<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5051 NEW CENTRE DRIVE, WILMINGTON, NC 28403
(Address of principal executive office) (Zip code)
(910) 392-1606
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's common stock outstanding, as of
August 10, 1998 was 16,302,876 shares.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Table of Contents
The terms "Company", "Registrant" or "AAI" in this Form 10-Q include
Applied Analytical Industries, Inc. and its subsidiaries, except where the
context may indicate otherwise. Any item which is not applicable or to which the
answer is negative has been omitted.
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited).
Condensed Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURES 13
EXHIBIT INDEX 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales (includes related party net
sales of $145; $1,372; $552
and $3,348, respectively) $ 19,426 $ 15,814 $ 36,539 $ 30,989
Operating costs and expenses:
Cost of sales 8,965 7,566 17,462 15,057
Selling 2,017 1,829 4,183 3,664
General and administrative 4,400 3,855 8,062 7,034
Research and development 1,965 1,753 3,368 3,371
---------- ---------- ---------- ----------
17,347 15,003 33,075 29,126
---------- ---------- ---------- ----------
Income from operations 2,079 811 3,464 1,863
Other income (expense):
Interest income, net of expense 116 247 248 574
Other, net (43) 93 (32) 217
---------- ---------- ---------- ----------
73 340 216 791
---------- ---------- ---------- ----------
Income before income taxes 2,152 1,151 3,680 2,654
Provision for income taxes 846 568 1,301 1,161
---------- ---------- ---------- ----------
Net income $ 1,306 $ 583 $ 2,379 $ 1,493
========== ========== ========== ==========
Basic earnings per share $ 0.08 $ 0.04 $ 0.15 $ 0.09
========== ========== ========== ==========
Weighted average shares outstanding 16,303 16,288 16,300 16,288
========== ========== ========== ==========
Diluted earnings per share $ 0.08 $ 0.04 $ 0.15 $ 0.09
========== ========== ========== ==========
Weighted average shares outstanding 16,357 16,417 16,405 16,429
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,811 $ 26,219
Accounts receivable 17,736 19,415
Work-in-progress 12,220 8,968
Prepaid and other current assets 4,841 4,481
----------------- -----------------
Total current assets 57,608 59,083
----------------- -----------------
Property and equipment, net 27,544 25,326
Goodwill and other intangibles 13,317 13,747
Other assets 2,241 2,293
----------------- -----------------
Total assets $ 100,710 $ 100,449
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 6,416 $ 5,561
Accounts payable 3,308 4,005
Customer advances 5,991 7,869
Accrued wages and benefits 3,825 3,561
Other accrued liabilities 5,180 5,450
----------------- -----------------
Total current liabilities 24,720 26,446
----------------- -----------------
Long-term debt 6,209 6,578
Other liabilities 1,061 1,349
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock -- --
Common stock 16 16
Paid-in capital 67,733 67,550
Retained earning (deficit) 1,043 (1,336)
Accumulated other comprehensive losses (6) (5)
Stock subscriptions receivable (66) (149)
----------------- -----------------
Total stockholders' equity 68,720 66,076
----------------- -----------------
Total liabilities and stockholders' equity $ 100,710 $ 100,449
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $ 2,379 $ 1,493
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation and amortization 2,830 2,324
Other 538 63
Changes in assets and liabilities:
Trade and other receivables 1,664 (7,575)
Work-in-progress (3,262) (47)
Prepaid and other assets, net (364) (305)
Accounts payable (690) (4,047)
Customer advances (1,868) (1,203)
Other accrued liabilities (301) (4,657)
-------- --------
Net cash provided (used) by operating activities: 926 (13,954)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (5,018) (5,258)
Other 77 (207)
-------- --------
Net cash used by investing activities (4,941) (5,465)
-------- --------
Cash flows from financing activities:
Net proceeds short-term debt 870 4,038
Net proceeds (payments) long-term borrowings (336) 984
Sale of common stock 76 32
-------- --------
Net cash provided by financing activities 610 5,054
-------- --------
Net decrease in cash and cash equivalents (3,405) (14,365)
Effect of exchange rate changes on cash (3) (21)
Cash and cash equivalents, beginning of period 26,219 42,186
-------- --------
Cash and cash equivalents, end of period $ 22,811 $ 27,800
======== ========
Supplemental information, cash paid for:
Interest $ 139 $ 248
Income taxes $ 800 $ 739
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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APPLIED ANALYTICAL INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. It is presumed that users of this interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full year.
2. EARNINGS PER SHARE
The weighted average shares used in the calculation of diluted earnings per
share represents the weighted average shares outstanding plus the dilutive
impact of stock options.
3. COMPREHENSIVE INCOME
The Company is required, effective fiscal year 1998, to report comprehensive
income and its components in accordance with the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. The
following table presents the components of the Company's comprehensive income.
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
(In thousands)
1998 1997
------- --------
<S> <C> <C>
Net income $ 2,379 $ 1,493
Other comprehensive income (loss):
Currency translation adjustments (1)
------- --------
Comprehensive income $ 2,378 $ 1,493
======= ========
</TABLE>
6
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4. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES:
Fee-for-service $ 17,199 $ 15,223 $ 32,776 $ 28,969
Product development 2,227 591 3,763 2,020
-------- -------- -------- --------
$ 19,426 $ 15,814 $ 36,539 $ 30,989
======== ======== ======== ========
United States $ 14,345 $ 12,575 $ 27,121 $ 24,257
Non-U.S. 5,190 3,504 9,976 7,243
Less inter-geographic sales (109) (265) (558) (511)
-------- -------- -------- --------
$ 19,426 $ 15,814 $ 36,539 $ 30,989
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
Fee-for-service $ 2,397 $ 2,566 $ 3,596 $ 4,210
Product development 261 (1,162) 394 (1,351)
Corporate (579) (593) (526) (996)
-------- -------- -------- --------
$ 2,079 $ 811 $ 3,464 $ 1,863
======== ======== ======== ========
United States $ 2,580 $ 1,196 $ 3,882 $ 2,320
Non-U.S. (501) (385) (418) (457)
-------- -------- -------- --------
$ 2,079 $ 811 $ 3,464 $ 1,863
======== ======== ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 without limitation, the commencement, completion or
cancellation of large contracts, progress of ongoing contracts, achieving
expected levels of licensing and royalty revenues, potential 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 and royalty revenues (on projects for which
associated expense may have been recognized in prior periods) can materially
affect quarterly results. Accordingly, the Company believes that comparisons of
its quarterly financial results may not be meaningful.
7
<PAGE> 8
RESULTS OF OPERATIONS - SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Net sales for the second quarter of 1998 increased 23% to $19.4 million compared
to $15.8 million in 1997. The core fee-for-service revenues were $17.2 million
in 1998, up 13% from $15.2 million in 1997. Revenues from internal product
development were $2.2 million in 1998 compared to $0.6 million last year. The
Company finalized one new domestic license agreement and filed two product
applications with the FDA in the second quarter of 1998.
Demand for fee-for-service business continues to be strong but the Company's
growth rate in certain areas has been limited by available capacity. In response
to this strong demand, the Company will expand its capacity with the addition of
a 75,000 square foot leased facility in New Jersey. This facility will be
brought on line over a three-year period, beginning with the fourth quarter of
1998. The building was formerly operated by a major pharmaceutical company,
which will minimize the time and cost of making it operational for AAI.
Overall gross margin was approximately 54% for the second quarter of 1998
compared to 52% for the same period of 1997. The gross margin from
fee-for-service work was approximately 48% for the second quarter of 1998
compared to 50% for the same period of 1997. The difference in gross margin
percentage is mainly attributable to the mix of services provided.
Selling expenses as a percentage of net sales were approximately 10% in 1998
compared to 11% last year. General and administrative expenses as a percentage
of net sales were approximately 23% in 1998 compared to 24% last year. These
changes are primarily a result of higher sales levels. The Company expects to
continue its efforts at controlling selling, general and administrative expenses
in line with overall growth.
Research and development expenses were approximately 10% of net sales in 1998
compared to 11% in 1997. The Company has continued spending on internal
development projects with an expectation of spending approximately 10% of net
sales over an annual cycle. As mentioned above, the Company filed two product
applications with the FDA during the second quarter of 1998.
The improvement in income from operations from $2.1 million in the second
quarter of 1998 compared to $0.8 million last year is mainly attributable to the
internal product development business. In the fee-for-service business, the
company had a 7% decline in income from operations, with $2.4 million in 1998
compared to $2.6 million last year. The 1998 results reflect the impact of
increased overhead costs associated with adding management staff in Europe
during the later part of 1997 and some shifts in sales mix.
RESULTS OF OPERATIONS - SIX MONTHS 1998 COMPARED TO SIX MONTHS 1997
Net sales for the first six-months of 1998 increased 18% to $36.5 million
compared to $31.0 million in 1997. The core fee-for-service revenues were $32.8
million in 1998, up 13% from $29.0 million in 1997. Revenues from internal
product development were $3.8 million in 1998 compared to $2.0 million last
year, an increase of approximately 86%.
Overall gross margin was approximately 52% for the first six-months of 1998
compared to 51% for the same period of 1997. The gross margin from
fee-for-service work was approximately 47% for the first six-months of 1998
compared to 48% for the same period of 1997. The difference in gross margin
percentage is mainly attributable to the mix of services provided.
Selling expenses as a percentage of net sales were approximately 11% in 1998
compared to 12% last year. General and administrative expenses as a percentage
of net sales were approximately 22% in 1998 compared to 23% last year. The 1998
general and administrative expenses include a gain of approximately $540,000
resulting from the sale of certain corporate assets in the first quarter. The
Company expects to continue its efforts at controlling selling, general and
administrative expenses in line with overall growth.
Research and development expenses were approximately 9% of net sales in 1998
compared to 12% in 1997. The Company has continued spending on internal
development projects with an expectation of spending approximately 10% of net
sales over an annual cycle.
The improvement in income from operations from $3.5 million in the first
six-months of 1998 compared to $1.9 million last year is mainly attributable to
the internal product development business. In the fee-for-service business, the
company had a 15% decline in income from operations, with $3.6 million in 1998
compared to $4.2 million last year. The 1998 results reflect the impact of
increased overhead costs associated with adding management staff in Europe
during the later part of 1997 and some shifts in sales mix.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. Working capital
was approximately $33.0 million at June 30, 1998 compared to approximately $32.6
million at December 31, 1997. Additionally, the Company has available a $20
million credit facility to supplement its liquidity needs.
Capital expenditures were approximately $5.0 million during the first six-months
of 1998 compared to approximately $5.3 million during the same period last year.
The Company anticipates total capital expenditures for 1998 to be approximately
$12 million.
AAI 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 and borrowings.
The Company believes that such sources of cash will be sufficient to fund
operations for the current and foreseeable future and to pay existing debt as it
becomes due and other capital obligations. The Company is constantly evaluating
acquisition or growth opportunities. At some point in the future there may be
opportunities that require additional external financing, and the Company may
from time-to-time seek to obtain funds through the public or private issuance of
equity or debt securities. There can be no assurances that such financing will
be available on terms acceptable to the Company.
YEAR 2000 DISCLOSURE
The Company has completed the assessment of most of its major applications and
hardware to determine the impact to computer systems and equipment when the year
2000 arrives. Over the past few years a number of computer systems that were not
year 2000 compatible have either been upgraded or replaced. Additionally, the
Company has plans in place to address most of the non-compliant systems. The
cost of bringing the Company in full compliance should not result in a material
increase in its capital spending program or any material one-time expenses.
While management does not believe this issue will materially affect its
products, services or competitive condition, it has not fully completed its
assessment at this time. Our assessment should be completed by the end of the
third quarter of 1998.
FORWARD LOOKING STATEMENTS
This quarterly report may contain certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on the
Company's belief and assumptions, as well as information currently available to
the Company. When or if used herein, the words "anticipate," "estimate,"
"expect," and similar expressions may identify forward-looking statements.
Although the Company believes that the expectations reflected in any such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Any such statements are subject to
certain risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results, performance or financial condition may vary materially from
those anticipated, estimated or expected. Key factors that may have a direct
bearing on the Company's results, performance and financial condition include,
but are not limited to, the Company's dependence on and effect of government
regulation; its management of
9
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growth and acquisition risks, including its integration of acquired operations;
the level of outsourcing of research, development and testing activities in the
pharmaceutical and biotechnology industries; its dependence on key personnel,
and its dependence on third-party marketing and distribution of internally
developed drugs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is not applicable.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
USE OF PROCEEDS
In 1996, the Company completed the sale of 3,105,000 shares of common stock
through an offering filed on Registration Statement Form S-1 (No. 333-5535)
which became effective on September 19, 1996. The net offering proceeds to the
Company after underwriting discounts and other expenses, as previously disclosed
in other Company filings, was $44,793,000. The application of such proceeds is
described below. Such information represents cumulative totals through the
reporting date of this periodic report and all amounts, unless indicated
otherwise, are for direct or indirect payments to others.
Construction of plant, building and facilities $ 6,604,000
Purchase and installation of machinery and equipment 11,994,000
Repayment of indebtedness 1,689,000
Working capital 9,183,000
Research and development 12,417,000
Temporary investments (short-term, investment
grade, interest bearing) 2,906,000
------------
Use of proceeds $ 44,793,000
============
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 5, 1998, the Company held its annual meeting of stockholders. The total
shares outstanding of common stock as of the record date was 16,302,542. The
matters voted upon at the meeting and the results are as follows:
Election of Director, James L. Waters, term to expire 2001:
Votes for 14,415,365
Votes against -
Votes withheld -
Abstentions 712
Approval of the Amendment to the Company's 1997 Stock Option Plan authorizing
the issuance of an additional 1,158,000 shares of common stock:
Votes for 13,528,662
Votes against 26,183
Votes withheld -
Abstentions 4,045
No other matters were voted upon at the meeting.
11
<PAGE> 12
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. Accordingly, any notice of nominations or other
business to be brought before the 1999 annual meeting of stockholders must be
received by the Secretary of the Company by December 13, 1998. 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. Any stockholder
desiring a copy of the Company's By-laws will be furnished one without charge
upon written request to the Secretary of the Company at 5051 New Centre Drive,
Wilmington, North Carolina 28403.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
A list of the exhibits required to be filed as part of this Report on Form 10-Q
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.
REPORTS ON FORM 8-K:
The Company filed a Form 8-K, dated April 30, 1998, to report the change in
independent accountants and a Form 8-K, dated August 4, 1998, to file a press
release reporting the Company's unaudited consolidated financial results for the
period ended June 30, 1998.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
APPLIED ANALYTICAL INDUSTRIES, INC.
Date: August 14, 1998 By: /s/ FREDERICK D. SANCILIO
----------------------------
Frederick D. Sancilio, Ph.D.
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: August 14, 1998 By: /s/ EUGENE T. HALEY
---------------------
Eugene T. Haley
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
13
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APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 - Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
3.2 - Restated By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (Registration No. 333-5535))
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 (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.1 - Employment Agreement dated November 17, 1995 between the
Company and Frederick D. Sancilio (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535))
10.2 - Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.3 - Applied Analytical Industries, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.4 - Applied Analytical Industries, Inc. 1997 Stock Option Plan, as
amended on May 8, 1998.
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 (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
10.6 - Lease Agreement dated as of March 7, 1994 between 5051 New
Centre Drive, L.L.C., as landlord, and the Company, as tenant
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
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Exhibit
No. Description
------- -----------
10.7 - Development Agreement dated as of April 25, 1994 between the
Company and Endeavor Pharmaceuticals Inc. (incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
10.8 - Development Agreement dated as of April 4, 1995 between the
Company and Aesgen, Inc. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.9 - Loan Agreement dated as of December 30, 1996 between
NationsBank, N.A. and the Company (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996)
10.10 - Amendment No. 1, dated as of February 13, 1998, to the Loan
Agreement dated as of December 30, 1996 between NationsBank,
N.A. and the Company (incorporated by reference to Exhibit
10.10 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.11 - Underwriting Agreement dated September 19, 1996 between the
Company and Goldman Sachs & Co., Cowen & Company and Lehman
Brothers, Inc., as representatives of the underwriters listed
on Schedule 1 thereto (incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
27 - Financial Data Schedule (for SEC use only)
15
<PAGE> 1
EXHIBIT 10.4
APPLIED ANALYTICAL INDUSTRIES, INC.
AMENDED 1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1997 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 the Company's common stock, $.001 par value
("Common 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, if the Board includes members who are not
"non-employee directors" (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 (the "Code")),
then all authority of the Board under the Plan shall be exercised by a committee
of the Board (the "Committee") composed solely of at least two members thereof
who are both "non-employee directors" 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 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 authorized but unissued
shares of the Company's Common Stock. An aggregate of 1,158,000 shares of Common
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 Board or the Committee shall deem relevant to the accomplishment
of the purposes of the Plan.
-2-
<PAGE> 3
(b) Allotment of Shares
The Board or the Committee, in its sole discretion and subject to the
provisions of the Plan, may grant Options to participants eligible under this
SECTION 4, on or after the date hereof. 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, except as otherwise determined by the Board of the Committee, no
participant may be granted Options with respect to more than 200,000 shares of
Common 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 fair market value 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
-3-
<PAGE> 4
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. 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. Fair
market value shall be the average of the high and low sales prices per share as
reported by the exchange on which the Common Stock is trading, including without
limitation the NASDAQ National Market, on any Grant Date.
(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.
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.
-4-
<PAGE> 5
(g) Vesting
Except as otherwise determined by the Board or the Committee, Options
shall vest as follows:
Aggregate Percentage of
Shares under Options
Date Vested on such Date
---- -------------------
Twelve months after Grant Date 50%
Twenty-four months after Grant Date 100%
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
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; (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; or (iv) as otherwise determined by the Board or the Committee.
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.
-5-
<PAGE> 6
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 thirty (30) days
after 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 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
-6-
<PAGE> 7
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 Common 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 such shares has been issued by the Company.
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
-7-
<PAGE> 8
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 issued 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 (including the NASDAQ
National Market) on which the Common 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 __________ ___ 1997, and shall be
effective until ____________ ____, 2007 after which time
-8-
<PAGE> 9
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 1997 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 Common Stock to be issued upon
exercise of an Option having a fair market value equal to the
required withholding amount.
<PAGE> 11
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:_________________________
-2-
<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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,811
<SECURITIES> 0
<RECEIVABLES> 17,935
<ALLOWANCES> 199
<INVENTORY> 0
<CURRENT-ASSETS> 57,608
<PP&E> 44,185
<DEPRECIATION> 16,641
<TOTAL-ASSETS> 100,710
<CURRENT-LIABILITIES> 24,720
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 67,727
<TOTAL-LIABILITY-AND-EQUITY> 100,710
<SALES> 36,539
<TOTAL-REVENUES> 36,539
<CGS> 17,462
<TOTAL-COSTS> 33,075
<OTHER-EXPENSES> 32
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464
<INCOME-PRETAX> 3,680
<INCOME-TAX> 1,301
<INCOME-CONTINUING> 2,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,379
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
