<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-05535
Prospectus Supplement No. 10, dated April 13, 1998
(To Prospectus dated April 1, 1997, as supplemented
on April 29, 1997, May 15, 1997, August 20, 1997,
November 12, 1997, November 17, 1997, February 4,
1998, March 3, 1998, March 31, 1998 and April 9, 1998)
[AAI LOGO]
Applied Analytical Industries, Inc.
Common Stock
(par value $0.001 per share)
On April 13, 1998, the Company filed its definitive proxy statement for
its Annual Meeting of Stockholders to be held on May 5, 1998. A copy of the
proxy statement is attached.
<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 5, 1998
---------------------
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 Tuesday, May 5, 1998
at 10:00 a.m., North Carolina time, at the corporate office of the Company,
located at 5051 New Centre Drive, Suite 208, Wilmington, North Carolina 28403.
1. To elect one (1) director to serve for a three-year term and until
his successor is elected and qualified;
2. To approve the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 1,158,000 shares; and
3. 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 20, 1998 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 13, 1998
<PAGE> 3
[AAI Logo]
APPLIED ANALYTICAL INDUSTRIES, INC.
5051 NEW CENTRE DRIVE
WILMINGTON, NORTH CAROLINA 28403
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 13, 1998
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 Tuesday, May 5, 1998 at 10:00 a.m., North Carolina time,
at the corporate office of the Company, located at 5051 New Centre Drive, Suite
208, Wilmington, North Carolina 28403, 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 1997 Annual Report to Stockholders commencing on or about April
13, 1998.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the Common Stock of the Company at the close
of business on March 20, 1998 will be entitled to vote at the Annual Meeting. As
of that date, a total of 16,302,208 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 any 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 nominee for
director named in this Proxy Statement and for the approval of the amendment to
the 1997 Stock Option Plan authorizing the issuance of an additional 1,158,000
shares. 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 DIRECTOR
The business and affairs of the Company are managed under the direction of
its Board of Directors, which is presently comprised of five members. The Board
of Directors is classified, with the directors serving staggered three-year
terms. One director has 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 2001 and until his successor is duly elected and qualified (except in
the case of earlier death, resignation or removal). The accompanying proxy may
not be voted for more than one director. The nominee for director has indicated
a willingness to serve, but in case he is not a candidate at the Annual Meeting,
the person 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 the nominee will be unable or unwilling to serve as a director if
elected. The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Annual Meeting is necessary to elect the
nominee for director. The Board of Directors recommends a vote FOR the election
of the nominee for director. Information concerning the nominee for director and
for each director whose term will continue after the Annual Meeting is set forth
below.
NOMINEE FOR DIRECTOR
TERM TO EXPIRE 2001
James L. Waters (age 72) 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 53) 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 40) 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.
TERM TO EXPIRE 2000
Frederick D. Sancilio, Ph.D., (age 48) is Chairman of the Board of
Directors, Chief Executive Officer 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 50) is Executive Vice President, Corporate
Development and has served as Chief Operating Officer from 1995 to 1997, 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee consisting of Messrs.
Gleberman and Ryan, and a Compensation Committee consisting of Mr. Ryan. The
Audit Committee's function is to review and make
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recommendations to the Board of Directors with respect to certain financial and
accounting matters. The Audit Committee met six times during the fiscal year
ended December 31, 1997. 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 seven times during the 1997 fiscal year.
The Board of Directors does not a have a standing nominating committee.
During the 1997 fiscal year, the Board of Directors held thirteen 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
20, 1998 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>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(A) SHARES
- ------------------------ --------------------- ----------
<S> <C> <C>
Frederick D. Sancilio, Ph.D.(b)............................. 4,657,422 28.6%
James L. Waters(c).......................................... 2,418,130 14.8%
The Goldman Sachs Group, L.P.(d)............................ 2,276,832 14.0%
Joseph H. Gleberman(e)...................................... -- --
John M. Ryan................................................ 6,000 *
William H. Underwood(f)..................................... 214,920 1.3%
Martin S. Hunicutt.......................................... 60,688 *
Kenneth R. Lomartire........................................ 5,000 *
R. Forrest Waldon........................................... 56,793 *
All executive officers and directors as a group (10
persons).................................................. 7,419,753 45.5%
</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 Company's 1995
Stock Option Plan, 1996 Stock Option Plan and the 1997 Stock Option Plan to
the extent such options are or become exercisable within 60 days.
Accordingly, the totals for the following executive officers and directors
and all executive officers and directors as a group includes the following
shares represented by options: Mr. Ryan, 5,000 shares; Mr. Underwood, 10,506
shares; Mr. Hunicutt, 60,688 shares; Mr. Waldon, 8,840 shares; Mr.
Lomartire, 5,000 shares; and all executive officers and directors as a
group, 90,034 shares.
(b) Dr. Sancilio's address is 5051 New Centre Drive, Wilmington, North Carolina
28403.
(c) Includes 465,133 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
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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
beneficially owned by GS Group as described in note (d) above.
(f) Includes 925 shares beneficially owned by Mr. Underwood's children.
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, 1997, all officers and directors
complied with all applicable Section 16(a) filing requirements, except each of
Messrs. Colonnese (former Chief Financial Officer), Lomartire and Hunicutt was
one day late filing a report with respect to options acquired under a Company
stock option plan. In addition, each of Messrs. Lomartire and Gorlich was late
filing his initial report indicating the application of Section 16 reporting
requirements to him.
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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 1997, 1996 and 1995 by: (i) the Company's chief executive officer,
(ii) the Company's next four most highly compensated executive officers who were
serving as executive officers on December 1997 and (iii) an additional
individual (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. 1997 350,000(b) 0 0 0 6,018
President and 1996 350,000(b) 0 0 0 3,082
Chief Executive Officer 1995 306,580(c) 79,217 0 0 5,131
William H. Underwood 1997 163,209 0 0 20,000 6,018
Executive Vice President 1996 159,993 0 0 7,680 3,082
1995 166,373 0 0 0 5,131
R. Forrest Waldon 1997 156,423 0 0 15,000 5,247
Executive Vice President 1996 126,583 3,531 0 7,680 3,082
and General Counsel 1995 114,064 0 272,000 0 5,047
Martin S. Hunicutt 1997 155,692 0 0 30,000 5,242
Executive Vice President 1996 130,000 0 0 101,376 2,025
1995 130,000 0 0 0 0
Kenneth R. Lomartire(e) 1997 122,671 0 0 15,000 3,774
Executive Vice President 1996 -- -- -- -- --
1995 -- -- -- -- --
Mark P. Colonnese(f) 1997 145,707 125,000 0 5,000 24,160(g)
1996 162,837 50,000 0 88,093 3,082
1995 121,448 0 0 0 35,691(h)
</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 include the Company's contributions under its 401(k) and
profit sharing plans in the following amounts: Dr. Sancilio, $5,131 in
1995, $3,082 in 1996, and $6,018 in 1997; Mr. Underwood, $5,131 in 1995,
$3,082 in 1996, and $6,018 in 1997; Mr. Waldon, $5,047 in 1995, $3,082 in
1996, and $5,247 in 1997; Mr. Hunicutt, none in 1995, $2,025 in 1996, and
$5,242 in 1997; and Mr. Lomartire, none in 1995 and 1996, and $3,744 in
1997; Mr. Colonnese, $1,095 in 1995, $3,082 in 1996, and $6,018 in 1997.
(e) Mr. Lomartire joined the Company in January 1997.
(f) Mr. Colonnese served as the Company's Vice President and Chief Financial
Officer and left the Company's employment on November 7, 1997.
(g) Of such amount, $18,142 related to payments and property from a severance
arrangement.
(h) Of such amount, $34,596 was paid as relocation expense in 1995 in
connection with Mr. Colonnese's acceptance of employment in 1993.
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The following table sets forth certain information with respect to options
granted during 1997 to the individuals named in the Summary Compensation Table.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OPTION TERM(A)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(B) FISCAL YEAR ($/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............ 20,000 4% 13.94 04-24-07 175,254 444,205
R. Forrest Waldon............... 15,000 3% 13.94 04-24-07 131,440 333,154
Martin S. Hunicutt.............. 30,000 6% 13.94 04-24-07 262,881 666,308
Kenneth R. Lomartire............ 15,000 3% 13.94 04-24-07 131,440 333,154
Mark P. Colonnese............... 5,000 1% 13.94 04-24-07 43,814 111,051
</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 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 Option Plan and 1996
Stock Option Plan vest in 25% increments at each of the sixth, eighteenth,
thirtieth and forty-second month anniversaries of the grant date. Options
granted under the 1997 Stock Option Plan vest in 33% increments at each of
the twelfth, twenty-fourth and thirty-six 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 individuals named in the Summary
Compensation Table.
AGGREGATED 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(A)
SHARES --------------------- ---------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. ...... 0 0 0/0 0/0
William H. Underwood............... 0 0 3,840/23,840 32,736/91,436
R. Forrest Waldon.................. 0 0 3,840/18,840 32,736/76,761
Martin S. Hunicutt................. 0 0 50,688/80,688 432,115/520,165
Kenneth R. Lomartire............... 0 0 0/15,000 0/44,025
Mark P. Colonnese.................. 44,047 317,945 0/0 0/0
</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
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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 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 to be 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.
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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 1997.
On November 20, 1995, the Company agreed to a cash bonus plan for Mark P.
Colonnese, the Company's former 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,
as amended, 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 $25,000 to be paid one
year thereafter. Accordingly, Mr. Colonnese was paid a total of $175,000 under
this arrangement in 1996 and 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 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's stockholders
approved the 1997 Stock Option Plan in May 1997. The Company granted 116,000
options to the executive officers, as a group, in 1997.
COMPENSATION PAYABLE TO THE CHIEF EXECUTIVE OFFICER
The 1997 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. Dr. Sancilio agreed to
forego any salary increase in 1997. 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 1997. This decision does not reflect the Committee's view of
Dr. Sancilio's and the Company's performance in 1997, and the Committee
anticipates that bonuses may be paid in the future for the level of performance
increases attained in 1997.
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 1997 at
his request, allocating the limited option pool to other officers and employees
of the Company. The Committee believes, however, that options provide
appropriate incentive compensation and may award options to Dr. Sancilio in the
future.
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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
John M. Ryan
9
<PAGE> 12
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, 1997 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.
<TABLE>
<CAPTION>
Measurement Period Nasdaq Industrial
(Fiscal Year Covered) AAI Average Peer Group
<S> <C> <C> <C>
9/19/96 100 100 100
12/31/96 119.53 101.29 92.41
12/31/97 103.13 143.34 76.61
</TABLE>
10
<PAGE> 13
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, 1997, 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 $3.2 million in net sales to Endeavor in 1997.
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 has expanded 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 had an initial two-year term which expired on November
17, 1997 and renews for successive one-year periods unless either party elects
not to renew the agreement. The employment agreement renewed by its terms for an
additional one-year term expiring November 17, 1998. Dr. Sancilio devotes the
substantial majority of his time to the management of the Company.
11
<PAGE> 14
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 $1.9
million in net sales to Aesgen in 1997. 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.
The Company holds a $1.6 million nonconvertible, non-voting preferred stock
investment in Aesgen, and the Company's directors and executive officers
beneficially own the following percentages of the fully diluted common equity of
Aesgen: Dr. Sancilio, 12.7%, Mr. Waters, 6.3%, Mr. Underwood, 1.0% 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, 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 exercise of options under the 1995 Stock Option Plan
at the exercise price of such options. As of December 31, 1997, options to
acquire 175,395 shares of Common Stock were granted under the 1995 Stock Option
Plan at an exercise price per share of $8.35, except for options for 2,214
shares at an exercise price of $9.10. In 1997, Dr. Sancilio received $374,904
and Mr. Waters received $163,577 under this arrangement.
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 was evidenced by a promissory
note, which bore interest at an annual rate of 6.15% and was paid in full,
including interest, by Mr. Underwood.
The Company loaned $33,528 to Mr. Waldon to purchase 105,453 shares of
Common Stock in November 1995 and an additional $168,700 related to income tax
liabilities arising in such transaction. Such loans are 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, 1997, the outstanding aggregate principal amount of
such loans was $199,016.
12
<PAGE> 15
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 managing director 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. makes a market in the Common Stock. Because of the
affiliation of Goldman, Sachs & Co. with the Company, Goldman, Sachs & Co. is
required to deliver a current prospectus to any purchaser in connection with any
such market-making transactions. The Company agreed with Goldman, Sachs & Co. to
register such transactions under the Securities Act of 1933, and effected such
registration in connection with its initial public offering by including in its
registration statement for the initial public offering a market-making
prospectus required to be used by Goldman, Sachs & Co. The Company has agreed to
make from time to time certain amendments or supplements to the market-making
prospectus and to pay certain expenses relating to such amendments or
supplements. Such expenses were less than $60,000 in 1997.
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.
ADOPTION OF AMENDMENT TO THE 1997 STOCK OPTION PLAN
Under the amendment to the 1997 Stock Option Plan (the "Amended Plan"), the
Company will be authorized to grant options to purchase up to 1,644,000 shares
of Common Stock, an increase of 1,158,000 shares from the current 1997 Stock
Option Plan. The Board anticipates that the 1,158,000 additional options,
combined with the options currently available for grant under the 1996 Stock
Option Plan and the 1997 Stock Option Plan, should be sufficient for employee
grants through the year 2000, unless the Company undertakes a significant
acquisition in such period. The Compensation Committee has recommended and the
Board has approved, adopting the Amended Plan authorizing the Company to issue
up to 1,644,000 options to purchase the Company's Common Stock.
The Board of Directors recommends the Company's Stockholders approve the
adoption of the Amended Plan.
The following is a summary description of the principal terms of the 1997
Stock Option Plan as proposed to be amended and does not purport to be complete
and is qualified in its entirety by the full text of the 1997 Stock Option Plan.
Stockholders may obtain a copy of the 1997 Stock Option Plan free of charge by
13
<PAGE> 16
contacting the Company at 5051 New Centre Drive, Wilmington, North Carolina
28403, attention: Investor Relations.
The purpose of the 1997 Stock 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 Stock 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 Stock Option Plan and to make all other
determinations necessary and advisable for the administration of the 1997 Stock
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
Stock Option Plan. A total of 386,700 options have been awarded under the 1997
Stock Option Plan.
Awards of Options may be made to officers and other key employees of the
Company or its subsidiaries ("Optionees"). The 1997 Stock 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 intended to qualify as incentive stock 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 10% stockholders). The exercise price per share
of any Option awarded under the 1997 Stock Option Plan may not be less than 100%
of the fair market value of a share of Common Stock on the date of grant of the
Option. The market value of Common Stock at March 20, 1998 was $16.94. 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 Stock 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 1997
Stock 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
14
<PAGE> 17
exercise price being treated as long-term capital gain or loss to the Optionee
with no deduction being allowed to the Company. Upon a sale or other disposition
of shares acquired upon the exercise of an incentive stock option within one
year after the transfer of the shares to the Optionee or within two years after
the date of grant of the incentive stock option (including the delivery of such
shares in payment of the exercise price of another incentive stock option within
such period), any excess of (a) the lesser of (i) the fair market value of the
shares at the time of exercise of the Option and (ii) the amount realized on
such disqualifying sale or other disposition of the shares over (b) the exercise
price of such shares, should constitute ordinary income to the Optionee and the
Company should be entitled to a deduction in the amount of such income. The
excess, if any, of the amount realized on a disqualifying sale over the fair
market value of the shares at the time of the exercise of the Option generally
will constitute short-term or long-term capital gain and will not be deductible
by the Company. Special rules may apply to Optionees who are subject to Section
16 of the Exchange Act.
Under certain circumstances the accelerated vesting or exercise of Options
in connection with a change of control of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
section 280G of the Internal Revenue Code. To the extent it is so considered,
the Optionee may be subject to a 20% excise tax and the Company may be denied a
tax deduction.
Section 162(m). Section 162(m) of the Internal Revenue Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1 million in any taxable year to the chief
executive officer or any of the four other most highly compensated executive
officers who are employed by the Company on the last day of the taxable year.
Compensation attributable to Options granted under the 1997 Option Plan should
not be subject to such deduction limitations.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has not appointed an accounting firm to serve as the
Company's independent accountant for the year ending December 31, 1998. The
Audit Committee has requested that the Company seek proposals for such services
from several accounting firms prior to making its recommendation to the Board of
Directors. That process has not been completed and is not anticipated to be
completed prior to the date of the Annual Meeting.
Representatives of Price Waterhouse LLP, the Company's independent
accountants for 1997, 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.
STOCKHOLDER PROPOSALS FOR 1999 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 1999 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than December 5,
1998.
15
<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 13, 1998
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.
16
<PAGE> 19
REVOCABLE PROXY APPLIED ANALYTICAL INDUSTRIES, INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1998
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 20, 1998 at the annual meeting of
stockholders to be held on May 5, 1998 (the "1998 Annual Meeting") or any
adjournment thereof.
1. ELECTION OF DIRECTOR
<TABLE>
<S> <C>
FOR the nominee listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for the nominee listed below [ ]
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR THE NOMINEE, STRIKE A LINE
THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
James L. Waters
2. PROPOSAL TO APPROVE THE AMENDMENT TO COMPANY'S 1997 STOCK OPTION PLAN
described in the Company's Proxy Statement for the 1998 Annual Meeting
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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 PROPOSAL AND THE ELECTION OF
THE DIRECTOR NOMINEE NAMED HEREIN, AND THIS PROXY WILL BE VOTED FOR THE PROPOSAL
AND FOR THE ELECTION OF THE DIRECTOR NOMINEE 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 13, 1998, 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: , 1998
------------------
-------------------------------
Signature
-------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
