W. Spangler, Inc.
General Partner
By: /s/William D. Cornwell, Jr.
------------------------------------
Name:
Title: Secretary
NORO-MOSELEY PARTNERS III, L.P.
By: MOSELEY & COMPANY - III L.L.C.
General Partner
By: /s/ Jack R. Kelly, Jr.
------------------------------------
Name:
Title: Member
/s/ James L. Waters
------------------------------------
James L. Waters
FOR PURPOSES OF SECTIONS 4.8 AND 8.2
ONLY
/s/ Frederick D. Sancilio
------------------------------------
Frederick D. Sancilio
44
<PAGE> 1
EXHIBIT 10.7
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of December 21, 1992 (the "Loan
Agreement"), is by and between
APPLIED ANALYTICAL INDUSTRIES, INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal place
of business in Wilmington, North Carolina (the "Borrower"); and
NATIONSBANK OF NORTH CAROLINA, N.A., a national banking association
organized and existing under the laws of the United States and having offices
in Wilmington, North Carolina (the "Bank").
RECITALS
A. The Borrower has requested that the Bank provide credit
facilities of up to $8,100,000.00 for the purposes described herein.
B. The Bank has agreed to provide the requested credit facilities
to the Borrower on the terms and conditions hereinafter set forth.
C. The Borrower may also request additional credit facilities
from the Bank subsequent to the date hereof. If extended, the Borrower and the
Bank agree that such additional credit facilities shall be governed by the
terms of this Loan Agreement.
NOW, THEREFORE, the Borrower and the Bank agree as follows:
ARTICLE I
DEFINITIONS
1.1 For the purposes hereof:
"Additional Loan" means any Loan made pursuant to Section 6.1
hereof;
"Additional Note" means any promissory note of the Borrower
executed and delivered as provided in Section 6.1 hereof;
"Aircraft Loan" means the Loan made pursuant to Section 5.1
hereof;
"Aircraft Note" means the promissory note of the Borrower
executed and delivered as provided in Section 5.2 hereof;
"Aircraft Security Agreement" means that certain security
agreement to be executed by the Borrower and the Bank on the date of
the making of the Aircraft Loan pursuant to which the Borrower grants
the Bank a security interest on the aircraft to be financed with
<PAGE> 2
the proceeds of the Aircraft Loan for purposes of securing the
Borrower's obligation to repay the Loans;
"Autoborrowing Documentation" shall have the meaning given to
such term in Section 2.5 hereof;
"Autoborrowing Loans" shall have the meaning given to such
term in Section 2.5 hereof;
"Autoborrowing Note" shall have the meaning given to such term
in Section 2.5 hereof;
"Borrowing Base" means eighty percent (80%) of the Receivables
Base;
"Business Day" means any day not a Saturday, Sunday or legal
holiday on which the Bank is open for business in Wilmington, North
Carolina;
"Capital Base" means the sum of Tangible Net Worth and
Subordinated Debt;
"Capital Expenditures Loan" means a Loan made pursuant to
Section 4.1 hereof;
"Capital Expenditures Note" means the promissory note of the
Borrower executed and delivered as provided in Section 4.2 hereof;
"Capital Expenditures Loan Committed Amount" means the maximum
principal amount of Capital Expenditures Loans permitted to be
outstanding under Section4.1;
"Capital Expenditures Loan Maturity Date" means May 31, 1994;
"Cash Flow" means, for the twelve (12) month period ending on
the date of computation: net income of the Borrower (i) plus
depreciation, amortization and other non-cash charges, (ii) minus an
amount equal to unfinanced capital expenditures and (iii) minus
dividends declared or paid or redemptions of stock or other
distributions of cash or property to shareholders of the Borrower;
"Closing Date" means the date as of which this Loan Agreement
is executed by the Borrower and the Bank;
"Commitment" means the commitment by the Bank to make Loans to
the Borrower hereunder;
"Consistent Basis" in reference to the application of
Generally Accepted Accounting Principles, means that the accounting
principles observed in the period referred to are comparable in all
material respects to those applied in the most recent preceding period;
"Coverage Ratio" means as of any date of computation, the
ratio of Cash Flow to Debt Service;
-2-
<PAGE> 3
"Current Assets" means all items which, in accordance with
Generally Accepted Accounting Principles, would be classified as
current assets on a balance sheet of the Borrower;
"Current Liabilities" means all items which, in accordance
with Generally Accepted Accounting Principles, would be classified as
current liabilities on a balance sheet of the Borrower;
"Current Ratio" means the ratio of Current Assets to Current
Liabilities;
"Debt Service" means the sum of (i) current maturities of Long
Term Debt for the twelve month period beginning on the computation
date, (ii) 1/8th of the average outstanding principal balance of the
Revolving Loans for the twelve month period ending on the computation
date, (iii) 1/5th of the outstanding balance of the Capital
Expenditures Loans on the computation date and (iv) proposed payments
of Subordinated Debt for the twelve month period beginning on the
computation date;
"Deed of Trust" means the deed of trust dated as of the
Closing Date executed by the Borrower for the benefit of the Bank (i)
granting the Bank a first lien on the Borrower's CSD building, daycare
building and Kerr Avenue building and (ii) granting the Bank a second
lien on the Borrower's AAI building and Hall Street buildings;
"Event of Default" shall have the meaning given to said term
in Section 11.1 hereof;
"Excess Cash Flow" means as of any date of computation, the
amount by which Cash Flow exceeds Debt Service;
"Financing Statements" means the UCC-1 financing statements to
be filed in order to perfect the Bank's security interests in certain
personal property and fixtures as more particularly described therein;
"Generally Accepted Accounting Principles" means those
principles of accounting set forth in pronouncements of the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants, as such principles are from time to time supplemented and
amended;
"Guarantors" means Frederick D. Sancilio and James L. Waters;
"Guaranty Agreement" means the guaranty agreement executed by
the Guarantors in favor of the Bank pursuant to which the Guarantors
guarantee the repayment of the Loans;
"Loan" or "Loans" means the loans made pursuant to Sections
2.1, 3.1, 4.1, 5.1 and 6.1 hereof;
"Loan Documents" means this Loan Agreement, the Notes, the Deed
of Trust, the Security Agreement, the Aircraft Security Agreement and
the Financing Statements;
-3-
<PAGE> 4
"Long Term Debt" means all indebtedness for borrowed money of
the Borrower which in accordance with Generally Accepted Accounting
Principles would be classified as long term debt, but including in any
event the current portions of such long term debt and leases required
to be capitalized in accordance with Generally Accepted Accounting
Principles, but excluding in any event Subordinated Debt;
"Note" or "Notes" means the promissory notes of the Borrower,
executed, and delivered as provided in Sections 2.2, 3.2, 4.2, 5.2 and
6.1 hereof;
"Person" means an individual, a corporation, a partnership, a
joint venture, an association, a joint stock company, a trust, an
unincorporated organization or a government or any agency or political
subdivision thereof;
"Prime Rate" means the rate of interest publicly announced by
the Bank in Charlotte, North Carolina from time to time as its "prime
rate." The Prime Rate is not necessarily the best or lowest rate of
interest offered by the Bank;
"Receivables Base" means an amount equal to the aggregate book
value of all billed receivables of the Borrower from the sale of
inventory or the rendering of services (excluding in any case
intercompany receivables owed by any Subsidiary or Affiliate) which are
no more than 90 days after the invoice date; provided, that in no event
shall any receivable be included in the Receivable Base unless such
receivable is free and clear of all liens and encumbrances, except
liens and encumbrances permitted hereunder;
"Revolving Loan" means a Loan made pursuant to Section 2.1
hereof;
"Revolving Note" means the promissory note of the Borrower
executed and delivered as provided in Section 2.2 hereof;
"Revolving Loan Committed Amount" means the maximum principal
amount of Revolving Loans permitted to be outstanding under Section
2.1;
"Revolving Loan Maturity Date" means May 31, 1994;
"Security Agreement" means that security agreement dated as of
the Closing Date by and between the Borrower and the Bank whereby the
Borrower grants the Bank (i) a first priority security interest in the
Borrower's now owned or hereafter acquired accounts receivable and
inventory and (ii) grants the Bank a first priority security interest
in the Borrower's now owned or hereafter acquired machinery,
equipment, leasehold improvements, furniture, office furnishings,
vehicles and fixtures;
"Subordinated debt" means indebtedness of the Borrower
subordinated to the obligations of the Borrower to the Bank on such
terms and conditions as accepted in writing by the Bank;
"Subsidiary" means any corporation more than 50% of the
outstanding voting stock of which at the time is owned directly or
indirectly by the Borrower and/or by one of more Subsidiaries;
-4-
<PAGE> 5
"Tangible Net Worth" shall mean the aggregate amount of assets
shown on the balance sheet of the Borrower at any particular date (but
excluding from such assets capitalized organization and development
costs, capitalized interest, debt discount and expense, goodwill,
patents, trademarks, copyrights, franchises, licenses, amounts due
from officers, directors, stockholders and affiliates, and such other
assets as are properly classified intangible assets under Generally
Accepted Accounting Principles) less liabilities at such date, all
computed in accordance with Generally Accepted Accounting Principles;
"Term Loan" means a Loan made pursuant to Section 3.1 hereof;
"Term Loan Committed Amount" means the maximum principal
amount of Term Loans permitted to be outstanding under Section 3.1;
"Term Loan Maturity Date" means December 31, 1997; and
"Term Note" means the promissory note of the Borrower executed
and delivered as provided in Section 3.2 hereof.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles applied on a Consistent Basis.
ARTICLE II
REVOLVING LOANS
2.1 Revolving Loans. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, the Bank
agrees to make Revolving Loans to the Borrower, at any time or from time to
time on or after the date hereof and until the Revolving Loan Maturity Date, in
an aggregate principal amount at any time outstanding not to exceed TWO MILLION
DOLLARS ($2,000,000.00) (the "Revolving Loan Committed Amount") for purposes of
financing the Borrower's working capital needs. The Borrower may borrow, repay
and reborrow hereunder on or after the date hereof and prior to the Revolving
Loan Maturity Date, subject to the terms, provisions and limitations set forth
herein.
2.2 Revolving Note. The Revolving Loans by the Bank shall be
evidenced by the Revolving Note duly executed by the Borrower, dated the
Closing Date, in substantially the form of Exhibit A attached hereto, payable
to the order of the Bank in a principal amount equal to the Revolving Loan
Committed Amount. The Revolving Note shall bear interest from its date on the
outstanding principal balance thereof as set forth in Section 2.3 hereof. The
aggregate unpaid principal amount of the Revolving Loans at any time shall be
the principal amount owing on the Revolving Note at such time. The principal
amount of the Revolving Loans, as evidenced by the Revolving Note, shall be
payable on the Revolving Loan Maturity Date and all accrued and unpaid interest
thereon, shall, subject to the provisions hereof, be payable monthly in arrears
on the tenth day of each month commencing January 10, 1993.
2.3 Interest. The outstanding principal balance of the Revolving
Loans shall bear interest at a rate equal to the Prime Rate plus three-quarters
percent (3/4%) per annum. Changes in the Prime Rate shall be effective on the
dates such rate change.
-5-
<PAGE> 6
2.4 Borrowing Base Limitation.
(a) The principal amount of the Revolving Loans
outstanding under this Article II at any time shall not exceed the
Borrowing Base.
(b) If at any time the outstanding principal balance of
the Revolving Loans exceeds the Borrowing Base, the Borrower shall
immediately pay the Bank an amount equal to such excess.
2.5 Autoborrowings. The Bank has agreed to make autoborrowing
loans (the "Autoborrowing Loans") to the Borrower from time to time pursuant to
the terms of that certain autoborrowing note executed by the Borrower in favor
of the Bank (hereinafter such autoborrowing note together with all notes
executed in modification or replacement thereto shall be referred to as the
"Autoborrowing Note") and related documentation (hereinafter the Autoborrowing
Note together with such related documentation shall be referred to as the
"Autoborrowing Documentation"). The Borrower hereby acknowledges and agrees
that the making by the Bank of an Autoborrowing Loan shall constitute usage by
the Borrower of the Revolving Loan Committed Amount thereby decreasing the
availability to the Borrower of Revolving Loans hereunder to the extent of the
outstanding principal balance of such Autoborrowing Loans from time to time.
The Borrower also acknowledges and agrees that the Bank shall be entitled to
disburse proceeds of the Revolving Loans to itself for purposes of repaying
amounts borrowed under the Autoborrowing Note.
ARTICLE III
TERM LOANS
3.1 Term Loans. Subject to the terms and conditions and relying
upon the representations and warranties herein set forth, the Bank agrees to
make Term Loans to the Borrower, at any time or from time to time on or after
the date hereof and until the Term Loan Maturity Date, in an aggregate
principal amount at any time outstanding not to exceed FOUR MILLION ONE HUNDRED
THOUSAND DOLLARS ($4,100,000.00) (the "Term Loan Committed Amount"); provided,
however, the Term Loan Committed Amount shall be reduced by an amount equal to
$102,500.00 at the end of each quarter commencing March 31, 1993. The Borrower
may borrow, repay and reborrow hereunder on or after the date hereof and prior
to the Term Loan Maturity Date, subject to the terms, provisions and
limitations set forth herein. The proceeds of the Term Loans shall be used to
fund up to $4,100,000.00 of the purposes previously disclosed to the Bank.
3.2 Term Note. The Term Loans by the Bank shall be evidenced by
the Term Note duly executed by the Borrower, dated the Closing Date, in
substantially the form of Exhibit B attached hereto, payable to the order of
the Bank in a principal amount equal to the Term Loan Committed Amount. The
Term Note shall bear interest from its date on the outstanding principal
balance thereof as set forth in Section 3.3 hereof. The aggregate unpaid
principal amount of the Term Loans at any time shall be the principal amount
owing on the Term Note at such time. The principal amount of the Term Loans,
as evidenced by the Term Note, shall be payable in sixty consecutive monthly
installments, the first 59 of which shall be in an amount equal to $34,167.00
and the 60th of which shall be in an amount equal to the then outstanding
principal balance of the Term Loans. Such installments shall be due and
payable on the tenth day of each month commencing January 10, 1993. All
accrued and unpaid interest on the Term Note
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shall, subject to the provisions hereof, be payable monthly in arrears on the
tenth day of each month commencing January 10, 1993.
3.3 Interest. The outstanding principal balance of the Term Loans
shall bear interest at a rate equal to the Prime Rate plus three-quarters
percent (3/4%) per annum. Changes in the Prime Rate shall be effective on the
dates such rates change.
3.4 Borrowing Limitation.
(a) The principal amount of the Term Loans outstanding
under this Article III at any time shall not exceed the Term Loan
Committed Amount, as such Term Loan Committed Amount is reduced from
time to time pursuant to Section 3.1 hereof.
(b) If at any time the outstanding principal balance of
the Term Loans exceeds the Term Loan Committed Amount, as such Term
Loan Committed Amount is reduced from time to time pursuant to Section
3.1 hereof, the Borrower shall immediately pay the Bank an amount
equal to such excess.
ARTICLE IV
CAPITAL EXPENDITURES LOANS
4.1 Capital Expenditures Loans. Subject to the terms and
conditions and relying upon the representations and warranties herein set
forth, the Bank agrees to make Capital Expenditures Loans to the Borrower, at
any time or from time to time on or after the date hereof and until the Capital
Expenditures Loan Maturity Date, in an aggregate principal amount up to ONE
MILLION DOLLARS ($1,000,000.00) (the "Capital Expenditures Loan Committed
Amount") for purposes of financing capital expenditures to be made by the
Borrower; provided, however, the amount of any Capital Expenditures Loan shall
not exceed 80% of the cost of the capital asset being acquired. The Borrower
may borrow on or after the date hereof and prior to the Capital Expenditures
Loan Maturity Date up to a cumulative amount of $1,000,000.00, subject to the
terms, provisions and limitations set forth herein.
4.2 Capital Expenditures Note. The Capital Expenditures Loans by
the Bank shall be evidenced by the Capital Expenditures Note duly executed by
the Borrower, dated the Closing Date, in substantially the form of Exhibit C
attached hereto, payable to the order of the Bank in a principal amount equal
to the Capital Expenditures Loan Committed Amount. The Capital Expenditures
Note shall bear interest from its date on the outstanding principal balance
thereof as set forth in Section 4.3 hereof. The aggregate unpaid principal
amount of the Capital Expenditures Loans at any time shall be the principal
amount owing on the Capital Expenditures Note at such time. The principal
amount of the Capital Expenditures Loans outstanding as of the Capital
Expenditures Loan Maturity Date shall be payable on the Capital Expenditures
Loan Maturity Date. All accrued and unpaid interest under the Capital
Expenditures Note, shall, subject to the provisions hereof, be payable monthly
in arrears on the tenth day of each month commencing January 10, 1993.
4.3 Interest. The outstanding principal balance of the Capital
Expenditures Loans shall bear interest at a rate equal to the Prime Rate plus
one percent (1%) per annum. Changes in the Prime Rate shall be effective on
the dates such rate change.
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ARTICLE V
AIRCRAFT LOAN
5.1 Aircraft Loan. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, the Bank
agrees to make a loan to the Borrower for the purpose of financing the
acquisition by the Borrower of an aircraft in an amount equal to the lesser of
(a) ONE MILLION DOLLARS ($1,000,000.00) or (b) 80% of the lesser of (i) the
cost of such aircraft or (ii) the appraised value of the aircraft, such
appraisal to be in form and substance satisfactory to the Bank. The funding of
the Aircraft Loan shall be contingent upon the continued satisfactory
performance of the Borrower (as determined by the Bank), the receipt by the
Bank of the Borrower's December 31, 1992 audited financial statements and the
compliance by the Borrower with the terms and provisions of this Loan
Agreement.
5.2 Aircraft Loan Note. The Aircraft Loan shall be evidenced by
an Aircraft Note duly executed on behalf of the Borrower, dated as of the date
of the making of the Aircraft Loan, payable to the order of the Bank in the
principal amount of the Aircraft Loan. All of the terms and provisions of the
Aircraft Loan (including repayment terms and interest rate) shall be negotiated
between the Borrower and the Bank. All such terms must be satisfactory to the
Bank. If any of such terms are not satisfactory to the Bank or if the Borrower
has not satisfied any other conditions imposed by the Bank with respect to the
making of the Aircraft Loan, the Bank shall not be obligated to make the
Aircraft Loan.
ARTICLE VI
ADDITIONAL LOANS
6.1 Additional Loans. The Borrower may request that the Bank make
additional loans to the Borrower subsequent to the date hereof. The terms of
such additional loans must be mutually agreed upon by the Borrower and the Bank
prior to the making of such loans by the Bank. Such additional loans will be
evidenced by promissory notes executed by the Borrower in favor of the Bank.
Such promissory notes will be deemed to be "Notes" for purposes of this Loan
Agreement automatically upon the execution thereof without any further action
to be taken by the Borrower or the Bank.
ARTICLE VII
ADDITIONAL PROVISIONS REGARDING LOANS
7.1 Default Rate. If the Borrower shall default in the payment
when due (subject to applicable grace periods, if any) of the principal of or
interest on any Loan or any other amount becoming due hereunder, the Borrower
shall on demand from time to time pay interest on any overdue payment of
principal and, to the extent permitted by law, on overdue payments of interest
up to the date of actual payment (after as well as before judgment):
(i) in the case of principal of or interest on a Loan at a
rate equal to 2% per annum above the rate which would otherwise be
payable hereunder; and
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<PAGE> 9
(ii) in the case of any other amount payable hereunder or
under any of the other Loan Documents (other than principal of or
interest on any Loan referred to in clause (i) above), at a rate 2% per
annum above the Prime Rate.
7.2 Voluntary Prepayments. Subject to the prepayment penalty with
respect to the Term Loan set forth below, the Borrower shall have the right at
any time and from time to time to prepay any Loan in whole or in part, without
premium or penalty, upon at least one Business Day's notice to the Bank;
provided, however, partial prepayments of any Loan shall be applied to
principal installments thereunder in the inverse order of maturities.
7.3 Capital Adequacy.
(a) In the event that the Bank shall have determined that
the adoption or implementation on or after the Closing Date of any
applicable law, rule, regulation or guideline regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration
thereof or by any court, or compliance by the Bank (or any lending
office of the Bank) with any request or directive made or issued after
the Closing Date regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency,
has or would have the effect of reducing the rate of return on the
Bank's capital as a consequence of its obligations hereunder to a level
below that which the Bank could have achieved but for such adoption,
change or compliance (taking into consideration the Bank's policies as
the case may be, with respect to capital adequacy) by an amount deemed
by the Bank to be material, then from time to time the Borrower shall
pay to the Bank such additional amount or amounts as will compensate
the Bank for any such reduction suffered.
(b) Failure on the part of the Bank to demand compensation
for any reduction in return on capital with respect to any period shall
not constitute a waiver of the Bank's rights to demand compensation for
any reduction in return on capital in such period or in any other
period. The protection of this Section shall be available to the Bank
regardless of any possible contention of invalidity or inapplicability
of the law, regulation or condition which shall have been imposed.
7.4 Fee. The Borrower agrees to pay the Bank a fee on the Closing
Date in the amount of $15,000.00.
ARTICLE VIII
CONDITIONS OF LENDING
The obligation of the Bank to make any Loan hereunder is subject to the
accuracy, as of the date thereof, of the representations and warranties
contained in Article IX hereof, to the performance by the Borrower of its
obligations to be performed hereunder on or before the date of each such Loan
and to the satisfaction of the following further conditions:
8.1 Conditions. In the case of each Loan to be made hereunder, at
the time of each such borrowing, the Borrower shall be in compliance in all
material respects with all the terms and provisions set forth herein on its
part to be observed or performed, and immediately after such borrowing no Event
of
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Default nor any event which upon notice or lapse of time or both would
constitute such an Event of Default shall have occurred and be continuing.
8.2 Borrowing Base Limitation. In the case of each Revolving Loan
to be made hereunder, immediately after giving effect to such Revolving Loan,
the aggregate principal balance of all outstanding Revolving Loans shall not
exceed the lesser of (i) the Revolving Loan Committed Amount or (ii) the
Borrowing Base.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Bank that:
9.1 Corporate Existence and Power. The Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and is duly qualified and in good standing as a foreign
corporation authorized to do business in every jurisdiction where the failure
to so qualify would have a material adverse effect on the Borrower. Further,
the Borrower has all power and authority to own and operate its properties and
to carry on its business as now conducted.
9.2 Authorization of Loan Agreement. The Borrower has the power and
authority to enter into this Loan Agreement and to perform its obligations
under and consummate the transactions contemplated by this Loan Agreement and
has by proper corporate action duly authorized the execution and delivery of
this Loan Agreement. When executed and delivered, this Loan Agreement and the
other Loan Documents will be valid and binding obligations of the Borrower
enforceable in accordance with their respective terms.
9.3 No Violation of Corporate Restrictions. Neither the execution
and delivery of this Loan Agreement, nor the performance of the obligations
under or consummation of the transactions contemplated by this Loan Agreement,
violates or will violate any law or governmental order, conflicts or will
conflict with any provision of any charter document or by-law of the Borrower
or any material term or provision of any agreement or instrument to which the
Borrower is a party or by which the Borrower is bound, or constitutes or will
constitute a breach of or a default under any such agreement or instrument
(unless appropriate written waivers have been received and delivered to the
Bank).
9.4 Governmental Consents. No consent, approval or authorization
of, or filing, registration or qualification with, any governmental authority
on the part of the Borrower is required as a condition to the execution,
delivery or performance of this Loan Agreement or any of the other Loan
Documents by the Borrower.
9.5 Litigation. There are no material pending, or to the best
knowledge of Borrower, threatened, legal proceedings to which the Borrower is a
party or of which any of its properties are the subject.
9.6 Other Agreements. The Borrower is not in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any material agreement or instrument to which it is a
party.
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<PAGE> 11
9.7 Taxes. The Borrower has filed or caused to be filed all
federal, state and local tax returns which are required to be filed by the
Borrower and has paid or caused to be paid all taxes as shown on said returns
or on any assessment to the extent such taxes have become due, except for taxes
which are being contested in good faith and against which reserves in
accordance with Generally Accepted Accounting Principles will be established.
The Borrower does not know of any proposed material tax assessments against it.
No extension of time for assessment or payment of any federal, state or local
tax by the Borrower is in effect.
9.8 Liens. None of the assets of the Borrower is subject to any
mortgage, pledge, title retention lien or other lien, encumbrance or security
interest, except (i) for current taxes not delinquent or taxes being contested
in good faith and by appropriate proceedings, (ii) liens arising in the
ordinary course of business for sums not due or sums being contested in good
faith and by appropriate proceedings, but not involving any borrowed money or
the deferred purchase price of property or services, (iii) mechanics' and
materialmen's liens, reservations, exceptions, encroachments, easements, rights
of way, covenants, conditions, restrictions, leases and other similar title
exceptions or encumbrances affecting real property which do not in the
aggregate materially detract from the value of said properties or materially
interfere with their use in the ordinary conduct of the Borrower's business and
(iv) to the extent shown in Exhibit D.
9.9 ERISA. The Borrower has not incurred any accumulated unfunded
deficiency within the meaning of the Employee Retirement Income Security Act of
1974 ("ERISA") nor has incurred any material liability to the Pension Benefit
Guaranty Corporation ("PBGC") established under such Act (or any successor
thereto under such Act) in connection with the employee benefit plan
established or maintained by the Borrower. The Borrower is in compliance in
all material respects with those provisions of ERISA and the regulations and
public interpretations thereunder which are applicable to the Borrower and its
Subsidiaries. No Reportable Event (as defined in ERISA) has occurred with
respect to any Plan.
9.10 Subsidiaries. The Borrower has no Subsidiaries as of the date
hereof except for Applied Analytical Industries Italy S.r.l. in Milan, Italy.
9.11 Regulation U. The Borrower is not engaged principally, or as
one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System).
9.12 Patents and Trademarks. The Borrower possesses all of the
necessary patents, licenses, trademarks, trademark rights, tradenames,
tradename rights and copyrights material to conduct its business as now
conducted, without known conflict with any patent, license, trademark,
tradename or copyright of any other Person.
9.13 Financial Information Provided. The Borrower represents that
the financial information it has heretofore furnished to the Bank dated
December 31, 1991 with regard to its operations is true and correct, and
presents fairly the financial position of the Borrower, and there have been no
material adverse changes since that date.
9.14 Environmental Compliance. The Borrower has fully complied with
all laws, ordinances, regulations and orders, including without limitation all
zoning, safety and environmental laws, ordinances, regulations and orders,
applicable to its business or properties and the present uses by the Borrower
of its properties do not violate any such laws, ordinances, regulations or
orders. There is not currently and in the past there has not been (i) any use,
treatment, storage or disposal of any hazardous substance or material
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<PAGE> 12
or pollutant on any of the Borrower's properties, except as of the date hereof
as disclosed on Exhibit E attached hereto, (ii) any spill, leakage, discharge
or release of any hazardous substance or material or pollutant thereon or
therefrom, or (iii) any off-site disposal by the Borrower of any hazardous
substance or material or pollutant in any location, except as disclosed on
Exhibit E attached hereto.
ARTICLE X
AFFIRMATIVE COVENANTS
10.1 The Borrower agrees that as long as its obligations hereunder
remain outstanding and until the Commitment hereunder is terminated (unless the
Bank shall otherwise consent in writing):
(a) within one hundred twenty (120) days of the end of each
fiscal year, deliver to the Bank a detailed financial report of the
Borrower based on Generally Accepted Accounting Principles applied on a
Consistent Basis containing an unqualified opinion of independent
certified public accountants acceptable to the Bank;
(b) within thirty (30) days after the end of each month of
each fiscal year, deliver financial information and reports as of the
end of such month (including financial statements, receivables agings
and payables agings) of the Borrower certified by the chief financial
officer of the Borrower to be correct and accurate;
(c) (i) on or before the second business day of each week a
report substantially in the form of Exhibit F on the Borrowing Base and
its components as at the end of the preceding week certified by the
chief financial officer to be correct and accurate;
(d) together with each delivery of financial reports
required by Section 10.1(a) and (b) hereof, deliver to the Bank a
statement signed by the chief financial officer of the Borrower
substantially in the form of Exhibit G hereto, setting forth that the
Borrower has kept, observed, performed and fulfilled each and every
agreement binding on it contained in this Loan Agreement and the Loan
Documents and is not at the time in default in the keeping, observance,
performance or fulfillment of any of the terms, provisions and
conditions of this Loan Agreement or any of the Loan Documents and that
no Event of Default specified in Article XII hereof, nor any event,
which, upon notice or lapse of time or both, would constitute such an
Event of Default, has occurred, or if such Event of Default exists or
would occur as the case may be, stating the nature thereof, the period
of existence thereof and what action the Borrower proposes to take with
respect thereto;
(e) promptly, from time to time, deliver to the Bank such
other information regarding the Borrower's operations, business affairs
and financial condition as the Bank may reasonably request. The Bank
is hereby authorized to deliver a copy of any such financial
information delivered hereunder to the Bank to any regulatory authority
having jurisdiction over the Bank with appropriate confidential
restrictions being noted on any submissions of such information;
(f) maintain or cause to be maintained all personal property
material to its business in good working order and condition and make
all needed repairs, replacements and renewals as are necessary to
conduct its business in accordance with prudent business practices;
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<PAGE> 13
(g) do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence, rights and
franchises;
(h)(i) comply with or contest in good faith all statutes and
governmental regulations of which the Borrower has knowledge and the
noncompliance of which would have a material adverse effect on the
financial condition of the Borrower; and (ii) pay all taxes,
assessments, governmental charges, claims for labor, supplies, rent and
any other obligation which, if unpaid, might become a lien against any
of its properties except liabilities being contested in good faith and
against which, if reasonably requested by the Bank, reserves
satisfactory to the Bank will be established;
(i) at all times keep its insurable properties insured to
such extent and against such risks, including, without limitation,
public liability insurance, hazard insurance, worker's compensation and
other insurance required by law, as is acceptable to the Bank and is
customary with companies of comparable size in the same or similar
business but at all times of the type and at least in the amount of the
present coverage of the Borrower. The Borrower will deliver to the
Bank certificates of each insurer evidencing the hazard insurance
coverage regarding the security granted to the Bank by the Borrower.
Each such policy of hazard insurance will require, and the certificates
will state that no such policy will be terminated without at least
thirty (30) days prior written notice having been delivered to the
Bank. Insurance proceeds from property securing the indebtedness
hereunder shall be immediately applied to reduce such indebtedness;
provided, however, insurance proceeds of less than $100,000.00 may be
disbursed to the Borrower for restoration or repair so long as no Event
of Default shall have occurred or be continuing;
(j) preserve and protect its patents, licenses trademarks,
trademark rights, tradenames, tradename rights and copyrights and
maintain all of its other material properties and assets used or useful
in the conduct of its business in good repair, working order and
condition and from time to time cause to be made all proper
replacements, betterments and improvements thereto;
(k) keep true books of records and accounts in accordance
with Generally Accepted Accounting Principles applied on a Consistent
Basis, and in which full, true and correct entries will be made of the
Borrower's dealings and transactions;
(l) permit any officer of the Bank designated by the Bank to
visit and inspect any of the Borrower's properties, books and financial
records at such times as the Bank may reasonably request upon
reasonable notice and during ordinary business hours;
(m) upon the request of the Bank, authorize any officer of
the Bank to discuss its financial statements and financial affairs at
any time and from time to time with the Borrower's independent
certified public accountants upon reasonable notice and during ordinary
business hours;
(n) deliver to the Bank forthwith, upon any officer of the
Borrower obtaining knowledge of an Event of Default or an event which
would constitute such an Event of Default but for the requirement that
notice be given or time elapse or both, a certificate signed by the
chief executive officer of the Borrower specifying the nature and
period of existence thereof and what action the Borrower proposes to
take with respect thereto;
(o) within ten (10) days of the event becoming known to any
officer of the Borrower, notify the Bank in writing of the occurrence
of any of the following events:
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(i) the pendency or commencement of any action, suit
or proceeding at law or in equity under which a party or parties
seek an amount equal to or exceeding $50,000.00;
(ii) any event or condition which shall constitute an
event of default under any other agreement for borrowed money or
any known or potential materially adverse change in any other
material contractual agreement;
(iii) any levy of an attachment, execution or other
process against its assets; and
(iv) any change in any existing agreement or contract
which may materially adversely affect any of its businesses or
affairs, financial or otherwise;
(p) the Borrower shall (i) at all times, make prompt payment
of all contributions required under all employee benefit plans
("Plans") to meet the minimum funding standard set forth in ERISA
(defined herein) with respect to its Plans; (ii) within thirty (30)
days after the filing thereof, furnish to the Bank copies of each
annual report/return (Form 5500 Series), as well as all schedules and
attachments required to be filed with the Department of Labor and/or
the Internal Revenue Service pursuant to ERISA, and the regulations
promulgated thereunder, in connection with each of its Plans for each
Plan Year; (iii) notify the Bank immediately of any fact, including,
but not limited to, any Reportable Event (as defined in ERISA) arising
in connection with any of its Plans, which might constitute grounds for
termination thereof by the PBGC or for, the appointment by the
appropriate United States District Court of a trustee to administer
such Plan, together with a statement, if requested by the Bank, as to
the reason therefor and the action, if any, proposed to be taken with
respect thereof; and (iv) furnish to the Bank, upon its request, such
additional information concerning any of the Borrower's Plans as may be
reasonably requested;
(q) satisfy the following financial tests (all computed
using historical cost basis statements):
(i) the Borrower will maintain as of the end of each
fiscal quarter (commencing with the fiscal quarter ending
December 31, 1992) a Capital Base of not less than
$4,000,000.00; provided, however, such amount shall be increased
on the last day of each fiscal year (commencing with the fiscal
year ending December 31, 1993) by an amount equal to the greater
of $750,000.00 or 40% of the net income of the Borrower for the
fiscal year then ending, such increases to be cumulative;
(ii) the Borrower shall maintain at all times a
Current Ratio of not less than 1.25 to 1.00;
(iii) the Borrower shall maintain a Coverage Ratio of
not less than 1.15 to 1.0 computed on the last day of each
fiscal quarter commencing with the fiscal quarter ending
December 31, 1992; and
(iv) the Borrower shall maintain a ratio of Total
Liabilities less Subordinated Debt to Capital Base of not
greater than (A) 2.5 to 1.0 at all times during the period
commencing on the Closing Date through and including December
30, 1993 and (B) 2.0 to 1.0 at all times thereafter.
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ARTICLE XI
NEGATIVE COVENANTS
11.1 The Borrower agrees that as long as its obligations hereunder
remain outstanding and until the Commitment is terminated (unless the Bank
shall otherwise consent in writing):
(a) incur, create, assume or permit to exist any
indebtedness for borrowed money, howsoever evidenced, or its equivalent
(including but not limited to leases required to be capitalized under
Generally Accepted Accounting Principles), except
(i) indebtedness set forth in the financial
statements referred to in Section 9.13 hereof and as set forth
in Exhibit H;
(ii) additional indebtedness extended by the Bank;
(iii) Subordinated Debt; and
(iv) purchase money indebtedness incurred to finance
the acquisition of equipment provided that (a) the aggregate
amount of such purchase money indebtedness incurred by the
Borrower at any time outstanding does not exceed $100,000.00,
and (b) the initial maturity of each item of such purchase money
indebtedness is at least three (3) years;
(b) incur, create or permit to exist any pledge, lien,
charge or other encumbrance of any nature whatsoever on the Borrower's
property, whether now owned or hereafter acquired, other than
(i) liens as disclosed in Exhibit D hereto;
(ii) any unfiled lien of materialmen, mechanics,
workmen, warehousemen, carriers, landlords or repairmen;
provided that if such a lien shall be perfected and shall not be
contested in good faith, it shall be discharged of record
immediately by payment, bond or otherwise;
(iii) tax liens which are being contested in good
faith, or which constitute liens for taxes the payment of which
is not yet required;
(iv) liens in favor of the Bank; and
(v) liens incurred in connection with the purchase
money indebtedness permitted under Section 11.1(a)(iv);
(c) sell, lease, transfer or otherwise dispose of any of its
properties and assets to any Person other than sales in any fiscal year
of obsolete machinery and equipment in the ordinary course of business
having an aggregate net book value of less than $100,000.00;
(d) enter into any agreement, directly or indirectly, with
any Person whereby the Borrower shall sell or transfer any property,
real or personal, whether now owned or hereafter acquired, and used or
useful in its business, and thereafter rent or lease such property or
other property which the
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<PAGE> 16
Borrower intends to use for substantially the same purpose or purposes
as the property being sold or transferred;
(e) seek or permit dissolution or liquidation of the
Borrower in whole or in part;
(f) guaranty, or become liable for, the obligations of any
other Person (provided, however, this shall not prevent the Borrower
from endorsing negotiable instruments for collections in the ordinary
course of business);
(g) make any loans or advances to any Person; provided,
however, the Borrower may make temporary loans or advances to employees
expected to be incurred in the ordinary course of business provided
such loans and advances do not exceed $100,000.00 in the aggregate at
any time outstanding;
(h) consolidate with, merge into, be acquired by or acquire
the assets or capital stock of any Person;
(i) without the prior consent of the Bank, create or permit
to exist any partnerships, joint ventures or make any substantial
investment other than as disclosed herein and permitted hereunder;
(j) purchase, own, invest in or otherwise acquire, directly
or indirectly, any stock or other securities, or make or permit to
exist any investment, capital contribution or acquire any interest
whatsoever in any other Person or permit to exist any loans or advances
for such purposes provided, the Borrower may maintain investments in or
invest:
(i) in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the
United States of America; provided, that such obligations mature
one year from the date of acquisition thereof;
(ii) in certificates of deposit maturing within one
year from the date of acquisition issued by a bank or trust
company organized under the laws of the United States or any
State thereof having capital surplus and undivided profits
aggregating at least $40 million and not known by the Borrower
to be having financial difficulties;
(iii) in commercial paper rated P-1 or better by
Moody's Investors Services, Inc. (Commercial Paper Record) or
A-1 or better by Standard & Poors; or
(iv) in equity securities with an aggregate cost of
not more than $100,000.00; or
(k) enter into or carry on any business other than the
manufacture of pharmaceutical-related products and services for the
pharmaceutical industry and the manufacture and sale of pharmaceutical
products.
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ARTICLE XII
EVENTS OF DEFAULT AND ACCELERATION
12.1 Any of the following shall constitute an "Event of Default"
under this Loan Agreement:
(a) Nonpayment. Nonpayment when and as due of any
principal, interest or other payment hereunder or under any of the
Notes and the continuation of such nonpayment for a period of five (5)
days.
(b) Breach of Covenants. Other than as set forth in Section
12.1(a) hereof, the failure to perform and observe any covenant or
other obligation contained herein or in any other Loan Documents and
the continuation of such failure for a period of thirty (30) days after
receipt of written notice from the Bank thereof.
(c) False Statements. If any representation or warranty
made by the Borrower in this Loan Agreement, any other Loan Document or
in any document, certificate, statement or report heretofore or
hereafter made shall be untrue in any material respect.
(d) Bankruptcy. In the event that the Borrower or either
Guarantor
(1) shall make an assignment for the benefit of
creditors; or
(2) has a petition initiating a proceeding under any
section or chapter of the Bankruptcy Code or its amendments,
filed by or against the Borrower or either Guarantor and, if
against the Borrower or either Guarantor, such petition is not
set aside within ninety (90) days after such filing; or
(3) shall file any proceedings for dissolution or
liquidation; or
(4) has a receiver, trustee or custodian appointed
for all or part of its or his assets; or
(5) seeks to make an adjustment, settlement or
extension of its or his debts with its or his creditors
generally; or
(6) has a notice of an action for enforcement of a
lien filed or recorded or a judgment lien or execution obtained
against it or him in excess of an aggregate of $50,000.00 which
notice of lien is not removed, insured, reserved for (in amounts
satisfactory to the Bank), satisfied, bonded or contested in
good faith within thirty (30) days after any officer of the
Borrower or the applicable Guarantor, as the case may be,
becomes aware of such lien;
(e) if an event of default occurs under any agreement by and
between the Borrower and the Bank which is in existence as of the date
hereof (including the Reimbursement Agreement dated as of November 1,
1988, as amended, by and between the Borrower and the Bank) or which is
entered into subsequent to the date hereof;
-17-
<PAGE> 18
(f) if the Borrower in the performance of any other
agreement between it and any other lender defaults and such default
permits such other lender to accelerate such other indebtedness of the
Borrower for borrowed money;
(g) the Guarantors shall at any time cease or fail to own in
the aggregate 51% or more of the voting stock of the Borrower; or
(h) either Guarantor shall default in the performance of any
obligation under the Guaranty Agreement.
12.2 Remedies. Upon the occurrence of any such Event of Default and
after the applicable grace period, if any, and unless the Bank agrees to waive
in writing such an Event of Default:
(a) Termination of Commitment. The Bank, in its sole
discretion, may terminate the Commitment.
(b) Acceleration of Indebtedness. All of the indebtedness
of any and every kind owing by the Borrower to the Bank, howsoever
evidenced, now existing or hereafter arising, shall become due and
payable upon written notice to the Borrower (other than an Event of
Default described in Section 12.1(d) in which case such indebtedness
shall become due and payable immediately without necessity of written
demand) without the necessity of any other demand, presentment, protest
or notice upon the Borrower, all of which are hereby expressly waived
by the Borrower.
(c) Acceleration of Obligations. All of the obligations of
the Borrower under the Loan Documents shall thereupon be immediately
due and payable without the necessity of any other demand, presentment,
protest or notice upon the Borrower, all of which are hereby expressly
waived by the Borrower.
(d) Right of Set-Off. Regardless of the adequacy of the
collateral, the Bank shall have the right, immediately and without
further action by it, to set-off against the Notes, all money owed by
the Bank in any capacity to the Borrower, whether or not due, and the
Bank shall be deemed to have exercised such right of set-off and to
have made a charge against any such money immediately upon the
occurrence of such event of default even though such charge is made or
entered on the books of the Bank subsequent thereto.
(e) Foreclosure. The Bank may cause foreclosure upon any
collateral as authorized in the Loan Documents in order to satisfy all
obligations of the Borrower to the Bank under and pursuant to all of
the rights and powers and in the manner contained in the Loan
Documents. The Borrower hereby agrees that the Bank shall have the
right to bid and become a purchaser on its own behalf in any such
sales.
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<PAGE> 19
ARTICLE XIII
MISCELLANEOUS
13.1 Notices. All notices and other communications hereunder shall
be sufficiently given and shall be deemed given when delivered or when mailed
by registered or certified mail, postage prepaid, addressed as follows:
(a) if to the Borrower:
Applied Analytical Industries, Inc.
1206 North 23rd Street
Wilmington, North Carolina 28405
Attention: Frederick D. Sancilio
(b) if to the Bank
NationsBank of North Carolina, N.A.
155 North Front Street
Wilmington, North Carolina 28401
Attention: Teresa D. Andrews
13.2 Waiver. No failure or delay on the part of the Bank in the
exercise of any right, power or privilege hereunder or under any other Loan
Document shall operate as a waiver of any such right, power or privilege nor
shall any such failure or delay preclude any other or further exercise thereof.
The rights and remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law.
13.3 Survival. All covenants, agreements, representations and
warranties made herein and in the other Loan Documents shall survive the making
by the Bank of the Loans and the execution and delivery to the Bank of the Loan
Documents and shall continue in full force and effect so long as any of the
indebtedness of the Borrower to the Bank evidenced by the Notes or any
obligations under the Commitment remain outstanding.
13.4 Successors and Assigns. This Loan Agreement and the Loan
Documents shall inure to the benefit of and be binding upon successors and
assigns of the Bank; provided, however, the Borrower shall not assign any of
its rights or obligations hereunder without the prior written consent of the
Bank.
13.5 Costs. The Borrower agrees to pay all reasonable costs and
expenses in connection with the preparation, execution and delivery of the Loan
Documents, including, without limitation, the reasonable fees and out-of-pocket
expenses of Moore & Van Allen, special counsel to the Bank, and costs and
expenses of the Bank in connection with the implementation and/or enforcement
of this Loan Agreement or the other Loan Documents (including without
limitation reasonable attorneys fees) and to hold the Bank harmless from any
and all such costs, expenses and liabilities.
-19-
<PAGE> 20
13.6 Amendment; Waiver; Consents. No approval, decision, option or
action required of the Bank ("Approval") hereunder nor any modification,
amendment or waiver ("Waiver") of any provision of this Loan Agreement or any
other Loan Document nor any consent to any departure by the Borrower therefrom
("Consent") shall in any event be effective unless the same shall be in writing
signed by the Bank and delivered in accordance with the provisions of Section
13.1 hereof, and then such Approval, Waiver or Consent shall be effective only
in the specific instance and for the purpose for which given but any such
Approval, Waiver or Consent when signed shall be effective and binding upon the
Bank. No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in the same, similar or other
circumstances.
13.7 Year. Except as otherwise provided for hereunder, interest,
fees and premiums hereunder shall be computed on the basis of a three hundred
sixty (360) day year for the actual number of days in the billing period.
13.8 Payment on Business Day. Should any installment or other
payment of the principal of or interest on the Notes become due and payable on
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day thereafter and in the case of an installment of
principal, interest shall be payable thereon at the rate per annum herein
specified during such extension.
13.9 Counterparts. This Loan Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed
an original, and it shall not be necessary in making proof of this Loan
Agreement to produce or account for more than one such counterpart.
13.10 Assignment. The Bank may, at any time, transfer or assign all
or any portion of the indebtedness evidenced by the Notes held by the Bank and
the terms hereof shall extend to any subsequent holder of the Notes.
13.11 Term. The term of this Loan Agreement shall be until the Bank
is no longer obligated to lend under the Commitment and the Bank has received
payment in full of the unpaid principal and interest of the Notes.
13.12 Captions. The captions herein are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this Loan Agreement nor the interest of any provisions hereof.
13.13 Governing Law. This Loan Agreement and the other Loan Documents
and all matters relating thereto shall be governed by and construed and
interpreted in accordance with the laws of the State of North Carolina. The
Borrower hereby submits to the jurisdiction and venue of the state and federal
courts of North Carolina and agrees that the Bank may, at its option, enforce
its rights under the Loan Documents in such courts. The Borrower hereby agrees
that both the federal and state courts in Mecklenburg County, North Carolina
are a convenient forum and agrees not to raise as a defense that such courts
are not a convenient forum.
13.14 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY WAIVE
THE RIGHT TO JURY TRIAL IN ANY ACTION, SUIT OR PROCEEDING ARISING FROM OR
RELATED TO THIS LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed or caused this
instrument to be executed under seal as of the day and year first above
written.
APPLIED ANALYTICAL INDUSTRIES,
INC.
ATTEST:
By /s/ R. Forrest Waldon By /s/ Frederick D. Sancilio
----------------------------- ------------------------------
Title Secretary Title President
(Corporate Seal)
NATIONSBANK OF NORTH CAROLINA,
N.A.
By /s/ Teresa D. Andrews
--------------------------------
Title Vice President
-21-
<PAGE> 22
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT, dated as of May 17, 1994 by
and between
APPLIED ANALYTICAL INDUSTRIES, INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal place
of business in Wilmington, North Carolina (the "Borrower"); and
NATIONSBANK OF NORTH CAROLINA, N.A., a national banking association
organized and existing under the laws of the United States and having offices
in Wilmington, North Carolina (the "Bank").
RECITALS
A. The Bank and the Borrower have entered into that certain Loan
Agreement, dated as of December 21, 1992 (the "Loan Agreement").
B. The Bank and the Borrower have agreed to make changes to the
Loan Agreement as provided for herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Loan Agreement is hereby amended as follows:
(a) The definition of "Capital Expenditures Loan Maturity
Date" in Section 1.01 is amended in its entirety so that such definition now
reads as follows:
"Capital Expenditures Loan Maturity Date" means May 31, 1995;
(b) The definition of "Cash Flow" in Section 1.01 is
amended in its entirety so that such definition now reads as follows:
"Cash Flow" means, for the twelve (12) month period ending on
the date of computation: net income of the Borrower (i) plus
depreciation, amortization and other non-cash charges, and (ii) minus
dividends declared or paid or redemptions of stock or other
distributions of cash or property to shareholders of the Borrower;
(c) The definition of "Revolving Loan Maturity Date" in
Section 1.01 is amended in its entirety so that such definition now reads as
follows:
"Revolving Loan Maturity Date" means May 31, 1995;
(d) Section 2.01 is amended in its entirety so that such
Section now reads as follows:
2.01 Revolving Loans. Subject to the terms and conditions
and relying upon the representations and warranties herein set forth,
the Bank agrees to make Revolving Loans to the Borrower, at any time
or from time to time on or after the date hereof and until the
Revolving Loan Maturity Date, in an aggregate principal amount at any
time outstanding not to exceed FIVE MILLION DOLLARS ($5,000,000.00)
(the "Revolving
<PAGE> 23
Loan Committed Amount") for purposes of financing the Borrower's
working capital needs. The Borrower may borrow, repay and reborrow
hereunder on or after the date hereof and prior to the Revolving Loan
Maturity Date, subject to the terms, provisions and limitations set
forth herein.
(e) Section 2.02 is amended by deleting the first
sentence thereto and replacing it with the following sentence:
The Revolving Loans by the Bank shall be evidenced by the
Revolving Note duly executed by the Borrower, dated May 17, 1994,
payable to the order of the Bank in a principal amount equal to the
Revolving Loan Committed Amount.
(f) Section 2.03 is amended by deleting the first
sentence thereto and replacing it with the following sentence:
The outstanding principal balance of the Revolving Loans shall
bear interest at a rate equal to the Prime Rate plus one-half percent
(1/2%) per annum.
(g) Section 2.06 is added to the Loan Agreement as
follows:
2.06 Unused Fee. In consideration of the Bank's
commitment to make the Revolving Loans, the Borrower agrees to pay an
unused fee of one-quarter of one percent (1/4%) per annum (computed on
the basis of the actual number of days elapsed in a year of 360 days)
on the average daily Unutilized Commitment during the preceding period
(for purposes hereof, the term "Unutilized Commitment" shall mean, at
any time the excess of the Revolving Loan Committed Amount at such
time over the aggregate principal amount of the Revolving Loans
outstanding at such time. This unused fee shall be payable on the
tenth day of each calendar quarter computed for the immediately
preceding calendar quarter. This unused fee shall continue until the
Revolving Loan Maturity Date or until the commitment of the Bank to
make Revolving Loans hereunder is terminated.
(h) Section 10.01(c) is amended in its entirety so that
such Section now reads as follows:
(c) deliver a report (i) on the 15th day of each month
substantially in the form of Exhibit F-1 on the Borrowing Base and its
components as of the 30th day of the prior month and (ii) on the 30th
day of each month substantially in the form of Exhibit F-1 on the
Borrowing Base and its components as of the 15th day of such month;
(i) Section 10.01(q) is amended in its entirety so that
such Section now reads as follows:
(q) satisfy the following financial tests (all computed
using historical cost basis statements):
(i) the Borrower will maintain as of the end of
each fiscal quarter (commencing with the fiscal quarter ending
December 31, 1993) a Capital Base of not less than
$4,750,000.00; provided, however, such amount shall be
increased on the last day of each
- 2 -
<PAGE> 24
fiscal year (commencing with the fiscal year ending December
31, 1994) by an amount equal to $1,600,000.00, such increases
to be cumulative;
(ii) the Borrower shall maintain at all times a
Current Ratio of not less than 1.00 to 1.00;
(iii) the Borrower shall maintain a Coverage Ratio
of not less than 1.50 to 1.0 computed on the last day of each
fiscal quarter commencing with the fiscal quarter ending June
30, 1994; and
(iv) the Borrower shall maintain a ratio of Total
Liabilities less Subordinated Debt to Capital Base of not
greater than (A) 2.75 to 1.0 at all times during the period
commencing on May 17, 1994 through and including December 31,
1994, (B) 2.5 to 1.0 at all times during the period commencing
on January 1, 1995 through and including December 31, 1995 and
(C) 2.0 to 1.0 at all times thereafter.
(j) Section 11.01(g) is amended in its entirety so that
such Section now reads as follows:
(g) make any loans or advances to any employees,
directors, shareholders, subsidiaries or affiliates in excess of
$100,000.00 at any time outstanding;
(k) Section 11.01(k) is amended by deleting the period at
the end of such Section and adding a semicolon followed by the word "or".
(l) Sections 11.01(l) and (m) are added as follows:
(l)(i) purchase, redeem or retire any of its stock; or (ii)
pay any dividends or other distributions to its shareholders other
than (A) dividends in an amount equal to 100% of the actual tax
liability incurred by the shareholders of the Borrower on account of
income of the Borrower for fiscal year 1994, (B) dividends in an
amount equal to 120% of the actual tax liability incurred by the
shareholders of the Borrower on account of income of the Borrower for
fiscal year 1995 and (C) dividends in an amount equal to 130% of the
actual tax liability incurred by the shareholders of the Borrower on
account of income of the Borrower for fiscal year 1996 and each fiscal
year thereafter; or
(m) make unfinanced capital expenditures in excess of
$2,500,000.00 in fiscal year 1994, $3,000,000.00 in fiscal year 1995
and $4,000,000.00 in fiscal year 1996 and thereafter (computed on a
non-cumulative basis).
(m) Section 11.02 is added to the Loan Agreement as
follows:
11.02 Notwithstanding anything to the contrary contained in
Section 11.01, the Borrower may invest in GenerEst so long as the
aggregate amount of cash loaned by the Borrower to GenerEst or
invested by the Borrower in GenerEst shall not exceed $500,000.00.
(n) Exhibit A is deleted.
(o) Exhibit F is deleted and replaced with Exhibit F-1
attached hereto.
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<PAGE> 25
C. The Borrower hereby represents and warrants that:
1. the "Representation and Warranties" set forth in Article IX of
the Loan Agreement, as amended, are true and correct as of the date of this
First Amendment;
2. the Borrower is not in default of the Loan Agreement or the
other Loan Documents (as defined in the Loan Agreement) and no event or
condition exists under the Loan Agreement or the other Loan Documents that, but
for the giving of notice or lapse of time or both, would result in such a
default as of the date of this First Amendment.
D. Except as modified hereby, all of the terms and provisions of
the Loan Agreement (and Exhibits) remain in full force and effect.
E. This First Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original.
F. This First Amendment and the Loan Agreement, as amended
hereby, shall be deemed to be contracts made under, and for all purposes shall
be construed in accordance with, the laws of the State of North Carolina.
- 4 -
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed by their duly authorized corporate officers as of the
day and year first above written.
APPLIED ANALYTICAL INDUSTRIES, INC.
ATTEST:
By: /s/ R. Forrest Waldon By: /s/ Frederick D. Sancilio
---------------------------------- ---------------------------------
Title: Secretary Title: President
------------------------------- ---------------------------------
(Corporate Seal)
NATIONSBANK OF NORTH CAROLINA, N.A.
By: /s/ Mary J. Rogers
---------------------------------
Title: Assistant Vice President
---------------------------------
Each of the undersigned guarantors hereby consents to the foregoing in their
capacities as guarantors.
(SEAL)
/s/ R. Forrest Waldon /s/ Frederick D. Sancilio
- -------------------------------- ----------------------------------
Witness Frederick D. Sancilio
(SEAL)
/s/ Richard Bennett /s/ James L. Waters
- -------------------------------- ----------------------------------
Witness James L. Waters
- 5 -
<PAGE> 27
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT, dated as of March 28, 1996 by
and between
APPLIED ANALYTICAL INDUSTRIES, INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal place
of business in Wilmington, North Carolina (the "Borrower"); and
NATIONSBANK, N.A., a national banking association organized and
existing under the laws of the United States and having offices in Wilmington,
North Carolina (the "Bank").
RECITALS
A. The Bank and the Borrower have entered into that certain Loan
Agreement, dated as of December 21, 1992, as amended (the "Loan Agreement").
B. The Bank and the Borrower have agreed to make changes to the
Loan Agreement as provided for herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Loan Agreement is hereby amended as follows:
(a) Section 1.01 is amended by deleting the definitions
of "Aircraft Loan", "Aircraft Note", "Aircraft Security Agreement",
"Autoborrowing Documentation", "Autoborrowing Loans", Autoborrowing Note",
"Capital Expenditures Loan Committed Amount", "Guarantors" and "Guaranty
Agreements".
(b) The definitions of "Capital Expenditures Loan",
"Capital Expenditures Note" and "Capital Expenditures Loan Maturity Date" in
Section 1.01 is amended in their entirety so that such definitions now read as
follows:
"Capital Expenditures Loan" shall have the meaning given to
such term in Section 4.01 hereof;
"Capital Expenditures Note" shall have the meaning to given to
such term in Section 4.02 hereof;
"Capital Expenditures Loan Maturity Date" means December 31,
2000;
(c) The definition of "Loan" and "Loans" in Section 1.01 is
amended in its entirety so that such Section now reads as follows:
"Loan" or "Loans" means, the loans made pursuant to Sections
2.01, 3.01, 4.01 and 6.01 hereof;
<PAGE> 28
(d) The definition of "Note" and "Notes" in Section 1.01 is
amended in its entirety so that such Section now reads as follows:
"Note" or "Notes" means, the promissory notes of the Borrower
executed and delivered as provided in Sections 2.02, 3.02, 4.02 and
6.01 hereof;
(e) The definition of "Receivables Base" is amended in its
entirety so that such definition now reads as follows:
"Receivables Base" means an amount equal to the aggregate book
value of all billed receivables of the Borrower from the sale of
inventory or the rendering of services (excluding in any case
receivables in excess of $1,000,000 in the aggregate owed by any
entities in which the Borrower has any ownership in or participates in
any earnings from) which are no more than 90 days after the invoice
date; provided, that in no event shall any receivable be included in
the Receivable Base unless such receivable is free and clear of all
liens and encumbrances, except liens and encumbrances permitted
hereunder;
(f) The definition of "Revolving Loan Maturity Date" in Section
1.01 is amended in its entirety so that such definition now reads as follows:
"Revolving Loan Maturity Date" means May 31, 1996;
(g) Section 1.01 is further amended by adding the following
definitions thereto in the alphabetically appropriate places:
"Applicable Margin" means the following interest rate spreads
determined as follows:
<TABLE>
<S> <C>
Total Liabilities/Tangible Net Worth Interest Rate Spread
less than or equal to .50 to 1.0 100 basis points
equal to or greater than .51 to 1.0 but less than 1.0 to 1.0 135 basis points
greater than or equal to 1.0 to 1.0 170 basis points
</TABLE>
"LIBOR Rate" means the floating 30 day London Interbank
Offering Rate as published in the Wall Street Journal from time to
time.
"Working Capital" means the amount by which Current Assets
exceeds Current Liabilities.
(h) Article II is amended in its entirety so that such Article now
reads as follows:
ARTICLE II
Revolving Loans
2.01 Revolving Loans. Subject to the terms and
conditions and relying upon the representations and warranties
herein set forth, the Bank agrees to make Revolving Loans to
the Borrower, at any time or from time to time on or after the
date hereof and until the
- 2 -
<PAGE> 29
Revolving Loan Maturity Date, in an aggregate principal amount
at any time outstanding not to exceed FIVE MILLION DOLLARS
($5,000,000.00) (the "Revolving Loan Committed Amount") for
purposes of financing the Borrower's working capital needs.
The Borrower may borrow, repay and reborrow hereunder on or
after the date hereof and prior to the Revolving Loan Maturity
Date, subject to the terms, provisions and limitations set
forth herein.
2.02 Revolving Note. The Revolving Loans by the
Bank shall be evidenced by the Revolving Note duly executed by
the Borrower, dated the Closing Date, in substantially the
form of Exhibit A attached hereto, payable to the order of the
Bank in a principal amount equal to the Revolving Loan
Committed Amount. The Revolving Note shall bear interest from
its date on the outstanding principal balance thereof as set
forth in Section 2.03 hereof. The aggregate unpaid principal
amount of the Revolving Loans at any time shall be the
principal amount owing on the Revolving Note at such time.
The principal amount of the Revolving Loans, as evidenced by
the Revolving Note, shall be payable on the Revolving Loan
Maturity Date and all accrued and unpaid interest thereon,
shall, subject to the provisions hereof, be payable monthly in
arrears on the tenth day of each month commencing May 10, 1996.
2.03 Interest. Effective November 15, 1995, the
outstanding principal balance of the Revolving Loans shall
bear interest at a rate equal to the LIBOR Rate plus the
Applicable Margin.
2.04 Borrowing Base Limitation.
(a) The principal amount of the Revolving Loans
outstanding under this Article II at any time shall not exceed
the Borrowing Base.
(b) If at any time the outstanding principal
balance of the Revolving Loans exceeds the Borrowing Base, the
Borrower shall immediately pay the Bank an amount equal to
such excess.
2.05 Unused Fee. In consideration of the Bank's
commitment to make the Revolving Loans, the Borrower agrees to
pay an unused fee of one-fifth of one percent (1/5%) per annum
(computed on the basis of the actual number of days elapsed in
a year of 360 days) on the average daily Unutilized Commitment
during the preceding period (for purposes hereof, the term
"Unutilized Commitment" shall mean, at any time the excess of
the Revolving Loan Committed Amount at such time over the
aggregate principal amount of the Revolving Loans outstanding
at such time. This unused fee shall be payable on the tenth
day of each calendar quarter computed for the immediately
preceding calendar quarter. This unused fee shall continue
until the Revolving Loan Maturity Date or until the commitment
of the Bank to make Revolving Loans hereunder is terminated.
(i) Section 3.03 is amended in its entirety so that such Section
now reads as follows:
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<PAGE> 30
3.03 Interest. Effective November 15, 1995, the
outstanding principal balance of the Term Loans shall bear
interest at a rate equal to the LIBOR Rate plus the Applicable
Margin.
(j) Article IV shall be amended in its entirety so that such
Article now reads as follows:
ARTICLE IV
Capital Expenditures Loan
4.01 Capital Expenditures Loan. The Bank has
previously made a capital expenditures loan to the Borrower
(the "Capital Expenditures Loan") the outstanding principal
balance of which as of March 28, 1996 is $998,000.00.
4.02 Capital Expenditures Note. The Capital
Expenditures Loan shall be evidenced by the promissory note,
dated March 28, 1996, executed by the Borrower in favor of the
Bank in the original prinicipal amount of $998,000.00 (the
"Capital Expenditures Note"). The Capital Expenditures Note
shall bear interest from its date on the outstanding principal
balance thereof as set forth in Section 4.03 hereof. The
principal amount of the Capital Expenditures Loan, as
evidenced by the Capital Expenditures Note, shall be payable
in sixty consecutive monthly installments, the first 59 of
which shall be in an amount equal to $16,663.00 and the 60th
of which shall be in an amount equal to the then outstanding
principal balance of the Capital Expenditures Loan. Such
installments shall be due and payable on the 28th day of each
month commencing April 28, 1996. All accrued and unpaid
interest on the Capital Expenditures Note shall, subject to
the provisions hereof, be payable monthly in arrears on the
28th day of each month commencing April 28, 1996.
4.03 Interest. Effective November 15, 1995, the
outstanding principal balance of the Capital Expenditures Loan
shall bear interest at a rate equal to the LIBOR Rate plus the
Applicable Margin.
(k) Article V is deleted.
(l) Sections 9.05 and 9.10 are amended in their entirety so that
such Sections now read as follows:
9.05 Litigation. There are no material pending,
or to the best knowledge of the Borrower, threatened, legal
proceedings to which the Borrower is a party or of which any
of its properties are the subject other than the Kurtzman
judgment of $363,000 plus interest from June, 1995.
9.10 Subsidiaries. The Borrower has no
Subsidiaries as of March 28, 1996 except for Applied
Analytical Industries Italy S.r.l. in Milan, Italy and AAI
Learning Center.
(m) Section 10.01(b) is amended in its entirety so that such
Section now reads as follows:
- 4 -
<PAGE> 31
(b) within thirty (30) days after the end of each
quarter of each fiscal year, deliver financial information and
reports as of the end of such quarter (including financial
statements, receivables agings and payables agings) of the
Borrower certified by the chief financial officer of the
Borrower to be correct and accurate;
(m) Section 10.01(q)(iv) is amended in its entirety so
that such Section now reads as follows:
(iv) the Borrower shall maintain a ratio
of Total Liabilities to Tangible Net Worth not
greater than 1.25 to 1.0 at all times;
(n) Section 10.01(q) is further amended by adding the following
subsection (v) thereto:
(v) the Borrower shall maintain as of
the end of each fiscal quarter Working Capital of at
least $2,000,000.00.
(o) Section 11.01(g) is amended in its entirety so that such
Section now reads as follows:
(g) make any loans or advances to any employees,
directors, shareholders, subsidiaries or affiliates in excess
of $250,000.00 at any time outstanding other than such loans
or advances made pursuant to agreements existing as of March
28, 1996 or such loans or advances made in the normal course
of business (on an arm's length basis);
(p) Section 11.01(l) is amended in its entirety so that such
Section now reads as follows:
(l)(i) purchase, redeem or retire any of its stock
(other than redemptions or repurchases or stock as part of any
employee benefit plan so long as the aggregate amount of such
redemptions and repurchases does not exceed $500,000.00); or
(ii) pay any dividends or other distributions to its
shareholders in excess of $100,000.00 per fiscal year;
(q) Exhibit D to the Loan Agreement is amended by adding thereto
the liens and encumbrances described on Exhibit D-1 attached hereto.
2. The Bank hereby agrees to release Frederick D. Sancilio and
James L. Waters from all of their respective obligations under all guarantees
previously executed by them with respect to the transactions evidenced by the
Loan Agreement.
3. The Borrower hereby represents and warrants that:
a. the "Representation and Warranties" set forth in
Article IX of the Loan Agreement, as amended, are true and correct as
of the date of this Second Amendment;
b. the Borrower is not in default of the Loan Agreement
or the other Loan Documents (as defined in the Loan Agreement) and no
event or condition exists under the Loan Agreement or the other Loan
Documents that, but for the giving of notice or lapse of time or both,
would result in such a default as of the date of this Second
Amendment.
- 5 -
<PAGE> 32
4. Except as modified hereby, all of the terms and provisions of
the Loan Agreement (and Exhibits) remain in full force and effect.
5. This Second Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original.
6. This Second Amendment and the Loan Agreement, as amended
hereby, shall be deemed to be contracts made under, and for all purposes shall
be construed in accordance with, the laws of the State of North Carolina.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their duly authorized corporate officers as of the
day and year first above written.
APPLIED ANALYTICAL INDUSTRIES, INC.
ATTEST:
By: /s/ R. Forrest Waldon By: /s/ Frederick D. Sancilio
---------------------------------- ---------------------------------
Title: Secretary Title: President
------------------------------- ---------------------------------
NATIONSBANK, N.A.
By: /s/ Mary J. Rogers
---------------------------------
Title: Assistant Vice President
---------------------------------
- 6 -
<PAGE> 33
NationsBank of North Carolina, N.A.
P.O. Box 1290
Wilmington, NC 28402-1290
Tel 919 763-9951
Fax 919 251-5317
NationsBank
June 3, 1996
Mr. Charlie Deignan
Applied Analytical Industries, Inc.
5051 New Centre Drive
Wilmington, North Carolina 28403
Dear Mr. Deignan:
NationsBank, N.A. has agreed to extend the maturity date of revolving notes 455
and 497 from May 31, 1996 for 90 days to August 31, 1996 in order to have time
to approximately review AAI's 1995 audited statements upon receipt.
If you have any questions regarding this extension, please do not hesitate to
contact me.
Sincerely,
/s/ Caroline Parris
- ----------------------------
Caroline Parris
Commercial Loan Officer
<PAGE> 34
ESTOPPEL AND MODIFICATION AGREEMENT
We hereby certify that the note of APPLIED ANALYTICAL INDUSTRIES, INC. to
NationsBank, N.A. (Carolinas) now known as NationsBank, N.A. dated May 31,
1995, in the original amount of $3,000,000.00, secured by Accounts Receivable &
Inventory, is a valid and subsisting obligation of the undersigned maker(s) to
the extent of $Zero Balance, the balance of the principal due thereon, with
interest from and after May 3, 1996; that there are no defenses or offsets
against the same and that the maturity and time of payment of the balance due
on said note has been modified with the consent of the undersigned so that the
remainder of the principal and interest will be due in the following manner:
Maturity date is extended to August 31, 1996.
All other terms and conditions remain the same.
WITNESS my/our hand(s) and seals this 3 day of June, 1996.
(SEAL)
By: /s/ Mark P. Colonnese
----------------------------------------------
Mark P. Colonnese, Vice President and Treasurer
(SEAL)
--------------------------------------------
<PAGE> 35
ESTOPPEL AND MODIFICATION AGREEMENT
We hereby certify that the note of APPLIED ANALYTICAL INDUSTRIES, INC. to
NationsBank, N.A. (Carolinas) now known as NationsBank, N.A. dated May 31,
1995, in the original amount of $2,000,000.00, secured by Accounts Receivable &
Inventory, is a valid and subsisting obligation of the undersigned maker(s) to
the extent of $Zero Balance, the balance of the principal due thereon, with
interest from and after May 21, 1996; that there are no defenses or offsets
against the same and that the maturity and time of payment of the balance due
on said note has been modified with the consent of the undersigned so that the
remainder of the principal and interest will be due in the following manner:
Maturity date is extended to August 31, 1996.
All other terms and conditions remain the same.
WITNESS my/our hand(s) and seals this 3 day of June, 1996.
(SEAL)
By: /s/ Mark P. Colonnese
----------------------------------------------
Mark P. Colonnese, Vice President and Treasurer
(SEAL)
--------------------------------------------
<PAGE> 1
EXHIBIT 10.8
LOAN AGREEMENT
between
THE NEW HANOVER COUNTY INDUSTRIAL
FACILITIES AND POLLUTION CONTROL
FINANCING AUTHORITY
and
APPLIED ANALYTICAL, INC.
Dated as of November 1, 1988
_______________________________________________________________________________
NOTE: THIS LOAN AGREEMENT HAS BEEN ASSIGNED TO, AND IS SUBJECT TO A SECURITY
INTEREST IN FAVOR OF, MELLON BANK, N.A., AS TRUSTEE UNDER AN INDENTURE
OF TRUST DATED AS OF NOVEMBER 1, 1988, BETWEEN THE NEW HANOVER COUNTY
INDUSTRIAL FACILITIES AND POLLUTION CONTROL FINANCING AUTHORITY AND
SUCH TRUSTEE, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME.
INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE
TRUSTEE AT ITS ADDRESS IN PITTSBURGH, PENNSYLVANIA.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Granting Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
Definitions and Rules of Construction
Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
Representations
Section 2.1. Representations by Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.2. Representations by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
Acquisition, Construction, Installation
and Financing of Project
Section 3.1. Loan of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Agreement to Acquire, Construct and
Equip Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.3. Agreement to Issue Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.4. Establishment of Completion Date . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.5. Company Required to Complete Project . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.6. Limitation of Issuer's Liability . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.7. Disclaimer of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV
Payments on Note
Section 4.1. Amounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.2. Payments Assigned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.3. Default in Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.4. Obligations of Company Unconditional . . . . . . . . . . . . . . . . . . . . . 10
Section 4.5. Note Secured by Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V
Maintenance, Alterations, Improvements, Taxes
and Insurance
Section 5.1. Undertaking of Project; Permits;
Maintenance and Modification . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.2. Taxes, Other Governmental Charges,
Utility Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.3. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.4. Company to Furnish Proof of Payment
of Taxes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VI
Damage, Destruction and Condemnation
Section 6.1. Parties to Give Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.2. Damage and Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.3. Condemnation and Loss of Title . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VII
Special Covenants
Section 7.1. Inspection of Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.2. Indemnification by Company . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.3. Maintenance of Corporate Existence . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.4. Financial Records and Statements . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.5. Use of Proceeds and Other Matters . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.6. Reference to Bonds Ineffective after Bonds Paid . . . . . . . . . . . . . . . . 20
Section 7.7. Project List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.8. Notification of an Act of Bankruptcy . . . . . . . . . . . . . . . . . . . . . 20
Section 7.9. Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.10. Compliance with Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.11. Outstanding Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VIII
Events of Default and Remedies
Section 8.1. Event of Default Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.2. Remedies on Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 8.3. No Remedy Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 8.4. Attorneys' Fees and Other Expenses . . . . . . . . . . . . . . . . . . . . . . 24
Section 8.5. No Additional Waiver Implied by One Waiver . . . . . . . . . . . . . . . . . . 24
Section 8.6. Waivers under Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE IX
Termination of Loan Agreement and Prepayment of Note
Section 9.1. Option to Prepay in Full . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.2. Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.3. Option to Prepay in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.4. Relation of Options to Indenture . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.5. Obligations after Payment of Note and
Termination of Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE X
Miscellaneous
Section 10.1. Term of Loan Agreement; Amounts
Remaining after Payment of the Bonds . . . . . . . . . . . . . . . . . . . . . 25
Section 10.2. Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 10.3. Amendments to Loan Agreement and Note . . . . . . . . . . . . . . . . . . . . 27
Section 10.4. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10.5. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10.6. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10.7. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10.8. Bank or Guarantors May Perform Company's
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10.9. Entire Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Signatures and Seals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit A - Form of Promissory Note
Exhibit B - Description of Project
</TABLE>
-iii-
<PAGE> 5
THIS LOAN AGREEMENT, made as of the first day of November, 1988, by
and between THE NEW HANOVER COUNTY INDUSTRIAL FACILITIES AND POLLUTION
FINANCING AUTHORITY, a political subdivision and body corporate and politic of
the State of North Carolina (the "Issuer"), and APPLIED ANALYTICAL, INC., a
Delaware corporation (the "Company");
W I T N E S S E T H:
WHEREAS, the Issuer is authorized and empowered by the Industrial and
Pollution Control Facilities Financing Act, Chapter 159C of the General
Statutes of North Carolina, as amended (the "Act"), to issue revenue bonds for
the purpose, among others, of paying all or any part of the cost of any
industrial project for industry; to acquire, construct and equip any such
project; and to make and execute financing agreements, security documents and
other contracts and instruments necessary or convenient in the exercise of such
powers; and
WHEREAS, the Issuer has been duly organized pursuant to the Act; and
WHEREAS, in order to further the purposes of the Act, the Issuer
proposes to undertake the financing of an industrial facility for the
manufacture of liquid and solid dosage forms of pharmaceutical products (the
"Project") in New Hanover County, North Carolina, which constitutes an
industrial project for industry under the Act, and to obtain the funds therefor
by the issuance of its bonds under an Indenture of Trust securing such bonds,
between the Issuer and Mellon Bank, N.A., Pittsburgh, Pennsylvania, as Trustee,
dated as of the date hereof; and
WHEREAS, the Issuer proposes to loan the proceeds from the sale of the
Series 1988 Bonds, as hereinafter defined, to the Company to acquire, renovate,
reconstruct and equip the Project upon the terms and conditions hereinafter set
forth; and
WHEREAS, the Company and NCNB National Bank of North Carolina (the
"Bank") will enter into a Reimbursement Agreement (the "Reimbursement
Agreement") dated as of the date hereof pursuant to which the Bank will issue
an irrevocable letter of credit in an amount not to exceed $3,685,208.33 to the
Trustee at the request and for the account of the Company upon the terms set
forth in the Reimbursement Agreement; and
WHEREAS, it has been determined that the financing of the acquisition,
renovation, reconstruction and equipping of the Project will require the
issuance, sale and delivery by the Issuer of a series of bonds in the aggregate
principal amount of $3,500,000 (the "Series 1988 Bonds");
<PAGE> 6
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants hereinafter contained, the parties hereto covenant and agree
as follows:
ARTICLE I
Definitions and Rules of Construction
Section 1.1. Definitions. All words and terms defined in the
Indenture shall have the same meanings in this Loan Agreement. Words defined
elsewhere in this Loan Agreement shall have the same meanings throughout this
Loan Agreement. The following words and terms as used in this Loan Agreement
shall have the following meanings unless a different meaning clearly appears
from the context:
"Code" shall mean the Internal Revenue Code of 1986, as it applies to
the Bonds. Reference herein to any specific provision of the Code shall be
deemed to include any successor provision of such provision of the Code.
"Company" shall mean Applied Analytical, Inc., a Delaware corporation,
its successors and any surviving, resulting or transferee corporation as
permitted by Section 7.3.
"Completion Date" shall mean the date established pursuant to Section
3.4.
"Deed of Trust" shall mean the Deed of Trust dated as of the date
hereof from the Company securing the Note and the Company's obligation to repay
the Bank for draws under the Letter of Credit, including any supplements or
amendments thereto permitted by the Indenture.
"Event of Default" shall mean any of the events enumerated in Section
8.1.
"Fiscal Year" shall mean the calendar year or such other fiscal year
as shall be selected by the Company.
"Indenture" shall mean the Indenture of Trust by and between the
Issuer and Mellon Bank, N.A., Pittsburgh, Pennsylvania, as Trustee, dated as of
the date of this Loan Agreement, relating to the Bonds, including any
supplements or amendments thereto.
"Letter of Credit" shall mean the irrevocable letter of credit in an
amount not to exceed $3,685,208.33 dated the date of the issuance of the Series
1988 Bonds and issued by the Bank to the Trustee at the request and for the
account of the Company pursuant to the Reimbursement Agreement, including any
permitted amendments
-2-
<PAGE> 7
thereto and any renewals or substitutes therefor, or any Substitute Letter of
Credit.
"Loan Agreement" shall mean this Loan Agreement between the Issuer and
the Company, dated as of November 1, 1988, including any supplements or
amendments hereto as permitted by the Indenture.
"Net Proceeds", when used with respect to any insurance recovery or
condemnation award with respect to the Project, shall mean the gross proceeds
from such insurance recovery or condemnation award less payment of attorneys'
fees, fees and expenses of the Trustee and all other expenses properly incurred
in the collection of such gross proceeds.
"Note" shall mean the promissory note of the Company in the principal
amount of $3,500,000, dated as of November 1, 1988, in the form attached hereto
as Exhibit A, issued pursuant hereto and delivered to the Issuer as
consideration for the loan of the proceeds of the Series 1988 Bonds for the
undertaking of the Project, and any amendment or supplement thereto or
substitution therefor.
"Project" shall mean an industrial facility for the manufacture of
liquid and solid dosage forms of pharmaceutical products in New Hanover County,
North Carolina, all as described in Exhibit B attached to this Loan Agreement,
as may be revised in accordance with Section 3.2, as the same may at any time
exist.
"Reimbursement Agreement" shall mean the Reimbursement Agreement dated
as of the date of this Loan Agreement between the Company and the Bank,
including any supplements or amendments thereto, and any similar agreement
between the Company and the Issuer of a Substitute Letter of Credit.
"Remarketing Agreement" shall mean the Remarketing Agreement dated as
of November 1, 1988, between the Issuer, the Company and the Remarketing Agent.
Section 1.2. Rules of Construction. The following rules shall apply
to the construction of this Loan Agreement unless the context clearly indicates
to the contrary:
(a) Words importing the singular number shall include plural
number and vice versa.
(b) Words importing the redemption or calling for redemption of
the Bonds shall not be deemed to refer to or connote the payment of the Bonds
at their stated maturity.
(c) All references herein to particular articles or sections are
references to articles or sections of this Loan Agreement.
-3-
<PAGE> 8
(d) The headings herein are solely for convenience of reference
and shall not constitute a part of this Loan Agreement nor shall they affect
its meaning, construction or effect.
ARTICLE II
Representations
Section 2.1. Representations by Issuer. The Issuer makes the
following representations as the basis for its undertakings hereunder:
(a) The Issuer is duly organized and existing under the Act.
(b) The Issuer has the power to finance the acquisition,
construction and equipping of the Project from the proceeds of the sale of the
Series 1988 Bonds and to loan the Company the proceeds from the sale of the
Series 1988 Bonds pursuant to the provisions of this Loan Agreement, such loan
being in furtherance of the purposes for which the Issuer was organized.
(c) The Issuer proposes to issue its Series 1988 Bonds in the
aggregate principal amount of $3,500,000 to finance the Cost of the Project
under the indenture pursuant to which the Issuer's interest in this Loan
Agreement and the revenues and receipts therefrom, including the Note and the
payments thereon by the Company, will be assigned and pledged by the Issuer to
the Trustee as security for payment of the principal of, premium, if any, and
interest on the Bonds.
(d) The Issuer has the power to enter into this Loan Agreement and
the Indenture and to carry out its obligations hereunder and thereunder and to
issue the Series 1988, Bonds to finance the cost of the Project; by proper
action has duly authorized the execution and delivery of this Agreement and the
Indenture, the performance of its obligations hereunder and thereunder and the
issuance of the Series 1988 Bonds; and, simultaneously with the execution and
delivery of this Loan Agreement, has duly executed and delivered the Indenture
and issued Series 1988 Bonds.
(e) The financing of the Project will serve the purposes of the
Act.
(f) The Issuer is not, to its knowledge, in default in the payment
of the principal of or interest on any of its indebtedness for borrowed money
and is not, to its knowledge, in default under any instrument under or subject
to which any indebtedness for borrowed money has been incurred, and, to its
knowledge, no event has occurred and is continuing under the provisions of any
such
-4-
<PAGE> 9
instrument that with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder.
(g) The Issuer is not, to its knowledge, (1) in violation of the
resolution creating it or any existing law, rule or regulation applicable to it
or (2) in default under any indenture, mortgage, deed or trust, lien, lease,
contract, note, order, judgment, decree or other agreement, instrument or
restriction of any kind by which it or any of its assets are or may be bound or
affected. The execution and delivery by the Issuer of this Loan Agreement, the
Indenture and the Series 1988 Bonds and compliance with the terms and
conditions hereof and thereof will not conflict with or result in the breach of
or constitute a default under any of the above described instruments or other
restrictions.
(h) No further approval, consent or withholding of objection on
the part of any regulatory body, Federal, state or local, is required in
connection with (1) the execution, issuance, sale and delivery of the Series
1988 Bonds by the Issuer or (2) the execution or delivery of or compliance by
the Issuer with the terms and conditions of this Loan Agreement and the
Indenture, or (3) the assignment by the Issuer of its rights under the Loan
Agreement and the Note.
(i) No litigation, inquiry or investigation of any kind in or by
any judicial or administrative court or agency is pending or, to its knowledge,
threatened against the Issuer with respect to (1) the organization and
existence of the Issuer, (2) its authority to execute or deliver this Loan
Agreement, the Indenture or the Series 1988 Bonds, (3) the validity or
enforceability of this Loan Agreement, the Indenture or the Series 1988 Bonds,
or the transactions contemplated hereby or thereby, (4) the title of any
officer of the Issuer who executed this Loan Agreement, the Indenture or the
Series 1988 Bonds, or (5) any authority or proceedings related to the execution
and delivery of this Loan Agreement, the Indenture or the Series 1988 Bonds, on
behalf of the Issuer, and no such authority or proceedings have been repealed,
revoked, rescinded or amended but are in full force and effect.
(j) The Issuer authorizes the Company, subject to the terms and
conditions set forth in this Loan Agreement, which terms and conditions the
Issuer determines to be necessary, desirable and proper, to provide for the
acquisition, construction and equipping of the Project by such means as shall
be available to the Company and in the manner determined by the Company.
(k) Neither this Loan Agreement, the Note and the payments thereon
by the Company nor any of the revenues to be received hereunder or thereunder
has been pledged or hypothecated in any manner or for any purpose other than as
provided in the Indenture as security for the payment of the Bonds.
-5-
<PAGE> 10
Section 2.2. Representations by Company. The Company makes the
following representations as the basis for its undertakings hereunder:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware; is qualified to
do or transact business and conduct its affairs in the State of North Carolina;
has the power to enter into this Loan Agreement, the Deed of Trust and the Note
and the transactions contemplated hereby and thereby and to perform its
obligations hereunder and thereunder; and by proper corporate action has duly
authorized the execution and delivery of this Loan Agreement, the Note, the
Deed of Trust and the Reimbursement Agreement and the performance of its
obligations hereunder and thereunder.
(b) The acquisition, construction and equipping of the Project and
the loan of the proceeds of the Bonds to the Company will constitute an
inducement to the Company to locate the Project in New Hanover County, North
Carolina.
(c) The Company will operate the Project, or cause it to be
operated, as an industrial project within the meaning of the Act and as a
manufacturing facility within the meaning of Section 144(a)(12)(C) of the Code
until Payment of the Bonds. The Project will be located entirely within the
boundaries of the City of Wilmington, New Hanover County, North Carolina.
(d) The execution and delivery of this Loan Agreement, the Note,
the Deed of Trust and the Reimbursement Agreement, the performance by the
Company of its obligations hereunder and thereunder and the consummation of the
transactions contemplated herein and therein are within the corporate powers of
the Company and will not (1) conflict with or constitute a breach of the
Company's charter or bylaws, (2) constitute a default under any indenture,
mortgage, deed of trust, lien, lease, contract, note, order, judgment, decree
or other agreement, instrument or restriction of any kind to which the Company
is a party or by which it or any of its properties are or may be bound or
affected or (3) result in a violation of any constitutional or statutory
provision or order, rule, regulation, decree or ordinance of any court,
government or governmental authority having jurisdiction over the Company or
its property.
(e) Neither construction nor acquisition of the Project commenced
prior to January 21, 1988.
(f) The Company is not in default in the payment of the principal
of or interest on any of its indebtedness for borrowed money and is not in
default under any instrument under and subject to which any indebtedness has
been incurred, and no event has occurred and is continuing under the provisions
of any such
-6-
<PAGE> 11
instrument that with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder.
(g) Except as set forth in Exhibit B to the Reimbursement
Agreement, there is no litigation at law or in equity or any proceeding before
any governmental agency involving the company pending or, to the knowledge of
the Company, threatened in which any liability of the Company is not adequately
covered by insurance or in which any judgment or order would have a material
adverse effect upon the business or assets of the Company or that would affect
the acquisition, renovation, reconstruction, equipping or operation of the
Project, the validity of this Loan Agreement, the Deed of Trust, the Note or
the Reimbursement Agreement or the performance of the Company's obligations
thereunder.
(h) The Company has obtained all consents, approvals,
authorizations, permits, licenses, certificates and orders of any governmental
or regulatory authority that are required to be obtained by it as a condition
precedent to the issuance of the Series 1988 Bonds or the execution and
delivery of this Loan Agreement, the Note, the Deed of Trust or the
Reimbursement Agreement or the performance by the.Company of its obligations
hereunder or thereunder, or that are required for the acquisition, renovation,
reconstruction or equipping of the Project.
(i) The Issuer shall have no responsibility for operation,
maintenance, repair and insurance of the Project.
ARTICLE III
Acquisition, Construction, Installation
and Financing of Project
Section 3.1. Loan of Proceeds. The Issuer hereby loans the proceeds
from the sale of the Series 1988 Bonds pursuant to this Loan Agreement to the
Company, and the Company hereby borrows the same from the Issuer as evidenced
by this Loan Agreement and the issuance and delivery of the Note to the Issuer.
The Company covenants to use such proceeds to pay Costs of the Project.
Section 3.2. Agreement to Acquire, Construct and Equip Project. The
Company shall cause the acquisition, construction and equipping of the Project
as described in Exhibit B, as such Exhibit B may be amended from time to time
by the Company, provided that in the case of any material change in such
Exhibit B there shall be filed with the Issuer and the Trustee the written
approving opinion of counsel recognized on the subject of municipal bonds
acceptable to the Trustee to the effect that such change shall not impair the
Federal income tax exemption of interest on any of the Bonds under Section 103
of the Code. The Company agrees to obtain all licenses, permits and consents
required for the acquisition,
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construction, equipping and operation of the Project, and the Issuer shall have
no responsibility therefor.
The Company will not take any action which would adversely affect the
qualification of the Project under the Act or the exclusion of interest on the
Series 1988 Bonds from gross income for Federal income tax purposes under
Section 103 of the Code.
Section 3.3. Agreement to Issue Bonds. In order to provide funds for
payment of the Cost of the Project the Issuer shall simultaneously with the
execution and delivery hereof proceed with the issuance and sale of the Series
1988 Bonds bearing.interest, maturing and having the other terms and provisions
set forth in the Indenture. The obligation of the Issuer to pay for the Cost
of the Project shall be limited to the proceeds in the Construction Fund
derived from the sale of the Series 1988 Bonds.
Upon the request of the Company, if the Company is not in default
under this Loan Agreement, the Deed of Trust or the Note, the Issuer shall, if
it agrees to the desirability of so doing and the terms thereof, use its best
efforts to issue and sell one or more series of Additional Bonds to pay the
cost of completion of the Project, to pay the cost of additions to the Project
within New Hanover County, North Carolina, to refund all or part of any series
of Bonds, or for any combination of such purposes. Such additional series of
Bonds shall be issued pursuant to and in compliance with Section 207 of the
Indenture.
Section 3.4. Establishment of Completion Date. The Completion Date
shall be evidenced to the Issuer and the Trustee by a certificate signed by an
Authorized Representative of the Company stating (a) the Cost of the Project,
(b) that the acquisition, construction and equipping of the Project has been
completed substantially in accordance with Section 3.2. and (c) that, except
for amounts retained by the Trustee for the Cost of the Project not then due
and payable, the full Cost of the Project has been paid. Notwithstanding the
foregoing, such certificate shall state that it is given without prejudice to
any rights against third parties which exist at the date of such certificate or
which may subsequently come into being.
Section 3.5. Company Required to Complete Project. If the proceeds
derived from the sale of the Series 1988 Bonds and any Additional Bonds issued
for such purpose are not sufficient to pay in full the Cost of the Project, the
Company shall pay so much of the cost thereof as may be in excess of the moneys
available therefor or shall pay over to the Trustee such moneys as are
necessary to provide for payment of such Cost. The Company agrees that, after
exhaustion of the proceeds derived from the sale of the Bonds, if the Company
should pay any portion of the Cost of the Project pursuant to the provisions of
this section, it shall not be entitled to any reimbursement therefor from the
Issuer or the
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Trustee nor shall it be entitled to any abatement, diminution or postponement
of its payments hereunder or under the Note.
Section 3.6. Limitation of Issuer's Liability. Anything contained in
this Loan Agreement to the contrary notwithstanding, any obligation the Issuer
may incur in connection with the undertaking of the Project for the payment of
money shall not be deemed to constitute a debt or general obligation of the
Issuer but shall be payable solely from the revenues and receipts derived by it
from the loan of the proceeds of the sale of the Series 1988 Bonds pursuant to
this Loan Agreement, including payments received under the Note and from
payments pursuant to the Letter of Credit. No provision in this Loan Agreement
or any obligation herein imposed upon the Issuer, or the breach thereof, shall
constitute or give rise to or impose upon the Issuer a pecuniary liability or a
charge upon its general credit. No officer or commissioner of the Issuer shall
be personally liable on this Loan Agreement.
Section 3.7. Disclaimer of Warranties. The Company recognizes that
since the Project has been or will be acquired, renovated, reconstructed and
equipped by the Company and by contractors and suppliers selected by the
company in accordance with plans and specifications prepared by architects or
engineers selected by the Company, THE ISSUER MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION OR
WORKMANSHIP OF ANY PART OF THE PROJECT OR ITS SUITABILITY FOR THE COMPANY'S
PURPOSES OR THE EXTENT TO WHICH PROCEEDS DERIVED FROM THE SALE OF THE BONDS
WILL PAY THE COST TO BE INCURRED IN CONNECTION THEREWITH.
ARTICLE IV
Payments on Note
Section 4.1. Amounts Payable. (a) The Company covenants to make all
payments on the Note, as and when the same become due.
(b) The Company shall also pay, as and when the same become due,
unless paid from the Construction Fund, (1) to the Trustee its reasonable fees
for services rendered and for expenses reasonably incurred by it as Trustee
under the Indenture and as Bond Registrar and Paying Agent on the Bonds
including the reasonable fees of its counsel, the reasonable fees and expenses
of any other Paying Agent and all other such amounts which the Company herein
assumes or agrees to pay, including any cost or expense necessary to cancel and
discharge the Indenture upon Payment of the Bonds, and (2) to the Issuer, its
reasonable costs and expenses, directly related to the Bonds and the Project,
including the reasonable fees of its counsel, a reasonable share of the cost of
any audits of the funds of the Issuer, and all other amounts which the Company
agrees to pay under the terms of this Loan Agreement.
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<PAGE> 14
Section 4.2. Payments Assigned. It is understood and agreed that the
Note and all payments thereon, as well as the Issuer's rights under this Loan
Agreement (except the obligation to indemnify and pay the costs and expenses of
the Issuer), are assigned by the Indenture to the Trustee. The Company
consents to such assignment, and agrees to pay to the Trustee all amounts
payable by the Company to the Trustee pursuant to the Note and this Loan
Agreement. The Issuer consents to such payment by the Company and directs that
all amounts be paid directly to the Trustee.
Section 4.3. Default in Payments. If the Company should fail to make
payments required by this Loan Agreement, other than pursuant to the Note, when
due, the Company shall pay interest with respect to the payments thereon at a
rate per year equal to the "prime rate" of the Trustee as announced from time
to time, from the due date until paid.
Section 4.4. Obligations of Company Unconditional. The obligation of
the Company to make payments on the Note to the Trustee and to perform and
observe all other covenants, conditions and agreements hereunder shall be a
general obligation of the Company without abatement, diminution or deduction
(whether from taxes or otherwise) and shall be absolute and unconditional,
irrespective of any defense or any rights of setoff, recoupment or counterclaim
it might otherwise have against the Issuer or the Trustee. Subject to
prepayment of the Note in full as provided therein, the Company shall not
suspend or discontinue any such payment on the Note or hereunder or fail to
observe and perform any of its other covenants, conditions and agreements
hereunder for any cause, including without limitation failure of the Company to
complete the Project, any acts or circumstances that may constitute an eviction
or constructive eviction, failure of consideration, failure of title to any
part or all of the Project, or commercial frustration.of purpose, or any damage
to or destruction or condemnation of all or any part of the Project, or any
change in the tax or other laws of the Untied States of America, the State of
North Carolina or any political subdivision of either,, or any failure of the
Issuer or the Trustee to observe and perform any covenant, condition or
agreement, whether express or implied, or any duty, liability or obligation
arising out of or in connection with ' the Indenture or this Loan Agreement.
The Company may, after giving to the Issuer and the Trustee 10 days' notice of
its intention to do so, at its own expense and in its own name or, with the
consent of the Issuer which consent shall not be unreasonably withheld, in the
name of the Issuer, prosecute or defend any action or proceeding or take any
other action involving third persons which the Company deems reasonably
necessary in order to secure or protect any of its rights hereunder or the
rights of the Issuer under the Indenture; and in such event the Issuer, subject
to payment by the Company of the Issuer's costs and expenses, shall cooperate
fully with the Company and take all necessary action to effect the substitution
of the Company for the Issuer in any such
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<PAGE> 15
action or proceeding if the Company shall so request; provided, however, if
such consent is refused for any reason, the Issuer shall assign, to the extent
permitted by law, all of its right, title and interest in such cause of action
or defense to the Company and the Issuer shall cooperate fully to effectuate
such assignment and take all necessary action to effect the substitution of the
Company for the Issuer in any such action or proceeding.
Section 4.5. Note Secured by Deed of Trust. The obligations of the
Company under the Note shall be secured by the Deed of Trust.
ARTICLE V
Maintenance, Alterations, Improvements, Taxes
and Insurance
Section 5.1. Undertaking of Project; Permits; Maintenance and
Modification. The Company shall use, maintain and operate the Project, or
cause it to be used, maintained and operated, in good repair, in accordance
with all applicable laws, rules and regulations, subject to ordinary wear and
tear and obsolescence. The Company may make modifications, replacements and
renewals of and to the Project as the Company shall deem necessary or desirable
and that do not adversely affect the value of the Project provided that all
such additions, modifications or improvements comply with all applicable
Federal, state and local codes. All such renewals, replacements, additions,
modifications and improvements shall become part of the Project.
Section 5.2. Taxes, Other Governmental Charges, Utility Charges. The
Company shall pay as the same become due, all taxes, assessments, impositions
and governmental charges of any kind whatsoever, general and specific, foreseen
and unforeseen and all water and sewer charges that may be lawfully assessed,
levied or imposed on the payments under the Note and this Loan Agreement and
with respect to the Project. The Company shall pay as the same become due all
utility and other charges incurred in the operation, maintenance, use and
occupancy of the Project and all assessments and charges lawfully made by any
governmental body for public improvements to the Project. The Company may
allow to exist any indebtedness for any such tax, assessment, charge, levy or
claim, provided any such tax, assessment, charge, levy or claim is being
contested in good faith by appropriate proceedings and the Company shall have
established and maintained adequate reserves for the Payment of the same.
Section 5.3. Insurance. The Company shall keep the Project
continuously insured against such risks as are customarily insured against by
businesses of like size and type (other than business
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interruption insurance), paying as the same become due all premiums in respect
thereto.
Section 5.4. Company to Furnish Proof of Payment of Taxes, etc. The
Company shall furnish the Trustee, upon request, proof of payment of any taxes,
governmental charges,utility charges, insurance premiums or other charges
required to be paid by the Company under this Loan Agreement.
ARTICLE VI
Damage, Destruction and Condemnation
Section 6.1. Parties to Give Notice. In case of any material damage
to or destruction of any part of the Project, the Company shall give prompt
notice thereof to the Issuer and the Trustee. In case of a taking of all or
any part of the Project or any right therein under the exercise of the power of
eminent domain or any loss thereof because of failure of title thereto or the
commencement of any proceedings or negotiations which might result in such a
taking or loss, the party upon which notice of such taking is served shall give
prompt notice to the other and to the Trustee. Each such notice shall describe
generally the nature and extent of such damage, destruction, taking, loss,
proceeding or negotiations.
Section 6.2. Damage and Destruction. Unless the Company terminates
this Loan Agreement and prepays the Note pursuant to Article IX, if all or part
of the Project is destroyed or damaged by fire or other casualty, the Company
shall be obligated to continue to make payments required under the Note and
shall promptly replace, repair, rebuild or restore the property damaged or
destroyed to substantially its same condition as prior to such damage or
destruction, with such alterations and additions as the Company may determine
and as will not impair the capacity or character of the Project for the purpose
for which it is then being used or is intended to be used. The Company shall
apply so much as may be necessary of the Net Proceeds of insurance received by
it on account of any such damage or destruction to payment of the cost of such
replacement, repair, rebuilding or restoration, either on completion thereof or
as the work progresses. If such Net Proceeds shall not be sufficient to pay in
full the cost of such replacement, repair, rebuilding or restoration, the
Company shall pay so much of the cost thereof as may be in excess of such Net
Proceeds. The Company shall not by reason of the payment of such excess cost
be entitled to any reimbursement from the Issuer or the Trustee or to any
abatement or diminution of the amount payable under this Loan Agreement or the
Note.
Any balance of such Net Proceeds remaining after payment of the cost
of such replacement, repair, rebuilding or restoration
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shall be paid to the Construction Fund, unless an Event of Default has
happened, in which case such balance shall be paid to the Bond Fund.
Section 6.3. Condemnation and Loss of Title. Unless the.Company
terminates this Loan Agreement and prepays the Note pursuant to Article IX, if
title to or the temporary use of all or any part of the Project shall be taken
under the exercise of the power of eminent domain, the Company shall be
obligated to continue to make the payments required under the Note. The
Company shall cause the Net Proceeds from any such condemnation award to be
applied to the restoration of the Project affected by the taking to
substantially its same condition as prior to the exercise of such power of
eminent domain with such repairs and replacements as the Company may determine
and as will not impair the capacity or character of the Project for the purpose
for which it is then being used or is intended to be used. Any balance of such
Net Proceeds remaining after payment of the cost of such restoration or
acquisition shall be paid to the Construction Fund, unless an Event of Default
has happened, in which case such balance shall be paid to the Bond Fund.
ARTICLE VII
Special Covenants
Section 7.1. Inspection of Project. The Issuer, the Trustee and
their duly authorized agents shall have the right at all reasonable times to
enter upon any part of the Project and to examine and inspect the same as may
be reasonably necessary for the proper maintenance of the Project provided for
in Section 3.2 or in the event of failure of the Company to perform its
obligations under Section 5.1. and the Issuer, the Trustee and their duly
authorized agents shall also have the right at all reasonable times to examine
the books and records of the Company insofar as such books and records relate
to the installation and maintenance of the Project.
Section 7.2. Indemnification by Company. The Company shall at all
times protect, indemnify and save harmless the Issuer and the Trustee from and
against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses including, without limitation:
(a) all amounts paid in settlement of any litigation commenced or
threatened against the Issuer or the Trustee, if such settlement is effected
with the written consent of the Company;
(b) all expenses reasonably incurred in the investigation of,
preparation for or defense of any litigation, proceeding or
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investigation of any nature whatsoever, commenced or threatened against the
Company, the Project, the Issuer or the Trustee;
(c) any judgments, penalties, fines, damages, assessments
indemnities or contributions; and
(d) the reasonable fees and expenses of attorneys, auditors and
consultants;
provided that such damages arise out of:
(1) any failure by the Company or its officers, employees
or agents, to perform or comply with the terms of this Loan Agreement or the
Note and any agreements, covenants, obligations, or prohibitions set forth
herein or therein;
(2) any breach of any representation or warranty of the
Company set forth in this Loan Agreement, the Deed of Trust, the Reimbursement
Agreement or the Note or any certificate or any letter of representation
delivered by the Company pursuant hereto or in accordance with the Indenture,
and any claim that any statement, representation or warranty of the Company
contains or contained any untrue or misleading statement of material fact or
omits to state any material facts necessary to make the statements made therein
not misleading in light of the circumstances under which they were made;
(3) any action, suit, claim, proceeding or investigation
of a judicial, legislative, administrative or regulatory nature arising from or
in connection with the financing, renovation, reconstruction, acquisition,
ownership, operation, occupation or use of the Project; or
(4) any suit, action, administrative proceeding,
enforcement action, or governmental or private action of any kind whatsoever
commenced against the Company, the Project, the Issuer or the Trustee which
might adversely affect the validity or enforceability of the Bonds, this Loan
Agreement, the Indenture or the Note or the performance by the Company, the
Issuer or the Trustee of any of their respective obligations thereunder;
provided that such indemnity shall be effective only to the extent of any loss
that may be sustained by the Issuer or the Trustee in excess of the Net
Proceeds received by it or them from insurance, if any, required hereunder with
respect to such loss and provided further that the benefits of this section
shall not inure to any person other than the Issuer, and the Trustee. Nothing
contained herein shall require the Company to indemnify the Issuer for any
claim or liability resulting from its gross negligence or its willful, wrongful
acts or the Trustee for any claim or liability resulting from its gross
negligence (under the standard of care set forth in Article X of the Indenture)
or its willful, wrongful acts.
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If any action, suit or proceeding is brought against the Issuer or the
Trustee for any loss or damage for which the Company is required to provide
indemnification under this section, the Issuer or the Trustee shall promptly
notify the Company and the Company shall have the right to, upon request, at
its expense resist and defend such action, suit or proceeding, or cause the
same to be resisted and defended by counsel designated by the Company and
approved by the Issuer and the Trustee, and such approval shall not be
unreasonably withheld, provided that such approval shall not be required in the
case of defense by counsel designated by any insurance company undertaking such
defense pursuant to any applicable policy of insurance. The obligations of the
Company under this section shall survive any termination of this Loan
Agreement.
All references in this section to the Issuer and the Trustee shall
include their members, commissioners, officers, employees and agents.
Section 7.3. Maintenance of Corporate Existence. So long as this
Loan Agreement shall not have been terminated pursuant to Section 10.1 hereof,
the Company shall remain qualified to do business or transact its business and
conduct its offices in the State of North Carolina and shall maintain its good
standing under the laws of the State of North Carolina, maintain its corporate
existence and shall not, without the prior consent of the Trustee, dissolve or
otherwise dispose of all or substantially all of its assets, or consolidate
with or merge into another corporation or permit one or more other corporations
to consolidate with or merger into it, provided that the Company may, without
violating this section, consolidate with or merge into another corporation, or
permit one or more corporations to consolidate with or merge into it, or sell
or otherwise transfer to another corporation all or substantially all of its
business and assets and thereafter dissolve, if the surviving (if other than
the Company), resulting or transferee corporation assumes in writing all of the
obligations of the Company contained in this Loan Agreement and the Note and,
if it is not a North Carolina corporation, either qualifies to do business in
North Carolina or files a consent to service of process in North Carolina with
the Trustee.
If consolidation, merger or sale or other transfer is made as
permitted by this section, the provision of this section shall continue in full
force and effect and no further consolidation, merger or sale or other transfer
shall be made except in compliance with the provisions of this section.
Section 7.4. Financial Records and Statements. The Company shall
maintain proper books of record and account, in which full and correct entries
shall be made in accordance with generally accepted accounting principles, of
all its business and affairs. The Company shall have an annual audit made by
independent
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certified public accountants of recognized standing and, within 120 days after
the end of each of its fiscal years, shall furnish the Trustee copies of the
balance sheet of the Company as of the end of such fiscal year and statements
of income, retained earnings and changes in financial position of the Company
for such fiscal year, all in reasonable detail and certified by such
accountants.
Section 7.5. Use of Proceeds and Other Matters.
(a) Use of Proceeds; Prohibited Uses of Project, etc. Neither the
Issuer nor the Company shall cause any proceeds of the Bonds to be expended
except pursuant to the Indenture. The Company shall not (1) requisition or
otherwise allow any payment out of proceeds of the Bonds (A) if such payment is
to be used for the acquisition of any property (or an interest therein) unless
the first use of such property is pursuant to such acquisition, provided that
this clause (A) shall not apply to any building (and the equipment purchased as
a part thereof, if any,) if the "rehabilitation expenditures", as defined in
Section 147(d) of the Code, with respect to the building equal or exceed 15% of
the portion of the cost of acquiring the building (including such equipment)
financed with the proceeds of the Bonds, (B) if as a result of such payment,
25% or more of the proceeds of the Bonds would be considered as having been
used directly or indirectly for the acquisition of land (or an interest
therein); (C) if, as a result of such payment, less than 95% of the net
proceeds of the Bonds, expended at the time of such requisition would be
considered as having been used for costs of the acquisition, construction, or
reconstruction or improvement of land or property of a character subject to the
allowance for depreciation within the meaning of Section 144(a)(1)(A) of the
Code ("Qualifying Costs") or (D) if such payment is used to pay issuance costs
(including counsel fees, remarketing fees and placement fees) of the Bonds in
excess of an amount equal to 2% of the principal amount of the Bonds; (2) take
or omit, or permit to be taken or omitted, any other action with respect to the
use of such proceeds the taking or omission of which would result in the loss
of exemption of interest on the Bonds from Federal income taxation under
Section 144 of the Code; or (3) take or omit, or permit to be taken or omitted,
any other action the taking or omission of which would cause the loss of such
exemption. Without limiting the generality of the foregoing, the Issuer and
the Company shall not use the proceeds of the Bonds, or permit such proceeds to
be used directly or indirectly, for the acquisition of land (or an interest
therein) to be used for farming purposes, or to provide (x) any facility the
primary purpose of which is retail food and beverage services, automobile sales
or service or the provision of recreation or entertainment, (y) any airplane,
skybox or other private luxury box, any health club facility, any facility
primarily used for gambling, any store the principal business of which is the
sale of alcoholic beverages for consumption off premises, any private or
commercial golf course, country club, massage parlor, tennis club, skating
facility (including roller
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skating, skateboard and ice skating), racquet sports facility (including any
hand ball or racquet ball court), hot tub facility, suntan facility, or race
track, or (z) single or multi-family residences. The Company shall not permit
the use of the Project by any person to whom any part of the aggregate
authorized face amount of the Bond would be allocated pursuant to Section
144(a)(10) of the Code if the amount so allocated when increased as provided in
Section 144(a)(10) of the Code would exceed $40,000,000.
(b) Commencement of Construction; First Users. The Company hereby
represents that neither "construction" nor "acquisition" of the Project
"commenced" prior to January 21, 1988, within the meaning of Section 144 of the
Code. No person, firm or corporation who was a substantial user" of the
Project (within the meaning described in such term under Section 144(a) of the
Code) before the date of issuance of the Bonds and who was or will be a
"substantial user" of the Project following its being placed in service, has
received or will receive, directly or indirectly, any proceeds from the
issuance and sale of the Bonds, except for the Company. The project was not
"first used," within the meaning of Section 144(a) of the Code and the Treasury
Regulations promulgated thereunder, prior to the date one year prior to the
issuance of the Bonds.
(c) Economic Life of Project. The Company hereby represents that
the "average reasonably expected economic life" of the components comprising
the Project, determined pursuant to Section 147(b) of the Code, is not less
than the amount set forth in the certificates or letters of representation of
the Company delivered at the issuance of the Bonds. The weighted average
maturity of the Bonds does not exceed 120% of the "average reasonably expected
economic life" of the components comprising the Project, determined pursuant to
Section 147(b) of the Code, as set forth in the certificates or letters of
representation of the Company delivered at the issuance of the Bonds. The
Company agrees that it will not make any changes in the Project which would, at
the time made, cause 120% of the "average reasonably expected economic life" of
the components of the Project, determined pursuant to Section 147(b) of the
Code, to be less than the "average maturity of the bonds" set forth in the
certificates or letters of representation of the company delivered at the
issuance of the Bonds.
(d) Certificate of Information; Internal Revenue Service Form
8038. The Company hereby represents that the information contained in the
certificates or letters of representation of the Company with respect to the
compliance with the requirements of Sections 103 and 144 and Sections 146
through 149 of the Code, including the information in Internal Revenue Service
Form 8038 (excluding the issue number and the employer identification of the
Issuer) filed by the Issuer with respect to the Bonds and the Project, is true
and correct in all material respects.
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(e) Arbitrage and Rebate. Neither the Company nor the Issuer
shall (1) take or omit to take any action, or approve the Company's making any
investment or use of any proceeds of the Bonds or any other moneys within their
respective control (including without limitation the proceeds of any insurance
or any condemnation award with respect to the Project) or the taking or
omission of any other action, which would cause the Bonds to be "arbitrage
bonds" within the meaning of the Section 148 of the Code, or (2) approve the
use of any proceeds from the sale of the Bonds otherwise than in accordance
with the Issuer's "non-arbitrage" certificate given at the issuance of the
Bonds barring any unforeseen circumstances, in which event the Company and the
Issuer shall use such proceeds with due diligence and shall otherwise comply
with the "nonarbitrage" certificate. Without limiting the generality of the
foregoing, the Company shall at its sole expense take all action required under
Section 148 of the Code and Treasury Regulations thereunder to prevent loss of
the exclusion from gross income for purposes of Federal income taxation of
interest on the Bonds under such Section, including but not limited to paying
on behalf of the Issuer the "rebate amount" to the United States of America in
accordance with the "rebate requirement" described in Section 1.103-15AT9(d)(1)
of such Treasury Regulations, and complying with the requirements of Section
510 of the Indenture. The Company shall also comply with any similar
requirements contained in any final Treasury Regulations adopted in place of
Section 1.103-15AT of such Treasury Regulations and all other requirements of
any such final Treasury Regulations.
(f) Use by United States of America or its Agencies. The Company
shall not permit the Project to be used or occupied other than as a member of
the general public in any manner for compensation by the United States of
America or an agency or instrumentality thereof, including any entity with
statutory authority to borrow from the United States of America (in any case
within the meaning of Section 149(b) of the Code) unless the Company shall
deliver to the Trustee an opinion of counsel recognized on the subject of
municipal bonds in form and substance satisfactory to the Trustee to the effect
that such use will not impair the exemption of interest on the Bonds from
Federal income taxation.
(g) Other Bonds to be Issued. During the period commencing on the
date of the issuance of the Bonds and ending 30 days thereafter, there shall be
issued no "private activity bonds", as defined in Section 141 of the Code,
which are guaranteed or otherwise secured by payments to be made by the Company
or any "related person" (or group of "related persons") unless the Company
shall deliver to the Trustee an opinion of counsel recognized on the subject of
municipal bonds in form and substance satisfactory to the Trustee to the effect
that the issuance of such "private activity bonds" will not impair the
exclusion from gross income of interest on the Bonds for purposes of Federal
income taxation.
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Except for the Company or any "related person" (or group of "related persons"),
no person has (1) guaranteed, arranged, participated in, assisted with or paid
any portion of the cost of the issuance of, the Bonds, and (2) provided any
property or any franchise, trademark or trade name (within the meaning of
Section 1253 of the Code) which is to be used in connection with the Project.
(h) Limit on Amount of Bonds, Reports. The Company represents
that on the date of the issuance of the Bonds (1) obligations have not been
assumed, expenditures have not been made and outstanding obligations do not
exist that will cause the "aggregate face amount" of the Bonds as computed
under the provisions of Section 144(a) and related sections of the Code to
exceed $10,000,000 and (2) outstanding obligations do not exist that will cause
the "aggregate face amount" of the Bonds allocated to any "test-period
beneficiary," as defined in Section 144(a)(10) of the Code, when increased by
such obligations as provided in Section 144(a)(10) of the Code, to exceed
$40,000,000. During the three year period beginning on the date of the
issuance of the Bonds (or, in the case of (ii) below, the date the Project is
placed in service, unless the Company provides to the Trustee an opinion of
counsel recognized on the subject of municipal bonds that such restriction is
no longer applicable), the Company shall not make any expenditure, assume any
obligation, permit the use of the Project by any person or take or permit other
action that would cause the "aggregate face amount" of the Bonds as computed
under the provisions of section 144(a) and related sections of the.Code (i) to
exceed $10,000,000 or such other maximum dollar amount then permitted by the
Code, or (ii) allocated to any "test-period beneficiary," when increased by
such obligations as provided in Section 144(a)(10) of the Code, to exceed
$40,000,000.
The Company and the Issuer shall file any reports or statements and
take any other action as may be required from time to time with respect,to the
qualification of the Bonds as Qualified small issue bonds within the meaning of
Section 144(a) of the Code.
(i) Election. The Issuer hereby elects to have the provisions
of Section 144(a)(4) of the Code apply to the Bonds. In support of this
election, the Issuer states as follows:
(1) The name of the Issuer is The New Hanover
County Industrial Facilities and Pollution Control Financing Authority and its
address is c/o Clerk, Board of Commissioners, 320 Chestnut Street, Wilmington,
North Carolina 28401.
(2) The principal user of the facilities to be
financed with the proceeds of the Bonds will be:
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Applied Analytical, Inc.
New Hanover County Industrial Air Park
Route 6
Wilmington, North Carolina 28405
Employer Identification Number: 04-2687849
(3) The Bonds are in the principal amount of
$3,500,000, dated November 1, 1988, and are to be issued on November 14, 1988.
There are no outstanding prior issues the proceeds of which have been or are to
be used primarily with respect to facilities located or to be located in the
City of Wilmington, New Hanover County, North Carolina, the principal users of
which is or will be the Company or any "related person" of the Company within
the meaning of Section 144(a)(3) of the Code.
(4) The amount of "Section 144(a)(4)(A) capital
expenditures," as that term is defined in the applicable regulations issued
pursuant to Section 144 of the Code, which has been paid or incurred during the
three years preceding the date of issuance of the Bonds with respect to
facilities located or to be located in the City of Wilmington, New Hanover
County, North Carolina, the principal users of which is or will be the Company,
or any "related person" of either within the meaning of Section 144(a)(3) of
the Code is zero. It is not anticipated that any such capital expenditures
will be incurred from the date hereof to the.date of the issuance of the Bonds.
Section 7.6. Reference to Bonds Ineffective after Bonds Paid. Upon
Payment of the Bonds and upon payment of all obligations under this Loan
Agreement, all references in this Agreement to the Bonds and the Trustee shall
be ineffective, and neither the Trustee nor the holders of any of the Bonds
shall thereafter have any rights hereunder except as provided in Section 7.2
and except with regard to payments of costs and expenses of the Issuer by the
Company.
Section 7.7. Project List. The Company shall maintain at the Project
site a list setting forth in reasonable detail all items constituting the
Project.
Section 7.8. Notification of an Act of Bankruptcy. The Company shall
notify the Bank and the Trustee within two Business Days after the occurrence
of an Act of Bankruptcy.
Section 7.9. Letter of Credit. The Company shall cause the initial
Letter of Credit to be issued and outstanding. If the term of the initial
Letter of Credit is extended or a Substitute Letter of Credit issued, the
Company shall cause such extension or Substitute Letter of Credit to be issued
for a term not less than one year or until the maturity of the Bonds, if
shorter.
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<PAGE> 25
Section 7.10. Compliance with Indenture. If the Company is not in
default under this Loan Agreement or the Note, the Issuer, at the request of
the Company, shall (a) at any time moneys held pursuant to the Indenture are
sufficient to effect redemption of the Bonds and if the same are then
redeemable under the Indenture, take all steps that may be necessary to effect
redemption thereunder and (b) take any other action required by the Indenture.
The Issuer will perform all of its agreements in the Indenture and the Bonds,
and, except for the assignment of this Loan Agreement pursuant to the
Indenture, will not convey its interest in this Agreement. The Company
covenants and agrees to do all things within its power in order to comply with
and to enable the Issuer to comply with all requirements and to fulfill all
covenants of the Indenture insofar as the same relate to or are applicable to
the Company. So long as an Event of Default has not occurred, the Issuer
agrees that it will not amend or supplement the Indenture so as to increase the
burdens or liabilities of the Company or affect the rights of the Company
without the prior written consent of the Company, except as otherwise set forth
in Section 1101 of the Indenture. The Company hereby agrees that it has
received an executed copy of the Indenture and that it is familiar with its
provisions.
Section 7.11. Outstanding Bonds. Promptly after each June 30, the
Company shall notify the North Carolina Local Government Commission and the
Issuer, by first class mail, of the aggregate principal amount of the Bonds
Outstanding at the close of business on such June 30.
ARTICLE VIII
Events of Default and Remedies
Section 8.1. Event of Default Defined. Each of the following events
shall be an Event of Default, provided events (a) through (f) shall only be an
Event of Default after the Conversion Date:
(a) Failure of the Company to make any payment on the Note when
the same becomes due and payable.
(b) Failure of the Company to observe and perform any of its other
payments, covenants, conditions or agreements under this Loan Agreement for a
period of 30 days after notice, specifying such failure and requesting that it
be remedied, given by the Issuer or the Trustee to the Company.
(c) (1) Failure of the Company to pay generally its debts as they
become due, (2) commencement by the Company of a voluntary case under the
Federal bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or other similar law, (3)
consent by the Company to the
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appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official for the Company for any substantial part
of its property, or to the taking possession by any such official to any
substantial part of the property of the Company, (4) making by the Company of
any, assignment for the benefit of creditors, or (5) taking of corporate action
by the Company in furtherance of any of the foregoing.
(d) The (1) entry of any decree or order for relief by a court
having jurisdiction over the Company or its property in an involuntary case
under the Federal bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or other similar law,
(2) appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator or similar official for the company or any substantial part of its
property, or (3) entry of any order for the termination or liquidation of the
Company of its affairs.
(e) Failure of the Company within 15 days after the commencement
of any proceedings against it under the Federal bankruptcy laws by any other
applicable Federal or state bankruptcy, insolvency or similar law, to have such
proceedings dismissed or stayed.
(f) Any warranty, representation or other statement by or on
behalf of the Company contained in this Loan Agreement or the Indenture or in
any instrument furnished in connection with the issuance or sale of the Bonds
was false or misleading in any material respect at the time it was made or
delivered.
(g) An Event of Default under the Indenture or the Deed of Trust.
The provisions of the foregoing subsection (b) are subject to the
limitation that if by reason of force majeure the Company is unable in whole or
in part to observe and perform any of its covenants, conditions or agreements
contained hereunder, other than its obligations contained in Sections 4.1,
7.2,. 7.3, 7.5 and 9.2 hereof, the Company shall not be deemed in default
during the continuance of such inability. The term "force majeure" as used
herein shall include without limitation acts of God; strikes, lockouts or other
industrial disturbances; acts of public enemies; orders of any kind of the
government of the United States of America of the State of North Carolina or
any political subdivision thereof or any of their departments, agencies or
officials, or any civil or military authority; insurrections; riots; epidemics;
landslides; lightning; earthquake; fire; hurricanes; tornadoes; storms; floods;
washouts; droughts; arrests; restraint of government and people; civil
disturbances; explosions; breakage or accident to machinery, transmission pipes
or canals; partial or entire failure of utilities; or any other cause or event
not reasonably within the control of the Company. The Company shall
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<PAGE> 27
remedy with all reasonable dispatch the cause or causes preventing the Company
from carrying out its covenants, conditions and agreements, provided that the
settlement of strikes, lockouts and other industrial disturbances shall be
entirely within the discretion of the Company, and the Company shall not be
required to make settlement of strikes, lockouts and other industrial
disturbances by agreeing to the demands of any opposing party when such course
is in the judgment of the Company unfavorable to the Company.
Notwithstanding anything herein to the contrary, a Determination of
Taxability shall not result in or constitute an Event of Default if Section 9.2
is complied with.
Section 8.2. Remedies on Default. Whenever an Event of Default shall
have happened the Trustee as the assignee of the Issuer may:
(a) Declare all payments hereunder or on the Note to be
immediately due and payable, whereupon the same shall become immediately due
and payable;
(b) Take whatever action at law or in equity may appear necessary
or desirable to collect the payments then due and thereafter to become due or
to enforce observance or performance of any covenant, condition or agreement of
the Company under this Loan Agreement, the Deed of Trust or the Note;
(c) Terminate any further action under this Loan Agreement and
may, at its option, declare all payments on the Note to be immediately due and
payable, whereupon the same shall become immediately due and payable;
(d) Inspect, examine and make copies of, the books, records and
accounts of the Company pertaining to the Project; and
(e) Exercise any remedies provided in the Indenture or the Deed of
Trust.
No action taken pursuant to this section (including termination of the
terms of this Loan Agreement) shall relieve the Company from its obligations
pursuant to Section 4.1 hereof.
The Issuer or the Trustee shall give notice to the Company of the
exercise of any of the rights or remedies under this section (1) in writing in
the manner provided in Section 10.2 and (2) by telephone or telegram, provided
that failure to give such notice by telephone or telegram shall not affect the
validity of the exercise of any right or remedy under this section.
Any balance of the moneys collected pursuant to action taken under
this section remaining after payment of all costs and
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<PAGE> 28
expenses of collection and amounts due hereunder shall be paid to the Trustee,
provided that after Payment of the Bonds any such balance shall be paid to the
Company.
Section 8.3. No Remedy Exclusive. No remedy set forth in Section 8.2
is intended to be exclusive of any other remedy, and every remedy shall be
cumulative and in addition to every other remedy herein or now or hereafter
existing at law, in equity or by statute. No delay or failure to exercise any
right or power accruing upon an Event of Default shall impair any such right or
power or shall be construed to be a waiver thereof, and any such right or power
may be exercised from time to time and as often as may be deemed expedient. In
order to entitle the Issuer or the Trustee to exercise any remedy reserved to
it in this Article VIII, it shall not be necessary to give any notice, other
than such notice as may be herein expressly required in this Loan Agreement.
Section 8.4. Attorneys' Fees and Other Expenses. The Company shall,
within thirty days after written demand, pay to the Issuer and the Trustee the
reasonable fees of attorneys and other reasonable costs and expenses incurred
by either of them in the collecting of payments due on the Note or the
enforcement of any other obligation of the Company upon an Event of Default.
Section 8.5. No Additional Waiver Implied by One Waiver. If either
party or its assignee waives a default by the other party under any covenant,
condition or agreement herein, such waiver shall be limited to the particular
breach so waived and shall not be deemed to waive any other breach hereunder.
Section 8.6. Waivers under Indenture. If any Event of Default under
the Indenture corresponding to an Event of Default hereunder shall have been
waived in accordance with the terms of the Indenture, such Event of Default
hereunder shall be deemed to have been waived only to the extent waived
thereunder.
ARTICLE IX
Termination of Loan Agreement and Prepayment of Note
Section 9.1. Option to Prepay in Full. Unless there has been a
determination which could result in a Determination of Taxability described in
Section 9.2, and subject to requirements under the Indenture for Eligible Funds
in certain instances, the Company shall have the option to prepay in full the
Note and terminate this Loan Agreement prior to Payment of the Bonds by (a)
paying to the Trustee an amount of cash or Government Obligations which,
together with existing investments in the Bond Funds, will provide the Bond
Fund with cash and/or Government Obligations, the principal of and interest on
which will be sufficient, in the opinion of the Trustee, (1) to redeem in
accordance with the relevant section of
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<PAGE> 29
the Indenture all Bonds then outstanding and to pay all amounts, if any,
required by Section 301 of the Indenture on the date on which the Bonds are to
be redeemed, (2) to pay at maturity all Bonds maturing prior to such
redemption, (3) to pay interest prior to their redemption or payment pay the
reasonable fees and expenses other expenses for which the Company this Loan
Agreement, the Note or the making arrangement satisfactory to the Trustee for
giving the required notice of redemption.
Section 9.2. Mandatory Prepayment. The Company shall be obligated to
prepay the Note in full (a) upon the occurrence of a Determination of
Taxability as defined in the Indenture; or (b) as provided in Section 301 of
the Indenture.
Section 9.3. Option to Prepay in Part. The Company shall have the
option to prepay the Note in part, and the Issuer agrees that the Trustee may
accept such payments to be paid to the Trustee for deposit in the Bond Fund and
used for redemption or, at the election of the Company, purchase of outstanding
Bonds in the manner and to the extent provided in the Indenture. The principal
amount of each Bond so purchased, delivered or credited shall be appropriately
credited by the Trustee against the obligation of the Company to make future
payments on the Note.
Section 9.4. Relation of Options to Indenture. The options granted
to the Company in this article shall be prior and superior to the Indenture and
may be exercised whether or not the company is in default under this Loan
Agreement, provided that any such default will not result in the nonfulfillment
of any condition to the exercise of any such option.
Section 9.5. Obligations after Payment of Note and Termination of
Loan Agreement. Anything contained in this Article IX to the contrary
notwithstanding, the obligations of the Company contained in Section 7.2 and
the obligation of the Company to pay the costs and expenses of the Issuer shall
continue after payment of the Note and termination of this Loan Agreement.
ARTICLE X
Miscellaneous
Section 10.1. Term of Loan Agreement; Amounts Remaining after Payment
of the Bonds. This Loan Agreement shall be effective upon execution and
delivery hereof, and subject to earlier termination upon prepayment in full of
the Note and all other amounts required to be paid hereunder, including all
amounts payable under the Indenture, shall expire at midnight on November 1,
2000, or if such payment of the Note has not been made on such date, when
payment in full of the Note and all other amounts required to be paid hereunder
shall have been made, except that, notwithstanding the
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<PAGE> 30
foregoing, the obligation of the Company to indemnify and pay the costs and
expense of the Issuer shall survive the expiration of this Loan Agreement. Any
amounts remaining after Payment of the Bonds and payment of the fees and
expenses of the Trustee, the paying agents and the Issuer in accordance with
the Indenture shall belong to and be paid to the Company by the Trustee as
overpayment of amounts due on the Note.
If the Letter of credit is not in effect, payments or prepayment of
the Note in full by the Company notwithstanding the provisions of Section 9.1
shall not discharge the obligations of the Company under this Loan Agreement
unless a period of 365 days beginning with the date. of such payment or
prepayment shall elapse during which no Act of Bankruptcy shall have occurred.
The security interest created hereby and the lien of the Indenture shall
continue in effect as security for the obligations of the Company hereunder
until the expiration of such 365-day period. Until the expiration of such
365-day period, payment or satisfaction of the obligations secured the
Indenture shall not be deemed to have been made, and the Company shall be
deemed to have waived for such 365-day period any rights it may have to require
recordation of a release deed or a certificate of satisfaction or marginal
entry of payment or satisfaction with respect to the Loan Agreement, the Deed
of Trust and the Indenture. The Company and the Issuer sha11 likewise not be
entitled to demand that the Trustee file a termination statement with respect
to any financing statement filed to perfect the security interest created by
the Indenture until after the expiration of such 365-day period. Anything to
the contrary herein notwithstanding, recordation of a release deed or a
certificate of satisfaction or marginal entry of payment or satisfaction with
respect to the Deed of Trust or the Indenture at any time before or after
expiration of such 365-day period shall constitute release of the lien thereof,
and the filing of a termination statement with respect to any such financing
statement at any time before or after expiration of such 365-day period shall
terminate the security interest referred to therein. If the Issuer or any
holder of the Bond is required to pay to a trustee in bankruptcy any amount.
received pursuant to the Note during such 365-day period, the Company shall
repay to such holder of the Bond on behalf of the Issuer such amount paid to
such trustee plus accrued interest thereon.
Section 10.2. Notices, etc. Unless otherwise provided herein, all
demands, notices, approvals, consents, requests and other communications
hereunder shall be in writing and shall be deemed to have been given when
delivered in person or mailed by first class registered or certified mail,
postage prepaid, addressed (a) if to the Company, to New Hanover County
Industrial Air Park, Route 6, Box 55, Wilmington, North Carolina 28405
(Attention: President), (b) if to the Issuer, c/o Clerk, Board of
Commissioners, 320 Chestnut Street, Wilmington, North Carolina 28401
(Attention: Chairman), (c) if to the Trustee, to One Mellon
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Bank Center, Room 3440, Pittsburgh, Pennsylvania 15258 (Attention: Corporate
Trust Group), or (d) if to the Bank, to 155 North Front Street, Wilmington,
North Carolina 28401 (Attention: Teresa D. Ray). A duplicate copy of each
demand, notice, approval, consent, request or other communication given
hereunder by either the Issuer or the Company to the other shall also be given
to the Trustee and the Bank. The Company, the Issuer, the Trustee and the Bank
may, by notice given hereunder, designate any further or different addresses to
which subsequent demands, notices, approvals, consents, requests or other
communications shall be sent or persons to whose attention the same shall be
directed.
Section 10.3. Amendments to Loan Agreement and Note. Neither this
Loan Agreement nor the Note shall be amended or supplemented and no
substitution shall be made for the Note subsequent to the issuance of the Bonds
and before Payment of the Bonds, without the consent of the Trustee, given in
accordance with Article XII of the Indenture.
Section 10.4. Successors and Assigns. This Loan Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns. No assignment by the Company shall
relieve the Company of its obligations hereunder.
Section 10.5. Severability. If any provision of this Loan Agreement
shall be held invalid by any court of competent jurisdiction, such holding
shall not invalidate any other provision hereof.
Section 10.6. Applicable Law. This Loan Agreement shall be governed
by the applicable laws of the State of North Carolina.
Section 10.7. Counterparts. This Loan Agreement may be executed in
several counterparts, each of which shall be an original and all of which
together shall constitute but one and the same instrument; except that to the
extent, that this Loan Agreement shall constitute personal property under the
Uniform Commercial Code of North Carolina, no security interest in this Loan
Agreement may be created or perfected through the transfer or possession of any
counterpart of the Loan Agreement other than the original counterpart, which
shall be the counterpart containing the receipt therefor executed by the
Trustee following the signatures to this Loan Agreement.
Section 10.8. Bank or Guarantors May Perform Company's Obligations.
The Bank or any of the Guarantors may perform or observe any covenant,
condition or agreement of the Company hereunder and.such performance or
observance shall be treated in all respects as the act of the Company.
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<PAGE> 32
Section 10.9. Entire Loan Agreement. This Loan Agreement together
with the Indenture. the Note and the Deed of Trust constitute the entire
agreement and supersede all prior agreements and understandings, both oral and
written, between the Issuer and the Company with respect to the subject matter
hereof.
IN WITNESS WHEREOF, the Issuer and the Company have caused this Loan
Agreement to be executed in their respective corporate names and their
respective corporate seals to be hereunto affixed and attested by their duly
authorized officers, all as of the date first above written.
THE NEW HANOVER COUNTY INDUSTRIAL
FACILITIES AND POLLUTION CONTROL
FINANCING AUTHORITY
(SEAL) By: /s/ [authorized officer]
----------------------------
Chairman
Attest:
/s/ George W. Jones, Jr.
- ---------------------------
Secretary
APPLIED ANALYTICAL, INC.
(SEAL) By: /s/ Frederick D. Sancilio
-----------------------------
Title: President
Attest:
/s/ Scot Bannerman
- -----------------------------
Title: Secretary
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<PAGE> 1
EXHIBIT 10.9
REIMBURSEMENT AGREEMENT
THIS REIMBURSEMENT AGREEMENT, dated as of November 1, 1988 (the
"Agreement") is by and between APPLIED ANALYTICAL, INC., a Delaware corporation
(the "Company"); and NCNB NATIONAL BANK OF NORTH CAROLINA, a national banking
association having offices in Wilmington, North Carolina (the "Bank").
W I T N E S S E T H:
WHEREAS, The New Hanover County Industrial Facilities and Pollution
Control Financing Authority (the "Issuer") has agreed pursuant to the terms and
conditions of a Loan Agreement dated as of the date hereof by and between the
Issuer and the Company (the "Loan Agreement") and an Indenture of Trust dated
as of the date hereof by and between the Issuer and Mellon Bank, N.A., (the
"Indenture") as trustee (in its capacity thereunder as trustee, hereinafter
referred to as the "Trustee") to issue bonds in the aggregate principal amount
of $3,500,000 (the "Bonds") in substantially the form set forth in the
Indenture and to loan the proceeds from the sale of the Bonds to the Company to
finance the acquisition, construction and equipping of a facility for the
purpose of manufacturing pharmaceutical related products for the pharmaceutical
industry pursuant to the Loan Agreement; and
WHEREAS, the Company will execute a Deed of Trust and an Assignment of
Leases to secure the Note, each as defined in the Loan Agreement, and the
Company's obligations hereunder; and
WHEREAS, Applied Analytical Industries, Inc., Formulations Development
Laboratories Inc., Pharmaceutical Manufacturing Company, Inc., Frederick D.
Sancilio, Candace J. Sancilio and James L. Waters will guarantee the full and
prompt payment of the Bonds and the Company's obligations hereunder pursuant to
Guaranty Agreements of even date herewith (the "Guaranty Agreements"); and
WHEREAS, the Loan Agreement provides that, as a condition precedent to
making the loan pursuant to the Loan Agreement, the Company will cause the Bank
to issue a letter of credit to the Trustee for the benefit of the holders of
the Bonds (the "Letter of Credit"); and
WHEREAS, as an inducement to the Bank to issue the Letter of Credit to
the Trustee, the Company has agreed to enter into this Agreement with the Bank.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I.
DEFINITIONS
1.01 For the purposes hereof:
(a) "Assignment of Life Insurance Policy" means the collateral
assignment by the Company to the Bank dated as of Closing Date of the life
insurance policy insuring the life of Frederick D. Sancilio;
(b) "Assignments of Leases" means the assignment of rents and
leases dated as of the date hereof executed by the Company in favor of the Bank
and the Issuer, and any amendments or supplements thereto;
(c) "Bond Documents" means the Bonds, the Loan Agreement, the
Indenture, the Letter of Credit, this Reimbursement Agreement, the Remarketing
Agreement, the Deed of Trust, the Guaranty Agreements, the Assignment of Life
Insurance Policy, the Assignment of Leases, Escrow Agreement, Collateral
Assignment and any other documents executed in connection with the issuance of
the Bonds;
(d) "Business Day" means a day upon which the Bank is open for
the transaction of business of the nature required in this Agreement in
Wilmington, North Carolina;
(e) "Capital Base" means Consolidated Tangible Net Worth plus
Subordinated Debt;
(f) "Cash Flow" means, for the twelve (12) month period ending
on the date of computation: net income of the Company and the corporate
Guarantors on a consolidated basis after deduction for taxes (i) plus
depreciation, tax deductible amortization and other non-cash charges, (ii)
minus an amount equal to unfinanced expenditures for fixed assets and (iii)
minus dividends declared or paid or redemptions of stock or other distributions
of cash or property to shareholders of the Company (including without
limitation dividends permitted under Section 5.01(n));
(g) "Closing Date" means the date this Agreement is executed by
the Company and the Bank;
(h) "Collateral Assignment" means the collateral assignment
dated as of the date hereof by and between the Company and the Bank, and any
amendments or supplements thereto;
(i) "Consistent Basis" in reference to the application of
Generally Accepted Accounting Principles, means that the accounting principles
observed in the period referred to are comparable in all material respects to
those applied in the most recent preceding period except as to any changes
required by the American Institute
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<PAGE> 3
of Certified Public Accountants or the Financial Accounting Standards Board
(except there shall be no instance allowing upward revaluation of assets);
(j) "Consolidated Current Assets" means all items which in
accordance with Generally Accepted Accounting Principles would be classified as
current assets on a consolidated balance sheet of the Company and the corporate
Guarantors; provided, however, for purposes of determining Current Assets
hereunder there shall be excluded loans and advances to employees and officers;
(k) "Consolidated Current Liabilities" means all items which in
accordance with Generally Accepted Accounting Principles would be classified as
current liabilities on a consolidated balance sheet of the Company and the
corporate Guarantors;
(l) "Consolidated Tangible Net Worth" means at any time, total
consolidated shareholders' equity of the Company and the corporate Guarantors
determined in accordance with Generally Accepted Accounting Principles applied
on a Consistent Basis, with no upward adjustments due to a revaluation of
assets, minus the book value of assets which would be treated as intangibles
under Generally Accepted Accounting Principles, including, but not limited to,
goodwill, trade-names, trademarks, copyright, patents and unamortized debt
discount;
(m) "Consolidated Total Liabilities" means total liabilities of
the Company and the corporate Guarantors on a consolidated basis determined in
accordance with Generally Accepted Accounting Principles;
(n) "Debt Service" means the sum of principal payments made or
due on Long Term Debt and lease payments made or due on capitalized leases of
the Company and the corporate Guarantors on a consolidated basis for the twelve
(12) month period beginning on the date of computation, as determined in
accordance with Generally Accepted Accounting Principles applied on a
Consistent Basis;
(o) "Escrow Agreement" means the escrow agreement dated as of
the date hereof by and between the Company and the Bank, and any amendments or
supplements thereto;
(p) "Deed of Trust" means the deed of trust and security
agreement dated as of the date hereof executed by the Company for the benefit
of the Bank and the Issuer, as co-beneficiaries, encumbering real property
fixtures and personal property, all as more particularly described therein, and
any amendments or supplements thereto;
(q) "Financing Statements" means those UCC financing statements
to be filed in order to perfect the Bank's security
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<PAGE> 4
interests in certain personal property and fixtures, all as more particularly
described therein;
(r) "Generally Accepted Accounting Principles" means those
principles of accounting set forth in pronouncements of the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants or which have other substantial authoritative support and are
applicable in the circumstances as of the date of a report, as such principles
are from time to time supplemented and amended;
(s) "Guarantors" means Applied Analytical Industries, Inc.,
Formulations Development Laboratories, Inc., Pharmaceutical Manufacturing
Company, Inc., Frederick D. Sancilio, Candace J. Sancilio and James L. Waters
and their respective successors, assigns, heirs, executors and personal
representatives;
(t) "Guaranty Agreements" means a collective reference to the
Guaranty Agreements of even date herewith extended by the Guarantors to the
Trustee and the Bank, and any amendments or supplements thereto;
(u) "Letter of Credit" means the letter of credit dated November
14, 1988 issued by the Bank to the Trustee for the account of the Company
substantially in the form of Exhibit A attached hereto and made a part hereof
and any amendments or supplements thereto;
(v) "Long Term Debt" means all indebtedness for borrowed money
of the Company and the corporate Guarantors on a consolidated basis which in
accordance with Generally Accepted Accounting Principles would be classified as
long term debt, but including in any event the current portions of such long
term debt and leases required to be capitalized in accordance with Generally
Accepted Accounting Principles, but excluding in any event Subordinated Debt;
(w) "Person" means an individual, partnership, corporation,
trust, incorporated organization, association, joint venture or a government or
agency or political subdivision thereof;
(x) "Pledged Bonds" means such term as defined in Section 2.04
hereof;
(y) "Prime Rate" means the interest rate announced from time to
time by the Bank in Charlotte, North Carolina as its prime rate. The Prime
Rate is not necessarily the best or lowest rate offered by the Bank;
(z) "Remarketing Agreement" means the Remarketing Agreement of
even date herewith among the Company, the Issuer, and the Bank, and any
amendments or supplements thereto;
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(aa) "Security Documents" means the Deed of Trust, the Assignment
of Leases, the Guaranty Agreements, the Assignment of Life Insurance Policy,
the Escrow Agreement, the Collateral Assignment and the Financing Statements;
and
(ab) "Subordinated Debt" means indebtedness of the Company and
the corporate Guarantors on a consolidated basis subordinated to the
obligations of the Company to the Bank on such terms and conditions as accepted
in writing by the Bank.
1.02 Except as otherwise defined the terms used in this Agreement
shall have the same meaning as used in the Indenture, the terms, definitions
and conditions of which are incorporated herein by reference.
ARTICLE II.
THE LETTER OF CREDIT AND REIMBURSEMENT
2.01 Subject to the terms and conditions of this Agreement, the
Bank has issued the Letter of Credit to the Trustee in an aggregate amount
equal to $3,685,208.33. The Bank may in its sole discretion, on or before
November 16, 1993, and on or before each November 16 thereafter for as long as
the Letter of Credit is in effect, extend the Letter of Credit for an
additional year and if the Letter of Credit is to be extended, the Bank shall
issue to the Trustee a substitute Letter of Credit prior to the expiration of
the then existing Letter of Credit. Unless the Company receives written notice
from the Bank on or before the date one (1) year prior to the expiration date
of the Letter of Credit, or any substitute Letter of Credit, that it intends to
renew or extend the Letter of Credit, or substitute Letter of Credit, the Bank
shall not be obligated to renew or extend the Letter of Credit or substitute
Letter of Credit.
2.02 (a) The Company agrees to pay to the Bank a Letter of Credit
commission equal to one percent (1%) per annum (on the basis of a year of 360
days) on the maximum amount available to be drawn under the Letter of Credit on
the date such commission is payable. This Letter of Credit commission will be
payable annually in advance beginning on the date of issuance of the Letter of
Credit and on each annual anniversary date thereafter until the expiration of
the Letter of Credit. With respect to payments made to the Escrow Agent (as
hereinafter defined) pursuant to Section 4.01(p) hereof, the Bank shall give a
credit to the Company against the Letter of Credit commission that is payable
immediately subsequent to any period of time for which the Deposited Funds (as
hereinafter defined) are deposited with the Escrow Agent in an amount equal to
one percent (1%) per annum (computed on an annual basis) of amounts paid to the
Bank in accordance with Section 4.01(p) hereof
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<PAGE> 6
("Deposited Funds") for the period of time for which such funds are deposited
with the Escrow Agent.
(b) The Company also agrees to pay the Bank on the date of any
drawing under the Letter of Credit a drawing fee in the amount then established
by the Bank as its drawing fee for letters of credit issued by the Bank (which
is $50.00 on the date hereof).
(c) The Company also agrees to pay to the Bank upon each
transfer of the Letter of Credit in accordance with its terms a transfer fee of
$500.00, or such other amount as shall at the time of transfer be charged which
the Bank makes for transfers of similar letters of credit.
2.03 (a) The Company agrees to reimburse the Bank on the day of
any drawing under the Letter of Credit for the actual amounts paid on such
drawings. The Company also agrees to pay interest on each unreimbursed drawing
under the Letter of Credit at the rate per annum specified in Section 2.03(b)
hereof; provided, however, that if any drawing under the Letter of Credit shall
be reimbursed to the Bank on the date of such drawing, such drawing under the
Letter of Credit shall not bear interest.
(b) If any drawing under the Letter of Credit is not reimbursed
in full on the date when it is made, then the amount thereof which is not so
reimbursed shall bear interest from and including the date of the making
thereof until reimbursed in full (but excluding the date of reimbursement) on
the unpaid amount thereof from time to time outstanding at a rate per annum (on
the basis of a year of 360 days) equal to the Prime Rate plus two percent (2%).
Interest owing under this Section 2.03 shall be due and payable at such time as
the Company reimburses the Bank for any drawing under the Letter of Credit and
on demand.
(c) The Company's obligation under this Section 2.03 to
reimburse the Bank for each drawing under the Letter of Credit shall be
absolute and unconditional under any and all circumstances and Irrespective of
any set-off, counterclaim or defense to payment which the Company may have or
have had against the Trustee, the Bank or any other Person, including, without
limitation, any defense based on any failure of the Company to receive all or
any part of the proceeds of the sale of the Bonds with respect to which such
drawing under the Letter of Credit was made or any nonapplication or
misapplication of the proceeds of such sale or the legality, validity,
regularity or enforceability of the Letter of Credit.
2.04 (a) As security for the payment of the obligations of the
Company hereunder, the Company hereby pledges, assigns, hypothecates, transfers
and delivers to the Bank all its right, title and interest in the Bonds which
are purchased with proceeds of a draw on the Letter of Credit so long as such
Bonds are held by
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<PAGE> 7
the Trustee and not remarketed (the "Pledged Bonds") and hereby grants to the
Bank a security interest in and to the Pledged Bonds, the interest thereon and
all proceeds thereof, as collateral security for the prompt and complete
payment when due of all amounts due in respect of the obligations of the
Company set forth in Section 2.03 hereof.
(b) If the Company shall become entitled to receive or shall
receive any principal or interest payment in respect of the Pledged Bonds, the
Company agrees to accept the same as the Bank's agent and to hold the same in
trust on behalf of the Bank and to deliver the same forthwith to the Bank. All
sums of money so paid in respect of the Pledged Bonds which are received by the
Company and paid to the Bank shall be credited against the obligations of the
Company to the Bank.
(c) If the Company makes or causes to be made to the Bank a
prepayment in respect of its reimbursement obligation under Section 2.03 or
such a prepayment is made on behalf of the Company as a result of a remarketing
of Bonds, the Bank agrees to release from the lien hereof and deliver to the
Company for resale in accordance with the Indenture, as the case may be,
Pledged Bonds in a principal amount equal to the amount of the prepayment so
made or to the principal amount of Pledged Bonds so purchased.
(d) Without the prior written consent of the Bank (which consent
may only be given if such Pledged Bonds have previously been released from the
lien of this Agreement) the Company agrees that it will not sell, assign,
transfer, exchange, or otherwise dispose of, or grant any option with respect
to, the Pledged Bonds, nor will it create, incur or permit to exist any pledge,
lien, mortgage, hypothecation, security interest, charge, option or any other
encumbrance with respect to any of the Pledged Bonds, or any interest therein,
or any proceeds thereof, except for the (i) lien and security interest provided
for by this Agreement and (ii) the sale of the Pledged Bonds pursuant to the
Indenture.
2.05 If at any time after the date hereof, and from time to time,
the Bank determines that the adoption or modification of any applicable law,
rule or regulation regarding taxation, the Bank's required levels of reserves,
deposits, insurance or capital (including any allocation of capital
requirements or conditions), or similar requirements, or any interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation, administration or compliance
of the Bank with any of such requirements, has or would have the effect of (i)
increasing the Bank's costs relating to the Letter of Credit hereunder, or (ii)
reducing the yield or rate of return of the Bank on the Letter of Credit
hereunder, to a level below that which the Bank could have achieved but for the
adoption or modification of any such requirements, the Company shall, within 15
days of any request by the Bank, pay to the Bank such additional
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<PAGE> 8
amounts as (in the Bank's sole judgment, after good faith and reasonable
computation) will compensate the Bank for such increase in costs or reduction
in yield or rate of return of the Bank. No failure by the Bank to immediately
demand payment of any additional amounts payable hereunder shall constitute a
waiver of the Bank's right to demand payment hereunder shall constitute a
waiver of the Bank's right to demand payment of such amounts at any subsequent
time. Nothing herein contained shall be construed or so operate as to require
the Company to pay any interest, fees, costs or charges greater than is
permitted by applicable law.
2.06 The amount available under the Letter of Credit (initially
$3,685,208.33 shall be reduced and reinstated as described in the Letter of
Credit.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.01 The Company represents and warrants that:
(a) (1) the Company is a corporation, validly organized under
the laws of the State of Delaware and is duly qualified and in good
standing in each jurisdiction where it does business and where the
failure to so qualify would have a material adverse effect on the
Borrower;
(2) the Company has the requisite corporate power and
authority to execute and perform this Agreement and the Security
Documents executed by the Company, and to execute and deliver this
Agreement and the Security Documents and all other certificates,
instruments and documents with respect to the indebtedness of the
Company hereunder;
(3) when executed and delivered, this Agreement and the
Security Documents executed by the Company will be valid and binding
obligations of the Company, enforceable in accordance with their
respective terms;
(4) the Company has no subsidiaries:
(b) the execution, delivery and performance of this Agreement
and the Security Documents:
(1) do not violate any provisions of law, any order of
any court or other agency of government or the charter or the by-laws
of the Company or any provisions of any indenture, agreement or other
instrument to which the Company or the properties or assets of the
Company are bound;
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<PAGE> 9
(2) will not be in conflict with, result in a breach of
or constitute an event of default nor an event which, upon notice or
lapse of time, or both, would constitute such an event of default
under any indenture, agreement or other instrument to which the
Company is a party;
(3) will not result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company except the liens created by such
Security Documents;
(c) except as set forth in Exhibit B hereto there is no action,
suit or proceeding at law or in equity or by or before any governmental
instrumentality or agency or arbitral body now pending, or to the knowledge of
the Company, threatened by or against or affecting the Company or any
properties or rights of the Company which, if adversely determined, would
impair the right of the Company to carry on its business substantially as now
conducted or would materially adversely affect the financial condition,
business or operations of the Company;
(d) the Company has filed or caused to be filed all federal,
state and local tax returns which are required to be filed and has paid or
caused to be paid all taxes as shown on said returns or on any assessment
received by it, to the extent that such taxes have become due;
(e) the Company is not
(1) a party to any judgment, order, decree or any
agreement or instrument or subject to corporate restrictions
materially adversely affecting its business, properties or assets,
operations or conditions (financial or otherwise);
(2) in default in the performance, observance or
fulfillment of any of the material obligations, covenants or
conditions contained in any agreement or instrument to which it is a
party;
(f) no part of the proceeds of any loan made under the Loan
Agreement will be used to purchase or carry or to reduce or retire any loan
incurred to purchase or carry, any "margin securities" (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System) or to
extend credit to others for the purpose of purchasing or carrying any such
margin stocks. The Company is not engaged, as one of its important activities,
in extending credit for the purpose of purchasing or carrying such margin
stock. If requested by the Bank, the Company will furnish to the Bank in
connection with any loan hereunder, a statement in conformance with the
requirements of Federal Reserve Form U-1 referred to in said Regulation;
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<PAGE> 10
(g) the audited financial statements of the Company as of
December 31, 1987 and the Company prepared financial statements as of June 30,
1988, fairly reflect the financial condition of the Company and the results of
its operations as of the dates and for the periods stated, and no material
adverse changes in the financial condition nor the business operations of the
Company have occurred subsequent to June 30, 1988;
(h) none of the assets of the Company is subject to any
mortgage, pledge, title retention lien or other lien, encumbrance or security
interest, except (i) for current taxes not delinquent or taxes being contested
in good faith and by appropriate proceedings, (ii) liens arising in the
ordinary course of business for sums not due or sums being contested in good
faith and by appropriate proceedings, but not involving any borrowed money or
the deferred purchase price of property or services, (iii) mechanics' and
materialmen's liens, reservations, exceptions, encroachments, easements, rights
of way, covenants, conditions, restrictions, leases and other similar title
exceptions or encumbrances affecting real property which do not in the
aggregate materially interfere with their use in the ordinary conduct of the
Company's business, (iv) the liens created by the Security Documents, and (v)
as set forth on Exhibit C hereto;
(i) the Company possesses all necessary patents, licenses,
trademarks, trademark rights, tradenames, tradename rights and copyrights to
conduct its business as now conducted, without known conflict with any patent,
license, trademark, tradename or copyrights of any other Person;
(j) neither this Agreement nor any of the Security Documents
contains any misrepresentation or untrue statement of fact or omits to state a
material fact necessary in order to make any such representation or statement
contained therein not misleading;
(k) the Company is not subject to the renegotiation of any
government contract;
(l) the Company has fully complied with all laws, ordinances,
regulations and orders, including without limitation all zoning, safety and
environmental laws, ordinances, regulations and orders, applicable to its
business or properties and the present uses by the Company of its properties do
not violate any such laws, ordinances, regulations or orders. There is not
currently and in the past there has not been (i) any use, treatment, storage or
disposal of any hazardous substance or material or pollutant on any of the
Company's properties, except as of the date hereof as disclosed on Exhibit H
attached hereto, (ii) any spill, leakage, discharge or release of any hazardous
substance or material or pollutant thereon or therefrom, or (iii) any off-site
disposal by the Company of any hazardous
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<PAGE> 11
substance or material or pollutant in any location, except as disclosed on
Exhibit H attached hereto; and
(m) the Company has not incurred any accumulated unfunded
deficiency within the meaning of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or incurred any material liability to the Pension
Benefit Guaranty Corporation ("PBGC") established under such Act (or any
successor thereto under such Act) in connection with any employee benefit plan
established or maintained by the Company.
ARTICLE IV.
AFFIRMATIVE COVENANTS
4.01 Until the expiration of the Letter of Credit and
reimbursement of all obligations thereunder and hereunder, the Company
covenants and agrees that it will (unless the Bank shall otherwise consent in
writing):
(a) within one hundred twenty (120) days of the end of
each fiscal year, deliver to the Bank a detailed financial report of
the Company, each corporate Guarantor and the Company and the
corporate Guarantors on a consolidated basis based on Generally
Accepted Accounting Principles applied on a Consistent Basis
containing an unqualified opinion of independent certified public
accountants acceptable to the Bank;
(b) within sixty (60) days after the end of each fiscal
quarter of each fiscal year deliver a balance sheet and profit and
loss statement of the Company, each corporate Guarantor and the
Company and the corporate Guarantors on a consolidated basis certified
by the chief financial officer of the Company and the Guarantors to be
correct and accurate;
(c) together with each delivery of financial reports
required by Section 4.01(a) and (b) hereof, deliver to the Bank a
statement signed by the chief financial officer of the Company
substantially in the form of Exhibit D hereto, setting forth that the
Company has kept, observed, performed and fulfilled each and every
agreement binding on it contained in this Agreement and in the
Security Documents and is not at the time in default in the keeping,
observance, performance or fulfillment of any of the terms, provisions
and conditions of this Agreement and in the Security Documents and
that no Event of Default specified in Article VI hereof, nor any
event, which, upon notice or lapse of time or both, would constitute
such an Event of Default, has occurred, or if such Event of Default
exists or would occur as the case may be, stating the
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<PAGE> 12
nature thereof, the period of existence thereof and what action the
Company proposes to take with respect thereto;
(d) promptly, from time to time, deliver to the Bank such
other information regarding the Company's operations, business affairs
and financial condition as the Bank may reasonably request. The Bank
is hereby authorized to deliver a copy of any such financial
information delivered hereunder to the Bank to any regulatory
authority having jurisdiction over the Bank with appropriate
confidential restrictions being noted on any submissions of such
information;
(e) maintain or cause to be maintained all personal
property material to its business in good working order and condition
and make all needed repairs, replacements and renewals as are
necessary to conduct its business in accordance with prudent business
practices;
(f) do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence,
rights and franchises;
(g) (i) comply with or contest in good faith all statutes
and governmental regulations of which the Company has knowledge and
the noncompliance of which would have a material adverse effect on the
financial condition of the Company; and (ii) pay all taxes,
assessments, governmental charges, claims for labor, supplies, rent
and any other obligation which, if unpaid, might become a lien against
any of its properties except liabilities being contested in good faith
and against which, if reasonably requested by the Bank, reserves
satisfactory to the Bank will be established;
(h) at all times keep its insurable properties insured to
such extent and against such risks, including, without limitation,
public liability insurance, hazard insurance, worker's compensation
and other insurance required by law, as is acceptable to the Bank and
is customary with companies of comparable size in the same or similar
business but at all times of the type and at least in the amount of
the present coverage of the Company. The insurance coverage of the
Company is described in Exhibit F attached hereto. The Company will
deliver to the Bank certificates (or endorsements showing the Bank as
loss payee using the standard "long form") of each insurer evidencing
the hazard insurance coverage regarding the security granted to the
Bank by the Company. Each such policy of hazard insurance will
require, and the certificates will state that no such policy will be
terminated without at least thirty (30) days prior written notice
having been delivered to the Bank. Except as required under the Loan
Agreement, insurance proceeds from property securing the indebtedness
hereunder shall be immediately applied to reduce
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<PAGE> 13
such indebtedness; provided, however, insurance proceeds of less than
$100,000.00 may be disbursed to the Company for restoration or repair
so long as no Event of Default shall have occurred or be continuing;
(i) preserve and protect its patents, licenses
trademarks, trademark rights, tradenames, tradename rights and
copyrights (the patents, licenses, trademarks, trademark rights,
tradenames, tradename rights and copyrights of the Company are
described on Exhibit G attached hereto) and maintain all of its
other material properties and assets used or useful in the
conduct of its business in good repair, working order and condition
and from time to time cause to be made all proper replacements,
betterments and improvements thereto;
(j) keep true books of records and accounts in accordance
with Generally Accepted Accounting Principles applied on a Consistent
Basis, and in which full, true and correct entries will be made of the
Company's dealings and transactions;
(k) permit any officer of the Bank designated by the Bank
to visit and inspect any of the Company's properties, books and
financial records at such times as the Bank may reasonably request
upon reasonable notice and during ordinary business hours;
(l) upon the request of the Bank, authorize any officer
of the Bank to discuss its financial statements and financial affairs
at any time and from time to time with the Company's independent
certified public accountants upon reasonable notice and during
ordinary business hours;
(m) use the bank as a depository, and maintain average
demand deposit balances (after reserves and activity charges) of
$25,000.00 or more; provided, if the Company should fail to maintain
such average balances for any fiscal quarter (commencing with the
fiscal quarter ending December 31, 1988) the Company shall pay to the
Bank for such fiscal quarter a shortfall fee (the "Shortfall Fee") not
later than forty-five (45) days after the end of such fiscal quarter
the amount by which such average balances are less than $25,000.00
(the "Shortfall Amount"). The Shortfall Fee shall be computed by
multiplying the Shortfall Amount by the average Prime Rate for such
quarterly period. For any fiscal quarter during which there is no
Shortfall Amount, there shall be no Shortfall Fee;
(n) deliver to the Bank forthwith, upon any officer of
the Company obtaining knowledge of an event of default under this
Agreement or under any of the Security Documents or an event which
would constitute such an Event of Default but for
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the requirement that notice be given or time elapse or both, a
certificate signed by the chief executive officer of the Company
specifying the nature and period of existence thereof and what action
the Company proposes to take with respect thereto;
(o) within ten (10) days of the event becoming known to
any officer of the Company, notify the Bank in writing of the
occurrence of any of the following events:
(i) the pendency or commencement of any action,
suit or proceeding at law or in equity under which a party or
parties seek an amount equal to or exceeding $50,000.00;
(ii) any event or condition which shall constitute
an event of default under any other agreement for borrowed
money or any known or potential materially adverse change in
any other material contractual agreement;
(iii) any levy of an attachment, execution or other
process against its assets; and
(iv) any change in any existing agreement or
contract which may materially adversely affect any of its
businesses or affairs, financial or otherwise;
(p) on the 1st day of each month commencing December 1,
1989, pay to NCNB National Bank of North Carolina, in its capacity as
Escrow Agent (the "Escrow Agent") pursuant to the terms of the Escrow
Agreement of even date herewith by and between the Escrow Agent and
the Company as follows:
(i) $20,500.00 on the 1st day of each month
commencing December 1, 1989 and ending October 1, 1990;
(ii) $24,500.00 on November 1, 1990;
(iii) $20,500.00 on the 1st day of each month
commencing December 1, 1990 and ending October 1, 1991;
(iv) $24,500.00 on November 1, 1991;
(v) $25,000.00 on the 1st day of each month
commencing December 1, 1991 and ending October 1, 2000; and
(vi) $325,000.00 on November 1, 2000;
(q) the Company shall (i) at all times, make prompt
payment of all contributions required under all employee
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<PAGE> 15
benefit plans ("Plans") to meet the minimum funding standard set forth
in ERISA (defined in Section 3.01(m) hereof) with respect to its
Plans; (ii) within thirty (30) days after the filing thereof, furnish
to the Bank copies of each annual report/return (Form 5500 Series), as
well as all schedules and attachments required to be filed with the
Department of Labor and/or the Internal Revenue Service pursuant to
ERISA, and the regulations promulgated thereunder, in connection with
each of its Plans for each Plan Year; (iii) notify the Bank
immediately of any fact, including, but not limited to, any Reportable
Event (as defined in ERISA) arising in connection with any of its
Plans, which might constitute grounds for termination thereof by the
PBGC or for the appointment by the appropriate United States District
Court of a trustee to administer such Plan, together with a statement,
if requested by the Bank, as to the reason therefor and the action, if
any, proposed to be taken with respect thereof; and (iv) furnish to
the Bank, upon its request, such additional information concerning any
of the Company's Plans as may be reasonably requested;
(r) satisfy the following financial tests (all computed
using historical cost basis statements):
(i) the Company and the corporate Guarantors will
at all times maintain a Capital Base of not less than (A)
$750,000.00 from the Closing Date through and including
December 30, 1988; and (B) $1,500,000.00 on and after December
31, 1988, provided, however, such amount shall be increased on
the last day of each fiscal year (commencing with the fiscal
year ending December 31, 1989) by an amount equal to the
greater of $500,000.00 or 55% of the net income of the Company
for the fiscal year then ending, such increases to be
cumulative;
(ii) the Company and the corporate Guarantors
shall maintain at all times a ratio of Consolidated Current
Assets to Consolidated Current Liabilities of not less than
1.25 to 1.00 from December 31, 1988 and all times thereafter;
(iii) the Company and the corporate Guarantors
shall maintain a ratio of Cash Flow to Debt Service of not
less than 2.0 to 1.0 computed on the last day of each fiscal
quarter commencing with the fiscal quarter ending December 31,
1988; and
(iv) the Company and the corporate Guarantors
shall maintain at all times a ratio of Consolidated Total
Liabilities less Subordinated Debt to Capital Base of not
greater than (A) 5.0 to 1.0 from the Closing Date through and
including December 30, 1988; (B) 3.75 to 1.00 from
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<PAGE> 16
December 31, 1988 through and including December 30, 1989; (C)
3.0 to 1.0 from December 31, 1989 through and including
December 30, 1990; (D) 2.0 to 1.0 from December 31, 1990
through and including December 30, 1991; and (E) 1.5 to 1.0
from December 31, 1991 and all times thereafter; and
(s) within thirty (30) days after the Closing Date deliver to
the Bank the life insurance policy to be assigned pursuant to the Assignment of
Life Insurance Policy and take all steps reasonably requested by the Bank to
perfect the Bank's assignment interest in such policy.
ARTICLE V.
NEGATIVE COVENANTS
5.01 Until the expiration of the Letter of Credit and
reimbursement of all obligations thereunder and hereunder, the Company
covenants that it will not, nor will it enter into any binding agreement to
(without the prior written consent of the Bank):
(a) incur, create, assume or permit to exist any
indebtedness for borrowed money, howsoever evidenced, or its
equivalent (including but not limited to leases required to be
capitalized under Generally Accepted Accounting Principles), except
(i) indebtedness set forth in the financial
statements referred to in Section 3.01(g) hereof, including
the indebtedness of up to $1,000,000.00 seasonal line of
credit and $850,000.00 equipment line of credit extended by
United Carolina Bank, and as set forth in Exhibit E;
(ii) additional indebtedness extended by the Bank;
(iii) Subordinated Debt;
(iv) purchase money indebtedness incurred to
finance the acquisition of equipment provided that (a) the
aggregate amount of such purchase money indebtedness incurred
by the Company at any time outstanding does not exceed
$100,000.00, and (b) the initial maturity of each item of such
purchase money indebtedness is at least three (3) years; and
(v) indebtedness extended on an unsecured basis by
any of the corporate Guarantors;
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<PAGE> 17
(b) incur, create or permit to exist any pledge, lien,
charge or other encumbrance of any nature whatsoever on the Company's
property, whether now owned or hereafter acquired, other than
(i) liens as disclosed in Exhibit C hereto,
including liens incurred in connection with the $850,000.00
equipment line of credit extended by United Carolina Bank and
the $200,000.00 and $800,000.00 lines of credit extended by
United Carolina Bank and participated in by the Bank;
(ii) any unfiled lien of materialmen, mechanics,
workmen, warehousemen, carriers, landlords or repairmen;
provided that if such a lien shall be perfected and shall not
be contested in good faith, it shall be discharged of record
immediately by payment, bond or otherwise;
(iii) tax liens which are being contested in good
faith, or which constitute liens for taxes the payment of
which is not yet required;
(iv) liens in favor of the Bank; and
(v) liens incurred in connection with the
purchase money indebtedness permitted under Section
5.01(a)(v);
(c) sell, lease, transfer or otherwise dispose of any of
its properties and assets to any Person other than obsolete machinery
and equipment in the ordinary course of business having an aggregate
net book value in excess of $100,000.00 in any fiscal year;
(d) enter into any agreement, directly or indirectly,
with any Person whereby the Company shall sell or transfer any
property, real or personal, whether now owned or hereafter acquired,
and used or useful in its business, and thereafter rent or lease such
property or other property which the Company intends to use for
substantially the same purpose or purposes as the property being sold
or transferred;
(e) seek or permit dissolution or liquidation of the
Company in whole or in part;
(f) guaranty, or become liable for, the obligations of
any other Person (provided, however, this shall not prevent the
Company from endorsing negotiable instruments for collections in the
ordinary course of business);
(g) make any loans or advances to any Person; provided,
however, the Company may make (i) temporary loans or advances to
employees expected to be incurred in the ordinary course of
-17-
<PAGE> 18
business provided such loans and advances do not exceed $100,000.00 in
the aggregate at any time outstanding and (ii) loans or advances to
any corporate Guarantor;
(h) make unfinanced capital expenditures for fixed assets
(including capitalized leases) which would in the aggregate exceed (on
a noncumulative basis) (i) $400,000.00 during the fiscal year ending
December 31, 1989 and (ii) $550,000.00 during any fiscal year
thereafter; provided, however, the Company shall not make any such
expenditures if it would result in a violation of any other provisions
of this Agreement; provided, further that expenditures for fixed
assets financed with proceeds of the loan made pursuant to the Loan
Agreement shall not be counted as a capital expenditure for purposes
of this Section 5.01(h);
(i) consolidate with, merge into, be acquired by or
acquire the assets or capital stock of any Person; provided that
nothing in this Section 5.01(i) shall prohibit the merger,
consolidation or acquisition of the Company or any corporate Guarantor
into or with the Company or any corporate Guarantor, as the case may
be, so long as (i) the Company or any Guarantor (including the
personal representative of the estate or the heirs or devisees of a
deceased individual Guarantor) or any combination thereof owns all of
the issued and outstanding stock of the surviving entity immediately
after such merger, consolidation or acquisition, and (ii) no Event of
Default under this Reimbursement Agreement shall have occurred or be
continuing immediately prior to or after such merger, consolidation or
acquisition;
(j) without the prior consent of the Bank, create or
permit to exist any partnerships, joint ventures or make any
substantial investment other than as disclosed herein and permitted
hereunder;
(k) except as permitted under Section 5.01(i) above,
purchase, own, invest in or otherwise acquire, directly or indirectly,
any stock or other securities, or make or permit to exist any
investment, capital contribution or acquire any interest whatsoever in
any other Person or permit to exist any loans or advances for such
purposes provided, the Company may maintain investments in or invest:
(i) in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by
the United States of America; provided, that such obligations
mature one year from the date of acquisition thereof;
(ii) in certificates of deposit maturing within
one year from the date of acquisition issued by a bank or
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<PAGE> 19
trust company organized under the laws of the United States or
any State thereof having capital surplus and undivided profits
aggregating at least $40 million and not known by the Company
to be having financial difficulties;
(iii) in commercial paper rated P-1 or better by
Moody's Investors Services, Inc. (Commercial Paper Record) or
A-1 or better by Standard & Poors;
(iv) in equity securities with an aggregate cost
of not more than $100,000.00; or
(v) the Company may purchase stock in or, make
loans or advances to, any of the corporate Guarantors;
(l) enter into or carry on any business other than the
manufacture of pharmaceutical-related products and services for the
pharmaceutical industry and the manufacture and sale of pharmaceutical
products;
(m) make redemptions of its capital stock, or make any
distribution of cash or property to its shareholders; provided,
however, the Company may make regularly scheduled principal and
interest payments under the promissory note of the Company dated May
31, 1986 in favor of Sancilio and Waters with an outstanding principal
balance of $254,263.00; provided further the Company may redeem voting
stock held by any of its shareholders upon the death of any such
shareholder or upon any involuntary transfer of such voting stock by
any such shareholder; and provided further, the Company may pay
Permitted S Corporation Dividends in any fiscal year (for purposes
herein, the term "Permitted S Corporation Dividends" means with
respect to any fiscal year, for so long as the Company shall remain an
S Corporation under the Internal Revenue Code of 1986, as amended,
dividends in an amount equal to the amount of federal and state income
taxes payable by the shareholders of the Company on account of the
Company's income attributable to such shareholders because of the
Company's status as an S Corporation.
ARTICLE VI.
EVENTS OF DEFAULT AND ACCELERATION
6.01 The following shall be Events of Default hereunder:
(a) the Company's failure to make payment of any amount as
required by this Agreement within five (5) days of when due;
-19-
<PAGE> 20
(b) other than as set forth in Section 6.01(a), the Company's
failure to comply with each and every covenant, term and condition in this
Agreement, in any of the Bond Documents or any of the Security Documents within
thirty (30) days after written notice from the Bank of such failure;
(c) if any representation or warranty made by the Company in this
Agreement, in any of the Bond Documents, in any of the Security Documents or in
any other document, certificate, statement or report heretofore or hereafter
made shall be untrue in any material respect when made;
(d) in the event that the Company or any Guarantor
(1) shall make an assignment for the benefit of
creditors; or
(2) has a petition initiating a proceeding under any
section or chapter of the Bankruptcy Code or its amendments, filed by
or against the Company and, if against the Company, such petition is
not set aside within ninety (90) days after such filing; or
(3) shall file any proceedings for dissolution or
liquidation; or
(4) has a receiver, trustee or custodian appointed for
all or part of its assets; or
(5) seeks to make an adjustment, settlement or extension
of its debts with its creditors generally; or
(6) has a notice of an action for enforcement of a lien
filed or recorded or a judgment lien or execution obtained against it
in excess of an aggregate of $50,000.00 which notice of lien is not
removed, insured, reserved for (in amounts satisfactory to the Bank),
satisfied, bonded or contested in good faith within thirty (30) days
after any officer of the Company becomes aware of such lien;
(e) in the event that the Company should default in the
performance of any of its obligations under any of the Bond Documents;
(f) if an event of default occurs under any loan agreement by
and between the Company and the Bank which is in existence as of the date
hereof or which is entered into subsequent to the date hereof;
(g) if an event of default occurs under any of the Bond
Documents;
-20-
<PAGE> 21
(h) if the Company in the performance of any other agreement
between it and any other lender defaults and such default permits such other
lender to accelerate such other indebtedness of the Company for borrowed money;
or
(i) the individual Guarantors shall at any time cease or fail to
own in the aggregate 51% or more of the voting stock of either the Company or
any of the corporate Guarantors.
6.02 Upon the occurrence of any such Event of Default and after
the applicable grace period, if any, and unless the Bank agrees to waive in
writing such Event of Default:
(a) all of the indebtedness of any and every kind owing
by the Company to the Bank under this Agreement, the Security
Documents or the Bond Documents shall become due and payable upon
written notice without the necessity of any other demand, presentment,
protest or notice upon the Company, all of which are hereby expressly
waived by the Company;
(b) regardless of the adequacy of the collateral, subject
to Section 7.03, the Bank shall have the right, immediately and
without further action by it, to set-off against the indebtedness of
the Company to the Bank all money owed by the Bank in any capacity to
the Company, whether or not due, and the Bank shall be deemed to have
exercised such right of set-off and to have made a charge against any
such money immediately upon the occurrence of such Event of Default
even though such charge is made or entered on the books of the Bank
subsequent thereto;
(c) the Bank may cause the Trustee to immediately draw
upon the Letter of Credit for the aggregate unpaid principal amount of
the Bonds and all interest accrued thereon less any Eligible Funds
then in the Bond Fund which shall be applied by the Trustee to
purchase or redeem, at the option of the Bank, as provided in the
Indenture, the Bonds for the benefit of the Bank as holder of the
Bonds;
(d) the Bank shall have the right to demand that the
Company deposit into an escrow account for the benefit of the Bank and
the Trustee, pro rata in accordance with the respective aggregate
amounts then and from time to time thereafter owed to the Bank
hereunder and to the Bondholders and under the Bonds, a sum equal to
the total unpaid principal of and premium, if any, and interest on the
Bonds; and
(e) the Bank may cause foreclosure upon the collateral as
authorized in the Security Documents in order to satisfy any and all
obligations of the Company to the Bank under and pursuant to all of
the rights and powers and in the manner contained in the Security
Documents. The Company hereby
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<PAGE> 22
agrees that the Bank shall have the right to bid and become a
purchaser on its own behalf in any such sales to the fullest extent
permitted by law.
ARTICLE VII.
MISCELLANEOUS
7.01 Any notice shall be conclusively deemed to have been
received by either party hereto and be effective on the day on which delivered
to such party at the address set forth below or such other address as such
party shall specify to the other party in writing, or if sent prepaid by
certified or registered mail or by telegram or telex (where the receipt of such
message is verified by return) on the third Business Day after the day mailed
(or sent), addressed to such party at said address:
(a) if to the Company:
Applied Analytical, Inc.
New Hanover County Industrial Air Park
Route 6, Box 55
Wilmington, North Carolina 28405
Attention: Mr. Frederick D. Sancilio
(b) if to the Bank:
NCNB National Bank of North Carolina
155 North Front Street
Wilmington, North Carolina 28401
Attention: Ms. Teresa D. Ray
with copies to:
NCNB National Bank of North Carolina
c/o NCNB Investment Banking Company
One NCNB Plaza, T-39
Charlotte, North Carolina 28280
Attention: Mr. Mark W. Whalen
7.02 No failure or delay on the part of the Bank in the exercise
of any right, power or privilege hereunder or under the Letter of Credit or
under any other Security Document shall operate as a waiver of any such right,
power or privilege nor shall any such failure or delay preclude any other or
further exercise thereof. The rights and remedies herein provided are
cumulative and not exclusive of any rights or remedies provided by law.
7.03 (a) The Company agrees that the Bank shall have a lien for
all the liabilities of the Company upon all deposits or deposit accounts, of
any kind, or any interest in any thereof, now or
-22-
<PAGE> 23
hereafter pledged, mortgaged, transferred or assigned to the Bank or otherwise
in the possession or control of the Bank for safekeeping or for any other or
different purpose for the account or benefit of the Company and including any
balance of any deposit account or of any credit of the Company with the Bank,
whether now existing or hereafter established, hereby authorizing the Bank at
any time or times with or without prior notice to apply such balances or any
part thereof to such of the liabilities of the Company and in such amounts as
it may select, and whether or not the collateral or the responsibility of other
Persons primarily, secondarily or otherwise liable may be deemed adequate. For
the purposes of this paragraph, all remittances and property shall be deemed to
be in the possession of the Bank as soon as the same may be put in transit to
it by mail or carrier or by other bailee.
(b) Notwithstanding the provisions contained in Sections 6.02(b)
and 7.03(a) hereof, the Bank hereby agrees to waive the exercise, at any time
after the commencement of a proceeding in bankruptcy or reorganization with
respect to the Company, of its right to setoff any and all deposits (general or
special) at any time held and other indebtedness at any time owing by the Bank
to or for the credit or the account of the Company against any and all of the
obligations of the Company now or hereafter existing in respect o
the,reimbursement obligations of the Company under this Agreement.
(c) Except as provided herein with respect to the Pledged Bonds,
the Bank hereby agrees that it will not at any time accept any collateral as
security for the payment of the reimbursement obligations of the Company under
this Agreement unless provision is made prior to or simultaneously with the
taking of such collateral security by the Bank for a prior or an equal and
ratable security interest in such collateral security to be granted to the
Trustee for the benefit of the holders from time to time of the Bonds.
(d) Notwithstanding the foregoing, the covenants of the Bank
contained in clauses (b) and (c) of this Section 7.03 shall be of no force and
effect at such time as, (i) in the opinion of nationally recognized counsel
experienced in bankruptcy matters, due to legislative or judicial developments
after the date hereof the absence of such covenants or failure to comply
therewith will not constitute a basis for granting of injunctive relief against
payment under the Letter of Credit and (ii) all rating agencies then rating the
Bonds shall have confirmed in writing that the making of a setoff or the taking
of such security by the Bank other than as described in (b) and (c) will not
affect the rating on the Bonds.
7.04 Whenever in this Agreement, any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party and all covenants, provisions and agreements by or on
behalf of the Company which are contained
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<PAGE> 24
in the Security Documents or this Loan Agreement shall inure to the benefit of
the successors and assigns of the Bank.
7.05 The Company will pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of this Agreement, the
Letter of Credit and the Security Documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of special counsel to the Bank, and
costs and expenses of the Bank in connection with the implementation and/or
endorsement of this Agreement, the Letter of Credit or the Security Documents,
the management and control of the collateral as well as any and all filing and
recording fees and stamp and other taxes with respect thereto and agrees to
save the Bank harmless from any and all such costs, expenses and liabilities.
7.06 No approval, decision, option or action required of the Bank
("Approval") hereunder nor any modification, amendment or waiver ("Waiver") of
any provision of this Agreement, the Letter of Credit or any other Security
Document, nor any consent to any departure by the Company therefrom ("Consent")
shall in any event by effective unless the same shall be delivered in
accordance with the provisions of Section 7.01 hereof, and then such Approval,
Waiver or Consent shall be effective only in the specific instance and for the
purpose for which given, but any such Approval, Waiver or Consent when so
signed shall be effective and binding upon the Bank. No notice to or demand on
the Company in any case shall entitle the Company to any other or further
notice or demand in the same, similar or other circumstances.
7.07 The Company hereby authorizes the Bank to make payments
under the Letter of Credit upon presentation to the Bank of certificates in the
forms described in the Letter of Credit attached hereto as Exhibit A and in no
event shall the Bank be required to verify the correctness of said certificates
or any other statement in any document or instrument relating to the Letter of
Credit.
7.08 The Company agrees that it will indemnify and hold the Bank
harmless from and against each and every claim, demand, action or suit which
may arise against the Bank by reason of any action taken pursuant to the Letter
of Credit, except for the Bank's own willful misconduct or gross negligence.
7.09 The terms of this Agreement shall be effective until the
termination of the Letter of Credit and the repayment of any obligations of the
Company hereunder.
7.10 This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
-24-
<PAGE> 25
7.11 All documents executed pursuant to the transactions
contemplated herein, including without limitation this Agreement, the Letter of
Credit and the Security Documents shall be deemed to be contracts made under,
and for all purposes shall be construed in accordance with, the internal laws
and judicial decisions of the State of North Carolina. The Company hereby
submits to the jurisdiction and venue of the state and federal courts of North
Carolina for purposes of resolving disputes hereunder and thereunder or for the
purposes of collection. For the purposes of service of process, the Company
hereby appoints the North Carolina Secretary of State as its service of process
agent. The Bank reserves the right to serve process on the Company according
to any other legal method. The Company hereby agrees that the federal and
state courts in Mecklenburg County, North Carolina are a convenient forum and
agrees not to raise as a defense that such courts are not a convenient forum.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers as of the year and day first
above written.
APPLIED ANALYTICAL, INC.
ATTEST:
By: /s/ Frederick D. Sancilio
--------------------------------
By: /s/ Scot Bannerman
---------------------------- Title: President
-----------------------------
Title: Secretary
-------------------------
(Corporate Seal)
NCNB NATIONAL BANK OF NORTH
CAROLINA
By: /s/ [Authorized Signature]
-----------------------------
Title: Vice-President
---------------------------
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<PAGE> 26
FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT
THIS FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT, dated as of April 3,
1990 is to that certain Reimbursement Agreement dated as of November 1, 1988
(as amended, the "Reimbursement Agreement"; all defined terms in the
Reimbursement Agreement are incorporated herein by reference) by and between
APPLIED ANALYTICAL, INC., a Delaware corporation (the "Company") and
NCNB NATIONAL BANK OF NORTH CAROLINA, a national banking association
organized and existing under the laws of the United States and having offices
in Wilmington, North Carolina (the "Bank").
RECITALS
A. The Company and the Bank entered into the Reimbursement
Agreement pursuant to which the Company agreed to reimburse to the Bank amounts
drawn on the Bank pursuant to the Letter of Credit (as defined in the
Reimbursement Agreement).
B. The Bank and the Company have agreed to make changes to the
Reimbursement Agreement as provided for herein.
NOW, THEREFORE, the parties hereto agree as follows:
A. The Reimbursement Agreement is hereby amended as follows:
1. Section 1.01(bb) is amended and restated to read as
follows:
"(bb) "Subordinated Debt" means indebtedness of the
Company subordinated to the obligations of the Company to the
Bank on such terms and conditions as accepted in writing by
the Bank."
2. Section 4.01(b) is amended and restated to read as
follows:
"(b) within sixty (60) days after the end of each
fiscal quarter of each fiscal year deliver a balance sheet and
profit and loss statement of the Company certified by the
chief financial officer of the Company to be correct and
accurate;"
3. Section 4.01(r) is amended and restated to read as
follows:
<PAGE> 27
"(r) satisfy the following financial tests (all
computed using historical cost basis statements):
(i) the Company will at all times maintain a
Capital Base of not less than (A) $750,000.00 from the Closing
Date through and including December 30, 1988; and (B)
$1,500,000.00 on and after December 31, 1988, provided,
however, such amount shall be increased on the last day of
each fiscal year (commencing with the fiscal year ending
December 31, 1989) by an amount equal to the greater of
$400,000.00 or 55% of the net income of the Company for the
fiscal year ending December 31, 1990, and by an amount equal
to the greater of $500,000.00 or 55% of the net income of the
Company for the fiscal year then ending for each fiscal year
thereafter, such increases to be cumulative;
(ii) the Company shall maintain at all times a
ratio of Consolidated Current Assets to Consolidated Current
Liabilities of not less than 1.25 to 1.00 from December 31,
1988 and all times thereafter;
(iii) the Company shall maintain a ratio of Cash
Flow to Debt Service of not less than 1.3 to 1.0 computed on
the last day of each fiscal quarter commencing with the fiscal
quarter ending December 31, 1988, not less than 1.3 to 1.0
commencing with the fiscal quarter ending December 31, 1989,
and not less than 1.5 to 1.0 commencing with the fiscal
quarter ending December 31, 1990 and on the last day of each
fiscal quarter thereafter; and
(iv) the Company shall maintain at all times a
ratio of Consolidated Total Liabilities less Subordinated Debt
to Capital Base of not greater than (A) 5.0 to 1.0 from the
Closing Date through and including December 30, 1988; (B) 4.0
to 1.00 from December 31, 1988 through and including December
30, 1989; (C) 3.5 to 1.0 from December 31, 1989 through and
including December 30, 1990; (D) 3.0 to 1.0 from December 31,
1990 through and including December 30, 1991; and (E) 2.0 to
1.0 from December 31, 1991 and all times thereafter; and"
4. Section 5.01(a)(v) is amended and restated to read
as follows:
"(v) Intentionally deleted."
5. Section 5.01(g) is amended and restated to read as
follows:
-2-
<PAGE> 28
"(g) make any loans or advances to any Person;
provided, however, the Company may make temporary loans or
advances to employees expected to be incurred in the ordinary
course of business provided such loans and advances do not
exceed $100,000.00 in the aggregate at any time outstanding;"
6. Section 5.01(i) is amended and restated to read as
follows:
"(i) consolidate with, merge into, be acquired by
or acquire the assets or capital stock of any Person;"
7. Section 5.01(k)(v) amended and restated to read as
follows:
"(v) Intentionally deleted."
8. Section 6.01(i) is amended and restated to read as
follows:
"(i) the Guarantors shall at any time cease or fail
to own in the aggregate 51% or more of the voting stock of the
Company."
9. All references to "and the corporate Guarantors,"
"Applied Analytical Industries, Inc.," "Formulations Development
Laboratories Inc.," and "Pharmaceutical Manufacturing Company, Inc."
are hereby deleted.
B. The Company hereby represents and warrants that:
1. the "Representations and Warranties" set forth in
Article III of the Reimbursement Agreement, as amended, are true and
correct as of the date of this First Amendment; and
2. the Company is not in default of the Reimbursement
Agreement or the other Bond Documents (as defined in the Reimbursement
Agreement) and no event or condition exists under the Reimbursement
Agreement or the other Bond Documents that, but for the giving of
notice of lapse of time or both, would result in such a default as of
the date of this First Amendment.
C. Except as modified hereby, all of the terms and provisions of
the Reimbursement Agreement (and Exhibits) remain in full force and effect.
D. This First Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original.
-3-
<PAGE> 29
E. This First Amendment and the Reimbursement Agreement, as
amended hereby, shall be deemed to be contracts made under, and for all
purposes shall be construed in accordance with, the laws of the State of North
Carolina.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed by their duly authorized corporate officers as of the
day and year first above written.
APPLIED ANALYTICAL INDUSTRIES, INC.
ATTEST:
By: /s/ R. Forrest Waldon By: /s/ Frederick D. Sancilio
--------------------------- -----------------------------------
Title: Secretary Title: President
------------------------ --------------------------------
(Corporate Seal)
NCNB NATIONAL BANK OF NORTH CAROLINA
By: /s/ Teresa D. Ray
----------------------------------
Title: Vice President
---------------------------------
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<PAGE> 30
THIRD AMENDMENT TO
REIMBURSEMENT AGREEMENT
THIS THIRD AMENDMENT TO REIMBURSEMENT AGREEMENT, dated as of December
21, 1992, is by and between
APPLIED ANALYTICAL INDUSTRIES, INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal place
of business in Wilmington, North Carolina (the "Company"); and
NATIONSBANK OF NORTH CAROLINA, N.A., a national banking association
organized and existing under the laws of the United States and having offices
in Wilmington, North Carolina (the "Bank").
RECITALS
A. The Bank and the Company have entered into that certain
Reimbursement Agreement, dated November 1, 1988, as amended (the "Reimbursement
Agreement").
B. The Bank and the Company have agreed to make changes to the
Reimbursement Agreement as provided for herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Reimbursement Agreement is hereby amended as
follows:
(a) Section 1.01(f) is amended in its entirety so
that such Section now reads as follows:
(f) "Cash Flow" means, for the twelve
(12) month period ending on the date of computation:
net income of the Company (i) plus depreciation,
amortization and other non-cash charges, (ii) minus
an amount equal to unfinanced capital expenditures
and (iii) minus dividends declared or paid or
redemptions of stock or other distributions of cash
or property to shareholders of the Company;
(b) Section 1.01(j) is amended in its entirety so
that such Section now reads as follows:
(j) "Current Assets" means all items
which, in accordance with Generally Accepted
Accounting Principles, would be classified as current
assets on a balance sheet of the Company;
<PAGE> 31
(c) Section 1.01(k) is amended in its entirety so
that such Section now reads as follows:
(k) "Current Liabilities" means all
items which, in accordance with Generally Accepted
Accounting Principles, would be classified as current
liabilities on a balance sheet of the Company;
(d) Section 1.01(l) is amended in its entirety
so that such Section now reads as follows:
(l) "Tangible Net Worth" shall mean the
aggregate amount of assets shown on the balance sheet
of the Company at any particular date (but excluding
from such assets capitalized organization and
development costs, capitalized interest, debt
discount and expense, goodwill, patents, trademarks,
copyrights, franchises, licenses, amounts due from
officers, directors, stockholders and affiliates, and
such other assets as are properly classified
intangible assets under Generally Accepted Accounting
Principles) less liabilities at such date, all
computed in accordance with Generally Accepted
Accounting Principles;
(e) Section 1.01(n) is amended in its entirety so
that such Section now reads as follows:
(n) "Debt Service" means the sum of (i)
current maturities of Long Term Debt for the twelve
month period beginning on the computation date, (ii)
1/8th of the average outstanding principal balance of
the Revolving Loans for the twelve month period
ending on the computation date, (iii) 1/5th of the
outstanding balance of the Capital Expenditures Loans
on the computation date and (iv) proposed payments of
Subordinated Debt for the twelve month period
beginning on the computation date;
(f) Section 4.01(m) is deleted;
(g) Section 4.01(r) is amended in its entirety so
that such Section now reads as follows:
(r) satisfy the following financial
tests (all computed using historical cost basis
statements):
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<PAGE> 32
(i) the Company will maintain as of
the end of each fiscal quarter (commencing
with the fiscal quarter ending December 31,
1992) a Capital Base of not less than
$4,000,000.00; provided, however, such amount
shall be increased on the last day of each
fiscal year (commending with the fiscal year
ending December 31, 1993) by an amount equal
to the greater of $750,000.00 or 40% of the
net income of the Company for the fiscal year
then ending, such increases to be cumulative;
(ii) the Company shall maintain at
all times a ratio of Current Assets to
Current Liabilities of not less than 1.25 to
1.00;
(iii) the Company shall maintain a
Coverage Ratio of not less than 1.15 to 1.0
computed on the last day of each fiscal
quarter commencing with the fiscal quarter
ending December 31, 1992; and
(iv) the Company shall maintain a
ratio of Total Liabilities less Subordinated
Debt to Capital Base of not greater than (A)
2.5 to 1.0 at all times during the period
commencing on the Closing Date through and
including December 30, 1993 and (B) 2.0 to
1.0 at all times thereafter.
(h) Section 5.01(h) is deleted;
(i) Section 5.01(m) is deleted;
(j) Section 6.01(f) is amended by adding the
following parenthetical at the end of such Section:
(including, without limitation, that certain
Loan Agreement, dated December 21, 1992, executed by
and between the Company and the Bank, as such Loan
Agreement is amended and/or replaced from time to
time).
C. The Company hereby represents and warrants that:
1. the "Representation and Warranties" set forth in
Article III of the Reimbursement Agreement, as amended, are true and
correct as of the date of this Third Amendment;
2. the Company is not in default of the Reimbursement
Agreement or the other Bond Documents (as defined in the Reimbursement
Agreement) and no event or condition exists
-3-
<PAGE> 33
under the Reimbursement Agreement or the other Bond Documents that,
but for the giving of notice or lapse of time or both, would result in
such a default as of the date of this Third Amendment.
D. Except as modified hereby, all of the terms and provisions of
the Reimbursement Agreement (and Exhibits) remain in full force and effect.
E. This Third Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original.
F. This Third Amendment and the Reimbursement Agreement, as
amended hereby, shall be deemed to be contracts made under, and for all
purposes shall be construed in accordance with, the laws of the State of North
Carolina.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be executed by their duly authorized corporate officers as of the
day and year first above written.
APPLIED ANALYTICAL INDUSTRIES, INC.
ATTEST:
By: /s/ R. Forrest Walden By: /s/ Frederick D. Sancilio
------------------------- -------------------------------
Title: Secretary Title: President
---------------------- -----------------------------
(Corporate Seal)
NATIONSBANK OF NORTH CAROLINA, N.A.
By: /s/ Teresa D. Andrews
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Title: Vice President
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Each of the undersigned guarantors hereby consents to the foregoing in their
capacities as guarantors.
/s/ R. Forrest Walden /s/ Frederick D. Sancilio (SEAL)
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Witness
/s/ Richard Bennett /s/ James L. Waters (SEAL)
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Witness
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EXHIBIT 10.10
LEASE AGREEMENT
THIS LEASE, made as of the 7th day of March, 1994, between
5051 New Centre Drive, L.L.C, whose address is 1206 North 23rd Street,
Wilmington, North Carolina 28405 (hereinafter referred to as "Landlord"), and
Applied Analytical Industries, Inc., whose address is 1206 North 23rd Street,
Wilmington, North Carolina (hereinafter referred to as "Tenant").
WITNESSETH:
1. DESCRIPTION - Landlord, in consideration of the rents agreed to be
paid and the covenants agreed to be performed as specified hereafter, hereby
leases to Tenant, and Tenant hereby rents from Landlord, the premises located
in 5051 New Centre Drive, Wilmington, North Carolina which premises are
identified by suite numbers in Exhibit A-1 covering approximately the square
feet of floor area set forth on Exhibit A-1, which said premises are
hereinafter referred to as the "demised premises," together with the right and
easement to use in common with Landlord, other Tenants, their agents, employees
and invitees, parking and other common facilities as may be furnished by
Landlord on the real property described in the attached Exhibit B, which real
property, together with the buildings and other improvements erected thereon,
is hereinafter referred to as "Landlord's premises."
2. TERM - The term of this Lease shall commence on March 7, 1994 and
continue for five (5) full calendar years. As used herein "lease year" shall
mean a calendar year within the term of this Lease; "partial lease year" shall
mean any portion of a calendar year.
3. DELIVERY OF POSSESSION - Landlord shall deliver possession of the
demised premises to Tenant at the commencement of the lease.
4. RENT - Tenant shall pay to Landlord as rent for the demised premises
during each year of the term of the Lease, the amount determined by multiplying
(i) the total square feet of the demised premises set forth on Exhibit A-1 by
(ii) Twelve and 50/100 Dollars ($12.50) per square foot. The rent is payable
in advance, in equal monthly installments, upon the first of each and every
month throughout the term of this Lease. The first monthly installment shall
be due on the commencement of the term of this Lease. In the event the term of
this Lease commences other than on the first of the month, there shall also be
due at the commencement of the term, such proportion of the monthly installment
as the number of days in such fractional month bears to thirty (30) days. Any
installment of rent due or accruing hereunder and any other sum, whether termed
rent or otherwise, and payable hereunder by Tenant to Landlord, not paid when
due, shall bear interest at the highest rate provided by law until the same be
paid, and time is of the essence of this Agreement.
5. USE AND OCCUPANCY - During the continuation of this Lease, the demised
premises shall be used and occupied for office and incidental purposes and for
no other purposes without the written consent of Landlord. Tenant shall not
use the demised premises for any purpose in violation of any law, municipal
ordinance, or regulation, nor shall Tenant perform any acts or carry on any
practices which may injure the demised premises or the building in which the
demised premises are located to be a nuisance, disturbance or menace to the
other tenants of said building.
6. TAXES - Landlord shall pay all general property taxes and special
assessments imposed upon the Landlord's premises, including but not limited to
land, building and improvements. In the event a tax is enacted as a substitute
for, or in lieu of an increase in, any portion of the general property tax,
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Landlord shall pay the property tax, assessments and such substitute tax as may
be imposed upon Landlord or Landlord's property.
Tenant shall be responsible for and pay when due all municipal, county
and state duties, taxes, fees and charges assessed during the term of this
Lease against any leasehold interest or personal property of any kind, owned or
placed in or upon the demised premises by Tenant.
7. UTILITIES - Landlord shall furnish the Landlord's premises, including
common areas and all demised premises except those demised premises which are
separately metered, with water, heat, air conditioning, electricity, and sewage
disposal and shall at its own cost and expense replace all burned-out
fluorescent tubes, ballasts and starters in standard lighting fixtures supplied
by Landlord. Tenant shall replace all burned-out fluorescent tubes, light
bulbs, ballasts and starters in light fixtures especially installed for Tenant.
Landlord shall not be liable or responsible for any interruption in such
utilities or other services due to causes beyond Landlord's reasonable control
or for interruptions in connection with the making of repairs or improvements
to the demised premises or the building in which the demised premises are
located. Electricity furnished by the Landlord shall be used only for purposes
of illumination and the operation of normal office equipment (excluding,
without limitation, computer equipment). Landlord shall not be required to
furnish heating, ventilating or air conditioning between 7 P.M. and 7 A.M. or
on Saturdays, Sundays or holidays.
8. JANITORIAL SERVICE - Landlord shall at its own cost and expense
provide janitorial services, ice and snow removal, to the Landlord's premises,
including common areas and all demised premises. In the event Tenant shall
require extraordinary janitorial services, the Tenant shall pay the Landlord
therefor at a rate to be agreed upon or, with the consent of Landlord, the
Tenant, at its own expense, may provide such service subject to Landlord's
supervision.
9. BUILDING OPERATION - Landlord shall, at its own cost and expense,
furnish all materials, labor and services necessary for the operation,
maintenance and repair of the Landlord's premises, except as hereafter
provided.
10. INSURANCE - Landlord shall, during the entire term or any extensions
or renewals hereof, keep the Landlord's premises and all improvements thereon
insured against damage by fire and those risks covered by extended coverage, as
provided in a Standard Fire Insurance Policy together with all risks, extended
perils coverage, in amounts sufficient to equal the full current replaceable
cost thereof which is not otherwise insured. In addition, Landlord shall,
during the entire term and during any extensions or renewals thereof, keep in
full force and effect public liability insurance with respect to the Landlord's
premises, its parking areas, drives, sidewalks and approaches, which are not
otherwise insured. Such insurance shall be in the amount of $10,000 as to
theft, loss of and damage to any vehicle which may enter the Landlord's
premises, and its contents, and in the amount of $500,000 in respect of injury
to any one person (including loss of life), and $1,000,000 to injury to two or
more persons (including loss of life), arising in any one accident or disaster.
Tenant shall indemnify and hold Landlord harmless from any liability
for damages to any person or property in, on or about the demised premises from
any cause whatsoever, excepting that caused by the negligence of the Landlord,
his agents or employees. Tenant shall procure and keep in effect during the
entire term hereof public liability and property damage insurance protecting
Landlord and Tenant from all causes including their own negligence, having as
limits of liability Five Hundred Thousand ($500,000) Dollars for damages
resulting to one person, Five Hundred Thousand ($500,000) Dollars for damages
resulting from one casualty, and Five Hundred Thousand ($500,000) Dollars for
property damage resulting from any one occurrence. Tenant shall deliver
policies of such insurance or certificates thereof to Landlord, and in the
event Tenant shall fail to procure such insurance, Landlord may at its option
procure the same for the
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account of Tenant, and the cost thereof shall be paid to Landlord as additional
rent upon receipt by Tenant of bills therefor.
11. ADJUSTMENT OF RENTAL - For each lease year, the Tenant shall pay to
Landlord a pro rata share of any excess of the annualized cost to Landlord of
performing its duties under paragraph 8 through 10 of this Lease, over the
annualized cost to Landlord of performing such duties during the base year.
The base year is defined as the earlier of the calendar year in which this
lease was dated or the calendar year in which the Tenant first became a tenant
of any part of Landlord's premises. Tenant's pro rata share shall be
determined by the ratio, the numerator of which is the total amount of square
feet of floor area in the demised premises and the denominator of which is the
total number of square feet of all floor area under Lease in the Landlord's
premises. At the end of each lease year or partial lease year, Landlord shall
furnish Tenant a statement showing in reasonable detail for the applicable
period all amounts paid or payable for performance of Landlord's duties and
Tenant's proportionate share of any excess cost, as defined herein. All
amounts required to be paid hereunder shall be paid within fifteen (15) days
after the statement is submitted to Tenant by Landlord. Certification by
Landlord's Architect of the amount of floor area shall be binding on the
parties hereto.
12. SECURITY DEPOSIT - Landlord herewith acknowledges the receipt of Five
Thousand Dollars ($5,000) which it is to retain as security for the faithful
performance of all the covenants, conditions and agreements of this Lease.
Landlord may, but shall not be required to, apply the same upon rents or other
charges in arrears or upon damages for Tenant's failure to perform the said
covenants, conditions and agreements; and Landlord's right to the possession of
the premises for non-payment of rent or for any other reason shall not in any
event be affected because Landlord holds this security. The said sum, if not
applied toward the payment of rent in arrears or toward the payment of damages
suffered by Landlord by reason of the Tenant's breach of the covenants,
conditions and agreements of this Lease, is to be returned to Tenant when this
Lease is terminated, according to its terms, and in no event is the said
security to be returned until Tenant has vacated the premises and delivered
possession to Landlord. In the event that Landlord repossesses himself of the
said premises because of Tenant's default or because of Tenant's failure to
carry out the covenants, conditions and agreements of this Lease, Landlord may
apply the said security upon all damages suffered to the date of said
repossession and may retain the said security to apply upon such damages as may
be suffered or shall accrue thereafter by reason of Tenant's default or breach.
Landlord shall not be obligated to keep the said security as a separate fund,
but may mix the said security with his own funds. In the event of any rightful
and permitted assignment of this Lease, the said security deposit shall be
deemed to be held by Landlord as a deposit made by the assignee and Landlord
shall have no further liability with respect to the return of said security
deposit to the assignor.
Tenant hereby agrees not to look to Mortgagee, as Mortgagee, mortgagee
in possession, or successor in title to the property, for accountability for
any security deposit required by the Landlord hereinunder, unless said sums
have actually been received by said Mortgagee as security for the Tenant's
performance of this lease.
13. REPAIRS AND ALTERATIONS - Landlord, after receiving written notice
from Tenant, and having reasonable opportunity thereafter to obtain the
necessary workmen, agrees to keep in good repair, the common areas of the
premises, the foundation, roof and four outer walls, including windows and
doors in the premises. Tenant shall pay or reimburse Landlord for the cost of
all such repairs arising out of the acts of Tenant, its officers, agents '
employees or invitees. Except as hereinbefore provided, Tenant agrees to
maintain and keep the demised premises in good repair and condition. Where
Tenant fails to maintain and repair the demised premises, Landlord may, at its
election, perform such duty at Tenant's expense.
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The Tenant shall not make any alterations, additions or improvements
to said premises without prior consent of Landlord, which shall not be
unreasonably withheld. All such alterations, additions or improvements shall
become the property of Landlord and remain upon and be surrendered with the
demised premises.
Landlord shall have the right to enter upon the demised premises at
all reasonable hours for the purpose of inspecting and making repairs or
improvements to the same or adjoining premises, or the building of which they
are a part. Where practical, Landlord shall consult with Tenant to minimize
any disruption of Tenant's business.
14. NON-LIABILITY - Landlord shall not be responsible or liable to Tenant
for any loss or damage that may be occasioned by or through the acts of
omissions of persons occupying adjoining premises or any part of the premises
adjacent to or connected with the demised premises or any part of the building
of which the demised premises are a part or for any loss or damage resulting to
Tenant or his property from burst, stopped or leaking water, gas, sewer or
steam pipes, or for any damage or loss of property within the demised premises
from any cause whatsoever excepting that caused by the negligence of the
Landlord, his agents or employees. In the event of any sale or transfer
(including any transfer by operation of law) of the demised premises, Landlord
(and any subsequent owner of the demised premises making such a transfer) shall
be relieved from any and all obligations and liabilities under this Lease
except such obligations and liabilities as shall have arisen during Landlord's
(or such subsequent owner's) respective period of ownership, provided that the
transferee assumes in writing all the obligations of the Landlord under this
Lease.
15. ASSIGNMENT - Tenant shall not assign, or in any manner transfer, this
Lease or any rights or interest herein or sublet the demised premises or any
part thereof without the prior written consent of Landlord, which consent shall
not be unreasonably withheld.
In the event the estate created hereby shall be taken in execution or
by other process of law, or if Tenant shall be adjudicated insolvent or
bankrupt pursuant to the provisions of any state or federal insolvency or
bankruptcy law, or if a receiver or trustee of the property of Tenant shall be
appointed by reason of Tenant's insolvency or inability to pay its debts, or if
any assignment shall be made of Tenant's property for the benefit of creditors,
or if Tenant shall suffer any lien, levy, or encumbrance to be filed against
the demised premises then and in any of such events, Landlord may terminate
this Lease by written notice to Tenant; provided, however, if the order of
court creating any of such disabilities shall not be final by reason of
pendency of such proceedings, or appeal from such order, and Tenant is acting
to contest or remove such disabilities, then Landlord shall not have the right
to terminate this Lease so long as Tenant performs its obligations hereunder.
Landlord reserves the right to subject and subordinate this Lease at
all times to the lien of any mortgage or mortgages now or hereafter placed upon
Landlord's interest in the demised premises and on the land and buildings of
which the demised premises are a part or upon any buildings hereafter placed
upon the land of which the demised premises are a part; provided, however, no
default by Landlord under any such mortgage shall affect Tenant's rights
hereunder so long as Tenant is not in default under this Lease.
16. CASUALTY LOSS - In case of damage to the demised premises or other
part of the building by fire or other casualty, Landlord, unless it elects to
terminate this Lease as provided hereafter, shall repair the damage, to the
extent of its insurance coverage, with reasonable dispatch after notice of the
damage. Repair by Landlord of any damage caused by carelessness, negligence or
improper conduct of Tenant, its agents, employees, visitors or licensees shall
not prejudice any right of Landlord or its insurer. If any part of the demised
premises is so
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damaged by fire or other casualty that they are untenantable but are
nevertheless repaired by Landlord, then the rent shall be adjusted for the time
during which and the extent to which the premises may have been untenantable.
If such repairs are delayed because of Tenant's failure to adjust Tenant's own
insurance claim, or because of Tenant's failure to remove its damaged property,
no reduction shall be made beyond a reasonable time allowed for such adjustment
or removal. If the fire or damage to the premises be caused by carelessness,
negligence or improper conduct by Tenant or its agents, employees, visitors or
licensees, then notwithstanding such damage, Tenant shall be liable for the
rent, during the unexpired portion of the term of this Lease without abatement,
unless Landlord elects to terminate this Lease as provided hereafter. If
Landlord, in its uncontrolled discretion, shall decide within a reasonable time
after any fire or other casualty (even though the demised premises may not have
been affected by such fire or casualty) to demolish, rebuild, or reconstruct,
or not to repair the building containing the demise premises, then upon written
notice given by Landlord to Tenant, this Lease shall terminate on a date
specified in such notice as if that date had been originally fixed as the
expiration of the term of this Lease and the rent shall be adjusted as of the
time of the occurrence of any such fire or other casualty.
17. CONDEMNATION - In the event that any part of the premises shall be
taken or condemned either permanently or temporarily by any competent authority
in appropriation proceedings or by any right of eminent domain, then the terms
of this Lease shall cease and terminate as of the date of title vests in the
condemnor and all rentals shall be paid up to that date, and the Tenant shall
have no claim against the Landlord for the value of any unexpired term of this
Lease. In the event any portion of the building, exclusive of the demised
premises, shall be taken or condemned as aforesaid, then Landlord may terminate
this Lease by Notice in writing to Tenant given within thirty (30) days after
the date title vests in the condemnor, and Tenant shall thereupon surrender
possession of the demised premises to Landlord. In the event Landlord does not
so terminate this Lease, Landlord, to the extent of the condemnation award,
shall repair and restore the portion of the building not affected by the taking
so as to constitute the remaining portion of the building a complete
architectural unit. Tenant shall have no interest in any award resulting from
any condemnation proceedings, except that Tenant shall be entitled to claim,
prove and receive in such proceedings such award as may be allowed Tenant for
loss of business, provided such award shall be in addition to the award of land
and buildings, or portion thereof, containing the demised premises.
18. REGULATIONS - Tenant covenants and agrees that Tenant, its agents,
employees, visitors and licensees shall comply with the following rules and
regulations and such additional rules and regulations as Landlord may, in its
reasonable discretion prescribe:
(a) Tenant shall not conduct or permit to be conducted within the
Landlord's premises any business, nor permit any act, nor store any material,
supplies or equipment, which will tend to increase the premiums for hazard,
fire and other insurance on said premises.
(b) Tenant shall not permit any merchandise or goods to be sold or
stored for sale in the demised premises.
(c) Tenant shall not permit any goods, boxes, papers, trash or
other articles or materials to be placed in the common areas of the Landlord's
premises.
(d) Tenant shall not permit the installation of any vending
machines in the demised premises.
(e) No electric or other wires for any purpose shall be brought
into the demised premises without Landlord's written permission specifying the
manner in which same may be done. No boring, cutting or stringing of wires
shall be done without Landlord's prior written consent. Tenant shall not
disturb or in any way interfere with the electric light fixtures and all work
upon or alterations to the same shall be done by persons authorized by
Landlord.
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(f) No bicycle or other vehicle, and no dog or other animal shall
be allowed ion offices, halls, corridors or elsewhere in the building.
(g) No machinery, equipment, office paraphernalia or fixtures,
e.g., safes, vaults, file cabinets, telephone apparatus, computing machinery or
electronic devices, of a weight that might overload the floors of supporting
columns or walls of the demised premises shall be installed except as permitted
by the Landlord in writing, and the Landlord at his sole option may place or
install any such machinery, equipment, office paraphernalia or fixtures and
charge the reasonable cost of such placement to the Tenant; provided always
that the Tenant shall be liable in all events of damage occasioned to the
premises or to any property of the Tenant or other Tenants in the building by
reason of overloading the floors.
(h) No additional lock or locks shall be placed on any door in the
building without Landlord's prior written consent. A reasonable number of keys
will be furnished by Landlord, and Tenant shall not make or permit any
duplicate keys to be made.
(i) Tenant shall not use any duplicating equipment emitting
noxious fumes, unless same are properly vented at Tenant's expense.
(j) Water closets and other toilet fixtures shall not be used for
any purpose other than that for which the same is intended, and any damage
resulting to same from Tenant's misuse shall be paid for by Tenant. No person
shall waste water by interfering or tampering with the faucets or otherwise.
(k) Tenant shall not interfere, in any way, with other Tenants,
their guest, customers or invitees.
19. SIGNS - A sign containing the Tenant's advertised name and suite
number and no other words or symbols shall be provided and installed by
Landlord, at Tenant's expense, on the exterior of the demised premises and on a
directory to be installed by Landlord within the entry way of the building.
The size, color, location, material and letter style shall be approved by
Landlord. Tenant shall not permit any other picture, lettering, notice or
advertisement of any kind to be installed on or displayed from the windows,
doors, roof, outside walls or grounds of the building in which the demised
premises are located without Landlord's consent.
20. STATEMENTS - Tenant agrees to furnish Landlord, upon request at any
time after the term of this Lease has commenced, a letter addressed to
Landlord's mortgage or financial institution giving the following information:
That Tenant has accepted possession, subject to the terms of this Lease; the
commencement and expiration dates of this Lease; the date when rent commenced;
and that this Lease is in full force and effect. Failure of Tenant to provide
Landlord at the request of Landlord's mortgagee or financial institution such a
letter as above described shall give Landlord the right to cancel this Lease
upon (5) day's prior written notice to Tenant of such cancellation and Tenant
shall remain liable to Landlord for any damages sustained by the Landlord
because of such failure by Tenant.
21. RENEWAL OPTION - This Lease shall stand renewed for successive
additional terms of one lease year, unless either party shall, not less than 90
days prior to the end of the term hereof, or not less than 90 days prior to the
end of any renewal term, by written notice to the other party, terminate this
Lease. All of the terms and conditions of this Lease shall apply to the
parties hereto during said renewal terms as though such renewal terms were part
of the original term of this Lease. The rent during said renewal term shall be
negotiated between the parties within the 90 day period preceding each renewal.
In the event the parties hereto cannot come to an agreement on the rent to be
applied during the renewal period prior to the commencement of the renewal
period (the "Anniversary Date"), the lease will be terminated 90 days from the
Anniversary Date. In the event the parties come to an agreement regarding the
terms and conditions of the renewal, the Tenant agrees to pay the renewal
monthly base rent in the same manner and under all of the same terms and
conditions as though said adjusted base rent were set forth in paragraph 4
hereof.
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22. RE-RENTING - Landlord shall also have the right to enter upon the
demised premises for a period commencing one hundred and twenty (120) days
prior to the termination of this Lease and all renewals or extensions thereof,
for the purpose of exhibiting the same to prospective tenants or purchasers.
During said period Landlord may place signs in or upon said premises to
indicate that the same are for rent or sale, which signs shall not be
alterated, removed, obliterated or hidden by Tenant.
23. REMEDIES -
(a) Tenant covenants and agrees that:
(i) If Tenant shall fail, neglect or refuse to pay any
installment of rent at the time and in the amount as herein provided or to pay
any other monies, payments or charges agreed by it to be paid, promptly when
and as the same shall become due and payable under the terms herein and if any
such default should continue for a period of more than ten (10) days; or
(ii) If Tenant shall abandon or vacate the demised
premises or shall fail, neglect or refuse to keep and perform any of the other
terms, covenants, conditions, stipulations, obligations or agreements herein
contained and covenanted and agreed to be kept and performed by it, and in the
event any such default shall continue for a period of more than fifteen (15)
days after notice thereof given in writing to Tenant by Landlord (provided,
however, that if the cause for giving such notice involves the making of
repairs or other matters which reasonably require a longer period of time than
the period of such notice, Tenant shall be deemed to have complied with such
notice so long as it has commenced to comply with said notice within the period
set forth in said notice and is diligently procuring compliance, or has taken
proper steps or proceedings under the circumstance to prevent the seizure,
destruction, alteration or other interference with said demised premises by
reason of noncompliance with the requirements of any law or ordinance or with
the rules, regulations, or directions of any governmental authority as the case
may be); then Landlord, besides other rights or remedies it may have by law,
shall be entitled to the rights and remedies enumerated below.
(b) In the event a default enumerated in subparagraph (a) of this
paragraph shall occur, Landlord shall be entitled to all the rights and
remedies of Landlord herein enumerated, which rights and remedies shall be
cumulative and non-exclusive and none shall exclude any other right or remedy
allowed by law. Such rights and remedies may be exercised concurrently and
whenever and as often as the occasion therefor arises:
(i) Tenant does hereby authorize and fully empower
Landlord or Landlord's agent at one to re-enter and take possession of the
demised premises immediately, and by reasonable force if necessary, without any
previous notice of intention to re-enter or resort to legal process, and to
remove all persons and property from the demised premises, and to use such
force and assistance in effecting and perfecting such removal of said persons
and property as may be necessary and advisable to recover exclusive possession
of all said demised premises, whether in the possession of Tenant or of third
persons or otherwise, without being deemed guilty in any manner of trespass,
without becoming liable for any loss or damage occasioned thereby, and without
prejudice to any remedies which might otherwise be used by Landlord, and to
store said property in a warehouse or elsewhere at the cost of and for the
account of Tenant.
(ii) Should Landlord elect to re-enter and take
possession, as herein provided, or should it re-enter or take possession
pursuant to legal proceedings or pursuant to any notice provided for by law,
Landlord may either terminate this Lease, or Landlord may, from time to time
without terminating this Lease, make such alterations and repairs as may be
necessary in order to relet the premises, and relet said premises or any part
thereof for such term or terms
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(which may be for a term extending beyond the term of this Lease) and as such
rental or rentals and upon such other terms and conditions as Landlord in its
sole discretion may deem advisable. Upon each such reletting, all rentals
received by Landlord from such reletting shall be applied, first, to the
payment of any damages or indebtedness other than rent due hereunder from
Tenant to Landlord; second, to the payment of any costs and expenses of ouch
reletting, including brokerage fees, attorney's fees and cost of such
alterations and repairs; third, to the payment of rent due and unpaid
hereunder, and the residue, if any, shall be held by Landlord and applied to
payment of future rent as the same may become due and payable hereunder. If
such rentals received from such reletting during any month are less than that
to be paid during that month by Tenant hereunder, Tenant shall promptly pay any
such deficiency to Landlord. Landlord reserves the right to bring any action
or legal proceeding for the recovery of any deficits remaining unpaid as
Landlord may deem favorable, from time to time, without being obliged to wait
until the end of the term hereof or any renewals or extensions thereof, for the
final determination of Tenant's account. No such reentry or taking possession
of said premises by Landlord shall be construed as an election on Landlord's
part to terminate this lease unless a written notice of such intention be given
to Tenant by Landlord or unless the termination hereof be decreed by a Court of
competent jurisdiction.
(iii) Notwithstanding any such reletting without termination,
Landlord may at any time elect to terminate this Lease for any breach or
default by Tenant. Should Landlord at any time terminate this Lease for any
breach or default, then, in addition to any other remedies Landlord may have,
it may recover from Tenant all damages it may incur by reason of such breach,
including the cost of recovering the demised premises, reasonable attorneys
fees, and all indebtedness due it by Tenant, including the worth at the time of
payment of the excess, if any, of the amount of all rent and other payments
reserved in this Lease for the remainder of the stated term over the then
reasonable rental value of the demised premises for the remainder of the stated
term, all of which amounts shall be immediately due and payable from Tenant to
Landlord.
In determining the reasonable rental value of the demised premises for
the remainder of the stated term, the value of the actual rental obligations of
the Tenant, if any, to whom the Landlord has relet the demised premises shall
be considered the then reasonable rental value and no reasonable rental value
shall be allowed as an offset of Tenant's obligation hereunder until the
expiration of a reasonable period after Landlord shall have leased all other
similar spaces in the Landlord's premises.
(c) No waiver of any term, obligation, covenant or condition or of
the breach of any terms, obligation, covenant or condition of this Lease shall
constitute a waiver of any subsequent breach of such term, obligation, covenant
or condition or shall justify or authorize the non-observance on any other
occasion of the same or of any other term, obligation, covenant or condition
hereof, nor shall the acceptance of rent or other payment by Landlord at any
time when Tenant is in default under any term, obligation, covenant or
condition hereof constitute a waiver of such default or of Landlord's right to
terminate this Lease or of any of Landlord's other rights on account of such
default, nor shall any waiver or indulgence granted by Landlord to Tenant be
taken as an estoppel against Landlord.
(d) Landlord shall in no event be charged with default in the
performance of any of its obligations hereunder and Tenant shall have no right
to cure such default unless and until Landlord shall have failed to commence
performance of such obligation within thirty (30) days (or such additional time
as is reasonably required to commence correction of such default) after notice
to Landlord by Tenant properly specifying wherein Landlord has failed to
perform any such obligations.
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If the holder of record of the first mortgage covering the demised
premises shall have given prior written notice to Tenant that it is the holder
of said first mortgage and if such notice includes the address at which notices
to such mortgagee are to be sent, then Tenant agrees to give the holder of
record of such first mortgage notice simultaneously with any notice given to
Landlord to correct any default of Landlord as hereinabove provided and agrees
that the holder of record of such first nor gage shall have the right, within
sixty (60) days after receipt of said notice, to correct or remedy such default
before Tenant may take any action under this Lease by reason of such default.
24. CONSTRUCTION - The captions appearing in this Lease are inserted only
as a matter of convenience and in no way define, limit, construe or describe
the scope or intent of such sections or paragraphs of this Lease, nor in any
way affect this Lease.
Wherever in the Lease the context requires, the singular shall be
deemed to include the plural, and the plural the singular. The word "it" shall
be used as synonymous with the words she, he or they where the context
requires.
The references contained herein to successors, devisees and assigns of
Tenant is not intended to constitute a consent to assignment by Tenant, but has
reference only to those instances in which Landlord may have given written
consent to a particular assignment.
If any term or provision of this Lease or the application thereof to
any person or circumstances shall to any extent be invalid or unenforceable,
the remainder of this Lease or the application of such terms or provisions to
persons or circumstances other than those as to which it was held invalid or
unenforceable, shall not be affected thereby and each term and provision of
this Lease shall be valid and enforced to the fullest extent permitted by law.
25. ENTIRE AGREEMENT - This Lease shall constitute the entire agreement of
the parties hereto; all prior agreements between the parties, whether written
or oral, are merged herein and shall be of no force and effect. This Lease
cannot be changed, modified or discharged orally but only by an agreement in
writing, signed by the party against whom enforcement of the change,
modification or discharge is sought.
26. NOTICES - Whenever under this Lease a provision is made for notice of
any kind, it shall be deemed sufficient notice and service thereof if such
notice to Tenant is in writing addressed to Tenant at his last known post
office address, or at the demised premises, and deposited in the mail,
certified or registered mail, with postage prepaid, and if such notice to
Landlord is in writing addressed to the last known post office address of
Landlord and deposited in the mail, certified or registered mail, with postage
prepaid. Notice need be sent to only one Tenant or Landlord where Tenant or
Landlord is more than one person.
27. SUCCESSORS - This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective heirs, administrators,
executors, representatives, successors and assigns.
[remainder of page left blank intentionally]
9
<PAGE> 10
IN WITNESS WHEREOF, Landlord and Tenant have executed and signed this
Lease on the day and year first above written.
WITNESS: LANDLORD:
/s/ Frederick D. Sancilio
- ------------------------- ----------------------------------
ATTEST: TENANT:
/s/ Mark P. Colonnese
- ------------------------- ----------------------------------
STATE OF NORTH CAROLINA
COUNTY OF NEW HANOVER
I, GL Kangas, a Notary Public of the County of New Hanover, North
Carolina, do hereby certify that Fred Sancilio, Mark Colonnese of 5051 NEW
CENTRE DRIVE L.L.C., personally appeared before me this day and acknowledged the
due execution of the foregoing statement.
Witness my hand and notarial seal, this the 1st day of
September, 1994.
/s/ GL Kangas
------------------------------------
Notary Public
My commission expires: 8/29/99
STATE OF ___________________
COUNTY OF __________________
I, __________________________________, a Notary Public of __________
County, North Carolina, certify that __________________ __________________
personally came before me this day and acknowledged that he (or she) is the
Secretary of ________________ __________________, a corporation, and that by
authority duly given and as the act of the corporation, the foregoing
instrument was signed in its name by its President, sealed with its corporate
seal, and attested by himself (or herself) as its Secretary.
Witness my hand and notarial seal, this the _____ day of
_____________________, 1994.
__________________________________
Notary Public
My commission expires:
10
<PAGE> 1
EXHIBIT 10.11
NORTH CAROLINA
DURHAM COUNTY
LEASE AGREEMENT
This Lease Agreement is made and entered into as of the 23rd day of
December, 1993, by and between I-40 Properties, a North Carolina Partnership
("Landlord") and Applied Analytical Industries, Inc. (AAI), a Delaware
Corporation, ("Tenant").
WITNESSETH:
WHEREAS, Landlord owns certain real property located at 6110
Quadrangle Drive, Durham, Durham County, North Carolina ("Tract") and the
building and other improvements on the same ("Building") more fully described
in Exhibit A (property description) attached hereto and incorporated herein by
reference; and
WHEREAS, Tenant is desirous of leasing the Building as more fully
described below and Landlord is willing to lease said property to Tenant.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants, conditions and agreements herein contained, the parties hereby agree
as follows:
DEMISED PREMISES
Landlord hereby demises and leases unto Tenant those premises located
in the Building and more fully described in Exhibit B (siteplan and space
plans) attached hereto and incorporated herein by reference ("Demised
Premises"). The parties agree that the Demised Premises contain approximately
thirty thousand and thirty one (30,031) rentable square feet and that the
Building contains approximately thirty thousand and thirty one (30,031)
rentable square feet.
1.
USE AND ACCEPTANCE OF DEMISED PREMISES
The Demised Premises shall be used by Tenant for USES WHICH ARE
DIRECTLY OR INDIRECTLY RELATED TO PHARMACEUTICAL PURPOSES. Tenant shall not
vacate or abandon the Demised Premises. TENANT ACCEPTS PREMISES WHICH INCLUDES
31 FUME HOODS, A BIOLOGICAL CLEAN ROOM AND LAB BENCHWORK AND CABINETS AS SHOWN
ON EXHIBIT B-1 AND B-2 (FLOOR PLANS). LANDLORD WARRANTS THAT ALL MECHANICAL
SYSTEMS AND FUME HOODS ARE IN WORKING CONDITION. (*) By accepting possession
of the Demised Premises, Tenant agrees that the Demised Premises are
- ------------------------
(*) During the initial ninety (90) day period of this Lease Agreement.
<PAGE> 2
in proper condition and are in all respects suitable for Tenant's use except as
otherwise provided in Section 4 below.
2.
TERM OF LEASE
(a) The term of this lease shall commence on January 1, 1994
("Commencement Date"), and shall end on March 31, 2004 ("Termination Date.")
Beginning with the day immediately following the Initial Termination Date,
Tenant shall have the right, if Tenant is not at any time in default hereunder,
to extend the term of the Lease for one (1) consecutive period(s) of sixty (60)
consecutive calendar months upon written notice to Landlord at least 12 months
prior to the expiration of the then expiring initial term. All of the
provisions of this Lease Agreement shall apply to the extended term, including
annual base rent increases of $.75 per rentable square foot above rent per
square foot paid the last month of the initial term and all operating expense
pass-throughs.
(b) If Tenant has not been in default, Tenant will have the right
to cancel this lease AT THE END OF THE 63RD MONTH OF THE LEASE TERM BY
PROVIDING 2 YEARS PRIOR WRITTEN NOTICE TO LANDLORD OF SUCH TERMINATION AND
PAYING LANDLORD $200,000 WITHIN 30 DAYS OF VACATING THE PREMISES. TENANT MAY
ALSO TERMINATE THIS LEASE WITHOUT PENALTY AT THE END OF THE 87TH MONTH OF THE
LEASE TERM BY PROVIDING 2 YEARS ADVANCE WRITTEN NOTICE.
3.
COVENANT TO PAY RENT
(a) Throughout the term hereof and any extensions or any holdover
periods, Tenant shall pay, without demand and without counterclaim, deduction
of set-off, monthly minimum rent as follows, payable on or before the first day
of each calendar month:
<TABLE>
<CAPTION>
PRSF ANNUAL MONTHLY
---- ------ -------
<S> <C> <C> <C> <C>
Jan. 1 - Mar. 31 1994 $ 0 $ 0 $ 0
Apr. 1 - Dec. 31 1994 13.75 412,926.00 34,411.00
Jan. 1 - Dec. 31 1995 14.50 435,450.00 36,287.00
Jan. 1 - Dec. 31 1996 15.25 457,973.00 38,164.00
Jan. 1 - Dec. 31 1997 16.10 483,499.00 40,292.00
Jan. 1 - Dec. 31 1998 17.00 510,527.00 42,544.00
Jan. 1 - Dec. 31 1999 18.00 540,558.00 45,047.00
Jan. 1, 2000 - 18.50 555,574.00 46,298.00
Mar. 31, 2004
</TABLE>
(b) The above minimum rent is net of all costs for janitorial,
water, electrical and interior maintenance, all of which are costs paid for
directly by Tenant.
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<PAGE> 3
(c) Tenant shall furthermore pay any additional rent required
under this lease when due without demand and without counterclaim, deduction or
setoff.
4.
LANDLORD'S AND TENANT'S WORK
Landlord and Tenant shall, at their own respective expense, perform
the additional work described as "Landlord's Work" or "Tenant's Work" in
Exhibit C attached hereto and incorporated herein by reference. It is
expressly understood and agreed that Landlord's obligation with respect to the
construction and finishing of the Demised Premises shall be limited to the
scope of work described as Landlord's Work in Exhibit C and shall in no event
include any work not described in Exhibit C. All Landlord's Work and Tenant's
Work shall constitute improvements to the Demised Premises which shall become
sole property of Landlord and shall remain at the Demised Premises upon
expiration of this Lease Agreement or termination of Tenant's right to
possession of the Demised Premises unless Landlord notifies Tenant otherwise in
writing. Possession of the Demised Premises shall be delivered to Tenant on or
before the Commencement Date, subject to extension for all delays resulting
from causes beyond the reasonable control of Landlord. All work by Tenant or
Landlord shall be performed in a lawful and workmanlike manner in accordance
with all ordinances, building codes or other governing law and in accordance
with plans and specifications prepared by Tenant at Tenant's sole cost and
expense and approved by Landlord, which approval Landlord may grant or withhold
in Landlord's sole discretion. Tenant shall take no action which may result in
a claim of lien against the Tract, Building or Demised Premises and Tenant
shall liquidate and discharge the same as provided in Section 12.
Tenant shall provide Landlord with construction drawings for ALL
MATERIAL improvements and changes it makes to the Premises, and shall provide
Landlord with updated "as built" space plans on a periodic basis.
5.
REAL ESTATE AND OTHER TAXES AND SPECIAL ASSESSMENTS
(a) During the term hereof and any extension or holdover period,
Tenant shall promptly and timely pay as additional rent all ad valorem taxes
LEVIED AGAINST THE TRACT, or assessments levied by any federal, state, county,
or municipal authority on Tenant's personal property in or on the Demised
Premises.
(b) Tenant shall pay as additional rent within thirty (30) days of
billing by Landlord Tenant's share as below defined of the amount of ad valorem
taxes LEVIED AGAINST THE TRACT, or assessments levied from time to time by the
foregoing authorities ON TENANT'S PERSONAL PROPERTY AS STATED IN PARAGRAPH 4
ABOVE. THE FOREGOING
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<PAGE> 4
LIMITATION RELATIVE TO PERSONAL PROPERTY OF TENANT SHALL APPLY TO ASSESSMENTS
ONLY AND SHALL IN NO WAY LIMIT OR APPLY TO AD VALOREM TAXES DURING THE TERM
HEREOF AND ANY EXTENSION OR HOLDOVER PERIOD. Tenant's share as used herein
shall be the difference in Base Year (actual taxes paid in 1993) and actual tax
costs for succeeding calendar years. Landlord may estimate Tenant's pro rata
share of such taxes and assessments and Tenant shall pay such estimated amount
as additional rent with Tenant's payment of monthly minimum rent. In the event
Tenant's actual prorata share exceeds its estimated share, Tenant shall pay the
deficiency to Landlord as additional rent within thirty (30) days of billing by
Landlord. In the event Tenant's actual prorata share is less than its
estimated share, Landlord shall credit the amount thereof to the monthly rents
next becoming due from Tenant.
6.
LANDLORD'S SERVICES
(a) Landlord shall cause to be furnished to the Demised Premises
24 HOURS A DAY 365 DAYS A YEAR the following services: maintenance of casualty
insurance by Landlord on the Building in such form and amount as is
satisfactory to Landlord, water to the extent available, electricity to the
extent available for normal general office use, removal of trash from site
receptacles in accordance with city schedules, normal heating and air
conditioning for the reasonably comfortable use and occupancy of the Demised
Premises (provided heating and cooling to any governmental regulation
prescribing limitations thereon shall be deemed to comply with this service),
Building repair and maintenance as set forth in Section 8 below, and Common
Area Maintenance as set forth in Section 14 below. All costs resulting from
Tenant's usage of water, heating, air conditioning, electricity, trash removal,
or other services shall be paid by Tenant. Tenant shall not install equipment
with unusual demands FOR A PHARMACEUTICAL LABORATORY for any of Landlord's
services without Landlord's prior written consent which Landlord may withhold
if Landlord reasonably determines that such equipment is not suitable for the
Building or may not safely be used therein. Landlord shall not be responsible
for any failure of or interruption in utility or other services to the Building
or Demised Premises.
(b) Tenant shall pay the Landlord as additional rent hereunder
within thirty (30) days of billing by Landlord the increase of Landlord's
Building Operating Expenses over Base Year 1993 as operating expenses are
defined below. BEGINNING CALENDAR YEAR 1995 AND THEREAFTER THE INCREASE OF
LANDLORD'S BUILDING OPERATING EXPENSES (EXCLUDING TAXES) THAT CAN BE PASSED
THROUGH TO TENANT SHALL BE LIMITED TO 105% OF THE INCREASE IN EXPENSES FOR THE
PRIOR CALENDAR YEAR. Landlord may estimate Tenant's Operating Expenses from
time to time and Tenant shall pay such estimated amount as additional rent
within thirty (30) days of billing by Landlord. In the event Landlord
determines that Tenant's actual
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<PAGE> 5
costs exceeds the estimated amount, Tenant shall pay the deficiency as
additional rent within thirty (30) days of billing by Landlord; and if the
estimated amount exceeds Tenant's actual prorata share, Tenant shall be
entitled to a credit for said excess against the next succeeding monthly
payments thereof.
(c) Landlord's "Operating Expenses" shall mean any and all costs and
expenses paid or incurred by Landlord or its agents for any of Landlord's
services specified above or otherwise in this Lease and for all wages of
maintenance personnel, material, and service costs and expenses and any and all
other costs or expenses paid or incurred by Landlord's agents in connection
with the operation, servicing, maintenance, and repair of the Building, HVAC
units, boilers and chillers, Common Areas or Tract in accordance with generally
accepted accounting principles, consistently applied. Provided, however,
Operating Expenses shall exclude: tenant upfitting costs or other concessions
paid or provided to tenants or the Building; INTERIOR MAINTENANCE TO THE
DEMISED PREMISES WHICH IS THE OBLIGATION OF TENANT IN ACCORDANCE WITH (E)
BELOW; leasing commissions; advertising and marketing expenses; capital
improvements to the Building or the Tract; principal and interest on any
indebtedness; depreciation; any ground rent payable by Landlord; special
services provided to tenants which are to be billed directly to such tenants;
and the prorated portion of any of the above components of Operating Expenses
allocated to activities of personnel or services provided for the benefit for
any development or property other than the Building and the Tract. Upon
Tenant's written request, Landlord shall provide Tenant a summary showing
Landlord's calculation of its Operating Expenses from time to time.
(d) Tenant shall pay or cause to be paid all charges for telephone
or any other communication or utility service used in or rendered or supplied
to the Demised Premises throughout the initial and any extended term of this
Lease Agreement or any holdover period which Landlord does not provide above
and Tenant shall indemnify the Landlord and hold Landlord harmless against any
liability or damages (including Landlord's reasonable attorneys' fees and
expenses) on such account.
(e) All maintenance inside the Demised Premises will be Tenant's
responsibility. This includes but is not limited to all lighting replacement,
plumbing repairs, ceiling tile replacement, any interior wall and door repairs
and any maintenance on the bathrooms.
7.
SECURITY DEPOSIT
Tenant shall deposit with Landlord on the signing of this Lease
Agreement the sum of thirty five thousand ($35,000) as security for the
performance of Tenant's obligations under this
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<PAGE> 6
Lease Agreement, including without limitation, the surrender of possession of
the Demised Premises to Landlord as herein provided. If from time to time
Landlord applies any part of said deposit to cure any default of Tenant, Tenant
shall upon demand immediately deposit funds with the Landlord sufficient to
restore the full initial balance of the security deposit. This deposit shall
BE INVESTED IN AN INTEREST BEARING ACCOUNT and, unless the Landlord uses the
same to cure a default of Tenant including restoring the Demised Premises to
the condition that Tenant is required to leave them at the conclusion of the
Term, Landlord shall within thirty (30) days of the termination of the Lease
Agreement refund to Tenant so much of the deposit as Landlord continues to
hold, INCLUDING ANY REMAINING INTEREST ACCRUED.
8.
REPAIR, PRESERVATION AND MAINTENANCE OF THE DEMISED
PREMISES
(a) Landlord at Landlord's sole cost and expense shall keep and
maintain the roof, foundation and the structural soundness of the exterior
walls of the Building and Demised Premises in good repair exclusive of matters
due to Tenant's willful misconduct or gross neglect, which Tenant shall
promptly remedy and repair. Tenant at Tenant's sole risk, cost and expense
shall maintain the remainder of the Demised Premises in good, clean and
sanitary condition and repair. Tenant furthermore shall not injure, deface,
overload or waste the Demised Premises or any part thereof or permit the same
to occur, nor shall Tenant engage in or permit any action which would threaten
to injure, deface, overload or waste the Demised Premises or any part thereof.
Tenant shall not permit the accumulation of waste or refuse matter in or on the
Demised Premises or adjacent thereto.
(b) Tenant shall return the Demised Premises to Landlord at the
end of the initial or any extended term of any holdover period in such
condition as they were in as of the Commencement Date or the date of completion
with respect to any improvements made after the Commencement Date, ordinary
wear and tear only excepted. Tenant shall hold Landlord harmless from any
loss, cost or damage (including Landlord's reasonable attorneys' fees and
expenses) caused by Tenant's failure to comply with Tenant's maintenance
obligations under this Lease Agreement or caused by the maintenance or repairs
made by Tenant or Tenant's agents, servants or employees, or by persons coming
on the Demised Premises at the express or implied invitation of the Tenant.
9.
TENANT'S GENERAL INDEMNITY
Landlord shall not be liable to Tenant, or to any other person or
entity whatsoever, EXCEPT GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT BY
LANDLORD, for any injury, loss or damage to any
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<PAGE> 7
person or property in or upon the Demised Premises or otherwise resulting from
Tenant's use of the Demised Premises or of the Building, the Tract or any
Common Areas designated from time to time by Landlord as below provided.
Tenant furthermore hereby covenants and agrees to assume all liability for or
on account of any injury, loss or damage above described or resulting from any
breach by Tenant or any of Tenant's obligations under this Lease Agreement
(including Landlord's reasonable attorneys' fees and legal expenses), and
Tenant shall save and hold Landlord harmless therefrom except as otherwise
provided in Section 17 of this Lease Agreement EXCEPT WHERE SUCH INJURY, LOSS
OR DAMAGE IS THE RESULT OF GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT BY
LANDLORD.
10.
ASSIGNMENT
Tenant shall neither assign, mortgage, pledge nor otherwise encumber
this Lease Agreement, nor sublet the whole or any part of the Demised Premises
without first obtaining the written consent of Landlord, which consent Landlord
shall not unreasonably withhold. Such consent by Landlord shall not relieve
Tenant of any of Tenant's obligations under this Lease Agreement. For purposes
of this Section, an assignment shall include a transfer of more than a thirty
percent (30%) ownership interest OF VOTING STOCK in Tenant whether all at once
or over time; PROVIDED, HOWEVER, THE FOREGOING PROHIBITION SHALL NOT APPLY TO A
PUBLIC OFFERING OF STOCK BY TENANT.
11.
STOCK IN TRADE AND FIXTURES AND INSURANCE THEREON
Tenant's stock in trade and fixtures and all other property of Tenant
or any third parties in or on the Demised Premises shall be at the sole risk of
Tenant or such third parties. Landlord shall not be liable to Tenant or any
third parties for any damage to personalty or fixtures at the Demised Premises
or Building or Tract for any reason, including but not limited to loss or theft
or damage due to leakage of water, gas, sewage or steam due to electrical or
other utility failure.
12.
ALTERATIONS, ADDITIONS AND SIGNS
(a) Tenant shall not make any alterations or additions to the
Demised Premises, WITH THE EXCEPTION OF THESE SET FORTH IN EXHIBIT C, without
first obtaining the written consent of Landlord, which consent Landlord shall
not unreasonably withhold. All alterations, additions and improvements to the
Demised Premises (whether made by Landlord or Tenant) shall become the property
of the Landlord and shall remain upon and become a part of the Demised Premises
at the termination of this Lease Agreement or Tenant's right to possession of
the Demised Premises unless Landlord otherwise notifies Tenant
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<PAGE> 8
in writing. Any alterations performed by Tenant and approved by Landlord shall
be in accordance with all applicable statutes, ordinances, regulations and
applicable law and shall be performed in a workmanlike manner with materials
and contractors approved by Landlord. Tenant in the event of any construction
work shall procure and maintain in force until completion and acceptance of any
completed improvements all risks builder's risk insurance, including vandalism
and malicious mischief, in form and amount reasonably acceptable to Landlord
covering improvements in place and all material and equipment at the job site
and Tenant shall deliver to Landlord satisfactory proof that worker's
compensation insurance has been procured to cover all persons employed in
connection with the construction. Tenant furthermore shall not in any event do
anything that may create or be the foundation for any lien upon the Demised
Premises or the Building or Tract, or upon any of the improvements on the
foregoing; and should any such lien be created or filed, Tenant at Tenant's own
cost and expense shall liquidate and discharge the same in full within ten (10)
days after the earlier of the notice or filing thereof.
(b) Tenant shall not place, paint or otherwise affix any signs
visible on any of the exterior portions of the Demised Premises or Building
without Landlord's prior written consent, which consent Landlord may grant or
withhold in Landlord's sole discretion, EXCEPT AS PROVIDED IN EXHIBIT E. All
Tenant signs must comply with all applicable municipal or other governmental
rules and regulations.
13.
UNLAWFUL, IMPROPER OR OFFENSIVE USE
Tenant shall not make nor allow to be made any use of the Demised
Premises or Common Areas designated from time to time by Landlord as below
provided which is unlawful or which in Landlord's judgment is improper,
dangerous or offensive. Tenant shall furthermore promptly comply with all
ordinances, regulations, rules or orders of any federal, state, county or
municipal authority applicable to the Demised Premises and Tenant shall not
bring hazardous materials or waste upon the Demised Premises or permit the same
to occur IN VIOLATION OF ANY OF THE FOREGOING. Tenant shall use, store or
dispose of any hazardous MATERIALS PERMITTED AS AFORESAID in a safe and
reasonable manner and in full compliance with all applicable federal, state,
municipal, county and other governmental laws, rules, and regulations. Tenant
shall be responsible for and shall pay all damages and charges to the state or
city government or any other persons or entities of any nuisance made or
suffered during the term of this Lease Agreement on or from the Demised
Premises or any such Common Areas resulting from the activities of Tenant or
its agents, licensees or invitees or otherwise. TENANT SHALL PROVIDE ON AN
ANNUAL BASIS A COPY OF TENANT'S ENVIRONMENTAL IMPACT STATEMENT WITHIN 30 DAYS
AFTER PREPARATION THEREOF.
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<PAGE> 9
14.
COMMON AREAS AND PARKING
Landlord hereby grants Tenant and Tenant's invitees, licensees and
agents the right, in common with other tenants of the Building, to use such
areas of the Tract, including parking areas, as Landlord may designate from
time to time to be common areas (the "Common Areas"). Tenant's use of
available parking shall not exceed the limit specified by Landlord for Tenant
from time to time. Any such usage by Tenant and Tenant's invitees, licensees
and agents of the Common Areas shall be incident to Tenant's business
activities hereunder, shall be lawful and reasonable, and shall be subject to
Landlord's rule making authority per this lease. Landlord shall have exclusive
control over the operation and maintenance of any such Common Areas. Landlord
and its agents' costs and expenses incurred in operating and maintaining the
Common Areas shall be Operating Expense reimbursable to Landlord as provided in
Section 6 above.
15.
DAMAGES TO PREMISES BY FIRE OR CASUALTY
AND TAKING FOR PUBLIC USE
(a) IN THE EVENT THE DEMISED PREMISES IS DAMAGED BY FIRE OR OTHER
CASUALTY, LANDLORD SHALL GIVE TENANT NOTICE OF ITS INTENTION TO REPAIR OR
RESTORE WITHIN 15 DAYS AFTER THE OCCURRENCE OF SUCH DAMAGE. If the Demised
Premises shall be damaged by fire or other casualty, which damage can
reasonably be corrected within ONE HUNDRED FIFTY (150) days and for a sum not
exceeding the insurance proceeds actually received therefor by Landlord,
Landlord shall be entitled to RESTORE AND REPAIR THE DEMISED PREMISES, retain
any excess insurance proceeds, AND TENANT SHALL BE OBLIGATED TO REOCCUPY THE
PREMISES UPON COMPLETION OF SUCH REPAIRS WITH TENANT'S SOLE REMEDY BEING THE
ABATEMENT OF RENT IN THE PORTION OF THE DEMISED PREMISES WHICH WERE NOT
TENANTABLE. In the event the Demised Premises cannot reasonably be so repaired
or replaced, either Landlord or Tenant may terminate this Lease Agreement by
written notice to the other provided, however, that (i) Tenant may not
terminate this Lease Agreement after Landlord has begun to repair or
reconstruct the Demised Premises and (ii) any obligations of the parties
existing under this Lease Agreement at the time of such termination shall be
unaffected by such termination, provided however there shall be an equitable
abatement of rent proportionate to the demised premises damaged by fire or
casualty and (iii) in the event such casualty occurs during the last twelve
(12) calendar months of the term or any extended term, Landlord may elect not
to rebuild and may retain the insurance proceeds received.
(b) In the event the whole of the Demised Premises shall be taken
by any public authority under the power of eminent domain or like power or by a
deed in lieu thereof, this Lease Agreement shall terminate as of the date that
possession of the Demised Premises
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<PAGE> 10
shall be delivered to the appropriate authority. In the event of only a
partial such taking, this Lease Agreement shall not terminate (unless either
party, by written notice to the other party, chooses to terminate the same) but
there shall be an equitable abatement of rent proportionate to the part of the
Demised Premises taken. Any termination of the Lease Agreement shall not
affect the obligations of the parties existing under the Lease Agreement up to
the time of termination. Tenant shall not be eligible to receive any part of
any award or awards from any eminent domain proceeds or deed in lieu thereof,
and Tenant hereby assigns all of its right, title and interest in and to any
such award or awards to Landlord. However, Tenant may, to the extent permitted
by law, and at Tenant's own expense and cost, take independent or related
proceedings against the public authority exercising the power of eminent domain
to pursue and establish any damages Tenant may have incurred for the taking of
Tenant's property and for business interruption or relocation expenses
resulting from the exercise of power of eminent domain (including any deed in
lieu thereof) provided that any such action by Tenant shall not reduce or
adversely affect the amount of Landlord's award.
16.
INSURANCE
(a) Throughout the term of this Lease Agreement and any extended
term or terms, Landlord shall provide fire and extended insurance coverage for
the Demised Premises and the Building for 100% of the replacement value
(defined as actual replacement cost excluding the costs of excavation,
foundation and footings) in a form and amount satisfactory to Landlord as
provided in Section 6 above WHICH INSURANCE SHALL BE OBTAINED FROM A COMPANY
RATED AAA BY BEST & COMPANY AND SHALL BE IN FORM REASONABLY ACCEPTABLE TO
TENANT. The costs of such insurance (as well as the costs of any other
insurance of any nature that Landlord shall choose to obtain for the Building,
Common Areas, Tract or any part thereof) shall be one of Landlord's Operating
Expenses reimbursable to Landlord in accordance with Section 6 above.
Throughout the term of this Lease Agreement and any extended term or hold over
period, Tenant shall provide, at Tenant's sole cost and expense, in addition to
the fire and extended insurance coverage for Tenant's property at the Demised
Premises required by this lease, public liability insurance for the Demised
Premises, including property damage with no less than One Million Dollars
($1,000,000.00) limit per occurrence and death and personal injury coverage
with no less than One Million Dollars ($1,000,000.00) limit per person. Such
policy shall name Landlord as an additional insured. Tenant shall also
maintain all worker's compensation and similar insurance required by applicable
law.
(b) With respect to all policies of insurance required to be
carried by either party under this Lease Agreement, either party
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<PAGE> 11
shall provide the other party with copies of the certificates of such insurance
at or prior to their effective dates. All such policies of either party shall
provide that the same may not be modified or cancelled without at least thirty
(30) days prior written notice to the other party and either party shall
provide the other party with copies of the certificates for all modified,
renewed or new insurance policies on or before their effective dates.
(c) To the extent possible without additional cost, each party
shall obtain, for each policy of insurance, provisions permitting waiver of any
claim against the other party for loss or damage within the scope of the
insurance. Such waiver coverage at an additional premium shall be obtained by
either party upon written notice from the other party seeking the same
accompanied by reimbursement by such other party for the additional expense.
(d) Tenant shall not take any action or permit anything to be done
which will increase the rate of fire or other insurance coverage on the Demised
Premises or any part thereof or adjacent thereto or on the Building or the
Tract. However, in the event the Tenant shall take any such action then, in
addition to any other rights Landlord might have under this Lease Agreement or
otherwise, Landlord may require Tenant, upon demand, separately to pay or
reimburse Landlord as additional rent the amount of any increased insurance
premiums attributable to such action which are in excess of those charged at
the date of this Lease Agreement.
17.
WAIVER OF SUBROGATION
(a) Landlord hereby releases Tenant, but only to the extent of
Landlord's insurance coverage and only to the extent payment is actually
received under such coverage by Landlord, from any liability for loss or damage
covered by any insurance policies which the Landlord carries with respect to
the Demised Premises, Building or Tract or any interest or property therein or
thereon whether or not such insurance is required by this Lease Agreement and
even if the insured peril shall be brought about by the default, negligence or
other action of the Tenant, Tenant's agents, employees or any of them;
provided, this release shall be in effect only with respect to an insured loss
only so long as Landlord's policy applicable to such loss contains a clause to
the effect that this release shall not affect the right of Landlord to recover
under such policy. Landlord does not waive and hereby reserves the right to
secure compensation from Tenant for any uninsured loss, any amounts not paid
because of deductibles and other amounts not paid for any reason whatsoever
OTHER THAN FOR LANDLORD'S FAILURE TO MAINTAIN INSURANCE UNDER SECTION 16.
(b) Tenant hereby releases Landlord, but only to the extent of
Tenant's insurance coverage and only to the extent payment is
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<PAGE> 12
actually received under such coverage, from any liability for loss or damage
covered by any insurance policies which the Tenant carries with respect to the
Demised Premises, Building or Tract or any interest or property therein or
thereon whether or not such insurance is required by this Lease Agreement and
even if the insured peril shall be brought about by the default, negligence or
other action of the Landlord, Landlord's agents, employees or any of them;
provided, this release shall be in effect only with respect to an insured loss
and only so long as Tenant's policy applicable to such loss contains a clause
to the effect that this release shall not affect the right of Tenant to recover
under such policy. Tenant does not waive and hereby reserves the right to
secure compensation from Landlord to which Tenant is otherwise entitled for an
uninsured loss, any amounts not paid because of deductibles and other amounts
not paid for any reason whatsoever. This section does not modify the
limitations of Landlord's liability to Tenant provided under any other sections
of this Lease Agreement.
18.
TENANT'S OBLIGATIONS AT THE END OF TERM AND HOLDING OVER
(a) Tenant shall, at the expiration of the initial or any extended
term of this Lease Agreement or hold over period, peaceably surrender the
Demised Premises to Landlord in the condition required in Section 8 above. At
such time, in addition to any other obligations of Tenant under this Lease
Agreement, Tenant shall leave the Demised Premises broom clean, shall fasten
and lock all doors and windows, shall return to Landlord all keys to the
Demised Premises, and shall notify Landlord of the address to which any balance
of the Security Deposit should be sent.
(b) Any holding over by Tenant at the Demised Premises after the
expiration of the term of this Lease Agreement or any final extended term shall
at most result in a tenancy from month to month, terminable at will of
Landlord. All of the obligations of Tenant under this Lease Agreement shall
apply to any such hold over period, except that the monthly portion of the Base
Rent shall be ONE HUNDRED TWENTY FIVE PERCENT (125%) in amount of each month
that Tenant remains in possession.
(c) Upon vacating the Premises, Tenant must have performed an
environmental audit to ensure that the facility is free of any materials and
residue which might be contaminated with any materials potentially hazardous to
health. UPON VACATING THE PREMISES, TENANT WILL PROVIDE DOCUMENTATION THAT THE
PREMISES ARE FREE OF POTENTIALLY HAZARDOUS MATERIALS TO THE SAME EXTENT AND
LEVEL USING SIMILAR METHODOLOGY (WITH THE SAME DEGREE OF TECHNOLOGY AVAILABLE
ON JANUARY 1, 1994), AS SPECIFIED IN (I) THE GLAXO LETTER OF CERTIFICATION
DATED _______________ CONCERNING BETA LACTAMS, (II) THE SPHINX LETTER OF
CERTIFICATION DATED DECEMBER 21, 1993 CONCERNING BETA LACTAMS, AND (III) THE
DUKE UNIVERSITY ANALYSIS OF
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<PAGE> 13
THE PREMISES DATED DECEMBER 2, 1993. TENANT WILL INCUR ALL COSTS TO FREE
PREMISES OF SUCH MATERIALS IF SUCH DO EXIST UPON LEASE TERMINATION.
19.
REMOVAL OF FIXTURES AND OTHER ITEMS AT END OF LEASE
To the extent consistent with other terms of this Lease Agreement,
Tenant at the expiration of this Lease Agreement shall remove all furniture and
other personal property, including fixtures, trade or otherwise, which Tenant
or any other third parties have installed upon or placed within the Demised
Premises during the term of this Lease Agreement or any extended term or
holdover period and to which Landlord is not entitled if such items can be
removed without material injury to the Demised Premises; provided, however, all
repairs to the Demised Premises required by such removal must be properly and
promptly made by Tenant at Tenant's sole cost and expense incident to such
removal. All property of Tenant remaining at the Demised Premises after the
last day of the term of this Lease Agreement or any extended term or holdover
period shall conclusively be deemed abandoned and may be removed by Landlord at
Tenant's expense or retained by Landlord.
20.
LANDLORD'S ENTRY
Landlord at all reasonable times AND UPON PRIOR NOTICE may enter to
view or inspect the Demised Premises and to make repairs which Landlord may see
fit to make in accordance with Section 9 or otherwise, EXCEPT EMERGENCY REPAIRS
FOR WHICH LANDLORD IS RESPONSIBLE AND FOR WHICH LANDLORD SHALL NOT BE OBLIGATED
TO GIVE PRIOR NOTICE. During a reasonable period not less than six (6) months
preceding the expiration of the initial or any extended term and throughout any
holdover period Tenant will permit Landlord to place and keep upon and about
the Demised Premises a notice that the Demised Premises are for rent or for
sale and during such period Landlord may enter the Demised Premises to show
them to prospective tenants or purchasers. LANDLORD ACKNOWLEDGES THE
CONFIDENTIAL NATURE OF TENANT'S BUSINESS OPERATIONS AND AGREES TO USE ITS BEST
EFFORTS NOT TO DISRUPT ORDINARY BUSINESS OPERATIONS IN EXERCISING ANY OF THE
RIGHTS GRANTED HEREIN.
21.
RULES AND REGULATIONS
Tenant shall comply with the rules and regulations attached as Exhibit
E as Landlord may prescribe from time to time for the use, safety, care and
cleanliness of the Demised Premises, the Building, the Tract, and any Common
Areas; provided the same are applicable equally to all occupants of the
Building.
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<PAGE> 14
22.
QUIET ENJOYMENT
Landlord agrees that if Tenant shall pay the rent as aforesaid and
perform the covenants and agreements herein contained on Tenant's part to be
paid and performed, Tenant shall peaceably hold and enjoy the Demised Premises
without hindrance or interruption by the Landlord or by any other person or
persons claiming through Landlord, DIRECTLY OR INDIRECTLY.
23.
SUBORDINATION AND TENANT'S ESTOPPEL
(a) This Lease Agreement shall be deemed subject and subordinate
to any mortgage or deed of trust which may heretofore or hereafter be executed
by Landlord covering the Demised Premises or any part thereof or the Building
or the Tract and to all renewals, modifications or extensions thereof. The
Landlord's interest in this Lease Agreement may be assigned as security for any
financing now or hereafter required by Landlord. In the event any proceedings
are brought or notice given for foreclosure of any mortgage or deed of trust on
the Demised Premises or the Building or for the exercise of any rights pursuant
to any mortgage, deed of trust or assignment Tenant will attorn to the holder
of the deed of trust, mortgagee, assignee or purchaser at a foreclosure sale,
as the case may be and will recognize such holder, assignee, mortgagee or
purchaser as Landlord, providing such holder, assignee, mortgagee or purchaser
agrees not to disturb Tenant's possession so long as Tenant is not in default
under the terms of this Lease Agreement.
(b) Tenant shall execute and deliver to Landlord at Landlord's
request from time to time, and within TEN (10) BUSINESS days thereof (i)
instruments evidencing the subordination position of this Lease Agreement
and/or (ii) estoppel certificates setting forth the date Tenant accepted
possession of the Demised Premises, that Tenant occupies the Demised Premises,
the termination date of the Lease Agreement, the date to which rent has been
paid, and the amount of monthly rent in effect as of such certification,
whether or not Tenant has any defense to the enforcement of Tenant's lease, any
knowledge Tenant has of any default or breach by Landlord, any other matters
requested by Landlord and that the Lease Agreement is in full force and effect
except as to modifications, agreements or amendments thereto, copies of each of
which including the Lease Agreement shall be attached. Failure by Tenant to
RESPOND TO any such request within such TEN (10) BUSINESS day period shall be
deemed a conclusive admission by Tenant that this Lease Agreement remains in
full force and effect, that Tenant has no defense thereto and that Landlord is
not in breach thereunder.
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<PAGE> 15
24.
CURING DEFAULTS AND LATE CHARGES
(a) If Tenant is required to perform or comply with any agreement
or provision hereof and shall fail to do so within the time provided therefor
(or if no time is provided therefor then within ten (10) days after WRITTEN
NOTICE AND demand for compliance shall have been provided to Tenant) then, in
each such case, upon the expiration of the time provided in this Lease
Agreement (except in the case of emergency situations in which event the time
frame may be shortened as appropriate) Landlord may perform and comply
therewith for the account and at the expense of Tenant; and Tenant upon receipt
of an itemized invoice of the cost and expense thereof, agrees to pay as
additional rent within thirty (30) days of billing by Landlord the cost and
expense incurred by Landlord.
(b) Tenant shall pay a late charge of the lesser of four percent
(4%) of all sums past due more then fifteen (15) days or the maximum amount
allowed by law and interest at the lesser rate of eighteen percent (18%) per
annum on all past due sums from the due date to the date payment is received or
the maximum amount allowed by law.
(c) NOTWITHSTANDING ANYTHING IN THE FOREGOING TO THE CONTRARY, IN
THE EVENT LANDLORD SHALL HAVE GIVEN TENANT WRITTEN NOTICE HEREUNDER TWO (2)
TIMES IN ANY TWELVE (12) CALENDAR MONTH PERIOD DUE TO THE FAILURE OF TENANT TO
MAKE TIMELY PAYMENT HEREUNDER, THEN UPON THE OCCURRENCE OF THE THIRD (3RD)
FAILURE OF TENANT TO MAKE TIMELY PAYMENT WITHIN SUCH TWELVE (12) CALENDAR MONTH
PERIOD, SUCH FAILURE ON THE PART OF TENANT SHALL AUTOMATICALLY CONSTITUTE AN
EVENT OF DEFAULT WITHOUT NECESSITY FOR WRITTEN NOTICE THEREOF FROM LANDLORD.
25.
EVENTS OF DEFAULT
(a) For purposes of this Lease Agreement, the occurrence of any
one or more of the following shall constitute an "Event of Default" hereunder
IF NOT CURED PURSUANT TO PARAGRAPH 24:
(i) Tenant fails to pay any rent or additional rent as and when
due;
(ii) Tenant breaches any other agreement or obligation herein set
forth and shall fail to cure such breach within ten (10) days
after written notice is sent by Landlord;
(iii) The commencement in any court or tribunal of any proceeding,
voluntary or involuntary, to declare Tenant insolvent or
unable to pay its debts as and when due;
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<PAGE> 16
(iv) The assignment by Tenant of all or any part of Tenant's
property or assets for the benefit of creditors;
(v) The levy or execution, attachment, or taking of the leasehold
interest of Tenant HEREUNDER by process of law or otherwise in
satisfaction of any judgment, debt or claim OR THE LEVY,
EXECUTION, ATTACHMENT OR TAKING OF OTHER PROPERTY OR ASSETS OF
TENANT WHICH MATERIALLY ADVERSELY AFFECT TENANT'S ABILITY TO
PERFORM TENANT'S OBLIGATIONS HEREUNDER;
(vi) Tenant files any petition or action for relief under any
creditor's law (including bankruptcy, reorganization, or
similar actions), either in state or federal court;
(vii) Any petition or action for relief under any creditor's law
(including bankruptcy, reorganization, or similar actions),
either in state or federal court is filed against Tenant;
(viii) Tenant conveys away substantially all of Tenant's assets
without adequate consideration; or
(ix) Tenant is dissolved, liquidated, ceases to exist or do
business or becomes insolvent.
(b) The remedies of terminating the term, of terminating
possession or otherwise as provided in this Lease Agreement shall be cumulative
and in addition to and not in limitation of any rights and remedies otherwise
available to the Landlord and the exercise of any rights and remedies on
default shall not preclude the exercise of any other rights and remedies
available to the Landlord at law or in equity or otherwise.
26.
LANDLORD'S RIGHTS ON TERMINATION OF TERM OR POSSESSION
(a) Upon any termination of the initial or extended term hereof,
whether by lapse of time or otherwise, or upon any termination of Tenant's
right to possession or occupancy only, without terminating the term hereof,
Tenant shall surrender possession and vacate the Demised Premises and shall
deliver possession thereof to the Landlord; and Tenant hereby grants to
Landlord full and free license to enter into and upon the Demised Premises in
such event to repossess the Demised Premises as of Landlord's former estate and
to expel or remove Tenant and any others who may be occupying the Demised
Premises and to remove therefrom any and all property, without being guilty of
or liable for trespass, eviction or forcible entry or detainer and without
relinquishing Landlord's right to rent or any other right given to Landlord
hereunder or by operation of the laws of the State of North Carolina. Upon the
occurrence of any Event of Default after
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<PAGE> 17
written notice thereof and the expiration of any applicable time for curing
such Event of Default, Landlord shall be entitled to the rights and remedies
set forth in Paragraph 24 and hereinafter in Paragraph 26.
(b) If Landlord elects to terminate Tenant's right to possession
only as above provided, without terminating the term hereof, Landlord at its
option may enter into the Demised Premises, remove Tenant's property and other
evidences of tenancy and take and hold possession thereof without such entry
and possession terminating the term hereof and without releasing Tenant from
its obligation to pay rents and other monetary obligations herein reserved for
the full term hereof. Upon and after entry into possession without terminating
such obligations, Landlord shall use reasonable efforts to relet the Demised
Premises, or any part for the account of Tenant to any person, firm or
corporation other than Tenant for such reasonable rent, for such time, and upon
such reasonable terms as Landlord in its sole discretion shall determine. If
any rent is to be collected by Landlord upon any such reletting for Tenant's
Account is not sufficient to pay the full amount of rent or any other rent
herein reserved (including additional rents and other charges) and any other
monetary obligations hereunder, and not heretofore paid by Tenant, together
with the reasonable costs of retaking possession and any repairs, alterations,
or redecoration necessary for such reletting, Tenant shall pay to Landlord the
amount of the entire deficiency upon demand, and if the rent to be collected
from such reletting is more than enough to pay the full amount of the rents
reserved hereunder and all of the aforementioned costs, Landlord shall be
entitled to retain such excess. In accordance with the foregoing, Tenant shall
continue to be entitled to make timely payment of the aforesaid amounts due
hereunder as and when such payments are due and payable; provided, however, in
the event Tenant shall fail to make any such payment in a timely manner,
Landlord shall have the right and remedy and be entitled to accelerate the rent
and other monetary obligations herein reserved for the full term hereof,
subject to applicable offset or credit as aforesaid. The obligation of Tenant
to pay rent and other monetary obligations hereunder constitutes evidence of
indebtedness. Notwithstanding any termination of the right to possession
without termination of the term, the Landlord expressly reserves the right, at
any time after the termination of possession, to terminate the term of this
Lease Agreement by notice of such termination to Tenant.
(c) The foregoing rights and remedies of Landlord are in addition
to any other rights and remedies Landlord may have at law or in equity.
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<PAGE> 18
27.
NO WAIVER
The acceptance of rentals and other payments by Landlord for any
period or periods after a default under any of the terms, covenants, and
conditions herein contained to be performed, kept and observed by Tenant shall
not be deemed a waiver of any rights on the part of the Landlord to terminate
this Lease Agreement for any other failure or for the continued failure by
Tenant to so perform, keep or observe its covenants, terms and conditions to be
kept, performed and observe by it. No waiver by Landlord of any of the terms
or conditions of this Lease Agreement shall be construed as a waiver by
Landlord of any subsequent default on the part of Tenant.
28.
NOTICES
All notices, demands and requests to be given hereunder by either
party shall be in writing and must be hand delivered or sent by registered mail
or by certified mail, return receipt requested, and shall be deemed properly
given when hand delivered or sent to the following addresses or at such other
address as either party shall designate by written notice to the other.
*Landlord: 1-40 Properties
P.O. Drawer 850
Burlington, NC 27216-0850
Attn: Mr. Milt Petty
Tenant: AAI
1206 N. 23rd Street
Wilmington, NC 28405
Attn.: Mr. Forrest Waldon
*With a copy to
Landlord's Agent: Vanguard Associates, Inc.
Attn.: Property Manager
Post Office Box 13866
Research Triangle Park, NC 27709-3866
*With a copy to: Mr. James L. Waters
1153 Grove Street
Framingham, MA 01701
*And also with a
copy to: Dr. Frederick D. Sancilio
7845 Masonboro Sound Road
Wilmington, NC 28409
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<PAGE> 19
29.
LEGAL COSTS
Should either party institute any legal proceedings against the other
party for breach of any provision herein contained, and prevail in such action,
the non-prevailing party shall be liable for the reasonable costs and expenses
of the other party, including the other party's reasonable attorney's fees and
expenses.
30.
LIABILITY OF LANDLORD
In the event Landlord shall fail to perform any covenant, term or
condition of this Lease Agreement upon Landlord's part required to be
performed, or if Tenant shall make any claim arising out of Tenant's occupancy
or use of the Demised Premises based upon any action or omission of Landlord,
Tenant covenants and agrees to look solely to Landlord's interest in the
Building for any recovery of money judgment from Landlord from and after the
date of this Lease Agreement. In no event shall the stockholders, partners,
directors, officers, agents or employees of Landlord (either individually or
severally) be personally liable for any such judgment. Furthermore, in no
event shall Tenant be entitled to an award of incidental or consequential
damages arising out of any breach by Landlord including but not limited to any
award for damage or destruction of Tenant's or any other person or entity's
personalty or fixtures located in or about the Demised Premises, moving
expenses, storage expenses, alternative leasing costs and expenses and costs
and expenses of locating and procuring alternative leased space.
31.
ENTIRE AGREEMENT
This Lease Agreement is executed with the express intent and
understanding that it shall supersede any and all prior discussions and/or
agreements between the parties hereto, it being understood and agreed that this
Lease Agreement contains the entire understanding and agreement concerning the
Lease Agreement of the Demised Premises.
32.
AMENDMENTS
Changes and amendments to this Lease Agreement shall be in writing and
signed by the parties affected by such change or amendment.
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<PAGE> 20
33.
CONTROLLING LAW
The Lease Agreement shall be governed by the laws of the State of
North Carolina.
34.
SUCCESSORS AND ASSIGNS
All of the covenants, agreements and conditions of this Lease
Agreement shall accrue to the benefit of and be binding upon the respective
parties hereto and their heirs, successors and assigns.
35.
NO JURY TRIAL
To the extent such waiver is permitted by law, the parties hereby
waive trial by jury in any action brought in connection with this Lease
Agreement or the Demised Premises.
36.
NO AGENCY
The execution of this Lease Agreement or the performance of any act
pursuant thereto shall not be deemed or construed to create between Landlord
and Tenant the relationship of principal or agent, or of a partnership or joint
venture.
37.
SEVERABILITY
In the event any provision of this Lease Agreement shall be determined
to be invalid or unenforceable, the remaining provisions of this Lease
Agreement shall continue in full force and effect.
38.
FORCE MAJEURE
In the event Landlord or Tenant is unable to perform any actions or
obligations required hereunder by virtue or acts of God or other events beyond
Landlord's or Tenant's control, Landlord or Tenant shall not be in breach
hereunder but shall use due diligence to perform such act or obligation when
and to the extent possible. Notwithstanding the foregoing, this shall not
excuse Tenant from the prompt payment of rent or other monies due under the
Lease.
39.
RECORDATION AND LEASE MEMORANDUM
This Lease Agreement may not be recorded without both parties prior
written consent, but each party agrees on request of the other to execute a
memorandum hereof for recording purposes.
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<PAGE> 21
40.
ASSIGNMENT BY LANDLORD
Landlord may sell the Tract, Building or any portion thereof at any
time and this Lease Agreement may be assigned by Landlord. In the event of any
such assignment, the assignee shall be deemed the Landlord hereunder as of the
effective date of any such assignment, Tenant shall attorn to the same, and the
undersigned Landlord shall have no further liability hereunder for matters
arising after the effective date of any such assignment.
41.
DUE AUTHORIZATION
Tenant warrants that all necessary corporate and/or other action has
been taken by Tenant to authorize Tenant's execution of this Lease Agreement.
42.
BROKERS
Landlord and Tenant respectively represent and warrant to each other
that neither of them has consulted or negotiated with any broker or finder with
regard to the Demised Premises except as identified below in this Section 42.
If none, indicate "none." Each such party shall indemnify the other against and
hold the other harmless from any claims for fees or commissions from anyone
with whom the indemnifying party has consulted or negotiated with regard the
Demised Premises not identified herein.
Vanguard Associates, Inc., WHOSE FEE IS THE SOLE RESPONSIBILITY OF LANDLORD.
43.
RELOCATION OF DEMISED PREMISES.
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<PAGE> 22
IN WITNESS WHEREOF, Landlord and Tenant have executed and sealed this
Lease Agreement in triplicate originals, all as of the day and year first above
written.
LANDLORD:
I-40 PROPERTIES (seal)
By: /s/ Maurice Koury (seal)
--------------------------
General Partner
TENANT:
APPLIED ANALYTICAL INDUSTRIES,
INC., a Delaware corporation (seal)
ATTEST: By: /s/ Frederick D. Sancilio
--------------------------------
Authorized Signatory
/s/ R. Forrest Waldon
- ---------------------
(CORPORATE SEAL)
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<PAGE> 23
STATE OF NORTH CAROLINA
COUNTY OF NEW HANOVER
I, Jonna Bradoc, a Notary Public for said County and State do hereby certify
that R. Forrest Waldon, Secretary of Applied Analytical Industries, Inc.,
personally appeared before me this day and acknowledged the due execution of
the foregoing instrument.
Witness my hand and official seal, this the 23rd day of December,
1993.
/s/ Jonna Bradoc
- -------------------
Notary Public
My commission expires 8/27/97
<PAGE> 24
STATE OF NORTH CAROLINA
COUNTY OF ALAMANCE
I, Susan B. Stout, a Notary Public for said County and State do hereby certify
that Maurice J. Koury, personally appeared before me this day and acknowledged
the due execution of the foregoing instrument.
Witness my hand and official seal, this the 23rd day of December,
1993.
/s/ Susan B. Stout
- ---------------------
Notary Public
My commission expires 7/26/94
<PAGE> 1
EXHIBIT 10.12
DEVELOPMENT AGREEMENT
This Agreement is made and entered into this 25th day of April, 1994,
by and between Applied Analytical Industries, Inc. (hereinafter "AAI"), a
Delaware corporation, having its principal place of business at 1206 North 23rd
Street, Wilmington, North Carolina, 28405 and GenerEst, Inc. (hereinafter the
"Company"), a Delaware corporation having its principal place of business at
1726 North 23rd Street, Wilmington, North Carolina 28405.
W I T N E S S E T H
WHEREAS, the Company and AAI have contemporaneously entered into an
Technology Assignment Agreement (the "Assignment Agreement") concerning certain
AAI technology and prototype formulations to be assigned to the Company;
WHEREAS, the Company has requested AAI to assist it in the development
of certain hormone pharmaceutical products by providing pharmaceutical
services; and
WHEREAS, AAI has agreed to assist the Company in the development of
said pharmaceutical products by providing requested pharmaceutical services
including formulation, testing, clinical production and regulatory services.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
ARTICLE I
DEFINITIONS
DEFINED TERMS. As used in this Development Agreement (hereinafter
"Agreement"), the following terms shall have the meanings described below:
1.1 "ACT" shall mean the Federal Food Drug and Cosmetic Act, as
amended.
1.2 "ACTIVE INGREDIENT" shall mean an ingredient contained in a
NEW PRODUCT which provides an intended pharmacologic or therapeutic effect.
<PAGE> 2
DEVELOPMENT AGREEMENT
Page 2 of 16
1.3 "ANDA" shall mean an Abbreviated New Drug Application as
provided for in Section 505(j) of the ACT and as set forth in 21 CFR Part 314,
as amended.
1.4 "ANNUAL BUDGET" shall mean a budget prepared by AAI and the
Company which establishes the Company's estimated monthly requirements of
DEVELOPMENT SERVICES and related expenses for the upcoming calendar year. The
ANNUAL BUDGET shall be prepared on or prior to December 31, of each calendar
year and shall be attached hereto and incorporated herein as part of EXHIBIT
"A."
1.5 "CLINICAL STUDIES" shall mean adequate and well controlled
bioequivalency studies as more fully described and set forth in 21 CFR Parts
314 and 320, as amended, and/or pilot studies designed to provide clinical
information to assist in the development of clinical bioequivalency protocols
and bioanalytical methods.
1.6 "CLINICAL SUPPLIES" shall mean a NEW PRODUCT, ACTIVE
INGREDIENT, COMPARATIVE INGREDIENT, or PLACEBO prepared for administration to
patients in CLINICAL STUDIES or use in cGMP stability studies.
1.7 "COMPARATIVE INGREDIENT" shall mean either ACTIVE INGREDIENT
or a pharmaceutical product containing ACTIVE INGREDIENT which is intended to
be compared to one or more NEW PRODUCTS.
1.8 "COMMERCIALIZE" shall mean the commercial exploitation of a
product through (i) manufacturing and selling the product, (ii) sublicensing
some or all the commercial rights to the product to third parties, (iii)
entering into a joint venture, partnership or other business combination
regarding the manufacture and/or marketing of the product, or (iv) some other
arrangement to produce revenue from the product.
1.9 "CURRENT GOOD MANUFACTURING PRACTICES" or "cGMP" shall mean
those current good manufacturing practice regulations established in 21 CFR
Parts 210 and 211, as amended.
1.10 "DEVELOPMENT SERVICES" shall mean those formulation,
development, clinical production, pharmaceutical testing, monitoring CLINICAL
STUDIES, regulatory, consulting and project management services which AAI may
provide to the Company upon request under the terms and conditions of this
Agreement.
1.11 "FDA" shall mean the United States Food and Drug
Administration.
<PAGE> 3
DEVELOPMENT AGREEMENT
Page 3 of 16
1.12 "FDA APPROVAL" shall mean a marketing approval for commercial
distribution of a NEW PRODUCT in the United States pursuant to Section 505 of
the ACT, as amended.
1.13 "MANUFACTURING MATERIALS" shall mean all ACTIVE INGREDIENT,
COMPARATIVE INGREDIENT and PLACEBO in bulk or semi-finished state, inactive
materials, ingredients, excipient, capsules, etc., and all packaging and
labeling components and materials furnished by the Company directly, or
manufactured, acquired or segregated by AAI for the account of the Company as
herein provided, for use in the preparation of CLINICAL SUPPLIES.
1.14 "NEW PRODUCT" or "NEW PRODUCTS" shall mean any one or more of
the following three (3) products, and other hormone pharmaceutical products as
AAI and the Company may jointly designate from time to time, to be developed by
AAI as set forth below:
(i) generic estradiol product which is THERAPEUTICALLY
EQUIVALENT to Estrace in the following tablet dosage strengths: 1.0
mg and 2.0 mg;
(ii) generic estropipate product which is THERAPEUTICALLY
EQUIVALENT to Ogen in the following tablet dosage strengths: 0.75 mg,
1.5 mg, and 3.0 mg;
(iii) generic conjugated estrogens product which is
THERAPEUTICALLY EQUIVALENT to Premarin in the following tablet dosage
strengths: 0.3 mg, 0.625 mg, 0.9 mg, 1.25 mg, and 2.50 mg.
1.15 "PLACEBO" shall mean a composition in dosage form having no
therapeutic or prophylactic effect.
1.16 "THERAPEUTICALLY EQUIVALENT" shall mean a pharmaceutically
equivalent product meeting the necessary requirements set forth by the FDA to
qualify as therapeutically equivalent to a marketed comparison product as
published in the current issue of the FDA Approved Products with Therapeutic
Equivalence Evaluations or equivalent publication.
<PAGE> 4
DEVELOPMENT AGREEMENT
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ARTICLE II
DEVELOPMENT SERVICES
AAI agrees to utilize best commercially reasonable efforts, consistent
with sound scientific principles, in providing DEVELOPMENT SERVICES for and on
behalf of the Company. All DEVELOPMENT SERVICES shall be performed in
accordance with applicable CURRENT GOOD MANUFACTURING PRACTICES and other
agreed upon terms and conditions. The parties may agree to develop additional
pharmaceutical products, in which case, the parties shall amend this Agreement
accordingly.
Section 2.1 DEVELOPMENT ACTIVITIES. As requested by the Company,
AAI will provide DEVELOPMENT SERVICES including, but not limited to, (i) drug
substance and raw material characterizations; (ii) formulation development;
(iii) analytical method development and validation; (iv) sourcing raw
materials; (v) raw material, finished product and packaging specifications;
(vi) laboratory scale development batches; and (vii) finished dosage form
characterizations and stability studies. Data generated from development
activities will be collected and presented in a format suitable for support of
a NEW PRODUCT ANDA.
Section 2.2 CLINICAL PRODUCTION. As requested by the Company,
AAI shall produce quantities of a NEW PRODUCT as mutually agreed upon for use
in CLINICAL STUDIES. Clinical production services shall be provided in
accordance with CURRENT GOOD MANUFACTURING PRACTICES and shall include
developing manufacturing procedures, batch records, packaging and labeling
instructions, release specifications, and quality assurance procedures.
(a) INFORMATION. As requested by the Company, AAI shall
submit relevant production records to the Company, including the
product formulation, master batch record, specifications, analytical
results and related supporting documentation.
(b) MANUFACTURING MATERIALS. AAI shall acquire
MANUFACTURING MATERIALS identified by the Company required for the
preparation of CLINICAL SUPPLIES. AAI's obligation to obtain said
MANUFACTURING MATERIALS or CLINICAL SUPPLIES on behalf of the Company
is subject to market availability.
<PAGE> 5
DEVELOPMENT AGREEMENT
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(c) VENDOR AUDITS. As requested by the Company, AAI will
conduct MANUFACTURING MATERIALS vendor audits.
(d) CONTROL SAMPLES. AAI shall retain control samples
for lots of CLINICAL SUPPLIES which it has produced for appropriate
inspection by the Company or the FDA.
(e) DISPOSAL OF MANUFACTURING MATERIALS AND CLINICAL
SUPPLIES. AAI shall safely dispose of, and the Company shall pay the
cost for the safe disposal of, any MANUFACTURING MATERIALS or CLINICAL
SUPPLIES requiring disposal according to all applicable federal, state
and local laws and regulations.
(f) MANUFACTURING SITE. As requested by the Company, AAI
shall assist the Company in qualifying a manufacturing site for a NEW
PRODUCT.
Section 2.3 CLINICAL STUDIES. AAI will select suitable clinical
research organizations ("CRO") to conduct appropriate CLINICAL STUDIES. AAI
will monitor such CLINICAL STUDIES and coordinate material requirements of the
CLINICAL STUDIES, including CLINICAL SUPPLIES, with the CRO.
Section 2.4 REGULATORY SERVICES. Upon successful conclusion of
the CLINICAL STUDIES demonstrating that a NEW PRODUCT is THERAPEUTICALLY
EQUIVALENT, AAI shall (i) prepare an ANDA for such NEW PRODUCT; (ii) respond to
regulatory questions related to services performed by AAI; and (iii) attend
meetings with appropriate regulatory agencies, if necessary, to facilitate FDA
APPROVAL of the NEW PRODUCT ANDA. AAI will provide necessary authorization
letters to government agencies granting the Company the right to reference
appropriate AAI Drug Master Files.
Section 2.5 PROJECT MANAGEMENT. Both parties recognize that
providing DEVELOPMENT SERVICES shall require AAI project management services
including project coordination through multidisciplinary team meetings. Each
such project shall be assigned an AAI team leader who will maintain overall
responsibility for coordination of the project. The AAI team leaders will
coordinate their efforts with the project manager appointed pursuant to the
Administrative Services Agreement entered into by the parties of even date
herewith.
<PAGE> 6
DEVELOPMENT AGREEMENT
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Section 2.6 AUDIT RIGHTS. The Company shall have the right to
audit those services performed by AAI on the Company's behalf. Such an audit
will be conducted according to reasonable notice and at a reasonable time
specified by AAI.
Section 2.7 INSPECTIONS. Both parties recognize that the FDA may
request AAI to produce records, data and materials relating to NEW PRODUCTS and
CLINICAL SUPPLIES as the result of ANDA submissions or as the subject of FDA
inspections. In such instances, AAI shall notify the Company of such requests,
and the Company shall have the right to send a representative immediately to
participate in the compilation of such records, data and materials as well as
be present during FDA inspections in so far as the subject matter of the
inspections relates to the NEW PRODUCTS or CLINICAL SUPPLIES.
Section 2.8 RIGHTS TO OTHER DEVELOPMENT EFFORTS. Both parties
agree that AAI may develop hormone products (other than any product
THERAPEUTICALLY EQUIVALENT to a NEW PRODUCT which AAI shall not develop at any
time during the term of this Agreement) on its own behalf or on behalf of
others. For the term of this Agreement and for a period of three years after
the termination hereof (other than a termination pursuant to Section 8.2
resulting from a breach of this Agreement by the Company or as a result of the
bankruptcy or reorganization of the Company and provided that during such three
year period if the Company has exercised the Lease Option described in Section
4A of Exhibit B hereto, the lease thereunder shall not have been terminated
(other than upon a purchase of such facility by the Company)), prior to
entering into any agreement with a third party to COMMERCIALIZE such a hormone
product, AAI shall present the results of its development efforts to the
Company, and the Company will then have the option to purchase the rights to
the hormone product for a period of thirty (30) days from the date the results
were presented. After the expiration of the thirty-day option period, AAI
will be under no further obligation to the Company with respect to the
submitted hormone product if the option is not exercised and may exploit,
assign, license or otherwise dispose of the hormone product at its sole
discretion and for its own account. If the Company exercises its option to
purchase, (i) the purchase price will be based upon the amount of development
work expended by AAI charged at AAI's then standard hourly rates for such
services and all related out-of-pocket expenses, (ii) AAI will assign its
rights, title and interest to the hormone product to the Company upon payment
for the same and (iii) the Company will subcontract further development efforts
to AAI pursuant to the terms of this Agreement.
<PAGE> 7
DEVELOPMENT AGREEMENT
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ARTICLE III
OWNERSHIP
Subject to the Company's payment to AAI for services provided
hereunder, all data, information, discoveries and inventions whether patentable
or not, and related documentation, which are generated by AAI during the course
of this Agreement (or by any subcontractor of AAI pursuant to an agreement
providing AAI ownership thereof) which are directly related to the NEW
PRODUCTS, the MANUFACTURING MATERIALS or CLINICAL SUPPLIES manufactured by AAI
for or on behalf of the Company shall be the exclusive property of the Company.
ARTICLE IV
SERVICES PERFORMED BY THIRD PARTIES
The parties hereto recognize that AAI may have to subcontract with
third party contractors for the performance of certain services agreed upon
hereunder including the performance of CLINICAL STUDIES and bioanalytical
analysis of clinical specimens.
Section 4.1 SUBCONTRACTOR CONFIDENTIALITY. Subcontractors shall
be hired on an independent contractor basis and shall be bound to maintain all
information, methodologies and technologies relating to the Company's projects
as confidential. AAI will procure confidentiality agreements from
subcontractors protecting the Company's proprietary and confidential
information prior to disclosure of such information and providing that services
performed thereunder are performed as a "work-for-hire" and that all data,
information, discoveries and inventions, whether patentable or not, and related
documentation shall be the exclusive property of the Company.
Section 4.2 MONITORING SUBCONTRACTORS. AAI shall monitor
subcontractors during the course of performance of contracted work and shall
incorporate the results of those services into its development efforts and
regulatory submissions as appropriate.
<PAGE> 8
DEVELOPMENT AGREEMENT
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ARTICLE V
MANUFACTURE OF NEW PRODUCTS
The parties acknowledge that the Company has entered into a License,
Development and Regulatory Filing Agreement with a third party wherein the
Company has agreed to enter into a supply agreement for conjugated estrogen NEW
PRODUCTS (the "SUPPLY AGREEMENT"). The Company and AAI agree to negotiate in
good faith the terms of a manufacturing agreement (the "MANUFACTURING
AGREEMENT"), according to the substantive terms contained in EXHIBIT "B"
attached hereto and incorporated herein, such that both the SUPPLY AGREEMENT
and MANUFACTURING AGREEMENT are entered into within a commercially acceptable
time not to exceed 90 days following the date of submission of an ANDA to the
FDA with respect to any of the New Products.
ARTICLE VI
PAYMENT FOR SERVICES RENDERED
Section 6.1 FEES AND EXPENSES. The Company shall pay for
services rendered and related expenses hereunder according to the following
terms and conditions:
(a) SERVICE CHARGES. AAI shall charge the Company for
DEVELOPMENT SERVICES rendered according to the following schedule:
<TABLE>
<CAPTION>
Position Hourly Rate
-------- -----------
<S> <C>
Senior Formulator . . . . . . . . . . . . . . . . $165/hour
Senior Chemist . . . . . . . . . . . . . . . . . $175/hour
Chemist . . . . . . . . . . . . . . . . . . . . $150/hour
Formulator . . . . . . . . . . . . . . . . . . . $125/hour
Project Team Meetings . . . . . . . . . . . . . . $500/hour
</TABLE>
The parties recognize that certain routine technical functions are
charged according to standard fractional hourly units (e.g., 0.2
hours) for administrative convenience.
<PAGE> 9
DEVELOPMENT AGREEMENT
Page 9 of 16
(b) TRAVEL AND OUT OF POCKET EXPENSES. AAI anticipates
that certain travel and out of pocket expenses will occur during the
performance of its duties hereunder. The Company agrees to pay for
such expenses incurred in providing DEVELOPMENT SERVICES.
(c) FACILITIES CHARGES. The Company agrees to pay
standard flat rate daily fees for utilization of production and
storage facilities.
(d) MATERIALS AND HANDLING CHARGES. The Company agrees
to pay a fifteen percent (15%) handling fee for all MANUFACTURING
MATERIALS or supplies acquired for or on behalf of the Company by AAI.
(e) SUBCONTRACTORS. The Company agrees to pay AAI for
subcontracted services at cost and the supervision, auditing, and
coordination of subcontractors at the hourly rates set forth in
Section 6.1(a).
(f) The rates quoted and to be charged to the Company by
AAI in subsections (a) through (e) are no greater than the standard
rates charged by AAI to others for the same or similar services.
Section 6.2 ANNUAL BUDGET. Prior to commencement of services
hereunder, AAI agrees to use reasonable and diligent efforts to prepare an
ANNUAL BUDGET establishing the Company's estimated monthly requirements of
DEVELOPMENT SERVICES for the upcoming calendar year. The ANNUAL BUDGET will be
amended each calendar year on or before December 31, and will be attached
hereto and incorporated herein as EXHIBIT "A." AAI shall provide notices of
significant cost overages to the Company.
(a) MONTHLY PAYMENT. On or before the first day of each
month, the Company agrees to pay AAI the budgeted service fees and
expenses for that month as established in the ANNUAL BUDGET. AAI
shall apply these prepaid funds against amounts due and payable to AAI
by the Company under the terms and conditions of this Agreement. AAI
shall maintain accurate accounting records of the Company's monthly
payments and deductions therefrom for services rendered and expenses
incurred.
(b) RECONCILIATION OF MONTHLY PAYMENTS AND CHARGES.
Monthly payments shall be reconciled against AAI's cumulative service
fees and expenses semi-annually on each six-month anniversary of this
Agreement. In
<PAGE> 10
DEVELOPMENT AGREEMENT
Page 10 of 16
the event a reconciliation results in a credit or debit balance to the
Company's account, it shall be handled as follows:
(i) Credit Balances. In the event the Company's
cumulative monthly payment to AAI exceeds the cumulative
service fees and expenses accrued through the date of
reconciliation, AAI shall issue a credit to the Company in
the amount of the overpayment which shall be applied to the
Company's monthly payment obligation pursuant to the ANNUAL
BUDGET until such credit is exhausted.
(ii) Debit Balances. In the event the Company's
cumulative monthly payments to AAI are less than the
cumulative service fees and expenses accrued through the date
of reconciliation, the Company shall pay AAI the debit balance
within thirty (30) days of the Company's receipt of invoice
for said underpayment amount. Should any part of the invoice
be in dispute, the Company covenants to pay the undisputed
amount according to the terms and conditions described herein
while said dispute is being resolved.
Section 6.3 AUDIT RIGHTS. The Company shall have the right, upon
reasonable notice and at its own expense, during AAI's performance of
DEVELOPMENT SERVICES, and for a period of two (2) years thereafter, to conduct
an audit of expenses charged to the Company for such services. The audit shall
be conducted by a certified public accountant selected by the Company and
approved by AAI, which approval shall not be unreasonably withheld. AAI shall
keep a complete and accurate account of expenses charged to the Company and
shall allow the examination of such records by the selected accountant during
regular business hours. Such audits may be performed no more frequently than
annually. In the event that such audit reveals that amounts charged by AAI to
the Company for the period commencing on the date of the most recent audit (or
from the date hereof with respect to the initial audit) exceed by 5 percent or
more the amount that AAI may rightfully have charged during such period, AAI
shall reimburse the Company for the expense of such audit.
<PAGE> 11
DEVELOPMENT AGREEMENT
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ARTICLE VII
LIABILITY AND INDEMNIFICATION
Section 7.1 LIABILITY OF AAI FOR DEVELOPMENT SERVICES. The
parties agree that AAI's liability to the Company for the DEVELOPMENT SERVICES
under this Agreement shall be limited to the amount of compensation which AAI
has received from the Company for the DEVELOPMENT SERVICES rendered hereunder.
AAI shall not be liable to the Company for injuries sustained by third parties,
consequential damages or any cost associated with a NEW PRODUCT's recall.
AAI's liability for commercial manufacturing shall be negotiated by the parties
according to the substantive terms set forth on the Manufacturing Term Sheet
and attached hereto as EXHIBIT "B".
Section 7.2 INDEMNIFICATION OF AAI. The Company shall indemnify
and hold harmless AAI, its agents, employees and affiliates from any loss,
expense and liability, including reasonable attorney's fees arising from or in
connection with the distribution or sale of any NEW PRODUCT or CLINICAL
SUPPLIES developed under this Agreement, except as limited by the MANUFACTURING
AGREEMENT to be entered into pursuant to the substantive terms of EXHIBIT "B".
Provided, however, that AAI will promptly notify the Company of any such claim
or suit, and at the Company's discretion and cost permit the Company's
attorneys to handle such claims or suits exclusively so long as the Company's
attorneys actively pursue the defense of the same. Provided further that this
indemnification and hold harmless shall not apply to any loss, expense or
liability caused by the gross negligence or willful misconduct of AAI.
Section 7.3 SURVIVAL. The covenants and obligations of
indemnification set forth herein shall survive the termination of this
Agreement.
ARTICLE VIII
TERM AND TERMINATION
Section 8.1 TERM OF AGREEMENT. Unless sooner terminated in a
manner herein provided, this Agreement shall continue for a period of seven (7)
years.
Section 8.2 TERMINATION. A party may terminate this Agreement if
the other party commits a material breach of this Agreement (which is not cured
within thirty
<PAGE> 12
DEVELOPMENT AGREEMENT
Page 12 of 16
(30) days of receipt of written notice of such), or files for bankruptcy or
reorganization. The development of any NEW PRODUCT may be terminated by the
Company if the cost of development becomes prohibitive. Upon termination by
either party, the Company shall be obligated to pay the cost of all work
completed and expenses incurred through the effective date of termination in
accordance with this Agreement, including AAI's cost of all materials and
services previously acquired or contracted which AAI cannot readily utilize in
other day-to-day operations.
ARTICLE IX
CONFIDENTIALITY
Section 9.1 NONDISCLOSURE. All confidential and proprietary
information directly or indirectly related to the NEW PRODUCTS shall be deemed
confidential. Such confidential information shall be safeguarded by AAI, shall
not be disclosed to third parties by AAI except as permitted herein and shall
be made available only to AAI's employees, subcontractors or consultants who
have a need to know for the purposes specified under this Agreement. These
obligations of confidentiality shall apply during the term of this Agreement,
and shall survive the termination of this Agreement, but such obligations shall
not apply to any information to the extent that such information:
(a) is or hereafter becomes generally available to the
public other than by reason of any default with respect to a
confidentiality obligation under this Agreement;
(b) is disclosed to AAI by a third party who is not in
default of any confidentiality obligation to the Company;
(c) is submitted to governmental agencies to facilitate a
NEW PRODUCT's FDA APPROVAL hereunder provided that reasonable measures
shall be taken to assure confidential treatment of such information;
(d) is provided to third party subcontractors under
appropriate terms and conditions including confidentiality provisions
at least as stringent as those in this Agreement;
(e) is required to be disclosed in compliance with
applicable laws or regulations in connection with the manufacture or
sale of a NEW PRODUCT;
<PAGE> 13
DEVELOPMENT AGREEMENT
Page 13 of 16
provided that AAI provides the Company with notice of intended
disclosure as far in advance as is possible under the circumstances;
or
(f) is otherwise required to be disclosed in compliance
with applicable laws or regulations or order by a court or other
regulatory body having competent jurisdiction; provided that AAI
provides the Company with notice of intended disclosure as far in
advance as is possible under the circumstances.
ARTICLE X
CORRESPONDENCE AND NOTICE
Until advised in writing to the contrary by the intended recipient,
documentation, reports, communications, and notices hereunder shall be
effective upon receipt and shall be addressed to:
GenerEst: GenerEst, Inc.
1726 North 23rd Street
Wilmington, NC 28405
(Attention: President)
AAI: Applied Analytical Industries, Inc.
1206 North 23rd Street
Wilmington, NC 28405
(Attention: General Counsel)
ARTICLE XI
GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of North Carolina.
<PAGE> 14
DEVELOPMENT AGREEMENT
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ARTICLE XII
MISCELLANEOUS
Section 12.1 LIMITATIONS OF RIGHTS. Except as expressly provided
for in this Agreement, nothing contained herein shall be construed as
conferring any license or other rights, by implication, estoppel or otherwise,
under any patent (including design and utility patents) or patent applications,
or any copyrights, trademarks, trade names or trade dress.
Section 12.2 WAIVER. The failure of either party hereto at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No waiver
by any party hereto of any condition, or of the breach of any provision, term,
covenant, representation, or warranty contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition or of the
breach of any other provision, term, covenant, representation or warranty of
this Agreement.
Section 12.3 PAROLE EVIDENCE. This Agreement contains the entire
agreement between the parties with respect to the subject matter thereof as of
its date and supersedes all prior agreements, negotiations, representations and
proposals, written and oral, relating to its subject matter.
Section 12.4 SEVERABILITY. If a court or other tribunal of
competent jurisdiction holds any term or provision, or portion thereof, of this
Agreement to be invalid, void or unenforceable, the remaining provisions of
this Agreement shall remain in full force and effect. It is the parties'
intention that if a court or other tribunal holds any term or provision of this
Agreement to be excessive in scope, such term or provision shall be adjusted
rather than voided, if possible.
Section 12.5 MODIFICATION. This Agreement may not be amended or
modified except by written instrument signed by AAI and the Company.
Section 12.6 COOPERATION. Each party will execute and deliver
all such instruments and perform all such other acts as the other party may
reasonably request to carry out the transactions contemplated by this
Agreement.
Section 12.7 FORCE MAJEURE. Neither AAI nor the Company shall be
liable for delay or failure in the performance of the obligations contained in
this
<PAGE> 15
DEVELOPMENT AGREEMENT
Page 15 of 16
Agreement caused solely by any one or more of the following: (a) acts of God,
or public enemy or war (declared or undeclared); (b) acts of governmental or
quasi-governmental authorities of the United States, or any political
subdivision thereof, or of any department or agency thereof, or regulations or
restrictions imposed by law or by court action, except as they may result from
the unreasonable failure of AAI or the Company to perform as required
hereunder; (c) acts of persons engaged in subversive activities or sabotage;
(d) fires, floods, explosions or other catastrophes; (e) strikes or similar
labor disruptions; (f) epidemics or quarantines restrictions; (g) freight
embargoes or interruption of transportation; (h) unusually severe weather; (i)
delays of a supplier of either party due to any of the above causes or events;
or (j) any other extraordinary causes, similar or dissimilar, beyond the
reasonable control of the party concerned; and provided that due diligence is
exercised to cure such cause and resume performance, and the time for
performance by such party shall be extended by the period of any such delay.
Section 12.8 BINDING EFFECT. Subject to the restrictions on
transfers, assignments and encumbrances set forth herein, this Agreement shall
inure to the benefit of and be binding upon the undersigned parties, their
respective legal successors and assigns.
Section 12.9 ASSIGNMENT. Neither party shall assign its rights
under this Agreement without the prior written consent of the other party.
[Remainder of page left blank intentionally]
<PAGE> 16
DEVELOPMENT AGREEMENT
Page 16 of 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date and year first
written above.
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ Frederick D. Sancilio
-------------------------------------------------
Frederick D. Sancilio, Ph.D.
President
Attest
By: /s/ R. Forrest Waldon
-------------------------------------------------
R. Forrest Waldon, Secretary
GENEREST, INC.
BY: /s/ Frederick D. Sancilio
-------------------------------------------------
Frederick D. Sancilio, Ph.D.
President
Attest:
By: /s/ R. Forrest Waldon
-------------------------------------------------
R. Forrest Waldon, Secretary
<PAGE> 1
EXHIBIT 10.13
DEVELOPMENT AGREEMENT
(AAI)
This Agreement is made and entered into as of the 4th day of April,
1995, by and between Applied Analytical Industries, Inc. (hereinafter, "AAI"),
a Delaware corporation, having its principal place of business at 1206 North
23rd Street, Wilmington, North Carolina, 28405, and Aesgen, Inc. (hereinafter,
the "Company"), a Delaware corporation having its principal place of business
at 5051 New Centre Drive, Wilmington, North Carolina 28403.
W I T N E S S E T H
WHEREAS, the Company has requested AAI to assist it in the development
of certain pharmaceutical products by providing pharmaceutical services; and
WHEREAS, AAI has agreed to assist the Company in the development of
said pharmaceutical products by providing requested pharmaceutical services.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
ARTICLE I
DEFINITIONS
DEFINED TERMS. As used in this Development Agreement (hereinafter
"Agreement"), the following terms shall have the meanings described below:
1.1 "AAI INVENTIONS" shall mean any and all new and useful
compositions of matter, articles of manufacture, processes, methods of
manufacture, methods of analysis or methods of use pertaining to ACTIVE
INGREDIENTS or NEW PRODUCTS, or methods of manufacture or use of any thereof,
which directly relate to or are based on AAI TECHNICAL INFORMATION and which
are conceived and/or first reduced to practice during the conduct of the
DEVELOPMENT SERVICES pursuant to this Agreement by AAI.
1.2 "AAI TECHNICAL INFORMATION" shall mean all of the intellectual
property rights developed, owned or possessed by AAI and related to any NEW
<PAGE> 2
DEVELOPMENT AGREEMENT
Page 2 of 26
PRODUCT, including, without limitation, the information, technology, trade
secrets, copyrights, patents, commercial and technical know how, methods of
synthesis, methods of analysis, manufacturing processes, designs, data,
specifications and any discoveries and inventions whether patentable or not,
utilized in making, formulating, compounding, mixing, processing, testing,
controlling, developing, improving, modifying, preserving, storing, finishing,
packaging, using or selling each NEW PRODUCT, but excepting NEW PRODUCT
SUBMISSION PACKAGES, COMPANY TECHNICAL INFORMATION and COMPANY INVENTIONS.
1.3 "ACT" shall mean the Federal Food Drug and Cosmetic Act, as
amended.
1.4 "ACTIVE INGREDIENTS" shall mean one or more ingredients
contained in a NEW PRODUCT which provide an intended pharmacologic or
therapeutic effect.
1.5 "ANDA" shall mean an Abbreviated New Drug Application as
provided for in Section 505(j) of the ACT and as set forth in 21 CFR Part 314,
as amended.
1.6 "ANNUAL BUDGET" shall mean a budget prepared by AAI and the
Company which establishes the Company's estimated monthly requirements of
DEVELOPMENT SERVICES and related expenses for the upcoming calendar year. The
ANNUAL BUDGET shall be submitted on or prior to December 31, of each calendar
year and shall be attached hereto and incorporated herein as part of EXHIBIT
"A." The initial ANNUAL BUDGET for the period ending December 31, 1995, which
has been approved by the parties hereto, is attached as Exhibit "A".
1.7 "BIOEQUIVALENCE" shall mean the absence of a significant
difference in the rate and extent to which the active ingredient or active
moiety in PHARMACEUTICAL EQUIVALENTS or PHARMACEUTICAL ALTERNATIVES becomes
available at the site of drug action when administered at the same molar dose
under similar conditions; or, in the case of PHARMACEUTICAL EQUIVALENTS or
PHARMACEUTICAL ALTERNATIVES with an intentionally different rate (e.g., certain
controlled release dosage forms) that is not essential to the attainment of
effective body drug concentrations on chronic use and is considered medically
insignificant for the drug, the absence of a significant difference in the
extent to which the active ingredient or moiety from each product becomes
available at the site of drug action, as more fully set forth and described in
21 CFR Part 320, as amended.
1.8 "CLINICAL STUDIES" shall mean bioequivalence studies and/or
pilot studies designed to provide clinical information to assist in the
development of clinical bioequivalence protocols and bioanalytical methods as
more fully described in each SERVICE ESTIMATE.
<PAGE> 3
DEVELOPMENT AGREEMENT
Page 3 of 26
1.9 "CLINICAL SUPPLIES" shall mean NEW PRODUCTS, ACTIVE
INGREDIENTS, COMPARATIVE INGREDIENTS, or PLACEBOS prepared for administration
to patients in CLINICAL STUDIES or use in cGMP stability studies furnished by
the Company directly, or manufactured, acquired or segregated by AAI for the
account of the Company as herein provided.
1.10 "COMMERCIALIZE" shall mean the commercial exploitation of a
NEW PRODUCT through (i) manufacturing and selling the NEW PRODUCT (ii)
licensing some or all the commercial rights to the NEW PRODUCT to third
parties, (iii) entering into a joint venture, partnership or other business
combination regarding the manufacture and/or marketing of a NEW PRODUCT, or
(iv) some other arrangement to produce revenue from a NEW PRODUCT.
1.11 "COMPANY INVENTIONS" shall mean any and all new and useful
compositions of matter, articles of manufacture, processes, methods of
manufacture, methods of analysis or methods of use pertaining to ACTIVE
INGREDIENTS or NEW PRODUCTS, or methods of manufacture or use of any thereof,
which directly relate to or are based on COMPANY TECHNICAL INFORMATION and
which are conceived and/or first reduced to practice during the conduct of the
DEVELOPMENT SERVICES pursuant to this Agreement by AAI.
1.12 "COMPANY TECHNICAL INFORMATION" shall mean that portion of the
intellectual property rights developed, owned or possessed by the Company that
are disclosed to AAI by the Company and related to any NEW PRODUCT, including,
without limitation, the information, technology, trade secrets, copyrights,
patents, commercial and technical know how, methods of synthesis, methods of
analysis, manufacturing processes, designs, data, specifications and any
discoveries and inventions whether patentable or not, utilized in making,
formulating, compounding, mixing, processing, testing, controlling, developing,
improving, modifying, preserving, storing, finishing, packaging, using or
selling each NEW PRODUCT, but excepting AAI TECHNICAL INFORMATION and AAI
INVENTIONS.
1.13 "COMPARATIVE INGREDIENTS" shall mean either ACTIVE INGREDIENTS
or pharmaceutical products containing ACTIVE INGREDIENTS which are intended to
be compared to one or more NEW PRODUCTS.
1.14 "CURRENT GOOD MANUFACTURING PRACTICES" or "cGMP" shall mean
those current good manufacturing practice regulations established in 21 CFR
Parts 210 and 211, as amended.
<PAGE> 4
DEVELOPMENT AGREEMENT
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1.15 "DEVELOPMENT SERVICES" shall mean those formulation
development, clinical production, pharmaceutical testing, regulatory,
consulting and project management services which AAI may provide to the Company
upon request under the terms and conditions of this Agreement.
1.16 "FDA" shall mean the United States Food and Drug
Administration.
1.17 "FDA APPROVAL" shall mean a marketing approval for commercial
distribution of a NEW PRODUCT in the United States pursuant to Section 505 of
the ACT, as amended.
1.18 "INITIAL PRODUCTS" shall mean the NEW PRODUCTS which the
Company and AAI have initially agreed to develop for and on behalf of the
Company pursuant to the terms and conditions of this Agreement and which are
set forth on Schedule 1 attached hereto and incorporated herein.
1.19 "MANUFACTURING MATERIALS" shall mean all ACTIVE INGREDIENTS,
COMPARATIVE INGREDIENTS and PLACEBOS in bulk or semi-finished state, inactive
materials, ingredients, excipient, capsules, etc., and all packaging and
labeling components and materials furnished by the Company directly, or
manufactured, acquired or segregated by AAI for the account of the Company as
herein provided, for use in the preparation of CLINICAL SUPPLIES.
1.20 "NEW PRODUCT" or collectively "NEW PRODUCTS" shall mean any
one or more pharmaceutical products as AAI and the Company may mutually agree
upon in writing from time to time, to be developed by AAI pursuant to the terms
and conditions of this Agreement for and on behalf of the Company, including
the INITIAL PRODUCTS. NEW PRODUCTS shall be set forth on Schedule 1 attached
hereto and incorporated herein as amended.
1.21 "NEW PRODUCT SUBMISSION PACKAGE" or collectively "NEW PRODUCT
SUBMISSION PACKAGES" shall mean those documents relating to a NEW PRODUCT,
produced or prepared by AAI in the performance of DEVELOPMENT SERVICES,
including written or otherwise recorded records, reports, test results, data,
batch records, regulatory applications and filings.
1.22 "PHARMACEUTICAL ALTERNATIVE" shall mean a product that, in
comparison to a lawfully marketed product, contains the identical therapeutic
moiety, or its precursor, but not necessarily in the same amount or dosage form
or as the same salt or ester, and that individually meets either the identical
or its own respective compendial or other applicable standard of identity,
strength, quality, and
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DEVELOPMENT AGREEMENT
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purity, including potency and, where applicable, content uniformity,
disintegration times and/or dissolution rates.
1.23 "PHARMACEUTICAL EQUIVALENT" shall mean a product that, in
comparison to a lawfully marketed product, contains identical amounts of the
identical active drug ingredient, i.e., the same salt or ester of the same
therapeutic moiety, in identical dosage forms, but not necessarily containing
the same inactive ingredients, and that meets the identical compendial or other
applicable standard of identity, strength, quality, and purity, including
potency and, where applicable, content uniformity, disintegration times and/or
dissolution rates.
1.24 "PLACEBOS" shall mean one or more compositions in dosage form
having no predicted therapeutic or prophylactic effect.
1.25 "SERVICE ESTIMATE" shall mean a written agreement between the
Company and AAI covering the scope and total estimated cost of DEVELOPMENT
SERVICES to be performed on an individual NEW PRODUCT. Each SERVICE ESTIMATE
will be appended to and made part of this Agreement.
1.26 "THERAPEUTICALLY EQUIVALENT" shall mean a pharmaceutically
equivalent product meeting the necessary requirements set forth by the FDA to
qualify as therapeutically equivalent to a marketed comparison product as
published in the current issue of the FDA Approved Products with Therapeutic
Equivalence Evaluations or equivalent publication.
ARTICLE II
DEVELOPMENT SERVICES
Section 2.0 DEVELOPMENT SERVICES. AAI agrees to utilize best
commercially reasonable efforts, consistent with sound scientific principles,
in providing DEVELOPMENT SERVICES for and on behalf of the Company to develop
and obtain regulatory approval for NEW PRODUCTS within the United States.
DEVELOPMENT SERVICES for each NEW PRODUCT will be performed in a commercially
reasonable manner pursuant to a SERVICE ESTIMATE and all DEVELOPMENT SERVICES
shall be performed in accordance with applicable CURRENT GOOD MANUFACTURING
PRACTICES and other agreed upon specifications, terms and conditions as set
forth in each SERVICE ESTIMATE. AAI shall notify the Company in advance of any
anticipated material changes in the scope of services provided under a SERVICE
ESTIMATE. The Company shall have the right to accept
<PAGE> 6
DEVELOPMENT AGREEMENT
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or reject any such proposed deviations from the then current SERVICE ESTIMATE.
No material change of the scope of services provided under a SERVICE ESTIMATE
and associated change in the estimated cost thereof shall be implemented before
AAI has received from the Company written agreement to such change and to any
resulting change in the ANNUAL BUDGET. Similarly, the Company shall notify AAI
of any anticipated material changes in the scope of the DEVELOPMENT SERVICES
under a SERVICE ESTIMATE it desires to effect. The material change will only
be effected upon the mutual written agreement of the parties which shall
constitute an amendment to the SERVICE ESTIMATE's scope of work and estimated
cost. Subject to the foregoing, the Company reserves the right to alter the
DEVELOPMENT SERVICES being conducted under any SERVICE ESTIMATE subject to its
agreement to the resulting change in estimated cost. AAI shall provide the
Company with progress reports with regard to its DEVELOPMENT SERVICES at such
times and in such manner as the Company may reasonably request. AAI shall
promptly advise the Company in writing at any time that it determines that the
estimated costs of performing services under a SERVICE ESTIMATE will exceed by
20% or more the costs set forth in such SERVICE ESTIMATE.
The parties may mutually agree to develop pharmaceutical products in
addition to the INITIAL PRODUCTS, in which case, the parties shall amend
Schedule 1 of this Agreement accordingly.
During the term of this Agreement, AAI shall not develop, for its own
account or for any person or entity (other than the Company), any formulation
of a product intended to be THERAPEUTICALLY EQUIVALENT to the reference product
of a NEW PRODUCT; provided, however, that the foregoing restriction shall not
apply: (i) with respect to a NEW PRODUCT, if the Company has terminated the
development of such NEW PRODUCT hereunder pursuant to Section 7.2 hereof, (ii)
in any country at any time one and one-half years after the first commercial
sale of such NEW PRODUCT in such country if the applicable government authority
has approved ANDA's (or similar documents applicable in such country) for two
or more products in addition to the NEW PRODUCT THERAPEUTICALLY EQUIVALENT to
the reference product of such NEW PRODUCT, (iii) with respect to services
performed by AAI pursuant to an agreement entered into by AAI prior to the
execution of the written agreement by AAI and the Company identifying such NEW
PRODUCT as contemplated by Section 1.20 or (iv) with respect to any NEW PRODUCT
that the Company shall have retained any other firm to perform the services
contemplated hereby pursuant to Section 2.8. Subject to the foregoing sentence
and Articles III and VIII herein, the parties hereto acknowledge that AAI is
not restricted hereby from performing non-formulation services for its own
account or for third parties with respect to pharmaceutical products. The
parties further acknowledge that AAI may also provide services
<PAGE> 7
DEVELOPMENT AGREEMENT
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(including formulation services) similar to those contemplated herein for other
parties or for its own account with respect to pharmaceutical products other
than products that are intended to be THERAPEUTICALLY EQUIVALENT to the
reference product of any of the NEW PRODUCTS. In providing DEVELOPMENT
SERVICES herein, AAI may, but shall not be obligated to, consider appropriate
third-party technologies for use in one or more NEW PRODUCT, and AAI shall
promptly advise the Company on each occasion of its consideration of using such
technologies and the anticipated costs and benefits of the use of such
technologies. AAI shall not acquire or license such third-party technology for
use in a NEW PRODUCT unless AAI and the Company mutually agree to the terms and
conditions of such acquisition or license, including AAI's reimbursement for
any AAI cost associated with the same.
Section 2.1 DEVELOPMENT ACTIVITIES. As requested by the Company,
AAI will provide DEVELOPMENT SERVICES for each NEW PRODUCT including, but not
limited to, (i) drug substance and raw material characterizations; (ii)
formulation development; (iii) analytical method development and validation;
(iv) sourcing and auditing raw material suppliers; (v) establishing raw
material, finished product and packaging specifications; (vi) producing
laboratory scale development batches; and (vii) finished dosage form
characterizations and stability studies. Data generated from development
activities will be collected and presented in a format suitable for support of
a NEW PRODUCT ANDA.
Section 2.2 CLINICAL PRODUCTION. As requested by the Company and
subject to AAI's existing production capability and capacity, AAI shall produce
quantities of a NEW PRODUCT as mutually agreed upon for use in CLINICAL
STUDIES. Clinical production services shall be provided in accordance with
CURRENT GOOD MANUFACTURING PRACTICES and shall include developing manufacturing
procedures, batch records, packaging and labeling instructions, release
specifications, and quality assurance procedures.
(a) INFORMATION. As requested by the Company, AAI shall
submit relevant production records to the Company, including the
product formulation, master batch record, specifications, analytical
results and related supporting documentation.
(b) MANUFACTURING MATERIALS. AAI shall acquire
MANUFACTURING MATERIALS identified by the Company required for the
preparation of CLINICAL SUPPLIES. AAI's obligation to obtain said
MANUFACTURING MATERIALS or CLINICAL SUPPLIES on behalf of the Company
is subject to market availability.
<PAGE> 8
DEVELOPMENT AGREEMENT
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(c) VENDOR AUDITS. As requested by the Company, AAI
will, at the Company's expense, conduct MANUFACTURING MATERIALS vendor
audits.
(d) CONTROL SAMPLES. AAI shall retain control samples for
lots of CLINICAL SUPPLIES which it has produced for appropriate
inspection by the Company or the FDA.
(e) DISPOSAL OF MANUFACTURING MATERIALS AND CLINICAL
SUPPLIES. AAI shall safely dispose of, and the Company shall pay the
cost for the safe disposal of, any MANUFACTURING MATERIALS or CLINICAL
SUPPLIES requiring disposal according to all applicable federal, state
and local laws and regulations.
(f) MANUFACTURING SITE. As requested by the Company, AAI
shall, at the Company's expense, assist the Company in qualifying
manufacturing sites for production.
Section 2.3 CLINICAL STUDIES. The Company shall select suitable
clinical research organizations ("CRO") to conduct appropriate CLINICAL
STUDIES; it being understood at this time that the Company has retained
Minservco, Inc. to perform such CLINICAL STUDIES. AAI shall assist with
coordinating material requirements of the CLINICAL STUDIES, including CLINICAL
SUPPLIES, with the CRO.
Section 2.4 REGULATORY SERVICES. AAI shall (i) respond to
regulatory questions related to services performed by AAI; (ii) attend meetings
with appropriate regulatory agencies, if necessary, to facilitate FDA APPROVAL
of the NEW PRODUCT ANDA; and, (iii) upon successful conclusion of the CLINICAL
STUDIES demonstrating a NEW PRODUCT's BIOEQUIVALENCE, prepare an ANDA for such
NEW PRODUCT. Subject to Section 8.1, AAI will provide necessary authorization
letters to government agencies granting the Company the right to reference
appropriate AAI Drug Master Files. At least five (5) business days prior to
the intended submission to the FDA by AAI of any substantive correspondence,
documentation or other information ("Communications") regarding the NEW
PRODUCTS or the ANDAs with respect thereto, AAI shall submit copies of such
Communications to the Company for review and inform the Company of the intended
date of submission of the same to the FDA. Prior to such date, the Company
shall have the right to comment on such Communications and to suggest
reasonable changes thereto, and the parties shall negotiate in good faith with
respect to the inclusion in the Communications of any such requested changes.
Anything herein to the contrary notwithstanding, AAI shall not submit any
Communications to the FDA regarding the NEW PRODUCTS or the ANDA's with respect
thereto without the prior written approval of the Company,
<PAGE> 9
DEVELOPMENT AGREEMENT
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except such Communications (i) as are required by applicable regulatory
requirements, (ii) which relate solely to AAI, or (iii) which are routine
nonsubstantive communications with the FDA. Within three (3) business days of
receipt from the FDA or submission to the FDA of any Communications relating to
the NEW PRODUCTS or the ANDA's, AAI shall provide copies of the same to the
Company.
Section 2.5 PROJECT MANAGEMENT. Both parties recognize that
providing DEVELOPMENT SERVICES will require AAI project management services
including (i) project oversight through a multidisciplinary management team
responsible for evaluating and approving development protocols prior to
implementation and (ii) individual project coordination through project teams.
Each such project shall be assigned an AAI team leader who will maintain
overall responsibility for coordination of the project. The AAI team leaders
will coordinate their efforts with the project manager appointed by the
Company. Anything herein to the contrary notwithstanding, the Company shall
have ultimate responsibility and authority over the design and development of
any NEW PRODUCTS.
Section 2.6 AUDIT RIGHTS. The Company shall have the right to
audit all services performed by AAI on the Company's behalf, including, but not
limited to, (i) the right to review all medical standards, medical practices
and medical ethics as they relate to the performance of the DEVELOPMENT
SERVICES; and (ii) the right to examine and assess compliance with timelines
and cost estimates set forth in each SERVICE ESTIMATE. Such an audit will be
conducted according to reasonable notice and at a reasonable time specified by
AAI.
Section 2.7 INSPECTIONS. Both parties recognize that the FDA may
request AAI, or other persons or entities engaged by or working under the
directions of AAI, to produce records, data and materials relating to NEW
PRODUCTS and CLINICAL SUPPLIES as the result of ANDA submissions or as the
subject of FDA inspections. In such instances, AAI shall notify the Company of
such requests, and the Company shall have the right, to the extent practicable,
to send a representative immediately to participate in the compilation of such
records, data and materials as well as be present during FDA inspections in so
far as the subject matter of the inspections relates to the MANUFACTURING
MATERIALS, NEW PRODUCTS or CLINICAL SUPPLIES, or any of the DEVELOPMENT
SERVICES to be provided hereunder.
Section 2.8 EXCLUSIVITY; RIGHT OF FIRST REFUSAL. AAI shall be
the Company's exclusive provider of DEVELOPMENT SERVICES for the INITIAL
PRODUCTS during the term of this Agreement; provided, however, that in the
event that the board of directors of the Company, prior to the execution of a
SERVICE ESTIMATE for a NEW PRODUCT, determines in good faith following
reasonable
<PAGE> 10
DEVELOPMENT AGREEMENT
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investigation that the expense to the Company for services provided or to be
provided by AAI hereunder with respect to such NEW PRODUCT have or would
significantly exceed the price of reasonably comparable services available from
a reasonably comparable firm, the Company may retain any such other firm to
perform the services contemplated hereunder with respect to such NEW PRODUCT.
Except as permitted by the proviso of the foregoing sentence, the Company shall
not contract with any third party to obtain services to develop any product
that the Company wishes to design or develop, unless the Company shall have
first negotiated on an exclusive basis with AAI for a period of not less than
sixty (60) days as to a good faith proposal for the performance by AAI of
DEVELOPMENT SERVICES on terms and conditions substantially identical to those
to be provided hereunder.
Section 2.9 PRIOR SERVICES. Prior to the execution of this
Agreement, AAI has performed DEVELOPMENT SERVICES with respect to certain of
the INITIAL PRODUCTS at the Company's request. AAI hereby transfers and
assigns to the Company all such intellectual property rights as the Company
would have obtained pursuant to this Agreement if all such services had been
performed hereunder. The parties agree that they shall execute such further
agreements, documents and instruments necessary to effect such transfer. In
addition, the Company shall promptly pay to AAI an amount equal to the amount
that would be chargeable by AAI hereunder if such services had been performed
pursuant to the terms hereof, except that the hourly rates for services
performed prior to March 1, 1995 shall be chargeable at the rates originally
agreed upon by AAI and the Company as set forth in Schedule 2.9 attached
hereto.
ARTICLE III
OWNERSHIP AND LICENSES
SECTION 3.1 COMPANY RIGHTS. The Company shall have the sole and
exclusive worldwide right, title and interest in and to the NEW PRODUCT
SUBMISSION PACKAGES, MANUFACTURING MATERIALS, CLINICAL SUPPLIES and all other
physical materials and specimens produced for or acquired by AAI on behalf of
the Company. The Company shall retain all rights, title and interest to
COMPANY TECHNICAL INFORMATION and COMPANY INVENTIONS and shall have the
exclusive right to use, sell and otherwise COMMERCIALIZE the COMPANY TECHNICAL
INFORMATION and COMPANY INVENTIONS for any and all purposes. AAI grants to the
Company an irrevocable, perpetual, royalty-free, nonexclusive, worldwide
license, with the right to sublicense, in and to the AAI TECHNICAL INFORMATION
and AAI INVENTIONS to the extent necessary to test, make, have made, use, sell,
and
<PAGE> 11
DEVELOPMENT AGREEMENT
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otherwise COMMERCIALIZE the NEW PRODUCTS. The COMPANY shall not have title or
any ownership right or interest in AAI TECHNICAL INFORMATION or AAI INVENTIONS,
and shall not utilize AAI TECHNICAL INFORMATION or AAI INVENTIONS except to
test, make, have made, use and sell the NEW PRODUCTS pursuant to the license
granted in this Section 3.1.
SECTION 3.2 AAI RIGHTS. AAI shall retain all rights, title and
interest in and to AAI TECHNICAL INFORMATION and AAI INVENTIONS and shall
retain the sole and exclusive right to use, sell and otherwise COMMERCIALIZE
the AAI TECHNICAL INFORMATION and AAI INVENTIONS except as expressly provided
for in Section 3.1 above. AAI shall have no license, right or interest
whatsoever in or to any NEW PRODUCT SUBMISSION PACKAGES, COMPANY TECHNICAL
INFORMATION or COMPANY INVENTIONS, except to the extent necessary for AAI to
provide DEVELOPMENT SERVICES hereunder for and on behalf of the COMPANY.
Notwithstanding the foregoing, the parties recognize that AAI shall have the
right to independently develop, without reference to any NEW PRODUCT SUBMISSION
PACKAGE, COMPANY TECHNICAL INFORMATION or COMPANY INVENTIONS, documents which
are substantially similar to the documents within a NEW PRODUCT SUBMISSION
PACKAGE for its own account or on behalf of third parties.
The Company shall have full responsibility and authority for the
COMMERCIALIZATION of any NEW PRODUCT to or with third parties, and this
Agreement shall not create in the Company any continuing obligation to promote,
market, sell, license or otherwise exploit any NEW PRODUCT. AAI shall not
promote, market, sell or otherwise seek to COMMERCIALIZE any NEW PRODUCT.
Nothing in this Agreement shall restrict AAI from developing competing
technologies or products for its own account or for and on behalf of third
parties, subject to the ownership and confidentiality provisions set forth in
this Article III and Article VIII, respectively, and the restriction on the
formulation of certain products that may compete with the NEW PRODUCTS as set
forth in Section 2.0.
Neither party may publicly use any trademark, servicemark, trade name
or logo (or any adaptation thereof) of the other party or any affiliate,
employee or agent thereof, without prior written consent of such other party
which consent may be withheld by such other party in its sole and absolute
discretion. The foregoing notwithstanding, it is understood and agreed that
reports resulting from services provided hereunder may identify AAI as the
source of the reports.
Section 3.3 NEW PRODUCT SUBMISSION PACKAGE CONFIDENTIALITY. Each
NEW PRODUCT SUBMISSION PACKAGE will be subject to the confidentiality
obligations of Article VIII herein.
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DEVELOPMENT AGREEMENT
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ARTICLE IV
SERVICES PERFORMED BY THIRD PARTIES
The parties hereto recognize that AAI may have to subcontract with
third party contractors for the performance of certain services agreed upon
hereunder. AAI shall be permitted to do so provided AAI gives the Company
prior written notice of its intention to do so and the Company approves such
subcontractors and the fees and compensations to be paid to them. The Company
shall not unreasonably withhold or delay its approval.
Section 4.1 SUBCONTRACTOR CONFIDENTIALITY. Subcontractors shall
be hired on an independent contractor basis and shall be bound to maintain all
information, methodologies and technologies relating to the Company's projects
as confidential. AAI will procure confidentiality agreements from
subcontractors protecting the Company's proprietary and confidential
information prior to disclosure of such information and providing that services
performed thereunder are performed as a "work-for-hire" and that all data,
information, discoveries and inventions, whether patentable or not, and related
documentation generated by the subcontractors for and on behalf of AAI shall be
the exclusive property of AAI, or the Company where COMPANY TECHNICAL
INFORMATION is involved, subject to the license in AAI INVENTIONS and AAI
TECHNICAL INFORMATION granted by AAI to the Company pursuant to Article III
hereof.
Section 4.2 MONITORING SUBCONTRACTORS. AAI shall monitor
subcontractors during the course of performance of contracted work and shall
incorporate the results of those services into its development efforts and
regulatory submissions as appropriate.
ARTICLE V
PUAYMENT FOR SERVICES RENDERED
Section 5.1 FEES AND EXPENSES. The Company shall pay for
services rendered and related expenses hereunder according to the following
terms and conditions:
(a) SERVICE CHARGES. AAI shall charge the Company for
DEVELOPMENT SERVICES rendered according to an annual schedule of
hourly
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DEVELOPMENT AGREEMENT
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rates. At the commencement of this Agreement, the following schedule
of hourly rates are in effect:
<TABLE>
<CAPTION>
Position Hourly Rate
-------- -----------
<S> <C>
Senior Formulator . . . . . . . . . . . . . . . $165
Senior Chemist . . . . . . . . . . . . . . . . . $150
Chemist . . . . . . . . . . . . . . . . . . . . $125
Regulatory Affairs Support . . . . . . . . . . . $150
FDL Technician . . . . . . . . . . . . . . . . . $125
Management and Project Team Meetings . . . . . . $500
</TABLE>
Beginning December 1995 and in each subsequent December during the
term of this Agreement, the parties will review the schedule of rates
then in effect pursuant to this Agreement and negotiate in good faith
any prospective adjustment to the rates to be charged hereunder;
provided, however, that during the annual periods ending December 31,
1997 and thereafter, the percentage increase in the hourly rates to be
charged hereunder in any year from the hourly rates in effect for the
immediately preceding year shall not exceed the greater of (i) the
percentage increase between the same periods in the all-cities
Consumer Price Index as published by the United States Bureau of Labor
Statistics, or (ii) the percentage increase between the same periods
in AAI's wage and employee benefit expenses for its employees
performing services at the hourly rates set forth above. AAI shall
furnish the Company such information as the Company may reasonably
request to support any increase under the preceding clause (ii).
The parties recognize that certain routine technical functions are
charged according to standard fractional hourly units (e.g., 0.2
hours) for administrative convenience.
(b) TRAVEL AND OUT-OF-POCKET EXPENSES. AAI anticipates
that certain travel and out-of-pocket expenses will be incurred during
the performance of its duties hereunder. The Company agrees to pay
for ordinary and necessary travel and other incidental expenses
incurred in providing DEVELOPMENT SERVICES provided however that AAI
shall not incur any such individual expense greater then Five Thousand
Dollars ($5,000) without the Company's prior approval which shall not
unreasonably be withheld.
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DEVELOPMENT AGREEMENT
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(c) FACILITIES CHARGES. The Company agrees to pay
standard flat rate daily fees for utilization of production and
storage facilities temporarily dedicated exclusively to the
development of NEW PRODUCTS hereunder.
(d) MATERIALS AND HANDLING CHARGES. The Company agrees
to pay a fifteen percent (15%) handling fee for all MANUFACTURING
MATERIALS or supplies acquired, pursuant to Section 2.2(b) of this
Agreement, for or on behalf of the Company by AAI.
(e) SUBCONTRACTORS. The Company agrees to pay AAI for
approved subcontracted services at cost and the supervision, auditing,
and coordination of such subcontractors at the hourly rates set forth
in Section 5.1(a).
(f) RATES AND CHARGES. AAI represents, warrants and
covenants that the hourly rates, facilities charges and material
handling charges to be charged to the Company for services hereunder,
as the same shall change from time to time, shall be reasonably within
the range of rates normally charged to AAI's customers for whom AAI
provides services comparable to those to be provided to the Company
hereunder.
(g) ACQUISITION OR LICENSE OF THIRD PARTY TECHNOLOGY.
The Company agrees to pay any costs (including royalty obligations)
AAI may sustain based on the acquisition or licensing of any
third-party technology related to the DEVELOPMENT SERVICES as mutually
agreed to pursuant to Article II hereof.
Section 5.2 ANNUAL BUDGET. Prior to January 1 of each calendar
year during the term of this Agreement, AAI agrees to use reasonable and
diligent efforts to prepare, and submit to the Company for review and approval,
an ANNUAL BUDGET establishing in reasonable detail the Company's estimated
monthly requirements of DEVELOPMENT SERVICES for the upcoming calendar year
based on approved SERVICE ESTIMATES. Upon approval by the Company, the ANNUAL
BUDGET will be attached hereto and incorporated herein as EXHIBIT "A." AAI
shall provide notice to the Company of any significant variance from the
current ANNUAL BUDGET.
(a) MONTHLY PAYMENT. On or before the first day of each
month, AAI shall invoice the Company for budgeted service fees and
expenses for that month as established in the then current approved
ANNUAL BUDGET. The invoiced amount will be due thirty days after
receipt. AAI shall apply these funds against amounts due and payable
to AAI by the Company under the
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DEVELOPMENT AGREEMENT
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terms and conditions of this Agreement. AAI shall maintain accurate
accounting records of the Company's monthly payments and deductions
therefrom for services rendered and expenses incurred.
(b) RECONCILIATION OF MONTHLY PAYMENTS AND CHARGES.
Monthly payments shall be reconciled against AAI's cumulative service
fees and expenses semi-annually on each July 15 and January 15 during
the term for the preceding months of this Agreement. In the event a
reconciliation results in a credit or debit balance to the Company's
account, it shall be handled as follows:
(i) Credit Balances. In the event the Company's
cumulative monthly payment to AAI exceeds the cumulative
service fees and expenses accrued through the date of
reconciliation, AAI shall issue a credit to the Company in
the amount of the overpayment which shall be applied to the
Company's succeeding monthly payment obligations pursuant to
the ANNUAL BUDGET until such credit is exhausted. In the
event that there are no remaining monthly payment obligations
to be performed by the Company, AAI shall pay the Company the
credit balance immediately upon demand by the Company.
(ii) Debit Balances. In the event the Company's
cumulative monthly payments to AAI are less than the
cumulative service fees and expenses accrued through the date
of reconciliation, the Company shall pay AAI the debit balance
within thirty (30) days of the Company's receipt of an invoice
for such underpayment amount.
(iii) Should any part of the reconciliation be in
dispute, the Company and AAI, as the case may be, covenants to
pay or credit the undisputed amount according to the terms and
conditions described herein while said dispute is being
resolved.
Section 5.3 AUDIT RIGHTS. The Company shall have the right, upon
reasonable notice and at its own expense, during AAI's performance of
DEVELOPMENT SERVICES, and for a period of three (3) years thereafter, to
conduct an audit of services fees and expenses charged to the Company for such
services. The audit shall be conducted by a certified public accountant
selected by the Company. AAI shall keep a complete and accurate account of
expenses charged to the Company and shall allow the examination of such records
by the selected accountant during regular business hours. Such audits shall be
performed no more frequently than annually.
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DEVELOPMENT AGREEMENT
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ARTICLE VI
LIABILITY AND INDEMNIFICATION
Section 6.1 LIABILITY OF AAI FOR DEVELOPMENT SERVICES. The
parties agree that AAI's liability to the Company for claims arising from or
relating to the DEVELOPMENT SERVICES with respect to each single NEW PRODUCT
dosage form under this Agreement shall be limited to the amount of compensation
which AAI has received from the Company for DEVELOPMENT SERVICES rendered
hereunder relating to that particular NEW PRODUCT dosage form. AAI shall not
be liable to the Company for injuries sustained by third parties; special,
indirect or consequential damages; or any cost associated with a NEW PRODUCT's
recall. Any test results, reports or analysis provided by AAI shall only be
for consideration and use by the Company in the design and development of the
NEW PRODUCTS, and AAI shall not be responsible for the adoption, use,
implementation or results of such test results, reports or analysis.
Section 6.2 INDEMNIFICATION OF AAI. The Company shall indemnify
and hold harmless AAI, its directors, officers, shareholders, agents, employees
and affiliates from any loss, expense and liability, including reasonable
attorney's fees arising from or in connection with the use or application by
the Company or any third party of any formulas, test results, analysis or other
information furnished by AAI hereunder or with the distribution or sale of any
NEW PRODUCT or CLINICAL SUPPLIES developed under this Agreement; provided,
however, that the Company shall not be obligated to provide such
indemnification if, when and to the extent that it is finally judicially
determined that the loss, expense or liability results from the gross
negligence or willful misconduct of AAI. Each person or entity seeking
indemnification hereunder shall promptly notify the Company of any loss,
expense or liability for which the Company may be liable hereunder and shall
permit the Company a reasonable opportunity to cure any underlying problem to
mitigate actual or potential damages, and to participate in, or assume the
defense of, any third-party claim or action. In the event that the Company
chooses to assume the defense of any third-party claim or action, the Company
shall provide the indemnified persons with notice of the progress of such
defense. The Company further agrees that it will not, without prior written
consent of the indemnified persons, which consent shall not be unreasonably
withheld or delayed, settle, compromise or consent to the entry of any judgment
or award in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder. The rights of AAI
hereunder shall be an addition to any other rights that AAI or any other
indemnified
<PAGE> 17
DEVELOPMENT AGREEMENT
Page 17 of 26
person may have, at law or otherwise, including, but not limited to, any right
to contribution.
Section 6.3 SURVIVAL. The covenants and obligations of
indemnification set forth herein shall survive the expiration or termination of
this Agreement.
Section 6.4 INSURANCE.
(a) At AAI's written request prior to commencing CLINICAL
STUDIES, the Company agrees that it will acquire and maintain clinical
research insurance coverage reasonably satisfactory to AAI, but not
less than $10,000,000 per occurrence, which indemnifies AAI for any
and all liability arising out of defects in the design, marketing,
promotion, sale, delivery, resale or use of any NEW PRODUCT.
(b) At AAI's written request prior to commencing
COMMERCIALIZATION of a NEW PRODUCT, the Company agrees that it will
acquire and maintain product liability insurance coverage reasonably
satisfactory to AAI, but not less than $10,000,000 per occurrence,
which indemnifies AAI for any and all liability arising out of defects
in the design, marketing, promotion, sale, delivery, resale or use of
any NEW PRODUCT.
(c) All policies of insurance obtained pursuant to Section
6.4(a)-(c) shall be primary and non- participating and shall name AAI
and any affiliate identified by AAI as additional insureds thereunder.
Additionally, all such policies shall include an endorsement waiving
the insurance company's rights of subrogation against AAI and any
affiliates identified by AAI. The policies of insurance required
under this Section 6.4 shall be valid and enforceable policies issued
by insurers of recognized responsibility. The Company shall deliver
to AAI evidence of the insurance required by this Section 6.4 at AAI's
request.
(d) AAI shall purchase and maintain at all times during the
term of this Agreement key man life insurance on the life of Frederick
D. Sancilio in a death benefit amount of not less than $1,000,000.
AAI shall deliver to the Company evidence of such insurance at the
Company's request.
<PAGE> 18
DEVELOPMENT AGREEMENT
Page 18 of 26
ARTICLE VII
TERM AND TERMINATION
Section 7.1 TERM OF AGREEMENT. Unless sooner terminated in a
manner herein provided, this Agreement shall continue for a period of eight (8)
years.
Section 7.2 TERMINATION. The rights and obligations of the
Company and AAI under this Agreement can be terminated in accordance with
Section 7.1 or:
(a) upon the written consent of both the Company and AAI;
(b) by either party, if the other applies for, consents
to or acquiesces in the appointment of a trustee or a receiver for
itself or its property, or in the absence of such application, consent
or acquiescence, a trustee or receiver is appointed for the other
party or for the property of the other party or if any bankruptcy,
reorganization or other proceeding under any bankruptcy or insolvency
law is instituted by or against the other party;
(c) by either party, upon the failure of the other to
comply with any of the material provisions of this Agreement provided,
however, no such right of termination shall be available under this
Section 7.2(c) unless the aggrieved party has first served upon the
non-complying party written notice of such non-compliance and such
non-compliance remains uncorrected for a period of sixty (60) days
after receipt of such notice; or
(d) by AAI, upon AAI's determination in its reasonable
judgment that its performance hereunder or any of its affiliates,
whether considered alone or in combination with other activities and
services provided by AAI or its affiliates, conflicts with or violates
(i) any statute, rule, regulation or decree of any court,
administrative agency or government body (including, without
limitation, the National Institutes of Health) to which it may be
subject, or (ii) ethical standards or principles applicable to the
pharmaceutical industry.
In addition to the foregoing, the development of any NEW PRODUCT and any
SERVICE ESTIMATE related thereto may be terminated by the Company at any time
by written notice to AAI. Unless otherwise agreed by the parties hereto, at
the date of the termination of this Agreement subject to Section 8.1 hereof,
AAI shall deliver to the Company copies of, and transfer rights as contemplated
hereby in, all written or otherwise recorded records, reports, test results,
data, batch records, regulatory
<PAGE> 19
DEVELOPMENT AGREEMENT
Page 19 of 26
applications and filings prepared by or on behalf of AAI with respect to all
NEW PRODUCTS then in development under this Agreement, and, unless directed in
writing by the Company to dispose of any of the following in accordance with
the procedures set forth in Section 2.2(e) hereof, all specimens and samples of
formulation prepared by or on behalf of AAI in the development of NEW PRODUCTS,
all control samples for lots of Clinical Supplies, and all Manufacturing
Materials, to the extent the foregoing is then in the possession or control of
AAI. Upon termination by the Company of the development of any NEW PRODUCT and
any SERVICE ESTIMATE related thereto, or upon termination of the Agreement by
either party pursuant to this Article VII, the Company shall be obligated to
pay the cost of all work completed and expenses incurred through the effective
date of termination in accordance with this Agreement, including AAI's cost of
all materials and services previously acquired or contracted for which AAI
cannot readily utilize in other day-to-day operations, net of the proceeds of
sale or salvage, and, subject to the foregoing, the parties agree to make
appropriate adjustments to the ANNUAL BUDGET and to reduce the Company's
monthly payment obligations thereunder. Except for termination by AAI pursuant
to Section 7.2(b) or (c), the license granted by AAI pursuant to Section 3.1
shall survive the expiration or termination of this Agreement.
ARTICLE VIII
CONFIDENTIALITY
Section 8.1 NONDISCLOSURE. The following provided by one party
to this Agreement (the "Disclosing Party") and received by the other party to
this Agreement (the "Receiving Party") shall be deemed confidential:
(i) All confidential and proprietary business or
technical documentation, materials, knowledge or other information
directly or indirectly related to the Company or its business which is
provided by the Company to AAI pursuant to this Agreement;
(ii) All AAI TECHNICAL INFORMATION, AAI INVENTIONS,
COMPANY TECHNICAL INFORMATION, COMPANY INVENTIONS, NEW PRODUCT
SUBMISSION PACKAGES, MANUFACTURING MATERIALS or CLINICAL SUPPLIES; and
(iii) Any other AAI or Company proprietary information or
trade secrets of a party to this Agreement provided to the other party
during the term of this Agreement.
<PAGE> 20
DEVELOPMENT AGREEMENT
Page 20 of 26
Such confidential information shall be safeguarded by the Receiving
Party, shall not be disclosed to third parties or used for any purpose other
than as permitted herein and shall be made available only to the Receiving
Party employees, subcontractors or consultants who have a need to know for the
purposes specified under this Agreement. These obligations of confidentiality
shall apply during the term of this Agreement, and shall survive the
termination of this Agreement, but such obligations shall not apply to any
information to the extent that such information:
(a) is or hereafter becomes generally available to the
public other than by reason of any default with respect to a
confidentiality obligation under this Agreement;
(b) is disclosed to the Receiving Party by a third party
who is not in default of any confidentiality obligation to the
Disclosing Party; or
(c) is conceived by the Receiving Party independent of
the DEVELOPMENT SERVICES being provided pursuant to this Agreement.
Notwithstanding the restrictions on confidential information set forth
above, either party may use or disclose confidential information to the extent
that such confidential information:
(a) is submitted to governmental agencies to facilitate a
NEW PRODUCT's FDA APPROVAL hereunder or to support the marketing of an
approved NEW PRODUCT provided that reasonable measures shall be taken
to assure confidential treatment of such information;
(b) is provided to third party subcontractors under
appropriate terms and conditions including confidentiality provisions
at least as stringent as those in this Agreement;
(c) is required to be disclosed in compliance with
applicable laws or regulations in connection with the manufacture or
sale of a NEW PRODUCT; provided that the Receiving Party provides the
Disclosing Party with notice of intended disclosure as far in advance
as possible under the circumstances; or
(d) is otherwise required to be disclosed in compliance
with applicable laws, regulations or policies of the FDA or any other
applicable governmental agency or authority or order by a court or
other regulatory body having competent jurisdiction; provided that the
Receiving Party provides the
<PAGE> 21
DEVELOPMENT AGREEMENT
Page 21 of 26
Disclosing Party with notice of intended disclosure as far in advance
as possible under the circumstances.
Upon expiration or earlier termination of this Agreement and upon payment in
full under Article V and Section 7.2 hereto, but subject to Articles III and IV
hereof, the Receiving Party shall return to the Disclosing Party all records
and any compositions, articles, devices, equipment and other items which
disclose or embody all of the Disclosing Party's confidential information,
including all copies or specimens thereof, whether prepared by the Receiving
Party, any subcontractors or others, except for such records and other items
which the Receiving Party or such third-parties, as the case may be, are
required to retain in accordance with applicable law including FDA guidelines
or information subject to FDA review. Notwithstanding the foregoing, the
Receiving Party may retain copies of such records for archival purposes only.
The Receiving Party agrees that the provisions of this Article VIII are
necessary and reasonable to protect the Disclosing Party (or any other entity
which succeeds, in whole or in part, to the Disclosing Party) in the conduct of
its business. The Receiving Party acknowledges that damages at law may be an
inadequate remedy for the breach of any of the covenants contained in this
Article VIII and, accordingly, in addition to any of the remedies which the
Disclosing Party would otherwise be entitled, the Disclosing Party shall be
entitled to seek injunctive relief for breach by the Receiving Party of any of
the provisions contained herein.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Section 9.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each of AAI
and the Company represents and warrants to the other that:
(a) it is a corporation duly organized, validly existing and
in good standing under the laws of the State of its incorporation,
with all requisite corporate power and authority to consummate the
transactions contemplated hereunder;
(b) the execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action;
(c) this Agreement has been duly executed and delivered and
constitutes a valid and legally binding agreement and obligation of
such party, enforceable against it in accordance with the terms
thereof;
<PAGE> 22
DEVELOPMENT AGREEMENT
Page 22 of 26
(d) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder do not and
will not conflict with or violate any provisions of law or the
Certificate of Incorporation or By-laws of such party, and do not and
will not conflict with or result in the breach of any condition or
provision of, or constitute a default under, or result in the creation
or imposition of any lien upon any of the property or assets of such
party by reason of the terms of any contract, mortgage, lien, lease,
agreement, indenture, instrument or judgment to which it is a party,
or which is, or purports to be, binding upon it, or which affects, or
purports to affect, any of its properties or assets, and no action by
any governmental department, commission, board, bureau or
instrumentality is necessary to make this Agreement valid and binding
upon such party hereto in accordance with its terms; and
(e) it possesses all permits, licenses and other governmental
approvals necessary to perform its obligations hereunder and will
comply fully with the terms and conditions of all such permits,
licenses and other approvals and with all federal, state and local
statutes and regulations applicable to its facilities and the
performance of its obligations hereunder.
Section 9.2 ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
OF AAI. AAI further represents, warrants and covenants to the Company that (i)
all DEVELOPMENT SERVICES shall be performed in accordance with all applicable
federal, state and local laws, codes, ordinances, rules and regulations
(including cGMP) and (ii) in its performance of DEVELOPMENT SERVICES and the
preparation and delivery to the Company of any test results, reports, analysis
or other work product, AAI shall not willfully infringe, misappropriate or
otherwise willfully violate any patents, patent applications, trademarks,
copyrights, trade secrets, know-how or other intellectual property rights of
any third party recognized in any jurisdiction.
Section 9.3 CONTINUING NATURE OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained herein shall be true and correct
as of the date hereof and at all times during the term of this Agreement or any
extensions or renewals thereof as though continuously made.
<PAGE> 23
DEVELOPMENT AGREEMENT
Page 23 of 26
ARTICLE X
CORRESPONDENCE AND NOTICE
Until advised in writing to the contrary by the intended recipient,
documentation, reports, communications, and notices hereunder shall be
effective upon receipt and shall be addressed to:
Aesgen: Aesgen, Inc.
5051 New Centre Drive
Wilmington, NC 28403
(Attention: President)
AAI: Applied Analytical Industries, Inc.
1206 North 23rd Street
Wilmington, NC 28405
(Attention: General Counsel)
ARTICLE XI
GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of North Carolina.
ARTICLE XII
MISCELLANEOUS
Section 12.1 LIMITATIONS OF RIGHTS. Except as expressly provided
for in this Agreement, nothing contained herein shall be construed as
conferring any license or other rights, by implication, estoppel or otherwise,
under any patent (including design and utility patents) or patent applications,
or any copyrights, trademarks, trade names or trade dress. This Agreement is
made only to benefit the parties hereto, and no third party shall have any
rights, interests or benefits hereunder.
Section 12.2 WAIVER. The failure of either party hereto at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No waiver
by any party hereto
<PAGE> 24
DEVELOPMENT AGREEMENT
Page 24 of 26
of any condition, or of the breach of any provision, term, covenant,
representation, or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or construed as
a further or continuing waiver of any such condition or of the breach of any
other provision, term, covenant, representation or warranty of this Agreement.
Section 12.3 PAROL EVIDENCE. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof as of
its date and supersedes all prior agreements, negotiations, representations and
proposals, written and oral, relating to its subject matter.
Section 12.4 SEVERABILITY. If a court or other tribunal of
competent jurisdiction holds any term or provision, or portion thereof, of this
Agreement to be invalid, void or unenforceable, the remaining provisions of
this Agreement shall remain in full force and effect. It is the parties'
intention that if a court or other tribunal holds any term or provision of this
Agreement to be excessive in scope, such term or provision shall be adjusted
rather than voided, if possible.
Section 12.5 MODIFICATION. This Agreement may not be amended or
modified except by written instrument signed by AAI and the Company.
Section 12.6 COOPERATION. Each party will execute and deliver
all such instruments and perform all such other acts as the other party may
reasonably request to carry out the transactions contemplated by this
Agreement.
Section 12.7 FORCE MAJEURE. Neither AAI nor the Company shall be
liable for delay or failure in the performance of the obligations contained in
this Agreement caused solely by any one or more of the following: (a) acts of
God, or public enemy or war (declared or undeclared); (b) acts of governmental
or quasi-governmental authorities of the United States, or any political
subdivision thereof, or of any department or agency thereof, or regulations or
restrictions imposed by law or by court action, except as they may result from
the unreasonable failure of AAI or the Company to perform as required
hereunder; (c) acts of persons engaged in subversive activities or sabotage;
(d) fires, floods, explosions or other catastrophes; (e) strikes or similar
labor disruptions; (f) epidemics or quarantines restrictions; (g) freight
embargoes or interruption of transportation; (h) unusually severe weather; (i)
delays of a supplier of either party due to any of the above causes or events;
or (j) any other extraordinary causes, similar or dissimilar, beyond the
reasonable control of the party concerned; and provided that due diligence is
exercised to cure such cause and resume performance, and the time for
performance by such party shall be extended by the period of any such delay.
<PAGE> 25
DEVELOPMENT AGREEMENT
Page 25 of 26
Section 12.8 BINDING EFFECT. Subject to the restrictions on
transfers, assignments and encumbrances set forth herein, this Agreement shall
inure to the benefit of and be binding upon the undersigned parties, their
respective legal successors and assigns.
Section 12.9 ASSIGNMENT. Neither party shall assign its rights
under this Agreement without the prior written consent of the other party.
Section 12.10 FURTHER ASSURANCES. Each of the parties hereto
agrees to execute such instruments and take such further action, if any, as may
be reasonably requested by the other party to assure such requesting party of
the rights and benefits intended by this Agreement.
Section 12.11 RELATIONSHIP. The relationship between the parties
established by this Agreement is solely that of independent contractors.
Neither party is in any way the legal representative, partner or agent of the
other, nor is either party authorized or empowered to create or assume any
obligation of any kind, implied or expressed, on behalf of the other party,
without the prior written consent of the other.
Section 12.12 ARBITRATION. Any controversy or claim arising out of
or relating to this Agreement or the transactions contemplated hereby, or the
breach hereof or thereof, shall be settled by arbitration in Wilmington, North
Carolina in accordance with the Rules of the American Arbitration Association
by an Arbitrator appointed in accordance with the Rules. The Arbitrator shall
follow the law governing this Agreement. Judgment upon the award may be
entered by any court having jurisdiction.
Section 12.13 OWNERSHIP OF OTHER ENTITIES. During the term of this
Agreement, AAI shall not own or acquire an ownership interest in any entity
principally engaged in the business of developing or manufacturing generic
pharmaceutical products, other than ownership of shares of capital stock of
GenerEst, Inc., a Delaware corporation, or of any entity that is not controlled
by AAI. For the purposes hereof, an entity shall be deemed to be controlled by
AAI if AAI has the power or authority to direct the management or policies of
such entity, whether through voting control, the ability to designate the
directors or general partners or persons exercising similar managerial
authority over such entity, by contract or otherwise.
Section 12.14 COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which will be considered one and the same
Agreement.
<PAGE> 26
DEVELOPMENT AGREEMENT
Page 26 of 26
[Remainder of page left blank intentionally]
<PAGE> 27
DEVELOPMENT AGREEMENT
Page 27 of 26
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date and year first
written above.
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ Frederick D. Sancilio
- ------------------------------------------
Frederick D. Sancilio, Ph.D.
President
Attest
By: /s/ R. Forrest Waldon
- ------------------------------------------
R. Forrest Waldon
Secretary
AESGEN, INC.
BY: /s/ Richard F. Brubaker
- ------------------------------------------
Chief Executive Officer
Attest:
By: /s/ R. Forrest Waldon
- ------------------------------------------
R. Forrest Waldon
Secretary
<PAGE> 1
EXHIBIT 10.14
EXCLUSIVE OPTION AGREEMENT
This Exclusive Option Agreement, effective as of May 28, 1996 (the
"Effective Date"), between Applied Analytical Industries, Inc., or one of its
designated affiliates, (collectively, hereinafter "AAI"), a Delaware
corporation having its principal place of business at 1206 North 23rd Street,
Wilmington, North Carolina 28406
and
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION]
WHEREAS, AAI, and [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] are in the business,
among others, of providing certain analytical, formulation development,
manufacturing, clinical, and regulatory services to the international
pharmaceutical industry; and
WHEREAS, AAI desires from [CONFIDENTIAL INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION], and
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] is willing to grant to AAI, an exclusive
option to purchase all of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] stock of [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION].
NOW, THEREFORE, in consideration for the mutual covenants and
agreements set forth hereinafter, and for other mutually recognized and
valuable consideration, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. General. When used in this Agreement, each of the
following terms shall have the meanings as set forth in this Article I.
Section 1.2. AAI. "AAI" means Applied Analytical Industries, Inc.
and its affiliates.
<PAGE> 2
Section 1.3. Affiliate. "Affiliate" means any existing or future
corporation, partnership, joint venture, or other entity that directly or
indirectly, now or in the future, controls, is controlled by, or is in control
with a party to this Agreement.
"Control" means the possession of the power to direct or cause the
direction of the management and policies of a person or business entity,
whether through ownership of voting securities, by contract, or otherwise.
Section 1.4. Exclusive Option Period. "Exclusive Option Period"
means the period of time during which AAI may elect to acquire all of
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] stock of [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] from
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION], such period commencing on the Effective
Date of this Agreement and ending at 11:59 p.m. Wilmington, North Carolina
time on the date six months after such Effective Date, unless sooner terminated
by execution of a Stock Purchase Agreement.
Section 1.5. "Stock Purchase Agreement" means the definitive
agreement pursuant to which AAI agrees to purchase from [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] all of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] stock of
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION].
ARTICLE II
EXCLUSIVE OPTION GRANT
Section 2.1. The Option. In consideration of the Exclusive Option
Fee set forth below, [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]:
(a) grants to AAI an option (the "Option") to purchase all of the
outstanding stock of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] owned by [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] for a purchase price consisting of (1) the Exclusive
Option Fee, plus (ii) the additional payments described in Section 4.1 hereof,
plus (iii) any reimbursements payable to [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
pursuant to Section 3.1(a) hereof; and
-2-
<PAGE> 3
(b) agrees not to solicit or encourage the submission of any
proposal or offer from any person relating to the acquisition of any stock or
any of the assets of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] (including by merger,
consolidation or share exchange) or participate in any discussions or
negotiations regarding, or furnish any information with respect to, any of the
foregoing during the Exclusive Option Period.
Section 2.2. Exclusive Option Fee. In consideration of the
Option, AAI shall place or cause to be placed within thirty days after the
execution of this Agreement the sum of [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] (the
"Exclusive Option Fee") in escrow pursuant to an escrow agreement in the form
of Exhibit A hereto (the "Escrow Agreement").
Section 2.3. Exercise of Option. AAI shall have the right to
exercise the Option by giving written notice to [CONFIDENTIAL INFORMATION HAS
BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
at any time from the Effective Date through the expiration of the Exclusive
Option Period. Upon such expiration, the parties will have no further
obligations to each other except those obligations set forth in Section 4.2
hereof and the Escrow Agreement.
Section 2.4. Exclusive Negotiation Period. Upon AAI's exercise of
the Option, AAI shall have the exclusive right for a period of ninety days
thereafter to negotiate with [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] the terms and
conditions of a definitive Stock Purchase Agreement; provided, however, that
the parties hereto may agree in writing to extend such negotiation period if
necessary.
Section 2.5. Payment of Escrow Funds. The Exclusive Option Fee,
including any accrued interest, shall be paid to AAI if the conditions in
Article III hereof are not fulfilled or if, after exercising the Option, the
parties are unable to negotiate a stock purchase agreement to their mutual
satisfaction within the ninety (90) day period set forth in Section 2.4. The
Exclusive Option Fee, including interest, shall be paid to [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] in all other events. The parties shall deliver a joint
written direction to the escrow agent under the Escrow Agreement to release the
escrowed funds to the appropriate party within five days after the delivery of
such written direction.
-3-
<PAGE> 4
ARTICLE III
CONDITIONS
Section 3.1. Conditions. [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION].
Section 3.2. AAI's Discretion. Notwithstanding the provisions of
Section 3.1, AAI reserves the right to exercise the option herein granted even
if all conditions set forth in Section 3.1 have not been met.
ARTICLE IV
OBLIGATIONS
Section 4.1. Good Faith Negotiations. Upon exercise of the
Option, the parties shall diligently proceed in good faith to complete and
execute the Stock Purchase Agreement. The Stock Purchase Agreement shall
provide that within thirty days following the first, second, and third
anniversaries of the execution of a Stock Purchase Agreement, AAI shall pay or
cause to be paid to [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] the sums of
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] and [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
respectively.
Section 4.2. Confidentiality. Except as otherwise expressly
provided in this Agreement, each party shall retain in confidence and not use
any and all business and/or scientific information belonging to the other party
("Confidential Information"). Each party shall exercise the same level of care
which it uses to prevent the unauthorized use or disclosure of its own
confidential information of similar importance. Such obligations of
confidentiality and nonuse shall be waived for Confidential Information which
(i) is known to the public prior to disclosure hereunder; (ii) becomes known to
the public through no fault of the receiving party; (iii) was known to the
receiving party prior to disclosure hereunder; (iv) is disclosed to the
receiving party by a third party who is not under an obligation of
confidentiality to the disclosing party; or (v) the receiving party has been
given the express written consent from the disclosing party to make such
disclosures. The obligations of confidentiality and nonuse created hereunder
shall expire seven years from the Effective Date of this Exclusive Option
Agreement unless such period is extended under a Stock Purchase Agreement.
-4-
<PAGE> 5
ARTICLE V
INDEMNIFICATION
Section 5.1. Indemnification of AAI. Notwithstanding any
negligent acts committed by AAI, its employees, or agents, and following the
execution of a Stock Purchase Agreement, [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] shall
indemnify AAI for all liabilities of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] not disclosed
on the financial statements of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] provided to AAI
at the closing of the Stock Purchase Agreement for a sum up to [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION], but only after AAI has incurred such liabilities in
excess of [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION].
ARTICLE VI
WARRANTIES
Section 6.1. Warranties. Each party warrants to the other party
that it has full power and authority to execute, deliver, and perform this
Agreement. [CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION] further warrants that he owns the
majority right, title and interest in and to [CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION].
Each party further warrants that within the Exclusive Option Period specified
herein, each such party has the full power and authority to enter into a Stock
Purchase Agreement.
ARTICLE VII
CORRESPONDENCE AND NOTICE
Until advised in writing to the contrary by the parties hereto, all
documentation, reports, notices, or any other communications hereunder shall be
effective upon receipt when mailed by Federal Express or other reliable courier
service and addressed to:
AAI: R. Forrest Waldon
Vice President and General Counsel
5051 New Centre Drive
Wilmington, North Carolina USA 28403
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION]
-5-
<PAGE> 6
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of [CONFIDENTIAL
INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION].
Section 8.2. Assignment. The parties shall not have the right to
assign this Agreement without prior written consent of the other party, except
that AAI may transfer its right to exercise the Option to any person.
Section 8.3. Entire Agreement and Amendment. This Agreement
constitutes the entire agreement between the parties with respect to subject
matter hereof. This Agreement may not be amended, supplemented, or otherwise
modified except by an instrument in writing executed by authorized
representatives of both parties.
Section 8.4. Titles. The recitals and titles of the Articles and
Sections of this Agreement are for general information and reference only, and
this Agreement shall not be construed by reference to such titles.
Section 8.5. No Other Rights. Except as expressly provided
herein, nothing contained herein shall be construed as conferring any license
or other rights, by implication, estoppel, or otherwise, to either party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
in duplicate originals, by their respective duly authorized officers or
representatives.
APPLIED ANALYTICAL INDUSTRIES, INC.
By: /s/ Frederick D. Sancilio
-----------------------------------------
Frederick D. Sancilio
President and Chief Executive Officer
By:
------------------------------------------
[CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION]
-6-
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, 1995 March 31, 1996
----------------- --------------
<S> <C> <C>
Pro forma historical weighted average shares outstanding(1)(2)(4) 10,521,909 10,521,909
Series A Convertible Preferred stock, mandatorily convertible to
Common Stock at consummation of the planned initial
public offering (2)(3)(4)...................................... 981,520 981,520
Common stock equivalents for options outstanding (2)(3)(4)...... 74,650 74,650
------------ ------------
Shares used in computing pro forma net income per share....... 11,578,079 11,578,079
============ ============
Pro forma net income............................................ $ 2,116 $ 655
============ ============
Pro forma net income per share.................................. $ .18 $ .06
============ ============
</TABLE>
- -----------------
(1) Weighted average common stock outstanding during the period including all
common stock issued at prices below the expected public offering price
during the twelve month period preceding the planned offering as if it was
outstanding at January 1, 1995.
(2) All common stock, convertible preferred stock, common stock options and
awards adjusted for a 200-for-1 common stock split followed by a
1-for-.6325 reverse split.
(3) Issuance of common stock options and convertible preferred stock at
prices below the expected public offering price during the twelve month
period preceding the planned offering, have been included as common stock
equivalents as if they had been issued as common stock as of
January 1, 1995.
(4) The common stock repurchase price for all periods used in computing the
proceeds received under the treasury stock approach is the estimated
initial public offering price.
<PAGE> 1
EXHIBIT 23.1
[ROBINSON, BRADSHAW & HINSON, P.A. LETTERHEAD]
June 7, 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.
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 June 5, 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
June 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPLIED ANALYTICAL INDUSTRIES, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,178
<SECURITIES> 0
<RECEIVABLES> 7,762
<ALLOWANCES> 73
<INVENTORY> 304
<CURRENT-ASSETS> 24,209
<PP&E> 21,229
<DEPRECIATION> 9,665
<TOTAL-ASSETS> 38,148
<CURRENT-LIABILITIES> 10,530
<BONDS> 0
0
21,510
<COMMON> 811
<OTHER-SE> 325
<TOTAL-LIABILITY-AND-EQUITY> 38,148
<SALES> 9,925
<TOTAL-REVENUES> 9,925
<CGS> 4,118
<TOTAL-COSTS> 4,118
<OTHER-EXPENSES> 4,521
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 1,109
<INCOME-TAX> 454
<INCOME-CONTINUING> 655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 655
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
