<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
APPLIED ANALYTICAL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[AAI LOGO]
APPLIED ANALYTICAL INDUSTRIES, INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 3, 2000
---------------------
To the Stockholders of Applied Analytical Industries, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Applied
Analytical Industries, Inc. (the "Company") will be held on Wednesday, May 3,
2000 at 10:00 a.m., North Carolina time, at the corporate office of the Company,
located at 2320 Scientific Park Drive, Suite 185, Wilmington, North Carolina
28405.
1. To elect two (2) directors to serve for three-year terms and until
their successors are elected and qualified;
2. To approve the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 500,000 options;
3. To approve the Amendment to the Company's Certificate of
Incorporation to increase the maximum size of the Board of
Directors from seven (7) to nine (9).
4. To ratify and approve the appointment of Ernst & Young LLP as the
independent public accountants for the Company for the fiscal year
ending December 31, 2000; and
5. To consider and act upon any other matters that may properly come
before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of business
on March 20, 2000 as the record date for the determination of stockholders
entitled to notice of and to vote at the meeting or any adjournment thereof.
Only stockholders of record of the Company's Common Stock at the close of
business on that date will be entitled to vote.
You are cordially invited to attend the meeting. However, whether or not
you plan to be personally present at the meeting, please complete, date and sign
the enclosed proxy and return it promptly in the enclosed envelope. If you later
desire to revoke your proxy, you may do so at any time before it is exercised.
By Order of the Board of Directors,
Gregory S. Bentley
Secretary
Wilmington, North Carolina
April 7, 2000
YOUR VOTE IS IMPORTANT. ACCORDINGLY, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE> 3
[AAI LOGO]
APPLIED ANALYTICAL INDUSTRIES, INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 7, 2000
This Proxy Statement is furnished in connection with the solicitation of
the enclosed proxy by the Board of Directors of Applied Analytical Industries,
Inc. (the "Company") for use at the annual meeting of stockholders (the "Annual
Meeting") to be held on Wednesday, May 3, 2000 at 10:00 a.m., North Carolina
time, at the corporate office of the Company, located at 2320 Scientific Park
Drive, Suite 185, Wilmington, North Carolina 28405, and at any adjournment
thereof, for the purposes set forth in the Notice of Annual Meeting of
Stockholders. This Proxy Statement and the form of proxy enclosed are being
mailed to stockholders with the Company's 1999 Annual Report to Stockholders
commencing on or about April 7, 2000.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the Common Stock of the Company at the close
of business on March 20, 2000 will be entitled to vote at the Annual Meeting. As
of that date, a total of 17,343,238 shares of Common Stock were outstanding,
each share being entitled to one vote. There is no cumulative voting. If a
stockholder returns a proxy withholding authority to vote the proxy with respect
to any or all of the nominees for director, then the shares of the Common Stock
covered by such proxy shall be deemed present at the Annual Meeting for purposes
of determining a quorum and for purposes of calculating the vote with respect to
such nominee, but shall not be deemed to have been voted for such nominee or
nominees. If a stockholder abstains from voting as to any matter, then the
shares held by such stockholder shall be deemed present at the meeting for
purposes of determining a quorum and for purposes of calculating the vote with
respect to such matter, but shall not be deemed to have been voted in favor of
such matter. If a broker returns a "non-vote" proxy, indicating a lack of
authority to vote on such matter, then the shares covered by such non-vote shall
be deemed present at the Annual Meeting for purposes of determining a quorum,
but shall not be deemed to be present and entitled to vote at the Annual Meeting
for purposes of calculating the vote with respect to any such matter.
Shares of the Company's Common Stock represented by proxies in the form
solicited will be voted in the manner directed by the stockholder. If no
direction is given, the proxy will be voted for the election of the nominees for
director named in this Proxy Statement, for the approval of the amendment to the
1997 Stock Option Plan authorizing the issuance of an additional 500,000
options, for the amendment to the Company's Certificate of Incorporation
increasing the maximum size of the Board of Directors from seven (7) to nine (9)
and for the ratification and approval of Ernst & Young LLP as the Company's
independent public accountants. Management of the Company is not aware of any
matters to be acted upon at the Annual Meeting other than those set forth in the
accompanying Notice of Annual Meeting. In the event that any other matters
properly come before the Annual Meeting and call for a vote of stockholders, the
persons named as proxies in the enclosed form of proxy will vote in accordance
with their best judgment on these matters. A proxy may be revoked at any time
before being exercised by delivery to an officer of the Company of a written
notice of termination of the proxy's authority or a duly elected proxy bearing a
later date.
<PAGE> 4
ELECTION OF DIRECTORS
The business and affairs of the Company are managed under the direction of
its Board of Directors, which is presently comprised of seven members. The Board
of Directors is classified, with the directors serving staggered three-year
terms. Two directors have been nominated for election to the Company's Board of
Directors at the Annual Meeting to hold office until the meeting of stockholders
in year 2003 and until their successors have been duly elected and qualified
(except in the case of earlier death, resignation or removal). The accompanying
proxy may not be voted for more than two directors. The nominees for director
have indicated their willingness to serve, but in case they are not candidates
at the Annual Meeting, the person named as proxies in the enclosed form of proxy
may vote for a substitute nominees in their discretion. The Board of Directors
has no reason to believe that any nominee will be unable or unwilling to serve
as director if elected. The affirmative vote of a majority of the shares of
Common Stock present and entitled to vote at the Annual Meeting is necessary to
elect the nominees for director. The Board of Directors recommends a vote FOR
the election of the nominees for director. Information concerning the nominees
for director and for each director whose term will continue after the Annual
Meeting is set forth below.
NOMINEES FOR DIRECTOR
TERM TO EXPIRE 2003
Frederick D. Sancilio, Ph.D., (age 50) is Chairman of the Board of
Directors, Chief Executive Officer and President of the Company. With more than
20 years' experience in the pharmaceutical industry, Dr. Sancilio worked with
Burroughs-Wellcome Co., Schering-Plough Corporation, and Hoffmann-LaRoche, Inc.
before founding the Company in 1979.
William H. Underwood (age 52) is Executive Vice President, Corporate
Development and Licensing, and has served as Chief Operating Officer from 1995
to 1997, as Executive Vice President of the Company since 1992, as Vice
President from 1986 to 1992, and as a director since January 1996. He has held
positions in the pharmaceutical and cosmetic industries for more than 17 years,
in positions including Director of Quality Assurance and Director of
Manufacturing at Mary Kay Cosmetics, Inc. and Group Leader of Bacteriological
Quality Control at Burroughs-Wellcome Co.
TERM TO EXPIRE 2001
James L. Waters (age 74) has served as a director of the Company since 1981
and as a non-employee officer from 1982 until 1996. Mr. Waters is a private
investor in numerous companies and is the founder of Waters Associates, Inc.,
now known as Waters Corporation, a scientific instrumentation manufacturer.
James G. Martin, Ph.D., (age 64) joined the Company's Board of Directors on
March 9, 1999. Dr. Martin served as Governor of the State of North Carolina from
1984-1992 and currently is Vice President, Research, Carolinas HealthCare
System, a regional healthcare system. Dr. Martin also serves as a director of
Duke Energy Corporation, Palomar Medical Technologies, Inc., and Family Dollar
Stores, Inc.
TERM TO EXPIRE 2002
John M. Ryan (age 55) has served as a director of the Company since January
1996. Mr. Ryan serves as managing partner of Ryan Partners, a business advisory
and venture capital firm he founded in July 1996. Prior to founding Ryan
Partners, Mr. Ryan served as a partner of Coopers & Lybrand, LLP (now
PricewaterhouseCoopers LLP), an accounting firm, with which he was associated
from 1972 to 1996. Mr. Ryan has served as a director of numerous private
companies and as an officer and director of several not-for-profit corporations.
Joseph H. Gleberman (age 42) joined the Company's Board of Directors in
1995. Mr. Gleberman has been employed by Goldman, Sachs & Co., an
investment-banking firm, since 1982 and has been a Partner of Goldman, Sachs &
Co. since 1990 and Managing Director since 1996. Mr. Gleberman serves as a
director of Backweb, Inc., Dade Behring Holdings, Inc. and Ticketmaster
Online-City Search, Inc.
2
<PAGE> 5
Richard G. Morrison, (age 63) joined the Company's Board of Directors in
December 1999. Dr. Morrison is an Adjunct Professor of Business at the Cameron
School of Business, University of North Carolina at Wilmington. Dr. Morrison has
more than 30 years of pharmaceutical industry experience having served as
president of Eli Lilly and Company operations in Venezuela, Mexico and Brazil.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee consisting of Messrs. Ryan
and Martin, and a Compensation Committee consisting of Messrs. Ryan and Martin.
The Audit Committee's function is to review and make recommendations to the
Board of Directors with respect to certain financial and accounting matters. The
Audit Committee met four (4) times during the fiscal year ended December 31,
1999. The Compensation Committee's function is to review and make certain
determinations with respect to matters concerning the remuneration of employees,
officers and directors and administer the Company's stock option plans. The
Compensation Committee met two (2) times during the 1999 fiscal year. The Board
of Directors does not a have a standing nominating committee.
During the 1999 fiscal year, the Board of Directors held ten meetings. Each
incumbent director attended at least 75% of the total number of meetings of the
Board of Directors and committees on which he served that were held during the
period he was a member of the Board of Directors or such committees.
COMPENSATION OF DIRECTORS
In March 1999, the Company amended its policy to compensate non-employee
directors for Board participation. Under the amended policy, all non-employee
directors of the Company receive $3,000 for each meeting of the Board of
Directors and $1,000 for each meeting of a committee of the Board of Directors
not held in connection with a regular Board meeting attended by such
non-employee director. Non-employee directors receive $500 for each telephonic
Board or committee meeting in which they participate. All directors are
reimbursed for expenses incurred in connection with attending meetings of the
Board of Directors and committees thereof.
3
<PAGE> 6
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
20, 2000 by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(a) SHARES
------------------------ --------------------- ----------
<S> <C> <C>
Frederick D. Sancilio, Ph.D. (b)............................ 4,663,891 26.9%
James L. Waters (c)......................................... 2,411,575 13.9%
The Goldman Sachs Group, L.P. (d)........................... 2,875,385 16.6%
Brown Capital Management, Inc. (e).......................... 1,511,000 8.7%
Joseph H. Gleberman (f)..................................... -- --
John M. Ryan................................................ 38,334 *
James G. Martin, Ph.D....................................... 18,167 *
Richard G. Morrison......................................... -- --
William H. Underwood (g).................................... 237,169 1.4%
Eugene T. Haley............................................. 39,967 *
Frances M. Sakers........................................... 2,900 *
William J. Blank............................................ 18,334 *
Richard Parker.............................................. 409,136 2.4%
All executive officers and directors as a group (15
persons).................................................. 7,885,862 45.5%
</TABLE>
- ---------------
* Less than 1%
(a) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Information in the table reflects options granted under the Company's 1995
Stock Option Plan, 1996 Stock Option Plan and the 1997 Stock Option Plan to
the extent such options are or become exercisable within 60 days.
Accordingly, the totals for the following executive officers and directors
and all executive officers and directors as a group includes the following
shares represented by options: Mr. Ryan, 38,334 shares; Mr. Underwood,
43,680 shares; Mr. Haley, 32,667 shares; Dr. Martin, 16,667 shares; Mr.
Parker, 3,250 shares; and all executive officers and directors as a group,
172,821 shares.
(b) Dr. Sancilio's address is 2320 Scientific Park Drive, Wilmington, North
Carolina 28405.
(c) Includes 461,057 shares of Common Stock beneficially owned by Mr. Waters'
spouse. Mr. Waters' address is 47 New York Avenue, Framingham, Massachusetts
01701.
(d) Based on certain filings with the Securities and Exchange Commission,
represents 2,875,385 shares owned by certain investment partnerships, of
which affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or general manager. Includes
1,428,549 shares held of record by GS Capital Partners II, L.P.; 567,908
shares held of record by G.S. Capital Partners II Offshore, L.P.; 120,552
shares held of record by Bridge Street Fund 1995, L.P.; 107,132 shares held
of record by Stone Street Fund 1995, L.P.; 52,691 shares held of record by
Goldman, Sachs & Co. Verwaltungs GmbH, as nominee for GS Capital Partners II
Germany Civil Law Partnership; 264 shares held by Greene Street 1998
Exchange Fund, L.P. ("Greene Street"), an affiliate of Goldman, Sachs & Co.
and the GS Group is the general partner of Greene Street, 40 shares acquired
in the ordinary course of trading activities, and 598,249 shares held in
managed accounts. GS Group disclaims beneficial ownership of the shares
owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than GS Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates. The address of
the GS Group is 85 Broad Street, New York, New York 10004.
(e) Based on Schedule 13G filed by Brown Capital Management, Inc. with the
Securities and Exchange Commission dated December 31, 1999. The address of
Brown Capital Management, Inc. is 1201 N. Calvert Street, Baltimore,
Maryland 21202.
(f) Mr. Gleberman, a managing director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,875,385 shares which may be deemed
beneficially owned by GS Group as described in note (d) above.
(g) Includes 925 shares beneficially owned by Mr. Underwood's children.
4
<PAGE> 7
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, as well as any holders of more
than 10% of the Company's Common Stock, to file with the Securities Exchange
Commission certain reports of ownership and changes in ownership of Common Stock
and other equity securities of the Company. Based solely on review of such
reports and certain representations furnished to it, the Company believes that
during the fiscal year ended December 31, 1999, all officers and directors
complied with all applicable Section 16(a) filing requirements.
5
<PAGE> 8
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
awarded to, earned by or paid for services rendered to the Company in all
capacities in 1999 by: (i) the Company's chief executive officer, (ii) the
Company's next four most highly compensated executive officers who were serving
as executive officers on December 31, 1999, and (iii) one person who served as
an executive officer of the Company during 1999 but did not serve as an
executive officer at year end (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------
NAME AND ----------------------- SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(a) BONUS($) OPTIONS/SARS(#) COMPENSATION($)(d)
- ------------------ ---- ------------ -------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D. 1999 395,385 0 0 34,072(e)
President and 1998 341,667(b) 0 0 19,818(f)
Chief Executive Officer 1997 350,000(c) 0 0 15,768
William H. Underwood 1999 171,346 0 0 3,000
Executive Vice President 1998 165,000 0 40,000 2,348
1997 163,209 0 20,000 6,018
Richard Parker(g) 1999 153,846 36,507 16,250 423
President 1998 0 0 0 0
Medical & Technical 1997 0 0 0 0
Research Associates, Inc.
Eugene T. Haley(h) 1999 259,616 0 0 3,108(i)
Executive Vice President 1998 201,923 0 65,000 7,488(j)
1997 0 0 0 0
William Blank(k) 1999 150,577 0 10,000 19,716(l)
Executive Vice President 1998 2,788 0 25,000 0
1997 0 0 0 0
Frances M. Sakers(m) 1999 194,231 0 0 33,878(n)
Former Executive Vice 1998 170,769 13,333 40,000 52,117(l)
President 1997 45,538 0 25,000 10,742(l)
</TABLE>
- ---------------
(a) Includes salary amounts deferred pursuant to the Company's 401(k) plan.
(b) Includes $91,667 in salary paid by Endeavor Pharmaceuticals Inc.
("Endeavor"), a company 35% owned by the Company.
(c) Includes $100,000 in salary paid by Endeavor.
(d) Such amounts include the Company's contributions under its 401(k) and
profit sharing plans in the following amounts: Dr. Sancilio, $6,018 in
1997, $2,348 in 1998 and $3,000 in 1999; Mr. Underwood, $6,018 in 1997,
$2,348 in 1998 and $3,000 in 1999; Mr. Haley, $3,000 in 1999; Ms. Sakers,
$3,000 in 1999; and Richard Parker $423 in 1999.
(e) Includes $31,072 in expense reimbursements paid pursuant to Dr. Sancilio's
employment agreement with the Company.
(f) Includes $17,470 in expense reimbursements paid pursuant to Dr. Sancilio's
employment agreement with the Company.
(g) Mr. Parker joined the Company in March 1999 and serves as the President of
the Company's wholly-owned subsidiary, Medical & Technical Research
Associates, Inc.
(h) Mr. Haley joined the Company in February 1998.
(i) Includes $108 gift certificate.
(j) Entire amount was for relocation expense payments.
(k) Mr. Blank joined the Company in December 1998.
(l) Entire amount was for relocation expense payments.
(m) Mrs. Sakers left the Company in October 1999.
(n) Includes $30,771 in post-employment payments made to Ms. Sakers and a $108
gift certificate.
6
<PAGE> 9
The following table sets forth certain information with respect to options
granted during 1999 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(a)
NAME AND GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION (#)(b) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------ ---------- ---------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D..... 0 0% 0 0 0 0
William H. Underwood............ 0 0% 0 0 0 0
Richard Parker.................. 16,250 4% 18.590 03-16-09 190,022 481,553
Eugene T. Haley................. 0 0 0 0 0 0
William Blank................... 10,000 2% 11.125 10-13-09 69,965 177,304
Frances M. Sakers............... 0 0 0 0 0 0
</TABLE>
- ---------------
(a) Potential realizable value is based on an assumption that the price of the
common stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option term. The numbers are
calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth.
(b) The options granted to Mr. Parker vest in 20% increments at each of the
twelfth, twenty-fourth, thirty-sixth, forty-eighth and sixtieth month
anniversaries of the grant date. The options granted to Mr. Blank vest in
33 1/3% increments at each of the twelfth, twenty-fourth, and thirty-six
month anniversaries of the grant date.
The following table sets forth certain information with respect to the
value of options held at fiscal year end by the Named Executive Officers:
AGGREGATED 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(a)
SHARES --------------------- ---------------------
NAME AND ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE)
------------------ ----------- ----------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Frederick D. Sancilio, Ph.D........ 0 0 0/0 0/0
William H. Underwood............... 0 0 29,014/38,666 5,952/0
Richard Parker..................... 0 0 0/16,250 0/0
Eugene T. Haley.................... 0 0 16,334/48,666 0/0
William Blank...................... 0 0 8,334/26,666 0/0
Frances M. Sakers.................. 0 0 32,667/32,333 0/0
</TABLE>
- ---------------
(a) Market value of underlying securities at fiscal year end minus the exercise
price of "in-the-money" options.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and President of the
Company. The Employment Agreement has an initial three-year term that is
automatically extended for an additional one-year period on each anniversary of
the Signing Date unless either
7
<PAGE> 10
party gives the other notice prior to the anniversary date of its intention not
to extend the term of the Employment Agreement. Under the Employment Agreement,
Dr. Sancilio will serve as the Company's Chairman of the Board, President and
Chief Executive Officer, and the Company is required to use its best efforts to
cause Dr. Sancilio to be re-elected to the Company's Board of Directors and to
the boards of directors of affiliates of the Company on which boards of
directors Dr. Sancilio was serving on the Signing Date and to be elected a
director of any majority-owned subsidiary of the Company acquired after the
Signing Date.
The Employment Agreement was amended in March 1999 such that Dr. Sancilio's
annual salary was increased to $400,000 (including any Endeavor Pharmaceuticals
Inc. salary paid to Dr. Sancilio) from the initial annual aggregate salary of
$350,000 set in November 1995. The salary amount may be increased by the Board
of Directors and once increased may not be reduced. The Employment Agreement
provides that Dr. Sancilio will be eligible to receive bonus compensation of up
to 50% of his annual salary if the Company attains certain performance
objectives set jointly by the Board of Directors and Dr. Sancilio. In addition,
Dr. Sancilio will be eligible to participate in employee benefit plans made
available generally to the Company's executive officers and any other Company
compensation or incentive plans of a long or short-term nature, to receive an
automobile allowance and to receive other perquisites not to exceed, in the
aggregate, $35,000 per year.
Under the Employment Agreement, the Company may terminate Dr. Sancilio's
employment at any time, with or without cause, as defined in the Employment
Agreement. In the event that the Company terminates Dr. Sancilio's employment
without cause or in the event that Dr. Sancilio terminates his employment within
90 days of an event of constructive discharge (defined in the Employment
Agreement to include, among other things, the removal of Dr. Sancilio from, or
the failure of Dr. Sancilio to be elected to, the positions of Chairman of the
Board or President, a reduction in Dr. Sancilio's responsibilities or relocation
of the Company's principal executive offices by more than 30 miles from its
current location), Dr. Sancilio would be entitled to receive payments
aggregating three times his then current annual salary to be paid in monthly
installments over two years, during which time Dr. Sancilio would continue to
receive medical and life insurance benefits. The Employment Agreement requires
Dr. Sancilio to refrain from certain activities in competition with the Company
for a period of two years after the termination of his employment for any
reason.
The Employment Agreement obligates the Company to use its reasonable best
efforts to cause Endeavor to employ Dr. Sancilio as a senior management employee
at an annual salary of at least $100,000 with bonus compensation of up to 50% of
annual salary to be paid if performance targets are attained and greater amounts
if targets are exceeded. Previously, Endeavor had employed Dr. Sancilio on such
terms, however, Dr. Sancilio no longer is employed by Endeavor and received no
compensation from Endeavor in 1999.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION POLICY
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for establishing compensation policies applicable to the Company's
executive officers and administering the Company's stock option plans. The goal
of the Committee is to attract, retain and reward high-quality executives by
aligning their compensation with the long-term financial health of the Company
and long-term stockholder interests. The Committee is to be composed entirely of
independent, outside directors of the Company. In establishing salary levels and
the amount of bonus compensation to be paid to officers other than the Chief
Executive Officer, the Committee relies in part on the recommendations of the
Chief Executive Officer, Dr. Frederick D. Sancilio. The Committee's compensation
policies are intended to provide compensation at levels competitive with other
companies of similar size in the same industry.
8
<PAGE> 11
BASE SALARIES
The Company has not utilized specific formulas to determine executive
compensation. The Committee has implemented a program to review and approve the
initial compensation packages of all new executives. In addition, the Committee
in 1999 requested the Company to conduct an industry survey (the "Survey") to
ensure that the Company's management compensation practices are consistent with
other companies within the industry. The Survey is analyzing the mix of cash,
bonus and equity components of compensation to fairly compensate management and
ensure that management's and the Company's long-term interests are sufficiently
aligned. The Study, under the guidance and supervision of the Committee, is
ongoing and the Committee anticipates a final report to be delivered to the full
Board by the end of the second quarter 2000.
CASH BONUSES
In 1999, the Company did not pay any discretionary cash bonuses to
individual senior executive officers. Certain members of the executive
management team have the potential to earn performance-based bonuses as set
forth in their original offers of employment. The bonus programs are composed of
three goals: the overall financial performance of the Company; the performance
of the executive's department; and the executive's attainment of certain goals.
In each case, no bonuses will be paid unless the Company achieves its financial
performance goals. The bonus programs currently in place, however, are subject
to modification based on the results of the Survey.
STOCK OPTIONS
The Committee recognizes the importance of stock ownership by its senior
executives and that such options are an integral component of executive
compensation. The goals of the Company's option plans are to promote the growth
and profitability of the Company and its subsidiaries by increasing the personal
participation of officers and key employees in the financial performance of the
Company. The opportunity for individual financial growth tied to the financial
growth of the Company helps ensure that the executives' and Company's interests
are similarly focused. The Committee in 1998 extended from three years to five
years the option period previously provided for executive option grants and made
larger option grants to executives than previously experienced. The modification
is intended to provide greater potential ownership and employee commitment to
the Company's long-term goals.
The Company adopted two stock option plans in November 1995, but did not
grant any options to employees until April 1996. The Company's stockholders
approved an additional Stock Option Plan in May 1997 and amended the Plan in
1998 to increase the number of options which may be granted. The Company granted
101,250 options to the executive officers, as a group, in 1999. All of the
options granted in 1999 went to executives hired after December 1998.
COMPENSATION PAYABLE TO THE CHIEF EXECUTIVE OFFICER
The 1999 salary of the Company's Chief Executive Officer and President, Dr.
Sancilio, was determined pursuant to a renewable three-year employment agreement
with the Company dated November 17, 1995. The Company entered into the
employment agreement in connection with, and as a part of, the Company's sale of
preferred stock to certain institutional investors on November 17, 1995 (the
preferred stock was converted into common stock upon completion of the Company's
initial public offering in September 1996). The Board of Directors has delegated
to the Committee its authority under the agreement to set Dr. Sancilio's base
salary and determine the amount and performance criteria for the payment of
bonuses. Under the agreement, Dr. Sancilio's base salary is to be reviewed at
least annually. Dr. Sancilio agreed to forego any salary increase in 1998. The
agreement provides that base salary may be increased in light of Dr. Sancilio's
performance, competitive levels of compensation and other factors the Committee
deems relevant. Dr. Sancilio's Employment Agreement was amended in March 1999
increasing the base salary to $400,000 from $350,000 (including any Endeavor
Pharmaceutical Inc. salary paid to Dr. Sancilio). Endeavor Pharmaceuticals did
not pay any compensation to Dr. Sancilio in 1999.
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<PAGE> 12
The agreement also provides for a bonus, at least equal to 50% of base
salary, if the Company attains target performance objectives agreed upon by the
Committee and Dr. Sancilio. At Dr. Sancilio's request, the Committee agreed not
to pay a bonus for 1999. This decision does not reflect the Committee's view of
Dr. Sancilio's and the Company's performance in 1999, and the Committee
anticipates that bonuses may be paid in the future for the level of performance
increases attained in 1999.
Under the agreement, Dr. Sancilio is also eligible to participate in other
compensation or incentive plans in which other senior executives are eligible to
participate. The Committee did not award any options to Dr. Sancilio in 1999 at
his request, allocating the limited option pool to other officers and employees
of the Company. The Committee believes, however, that options provide
appropriate incentive compensation and may award options to Dr. Sancilio in the
future.
CAP ON DEDUCTION OF EXECUTIVE COMPENSATION
Under Section 162(m) of the Internal Revenue Code, a public company may not
deduct more than $1 million in compensation paid to one of its senior executive
officers, unless the excess amount is performance-based compensation satisfying
certain rules. The Company's stock option plans are designed to qualify under
the performance-based compensation requirements of this provision. Due to
current salary levels and anticipated bonus targets, the Committee believes that
it is unlikely that application of Section 162(m) will prevent the Company from
claiming a deduction for the amount of compensation paid to senior executive
officers.
Compensation Committee
John M. Ryan
James G. Martin
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<PAGE> 13
PERFORMANCE GRAPH
The rules of the Securities and Exchange Commission require the Company to
include in this Proxy Statement a line graph presentation comparing cumulative
total stockholder returns for the period beginning September 19, 1996 and ending
on December 31, 1999 with a published industry index or line-of-business index.
The Company has selected the Nasdaq Industrial Average and a composite peer
group consisting of ClinTrials Research Inc., Parexel International,
Pharmaceutical Product Development, Inc. and Quintiles Transnational Corp. The
above graph assumes that $100 was invested on September 19, 1996 in AAI stock
(at the initial public offering price) and in the index and peer group on
September 19, 1996, and the reinvestment of all dividends. The past performance
of Company Common Stock is not necessarily indicative of future performance.
<TABLE>
<CAPTION>
AAI NASDAQ INDUSTRIAL PEER GROUP
--- ----------------- ----------
<S> <C> <C> <C>
9/20/96 100.00 100.00 100.00
12/31/96 119.53 100.18 91.54
12/31/97 103.13 110.24 82.15
12/31/98 108.59 117.75 78.85
12/31/99 57.03 202.14 52.64
</TABLE>
11
<PAGE> 14
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING MANAGEMENT
On October 15, 1999, the Company terminated the lease on its previous
headquarters facility with 5051 New Centre Drive, LLC ("New Centre"), an entity
in which each of Mr. Waters and Dr. Sancilio owned a one-third interest. Under
the lease agreement between the Company and New Centre, the Company paid rent at
an annual base rate of $13.30 for approximately 19,000 square feet of space. The
parties mutually agreed to an early termination of the lease effective October
15, 1999 without additional consideration. The Company paid $189,108 in rent to
New Centre in 1999.
Approximately 35% of the capital stock of Endeavor Pharmaceuticals Inc.
("Endeavor") on a fully diluted basis is held by the Company and certain
officers of the Company serve as directors of Endeavor. Pursuant to an agreement
among the Endeavor stockholders, the Company has the right to designate two of
the six members of the Endeavor board of directors. The management team at
Endeavor is composed of three former employees of the Company. The Company
provides product development and manufacturing services pursuant to agreements
with Endeavor. The Company realized $2.8 million in net sales to Endeavor in
1999.
In February 2000, the Company purchased certain product rights and
validated manufacturing equipment from Endeavor. Endeavor assigned the rights to
an FDA approved hormone product and the related commercialization contract to
the Company. Under the commercialization agreement, the Company will be entitled
to certain minimum royalties upon the successful transfer of the manufacturing
process to the third party. Endeavor also sold a piece of manufacturing
equipment and related accessories to the Company. As consideration for the
product rights and equipment, the Company agreed to reduce Endeavor's
outstanding receivable balance from approximately $2.9 million, including
work-in-progress, to $950,000.
The Company provides product development services to Aesgen, which develops
pharmaceutical products. Approximately 30% of Aesgen's outstanding common stock
is held by the holders of a majority of the Company's currently outstanding
shares of capital stock. In addition, Mr. Waters and Dr. Sancilio serve on the
ten-member board of directors of Aesgen. The Company realized $100,000 in net
sales to Aesgen in 1999. The Company has the right under its development
agreement with Aesgen to provide certain product development and support
services to Aesgen with respect to certain drugs currently being developed by
Aesgen, provided that the Company's fees for such services are comparable to
those of a reasonably comparable firm. In addition, under such development
agreement, the Company has agreed, absent certain circumstances, not to develop
for its own account or for any other person, any formulation of a product
intended to be therapeutically equivalent to the same reference product for any
of the products currently under development by Aesgen and any additional drugs
that the Company agrees to develop for Aesgen under the development agreement.
The Company believes that the terms of such agreement are no less favorable than
terms that would be obtained in a transaction with an unrelated third party.
The Company holds a $1.6 million nonconvertible, non-voting preferred stock
investment in Aesgen, and the Company's directors and executive officers
beneficially own the following percentages of the fully diluted common equity of
Aesgen: Dr. Sancilio, 12.7 %, Mr. Waters, 6.3% and Mr. Underwood, 1.0%.
In November 1995, in connection with the purchase by GS Capital Partners
II, L.P., G.S. Capital Partners II Offshore, L.P., Bridge Street Fund 1995,
L.P., Stone Street Fund 1995, L.P., and Goldman, Sachs & Co. Verwaltungs GmbH
(the "Goldman Investors") and certain other investors of shares of preferred
stock described below, Mr. Waters purchased shares of preferred stock
(convertible into 119,833 shares of Common Stock), on substantially the same
terms and conditions, including price, as other purchasers of shares of
preferred stock. In connection with such transaction, the Company granted
certain stockholders, including Mr. Waters and Dr. Sancilio, rights to cause the
Company to register for sale shares of Common Stock acquired upon conversion of
the preferred stock. All shares of preferred stock were converted into Common
Stock automatically upon completion of the Company's initial public offering in
September 1996. In addition, in connection with the Company's issuance of shares
of preferred stock, Mr. Waters and Dr. Sancilio agreed to indemnify the Company
against certain matters including the imposition of certain federal income tax
liabilities, if any, in connection with the Company's election to be treated as
an S corporation, and the
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<PAGE> 15
payment of any amount due in connection with the resolution of an assessment
against the Company of a North Carolina use tax deficiency of approximately
$340,000 plus penalties and interest assessed against the Company. In addition,
and as part of the same transaction, Mr. Waters and Dr. Sancilio have agreed to
sell to the Company up to a total of 242,539 shares of Common Stock to provide
the shares for issuance pursuant to the 1995 Stock Option Plan. Such shares are
required to be sold by Mr. Waters and Dr. Sancilio upon the exercise of options
under the 1995 Stock Option Plan at the exercise price of such options. As of
December 31, 1999, options to acquire 68,249 shares of Common Stock were granted
and outstanding under the 1995 Stock Option Plan at an exercise price per share
of $8.35. In 1999, Dr. Sancilio received $32,198 and Mr. Waters received $26,336
under this arrangement.
The Company has 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.
The services will be performed by PharmComm at market rates after considering
the timing of the advance payment. AAI has engaged PharmComm to perform these
services since 1996 and has compensated PharmComm at favorable rates pursuant to
written agreements for the services. PharmComm also provides computer validation
services to AAI at market rates. These validation services are required for
compliance with regulatory requirements. Total payments for scanning and
validation services provided to AAI by PharmComm were approximately $214,000,
$436,000 and $266,565 for the years ended December 31, 1997, 1998, and 1999,
respectively.
In 1988, the Company secured financing with variable rate North Carolina
industrial revenue bonds which are supported by a letter of credit issued by a
bank. Dr. Sancilio and Mr. Waters guaranteed the Company's obligation to repay
amounts drawn under such letter of credit.
CERTAIN BUSINESS RELATIONSHIPS
In November 1995, the Goldman Investors and certain other investors
purchased shares of preferred stock of the Company. All outstanding shares of
preferred stock were converted into Common Stock in conjunction with the
Company's public offering of Common Stock in September 1996. The Goldman
Investors own 2,276,832 shares of Common Stock, which were purchased at $8.35
per share. Pursuant to a Stockholder Agreement entered into in November 1995 in
connection with the purchase of preferred stock, the Goldman Investors have the
right to designate one member of the Board of Directors for so long as the
Goldman Investors and their affiliates (which include Goldman, Sachs & Co.)
beneficially own 10% or more of the outstanding shares of Common Stock. Pursuant
to such Agreement, Mr. Gleberman, a managing director of Goldman, Sachs & Co.,
serves as one of the Company's directors.
In connection with the purchase by the Goldman Investors and certain other
investors of shares of preferred stock in November 1995, the Company agreed that
so long as the Goldman Investors beneficially own 5% or more of the outstanding
shares of Common Stock, the Company will retain Goldman, Sachs & Co. or an
affiliate to perform all investment banking services for the Company for which
an investment banking firm is retained and to serve as managing underwriter of
any offering of the Company's capital stock on customary terms, consistent with
an arm's-length transaction. In the event that the Company and Goldman, Sachs &
Co. or their affiliates cannot agree to the terms of such engagement after good
faith discussions, the agreement permits the Company to engage any other
investment banking firm, although Goldman, Sachs & Co. are entitled to serve as
co-managing underwriter in any underwritten offering of the Company's capital
stock. Goldman, Sachs & Co. served as lead underwriter in the Company's initial
public offering of its Common Stock in September 1996 and in connection
therewith the underwriting syndicate purchased approximately 3.1 million shares
of Common Stock at an underwriting discount of $3.5 million to the aggregate
public offering price. The Company has agreed to indemnify Goldman, Sachs & Co.
and their affiliates against certain liabilities, including liabilities under
the Securities Act of 1933.
Goldman Sachs & Co. makes a market in the Common Stock. Because of the
affiliation of Goldman, Sachs & Co. with the Company, Goldman, Sachs & Co. is
required to deliver a current prospectus to any
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<PAGE> 16
purchaser in connection with any such market-making transactions. The Company
agreed with Goldman, Sachs & Co. to register such transactions under the
Securities Act of 1933, and effected such registration in connection with its
initial public offering by including in its registration statement for the
initial public offering a market-making prospectus required to be used by
Goldman, Sachs & Co. The Company has agreed to make from time to time certain
amendments or supplements to the market-making prospectus and to pay certain
expenses relating to such amendments or supplements. Such expenses were less
than $60,000 in 1999.
Approximately 12.6% of the capital stock of Endeavor on a fully diluted
basis and 4.1% of the common equity of Aesgen on a fully diluted basis is held
by the Goldman Investors.
ADOPTION OF AMENDMENT TO THE 1997 STOCK OPTION PLAN
Under the amendment to the 1997 Stock Option Plan (the "Amended Plan"), the
Company will be authorized to grant options to purchase up to 2,144,000 shares
of Common Stock, an increase of 500,000 shares from the current 1997 Option
Plan. The Board anticipates that the 500,000 additional options, combined with
the options currently available for grant under the 1996 Stock Option Plan and
the 1997 Option Plan, should be sufficient for employee grants through the year
2001, unless the Company undertakes a significant acquisition in such period.
The Compensation Committee has recommended, and the Board has approved, adopting
the Amended Plan authorizing the Company to issue up to 2,144,000 options to
purchase the Company's Common Stock.
The Board of Directors recommends the Company's Stockholders vote FOR the
adoption of the Amended Plan.
The following is a summary description of the principal terms of the
proposed 1997 Option Plan but does not purport to be complete and is qualified
in its entirety by the full text of the 1997 Option Plan. Stockholders may
obtain a copy of the 1997 Option Plan free of charge by contacting the Company
at 2320 Scientific Park Drive, Wilmington, North Carolina 28405, attention:
Investor Relations.
The purpose of the 1997 Option Plan is to promote the growth and
profitability of the Company and its subsidiaries by increasing the personal
participation of officers and key employees in the financial performance of the
Company. The 1997 Option Plan will be administered by the Compensation
Committee. The Compensation Committee will have the authority to interpret the
terms and provisions of, and adopt, amend and rescind general and special rules
relating to the administration of, the 1997 Option Plan and to make all other
determinations necessary and advisable for the administration of the 1997 Option
Plan. All of the Company's employees will be eligible to receive stock options
to purchase shares of Common Stock ("Options") pursuant to the 1997 Option Plan.
A total of 1,557,398 options have been awarded and are outstanding under the
1997 Option Plan.
Awards of Options may be made to officers and other key employees of the
Company or its subsidiaries ("Optionees"). The 1997 Option Plan permits awards
of Options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code and nonqualified options. The Compensation Committee
is authorized to establish the exercise price of Options, although the per share
exercise price for Options intended to qualify as incentive stock options may
not be less than 100% of the fair market value of a share of Common Stock on the
date of grant (110% for certain 10% stockholders). The exercise price per share
of any Option awarded under the 1997 Option Plan may not be less than 100% of
the fair market value of a share of Common Stock on the date of grant of the
Option. The market value of Common Stock at March 20, 2000 was $10.75 per share.
The Compensation Committee is authorized to set the term of the Options, which
may be no longer than 10 years (5 years for certain Options intended to qualify
as incentive stock options).
Options awarded under the 1997 Option Plan will become exercisable as
determined by the Compensation Committee. The Options become immediately
exercisable upon completion of certain transactions involving a change in
control of the Company or a sale by the Company of all or substantially all of
its assets. Unexercised Options will expire thirty days after termination of the
Optionee's employment, other than as a result of death, disability or
retirement, in which cases Options may be exercised for a specified period after
14
<PAGE> 17
termination of employment. Options may not be transferred other than by will or
the laws of descent and distribution or pursuant to certain qualified domestic
relations orders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
brief summary of the principal United States federal income tax consequences
under current federal income tax laws relating to Options awarded under the
Stock 1997 Option Plan. This summary is not intended to be exhaustive and, among
other things, does not describe state, local or foreign income and other tax
consequences.
An Optionee will not recognize any taxable income upon the grant of a
nonqualified option, and the Company will not be entitled to a tax deduction
with respect to such grant. Upon exercise of a nonqualified option, the excess
of the fair market value of the shares on the exercise date over the exercise
price will be taxable as compensation income to the Optionee. Subject to the
Optionee including such excess amount in income or the Company satisfying
applicable reporting requirements, the Company should be entitled to a tax
deduction in the amount of such compensation income. The Optionee's tax basis
for the shares received pursuant to such exercise will equal the sum of the
compensation income recognized and the exercise price.
In the event of a sale of shares received upon the exercise of a
nonqualified option, any appreciation or depreciation after the exercise date
generally will be taxed as capital gain or loss and will be long-term gain or
loss if the holding period for such stock was more than one year.
Generally, an Optionee should not recognize taxable income at the time of
grant or exercise of an incentive stock option and the Company should not be
entitled to a tax deduction with respect to such grant or exercise. The exercise
of an incentive stock option generally will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
Optionee.
A sale or other disposition by an Optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such Optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain or loss
to the Optionee with no deduction being allowed to the Company. Upon a sale or
other disposition of shares acquired upon the exercise of an incentive stock
option within one year after the transfer of the shares to the Optionee or
within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the lesser
of (i) the fair market value of the shares at the time of exercise of the Option
and (ii) the amount realized on such disqualifying sale or other disposition of
the shares over (b) the exercise price of such shares, should constitute
ordinary income to the Optionee and the Company should be entitled to a
deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market value of the shares at the
time of the exercise of the Option generally will constitute short-term or
long-term capital gain and will not be deductible by the Company. Special rules
may apply to Optionees who are subject to Section 16 of the Exchange Act.
Under certain circumstances the accelerated vesting or exercise of Options
in connection with a change of control of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
section 280G of the Internal Revenue Code. To the extent it is so considered,
the Optionee may be subject to a 20% excise tax and the Company may be denied a
tax deduction.
SECTION 162(m). Section 162(m) of the Internal Revenue Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1 million in any taxable year to the chief
executive officer or any of the four other most highly compensated executive
officers who are employed by the Company on the last day of the taxable year.
Compensation attributable to Options granted under the 1997 Option Plan should
not be subject to such deduction limitations.
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
Article Ten, Section 1 of the Company's Restated Certificate of
Incorporation (the "Charter") currently provides that "[t]he number of directors
of the Corporation shall not be less than three (3) nor more than seven (7). The
exact number of directors within the limitations specified in the preceding
sentence shall be
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<PAGE> 18
fixed from time to time by, or in the manner provided in, the Corporation's
Bylaws." Section 3.2 of the Company's Bylaws currently fixes the number of
directors at seven (7).
By a vote on March 27, 2000, the Board of Directors approved and
recommended that the stockholders of the Company approve a proposal to amend
Article Ten, Section 1 of the Charter to increase the maximum number of
directors that may be fixed from time to time in accordance with the provisions
of the Company's Bylaws from seven (7) to nine (9). The affirmative vote of
seventy-five percent (75%) of the issued and outstanding shares of the Company's
Common Stock is required to approve the proposed amendment.
The Board of Directors believes that the proposal should be adopted in
order to provide the Company with the flexibility to increase the number of
directors in order to enable a greater breadth of industry and international
experience to oversee the Company's business affairs. The Company does not
presently have any nominees or candidates for the proposed new directorships.
However, if the proposal is approved, the Board of Directors intends to amend
the Company's Bylaws to increase the number of directors to nine (9), and to
seek outside, independent candidates to augment the current array of experience
resident on the Company's Board.
The Board of Directors recommends a vote FOR the approval of the amendment
of the Company's Certificate of Incorporation.
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as independent
public accountants of the Company for the fiscal year ending December 31, 2000.
A proposal to ratify the appointment of Ernst & Young LLP will be presented at
the Annual Meeting. Representatives of Ernst & Young LLP are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they desire to do so, and will be available to answer appropriate questions from
stockholders.
The Board of Directors recommends the Company's stockholders vote FOR
ratifying the appointment of Ernst & Young LLP as independent public accountants
of the Company for the fiscal year ending December 31, 2000.
STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
Under the applicable rules of the Securities and Exchange Commission, a
stockholder who wishes to submit a proposal for inclusion in the proxy statement
of the Board of Directors for the annual meeting of stockholders to be held in
the spring of 2001 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than December 1,
2000.
The By-laws of the Company establish an advance notice procedure for
stockholder proposals to be brought before a meeting of stockholders of the
Company and for nominations by stockholders of candidates for election as
directors at an annual meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of stockholders as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors or by a
committee of the Board of Directors designated to make nominations, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected, will
be eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to stockholders. Accordingly, any notice of nominations or other
business to be brought before the 2001 annual meeting of
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<PAGE> 19
stockholders must be received by the Secretary of the Company by December 1,
2000. The notice of any stockholder proposal or nomination for election as a
director must set forth the various information required under the By-laws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
Any stockholder desiring a copy of the Company's By-laws will be furnished one
without charge upon written request to the Secretary of the Company at 2320
Scientific Park Drive, Wilmington, North Carolina 28405.
OTHER MATTERS
The Board knows of no other matters which will be presented to the Annual
Meeting. If, however, any other matter is properly presented at the Annual
Meeting, the proxy solicited by this Proxy Statement will be voted in accordance
with the judgment of the person or persons holding such proxy.
By Order of the Board of Directors,
Gregory S. Bentley
Secretary
Wilmington, North Carolina
April 7, 2000
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
REQUESTED TO SIGN AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED POSTPAID ENVELOPE.
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<PAGE> 20
- FOLD AND DETACH HERE -
REVOCABLE PROXY APPLIED ANALYTICAL INDUSTRIES, INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Gregory S. Bentley and Albert N. Cavagnaro
as Proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock of Applied Analytical Industries, Inc. (the "Company") held of
record by the undersigned on March 20, 2000 at the annual meeting of
stockholders to be held on May 3, 2000 or any adjournment thereof.
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
FOR the nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for the nominees listed below [ ]
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR A NOMINEE, STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
Frederick D. Sancilio
William H. Underwood
2. PROPOSAL TO APPROVE the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 500,000 options.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the Amendment to the Company's Certificate of
Incorporation to increase the maximum size of the Board of Directors from
seven (7) to nine (9).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP as the independent
accountants for the Company for the fiscal year ending December 31, 2000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
<PAGE> 21
- FOLD AND DETACH HERE -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL AND THE ELECTION OF
THE DIRECTOR NOMINEES NAMED HEREIN, FOR THE AMENDMENT TO THE 1997 STOCK OPTION
PLAN, FOR THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION AND FOR RATIFICATION
OF ERNST & YOUNG LLP AS INDEPENDENT ACCOUNTANTS, AND THIS PROXY WILL BE VOTED
FOR THE PROPOSAL AND FOR THE ELECTION OF THE DIRECTOR NOMINEES NAMED HEREIN AND
FOR APPROVAL OF EACH OF THE PROPOSALS SET FORTH HEREIN, UNLESS THE STOCKHOLDER
DIRECTS OTHERWISE, IN WHICH CASE IT WILL BE VOTED AS DIRECTED.
The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy
Statement dated April 7, 2000, and revokes all proxies heretofore given by the
undersigned.
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Dated: , 2000
-------------------
-------------------------------
Signature
-------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
