<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
APPLIED ANALYTICAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(AAI logo)
APPLIED ANALYTICAL INDUSTRIES, INC.
5051 NEW CENTRE DRIVE
WILMINGTON, NORTH CAROLINA 28403
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 12, 1997
---------------------
To the Stockholders of Applied Analytical Industries, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Applied
Analytical Industries, Inc. (the "Company") will be held on Monday, May 12, 1997
at 10:00 a.m., North Carolina time, at the Blockade Runner Hotel, Nighthawk I
Room, 275 Waynick Boulevard, Wrightsville Beach, North Carolina 28480.
1. To elect two (2) directors to serve for a three-year term and until
their respective successors are elected and qualified;
2. To approve the 1997 Stock Option Plan authorizing the issuance of
486,000 options;
3. To ratify and approve the appointment of Price Waterhouse LLP as
the independent auditors for the Company for the fiscal year ending
December 31, 1997; and
4. To consider and act upon any other matters that may properly come
before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of business
on March 21, 1997 as the record date for the determination of stockholders
entitled to notice of and to vote at the meeting or any adjournment thereof.
Only stockholders of record of the Company's Common Stock at the close of
business on that date will be entitled to vote.
You are cordially invited to attend the meeting. However, whether or not
you plan to be personally present at the meeting, please complete, date and sign
the enclosed proxy and return it promptly in the enclosed envelope. If you later
desire to revoke your proxy, you may do so at any time before it is exercised.
By Order of the Board of Directors,
R. Forrest Waldon
Secretary
Wilmington, North Carolina
April 11, 1997
<PAGE> 3
(AAI logo)
APPLIED ANALYTICAL INDUSTRIES, INC.
5051 NEW CENTRE DRIVE
WILMINGTON, NORTH CAROLINA 28403
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 11, 1997
This Proxy Statement is furnished in connection with the solicitation of
the enclosed proxy by the Board of Directors of Applied Analytical Industries,
Inc. (the "Company") for use at the annual meeting of stockholders (the "Annual
Meeting") to be held on Monday, May 12, 1997 at 10:00 a.m., North Carolina time,
at the Blockade Runner Hotel, Nighthawk I Room, 275 Waynick Boulevard,
Wrightsville Beach, North Carolina 28480, and at any adjournment thereof, for
the purposes set forth in the Notice of Annual Meeting of Stockholders. This
Proxy Statement and the form of proxy enclosed are being mailed to stockholders
with the Company's Annual Report to Stockholders commencing on or about April
11, 1997.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the Common Stock of the Company whose names
appear of record on the Company's books at the close of business on March 21,
1997 will be entitled to vote at the Annual Meeting. As of that date, a total of
16,287,423 shares of Common Stock were outstanding, each share being entitled to
one vote. There is no cumulative voting. If a stockholder returns a proxy
withholding authority to vote the proxy with respect to any or all of the
nominees for director, then the shares of the Common Stock covered by such proxy
shall be deemed present at the Annual Meeting for purposes of determining a
quorum and for purposes of calculating the vote with respect to such nominee,
but shall not be deemed to have been voted for such nominee or nominees. If a
stockholder abstains from voting as to any matter, then the shares held by such
stockholder shall be deemed present at the meeting for purposes of determining a
quorum and for purposes of calculating the vote with respect to such matter, but
shall not be deemed to have been voted in favor of such matter. If a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on such
matter, then the shares covered by such non-vote shall be deemed present at the
Annual Meeting for purposes of determining a quorum, but shall not be deemed to
be present and entitled to vote at the Annual Meeting for purposes of
calculating the vote with respect to such matter.
Shares of the Company's Common Stock represented by proxies in the form
solicited will be voted in the manner directed by the stockholder. If no
direction is given, the proxy will be voted for the election of the nominees for
director named in this Proxy Statement, for adopting the 1997 Stock Option Plan
authorizing the issuance of 486,000 options, and for the ratification and
approval of the appointment of Price Waterhouse LLP as the Company's independent
auditors. Management of the Company is not aware of any matters to be acted upon
at the Annual Meeting other than those set forth in the accompanying Notice of
Annual Meeting. In the event that any other matters properly come before the
Annual Meeting and call for a vote of stockholders, the persons named as proxies
in the enclosed form of proxy will vote in accordance with their best judgment
on these matters. A proxy may be revoked at any time before being exercised by
delivery to an officer of the Company of a written notice of termination of the
proxy's authority or a duly elected proxy bearing a later date.
<PAGE> 4
ELECTION OF DIRECTORS
The business and affairs of the Company are managed under the direction of
its Board of Directors, which is presently comprised of six members. The Board
of Directors is classified, with the directors serving staggered three-year
terms. Two directors have been nominated for election to the Company's Board of
Directors at the Annual Meeting to hold office until the meeting of stockholders
in year 2000 and until their successors are duly elected and qualified (except
in the case of earlier death, resignation or removal). The accompanying form of
proxy may not be voted for more than two directors. Each of the nominees for
director has indicated a willingness to serve, but in case any of them is not a
candidate at the Annual Meeting, the persons named as proxies in the enclosed
form of proxy may vote for a substitute nominee in their discretion. The Board
of Directors has no reason to believe that any nominee will be unable or
unwilling to serve as a director if elected. The two nominees receiving a
plurality of the votes cast at the Annual Meeting will be elected as directors.
The Board of Directors recommends a vote FOR the election of each of the
nominees for director. Information concerning the nominees for each director and
for each director whose term will continue after the Annual Meeting is set forth
below.
NOMINEES FOR DIRECTOR
TERM TO EXPIRE 2000
Frederick D. Sancilio, Ph.D., (age 47) 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.
William H. Underwood (age 49) 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.
DIRECTORS CONTINUING IN OFFICE
TERM TO EXPIRE 1998
Charles D. Moseley, Jr. (age 54) has served as a director of the Company
since January 1996. Since 1983, Mr. Moseley has been a partner of Noro-Moseley
Partners, a venture capital firm. Mr. Moseley is also a director of One Price
Clothing Stores, Inc. and several privately held companies.
James L. Waters (age 71) has served as a director of the Company since 1981
and as a non-employee officer from 1982 until 1996. Mr. Waters is a private
investor in numerous companies and was the founder of Waters Associates, Inc.,
now known as Waters Corporation, a scientific instrumentation manufacturer.
DIRECTORS CONTINUING IN OFFICE
TERM TO EXPIRE 1999
John M. Ryan (age 52) has served as a director of the Company since January
1996. Mr. Ryan serves as managing partner of Ryan Partners, a business advisory
and venture capital firm he founded in July 1996. Prior to founding Ryan
Partners, Mr. Ryan served as a partner of Coopers & Lybrand, L.L.P., an
accounting firm, with which he was associated from 1972 to 1996. Mr. Ryan has
served as a director of numerous private companies and as an officer and
director of several not-for-profit corporations.
Joseph H. Gleberman (age 39) joined the Company's Board of Directors in
1995. Mr. Gleberman has been employed by Goldman, Sachs & Co., an investment
banking firm, since 1982 and has been a Partner of Goldman, Sachs & Co. since
1990 and Managing Director since 1997. Mr. Gleberman serves as a director of
Biofield Corporation and Diagnostic Holdings, Inc.
2
<PAGE> 5
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee consisting of Messrs.
Gleberman, Moseley and Ryan, and a Compensation Committee consisting of Messrs.
Moseley and Ryan. The Audit Committee's function is to review and make
recommendations to the Board of Directors with respect to certain financial and
accounting matters. The Audit Committee met one time during the fiscal year
ended December 31, 1996. The Compensation Committee's function is to review and
make certain determinations with respect to matters concerning the remuneration
of employees, officers and directors and administer the Company's stock option
plans. The Compensation Committee met one time during the 1996 fiscal year. The
Board of Directors does not have a standing nominating committee.
During the 1996 fiscal year, the Board of Directors held eleven meetings.
Each incumbent director attended at least 75% of the total number of meetings of
the Board of Directors and committees on which he served that were held during
the period he was a member of the Board of Directors or such committees.
COMPENSATION OF DIRECTORS
In December 1996, the Company adopted a policy to compensate all
non-employee directors of the Company $1,500 for each meeting of the Board of
Directors and $1,000 for each meeting of a committee of the Board of Directors
not held in connection with a regular Board meeting attended by such
non-employee director. Non-employee directors receive $200 for each telephonic
Board or committee meeting in which they participate. All directors are
reimbursed for expenses incurred in connection with attending meetings of the
Board of Directors and committees thereof.
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 March
19, 1997 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
executive officer and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(A) BENEFICIALLY OWNED
- ------------------------ --------------------- ------------------
<S> <C> <C>
Frederick D. Sancilio, Ph.D.(b)........................ 5,053,044 30.9%
James L. Waters(c)..................................... 2,617,703 16.0%
The Goldman Sachs Group, L.P.(d)....................... 2,276,832 13.9%
Joseph H. Gleberman(e)................................. -- --
Charles D. Moseley, Jr.(f)............................. 119,833 *
John M. Ryan........................................... 1,000 *
William H. Underwood(g)................................ 233,834 1.4%
Anthony F. Arato(h).................................... 73,805 *
Mark P. Colonnese(i)................................... 23,023 *
Martin S. Hunicutt(j).................................. 26,594 *
James Swarbrick, Ph.D.(k).............................. 21,468 *
R. Forrest Waldon...................................... 107,373 *
All executive officers and directors as a group (11
persons)............................................. 8,277,677 50.7%
</TABLE>
- ---------------
* Less than 1%
(a) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Information in the table reflects options granted under the 1995 Option Plan
and the 1996 Option Plan to the extent such options are or become
exercisable within 60 days. Accordingly, the totals for the following
executive officers and all executive officers and directors as a group
includes the
3
<PAGE> 6
following shares represented by options: Mr. Underwood, 1,920 shares; Mr.
Arato, 1,920 shares; Mr. Colonnese, 22,023 shares; Mr. Hunicutt, 25,344
shares; Dr. Swarbrick, 19,968 shares; Mr. Waldon, 1,920 shares; and all
executive officers and directors as a group, 73,095 shares.
(b) Dr. Sancilio's address is 5051 New Centre Drive, Wilmington, North Carolina
28403.
(c) Includes 496,133 shares of Common Stock beneficially owned by Mr. Waters'
spouse. Mr. Waters' address is 47 New York Avenue, Framingham, Massachusetts
01701.
(d) 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.
(e) Mr. Gleberman, a Managing Director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,276,832 shares which may be deemed to be
beneficially owned by GS Group as described in note (d) above.
(f) Represents 119,833 shares beneficially owned by Noro-Moseley. Mr. Moseley
disclaims beneficial ownership of such shares.
(g) Includes 925 shares owned by Mr. Underwood's children.
(h) Includes 159 shares owned by Mr. Arato's children.
(i) Includes 1,000 shares owned by Mr. Colonnese's children.
(j) Includes 500 shares owned by Mr. Hunicutt's children.
(k) Includes 500 shares owned by Dr. Swarbrick's spouse.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, as well as any holders of more
than 10% of the Company's Common Stock, to file with the Securities Exchange
Commission certain reports of ownership and changes in ownership of Common Stock
and other equity securities of the Company. Based solely on review of such
reports and certain representations furnished to it, the Company believes that
during the fiscal year ended December 31, 1996, all officers and directors
complied with all applicable Section 16(a) filing requirements except as
follows: each of Drs. Sancilio and Swarbrick and Messrs. Waters, Moseley,
Underwood, Arato, Colonnese, Hunicutt and Waldon were tardy in reporting the
conversion of shares of non-voting Class B Common Stock or options to purchase
shares of Class B Common Stock into shares of Common Stock or options to
purchase shares of Common Stock effected automatically upon the closing of the
Company's initial public offering of Common Stock. In addition, Messrs. Ryan,
Arato, Colonnese, Hunicutt and Underwood, as well as Dr. Swarbrick were each
late filing one report with respect to the acquisition of shares of Common Stock
in the initial public offering. The Company has instituted a program to assist
its directors and executive officers comply with the reporting requirements of
Section 16(a).
4
<PAGE> 7
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
awarded to, earned by or paid for services rendered to the Company in all
capacities in 1996 by: (i) the Company's chief executive officer and (ii) the
Company's next five most highly compensated executive officers who were serving
as executive officers at the end of 1996 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
----------------------------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
NAME AND ----------------------- STOCK OPTIONS/SARS ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(A) BONUS($) AWARDS($) (#) COMPENSATION($)(D)
- ------------------ ---- ------------ -------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. 1996 360,125(b) 0 0 0 3,082
President and 1995 306,580(c) 79,217 0 0 5,131
Chief Executive Officer
William H. Underwood 1996 159,993 0 0 7,680 3,082
Executive Vice President 1995 166,343 0 0 0 5,131
Mark P. Colonnese 1996 162,837 200,000(e) 0 88,093 3,082
Vice President and Chief 1995 121,448 0 0 0 35,691
Financial Officer
R. Forrest Waldon 1996 126,583 3,531 0 7,680 3,082
Vice President and 1995 114,064 0 272,000(f) 0 5,047
General Counsel
Martin S. Hunicutt 1996 130,000 0 0 101,376 2,025
Vice President 1995 130,000 0 0 0 0
James Swarbrick, Ph.D. 1996 130,000 0 0 79,871 2,697
Vice President 1995 130,000 0 0 0 3,323
</TABLE>
- ---------------
(a) Includes amounts deferred pursuant to the Company's 401(k) plan.
(b) Includes $100,000 in salary paid by Endeavor Pharmaceuticals Inc., a company
40% owned by the Company.
(c) Includes $12,500 in salary paid by Endeavor Pharmaceuticals Inc.
(d) Such amounts represent the Company's contributions under its 401(k) and
profit sharing plans; and with respect to Mr. Colonnese, includes $34,596
paid as relocation expense in 1995 in connection with Mr. Colonnese's
acceptance of employment in 1993.
(e) Of such amount, $50,000 was paid in 1996, $50,000 was paid in 1997, $50,000
is payable in September 1997 and $50,000 is payable in December 1997.
(f) Such amount represents the value of shares of restricted stock awarded to
Mr. Waldon net of consideration paid by Mr. Waldon for such shares.
Restrictions with respect to such shares lapsed upon the completion of the
Company's initial public offering in September 1996.
The following table sets forth certain information with respect to options
granted during 1996 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(A)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(B) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. .... 0 0 0 0 0 0
William H. Underwood............. 7,680 1.4% 8.35 4-26-06 40,330 102,204
Mark P. Colonnese................ 88,093 15.8% 8.35 4-26-06 462,600 1,172,320
R. Forrest Waldon................ 7,680 1.4% 8.35 4-26-06 40,330 102,204
Martin S. Hunicutt............... 101,376 18.2% 8.35 4-26-06 532,353 1,349,086
James Swarbrick, Ph.D. .......... 79,871 14.3% 8.35 4-26-06 419,424 1,062,903
</TABLE>
- ---------------
(a) Potential realizable value is based on an assumption that the price of the
common stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option
5
<PAGE> 8
term. The numbers are calculated based on the requirements promulgated by
the Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(b) The options granted under the Company's 1995 Stock Plan and 1996 Stock Plan
vest in 25% increments at each of the sixth, eighteenth, thirtieth and
forty-second month anniversaries of the grant date.
The following table sets forth certain information with respect to the
value of options held at fiscal year end by the executive officers named in the
Summary Compensation Table.
AGGREGATED 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(A)
--------------------------------- ---------------------------------
NAME EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. ......... 0 0 0 0
William H. Underwood.................. 1,920 5,760 22,012 66,038
Mark P. Colonnese..................... 22,023 66,070 252,505 757,481
R. Forrest Waldon..................... 1,920 5,760 22,012 66,038
Martin S. Hunicutt.................... 25,344 76,032 290,569 871,707
James Swarbrick, Ph.D. ............... 19,968 59,903 228,933 686,788
</TABLE>
- ---------------
(a) Market value of underlying securities at fiscal year end minus the exercise
price of "in-the-money" options.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and President of the
Company. The Employment Agreement has an initial three-year term that is
automatically extended for an additional one-year period on each anniversary of
the Signing Date unless either party gives the other notice prior to the
anniversary date of its intention not to extend the term of the Employment
Agreement. Under the Employment Agreement, Dr. Sancilio will serve as the
Company's Chairman of the Board, President and chief executive officer, and the
Company is required to use its best efforts to cause Dr. Sancilio to be
re-elected to the Company's Board of Directors and to the boards of directors of
affiliates of the Company on which boards of directors Dr. Sancilio was serving
on the Signing Date and to be elected a director of any majority-owned
subsidiary of the Company acquired after the Signing Date.
The Employment Agreement provides that Dr. Sancilio will receive an annual
salary of $250,000, which amount may be increased by the Board of Directors and
once increased may not be reduced. The Employment Agreement provides that Dr.
Sancilio will be eligible to receive bonus compensation of up to 50% of his
annual salary if the Company attains certain performance objectives set jointly
by the Board of Directors and Dr. Sancilio. In addition, Dr. Sancilio will be
eligible to participate in employee benefit plans made available generally to
the Company's executive officers and any other Company compensation or incentive
plans of a long or short-term nature and to receive other perquisites not to
exceed, in the aggregate, $10,000 per year.
Under the Employment Agreement, the Company may terminate Dr. Sancilio's
employment at any time, with or without cause, as defined in the Employment
Agreement. In the event that the Company terminates Dr. Sancilio's employment
without cause or in the event that Dr. Sancilio terminates his employment within
90 days of an event of constructive discharge (defined in the Employment
Agreement to include, among other things, the removal of Dr. Sancilio from, or
the failure of Dr. Sancilio to be elected to, the positions of Chairman of the
Board or President, a reduction in Dr. Sancilio's responsibilities or relocation
of the Company's principal executive offices by more than 30 miles from its
current location), Dr. Sancilio would be entitled to receive payments
aggregating three times his then current annual salary to be paid in monthly
installments over two years, during which time Dr. Sancilio would continue to
receive medical and life
6
<PAGE> 9
insurance benefits. The Employment Agreement requires Dr. Sancilio to refrain
from certain activities in competition with the Company for a period of two
years after the termination of his employment for any reason.
The Employment Agreement obligates the Company to use its reasonable best
efforts to cause Endeavor to employ Dr. Sancilio as a senior management employee
at an annual salary of at least $100,000 with bonus compensation of up to 50% of
annual salary to be paid if performance targets are attained and greater amounts
if targets are exceeded. Endeavor has employed Dr. Sancilio on such terms, and
should Endeavor fail to continue to employ him on such terms, it is anticipated
that Dr. Sancilio's annual salary and bonus paid by AAI would be increased by
similar amounts.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION POLICY
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for establishing compensation policies applicable to the Company's
executive officers and administering the Company's stock option plans. The goal
of the Committee is to attract, retain and reward high-quality executives by
aligning their compensation with the long-term financial health of the Company
and long-term stockholder interests. The Committee is composed entirely of
independent, outside directors of the Company. In establishing salary levels and
the amount of bonus compensation to be paid to officers other than the Chief
Executive Officer, the Committee relies in part on the recommendations of the
Chief Executive Officer, Dr. Frederick D. Sancilio. The Committee's compensation
policies are intended to provide compensation at levels competitive with other
companies of similar size in the contract research organization industry.
BASE SALARIES
The Company has not utilized specific formulas to determine executive
compensation. The Committee has received information and industry surveys from
independent consulting professionals concerning the compensation and benefits
accorded other executive management in similar industries. Individual salaries
are established by the Committee based on this information and a subjective
analysis of the individual's performance, after taking into account
recommendations of the Chief Executive Officer concerning the overall
effectiveness of the executive and contribution to the success of the Company.
CASH BONUSES
Cash bonuses are to be paid to individual senior executive officers based
on the Committee's subjective analysis of the individual's contribution to the
Company, the Company's overall performance and the anticipated compensation to
be received by the individual, including compensation in the form of stock
options. In light of the stock options awarded senior executives, no
discretionary bonuses were paid in 1996.
On November 20, 1995, the Company agreed to a cash bonus plan for Mark P.
Colonnese, the Company's Chief Financial Officer, pursuant to which he would
receive a cash bonus of $50,000 upon the closing of an initial public offering
and an additional $50,000 one year later. In addition, the agreement provided
that in the event that the trading price per share of the Company's common stock
exceeds $12.525 for 90 consecutive days, Mr. Colonnese would receive an
additional $50,000, with an additional $50,000 to be paid one year thereafter.
Accordingly, Mr. Colonnese was entitled to payment of $100,000 under this
arrangement in 1996, and is entitled to an additional $100,000 in 1997.
STOCK OPTIONS
The Committee recognizes the importance of stock ownership by its senior
executives and that such options are an integral component of executive
compensation. The goals of the Company's option plans are 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 opportunity for
7
<PAGE> 10
individual financial growth tied to the financial growth of the Company helps
ensure that the executive's and Company's interests are similarly focused. In
granting stock options, the Committee takes into account the executive's
previous opportunities to participate in the Company's equity ownership and the
executive's potential contribution to the long-term growth of the Company.
The Company adopted two stock option plans in November 1995, but did not
grant any options to employees until April 1996. The Company granted 292,380
options to the executive officers, as a group, in 1996.
COMPENSATION PAYABLE TO THE CHIEF EXECUTIVE OFFICER
The 1996 salary of the Company's Chief Executive Officer and President, Dr.
Sancilio, was determined pursuant to a renewable three-year employment agreement
with the Company dated November 17, 1995. The Company entered into the
employment agreement in connection with, and as a part of, the Company's sale of
preferred stock to certain institutional investors on November 17, 1995 (the
preferred stock was converted into Common Stock upon completion of the Company's
initial public offering in September 1996). The Board of Directors has delegated
to the Committee its authority under the agreement to set Dr. Sancilio's base
salary and determine the amount and performance criteria for the payment of
bonuses. Under the agreement, Dr. Sancilio's base salary is to be reviewed at
least annually and may be no less than $250,000 per year. Because the agreement
was entered into shortly before the beginning of 1996, the Committee did not
adjust Dr. Sancilio's base salary, and he received $250,000 for the year. The
agreement provides that base salary may be increased in light of Dr. Sancilio's
performance, competitive levels of compensation and other factors the Committee
deems relevant.
The agreement also provides for a bonus, at least equal to 50% of base
salary, if the Company attains target performance objectives agreed upon by the
Committee and Dr. Sancilio. At Dr. Sancilio's request, the Committee agreed not
to pay a bonus for 1996. This decision does not reflect the Committee's view of
Dr. Sancilio's and the Company's performance in 1996, and we anticipate that
bonuses may be paid in the future for the level of performance increases
attained in 1996.
Under the agreement, Dr. Sancilio is also eligible to participate in other
compensation or incentive plans in which other senior executives are eligible to
participate. The Committee did not award any options to Dr. Sancilio in 1996 at
his request, allocating the limited option pool to other officers and employees
of the Company. For the same reason, because only 288,887 options are available
for issuance under the Company's 1996 Stock Option Plan, the Committee does not
anticipate awarding any options under this plan to Dr. Sancilio. The Committee
believes, however, that options provide appropriate incentive compensation and
may award options to Dr. Sancilio in the future.
CAP ON DEDUCTION OF EXECUTIVE COMPENSATION
Under Section 162(m) of the Internal Revenue Code, a public company may not
deduct more than $1 million in compensation paid to one of its senior executive
officers, unless the excess amount is performance-based compensation satisfying
certain rules. The Company's stock option plans are designed to qualify under
the performance-based compensation requirements of this provision. Due to
current salary levels and anticipated bonus targets, the Committee believes that
it is unlikely that application of Section 162(m) will prevent the Company from
claiming a deduction for the amount of compensation paid to senior executive
officers.
Compensation Committee
Charles D. Moseley, Jr.
John M. Ryan
8
<PAGE> 11
PERFORMANCE GRAPH
The rules of the Securities and Exchange Commission require the Company to
include in this Proxy Statement a line graph presentation comparing cumulative
total stockholder returns for the period beginning September 19, 1996 and ending
on December 31, 1996 with a published industry index or line-of-business index.
The Company has selected the Nasdaq Industrial Average and a composite peer
group consisting of ClinTrials Research Inc., IBAH, Inc., Parexel International,
Pharmaceutical Product Development, Inc. and Quintiles Transnational Corp. The
graph assumes that $100 was invested on September 19, 1996 in AAI stock (at the
initial public offering price) and in the index and peer group on September 19,
1996, and the reinvestment of all dividends. The past performance of Company
Common Stock is not necessarily indicative of future performance.
(GRAPH)
<TABLE>
<CAPTION>
9/19/96 10/31/96 11/29/96 12/31/96
<S> <C> <C> <C> <C>
AAI 100.00 135.94 132.81 119.53
Nasdaq Industrial Average 100.00 98.28 101.86 101.29
Peer Group 100.00 89.08 86.47 92.41
</TABLE>
9
<PAGE> 12
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING MANAGEMENT
The Company leases its headquarters facility from 5051 New Centre Drive,
LLC ("New Centre"), an entity in which each of Mr. Waters and Dr. Sancilio owns
a one-third interest. Pursuant to the lease agreement between the Company and
New Centre, the Company pays rent at an annual base rate of $12.50 per square
foot of space leased, subject to adjustment for increases in the landlord's
expense in maintenance and insurance of the facility. The effective rate per
square foot was increased to the current rate of $13.30 commencing in June 1995
to reflect such increased expenses. Under the agreement, the Company may lease
portions of the entire facility as needed and upon agreement of New Centre. At
December 31, 1996, the Company leased approximately 19,000 square feet of space
under the agreement. The initial term of the lease agreement expires in March
1999, but the agreement will extend for successive one-year periods unless
either party provides the other, at least 90 days prior to the scheduled
expiration of the agreement, notice of its intent not to renew the lease. The
lease rate for any renewal term is to be set by mutual agreement of the parties.
Approximately 40% of the capital stock of Endeavor Pharmaceuticals Inc.
("Endeavor") on a fully diluted basis is held by the Company, and certain
directors and officers 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 two of the six members of the Endeavor board of
directors. The Company realized $6.2 million in net sales to Endeavor in 1996.
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 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 the Company in manufacturing
Endeavor's products. Upon achievement of the milestone by Endeavor, the Company
will also sell to Endeavor the equipment and inventory of raw materials, assign
to Endeavor its raw materials supply agreements relating to Endeavor's products
and make available certain personnel to Endeavor so that Endeavor can assume its
manufacturing operations. Upon exercise of either the option to lease or the
option to purchase, Endeavor is required to pay an exercise price of $2 million
to the Company in addition to lease payments or a purchase price based on the
fair market value of the facility. If Endeavor exercises the option to lease but
does not subsequently exercise the option to purchase and does not achieve
certain development milestones by a specified date, the Company must repay the
option exercise price to Endeavor. The facility subject to the option is
currently used by the Company for clinical supply and niche manufacturing
operations. The Company is presently expanding its clinical supply and niche
manufacturing facilities which could be used to manufacture Endeavor's products
currently under development or, if Endeavor exercises its option to manufacture
such product itself, for other client work. The Company has also agreed to
permit Endeavor under certain circumstances the first right to purchase
additional proprietary hormone pharmaceutical products developed by the Company
at a price equal to the amount of development work expended by the Company at
its standard hourly rates and out-of-pocket expenses, and the Company would
continue the development work with respect to such product under the agreement
with Endeavor.
In addition to his duties at the Company, 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 the Company's principal executive
offices and does not have day-to-day responsibilities in the operation of
Endeavor and is assigned responsibilities from time to time by Endeavor's board
of directors. Dr. Sancilio receives an annual salary of $100,000 and is eligible
for bonus compensation of up to 50% of salary. Dr. Sancilio's employment
agreement with Endeavor has an initial two-year term expiring on November 17,
1997 and renews for successive one-year periods unless either party elects not
to renew the agreement. Dr. Sancilio devotes the substantial majority of his
time to the management of the Company.
10
<PAGE> 13
In addition, the Company provided management and administrative services to
Endeavor at an annual fee of $120,000 through April 1996 when this agreement was
terminated by Endeavor. The Company believes that the terms of each of the
foregoing agreements are no less favorable than terms that would be obtained in
an agreement with an unrelated third party.
The Company provides product development services to Aesgen, which develops
generic pharmaceutical products. Approximately 30% of Aesgen's outstanding
common stock is held by the holders of a majority of the Company's currently
outstanding shares of capital stock. In addition, Mr. Waters and Dr. Sancilio
serve on the ten-member board of directors of Aesgen. The Company realized $4.7
million in net sales to Aesgen in 1996. The Company has the right under its
development agreement with Aesgen to provide certain product development and
support services to Aesgen with respect to certain drugs currently being
developed by Aesgen, provided that the Company'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 the Company agrees to develop for Aesgen under the development
agreement. The Company believes that the terms of such agreement are no less
favorable than terms that would be obtained in a transaction with an unrelated
third party.
In June 1996, the Company sold to Aesgen marketing rights to a product
being developed by the Company. Under the agreement, Aesgen will pay license
fees and additional royalties upon marketing of the product, although there can
be no assurance that the product will be approved by the FDA or marketed.
While incorporated in July 1994, Aesgen was formally organized and funded
in April 1995 via issuance of approximately $11 million of nonconvertible,
non-voting, mandatorily redeemable, preferred stock. As the Company did not
intend to hold an equity interest, the Company entered a series of related
transactions commencing in December 1995 in which the Company transferred to a
corporation ("Aesgen Holding") owned by the holders of substantially all of the
currently outstanding capital stock of the Company approximately 30% of the
outstanding Aesgen common stock in return for $50,000 (the amount paid by the
Company for such shares) and Aesgen Holding's assumption of and the Company's
release from an obligation to invest an additional $1.2 million in Aesgen. The
Company retains a $1.6 million nonconvertible, non-voting preferred stock
investment in Aesgen. Aesgen Holding has distributed all shares of Aesgen common
stock held by it to its stockholders. Accordingly, the Company's executive
officers beneficially own the following percentages of the fully diluted common
equity of Aesgen: Dr. Sancilio, 12.1%, Mr. Underwood, 0.7%, Mr. Arato, 0.2% and
Mr. Waldon, 0.2%.
In November 1995, in connection with the purchase by GS Capital Partners
II, L.P., G.S. Capital Partners II Offshore, L.P., Bridge Street Fund 1995,
L.P., Stone Street Fund 1995, L.P., and Goldman, Sachs & Co. Verwaltungs GmbH
(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. All shares of preferred stock were converted into Common
Stock automatically upon completion of the Company's initial public offering in
September 1996. 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 the Company 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 the Company 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
11
<PAGE> 14
exercise of options under the 1995 Stock Option Plan at the exercise price of
such options. As of December 31, 1996, options to acquire 235,681 shares of
Common Stock were granted and outstanding under the 1995 Stock Option Plan at an
exercise price per share of $8.35, except for options for 2,214 shares at an
exercise price of $9.10, were outstanding.
In 1988, the Company secured financing with variable rate North Carolina
industrial revenue bonds which are supported by a letter of credit issued by a
bank. Dr. Sancilio and Mr. Waters guaranteed the Company's obligation to repay
amounts drawn under such letter of credit.
The Company loaned $82,775 to Mr. Underwood in 1993 in connection with a
purchase of shares of Common Stock. 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 December 31, 1996, the outstanding principal
amount of such promissory note was $82,775.
The Company loaned $168,865 to Mr. Waldon in connection with his purchase
of 105,453 shares of Common Stock in November 1995 for $30,000 and with the
income tax liabilities arising in such transaction. Such loan is evidenced by a
promissory note that bears interest at an annual rate of 6.48%, and interest is
payable bi-weekly. Mr. Waldon's shares of Common Stock are pledged to secure
such loan. At December 31, 1996, the outstanding aggregate principal amount of
such loan was $167,988.
CERTAIN BUSINESS RELATIONSHIPS
In November 1995, the Goldman Investors and certain other investors
purchased shares of preferred stock of the Company. All outstanding shares of
preferred stock were converted into Common Stock in conjunction with the
Company's public offering of Common Stock in September 1996. The Goldman
Investors own 2,276,832 shares of Common Stock, which were purchased at $8.35
per share. 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.
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 on customary terms, consistent with
an arm's-length transaction. In the event that the Company and Goldman, Sachs &
Co. or their affiliates cannot agree to the terms of such engagement after good
faith discussions, the agreement permits the Company to engage any other
investment banking firm, although Goldman, Sachs & Co. are entitled to serve as
co-managing underwriter in any underwritten offering of the Company's capital
stock. Goldman, Sachs & Co. served as lead underwriter in the Company's initial
public offering of its Common Stock in September 1996 and in connection
therewith the underwriting syndicate purchased approximately 3.1 million shares
of Common Stock at an underwriting discount of $3.5 million to the aggregate
public offering price. The Company has agreed to indemnify Goldman, Sachs & Co.
and their affiliates against certain liabilities, including liabilities under
the Securities Act of 1933.
Goldman Sachs & Co. acted as a manager of and received customary discounts
in the Company's initial public offering of Common Stock. Pursuant to an
agreement entered into in connection with the Company's initial public offering,
the Company has agreed to maintain a current prospectus in connection with
Goldman, Sachs & Co.'s market-making transactions and to pay certain expenses
relating to amendments or supplements to the prospectus.
Approximately 14.2% of the capital stock of Endeavor on a fully diluted
basis and 4.1% of the common equity of Aesgen on a fully diluted basis is held
by the Goldman Investors.
12
<PAGE> 15
In November 1995, Noro-Moseley Partners III, L.P. ("Noro-Moseley"), a
venture capital limited partnership, purchased shares of preferred stock. All
outstanding shares of preferred stock were converted into Common Stock in
conjunction with the Company's public offering in September 1996. Noro-Moseley
also currently owns 14.8% of the capital stock of Endeavor on a fully diluted
basis and 8.2% of the common equity of Aesgen on a fully diluted basis. Charles
D. Moseley, Jr., a member of the limited liability company which is the general
partner of Noro-Moseley, serves as a director on the boards of directors of the
Company, Endeavor and Aesgen.
REGISTRATION RIGHTS
The holders (which include Dr. Sancilio, Mr. Waters, the Goldman Investors
and Noro-Moseley) of 13,076,206 shares of Common Stock (the "Registrable
Securities") 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, ceases to beneficially own Registrable Securities (i) equal to 10%
of the then outstanding shares of Common Stock or (ii) having an aggregate
market value of at least $30 million.
In addition, if the Company proposes to register any of its shares of
Common Stock under the Securities Act other than in connection with a Company
employee benefit plan or a corporate reorganization, the holders of Registrable
Securities may require the Company to include all or a portion of their shares
in such registration, subject to certain priorities among them, although a
co-managing underwriter of any such offering unaffiliated with any holder of
Registrable Securities may limit the number of shares in such registration. All
expenses incurred in connection with such registrations (other than underwriting
discounts and commissions) will be borne by the Company.
ADOPTION OF 1997 STOCK OPTION PLAN
Under the proposed 1997 Stock Option Plan (the "1997 Option Plan"), the
Company will be authorized to grant options to purchase up to 486,000 shares of
Common Stock. The Compensation Committee has recommended and the Board has
approved, adopting the 1997 Option Plan authorizing the Company to issue 486,000
options to purchase the Company's Common Stock.
The affirmative vote of a majority of the shares of Common Stock present
and entitled to vote at the Annual Meeting is necessary to approve the adoption
of the 1997 Option Plan. The Board of Directors recommends the Company's
stockholders approve the adoption of the 1997 Option Plan.
The following is a summary description of the principal terms of the
proposed 1997 Option Plan does not purport to be complete and is qualified in
its entirety by the full text of the 1997 Option Plan. Stockholders may obtain a
copy of the 1997 Stock Option Plan free of charge by contacting the Company at
5051 New Centre Drive, Wilmington, North Carolina 28403, Attention: Investor
Relations.
The purpose of the 1997 Option Plan 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 1997 Option Plan will be administered by the Committee. The
Committee will have the authority to interpret the terms and provisions of, and
adopt, amend and rescind general and special rules relating to the
administration of, the 1997 Option Plan and to make all other determinations
necessary and advisable for the administration of the 1997 Option Plan. All of
the Company's employees will be eligible to receive stock options to purchase
shares of Common Stock ("Options") pursuant to the 1997 Option Plan. No Options
have been awarded under the 1997 Stock Option Plan.
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<PAGE> 16
Awards of Options may be made to officers and other key employees of the
Company or its subsidiaries ("Optionees"). The 1997 Option Plan permits 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 may not be less than 100% of the fair market value of a share
of Common Stock on the date of grant (110% for certain Options intended to
qualify as incentive stock options awarded to 10% stockholders). The market
value of Common Stock at March 21, 1997 was $19.75 per share. The Committee is
authorized to set the term of the Options, which may be no longer than 10 years
(5 years for certain Options intended to qualify as incentive stock options).
Options awarded under the 1997 Option Plan will become exercisable as
determined by the Committee. 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 will expire thirty days after 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.
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 1997 Option Plan. 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 grant or exercise. The exercise
of an incentive stock option generally will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
Optionee.
A sale or other disposition by an Optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such Optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain or loss
to the Optionee with no deduction being allowed to the Company. Upon a sale or
other disposition of shares acquired upon the exercise of an incentive stock
option within one year after the transfer of the shares to the Optionee or
within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the lesser
of (i) the fair market value of the shares at the time of exercise of the Option
and (ii) the amount realized on such disqualifying sale or other disposition of
the shares over (b) the exercise price of such shares, should constitute
ordinary income to the Optionee and the Company should be entitled to a
deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market value of the shares at the
time of the exercise of the Option generally will constitute short-term or
long-term capital gain and will not be deductible by the Company. Special rules
may apply to Optionees who are subject to Section 16 of the Exchange Act.
14
<PAGE> 17
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 1997 Option Plan should
not be subject to such deduction limitations.
APPROVAL OF INDEPENDENT AUDITORS
The Board of Directors has appointed Price Waterhouse LLP as independent
auditors for the Company for the fiscal year ending December 31, 1997. A
proposal to ratify the appointment of Price Waterhouse LLP will be presented at
the Annual Meeting. Representatives of Price Waterhouse LLP are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they desire to do so, and will be available to answer appropriate questions from
stockholders. The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Annual Meeting is necessary to ratify the
appointment of Price Waterhouse LLP.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Under the applicable rules of the Securities and Exchange Commission, a
stockholder who wishes to submit a proposal for inclusion in the proxy statement
of the Board of Directors for the annual meeting of stockholders to be held in
the spring of 1998 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than December 12,
1997.
The By-laws of the Company establish an advance notice procedure for
stockholder proposals to be brought before a meeting of stockholders of the
Company and for nominations by stockholders of candidates for election as
directors at an annual meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of stockholders as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors or by a
committee of the Board of Directors designated to make nominations, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected, will
be eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to stockholders.
The notice of any stockholder proposal or nomination for election as a
director must set forth the various information required under the By-laws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them. A
copy of the Company's By-laws may be obtained by stockholders free of charge
upon request by writing the Company at 5051 New Centre Drive, Wilmington, North
Carolina 28403, Attention: Investor Relations.
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<PAGE> 18
OTHER MATTERS
The Board knows of no other matters which will be presented to the Annual
Meeting. If, however, any other matter is properly presented at the Annual
Meeting, the proxy solicited by this Proxy Statement will be voted in accordance
with the judgment of the person or persons holding such proxy.
By Order of the Board of Directors,
R. Forrest Waldon
Secretary
Wilmington, North Carolina
April 11, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
REQUESTED TO SIGN AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED POSTPAID ENVELOPE.
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<PAGE> 19
APPENDIX A
REVOCABLE PROXY APPLIED ANALYTICAL INDUSTRIES, INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints R. Forrest Waldon and Albert N. Cavagnaro as
Proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock of Applied Analytical Industries, Inc. (the "Company") held of
record by the undersigned on March 21, 1997 at the annual meeting of
stockholders to be held on May 12, 1997 (the "1997 Annual Meeting") or any
adjournment thereof.
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for all nominees listed below [ ]
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
Frederick D. Sancilio, Ph.D. and William H. Underwood
2. PROPOSAL TO APPROVE THE COMPANY'S 1997 STOCK OPTION PLAN described in the
Company's Proxy Statement for the 1997 Annual Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO RATIFY AND APPROVE THE APPOINTMENT OF PRICE WATERHOUSE LLP as the
independent auditors for the Company for the fiscal year ending December 31,
1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS AND THE ELECTION OF
THE DIRECTOR NOMINEES NAMED HEREIN, AND THIS PROXY WILL BE VOTED FOR THE
PROPOSALS AND FOR THE ELECTION OF THE DIRECTOR NOMINEES NAMED HEREIN UNLESS THE
STOCKHOLDER DIRECTS OTHERWISE, IN WHICH CASE IT WILL BE VOTED AS DIRECTED.
The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy
Statement dated April 11, 1997, and revokes all proxies heretofore given by the
undersigned.
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Dated: , 1997
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Signature
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Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
