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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K/A
(Amendment No. 1)
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
5051 NEW CENTRE DRIVE, WILMINGTON, NC 28403
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (910) 392-1606
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K of any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock, as of
March 19, 1999 was 17,204,490 shares. The aggregate market value for the voting
stock held by non-affiliates of the Registrant on March 19, 1999 was
approximately $113,039,189.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report to Shareholders are
incorporated by reference in Parts I, II, and IV hereof.
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PRELIMINARY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") amends the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999
to include in Part III thereof information included in the Registrant's proxy
statement for its annual meeting of stockholders held on May 19, 1999.
1
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain information with respect to the directors
of the Company:
John M. Ryan (age 54) 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. (now
PricewaterhouseCoopers), 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 41) 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 1996. Mr. Gleberman serves as a director of
Dade Behring Holdings, Inc. and Ticketmaster Online-City Search, Inc.
Frederick D. Sancilio, Ph.D., (age 49) 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 51) is Executive Vice President, Corporate
Development and Licensing, 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.
James L. Waters (age 73) 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.
James G. Martin, Ph.D., (age 63) joined the Company's Board of Directors on
March 9, 1999. Dr. Martin served as Governor of the State of North Carolina from
1984-1992 and currently is Vice President, Research, Carolinas HealthCare
System. Dr. Martin also serves on the Boards of Duke Energy Corporation, J.A.
Jones Construction, and Family Dollar Stores, Inc.
In March 1999, the Company amended its policy to compensate non-employee
directors for Board participation. Under the amended policy, all non-employee
directors of the Company receive $3,000 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 $500 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.
The following sets forth certain information with respect to the executive
officers of the Company (other than Dr. Sancilio and Mr. Underwood, for whom
such information is provided above):
Eugene T. Haley, 49, Executive Vice President and Chief Financial Officer.
Mr. Haley has served as Executive Vice President and Chief Financial Officer
since February 1998. Prior to joining the Company he served as the Chief
Financial Officer of Kodak Worldwide Consumer Imaging Services during 1997 and
as Senior Vice President of Qualex, Inc. (an Eastman-Kodak subsidiary) from 1993
to 1997.
Frances M. Sakers, 41, Executive Vice President and Chief Operating
Officer. Ms. Sakers has served in her current position since September 1997.
Prior to joining the Company, Ms. Sakers was Executive Director of Quality
Control at Novartis Pharmaceuticals U.S. and has held various positions in
pharmaceutical operations at CIBA-Geigy Corporation for 14 years.
Joachim Rexhaus, 45, Executive Vice President, European Operations. Mr.
Rexhaus was elected an Executive Vice President in 1998 and has served the
Company since August 1997 in a number of financial and administrative management
positions in Europe. Prior to joining the Company, Mr. Rexhaus held a number of
financial and administrative management positions, most recently at Hoechst AG,
Syntax and IBM.
William J. Blank, 48, Executive Vice President, Marketing and Sales. Mr.
Blank has served as Executive Vice President, Marketing and Sales since January
1999. Prior to joining the Company, he served as Vice President of Client
Relations at Parexel International Corp. and has held various sales and
marketing positions in the healthcare services industry.
2
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ITEM 11. EXECUTIVE COMPENSATION.
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, 1998, all officers and directors
complied with all applicable Section 16(a) filing requirements, except Mr. Haley
was one day late filing a report with respect to a purchase of shares.
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 1998 by: (i) the Company's chief executive officer and (ii) the
Company's next four most highly compensated executive officers who were serving
as executive officers on December 31, 1998 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------
NAME AND ----------------------- SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(a) BONUS($) OPTIONS/SARS(#) COMPENSATION($)(d)
- ------------------ ---- ------------ -------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. 1998 341,667(b) 0 0 19,818(e)
President and 1997 350,000(c) 0 0 15,768
Chief Executive Officer 1996 350,000(c) 0 0 13,207
William H. Underwood 1998 165,000 0 40,000 2,348
Executive Vice President 1997 163,209 0 20,000 6,018
1996 159,993 0 7,680 3,082
Joachim Rexhaus(f) 1998 161,996 11,388 35,000 4,678(g)
Executive Vice President 1997 76,568 0 11,000 2,002(h)
1996 0 0 0 0
Eugene T. Haley(i) 1998 201,923 0 65,000 7,488(j)
Executive Vice President 1997 0 0 0 0
1996 0 0 0 0
Frances M. Sakers(k) 1998 170,769 13,333 40,000 52,117(l)
Executive Vice President 1997 45,538 0 0 10,742(l)
1996 0 0 0 0
</TABLE>
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(a) Includes amounts deferred pursuant to the Company's 401(k) plan.
(b) Includes $91,667 in salary paid by Endeavor Pharmaceuticals Inc.
(c) Includes $100,000 in salary paid by Endeavor Pharmaceuticals Inc., a
company 40% owned by the Company.
(d) Such amounts include the Company's contributions under its 401(k) and profit
sharing plans in the following amounts: Dr. Sancilio, $3,082 in 1996, $6,018
in 1997 and $2,348 in 1998; Mr. Underwood, $3,082 in 1996, $6,018 in 1997
and $2,348 in 1998.
(e) Includes $17,470 in expense reimbursements paid pursuant to Dr. Sancilio's
employment agreement with the Company.
(f) Mr. Rexhaus joined the Company in July 1997.
(g) Includes $4,324 car allowance and $355 in deferred compensation.
(h) Includes $1,853 car allowance and $149 in deferred compensation.
(i) Mr. Haley joined the Company in February 1998.
(j) Entire amount was for relocation expense payments.
(k) Mrs. Sakers joined the Company in September 1997.
(l) Entire amount was for relocation expense payments.
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The following table sets forth certain information with respect to options
granted during 1998 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(a)
NAME AND GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION (#)(b) FISCAL YEAR ($/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........... 40,000 4% 12.813 05-05-08 322,289 816,773
Joachim Rexhaus................ 35,000 4% 12.813 05-05-08 282,002 714,676
Eugene T. Haley................ 65,000 7% 12.813 05-05-08 523,719 1,327,256
Frances M. Sakers.............. 40,000 4% 12.813 05-05-08 322,289 816,773
</TABLE>
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(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 in 1998 to Named Executive Officers under the 1997 Stock
Option Plan vest in 20% increments at each of the twelfth, twenty-fourth,
thirty-sixth, forty-eighth and sixtieth 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 Named Executive Officers:
AGGREGATED 1998 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($)(a)
SHARES --------------------- ---------------------
NAME AND ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE)
------------------ ----------- ----------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. ...... 0 0 0/0 0/0
William H. Underwood............... 0 0 12,427/55,253 74,885/245,607
Joachim Rexhaus.................... 0 0 3,667/42,333 19,252/198,168
Eugene T. Haley.................... 0 0 0/65,000 0/296,530
Frances M. Sakers.................. 0 0 8,334/56,666 43,754/269,977
</TABLE>
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(a) Market value of underlying securities at fiscal year end minus the exercise
price of "in-the-money" options.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and President of the
Company. The Employment Agreement has an initial three-year term that is
automatically extended for an additional one-year period on each anniversary of
the Signing Date unless either party gives the other notice prior to the
anniversary date of its intention not to extend the term of the Employment
Agreement. Under the Employment Agreement, Dr. Sancilio will serve as the
Company's Chairman of the Board, President and chief executive officer, and the
Company is required to use its best efforts to cause Dr. Sancilio to be
re-elected to the Company's Board of Directors and to the boards of directors of
affiliates of the Company on which boards of directors Dr. Sancilio was serving
on the Signing
4
<PAGE> 6
Date and to be elected a director of any majority-owned subsidiary of the
Company acquired after the Signing Date.
The Employment Agreement was amended in March 1999 such that Dr. Sancilio's
annual salary was increased to $400,000 (including any Endeavor Pharmaceuticals
Inc. salary paid to Dr. Sancilio) from the initial annual aggregate salary of
$350,000 set in November 1995. The salary 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, to receive an
automobile allowance 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.
5
<PAGE> 7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of April
8, 1999 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)............................. 4,628,891 26.9%
James L. Waters(c).......................................... 2,415,561 14.0%
The Goldman Sachs Group, L.P.(d)............................ 2,875,385 16.7%
J.P. Morgan & Co. Incorporated(e)........................... 1,135,900 6.6%
Joseph H. Gleberman(f)...................................... -- --
John M. Ryan................................................ 22,667 *
James G. Martin, Ph.D. ..................................... -- --
William H. Underwood(g)..................................... 220,583 1.3%
Eugene T. Haley............................................. 19,434 *
Frances M. Sakers........................................... 19,234 *
William J. Blank............................................ -- --
Joachim Rexhaus............................................. 10,667 *
All executive officers and directors as a group (10
persons).................................................. 7,333,051 42.6%
</TABLE>
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* 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, 21,667 shares; Mr. Underwood,
27,094 shares; Mr. Haley, 16,334 shares; Mrs. Sakers, 16,334 shares; Mr.
Rexhaus, 10,667 shares; and all executive officers and directors as a group,
92,096 shares.
(b) Dr. Sancilio's address is 5051 New Centre Drive, Wilmington, North Carolina
28403.
(c) Includes 461,057 shares of Common Stock beneficially owned by Mr. Waters'
spouse. Mr. Waters address is 47 New York Avenue, Framingham, Massachusetts
01701.
(d) Based on certain filings with the Securities and Exchange Commission,
represents 2,875,385 shares owned by certain investment partnerships, of
which affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or general manager. Includes
1,428,549 shares held of record by GS Capital Partners II, L.P.; 567,908
shares held of record by G.S. Capital Partners II Offshore, L.P.; 120,552
shares held of record by Bridge Street Fund 1995, L.P.; 107,132 shares held
of record by Stone Street Fund 1995, L.P.; 52,691 shares held of record by
Goldman, Sachs & Co. Verwaltungs GmbH, as nominee for GS Capital Partners II
Germany Civil Law Partnership; 264 shares held by Greene Street 1998
Exchange Fund, L.P. ("Greene Street"), an affiliate of Goldman, Sachs & Co.
and the GS Group is the general partner of Greene Street, 40 shares acquired
in the ordinary course of trading activities, and 598,249 shares held in
managed accounts. 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) Based on Schedule 13G filed by J.P. Morgan & Co. Incorporated with the
Securities and Exchange Commission dated December 31, 1998. The address of
J.P. Morgan & Co. Incorporated is 60 Wall Street, New York, New York 10260.
(f) Mr. Gleberman, a managing director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,875,385 shares which may be deemed
beneficially owned by GS Group as described in note (d) above.
(g) Includes 925 shares beneficially owned by Mr. Underwood's children.
6
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 expired in March
1999, but the agreement has been extended for successive one-year periods until
one 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 $1.6 million in net sales to Endeavor in 1998.
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 trial supply and niche manufacturing.
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
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<PAGE> 9
November 17, 1999. Dr. Sancilio devotes the substantial majority of his time to
the management of the Company.
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
$180,000 in net sales to Aesgen in 1998. 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, 9.4%, Mr. Waters, 9.0% and Mr. Underwood, 0.8%.
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, 1998, 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 1998, Dr. Sancilio received $2,346 and
Mr. Waters received $1,912 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 was paid in full in 1998 by Mr. Underwood.
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
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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 1998.
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.
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Certain other relationships and related transactions with management are
described in Items 11 and 12, and are incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment to be signed
on its behalf by the undersigned thereunto duly authorized.
<TABLE>
<C> <S> <C>
/s/ GEORGE W. BECKWITH Controller (Principal June 23, 1999
- ----------------------------------------------------- Accounting Officer)
George W. Beckwith
</TABLE>
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