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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2320 SCIENTIFIC PARK DRIVE, WILMINGTON, NC 28405
(Address of principal executive office) (Zip code)
(910) 254-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's common stock outstanding, as of
April 27, 2000, was 17,491,074 shares.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Table of Contents
The terms "Company", "Registrant" or "AAI" in this Form 10-Q include
Applied Analytical Industries, Inc. and its subsidiaries, except where the
context may indicate otherwise. Any item which is not applicable or to which the
answer is negative has been omitted.
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
AAI, INC.
Quarter ended
Consolidated Statements of Operations
(000)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
Net revenues $ 24,906 $ 26,115
-------- --------
Operating costs and expenses:
Direct costs 13,526 14,598
Selling 2,878 2,668
General and administrative 6,128 5,263
Research and development 1,467 1,868
Transaction, integration, and restructuring costs -- 6,400
------------ ------------
23,999 30,797
------------ ------------
Income (loss) from operations 907 (4,682)
Other income (expense):
Interest expense (497) (179)
Other, net 114 (32)
------------ ------------
(383) (211)
------------ ------------
Income (loss) before income taxes 524 (4,893)
Provision (benefit) for income taxes -- (1,130)
------------ ------------
Net income (loss) $ 524 $ (3,763)
============ ============
Basic earnings (loss) per share $ 0.03 $ (0.22)
============ ============
Weighted average shares outstanding 17,288 17,199
============ ============
Diluted earnings (loss) per share $ 0.03 $ (0.22)
============ ============
Weighted average shares outstanding 17,703 17,199
============ ============
The accompanying notes are an integral part of these financial statements.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,842 $ 2,013
Accounts receivable 28,201 33,564
Work-in-progress 16,226 14,189
Prepaid and other current assets 11,561 11,426
----------- ------------
Total current assets 57,830 61,192
Property and equipment, net 43,375 45,026
Goodwill and other intangibles, net 11,739 13,040
Other assets 3,746 4,228
----------- ------------
Total assets $ 116,690 $ 123,486
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 27,329 $ 28,387
Accounts payable 5,082 6,969
Customer advances 7,217 9,146
Accrued wages and benefits 3,979 4,081
Other accrued liabilities 4,514 6,102
----------- ------------
Total current liabilities 48,121 54,685
Long-term debt, less current portion 808 962
Other long-term liabilities 730 1,281
Stockholders' equity:
Common stock 17 17
Paid-in capital 70,040 69,732
Accumulated deficit (1,736) (2,260)
Accumulated other comprehensive losses (1,266) (906)
Stock subscriptions receivable (24) (25)
----------- ------------
Total stockholders' equity 67,031 66,558
----------- ------------
Total liabilities and stockholders' equity $ 116,690 $ 123,486
=========== ============
The accompanying notes are an integral part of these financial statements.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 524 $(3,763)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,856 1,794
Issuance of stock for services 225 --
Other (62) 42
Changes in operating assets and liabilities:
Accounts receivable 5,216 99
Work-in-progress (2,275) (546)
Prepaid and other assets, net 303 (2,408)
Accounts payable (1,826) (659)
Customer advances (1,806) (3,162)
Other accrued liabilities (2,000) 5,189
------- -------
Net cash provided by (used in) operating activities 155 (3,414)
Cash flows from investing activities:
Disposition of assets 270 --
Purchases of property and equipment, net (436) (2,946)
Pre-acquisition tax settlement 543 --
Other -- (37)
------- -------
Net cash provided by (used in) investing activities 377 (2,983)
Cash flows from financing activities:
Net (payments on) proceeds from short-term borrowings (554) 5,194
Payments on long-term borrowings (220) (1,476)
Exercise of stock options 83 --
Other 3 (17)
------- -------
Net cash (used in) provided by financing activities (688) 3,701
------- -------
Net decrease in cash and cash equivalents (156) (2,696)
Effect of exchange rate on cash (15) (70)
Cash and cash equivalents, beginning of period 2,013 12,299
------- -------
Cash and cash equivalents, end of period $ 1,842 $ 9,533
======= =======
Supplemental information, cash paid for:
Interest 557 222
Income taxes 5 17
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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APPLIED ANALYTICAL INDUSTRIES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and applicable
Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The consolidated financial information as of December 31,
1999 has been derived from audited financial statements. It is presumed that
users of this interim financial information have read or have access to the
audited financial statements for the preceding fiscal year. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. Operating results
for the interim periods presented are not necessarily indicative of the results
that may be expected for the full year.
2. MERGERS AND ACQUISITIONS
On March 16, 1999, the Company merged with Medical & Technical Research
Associates, Inc. ("MTRA"), a clinical contract research organization located
near Boston, Massachusetts, in exchange for approximately 1.3 million shares of
AAI stock, including the conversion of MTRA options. The merger has been
accounted for as a pooling-of-interests, and accordingly, the accompanying
consolidated financial statements include operations of the combined entities
for the three months ended March 31, 2000 and 1999.
In connection with the merger, the Company recorded a nonrecurring charge to
operating income reflecting the costs to complete the transaction, integrate the
businesses and realign its workforce to its new combined operating structure.
The items included in this charge are detailed in Note 7.
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3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and fully diluted
earnings per share (in thousands except per share amounts):
Three months ended
March 31,
---------------------
2000 1999
------- --------
Numerator:
Net income (loss) (1) $ 524 $ (3,763)
Denominator:
Denominator for basic earnings per share -
weighted average shares 17,288 17,199
Effect of dilutive securities:
Employee stock options (2) 415 --
------- --------
Denominator for fully diluted earnings per share -
weighted average shares 17,703 17,199
======= ========
Basic earnings per share $ 0.03 $ (0.22)
Diluted earnings per share $ 0.03 $ (0.22)
(1) Numerator for basic and diluted earnings per share
(2) Options to purchase 493,000 weighted average shares were not included
in diluted earnings per share since their inclusion would be
antidilutive
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner sources. The
following table presents the components of the Company's comprehensive income
(loss):
Three months ended March 31,
(In thousands)
----------------------------
2000 1999
------ --------
Net income (loss) $ 524 $(3,763)
Other comprehensive income (loss):
Currency translation adjustments (360) (634)
------ --------
Comprehensive income (loss) $ 164 $(4,397)
===== ========
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5. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA :
Three months ended
March 31,
-----------------------
2000 1999
-------- --------
NET REVENUES:
Pharmaceutic $ 15,936 $ 15,958
Clinical 6,991 6,260
Internal product development 1,979 3,897
-------- --------
$ 24,906 $ 26,115
======== ========
United States $ 20,065 $ 20,071
Non-U.S 5,653 7,048
Less inter-geographic sales (812) (1,004)
-------- --------
$ 24,906 $ 26,115
======== ========
INCOME (LOSS) FROM OPERATIONS:
Pharmaceutic $ 1,921 $ 1,403
Clinical 241 357
Internal product development 159 1,010
Corporate (1,414) (1,052)
Corporate restructuring charges -- (6,400)
-------- --------
$ 907 $ (4,682)
======== ========
United States $ (1,341) $ (6,671)
Non-U.S 2,248 1,989
-------- --------
$ 907 $ (4,682)
======== ========
6. PROVISION FOR INCOME TAXES
The Company's effective tax rate has been affected by losses in Europe. These
losses have created a tax asset which has been fully reserved, and no tax
benefit has been recognized. For the quarter ended March 31, 2000, the provision
for income taxes has been fully eliminated by use of net operating loss
carryforwards.
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7. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS
In connection with the Company's merger with MTRA, certain expenses of the
transaction, costs to integrate the two organizations and reorganize the
combined business were accrued and recorded in the first quarter of 1999.
Transaction costs are comprised of amounts owed to investment bankers and
advisors as a percentage of the total merger consideration and other expenses
directly related to the completion of the transaction, including financial
reviews and legal fees. Personnel separation costs include the separation of
approximately 58 employees in the US and Europe to combine the clinical
operations of the companies and realign the workforce in the new organization.
Facility and other costs include lease payments required under non-cancelable
leases for vacant properties and the write off of leasehold improvements and
equipment which will become redundant or obsolete due to the transaction. Other
costs include integration costs directly related to the merger and other costs
resulting from actions taken to merge the operations.
The following table presents the components of the expense recorded and the
amounts paid through March 31, 2000 (in thousands).
Total Paid to
Expense Date
------- -------
Transaction costs $ 1,913 $ 1,913
Personnel separation costs 1,919 1,729
Facility costs 2,568 2,457
------- -------
$ 6,400 $ 6,099
======= =======
8. TRANSACTIONS WITH RELATED PARTIES
In 1999, the Company advanced $300,000 to PharmComm, Inc. ("PharmComm"), a
company whose principal stockholders include Dr. Frederick Sancilio, Mr. James
Waters and Mr. William Underwood, all directors of AAI. One other stockholder of
PharmComm is a member of AAI management.
The advance payment was for services to be rendered by PharmComm during 1999 and
2000 for scanning and indexing services required as part of AAI's regulatory
compliance and record retention policies. AAI has engaged PharmComm to perform
these services since 1996 and has compensated PharmComm pursuant to written
agreements for the services. PharmComm also provides computer validation
services to AAI, which are required for compliance with regulatory requirements.
The remaining balance on the $300,000 prepayment was approximately $184,000 at
March 31, 2000.
The Company also has work-in-process and receivables due from Aesgen, Inc.
("Aesgen") and Endeavor Pharmaceuticals Inc. ("Endeavor"). Both Endeavor and
Aesgen were organized by AAI and its principal shareholders, and continue to be
related parties. The total amount of work-in-progress and receivables at March
31, 2000 related to Aesgen was approximately $594,000 and the amount related to
Endeavor was approximately $1,193,000. Revenues recognized from Aesgen and
Endeavor totaled $281,000 and $782,000 for the three months ended March 31, 2000
and 1999, respectively.
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9. DEBT
The following table presents the components of current maturities of long-term
and short-term debt (in thousands):
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
Industrial revenue bonds $ 600 $ 600
Revolving credit agreement 18,153 18,153
German bank debt 7,907 4,780
Current maturities of long-term debt 669 4,854
----------- ------------
Current maturities of long-term debt
and short-term debt $ 27,329 $ 28,387
=========== ============
U.S. bank term loans $ 1,477 $ 1,697
German term loans -- 4,119
Less current maturities of long-term debt (669) (4,854)
----------- ------------
Total long-term debt due after one year $ 808 $ 962
=========== ============
The Company has a revolving credit facility with a U.S. bank which expires on
May 31, 2000. The lender has agreed to amend and extend the credit facility from
May 31, 2000 to November 30, 2000. The agreement provides for borrowings of up
to $25 million, based upon a borrowing base consisting of portions of fixed
assets and accounts receivable, at variable interest rates based on the 30-day
LIBOR. At the end of the revolving credit period, any outstanding balances under
this facility must be repaid. The agreement requires the payment of certain
commitment fees based on the unused portion of the line of credit. At March 31,
2000, the Company qualified for the entire $25 million borrowing base of the
facility; actual borrowings totaled $18.2 million.
Under the terms of the revolving credit facility and the stand-by letter of
credit agreement, the Company is required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios, and incurring additional indebtedness. The Company was in
compliance with those covenants at March 31, 2000.
10. CONTINGENCIES
In July 1999, AAI filed a demand for arbitration against a former client seeking
approximately $700,000 for manufacturing services rendered. The former client
counterclaimed for $5 million alleging various misrepresentations by the
Company. In December 1999, the former client filed suit in North Carolina State
Court contesting the arbitration and seeking several million in alleged damages.
The Company counter sued the former client for approximately $3.6 million,
including interest, for various services rendered in addition to the amounts
owed for manufacturing services. The State Court ruled in February 2000 that all
claims under the manufacturing agreement are to be decided under
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arbitration. A June 2000 date has been set for the arbitration. Discovery has
not yet commenced in the litigation. The Company and the former client are
attempting to negotiate a settlement in lieu of the arbitration and legal
proceedings; however, there can be no assurance that any settlement will occur.
The Company vigorously contests the misrepresentation claims and believes it is
entitled to the value of the services rendered. The Company does not believe
that any future settlement will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The Company currently leases a facility adjacent to the Company's laboratories
from two banks. The facility was built in 1999 in Wilmington, North Carolina.
The Company's operating lease for this facility covers an initial period of
three years with two one-year renewal periods. At the end of the initial term,
the Company may elect to purchase the facility at fair market value, extend the
lease or the property may be sold.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's quarterly results have been, and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including without limitation, the commencement, completion or
cancellation of large contracts, progress of ongoing contracts, achieving
expected levels of licensing and royalty revenues, potential acquisitions, the
timing of start-up expenses for new facilities, timing and level of research and
development expenditures and changes in the mix of services. Since a large
percentage of the Company's operating costs are relatively fixed, variations in
the timing and progress of large contracts or the recognition of licensing and
royalty revenues (on projects for which associated expense may have been
recognized in prior periods) can materially affect quarterly results.
Accordingly, the Company believes that comparisons of its quarterly financial
results may not be meaningful.
RESULTS OF OPERATIONS - FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Overall net revenues for the first quarter of 2000 decreased by 5% to $24.9
million, compared to $26.1 million in the first quarter of 1999. Pharmaceutic
revenues were approximately $15.9 million in both the 2000 and 1999 periods.
Clinical revenues were up 12% to $7.0 million in the first quarter of 2000 from
$6.3 million in the same period of 1999. Revenues from internal product
development were $2.0 million in 2000 compared to $3.9 million last year.
Clinical sales increased from the amounts in the first quarter of 1999 due to a
number of factors. Since the first quarter of 1999, management has taken
specific steps to increase selling efforts by increasing the number of
professionals devoted to the customer focused selling approach used in the past.
The integration of the European and U.S. clinical businesses started in the
first quarter of 1999 is nearly complete, bringing greater efficiencies and
focus to the Company's clinical business.
In 1999, first quarter product development revenues included a $1.8 million
milestone payment, while the first quarter 2000 was primarily royalty based. The
Company anticipates that product development revenues will increase in future
quarters as additional agreements are signed but expects that revenues from
these contract signings will be intermittent until royalty streams earned from
launched products exceed the development fees earned. However, there can be no
assurance that the Company will be successful in executing additional product
development agreements and increase its future revenue or that the products
developed will be commercially successful.
Despite the lower sales in the 2000 period, gross margin dollars were only
slightly behind last year's first quarter. Gross margin as a percentage of
revenues was approximately 46% for the first quarter of 2000 compared to 44% for
the same period of 1999. The lower cost levels reflect successful implementation
of efficiency programs implemented during 1999.
Selling, general and administrative costs as a percentage of net revenues
increased to approximately 36% in 2000 compared to 30% for the same quarter in
1999. SG&A expenses were higher by 14% over the 1999 period reflecting the
expansion of selling efforts as well as continued investment in information
systems.
Research and development expenses were approximately 6% of net sales in the
first quarter of 2000, compared with approximately 7% of sales for the same
period in 1999. The Company intends to
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continue to spend substantially on research and development as part of its
long-term strategy of product development.
In connection with the March 1999 merger with MTRA, the Company recorded a $6.4
million nonrecurring charge to operating income reflecting the costs to complete
the transaction, integrate the businesses and realign its workforce to its new
combined operating structure. See Note 7 in Item 1 "Financial Statements" for
more information.
Income from operations was $.9 million in the first quarter of 2000 as compared
to a loss of $4.7 million for the same period of 1999. This change was due to
the absence of the restructuring charge of $6.4 million taken in the first
quarter of 1999 described above, partially offset by higher SG&A costs.
The Company recorded no provision for income taxes in the first quarter of 2000
because the distribution of product development revenues was heavily weighted in
Europe, where net operating loss carryforwards have been utilized to shelter
income from taxation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. Operating cash
provided in the first quarter of 2000 was essentially neutral, a significant
improvement over last year with its net cash usage from operating activities of
$3.4 million. Cash payments on borrowings during the first quarter of 2000 were
approximately $.8 million.
Capital expenditures were $.4 million during the first three months of 2000
compared to $2.9 million during the same period last year. This reduction is
part of the Company's plan to lower capital expenditures during 2000. Generally,
the Company anticipates total capital expenditures for 2000 to be less than
depreciation for the year.
The Company has a revolving credit facility with a U.S. bank which expires on
May 31, 2000. The lender has agreed to amend and extend the credit facility from
May 31, 2000 to November 30, 2000. The agreement provides for borrowings of up
to $25 million, based upon a borrowing base consisting of portions of fixed
assets and accounts receivable, at variable interest rates based on the 30-day
LIBOR. At the end of the revolving credit period, any outstanding balances under
this facility must be repaid. The agreement requires the payment of certain
commitment fees based on the unused portion of the line of credit. At March 31,
2000, the Company qualified for the entire $25 million borrowing base of the
facility; actual borrowings totaled $18.2 million.
Under the terms of the revolving credit facility and the stand-by letter of
credit agreement, the Company is required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios, and incurring additional indebtedness. The Company was in
compliance with these covenants at March 31, 2000.
AAI expects that near term growth can be accommodated utilizing existing
facilities. The Company is reducing capital expenditures and operating costs in
order to increase cash flow available to reduce reliance on bank facilities and
reduce borrowing costs. The Company may from time to time seek to supplement
cash flow from operations with the issuance of equity securities and additional
borrowings. At some point in the future there may be opportunities that require
additional external financing, and the Company may from time-to-time seek to
obtain funds through the public or private issuance of equity or debt
securities. While the Company remains confident that it can secure additional
financing
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if necessary, there can be no assurances that such financing will be available
or that the terms will be acceptable to the Company.
YEAR 2000 DISCLOSURE
The Company has assessed its computer systems for the year 2000 readiness, and
replaced all systems and software it found to be non-compliant. These
replacements were generally part of a regular upgrade program. In addition, the
Company tested all of its systems and software and has obtained verifications
from its vendors that the systems they supplied are year 2000 ready. The company
believes that any year 2000 problem is unlikely to arise in the future, and that
if any problem does arise, it will be able to fix the problem quickly and
without material expenses.
To date, the Company has not experienced any disruptions of operations due to
year 2000 problems, nor has it received notice from any of its customers about
problems resulting from non-year 2000 compliant software.
FORWARD LOOKING STATEMENTS, RISK FACTORS AND "SAFE HARBOR" LANGUAGE
This quarterly report contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on the
Company's belief and assumptions, as well as information currently available to
the Company. These forward-looking statements involve risks and uncertainties
that could cause the actual results of Applied Analytical Industries, Inc. to
differ materially from management's expectations as expressed or implied.
These forward-looking statements include, among others:
o All statements discussing liquidity; future, planned or
targeted operational or financial expectations, goals or
objectives; future, planned or targeted cost reductions and
capital expenditures; continued access to financing; and
effects of non-compliant computer systems due to Year 2000
issues; and
o All statements using the words "expect", "may", "believe",
"anticipate", "estimate", "project", "intend", "will", "plan",
"target", "objective", "goal", "should" and similar
expressions are intended to identify forward-looking
statements.
Although the Company believes that the expectations reflected in any such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Any such statements are subject to
certain risks and uncertainties including, but not limited to, the ability to
successfully and timely complete planned product development and R&D activities,
negotiate beneficial agreements with pharmaceutical companies for AAI's products
and services (including those providing greater proportions of royalty to
milestone payments), select and commercialize therapeutic niches for AAI's own
sales while avoiding conflicts with our clients' businesses, obtain additional
efficiency and profitability improvements in AAI operations, and obtain
regulatory approvals of AAI's products; the ability of contractual marketing
alliances to be integrated successfully with AAI's operations without unexpected
costs; actual operational performance; the ability to hire and retain qualified
personnel; other regulatory approvals; and industry outsourcing trends. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions or projections prove incorrect, actual results, performance or
financial condition may vary materially from those anticipated, estimated or
expected.
The Company assumes no obligation to update its forward-looking statements, or
other statements, contained herein. Additional factors that may cause the actual
results to differ materially are discussed in Exhibit 99.1 attached hereto and
incorporated herein by reference and in the Company's recent filings with the
Securities and Exchange Commission ("SEC"), including, but not limited to, the
Company's registration statement, as amended, its Annual Report on Form 10-K
filed with the SEC on March 30, 2000, and its other periodic filings.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of global operating activities, is exposed to risks
associated with changes in foreign exchange rates. As foreign exchange rates
change, the U. S. dollar equivalent of revenues and expenses denominated in
foreign currencies change and can have an adverse impact on the Company's
operating results. To seek to minimize its risk from foreign exchange movement,
the Company uses local debt to fund its foreign operations. If foreign exchange
rates were to change 10%, year to date operating results would have been lower
by $244,000 due to the change in reported results from European operations.
The Company is also exposed to changes in interest rates on its variable rate
debt instruments and leases tied to LIBOR. If interest rates were to change 1%,
annual interest expense on variable rate debt and leases tied to interest rates
would increase by approximately $288,000, or $72,000 per quarter.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
A list of the exhibits required to be filed as part of this Report on Form 10-Q
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.
REPORTS ON FORM 8-K:
The Company has recently filed the following Form 8-K:
Dated February 25, 2000, to file two press releases reporting the
Company's results of operations for the year ended December 31, 1999, and
supplemental financial information for the same period.
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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 report to be signed on its
behalf by the undersigned thereunto duly authorized.
APPLIED ANALYTICAL INDUSTRIES, INC.
Date: May 12, 2000 By: /s/ FREDERICK D. SANCILIO
-----------------------------------------------
Frederick D. Sancilio, Ph.D.
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: May 12, 2000 By: /s/ WILLIAM L. GINNA, JR.
-----------------------------------------------
William L. Ginna, Jr.
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
3.2 - Amended By-laws of the Company
4.1 - Articles Fourth, Seventh, Eleventh and Twelfth of the form of
Amended and Restated Certificate of Incorporation of the Company
(included in Exhibit 3.1)
4.2 - Article II of the form of Restated By-laws of the Company
(included in Exhibit 3.2)
4.3 - Specimen Certificate for shares of Common Stock, $.001 par value,
of the Company (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.1 - Employment Agreement dated November 17, 1995 between the Company
and Frederick D. Sancilio (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.2 - Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.3 - Applied Analytical Industries, Inc. 1997 Stock Option Plan, as
amended on May 8, 1998, (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998)
10.4 - Lease Agreement dated as of March 7, 1994 between the Company and
5051 New Centre Drive, L.L.C., as landlord, and the Company as
tenant (incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.5 - Stockholder Agreement dated as of November 17, 1995 among the
Company, GS Capital Partners II, L.P., GS Capital Partners II
Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street
Fund 1995, L.P., Bridge Street Fund 1995, L.P., Noro-Moseley
Partners III, L.P., Wakefield Group Limited Partnership, James L.
Waters, Frederick D. Sancilio and the parties listed on Schedule 1
thereto (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.6 - Development Agreement dated as of April 25, 1994 between the
Company and Endeavor Pharmaceuticals Inc. (formerly, GenerEst,
Inc.) (incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
17
<PAGE> 18
10.7 - Development Agreement dated as of April 4, 1995 between the
Company and Aesgen, Inc. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
(Registration No.
333-5535))
10.8 - Loan Agreement dated as of December 30, 1996 between NationsBank,
N.A. and the Company (incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
10.9 - Amendment No. 1, dated February 13, 1998, to the Loan Agreement
dated as of December 30, 1996 between NationsBank, N.A. and the
Company, (incorporated herein by reference to Exhibit 10.10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
10.10 - Underwriting Agreement dated September 19, 1996 between the
Company and Goldman Sachs & Co., Cowen & Company and Lehman
Brothers, Inc., as representatives of the underwriters listed on
Schedule 1 thereto (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.11 - Partnership Agreement dated as of October 2, 1998 between the
Company, First Security Bank, N. A. and the Various Banks and Other
Lending Institutions Which are Parties Hereto from time to time, as
the Holders and as the Lenders and NationsBank, N. A. (incorporated
by reference to Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998)
10.12 - Security Agreement dated as of October 2, 1998 between First
Security Bank, N. A., and NationsBank, N. A. (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
10.13 - Amendment No. 1 to the Employment Agreement dated November 17,
1995 between the Company and Frederick D. Sancilio (incorporated by
reference to Exhibit 10.14 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999)
10.14 - Amendment and Forbearance Agreement dated August 26, 1999 between
the Company and the Bank of America, N.A. (incorporated by
reference to Exhibit 10.15 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
10.15 - Pledge Agreement dated August 26, 1999 between the Company and
the Bank of America, N.A. (incorporated by reference to Exhibit
10.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
10.16 - Security Agreement dated August 26, 1999 between the Company and
the Bank of America, N.A. (incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
10.17 - Applied Analytical Industries, Inc. 1996 Stock Option Plan, as
amended on March 27, 2000 (incorporated by reference to exhibit to
the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1999)
10.18 - Amended and Restated Loan Agreement dated as of November 30, 1999
between the Company, AAI Applied Analytical Industries Deutschland
GmbH & Co. KG, certain
18
<PAGE> 19
subsidiaries of the Company and Bank of America, N.A, (incorporated
by reference to exhibit to the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1999)
27 - Financial Data Schedule (for SEC use only)
99.1 - Risk Factors
19
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
APPLIED ANALYTICAL INDUSTRIES, INC.
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
CORPORATE OFFICES
Section 1.1 REGISTERED OFFICE..........................................1
Section 1.2 OTHER OFFICES..............................................1
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE OF MEETINGS..........................................1
Section 2.2 ANNUAL MEETING.............................................1
Section 2.3 SPECIAL MEETINGS...........................................1
Section 2.4 NOTICE OF STOCKHOLDERS' MEETINGS...........................2
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE...............2
Section 2.6 QUORUM.....................................................2
Section 2.7 ADJOURNED MEETING; NOTICE..................................2
Section 2.8 CONDUCT OF BUSINESS........................................2
Section 2.9 VOTING.....................................................3
Section 2.10 WAIVER OF NOTICE...........................................3
Section 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....4
Section 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS.................................................4
Section 2.13 PROXIES....................................................5
Section 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................5
ARTICLE III
DIRECTORS
Section 3.1 POWERS.....................................................5
Section 3.2 NUMBER OF DIRECTORS........................................6
Section 3.3 ELECTION OF DIRECTORS......................................6
Section 3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................6
Section 3.5 REGULAR MEETINGS...........................................6
Section 3.6 SPECIAL MEETINGS; NOTICE...................................6
Section 3.7 WAIVER OF NOTICE...........................................7
Section 3.8 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..........7
Section 3.9 FEES AND COMPENSATION OF DIRECTORS.........................7
Section 3.10 APPROVAL OF LOANS TO OFFICERS..............................7
ARTICLE IV
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS....................................8
Section 4.2 COMMITTEE MINUTES..........................................8
Section 4.3 MEETINGS AND ACTIONS OF COMMITTEES.........................8
ARTICLE V
OFFICERS
Section 5.1 OFFICERS...................................................9
Section 5.2 APPOINTMENT OF OFFICERS....................................9
Section 5.3 SUBORDINATE OFFICERS.......................................9
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS........................9
Section 5.5 CHAIRMAN OF THE BOARD.....................................10
Section 5.6 PRESIDENT.................................................10
Section 5.7 VICE PRESIDENTS...........................................10
Section 5.8 SECRETARY.................................................10
Section 5.9 CHIEF FINANCIAL OFFICER...................................11
Section 5.10 ASSISTANT SECRETARY.......................................11
Section 5.11 ASSISTANT TREASURER.......................................11
Section 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............11
Section 5.13 AUTHORITY AND DUTIES OF OFFICERS..........................12
ARTICLE VI
INDEMNITY
Section 6.1 THIRD PARTY ACTIONS.......................................12
Section 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.............12
Section 6.3 SUCCESSFUL DEFENSE........................................13
Section 6.4 DETERMINATION OF CONDUCT..................................13
Section 6.5 PAYMENT OF EXPENSES IN ADVANCE............................13
Section 6.6 INDEMNITY NOT EXCLUSIVE...................................13
Section 6.7 INSURANCE INDEMNIFICATION.................................14
Section 6.8 THE CORPORATION...........................................14
Section 6.9 EMPLOYEE BENEFIT PLANS....................................14
Section 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES................................................15
ARTICLE VII
RECORDS AND REPORTS
Section 7.1 MAINTENANCE AND INSPECTION OF RECORDS.....................15
Section 7.2 INSPECTION BY DIRECTORS...................................15
Section 7.3 ANNUAL STATEMENT TO STOCKHOLDERS..........................16
ARTICLE VIII
GENERAL MATTERS
Section 8.1 CHECKS....................................................16
Section 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS..........16
Section 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES....................16
Section 8.4 SPECIAL DESIGNATION ON CERTIFICATES.......................17
Section 8.5 LOST CERTIFICATES.........................................17
Section 8.6 CONSTRUCTION; DEFINITIONS.................................17
Section 8.7 DIVIDENDS.................................................18
Section 8.8 FISCAL YEAR...............................................18
Section 8.9 SEAL......................................................18
Section 8.10 TRANSFER OF STOCK.........................................18
Section 8.11 STOCK TRANSFER AGREEMENTS.................................18
Section 8.12 REGISTERED STOCKHOLDERS...................................18
ARTICLE IX
AMENDMENTS
<PAGE> 3
AMENDED AND RESTATED BY-LAWS
OF
APPLIED ANALYTICAL INDUSTRIES, INC.
ARTICLE I
CORPORATE OFFICES
Section 1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
Section 1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
Section 2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Monday of May of each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
Section 2.3 SPECIAL MEETINGS
Special meetings of the stockholders may be called only by the board of
directors as permitted in the certificate of incorporation (All references to
"certificate of incorporation" herein shall be references to the certificate of
incorporation as amended, supplemented or restated from time to time). The
corporation shall promptly give notice to the stockholders
<PAGE> 4
entitled to vote upon the calling of a special meeting in accordance with the
provisions of SECTIONS 2.4 AND 2.5 hereof.
Section 2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with SECTION 2.5 of these by-laws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the Secretary or an Assistant Secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
Section 2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the Chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
Section 2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
by-laws otherwise require, notice need not be given of that adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 2.8 CONDUCT OF BUSINESS
Subject to any other applicable requirements, only such business
(including the nomination of a person for election as a director) may be
conducted at a meeting of the stockholders as has been brought before the
meeting by, or at the direction of, the corporation's
2
<PAGE> 5
board of directors or by a stockholder who has given to the secretary of the
corporation timely written notice, as provided below, of the stockholder's
intention to bring certain business before the meeting.
Any stockholder wishing to bring business before a meeting of
stockholders must provide notice to the corporation not more than one hundred
twenty (120) days in advance of the anniversary date of the corporation's proxy
statement for the previous year's annual meeting or, in the case of special
meetings, at the close of business on the tenth (10th) day following the date on
which notice of such meeting is first given to stockholders, of the business to
be presented by him at the stockholders' meeting. Any such notice shall set
forth the following as to each matter the stockholder proposes to bring before
the meeting: (A) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting
and, if such business includes a proposal to amend the by-laws of the
corporation, the language of the proposed amendment; (B) the name and address,
as they appear (if so appearing) on the corporation's books, of the stockholder
proposing such business (and any person acting in concert with such
stockholder); (C) the class and number of shares of the corporation that are
beneficially owned by such stockholder; (D) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business; and (E) any material interest of the stockholder in such
business. Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section. In the absence of such notice
to the corporation meeting the above requirements, a stockholder shall not be
entitled to present any business at any meeting of stockholders.
The presiding officer of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including the regulation
of the manner of voting and the conduct of business.
Section 2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of SECTION 2.12 of these
by-laws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgers
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
Section 2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting
3
<PAGE> 6
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these by-laws.
Section 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action that is consented to would have
required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
Section 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporation action in writing without
a meeting, or entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange or stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when
no prior action by the board of directors is necessary, shall be the
day on which the first written consent is expressed.
4
<PAGE> 7
(iii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
Section 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
ARTICLE III
DIRECTORS
Section 3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these by-laws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
5
<PAGE> 8
Section 3.2 NUMBER OF DIRECTORS
The exact number of directors shall be six (6) until changed, within
the limits specified in the certificate of incorporation, by a by-law amending
this SECTION 3.2, duly adopted by the board of directors or by the stockholders.
The directors shall be divided into classes as provided in the certificate of
incorporation.
Section 3.3 ELECTION OF DIRECTORS
Directors shall be elected as provided by the certificate of
incorporation. Only persons who are selected and recommended by the
corporation's board of directors or by a committee of such board designated to
make nominations, or who are nominated by a stockholder who has given timely
written notice in proper form in accordance with SECTION 2.8 hereof, to the
secretary of the corporation prior to a meeting at which directors are to be
elected will be eligible for election as directors, such determination to be
made by the presiding officer of such meeting.
Section 3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware. Unless
otherwise restricted by the certificate of incorporation or these by-laws,
members of the board of directors, or any committee designated by the board of
directors, may participate in a meeting of the board of directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
Section 3.5 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
Section 3.6 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly
6
<PAGE> 9
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
Section 3.7 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these by-laws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these by-laws.
Section 3.8 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these by-laws, any action required or permitted to be taken at any meeting of
the board of directors, or of any committee thereof, may be taken without a
meeting if all members of the board or committee, as the case may be, consent
thereto in writing and the writings are filed with the minutes of proceedings of
the board or committee.
Section 3.9 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these by-laws, the board of directors shall have the authority to fix the
compensation of directors.
Section 3.10 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of share of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
7
<PAGE> 10
ARTICLE IV
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the by-laws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of share of any series of stock or authorize the increase or
decrease of the share of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the by-laws of the corporation; and, unless the board
resolution establishing the committee, the by-laws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
Section 4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
Section 4.3 MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of these by-laws and the certificate of
incorporation with such changes in the context thereof as are necessary to
substitute the committee and its members for the board of directors and its
members; provided, however, that the time of regular meetings of committees may
be determined either by resolution of the board of directors or by resolution of
8
<PAGE> 11
the committee, that special meetings of committees may also be called by
resolution of the board of directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these by-laws.
ARTICLE V
OFFICERS
Section 5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and
a chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of SECTION 5.3 of these by-laws. Any number of
offices may be held by the same person.
Section 5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be
appointed (including those being appointed to fill any vacancy) in accordance
with the provisions of SECTIONS 5.3 of these by-laws, shall be appointed by the
board of directors, subject to the rights, if any, of an officer under any
contract of employment.
Section 5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to
appoint, such other officers and agents as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these by-laws or as the board of
directors may from time to time determine.
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board of directors or, except in the case of an officer
chosen by the board of directors, by any officer upon whom such power or removal
may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
9
<PAGE> 12
Section 5.5 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these by-laws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
SECTION 5.6 of these by-laws.
Section 5.6 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an officer,
the president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
by-laws.
Section 5.7 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these by-laws, the
president or the chairman of the board.
Section 5.8 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
10
<PAGE> 13
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these by-laws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these by-laws.
Section 5.9 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
it assets, liabilities, receipts, disbursements, gains, losses, capital retained
earnings, and shares. The books of account shall at all reasonable times be open
to inspection by any director and he shall report on the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these by-laws.
5.9A TREASURER
The treasurer shall deposit all moneys and other valuables in the name
and to the credit of the corporation with such depositories as may be designated
by the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, whenever they request it, and account for
all his transactions as treasurer, and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or these
by-laws.
Section 5.10 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his ability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as may be prescribed by the
board of directors or these by-laws.
Section 5.11 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
chief financial officer and shall perform such other duties and have such other
powers as may be prescribed by the board of directors or these by-laws.
Section 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and
11
<PAGE> 14
exercise on behalf of this corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of this
corporation. The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
Section 5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
Section 6.1 THIRD PARTY ACTIONS
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the corporation, which approval shall not be unreasonably
withheld) actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
and amounts paid in settlement (if such settlement is approved in advance by the
corporation, which approval shall not be unreasonably withheld) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in manner he reasonably believed
12
<PAGE> 15
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Notwithstanding any other provision of this ARTICLE VI, no person shall
be indemnified hereunder for any expenses or amounts paid in settlement with
respect to any action to recover short-swing profits under Section 16(b) of the
Securities Exchange Act of 1934, as amended.
Section 6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in SECTIONS 6.1 AND 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 6.4 DETERMINATION OF CONDUCT
Any indemnification under SECTIONS 6.1 AND 6.2 (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that the indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in SECTIONS 6.1 AND 6.2. Such determination shall
be made (a) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding or (b) or
if such quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders. Notwithstanding the foregoing, a director,
officer, employee or agent of the corporation shall be entitled to contest any
determination that the director, officer, employee or agent has not met the
applicable standard of conduct set forth in SECTIONS 6.1 AND 6.2 by petitioning
a court of competent jurisdiction.
Section 6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
SECTION 6.1 OR 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this ARTICLE VI.
Section 6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this ARTICLE VI shall not be deemed exclusive
of any other rights to which those
13
<PAGE> 16
seeking indemnification or advancement of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such persons' official capacity and as to action in another
capacity while holding such office.
Section 6.7 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this ARTICLE VI.
Section 6.8 THE CORPORATION
For purposes of this ARTICLE VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this ARTICLE VI (including,
without limitation the provisions of SECTION 6.4) with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section 6.9 EMPLOYEE BENEFIT PLANS
For purposes of this ARTICLE VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this ARTICLE
VI.
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<PAGE> 17
Section 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES
The indemnification and advancement of expenses provided by, or granted
pursuant to, this ARTICLE VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
Section 7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive officer or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, an may be inspected by any stockholder who is present.
Section 7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
in Delaware is hereby vested with the exclusive jurisdiction to determine
whether a director is entitled to the inspection sought. The Court may summarily
15
<PAGE> 18
order the corporation to permit the director to inspect any and all books and
records, the stock ledger, and the stock list and to make copies or extracts
therefrom. The Court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
Section 7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
Section 8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or person may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and other the persons so authorized
shall sign or endorse those instruments.
Section 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these by-laws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
Section 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer,
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<PAGE> 19
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
Section 8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face of back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 8.5 LOST CERTIFICATES
Except as provided in this SECTION 8.5, no new certificate for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
Section 8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these by-laws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
17
<PAGE> 20
Section 8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in (i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
Section 8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
Section 8.9 SEAL
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
Section 8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
Section 8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
Section 8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books and the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
18
<PAGE> 21
ARTICLE IX
AMENDMENTS
The by-laws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
by-laws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal by-laws.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPLIED ANALYTICAL INDUSTRIES, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,842
<SECURITIES> 0
<RECEIVABLES> 31,456
<ALLOWANCES> 3,255
<INVENTORY> 0
<CURRENT-ASSETS> 57,829
<PP&E> 76,074
<DEPRECIATION> 32,699
<TOTAL-ASSETS> 116,690
<CURRENT-LIABILITIES> 48,121
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 67,013
<TOTAL-LIABILITY-AND-EQUITY> 116,690
<SALES> 24,906
<TOTAL-REVENUES> 24,906
<CGS> 13,526
<TOTAL-COSTS> 23,999
<OTHER-EXPENSES> 114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497
<INCOME-PRETAX> 524
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<PAGE> 1
Exhibit 99.1
RISK FACTORS
Key risk factors that may have a direct bearing on the Company's results,
performance and financial condition include:
o the Company's ability to successfully develop, on its own
behalf and on behalf of its customers, and timely and
successfully commercialize, launch and sell new and improved
pharmaceutical products and services;
o the ability and willingness of the Company's customers to
successfully commercialize, launch and sell new and improved
pharmaceutical products in which the Company has an economic
interest;
o the Company's ability to successfully enter into and perform
beneficial royalty, milestone and fee-for-service agreements
with pharmaceutical companies;
o the introduction and sale of new or modified pharmaceutical
products and technologies by other companies that affect the
demand for pharmaceutical products and services in which AAI
has a financial interest, either directly or through sales to,
or royalties, milestones or other fees to be received from,
AAI's customers and marketing partners;
o the Company's success in obtaining timely regulatory approvals
of the Company's internally developed products and to obtain
other regulatory approvals and regulatorily acceptable
governmental audits and inspections of the Company's
facilities, records and other regulated activities;
o our ability to hire and retain adequate numbers of qualified
employees;
o industry outsourcing trends and volumes;
o changes in economic and market conditions that impact the
demand for the Company's products and services;
o our ability to obtain suitable types and quantities of raw
materials, excipients and active pharmaceutical ingredients
used to develop, improve or manufacture products, at
commercially viable prices;
o federal, state and foreign regulatory and legal changes and
developments that impact the pharmaceutical industry and those
companies developing or providing services and products to the
pharmaceutical industry, including the Company, as well as the
outcome of related judicial cases involving or affecting the
industry or such companies, including any such changes,
developments or judicial cases pertaining to FDA or other
regulatory, environmental, health and safety matters;
o changes in tariffs and import/export controls and
restrictions;
<PAGE> 2
o account receivable collection by the Company, and bankruptcy,
insolvency or impaired ability by the Company's customers to
pay amounts owed to the Company, in full and on a timely
basis;
o risks inherent in international operations, including, e.g.,
possible economic, political, military, trade restraints or
restrictions, monetary, or currency instabilities or
developments affecting the United States, Canada, the European
Union and its member states, the People's Republic of China,
Turkey and Argentina, among others;
o the effects of vigorous competition and/or mergers and
acquisitions in the pharmaceutical industry and those
companies developing or providing services and products to the
pharmaceutical industry;
o changes in interpretations and application of generally
accepted accounting practices and policy standards by
regulatory and accounting bodies that may cause the Company's
reported financial results to differ from anticipated results;
o the concurrence of the Internal Revenue Service and state and
foreign taxation agencies with the Company's interpretation
and application of the applicable tax laws and regulations to
the Company's operations and financial results, including in
the Company's tax filings and returns;
o the Company's ability to successfully persuade the U.S. Patent
and Trademark Office and its foreign counterparts to issue
patents with strong claims, on a timely basis, and to enforce
such issued patents against infringing companies;
o the outcome of any government reviews, investigations, claims
or challenges that may arise with respect to the contracts,
asset and stock sales and acquisitions, mergers, and joint
ventures of or involving the Company;
o our ability to successfully find and complete advantageous
acquisitions, joint ventures and mergers, including, e.g., our
ability to accurately identify and assess the value,
strengths, weaknesses, synergies, contingent and other
liabilities and potential profitability of acquisition or
merger candidate or of joint ventures and to successfully
integrate acquired or merged operations into the operations of
the Company; and
o the compliance by the Company's customers, suppliers,
licensors, licensees or other third parties with which the
Company has contractual relations, with their contractual
obligations to the Company, as well as the Company's ability
to enforce such obligations through litigation, arbitration,
mediation or other dispute resolution efforts.
Discussion of Risk Factors in the Pharmaceutical Industry. The Company believes
that the pharmaceutical industry in which it currently operates through its
development and commercialization of new and improved pharmaceutical products
and services holds tremendous opportunities for companies successful in
competing in that industry. At the same time, the Company is aware of what it
takes to be successful in this industry and the risk factors associated with the
industry.
In order to assist our stockholders in better understanding the risk factors in
the pharmaceutical industry, the Company is taking this opportunity to summarize
and discuss them:
<PAGE> 3
COMPETITION. The Company encounters aggressive competition in all areas
of its business. Our competitors are numerous, ranging from large
pharmaceutical companies to many smaller specialized firms. AAI
competes primarily on the basis of innovation, ability to obtain
regulatory approvals successfully and at early dates, technology and
patents, a sophisticated understanding of chemistry, finding and
developing novel chemical opportunities with respect to new or existing
pharmaceutical products, service performance, price, quality,
reliability, and customer service and support.
Product opportunities frequently arise as innovator drugs approach the
end of their patent lives. These include both product life cycle
management (PLCM) activities to extend the product franchise life
cycles for innovator pharmaceutical firms and to engage in generic
product development. Developing new or improved drug products is
complex and difficult, both technically and from a regulatory
standpoint. Commercial success and viability depends on whether (and
how many) other companies are developing new or improved competing
drugs or generic equivalents to innovator drugs, which companies
receive the earliest regulatory approvals to market the competing or
generic products, and differences in the competing products'
characteristics, effectiveness, safety, stability and side effects
profiles. The product development process requires, often years in
advance, accurate anticipation of market and customer acceptance of
particular products, customers' needs, emerging technological trends,
and a timely ability to complete successfully many dependent and
complex chemistry, analytical, testing and regulatory approval
requirements. When developed, new formulations may not accomplish
desired delivery, clinical or product stability characteristics, and
new or reformulated drugs may not have acceptable safety,
effectiveness, stability or side effect profiles. Complications can
also arise during production scale-up and/or developing or using
acceptable analytical methodologies that materially affect the
commercial or technical viability of a new or improved product. New or
improved products can also encounter unexpected unresolvable patent
conflicts. Delays or problems may also arise from internal conflicts
for resource availability, personnel errors or equipment failures.
Pharmaceutical product development life cycles are long (typically
several years) with substantial risks of failure in any of the
development and clinical testing phases. The windows of opportunity to
develop and commercialize such products open and close quickly with
regulatory and market developments. To remain competitive, the Company
must develop or license new and improved products, find, develop and
commercialize PLCM opportunities for innovator drugs whose patent
protection is soon to expire or generic products, periodically enhance
its existing products and services, and compete effectively on the
basis of the factors described above.
The Company is also subject to the impact of marketplace actions of its
competitors. For example, in the event of business difficulties faced by a major
competitor, the competitor may decide to slash its prices or take other pricing
or market actions in order to obtain new business at any price, thereby
disrupting the entire marketplace for pricing and obtaining of new business for
the Company and other marketplace participants. There can be no assurance that
disruptive actions by the Company's competitors will not occur or affect the
Company's financial results or business operations.
SELECTION AND INVESTMENT IN NEW RESEARCH AND DEVELOPMENT PROJECTS. The
Company seeks to select new or improved products and services to work
on in its judgment of those that may yield strong commercial success
for the Company, in light of its then-available resources, technical
capabilities and alternatives. However, in light of the multi-year
product development cycle times, the Company must make long-term
investments in its research and
<PAGE> 4
development projects and commit significant resources before knowing
whether its predictions will eventually result in products that achieve
customer and market acceptance and success.
MARKETING OF NEW AND IMPROVED PRODUCTS AND SERVICES. After a new or
improved pharmaceutical product or service is successfully developed,
the Company must either find a pharmaceutical marketing partner and
successfully enter into a profitable license and distribution agreement
or seek to sell the product or service through its own sales force.
Commercial success by the Company depends on our ability to create and
maintain such effective marketing channels.
MANUFACTURING OBLIGATIONS. Frequently, the Company has related
manufacturing obligations that require it to manufacture sufficient
volumes of marketable product at acceptable costs. This is a process
that requires accurate forecasting of costs, volumes and mix of
products and service estimates. Moreover, the supply and timing of a
new product or service must match customers' demand and timing for the
particular product or service. Given the wide variety of products and
services the Company offers and is developing, the process of planning
production and projecting profitable cost charges is difficult.
INTELLECTUAL PROPERTY. The Company generally relies upon patent,
copyright, trademark and trade secret laws in the United States and in
selected other countries to establish and maintain its proprietary
rights in its intellectual property, technology and products. However,
there can be no assurance that any of the Company's proprietary rights
will not be challenged, invalidated or circumvented, or that any such
rights will provide significant competitive advantages. Moreover,
because of the rapid pace of technological change in the pharmaceutical
industry, many of the Company's products rely on key technologies
developed by itself or others that may be obsoleted at any time. There
can be no assurance that the Company will be able to continue to
develop or obtain licenses to necessary technologies. In addition, from
time to time, the Company receives notices from third parties regarding
patent claims. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert
management's attention and resources and cause the Company to incur
significant expenses. In the event of a successful claim of
infringement against the Company and failure or inability of the
Company to license the infringed technology or to substitute similar
non-infringing technology, the Company's business could be adversely
affected. The Company also routinely enters into confidential
disclosure agreements with third parties and customers that restrict
the disclosure and/or use of the Company's intellectual property,
including its confidential and proprietary information, disclosed to
such third parties. Failure of such third-parties to honor their
confidentiality and non-use obligations owed to AAI can materially harm
the Company.
RELIANCE ON SUPPLIERS. The Company's operations are dependent on our
ability to obtain suppliers of quality raw materials, excipients and
active pharmaceutical ingredients at commercially acceptable prices and
terms, in time to satisfy critical product development, testing,
analytical and manufacturing activities, customer contracts, or the
development plans of the Company. The Company from time to time
experiences constrained timely and cost-effective supplies of such
desired materials. Such constraints, if persistent or widespread, may
adversely affect the Company's operating results until resolved or
alternate sourcing can be developed.
DEVELOPMENT OF DIRECT SALES OF NICHE PHARMACEUTICAL PRODUCTS. The
Company is currently planning the development of its own distribution
channels for certain "niche" pharmaceutical
<PAGE> 5
products not intended to conflict with products being sold by the
Company's customers. The Company is in the process of developing its
own, and seeking to identify and buy from third parties,
non-conflicting "niche" pharmaceutical products. There is no assurance
that such distribution channels can be successfully developed, that
such products can be successfully identified, acquired or developed, or
that the Company's customers may not react adversely to such marketing
efforts by the Company. The Company's operational and financial results
could be materially and adversely affected due to any such adverse
reactions.
INTERNATIONAL. Sales outside the United States make up a significant
portion of the Company's revenues. In addition, a significant portion
of the Company's facilities and personnel, along with key customers and
suppliers, are located outside the United States. Accordingly, the
Company's future results could be adversely affected by a variety of
factors, including changes in a specific country's or region's
political conditions or changes or continued weakness in economic
conditions, trade protection measures, import or export licensing
requirements, facility or ownership interest nationalization, the
overlap of different tax structures, unexpected changes in regulatory
requirements, military conflicts or actions, and natural disasters.
MANAGEMENT AND SKILLED PERSONNEL. As with any technological company,
the Company's operations require adequate numbers of skilled scientific
and technical personnel, as well as strong management and sales
capabilities, to be successful. Such personnel are in strong demand by
many other companies and the Company's personnel are frequently hired
away by other companies. Retaining skilled personnel, and hiring
replacements, are critical to the Company's success. There can be no
assurance that the loss of key personnel, whether to other companies or
to accident, illness, death, injury or retirement, will not occur at a
time or in a manner that will not disrupt or delay key projects and
activities of the Company and thereby adversely affect our operations
or financial results.
DEMANDS OF GROWTH. In recent years, the Company has been growing in
size and complexity of operations. An organization bears many burdens
organizationally caused by such growth, including, among others,
successfully improving, increasing and changing the financial,
information technology, operational, personnel-related and other
systems, policies and practices of the organization and the
organizational structure of the business and its management, as well as
finding and hiring the appropriate people for new or changed positions.
The Company believes that it is presently meeting the challenges of
growth, but any failure or inability to meet such challenges, or to
successfully create, maintain or use such systems, policies or
practices, can materially and adversely affect the operations and
financial result of the Company.
LITIGATION, INVESTIGATIONS AND CLAIMS. Any company, including AAI,
always faces the risk of potential litigation being brought against it
in the course of its business operations. By their nature, litigation,
pre-litigation investigations and controversies, and claim demands
occur when disputes arise between two parties, or between a party and a
government agency, as to whether legal obligations are owed or
breached. These are often difficult or impossible to predict, avoid or
mitigate in advance. When they occur, litigation, investigations and
claim demands may be based on either valid or unfounded claims. In
either case, however, litigation typically seeks substantial amounts of
money and/or injunctive relief and involve substantial legal fees and
expenses, and pre-litigation investigations and claim demands
frequently involve major costs and diversions of management and
personnel time and attention, which, in each case, can materially and
adversely affect the Company's operations or financial results.
<PAGE> 6
CREDITWORTHINESS AND CONTRACT COMPLIANCE OF CUSTOMERS. The magnitude of
the Company's contracts are often substantial in comparison to the
Company's size. While many of the Company's customers are large and
well-funded pharmaceutical companies, others are small (or are
"virtual" companies) with substantially less resources which can run
into financial or operational difficulties from time to time. In the
event that a customer with a significant contract with the Company runs
into financial or credit difficulties, declares bankruptcy, becomes
insolvent or otherwise is unable or unwilling to pay monies owed to the
Company on a timely basis or otherwise honor its obligations under such
a contract, the Company could be materially and adversely affected.
DERIVATIVE FINANCIAL INSTRUMENTS. As is common with companies operating
internationally, the Company is exposed to foreign currency exchange
rate risk inherent in its contracts, business dealings, and assets and
liabilities denominated in currencies other than the U.S. dollar, as
well as interest rate risk inherent in the Company's debt, investment
and accounts receivable portfolio. The Company's risk management
strategy utilizes derivative financial instruments, including forwards
and swaps, to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting gains and losses that occur on
the underlying exposures with gains and losses on the derivative
contracts hedging them. The Company does not enter into derivatives for
trading purposes.
The Company has performed a sensitivity analysis assuming a
hypothetical adverse movement of 10% in foreign exchange rates and 1% in
interest rates (applied to variable rate debt and leases tied to interest
rates). As of March 31, 2000, the analysis indicated that such hypothetical
market movements would have an effect of lowering operating results year-to-date
by approximately $244,000 due to the exchange rate and annual interest rate
expense would increase by approximately $288,000 or $72,000 a quarter. Actual
gains and losses in the future may differ materially from that analysis,
however, based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the Company's actual exposures and hedges.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES.
From time to time, the Company engages in discussions with a variety of
parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The implementation or integration of a
transaction may contribute to the Company's results differing from the
investment community's expectation in a given quarter. Divestitures may
result in the cancellation of orders and charges to earnings.
Acquisitions and strategic alliances may require, among other things,
integration or coordination with a different company culture,
management team organization and business infrastructure. They may also
require the development, manufacture and marketing of product offerings
that enhance or detract from the performance of the combined business
or product line. Depending on the size and complexity of the
transaction, successful integration depends on a variety of factors,
including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination
of different research and development and product manufacturing
facilities. All of these efforts require varying levels of management
resources, which may temporarily adversely impact other business
operations.
HURRICANES. A significant portion of the Company's research and
development activities, its corporate headquarters, and other critical
business operations and certain of its suppliers are located in
geographic areas that have had, and are likely to continue to have,
hurricanes and major storms. To mitigate this risk, the Company
maintains certain levels of business interruption and other insurance
coverage. However, the ultimate impact on the Company, its
<PAGE> 7
operations and its infrastructure of future hurricanes and storms
cannot be foreseen or controlled at this time.
DRUG ENFORCEMENT AGENCY ("DEA") REGULATION. Certain of the Company's
development, testing and other activities are subject to the Controlled
Substances Act, administered by the Drug Enforcement Agency (the
"DEA"), which regulates strictly all narcotic and habit-forming
substances. The Company maintains separate, restricted-access
facilities and heightened control procedures for projects involving
such substances due to the level of security and other controls
required by the DEA. Any failure or inability by the Company to comply
with such Act and regulations could materially and adversely affect the
business, operations and financial results of the Company.
ENVIRONMENTAL AND HAZARDOUS MATERIALS IN THE WORKPLACE. Certain of the
Company's operations involve the use of substances regulated under
various federal, state, local, and international laws governing the
environment. Moreover, the Company's activities involve the controlled
use of hazardous materials and chemicals. The Company is subject to
federal, state and local laws and regulations governing the use,
storage, handling and disposal of such materials and certain waste
products. In the event of an accident, discharges (e.g., to the
groundwater or air) or other non-compliance, the Company could be held
liable for any damages that result, including damages or injuries,
including deaths, to persons, property or the environment, which could
materially and adversely affect the financial condition and operations
of the Company.
PROFIT MARGIN. The profit margins realized by the Company vary among
its products and services, its customers, its competitive situation,
and its geographic areas of operation. Consequently, the overall
profitability of the Company's operations in any given period is
partially dependent on the product, service, customer and geographic
mix, and competitive situation, reflected in that period's net sales.
CHANGES IN LAWS AND REGULATIONS. The Company operates in a highly
regulated business. Failure or inability to comply with the laws and
regulations applicable to our business would materially and adversely
affect the Company's business and financial results. Moreover, these
laws and regulations and governmental interpretations and applications
thereof, both in the United States and in foreign countries, change
over time. The Company can give no assurance that the laws and
regulations applicable to our business will not change, or be
interpreted or re-interpreted by governmental agencies or bodies, in
ways harmful to the Company and its financial results and business
operations.
CREDIT FACILITIES AND AVAILABILITY OF CASH. The Company is dependent on
its bank relationships and credit facilities to provide cash and
funding for Company operations. In the event of any future disruption
or limitation in such relationships or facilities, any decision by the
Company's banks to terminate, reduce or impose limitations on our
credit facilities or to exercise rights to impose restrictions or
declare breaches under banking contract provisions, any decisions by
the Company's banks to collect on any assets of the Company as
collateral for such lending facilities, or in the event that the
Company requires more cash than is available to it under such credit
facilities, the Company's operations and financial condition could be
materially and adversely affected.
FLUCTUATIONS AND VOLATILITY OF STOCK PRICES. In the pharmaceutical
industry, future revenue and margin trends cannot be reliably predicted
and may cause the Company to adjust its
<PAGE> 8
operations, which could cause period-to-period fluctuations in
operating results. The Company's stock price, like that of other small
pharmaceutical companies, is subject to significant volatility. The
announcement of new products, services, technological innovations or
business developments by the Company or its competitors, quarterly or
annual variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community, and
speculation in the press, Internet web sites or investment community
are among the factors affecting the Company's stock price. In addition,
the stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to the
Company's performance. Moreover, major potential contracts or business
arrangements being negotiated or pursued by the Company frequently
occur late in given financial quarters or years. Any failure or
inability by the Company in achieving, or even brief delays in
implementing, potential licensing, product life cycle management,
product development and other major contracts or arrangements being
pursued or negotiated by the Company can, and from time to time does,
move the financial and sales impact of expected or planned sales and
contracts from one accounting period to another or prevent them from
being booked at all. Such delays or inabilities are difficult or
impossible to predict or control and can materially and adversely
affect quarterly or annual revenues and profitability, which can
materially and adversely affect the price of the Company's stock. In
addition, typical trading volumes in the Company stock are thin, so
that the purchase or sale of relatively small amounts of the Company
stock and announcements of Company-related news and developments can
materially affect the price of such stock, either through increases or
decreases. Because of the foregoing reasons, recent trends should not
be considered reliable indicators of future stock prices or financial
results.
