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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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2320 SCIENTIFIC PARK DRIVE, WILMINGTON, NC 28405
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (910) 254-7000
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K of any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock, as of
February 29, 2000 was 17,343,238 shares. The aggregate market value for the
voting stock held by non-affiliates of the Registrant on February 29, 2000 was
approximately $77,294,351.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1999 Proxy Statement dated approximately April
7, 2000 are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS.
The terms "Company", "Registrant" or "AAI" in this Form 10-K include
Applied Analytical Industries, Inc., its corporate predecessors and its
subsidiaries, except where the context may indicate otherwise. The Company was
incorporated in 1986, although its corporate predecessor was founded in 1979.
AAI operates in two business segments which include a product development
business and a fee-for-service business.
AAI is a specialty pharmaceutical company offering product development
opportunities and contract support services to the worldwide pharmaceutical and
biotechnology industries.
AAI offers a wide range of pharmaceutical product development services
including comprehensive pharmaceutical formulation, testing and manufacturing,
in addition to the ability to take these newly formulated products into and
through the human clinical studies needed for marketing approval. AAI provides
these services both individually and on an integrated fashion to pharmaceutical
partners, as well as utilizing them on its internal proprietary projects and new
drug development activities. This business segment also provides a strong base
of resources, expertise and ideas that allows the Company to carry out its
internal product development activities successfully.
AAI has contributed to the submission, approval or continued marketing of
client products worldwide, encompassing a wide range of therapeutic categories
and technologies. The Company believes that its ability to offer an extensive
portfolio of high quality drug development and support services enables it to
effectively compete as pharmaceutical and biotechnology companies look for a
mixture of standalone and integrated drug development solutions that offer
cost-effective results on an accelerated basis.
The Company's product development business segment utilizes its
fee-for-service business segment as a well-established foundation for the
continued growth of AAI's internal product development program for new and
improved drugs and drug delivery technologies. This internal drug and drug
technology development business is funded initially by the Company, with the
Company later participating in the benefits of any potential commercial success
through licensing and royalty arrangements with partner pharmaceutical firms.
The objective of the product development business is the growth and
utilization of a portfolio of proprietary technologies and patent and
intellectual property rights to bring products to market that are safer, more
effective, innovative, and more cost-efficient for the patient and health care
community. Moreover, growth in AAI's product development business will generate
more business, skills and relationships in the Company's fee-for-service
business. Success in both strategies will permit the AAI to continue to
establish itself as a specialty pharmaceutical company.
In 1994, as part of its internal development program, the Company organized
Endeavor Pharmaceuticals Inc. ("Endeavor") to develop certain hormone
pharmaceutical products, focusing initially on several such products then under
development by AAI. The Company owns approximately 35% of the fully-diluted
common equity of Endeavor.
In December 1996, the Company acquired L.A.B. Gesellschaft fur
pharmakologische Untersuchungen mbH & Co KG. ("L.A.B."). L.A.B. was a European
contract research and development organization headquartered in Neu-Ulm, Germany
with principal operating units in Neu-Ulm and Munich, Germany; Paris, France,
and Arnhem, Netherlands as well as a sales office in London, England. The former
L.A.B. operations are now included in the organization referred to as AAI
Europe. AAI Europe focuses on both clinical and non-clinical pharmaceutical
product development and provides services that include drug formulation
development; chemical analysis; Phase I clinical trial studies; bioanalytical
testing; and European regulatory consulting. AAI Europe also provides Phase
II-IV multi-center clinical trial studies focused in niche therapeutic areas
including hepatic disease, chemotherapeutics, and hormone replacement therapy.
In September 1998, the Company acquired Kansas City Analytical Services,
Inc. (KCAS) a bioanalytical services company in the Kansas City, Kansas area.
KCAS offers bioanalytical testing of products to large
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and small pharmaceutical development companies as well as to the Company's
internal product development program. The addition of KCAS significantly
increased AAI's bioanalytical testing capacity.
On March 16, 1999, the Company merged with Medical & Technical Research
Associates, Inc., (MTRA) a clinical research organization located near Boston,
Massachusetts. MTRA offers clinical phase II -- IV studies predominately in the
US market to large and small pharmaceutical companies as well as to the
Company's internal product development program. The addition of MTRA adds
clinical Phase II -- IV capabilities in the United States and significantly
increases AAI's ability to provide clinical testing to U.S. customers and enable
the Company to compete for global clinical trial engagements. It also provides a
strong base of clinical trials skills for the Company's internal product
development program.
The merger with MTRA was accounted for as a pooling-of-interests, and
accordingly, all prior period consolidated financial statements have been
restated to include the results of operations, financial position, and cash
flows of MTRA as though MTRA had always been a part of AAI. Results for the
years ended December 31, 1999, 1998 and 1997 represent the combined results of
AAI and MTRA.
PRODUCT DEVELOPMENT BUSINESS
The Company dedicates a portion of its technical resources and operating
capacity to internal drug and technology development with the objective of
licensing marketing rights to third parties. It also provides product
development services for clients' new and existing products that generate
royalties, milestone payments and upfront fees for the Company.
The Company does not independently commercialize products developed
internally or otherwise directly compete with its clients in the marketing or
distribution of products and, accordingly, believes that its internal
development efforts are complementary to its clients' development needs. The
Company's internal product and technology development program has resulted in
multiple product applications filed with the FDA and European regulatory
agencies. Many of these products have been licensed or sold. The internal
development program has also resulted in patents covering drug technology and
pending patent applications.
Since 1993, the Company has significantly increased its investment in its
internal product development program. Because of the length of time required for
development and approval of pharmaceutical products, the Company has only
recently begun to recognize significant license revenue from its internal
development efforts. The Company anticipates that internal product development
revenues, including royalties and milestone license payments, will represent a
growing proportion of its revenue. However, there can be no assurance that
internal development projects will yield products that will be approved by the
appropriate regulatory authorities or will be attractive to potential clients.
Although there is a risk that any particular development project may not produce
revenues, the Company believes that the profit margins from successful drug and
technology development projects could potentially exceed the margins for
standard fee-for-service engagements. The Company seeks to pursue multiple drug
and technology development projects to manage risk in each particular effort.
In 1994, as part of its internal development program, the Company organized
Endeavor with certain financial investors and an affiliate of Schering AG to
continue the development of certain generic hormone products then under
development by AAI. The Company assigned its rights to such products to Endeavor
in return for approximately 47% of Endeavor's equity during a private placement
of Endeavor stock, and the Company entered into a contract with Endeavor to
continue product development and clinical supply manufacture. AAI currently owns
approximately 35% of the fully diluted common equity of Endeavor. The Company
believes that such services are provided at terms that are no less favorable
than terms that would be obtained from an unrelated third party.
The Company recently purchased certain product rights and validated
manufacturing equipment from Endeavor as consideration for reducing the Endeavor
outstanding receivable balance from approximately $2.9 million, including
work-in-progress, to $950,000.
Endeavor is currently developing another product, in multiple dosage
strengths; however, there can be no assurance that such product will ultimately
be approved by the FDA. Endeavor does not directly market any
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products and its revenues are dependent upon licensing fees and royalties from
third parties. Continued product development by Endeavor is dependent upon
revenues from additional capital funding.
In 1995 the Company entered into an agreement with Aesgen, Inc. ("Aesgen"),
a company organized by the Company with an affiliate of Mayo Clinic, MOVA
Pharmaceutical Corporation and certain financial investors, to develop certain
pharmaceutical products. Six products developed by the Company for Aesgen have
been approved by the FDA. In 1996, the Company sold to Aesgen marketing rights
to a product being developed by the Company. Under the agreement, Aesgen will
pay license fees and additional royalties upon marketing the product, although
there can be no assurance that the product will be approved by the FDA or
marketed. AAI continues to hold a $1.6 million non-voting, non-convertible
preferred stock investment in Aesgen.
In addition to its development work for Endeavor and Aesgen, the Company
has continued its internal development of products to be licensed to third
parties that have marketing and distribution capabilities. The Company has
entered into numerous license agreements for products that are currently in
development. The terms of the license agreements vary as to amounts of milestone
payments, as well as methods and extent of revenue participation. While the
Company anticipates that most of its product license agreements will provide
that prospective clients will ultimately sponsor the approved product, in
certain instances the Company has made submissions for internally developed
products in its own name.
Continuing to leverage its development capabilities, the Company has moved
into product line extension development and has also begun reviewing new
compounds that are chemically similar to currently marketed products with proven
therapeutic and safety profiles, and that offer improved characteristics over
the marketed product. Such improved characteristics would include enhanced or
new therapeutic indices, reduced side effects, improved bioavailability and
improved pharmacokinetics. Because considerable toxicity data already exists for
the marketed product, the Company believes that product lines extensions and
pro-drugs generally could be developed with less risk of failure and in a
shorter time frame than new chemical entity development. The Company believes
that virtual and limited-resource drug companies provide opportunities to enter
into collaborative ventures to identify and develop these types of compounds.
The Company is also active in providing product life cycle management for
major existing products. The Company brings together scientific, patent and
regulatory capabilities focused on enhancing existing products.
TECHNOLOGY DEVELOPMENT PROGRAM
As an adjunct to the internal development program, the Company has sought
to protect certain intellectual property it has developed relative to the drug
development process. The Company has established a patent committee that meets
regularly to review employee-generated submissions of possible patentable
subject matter. The patent committee reviews the novelty and usefulness of the
submission and, with input from the marketing department as to commercial
viability, determines to either pursue a patent application or designate the
submission as a trade secret.
The Company's internal development program has yielded multiple issued
patents and has several pending applications. For example, the Company's
patented Pro-Sorb(R) formulation technology has been shown to facilitate the
oral absorption of a number of non-steroidal anti-inflammatory drugs or NSAIDs,
such as diclofenac, to reduce gastric irritation and speed the onset of
therapeutic activity. In addition, the Company has patented a novel oral
delivery system for certain biotechnology compounds that may currently be
administered only by injection. The Company is seeking licensing partners for
its other recently developed technologies.
FEE-FOR-SERVICE BUSINESS
The Company also provides a broad array of drug development services,
including chemical analysis, synthesis and other laboratory services;
formulation development; bioanalytical services; clinical supply and niche
manufacturing; clinical trial services and monitoring; and regulatory and
compliance consulting. The Company assigns project management teams consisting
of customer service representatives and technical
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employees that meet with clients at frequent intervals to monitor and guide
projects through the development process. Continual client interaction allows
the Company to efficiently manage the drug development process. Historically,
the Company's laboratory services have accounted for approximately one half of
its fee-for-service revenue, although relative amounts vary from year to year.
Formulation development projects and clinical supply and niche manufacturing
generally have contributed the major portions of remaining annual
fee-for-service revenue.
LABORATORY SERVICES
In support of its own internal as well of its clients' drug development and
compliance programs, the Company offers laboratory services to characterize and
measure drug components and impurities. The Company has more than 19 years
experience in providing analytical testing services dedicated exclusively to the
drug industry and has developed the scientific expertise, state-of-the-art
equipment and broad range of scientific methods to accurately and quickly
analyze almost any compound or product. The Company's laboratory services
include method development and validation; stability studies; raw materials and
release testing; biotechnology, microbiology and bioanalytical testing; product
characterization and organic synthesis.
Method Development and Validation. The Company develops and validates
methods used in a broad range of laboratory testing necessary to determine
physical or chemical characteristics of compounds. Analytical methods are
developed to demonstrate potency, purity, stability or physical attributes.
These methods are validated to ensure the data generated by these methods are
accurate, precise, reproducible and reliable and are used throughout the drug
development process and in product support testing.
Stability Studies. The Company provides stability testing and secure
storage facilities necessary to establish and confirm product purity, potency
and other shelf-life characteristics. Stability testing is required at all
phases of product development, from dosage form development through commercial
production, to confirm shelf life of each manufactured batch. The Company
maintains state-of-the-art climate-controlled facilities in the United States
and Germany to determine the impact of a range of storage conditions on product
integrity. FDA regulations and the regulations of European regulatory
authorities require that samples of clinical and commercial products placed in
stability chambers be analyzed in a timely fashion after scheduled "pull points"
occur, based on the date of manufacture. The Company's proprietary Laboratory
Tracking System (LTS) tracks client products maintained at the Company's
stability storage facilities and automatically schedules required testing as
pull points occur.
Raw Materials and Product Release Testing. The Company offers testing
required by the FDA and other regulatory agencies to confirm that raw materials
used in production and resulting finished products are consistent with
established specifications. Due to the incorporation of "just in time" inventory
control systems in client production schedules, release testing for both raw
materials and the finished product often cannot be scheduled by clients in
advance, yet must be performed immediately. The Company believes that its
internal scheduling systems, analytical laboratory expertise and systems for
prompt testing provide it with a competitive advantage in providing both raw
material and batch release testing. The Company believes that this service
enhances its client's confidence in adopting cost-saving "just in time"
inventory control systems.
Biotechnology Analysis and Synthesis. Although the types of analytical
investigations of biotechnology products are similar to those required for more
traditional pharmaceutical products, the complex molecular structure of many
biotechnology products requires different technology and expertise. The Company
provides a broad array of biotechnology services, including both analytical and
biological testing and method development and validation. AAI's breadth of
services allows the Company to rapidly deduce and characterize the complex
structure of the biotechnology product and measure the molecule or its
metabolites in human blood plasma to support clinical trial evaluation. The
Company has expertise in a broad spectrum of biochemical and immunochemical
methods for characterization and analysis of biotechnology drugs. These methods
include amino acid sequencing, amino acid analysis, peptide mapping,
carbohydrate and lipid analysis and electrophoresis. The Company also has
expertise in developing chromatographic methods that precisely evaluate the
purity and stability of biotechnology products. This service breadth and
diversity of analytical skills and technologies enable the Company to assist its
clients from early product development
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through the investigational new drug application and product license application
stages and commercial production.
Microbiological Testing. Microbiological testing is an essential indicator
to ensure that a drug product, whether raw material or finished product, does
not contain harmful micro-organisms. The Company has significant experience
conducting various microbial tests to identify and quantify micro-organisms that
may be present, including limulus amebocyte lysate testing, which measures toxic
byproducts of micro-organisms, and particulate matter testing to determine the
presence of foreign matter in injectable drug products. The Company also
performs sterility testing to identify the genus and species of any
micro-organisms that are present. In addition, the Company performs tests to
determine the effectiveness of antibiotics against micro-organisms and the
minimum levels of preservatives necessary in product formulations. The Company
also assists clients with environmental monitoring, including water and air
systems testing, using an automated biochemical system to identify
micro-organisms present and determine whether such systems are within applicable
microbial limits. The Company assists clients in validating their environmental
control systems to ensure compliance with Good Manufacturing Practices (GMP)
regulations.
Bioanalytical Testing. The Company offers bioanalytical testing services
to support clinical trials for its and its clients' pharmaceutical product
development needs, analyzing plasma samples to characterize the metabolized
forms of the drug and determine the rate of absorption. Bioanalytical studies of
new drugs often present challenging and complex issues, with products being
metabolized into multiple active and inactive forms, each of which must be
measured. The Company works with its clients to develop and validate analytical
methods to permit detection and measurement of the various components to trace
levels. The acquisition of L.A.B. in 1996 and KCAS in 1998 significantly
enhanced the Company's bioanalytical capabilities.
Product Characterization. The Company has the expertise and instruments
required to identify and characterize a broad range of chemical entities.
Characterization analysis identifies the chemical composition, structure and
physical properties of a compound, and characterization data forms a significant
portion of a regulatory application. The Company uses numerous techniques to
characterize a compound, including spectroscopy, chromatographic analyses and
other physical chemistry techniques. Additionally, the Company uses such
information for control testing to be performed throughout development and
marketing to confirm consistent drug composition. Once appropriate test methods
are developed and validated, and appropriate reference standards are
characterized and certified, the Company can assist clients by routinely testing
compounds for clinical and commercial use.
Organic Synthesis. The Company develops synthesis methods for producing
experimental quantities of new compounds needed for analytical characterization,
toxicological studies, formulation development and clinical trials. Through
organic synthesis techniques, the Company can produce reference standards of the
active compound, specific impurities, degradation by-products, bioassay
reference standards or molecular analogs to permit sufficient quantities of such
compounds to be separately characterized and studied.
FORMULATION DEVELOPMENT SERVICES
The Company provides integrated formulation development services for its
own internally developed pharmaceutical products and for those of its clients,
enabling the Company to take a compound and develop a safe and stable product
with desired characteristics. The Company believes its formulation expertise and
extensive analytical capabilities enable it to provide an efficient, seamless
development program, with a dedicated project team tracking the product through
all stages of formulation development. The Company provides formulation
development services during each phase of the drug development process, from new
compounds and modifications of existing products to generic versions of branded
products. The Company's formulation development projects may support a small
segment of critical development activities or may last for several years going
from early formulation development to optimized and validated production-scale,
packaged product.
The Company's formulation development expertise spans a broad spectrum of
therapeutic areas. The Company works with clients and its own product
development personnel to develop products with desired
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characteristics, including dosage form, strength, release rate, absorption
properties, stability and appearance. The Company has developed significant
product and process capabilities that enable it to efficiently solve the complex
problems that arise in developing formulations with targeted characteristics and
has developed a range of proprietary product technologies that allow it to
efficiently achieve desired results in product design and development.
In providing formulation services, the Company works closely with clients
and its own product development personnel to design and conduct feasibility
studies to chart the potential of formulating a drug using a combination of
active drug ingredients and inert materials called excipients. Using
experimental designs, initial prototype formulations are prepared to identify
potential problems in stability, bioavailability and manufacturing. Generally,
formulation development is an iterative process, with numerous initial
formulations being modified as problems are encountered. The Company believes
its experience and expertise in formulation development, as well as certain
proprietary technologies, permit it to design efficient protocols for
identifying and optimizing prototypes with the greatest potential. Upon
selection of the final product prototypes, the Company develops protocols to
scale the product batch size from development stage (hundreds to thousands of
units) to clinical scale (thousands to millions of units). During the clinical
phase the Company refines the formulation in response to clinical, bioanalytical
and stability data. The manufacturing scale-up process involves identifying and
resolving manufacturing problems to facilitate an efficient transfer to the
full-scale production equipment of the Company's clients. Throughout the
development process, the Company develops and validates the analytical methods
necessary to test the product to establish and confirm product specifications.
In addition to new drug development, the Company offers product
modification and line extension services to clients, generally for marketed
products facing patent expiration. Modifications of existing products offer the
Company's clients an opportunity to improve product characteristics, increasing
product market viability. Improved product characteristics include enhancement
of stability, absorption profiles (e.g., quick or sustained release), taste and
appearance. Product line extensions may include new dosage forms such as solids,
liquids and chewables, as well as new dosage strengths. Product modifications
and line extensions offer clients the opportunity to target new patient
subpopulations and improve patient compliance. The Company also offers
formulation services and other pharmaceutical product development services to
clients seeking to develop generic products.
CLINICAL SUPPLY AND NICHE MANUFACTURING
The Company provides clinical trials materials for Phase I through IV
clinical trials. The Company has expertise in manufacturing tablets, capsules,
sachets, liquids and suspensions, creams, gels, lotions and ointments. The
Company believes that outsourcing of clinical supply manufacturing is
particularly attractive to pharmaceutical companies that maintain large,
commercial-quantity, batch facilities, where clinical supply manufacturing would
divert resources from revenue-producing manufacturing. Similarly, pharmaceutical
companies often seek to outsource commercial manufacturing of small quantity
products. The Company has a dedicated 20,000 square foot facility in Wilmington,
North Carolina and a similar facility in Paris, France to distribute and track
clinical trial materials used in clinical studies. In addition, the Company
provides its clients assistance in scaling up production of clinical supply
quantities to commercial quantity manufacturing, and manufactures inventory on
behalf of clients for commercial sale while client production facilities are
being built and validated.
The Company's manufacturing facilities and equipment are qualified and
validated to operate under GMP regulations.
REGULATORY SERVICES
The Company assists in the preparation of regulatory submissions, audits a
client's vendors and client operations, conducts seminars, provides training
courses, and advises clients on applicable regulatory requirements. The Company
also assists clients in designing development programs for new or existing drugs
intended to be marketed in the United States and Europe. At the client's
request, the Company will either
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review client prepared submissions or draft sections and assemble regulatory
packages and attend FDA meetings with clients. The Company assists clients in
preparation for FDA inspections and assists them in correcting any deficiencies
noted in FDA inspections. In preparation for an FDA inspection, the Company's
regulatory affairs specialists conduct mock inspections to anticipate FDA
observations and advise clients of appropriate remedial actions. The Company
also audits manufacturers of active and excipient ingredients used in the drug
product, as well as packaging components, on behalf of clients to ensure that
the manufacturers' facilities are in compliance with GMP regulations. Such
audits generally include review of the vendor's drug master files, analysis of
written standard operating procedures ("SOP"), review of production records, and
observation of operations to ensure that written SOP's are being followed. Audit
reports include recommendations to address any deficiencies. The Company also
advises clients on validation issues concerning their systems and processes and
audits client facilities to assist them in validating their processes, cleaning,
water and air handling systems. The Company leverages its in-house laboratory
training programs by providing training to clients' employees. In addition, the
Company organizes and conducts seminars worldwide on a number of topical
industry issues.
CLINICAL SERVICES
The Company has a 48-bed Phase I clinical trial facility located in the
same facility as one of the Company's analytical laboratories in Research
Triangle Park, North Carolina. With the acquisitions of L.A.B. and MTRA, the
Company expanded its Phase I clinical trial capabilities and added the ability
to conduct and monitor Phase II-IV studies and multi-center trials focused in
niche therapeutic areas, including hepatic disease, chemotherapeutics and
hormone replacement therapy. The Company's Neu-Ulm, Germany operations include a
57-bed facility for conducting certain Phase I and II clinical trial studies, as
well as bioequivalency studies.
MTRA provides a full range of Phase II-IV clinical services to customers in
the pharmaceutical, biotechnology and medical device industries for assistance
in the drug development and regulatory approval process in North America as well
as to the Company's internal product development activities. The clinical
services include clinical trial management and monitoring, data management and
statistics. With the addition of MTRA in 1999, the Company anticipates that
clinical services will contribute more significantly to total revenues as
clinical services will be offered on a global scale and have a significant
customer base in the United States.
INFORMATION TECHNOLOGY
The Company has made significant investments in information technology. The
Company's proprietary LTS system tracks laboratory workflow and enables the
Company to monitor and plan work through the Company's laboratories. The LTS
system monitors the progress of a client's project, records time expended by
laboratory personnel, tracks sample locations and controls document revisions.
The Company's customized data management system connects analytical instruments
with multiple software architectures permitting automated data capture. The
Company believes that information technology will enable it to expedite the
development process by designing innovative services for individual client
needs, providing project execution, monitoring and control capabilities that
exceed a client's internal capabilities, streamlining and enhancing data
presentation to the FDA and enhancing its own internal operational productivity
while maintaining its quality.
In 1999, the Company continued its implementation of an enterprise wide
financial and operational integrated management information system including
significant systems licensed from SAP. Certain financial components became
operational at year end 1998, other operational management systems followed
later in 1999. The new system will eventually be implemented in all subsidiaries
and allows for expansion in a consistent and controlled manner.
Disclosure regarding the impact of year 2000 is included in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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CLIENTS
The Company has provided services to most of the major pharmaceutical
companies in the world. The Company believes that concentration of business
among certain large clients is not uncommon in its industry. The Company has
experienced such concentration in the past and may experience such concentration
in the future. Although AAI strives to reduce its reliance on a limited number
of major clients, there can be no assurance that the Company's business will not
be dependent upon certain major clients, the loss of which could have a material
adverse effect on the Company. In addition, due to the project nature of the
Company's business, there can be no assurance that significant clients in any
one period will continue to be significant clients in other periods.
MARKETING AND BUSINESS DEVELOPMENT
Since its inception, the Company has taken a customer-focused approach in
marketing its services, often placing the Company's technical personnel with its
clients' development teams to participate in planning meetings for the
development of a product. The Company assigns sales and technical personnel as
contacts for its larger clients, understanding that technical personnel may be
better able to identify the full scope of the client's needs and suggest
innovative approaches before the client formally develops the parameters of an
anticipated project. Generally, the Company also hosts more than ten technical
seminars per year for the pharmaceutical and biotechnology industries addressing
a variety of formulation development issues, stability testing and other topics.
CONTRACTUAL ARRANGEMENTS
The Company's product development contracts typically provide for upfront
fees, milestone payments and royalties. The commercialization of the product is
the responsibility of the marketing partner. The Company's fee-for-service
contracts are typically evidenced by signed service estimates establishing an
estimated fee for identified services. During the Company's performance of a
project, clients often adjust the scope of services to be provided by the
Company in light of interim project results, at which time the amount of fees is
adjusted accordingly. Generally, the Company's fee-for-service contracts are
terminable by the client upon notice of 30 days or less, although certain major
formulation development and manufacturing agreements are not unilaterally
terminable by the client. Although the contracts typically permit payment of
certain fees for winding down a project, the loss of a large contract or the
loss of multiple contracts could adversely affect the Company's future revenue
and profitability. Contracts may be terminated for a variety of reasons,
including the client's decision to forego a particular study, the failure of
product prototypes to satisfy safety requirements and unexpected or undesired
results of product testing.
BACKLOG
Backlog consists of anticipated net sales from signed service estimates and
other fee-for-service contracts that have not been completed and provide for a
readily ascertainable price. Once contracted work begins, net sales are
recognized as the service is performed. In certain cases, the Company begins
work for a client before a contract is signed. Accordingly, backlog does not
include anticipated net sales for which the Company has begun work but for which
the Company does not have a signed service estimate, or for any variable-priced
contracts. In addition, during the course of a project the client may
substantially adjust the requested scope of services and corresponding
adjustments are made to the price of services under the contract.
The Company believes that its backlog as of any date is not a meaningful
predictor of future results because the backlog can be affected by a number of
factors, including variable size and duration of contracts and adjustments in
the scope of a contracted project as interim results become available.
Additionally, contracts generally are subject to termination by clients upon 30
days notice or less. Moreover, the scope of a contract can change over the
course of a project. At December 31, 1999 and 1998 backlog was approximately
$75.2 and $45.0 million, respectively. Of the 1999 amount, approximately $36.9
million is not expected to be filled within year 2000.
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COMPETITION
The Company competes primarily with in-house research, development, quality
control and other support service departments of pharmaceutical and
biotechnology companies, as well as university research laboratories. In
addition, the Company believes that although there are numerous competitors in
its industry, there are few competitors that offer the depth and breadth of
scientific capabilities that it provides. Certain of the Company's competitors
may have significantly greater resources than the Company. Competitive
conditions for service areas vary.
Competitive factors include reliability, turn-around time, reputation for
innovative and quality science, capacity to perform numerous required services,
financial viability and price. The Company believes that it competes favorably
in these areas.
GOVERNMENT REGULATION
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the Federal Food, Drug, and Cosmetic Act and
associated GMP regulations which are administered by the United States Food and
Drug Administration (FDA) in accordance with current industry standards.
Services being performed outside the United States or for products intended to
be substituted to non-U.S. jurisdictions may be subject to additional regulatory
requirements and government agencies applicable to that jurisdiction. U.S.
regulations apply to all phases of drug manufacture, testing and record keeping,
including personnel, facilities, equipment, control of materials, processes and
laboratories, packaging, labeling and distribution. Noncompliance with such
regulations by the Company in a project could result in disqualification of data
collected by the Company for such project. Material violation of regulatory
requirements could result in additional regulatory sanctions. In severe cases
violations could result in a mandated closing of the Company's facilities which
would materially and adversely affect the Company's business.
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other regulatory compliance parameters. In addition, FDA regulations and
guidelines, as well as applicable international standards, serve as a basis for
the Company's standard operating procedures. Certain of the Company's
development and testing 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.
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 and is insured against losses arising out of the
normal course of business operations. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result which could materially and adversely affect the
financial condition of the Company.
EMPLOYEES
At December 31, 1999, the Company had approximately 1,100 full-time
equivalent employees, of which 73 hold Ph.D. or M.D. degrees, or the foreign
equivalent. The Company believes that its relations with its employees are good.
None of the Company's employees in the U.S. are represented by a union. German
and French law provide certain representative rights to employees.
The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. The
9
<PAGE> 11
Company believes that its employee benefit plans enhance employee morale,
professional commitment and work productivity and provide an incentive for
employees to remain with the Company. While the Company has not experienced any
significant problems in attracting or retaining qualified staff, there can be no
assurance that the Company will be able to avoid these problems in the future.
All employees enter into confidentiality agreements protecting the
Company's proprietary information, as well as client-confidential material. New
U.S.-based employees are generally required to sign non-competition agreements,
prohibiting the employee from engaging in activities in competition with the
Company for a period of one year after termination of employment.
SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name, age, principal occupation and
business experience for the executive officers of the Company.
Frederick D. Sancilio, Ph.D., 50, Chairman of the Board, President, Chief
Executive Officer and Director. Dr. Sancilio has served in his current capacity
for more than five years. Before founding the Company in 1979, Dr. Sancilio's
experience in the pharmaceutical industry included various positions with
Burroughs-Wellcome Co., Schering-Plough Corporation, and Hoffmann-LaRoche, Inc.
He has published more than 30 scientific articles discussing various aspects of
pharmaceutical chemistry and regularly makes scientific presentations at
pharmaceutical seminars and meetings worldwide.
Gregory S. Bentley, 50, Executive Vice President, General Counsel and
Secretary. Mr. Bentley has served as Executive Vice President, Secretary and
General Counsel of the Company since June 1999. Prior to joining the Company,
Mr. Bentley served from 1994 to 1999 as Vice President, Regulatory and Quality
for Siemens Medical Systems, Inc., a leading medical device company and a
subsidiary of Siemens Corporation, and as Associate General Counsel of Siemens
Corporation. Prior to joining Siemens Corporation in 1986, Mr. Bentley practiced
law with Shearman & Sterling in New York.
William J. Blank, 49, Executive Vice President, Marketing and Sales. Mr.
Blank has served as Executive Vice President, Marketing and Sales since January
1999. Prior to joining the Company, he served as Vice President of Client
Relations at Parexel International Corp. from 1997 to 1998, and as Vice
President of Marketing for NMC Homecare, a division of National Medical Care,
from 1992-1996.
William L. Ginna, Jr. 47, Vice President and Chief Financial Officer. Prior
to joining the Company in February 2000, he served as Vice President and Chief
Financial Officer for London International Group, a medical and consumer
products distributor. Mr. Ginna, a Certified Public Accountant, also spent ten
years with Athlone Industries, Inc., a New York Stock Exchange manufacturer of
specialty steels and consumer products, where he most recently was Vice
President and Controller.
Eugene T. Haley, 50, International Managing Director and Treasurer. Prior
to his appointment to International Managing Director in February 2000, Mr.
Haley served as Executive Vice President and Chief Financial Officer since
joining the Company in February 1998. Prior to joining the Company he served as
the Chief Financial Officer of Kodak Worldwide Consumer Imaging Services during
1997 and as Senior Vice President of Qualex, Inc. (an Eastman-Kodak subsidiary)
from 1993 to 1997.
David Johnston, Ph.D., 49, Executive Vice President, Non-clinical
Operations. Prior to joining the Company in January 2000 as Executive Vice
President, Non-clinical Operations, Dr. Johnston served as President of Oread
Laboratories and Executive Vice President of Drug Development of Oread, Inc. a
contract research organization located in Lawrence, Kansas. Prior to joining
Oread, Dr. Johnston served as Vice President of Pharmaceutical Product
Development of Sanofi, a pharmaceutical company, directing more than 50
scientists in the area of drug development.
Richard J. Parker, 62, President Clinical Trials Division. Prior to the
Company's merger with MTRA, Mr. Parker served as Chief Executive Officer and
President of MTRA since founding MTRA in 1970.
Joachim Rexhaus, 46, Executive Vice President, European Operations. Mr.
Rexhaus was elected an Executive Vice President in 1998 and has served the
Company since August 1997 in a number of financial and
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<PAGE> 12
administrative management positions in Europe. Prior to joining the Company, Mr.
Rexhaus held a number of financial and administrative management positions, most
recently at Hoechst AG, Syntex and IBM.
William H. Underwood, 52, Executive Vice President and Director. Mr.
Underwood has served in his current position since 1992 and has been a Director
since 1996. He also served as Chief Operating Officer from 1995 to May 1997. He
has held various positions in the pharmaceutical and cosmetic industries, prior
to joining the Company in 1986, with Mary Kay Cosmetics, Inc. and
Burroughs-Wellcome Co.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Wilmington, North
Carolina, in a 74,000-square foot leased facility. The Company's primary U.S.
facilities are located in Wilmington, North Carolina; Research Triangle Park,
North Carolina; North Brunswick, New Jersey; Natick, Massachusetts; and Shawnee,
Kansas constituting approximately 278,000 square feet of total operational and
administrative space. The Company's primary European facilities are located in
Neu-Ulm, Germany and include approximately 120,000 square feet of operational
and administrative space. This facility is leased under renewable leases
expiring in 2008. The Company maintains other operating units at leased
facilities in San Bruno, California; Toronto, Canada; Munich, Germany; Paris,
France; and Arnhem, Netherlands. The Company maintains sales offices in Chicago,
Illinois; Boston, Massachusetts; San Diego and San Francisco, California;
Copenhagen, Denmark; London, England; Rome, Italy and Tokyo, Japan. The Company
also has joint operations with Shanghai Second Medical University located in
Shanghai, China and Tonji University in Wuhan, China. The Company believes that
its facilities are adequate for the Company's operations and that suitable
additional space will be available when needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company may be party to lawsuits and administrative proceedings
incidental to the normal course of its business which are not considered
material. Management does not believe that any liabilities related to such
lawsuits or proceedings will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
On July 28, 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. On December 29, 1999, the former client filed suit in North
Carolina State Court contesting the arbitration and seeking several million
dollars in alleged damages. The Company countersued 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 that all claims under the manufacturing agreement are to be decided
under 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 claims made by this former customer 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter ended December 31, 1999.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The price range of the Company's common stock, which is traded on the
NASDAQ market under the symbol "AAII," is listed below by quarter for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999
High........................................................ $26 4/7 $14 2/3 $12 $13 1/8
Low......................................................... $11 $10 7/8 $ 4 7/8 $ 7 3/8
1998
High........................................................ $19 1/8 $16 1/8 $14 5/8 $18 3/4
Low......................................................... $13 1/4 $ 9 $ 9 5/8 $10
</TABLE>
The company estimates there were approximately 1,700 holders of record for
its common stock as of February 29, 2000. No cash dividends were declared during
1999 or 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company has been restated
to reflect a transaction accounted for as a pooling of interests and should be
read in conjunction with the Company's audited consolidated financial statements
and notes in Item 8 "Financial Statements and Supplementary Data" and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
<PAGE> 14
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................................ $102,175 $ 98,243 $ 80,105 $ 53,728 $ 45,118
Direct costs................................ 56,906 50,833 42,667 24,975 21,037
Selling..................................... 12,160 9,953 9,539 8,282 6,669
General and administrative.................. 25,186 21,724 18,643 10,833 9,927
Research and development.................... 10,305 6,130 7,791 4,216 3,329
Unusual item(1)(2).......................... 6,400 -- -- 6,600 --
Other income (expense), net................. (1,409) 502 1,375 2,013 (4,567)
-------- -------- -------- -------- --------
Income (loss) before income taxes........... (10,191) 10,105 2,840 835 (411)
Provision for income taxes.................. (2,278) 3,567 342 1,773 113
Equity income............................... -- -- -- -- 444
-------- -------- -------- -------- --------
Net income (loss)........................... $ (7,913) $ 6,538 $ 2,498 $ (938) $ (80)
======== ======== ======== ======== ========
Basic earnings (loss) per share............. $ (0.46) $ 0.38 $ 0.15 $ (0.07) $ (0.01)
Weighted average shares outstanding......... 17,204 17,124 17,092 12,840 11,468
Diluted earnings (loss) per share........... $ (0.46) $ 0.37 $ 0.14 $ (0.07) $ (0.01)
Weighted average shares outstanding......... 17,204 17,722 17,772 12,840 11,468
PRO FORMA DATA (UNAUDITED)(3):
Net income, as reported..................... $ (80)
Pro forma income taxes...................... 1,203
========
Pro forma net income........................ (1,283)
========
Pro forma earnings per shar................. $ (0.11)
========
Weighted average shares outstanding......... 11,468
========
BALANCE SHEET DATA, AT PERIOD END:
Working capital............................. $ 6,507 $ 26,160 $ 32,523 $ 34,286 $ 6,490
Property and equipment, net................. 45,026 38,802 26,559 20,793 12,371
Total assets................................ 123,486 121,252 108,768 115,959 47,267
Long-term debt.............................. 962 7,749 8,545 8,892 3,379
Total stockholders' equity(4)............... 66,558 75,122 67,403 64,079 19,863
</TABLE>
- ---------------
The accompanying notes are an integral part of these financial statements.
(1) In connection with the merger with Medical & Technical Research Associates,
Inc., the Company recorded a $6.4 million unusual item in the first quarter
of 1999 (see Note 2 to the Consolidated Financial Statements).
(2) In connection with the acquisition of a German company, the Company
recognized an unusual item representing the write-off of certain in-process
research and development costs with an appraised value of approximately $6.6
million as of December 31, 1996.
(3) Pro forma information is presented prior to 1996 to reflect pro forma
provisions for income taxes for the periods prior to November 17, 1995, when
the Company was treated as an S Corporation for income tax purposes.
(4) The Company completed an initial public offering of its common stock in
September 1996.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is engaged in the business of performing product development
and support services on a contract basis for large and small pharmaceutical
companies around the world as well as the development of select generic drugs
and improved formulations of marketed drugs. In implementing this strategy, the
Company earns revenue through fee-for-service contracts with customers and by
licensing and selling internally developed technologies and products.
The product development business utilizes the resources and operating
capacity of the nonclinical and clinical groups to study and develop new and
improved drugs and drug technologies that improve existing drugs. The Company
licenses the developed technologies and products to customers usually before the
development is complete. In general, the Company is partially paid for its
efforts and innovations at predefined events, known as milestones, which are
intended to help cover the costs of development. The milestone payments are not
refundable. In most cases, the Company also receives royalties on the eventual
sales of the approved product. The Company bears the risk that some of the
development projects may not be approved or that the eventual sales of the
product may not meet expectations. These development projects generally last
several years.
The fee-for service business consists of two main groups, a nonclinical and
a clinical group. The nonclinical group performs laboratory analysis of various
chemical compounds and small scale manufacturing of chemical compounds used for
further testing, or in some cases, for sale to the public. The services
performed by the nonclinical group include chemical analysis, chemical
synthesis, drug formulation, clinical supply and niche manufacturing,
bio-analytical studies, and regulatory and compliance consulting. All of these
services involve either laboratory work or consulting services. The clinical
group performs testing of new drugs for customers and the Company's own
pharmaceutical development program under controlled conditions as part of the
customers' process in gaining approval for the drug. All of the clinical
services involve contact with patients and monitoring clinical studies performed
in hospitals and clinics.
Both the nonclinical and clinical groups receive requests for services from
a customer, often on a competitive basis. An estimate of costs to perform the
service is delivered to the customer based on the expected resources and
materials required to complete the project. The projects vary in length, some
lasting less than one month and others lasting several years, however, most
projects may be cancelled by the customer with 30 days notice.
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements involve risks and
uncertainties that may cause actual results to differ materially, including,
without limitation, the ability to successfully complete scheduled product
development projects, continue historic success in entering into beneficial
royalty agreements with pharmaceutical companies, obtain timely regulatory
approvals of the Company's internally developed products, dependence on third
party marketing and distribution of internally developed products, the ability
of acquired businesses to be integrated with AAI's operations, actual
operational performance, the ability to hire and retain qualified employees,
other regulatory approvals and industry outsourcing trends.
RESULTS OF OPERATIONS
On March 16, 1999, the Company merged with Medical & Technical Research
Associates, Inc., (MTRA) a clinical research organization located near Boston,
Massachusetts. MTRA offers clinical phase II -- IV studies predominately in the
US market to large and small pharmaceutical companies. The addition of MTRA adds
clinical phase II -- IV capabilities in the United States and will significantly
increase AAI's ability to provide clinical testing to U.S. customers and enable
the Company to compete for global clinical trial engagements.
The MTRA merger was accounted for as a pooling-of-interests, and
accordingly, all prior period consolidated financial statements have been
restated to include the results of operations, financial position, and
14
<PAGE> 16
cash flows of MTRA as though MTRA had always been a part of AAI. Results for the
years ended December 31, 1999, 1998 and 1997 represent the combined results of
AAI and MTRA.
1999 Compared to 1998
Net revenues increased by 4% in 1999 compared to 1998. Increases were
achieved in both segments, with fee-for-service revenues up by 1% and product
development revenues higher by 39%. The fee-for service increase was due to the
inclusion of KCAS for an entire year, as opposed to a partial one for 1998.
Excluding KCAS, fee-for-service revenues were down 3%, reflecting capacity
underutilization in the second and third quarters as a result of industry-wide
volume decreases. The significant increase in product development revenues
represents the early benefits of the Company's substantial research and
development spending in 1999 and prior years.
Overall, gross margins as a percentage of revenues decreased by 4% to 44%.
Fee-for-service margins decreased by 6%, again due to capacity underutilization
in the second and third quarters. This impact has been somewhat offset at the
gross margin level due to the higher mix of product development revenues, with
related expenses recorded as research and development.
Selling expenses increased by 22% over last year. In addition, selling
expenses increased as a percentage of revenues from 10% to 12%. These increases
reflect the expansion of the Company's sales and marketing infrastructure.
General and administrative expenses increased by 16% in 1999, due primarily to a
special charge taken in the fourth quarter of $2.2 million for reserves on
certain customer balances, as well as the addition of several senior personnel
to the Company's management team. Management believes that while dollar levels
of selling and administrative spending will increase, the level of spending as a
percentage of revenues will decline in future years.
Research and development expenses increased by 68% and as a percentage of
revenues, from 6% to 10%. The substantial R&D spend is consistent with the
Company's strategy of long-term 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 2 in Item 8 "Financial Statements
and Supplementary Data" for more information.
Income from operations decreased from income of $9.6 million in 1998 to a
loss of $8.8 million in 1999. The first factor in this change was a decrease in
the fee-for-service margins by 6%, resulting from capacity underutilization in
the second and third quarters. Second was the significant increase in 1999
research and development spending of $4.2 million higher then 1998, supporting
the Company's strategy of long-term product development. A third factor was the
$2.2 million special charge for reserves on certain customer balances, causing a
considerable increase in general and administrative expenses. A last factor was
the $6.4 million nonrecurring charge for restructuring costs in connection with
the MTRA merger.
The swing from interest income in 1998 to interest expense in 1999 is
explained below in "Liquidity and Capital Resources". Generally, the Company
moved from a cash investor to a borrower in 1999 as a result of restructuring
cost payments and purchases of property and equipment.
The Company's benefit for income taxes was $2.3 million in 1999 as compared
to a provision of $3.6 million in 1998 in accordance with the pretax loss or
income. The effective tax benefit rate in 1999 was 22.3% compared to an
effective tax rate of 35.2% in 1998. This decrease in the effective rate is
primarily the result of a $1.3 million increase in net permanent differences in
1999.
The 1999 income tax benefit reflects the Company's utilization of
accumulated U.S. net operating losses as a carryback credit against income taxes
previously paid in 1998 and 1997. To date, the Company has not recognized an
income tax benefit related to net operating loss carryforwards because the
Company incurred operating losses in 1999 and the realization of future tax
benefits is uncertain. However, as the Company generates additional taxable
income to the extent of the cumulative losses, a tax benefit for losses incurred
will be recognized by utilizing net operating loss carryforwards.
15
<PAGE> 17
1998 Compared to 1997
Net revenues increased by 23% in 1998 compared to 1997. The increase was
due in part to the acquisition of KCAS, without which the revenue increase would
have been 20%. Fee-for-service revenues increased 22% while product development
revenues increased 26% in 1998 over 1997.
Gross margins in the fee-for-service business increased to 44% from 43%,
with no change in the percentage after excluding KCAS.
Selling expenses increased by 4% but decreased as a percentage of sales
from 12% to 10% in 1998 from 1997 levels. General and administrative expenses
increased by 17% in 1998, but decreased as a percentage of fee for service
revenues to 24% in 1998 from 25% in 1997. The increase was due mainly to
increases in staff costs which supported the higher volumes and revenues. Both
selling and general and administrative expenses decreased as a percentage of
fee-for-service revenues in 1998 from 1997 levels.
Research and development expenses decreased by 21% in 1998 from 1997
levels. Overall research spending as a percent of net revenues also decreased
from 10% in 1997 to 6% in 1998. The decrease was due partially to the stage of
development of the internal products. In addition, this decrease was partially
due to the Company internally performing various research activities which had
previously been sent to outside parties. The Company was able to perform these
research activities internally as a result of its acquisitions of L.A.B., KCAS
and through internal expansion.
The Company terminated certain business combination discussions during the
third quarter of 1997. In relation to these discussions, the Company recognized
a net credit of $400,000 in other income, representing a $1 million payment made
to its German subsidiary and approximately $600,000 of expenses incurred by AAI.
Income from operations had a significant increase of $8.1 million in 1998
over 1997. The major portion of this increase came from the fee-for-service
segment of the business, which increased revenues by $16.1 million, or 22%. The
product development segment of the business also contributed to the increase,
with $1.5 million of higher revenues coupled with lower research and development
spending of $1.7 million. These increases were somewhat offset by higher
selling, general and administrative expenses as discussed above.
The Company's provision for income taxes was $3.6 million in 1998 compared
to $342,000 in 1997. The increase in the Company's tax provision from 1997 to
1998 resulted mainly from applying the federal statutory rates to the $7.2
million increase in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its business primarily through cash flows from
operations and borrowings. In 1999, $12.7 million of cash was used in
operations, $5.7 million of which were restructuring payments. In addition,
purchases of property and equipment amounted to $13.5 million. Major capital
assets purchased during 1999 included the establishment of a new corporate
facility in Wilmington, North Carolina and continued implementation of an
enterprise wide financial and operational integrated management information
system. These uses of cash were funded through net financing activities of about
$16.2 million.
In 1998, $2.7 million of cash was generated from operations. Cash was used
in 1998 as follows: $4.0 million to acquire KCAS; $14.6 million to purchase
capital assets; and a $8.8 million increase in noncash working capital. The
major capital assets purchased in 1998 include a clinical supply manufacturing
and distribution facility in Wilmington, North Carolina, and the opening of an
analytical facility in North Brunswick, New Jersey.
In 1997, $13.4 million of cash was used by operations predominately to
increase noncash working capital and $4.4 million was received through
additional borrowings. Cash was used to purchase capital assets in the amount of
$11.4 million.
Capital assets purchased were for new equipment and facility improvements
to increase capacity and productivity. The Company anticipates capital
expenditures in 2000 to be significantly below the 1999 level.
16
<PAGE> 18
Working capital was $6.5 million at December 31, 1999 and $26.2 million at
December 31, 1998. The Company has a $25 million credit facility available to
supplement its liquidity needs. Since this credit facility expires in May 2000,
the outstanding balance of $18.2 million at December 31, 1999 was classified as
current debt, thus reducing working capital. At the present time, the Company is
renegotiating its credit facility and expects either an extension or new
facility to be in place before the current facility expires.
The Company expects to continue expanding its operations through internal
growth and strategic acquisitions. The Company expects such activities will be
funded from existing cash and cash equivalents, cash flow from operations and
borrowings under its credit facility. The Company believes that such sources of
cash will be sufficient to fund operations for the current and foreseeable
future and to pay existing debt as it becomes due and other capital obligations.
The Company is constantly evaluating acquisition or other growth opportunities.
At some point in the future there may be opportunities that require additional
external financing, and the Company may from time to time seek to obtain funds
from the public or private issuance of equity or debt securities. There can be
no assurances that such financing will be available on terms acceptable to the
Company.
YEAR 2000 DISCLOSURE
The Company has assessed its computer systems for year 2000 readiness and
replaced all systems and software it found to be noncompliant. 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.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse effect on its results of operations or financial condition.
EURO CONVERSION
On January 1, 1999, the European Community began denominating significant
financial transactions in a new monetary unit, the Euro. The Euro is intended to
replace the traditional currencies of the individual EU member countries. The
Company's operations in Europe are continuing to operate in the traditional
currencies and are not converting internal financial systems to the Euro as a
functional currency. The Company's significant operations all have
multi-currency capable systems and will account for Euro denominated
transactions without additional modification or difficulty. The Company is
evaluating when to convert its local currency in Europe to the Euro with as
little disruption to customer and vendors as possible. The Company does not
intend to make such a conversion in 2000.
ITEM 7A. 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 expensed 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%, operating results would have changed by $77,000 in
1999.
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<PAGE> 19
The Company is also exposed to changes in interest rates on its variable
rate debt instruments. If interest rates were to change 1%, based on year end
debt amounts subject to variable interest rates, annual interest expense on
variable rate debt would change by $212,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
APPLIED ANALYTICAL INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 19
Consolidated Statements of Operations -- Years ended
December 31, 1999, 1998 and 1997.......................... 20
Consolidated Balance Sheets December 31, 1999 and 1998...... 21
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997.......................... 22
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1999, 1998
and 1997.................................................. 23
Notes to Consolidated Financial Statements.................. 24
Quarterly Financial Information (Unaudited)................. 37
Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts........ 38
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Applied Analytical Industries, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Analytical Industries, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of Medical & Technical Research Associates, Inc., a
wholly-owned subsidiary, for the year ended December 31, 1997 which statements
reflect total net revenues constituting 18 percent of the related consolidated
total. Those financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Medical & Technical Research Associates, Inc. for 1997, is based
solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1997, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Analytical Industries, Inc., and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 17, 2000
19
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Net revenues (includes related party net revenues of $2,900,
$1,807, and $5,170)....................................... $102,175 $98,243 $80,105
Operating costs and expenses:
Direct costs.............................................. 56,906 50,833 42,667
Selling................................................... 12,160 9,953 9,539
General and administrative................................ 25,186 21,724 18,643
Research and development.................................. 10,305 6,130 7,791
Transaction, integration and restructuring costs (Note
2)..................................................... 6,400 -- --
-------- ------- -------
110,957 88,640 78,640
-------- ------- -------
Income (loss) from operations............................... (8,782) 9,603 1,465
Other income (expense):
Interest, net............................................. (1,256) 270 690
Other..................................................... (153) 232 685
-------- ------- -------
(1,409) 502 1,375
======== ======= =======
Income (loss) before income taxes........................... (10,191) 10,105 2,840
Provision (benefit) for income taxes........................ (2,278) 3,567 342
-------- ------- -------
Net income (loss)........................................... $ (7,913) $ 6,538 $ 2,498
======== ======= =======
Basic earnings (loss) per share............................. $ (0.46) $ 0.38 $ 0.15
======== ======= =======
Weighted average shares outstanding......................... 17,204 17,124 17,092
======== ======= =======
Diluted earnings (loss) per share........................... $ (0.46) $ 0.37 $ 0.14
======== ======= =======
Weighted average shares outstanding......................... 17,204 17,722 17,772
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,013 $ 12,299
Accounts receivable, net (Note 3)......................... 33,564 27,882
Work-in-progress.......................................... 14,189 15,570
Prepaid and other current assets.......................... 11,426 7,902
-------- --------
Total current assets.............................. 61,192 63,653
-------- --------
Property and equipment, net................................. 45,026 38,802
Goodwill and other intangibles, net......................... 13,040 15,509
Other assets................................................ 4,228 3,288
-------- --------
Total assets...................................... $123,486 $121,252
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and short-term
debt................................................... $ 28,387 $ 7,039
Accounts payable.......................................... 6,969 7,169
Customer advances......................................... 9,146 10,927
Accrued wages and benefits................................ 4,081 4,522
Other accrued liabilities................................. 6,102 7,836
-------- --------
Total current liabilities......................... 54,685 37,493
-------- --------
Long-term debt.............................................. 962 7,749
Other liabilities........................................... 1,281 888
Stockholders' equity:
Preferred stock, $ .001 par value, 5 million shares
authorized, non outstanding in 1999 or 1998............ -- --
Common stock, $.001 par value; 100 million shares
authorized, 17,205,390 outstanding -- 1999; 17,192,202
outstanding -- 1998;................................... 17 17
Paid-in capital............................................. 69,732 69,570
Retained earnings (deficit)................................. (2,260) 5,653
Accumulated other comprehensive income (losses)............. (906) (53)
Stock subscriptions receivable.............................. (25) (65)
-------- --------
Total stockholders' equity........................ 66,558 75,122
-------- --------
Total liabilities and stockholders' equity........ $123,486 $121,252
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7,913) $ 6,538 $ 2,498
Adjustments to reconcile to net cash (used) provided by
operating activities:
Depreciation and amortization.......................... 7,248 5,394 5,790
Deferred income taxes.................................. 653 1,440 (986)
Restructuring costs (note 2)........................... 700 -- --
Other.................................................. 53 (383) 203
Changes in assets and liabilities:
Trade and other receivables.......................... (6,210) (3,710) (9,302)
Work-in-progress..................................... 913 (5,838) 200
Prepaid and other assets, net........................ (5,298) (1,003) (2,001)
Accounts payable..................................... 67 1,666 (4,833)
Customer advances.................................... (1,473) (428) (1,144)
Other accrued liabilities............................ (1,484) (1,010) (3,811)
-------- -------- --------
Net cash (used) provided by operating
activities...................................... (12,744) 2,666 (13,386)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (13,487) (14,636) (11,399)
Proceeds from sales of assets............................. -- -- 2,017
Acquisition of KCAS, net of cash acquired................. -- (4,008) --
Short-term investment..................................... -- -- 3,961
Other..................................................... (153) (1) (503)
-------- -------- --------
Net cash used by investing activities............. (13,640) (18,645) (5,924)
-------- -------- --------
Cash flows from financing activities:
Net proceeds (payments) short-term debt................... 18,229 699 3,304
Proceeds from long-term borrowings........................ -- 1,763 1,128
Payments on long-term borrowings.......................... (2,279) (2,814) (2,739)
Issuance of common stock.................................. -- 1,091 600
Other..................................................... 275 -- --
-------- -------- --------
Net cash provided by financing activities......... 16,225 739 2,293
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (10,159) (15,240) (17,017)
Effect of exchange rate changes on cash..................... (127) 103 (32)
Cash and cash equivalents, beginning of period.............. 12,299 27,436 44,485
-------- -------- --------
Cash and cash equivalents, end of period.......... $ 2,013 $ 12,299 $ 27,436
======== ======== ========
Supplemental information, cash paid for:
Interest.................................................. $ 1,264 $ 1,090 $ 1,225
Income taxes.............................................. 124 1,984 1,414
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
COMMON STOCK OTHER EARNINGS STOCK
--------------- PAID-IN COMPREHENSIVE (ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT) RECEIVABLE TOTAL
------ ------ ------- ------------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................. 17,087 $17 $67,605 $ -- $(3,383) $(149) $64,090
------ --- ------- ----- ------- ----- -------
Stock options exercised..................... 10 -- 75 -- -- -- 75
Stock option tax benefits................... -- -- 525 -- -- -- 525
Stock award forfeitures..................... (1) -- -- -- -- -- --
Deferred compensation earned................ -- -- 228 -- -- -- 228
Currency translation adjustment............. -- -- -- (5) -- -- (5)
Net income.................................. -- -- -- -- 2,498 -- 2,498
------ --- ------- ----- ------- ----- -------
Balance, December 31, 1997.................. 17,096 17 68,433 (5) (885) (149) 67,411
------ --- ------- ----- ------- ----- -------
Stock issued in acquisition of KCAS......... 27 -- 291 -- -- -- 291
Stock options exercised..................... 69 -- 602 -- -- -- 602
Stock option tax benefits................... -- -- 99 -- -- -- 99
Stock award forfeitures..................... -- -- (6) -- -- -- (6)
Deferred compensation earned................ -- -- 151 -- -- -- 151
Currency translation adjustment............. -- -- -- (48) -- -- (48)
Payments on stock subscriptions............. -- -- -- -- -- 84 84
Net income.................................. -- -- -- -- 6,538 -- 6,538
------ --- ------- ----- ------- ----- -------
Balance, December 31, 1998.................. 17,192 17 69,570 (53) 5,653 (65) 75,122
------ --- ------- ----- ------- ----- -------
Stock options exercised..................... 13 -- 162 -- -- -- 162
Currency translation adjustment............. -- -- -- (853) -- -- (853)
Payments on stock subscriptions............. -- -- -- -- -- 40 40
Net loss.................................... -- -- -- -- (7,913) -- (7,913)
------ --- ------- ----- ------- ----- -------
Balance, December 31, 1999.................. 17,205 $17 $69,732 $(906) $(2,260) $ (25) $66,558
====== === ======= ===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
ORGANIZATION
Applied Analytical Industries, Inc. ("AAI") is a multinational specialty
pharmaceutical company conducting its own internal product development and
providing pharmaceutical product development for large and small pharmaceutical
companies with its principal offices in the United States and Germany. The
majority of revenues are earned in the fee-for-service business as explained in
Note 10 and a portion of the Company's resources are devoted to research and
development of new products. Major customers are large and small pharmaceutical
and biotechnology companies.
BUSINESS COMBINATIONS
Medical & Technical Research Associates, Inc.
On March 16, 1999, the Company merged with Medical & Technical Research
Associates, Inc., (MTRA) a clinical research organization located near Boston,
Massachusetts, in exchange for approximately 1.3 million shares of AAI stock,
including conversion of MTRA stock options. The MTRA merger was accounted for as
a pooling-of-interests, and accordingly, all prior period consolidated financial
statements have been restated to include the results of operations, financial
position, and cash flows of MTRA as though MTRA had always been a part of AAI.
The results of operations for the separate companies and the combined amounts
presented in the financial statements are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
THREE MONTHS ENDED ------------------------
MARCH 31, 1999 1998 1997
------------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
AAI............................................... $21,275 $ 80,380 $ 65,401
MTRA.............................................. 4,840 17,863 14,704
------- -------- --------
$26,115 $ 98,243 $ 80,105
======= ======== ========
Net income(loss)
AAI............................................... $(4,002) $ 5,701 $ 1,255
MTRA.............................................. 239 837 1,243
------- -------- --------
$(3,763) $ 6,538 $ 2,498
======= ======== ========
</TABLE>
Kansas City Analytical Services, Inc.
On September 14, 1998, the Company acquired all of the outstanding equity
of Kansas City Analytical Services, Inc. (KCAS), a bioanalytical and
pharmaceutical analysis laboratory located near Kansas City, Kansas. The
acquisition has been accounted for using the purchase method of accounting. The
aggregate purchase price was approximately $5.5 million, consisting of cash
($5.2 million) and the issuance of 26,642 shares of common stock. The excess of
the purchase price over the fair value of the assets acquired was $1.5 million
and has been recorded as goodwill which is being amortized on a straight line
basis over 20 years. Accordingly, the results of KCAS's operations have been
included in the Company's consolidated results from the date of acquisition.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Applied
Analytical Industries, Inc. and its wholly-owned subsidiaries ("The Company").
All material intercompany transactions have been eliminated. The Company has
ownership of approximately 35%, on a fully diluted basis, of Endeavor
Pharmaceuticals Inc. ("Endeavor") which is accounted for under the equity
method. Certain balances in the prior year consolidated financial statements
have been reclassified to conform to the December 31, 1999 presentation.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues from fee-for-service contracts are recognized generally on a
percentage-of-completion basis as the work is performed. Licensing revenues are
recognized generally on a percentage-of-completion basis for interim contract
milestones. Contract milestones based on product approval are recognized when
the applicable product is approved. Royalty revenues are recognized as earned in
accordance with contract terms. Work-in-progress represents revenues recognized
prior to contract billing terms. Provisions for losses on contracts, if any, are
recognized when identified.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". Deferred
tax assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related principally to product development
are charged to expense as incurred.
EARNINGS PER SHARE
During 1999, the Company completed a business combination accounted for as
a pooling of interests and accordingly, all share and per share amounts have
been restated to reflect the business combination (see Note 2). Basic earnings
per share are based on the weighted average number of common shares outstanding
during the year. The weighted average number of common shares outstanding was
approximately 17,204,011, 17,123,503 and 17,091,573 in 1999, 1998 and 1997,
respectively. Diluted earnings per share were computed assuming that the
weighted average number of shares was increased by the conversion of stock
options issued to employees and members of the Company's Board of Directors. The
diluted per share amounts reflect a change in the number of shares outstanding
(the "denominator") to include the options as if they were converted to shares
and issued. In each year presented, the net income (the "numerator") is the same
for both basic and diluted per share computations. The following table provides
a reconciliation of the denominators for the basic and diluted earnings per
share computations for each of the years ended December 31:
<TABLE>
<CAPTION>
1999(1) 1998 1997
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Basic earnings per share:
Weighted average number of shares....................... 17,204 17,124 17,092
Effect of dilutive securities:
Employee and director stock options..................... -- 598 680
------ ------ ------
Diluted earnings per share:
Adjusted weighted average number of shares and assumed
conversions.......................................... 17,204 17,722 17,772
====== ====== ======
- ---------------
(1) Weighted average number of shares not included in
diluted EPS since antidilutive....................... 535 -- --
====== ====== ======
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WORK-IN-PROGRESS
Work-in-progress represents revenues recognized for the value of work
completed prior to contracted billing dates.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is recognized
using the straight-line method over the estimated useful lives of the assets.
Depreciable lives are 31.5 years for buildings and improvements and 3 to 15
years for equipment. Leasehold improvements are amortized over the lesser of the
asset life or the lease term. Depreciation expense was approximately $6.5
million, $4.6 million and $4.8 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The following table presents the components of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 947 $ 990
Buildings and improvements.................................. 16,814 14,833
Machinery and equipment..................................... 51,617 46,043
Construction-in-progress.................................... 7,494 4,801
-------- --------
Total cost of property and equipment........................ 76,872 66,667
Less accumulated depreciation............................... (31,846) (27,865)
-------- --------
Property and equipment, net............................ $ 45,026 $ 38,802
======== ========
</TABLE>
GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, the excess of the purchase price over the fair value of the net
assets of acquired companies, is amortized over 20 years. At December 31, 1999
and 1998, the amounts for accumulated amortization of goodwill were
approximately $2.0 million and $1.3 million, respectively. Other identifiable
intangible assets are amortized, if applicable, on a straight-line basis over
their estimated useful lives, which range from 3 to 17 years. At December 31,
1999 and 1998, the amounts of accumulated amortization of other intangibles were
approximately $610,000 and $490,000, respectively.
The Company has an investment in nonvoting, mandatorily redeemable
preferred stock of a related party, which is carried at original cost in other
assets.
On an ongoing basis, the Company assesses the recoverability of its
goodwill, intangibles and other assets by determining its ability to generate
future cash flows sufficient to recover the unamortized balances over the
remaining useful lives. Goodwill, intangibles and other assets determined to be
unrecoverable based on future cash flows would be written-off in the period in
which such determination is made.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with FASB Statement No. 52 "Foreign Currency
Translation". All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rates for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported in other comprehensive income included in the stockholders' equity
statement.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of the Company's comprehensive
income net of related tax effects:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)................................... $(7,913) $ 6,538 $ 2,498
Currency translation adjustments.................... (853) (48) (5)
------- ------- -------
Comprehensive income (loss).................... $(8,766) $ 6,490 $ 2,493
======= ======= =======
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities". SFAS No. 133, as amended, is required to be adopted in
years beginning after June 15, 2000. Because of the Company's minimal use of
derivatives, if any, management does not anticipate that the adoption of this
statement will have a material impact on net earnings or the financial position
of the Company.
EMPLOYEE STOCK BASED COMPENSATION
The Company has elected to continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock options as permitted by
SFAS No. 123 "Accounting for Stock-Based Compensation" and make the required pro
forma disclosures required by SFAS No. 123 (see Note 5). Under ABP No. 25, if
the exercise price of the Company's stock options is not less than the estimated
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, the
preferred stock investment, current liabilities and long-term debt approximate
fair value. It is not practicable to estimate the fair value of the Company's
equity investment, which is recorded at zero, as no readily determinable market
exists for investments in such entities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from such
estimates and changes in such estimates may affect amounts reported in future
periods.
2. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS
In connection with the MTRA merger, 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.
Transaction costs were 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 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
equipment costs include lease payments required under noncancelable leases for
vacant properties and the write-off of leasehold improvements and equipment that
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.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of the expense recorded and the
amounts paid through December 31, 1999:
<TABLE>
<CAPTION>
TOTAL PAID TO
EXPENSE DATE
------- -------
(IN THOUSANDS)
<S> <C> <C>
Transaction costs........................................... $ 1,913 $ 1,913
Personnel separation costs.................................. 1,919 1,603
Facility and other costs.................................... 2,568 2,185
------- -------
$ 6,400 $ 5,701
======= =======
</TABLE>
3. ACCOUNTS RECEIVABLE, NET
The following table presents the components of accounts receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Billed...................................................... $30,786 $24,761
Unbilled.................................................... 5,130 3,361
Related parties............................................. 762 980
------- -------
Total accounts receivable................................... 36,678 29,102
Allowance for doubtful accounts............................. (3,114) (1,220)
------- -------
Total accounts receivable, net......................... $33,564 $27,882
======= =======
</TABLE>
Unbilled accounts receivable represent invoices that are sent to clients in
periods following the completion of the related work. Unbilled amounts become
billed accounts receivable approximately fifteen to twenty days after the work
is completed.
4. DEBT AND CREDIT LINE
The following table presents the components of current maturities of
long-term debt and short-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Industrial revenue bonds.................................... $ 600 $ 900
Revolving credit agreement.................................. 18,153 --
U.S. Bank debt.............................................. -- 59
German bank debt............................................ 4,780 5,059
Current maturities of long-term debt........................ 4,854 1,021
------- -------
Current maturities of long-term debt and short-term
debt................................................. $28,387 $ 7,039
======= =======
</TABLE>
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. bank term loans........................................ $ 1,697 $ 3,975
German term loans........................................... 4,119 4,795
Less current maturities of long-term debt................... (4,854) (1,021)
------- -------
Total long-term debt due after one year................ $ 962 $ 7,749
======= =======
</TABLE>
The industrial revenue bonds were secured to finance the acquisition and
construction of facilities in North Carolina. They have a variable interest
rate, which is adjusted annually with a maximum allowable rate of 15%. The rates
at December 31, 1999 and 1998 were approximately 5.5% and 4.2%, respectively.
The bonds are payable in monthly installments of $25,000, plus interest, through
November 2000, and are redeemable at the option of the bondholders. The Company
has entered into an agreement with a bank to pay any bonds redeemed under a
stand-by letter of credit covering the outstanding principal of the bonds. The
Company also has a bond re-marketing agreement with such bank to re-market any
bonds presented for early redemption, on a best efforts basis. These bonds have
been classified as short-term debt because of the early redemption feature.
The bank term loans include approximately $1.7 million and $3.9 million
with U.S. banks as of December 31, 1999 and 1998, respectively. The loans have
variable interest rates based on the 30-day LIBOR. The loans are payable in
monthly installments including interest. The average interest rate on these
loans was approximately 6.9% for both 1999 and 1998. The bank term loans also
include approximately 8 million Deutsche marks, as of December 31, 1999 and
1998. This amount represents a subsidiary's note payable to a German bank, which
is due in March 2000 with interest payable quarterly at 4.85%. AAI has issued a
stand-by letter of credit to this bank to cover borrowings outstanding.
In 1996, the Company entered into a revolving credit agreement with a U.S.
bank which, as amended, expires in May of 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 December 31, 1999, 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 December 31, 1999.
Scheduled maturities of long-term debt as of December 31, 1999 are
$4,854,000 -- 2000; $481,000 -- 2001; $481,000 -- 2002.
5. STOCKHOLDERS' EQUITY
The authorized capital stock of the Company at December 31, 1999 and 1998
was 100 million shares of voting common stock, $0.001 par value per share, and 5
million shares of preferred stock, $0.001 par value per share. The preferred
stock is issuable in one or more series by the Company's Board of Directors
without further stockholder approval. No preferred stock was outstanding at
December 31, 1999 or 1998. The Company has reserved 2,553,197 shares of common
stock for issuance under stock option plans.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION AND AWARD PLANS
The Company has four stock option plans, the 1997 Stock Option Plan ("1997
Plan"), the 1996 Stock Option Plan ("1996 Plan"), the 1995 Stock Option Plan
("1995 Plan") and the 1996 Incentive and Non-Qualified Stock Option Plan ("MTRA
Plan"). Under the 1995 Plan, the Board of Directors may grant options to
purchase up to 242,538 shares of common stock. However, the Company has no
obligation to issue the shares upon exercise of such options until it has
purchased an equal number of shares from certain existing stockholders. Under
the 1997 and 1996 Plans, the Board of Directors may grant options to purchase up
to 1,644,000 and 495,627, respectively, of newly issued shares of common stock.
AAI adopted the MTRA Plan in March 1999 after the MTRA merger (see Note 2).
AAI's board reserved 517,500 shares to cover the exercise of the options under
the MTRA Plan. The plans require that the exercise price of options cannot be
less than either 100% (1997 Plan and MTRA Plan) or 75% (1996 and 1995 Plans) of
the estimated fair market value of the Company's shares of common stock on the
date of grant.
The combined activity from all plans is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997............................ 1,199,783 $11.39
Granted................................................... 977,100 13.02
Exercised................................................. (76,679) 9.02
Forfeited................................................. (199,245) 11.87
--------- ------
Outstanding, December 31, 1998............................ 1,900,959 12.61
--------- ------
Granted................................................... 474,600 11.72
Exercised................................................. (28,949) 7.83
Forfeited................................................. (194,410) 12.81
--------- ------
Outstanding, December 31, 1999............................ 2,152,200 $ 9.60
--------- ------
Exercisable, December 31, 1999............................ 1,018,731 $ 6.37
--------- ------
</TABLE>
Information regarding stock options outstanding and options exercisable at
December 31, 1999 is summarized in the table below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES REMAINING EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.72 - $ 8.00.................. 720,681 7.36 $ 2.79 508,681 $ 0.72
$ 8.35 - $12.81.................. 997,336 8.15 $11.93 372,335 $11.06
$13.38 - $22.00.................. 434,183 8.41 $15.56 137,715 $14.52
--------- ---- ------ --------- ------
$ 0.72 - $22.00.................. 2,152,200 7.94 $12.35 1,018,731 $ 6.37
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123. The
fair value for cash options was estimated at the date of grant using a
Black-Scholes pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected dividend yield................................... 0.0% 0.0% 0.0%
Risk-free interest rate................................... 5.8% 5.5% 5.4%
Expected volatility....................................... 180.0% 55.0% 54.0%
Expected life (in years from vesting)..................... 5 5 5
</TABLE>
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
stock options are amortized to expense over the vesting period. The grant date
Black-Scholes weighted average fair value of options was $11.28, $6.87 and $7.84
per share for 1999, 1998 and 1997, respectively.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans; therefore, compensation expense has not
been recognized for all options granted. If compensation cost for the Company's
plans had been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123, the
Company's net income (loss) and earnings (loss) per share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported....................................... (7,913) $6,538 $2,498
Pro forma......................................... (10,162) $5,414 $2,014
Earnings (loss) per share:
As reported --
Basic.......................................... ($0.46) $ 0.38 $ 0.15
Diluted........................................ ($0.46) $ 0.37 $ 0.14
Pro forma --
Basic.......................................... ($0.59) $ 0.32 $ 0.12
Diluted........................................ ($0.59) $ 0.31 $ 0.11
</TABLE>
6. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
PHARMCOMM
During 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. The services will be
performed by PharmComm after considering the timing of the advance payment. 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.
Total payments for scanning and validation services provided to AAI by
PharmComm were approximately $214,000, and $436,000 for the years ended December
31, 1997, and 1998, respectively. In 1999, AAI paid PharmComm approximately
$277,000, excluding the advance payment for services discussed above. At
December 31, 1999, $249,000 of the $300,000 prepayment was remaining for
application to future invoices.
ENDEAVOR PHARMACEUTICALS INC.
In 1994, AAI organized Endeavor Pharmaceuticals Inc. ("Endeavor") with
Berlex Laboratories, Inc. and several other investors to fund the development of
hormone pharmaceutical products, initially focusing on several generic hormone
products already under development by the Company. The Company has also agreed
to permit Endeavor, under certain circumstances, the first right to purchase
additional proprietary hormone pharmaceutical products developed by AAI. AAI
obtained a 47% equity interest in Endeavor through the contribution of its
accumulated product research and development and technical know-how. The other
investors contributed cash in exchange for their interests which, for all
investors, was in the form of convertible
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock. Based on a subsequent cash infusion by a new investor in 1995,
the Company's interest in Endeavor was reduced to approximately 35%, on a fully
diluted basis.
This investment has been recorded at zero value since 1995. Endeavor has
accumulated losses of approximately $20 million as of December 31, 1999. The
Company will not be able to record any income from this investment until
Endeavor has earned income in an amount equal to such accumulated losses.
The Company had net sales to Endeavor for product development services of
approximately $2.8 million, $1.6 million and $3.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively. AAI had approximately $950,000
in accounts receivable at December 31, 1999 and approximately $1.6 million in
work-in-progress related to Endeavor at December 31, 1998.
In December 1999, the Company agreed to purchase 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.
AESGEN, INC.
Aesgen, Inc. ("Aesgen") was formally organized with an affiliate of the
Mayo Clinic and MOVA Pharmaceutical Corporation and funded in 1995 through the
issuance of approximately $11 million of nonconvertible, nonvoting, mandatorily
redeemable, preferred stock. The Company made a cash investment of $1.6 million
in such preferred stock, which is carried at cost, and is included in other
noncurrent assets on the balance sheet.
In 1996, the Company sold to Aesgen marketing rights to a product under
development by the Company. Under the agreement, Aesgen paid a license fee and
will pay additional royalties upon marketing the product. AAI recognized net
sales of approximately $100,000, $200,000 and $1.9 million from Aesgen for the
years ended December 31, 1999, 1998 and 1997, respectively. AAI also had
accounts receivable of approximately $200,000 from Aesgen at December 31, 1999,
and work-in-progress of approximately $403,000 and $97,000 at December 31, 1999
and 1998 respectively. AAI has the right, under its development agreement with
Aesgen, to provide certain product development and support services to Aesgen
with respect to some generic drugs currently being developed by Aesgen, provided
that AAI's fees for such services are comparable to those of a competitor. In
addition, under such development agreement, the Company has agreed not to
develop, for its own account or any other person, a formulation of any of the
generic products currently under development for Aesgen and any additional drugs
that AAI agrees to develop in the future for Aesgen.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (BENEFIT)
The following table presents the components for the provision for income
taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
United States..................................... $ (9,432) $ 9,903 $2,969
Non-U.S........................................... (759) 202 (129)
-------- ------- ------
Income (loss) before taxes................... $(10,191) $10,105 $2,840
======== ======= ======
Provision for income taxes:
Current:
Federal........................................ $ (1,037) $ 1,972 $1,236
State.......................................... -- 144 10
Non-U.S........................................ 5 31 63
-------- ------- ------
Total current taxes.......................... (1,032) 2,147 1,309
======== ======= ======
Deferred:
Federal........................................ (897) 1,164 (557)
State.......................................... (349) 256 (410)
Non-U.S........................................ -- -- --
-------- ------- ------
Total deferred taxes......................... (1,246) 1,420 (967)
-------- ------- ------
Total provision (benefit) for income taxes.......... $ (2,278) $ 3,567 $ 342
======== ======= ======
</TABLE>
The following table presents the reconciliation of the provision for income
taxes to the amount computed by applying the U.S. federal statutory income tax
rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes................... $(10,191) $10,105 $2,840
======== ======= ======
Tax expense (benefit) using U.S. statutory income
tax rate of 34%................................... $ (3,465) $ 3,436 $ 965
State income taxes, net............................. (349) 194 (86)
Permanent items, net................................ 1,504 198 286
Non-U.S. operations, net............................ 126 (37) 107
Tax credits......................................... (230) (400) (411)
Change in reserve for deferred tax assets........... 136
Other, net.......................................... -- 176 (519)
-------- ------- ------
Provision (benefit) for income taxes................ $ (2,278) $ 3,567 $ 342
======== ======= ======
</TABLE>
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred taxes are included in prepaids and other current assets and
other accrued liabilities. The following table presents the deferred tax assets
and deferred tax liability.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets, resulting from:
Accrued liabilities....................................... $ 647 $ 530
Accounts receivable....................................... 1,700 299
Write-off of in-process R&D............................... 2,223 2,740
Tax credits............................................... 230
U.S. Net operating loss carryforwards..................... 1,559
Non-U.S. net operating losses............................. 2,299 1,918
Other items............................................... 345 1,583
Deferred tax liability, resulting from:
Property and equipment.................................... (1,822) (999)
Valuation allowances on tax assets.......................... (4,522) (4,658)
------- -------
Net deferred tax assets..................................... $ 2,659 $ 1,413
======= =======
</TABLE>
Valuation allowances have been provided for certain assets resulting from
the Company's German acquisition in 1996 since realization of such assets cannot
be predicted with reasonable certainty at this time. As of December 31, 1999,
the Company had approximately $2.3 million of federal net operating loss
carryforwards, which begins to expire in 2012 and $10.0 million of state net
operating loss carryforwards with the following expirations: $600,000 in 2000,
$3.9 million in 2002, and $5.5 million in 2005.
8. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for all domestic AAI employees
with one year of service through a defined contribution plan qualified under
section 401(k) of the Internal Revenue Code of 1986, as amended. Participants
may elect to contribute a portion of their annual compensation, subject to
limitations. The Company makes matching contributions in AAI stock equal to 50%
of a participant's contribution up to a certain amount. Additionally, the
Company makes profit-sharing contributions at the discretion of the Board of
Directors. The Company has expensed $607,000, $632,000 and $479,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and equipment under renewable lease
agreements classified as operating leases. Rent expense under these agreements
for the years ended December 31, 1999, 1998 and 1997 was $3.2 million, $3.3
million, and $3.3 million, respectively. Future minimum rentals due under lease
agreements as of December 31, 1999 are $2.9 million -- 2000; $2.4
million -- 2001; $1.5 million -- 2002; $1.4 million -- 2003; $1.2
million -- 2004 and $5.2 million -- thereafter.
The Company is party to lawsuits and administrative proceedings incidental
to the normal course of its business. In connection with the 1995 issuance of
the Series A Preferred, two of the Company's stockholders have agreed to
indemnify the Company for certain losses, if incurred. Management does not
believe that any liabilities related to such lawsuits or proceedings will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 28, 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. On December 29, 1999, the former client filed suit in North
Carolina State Court contesting the arbitration and seeking several million
dollars 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 that all claims under the manufacturing agreement are to be decided
under 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.
10. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
The Company operates in two business segments consisting of a
fee-for-service business and a product development business. The core services
provided on a fee-for-service basis to the worldwide pharmaceutical and
biotechnology industries worldwide include comprehensive formulation, testing
and manufacturing expertise, in addition to the ability to take investigational
products into and through human clinical trials. In the product development
segment, the Company internally develops drugs and technologies with the
objective of licensing marketing rights to third parties in exchange for license
fees and royalties. The Company does not independently commercialize products
developed internally or otherwise directly compete with its pharmaceutical
clients in the marketing or distribution of products. The majority of the
Company's non-U.S. operations are located in Germany.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In determining income from operations, costs are allocated to the product
development business based upon direct labor and materials plus an allocation of
general overhead. The corporate line includes general corporate overhead costs
and goodwill amortization, which are not directly attributable to a business
segment. Financial data by segment and geographic region are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUES:
Fee-for-service.................................. $ 92,110 $ 90,989 $ 74,335
Product development.............................. 10,065 7,254 5,770
-------- -------- --------
$102,175 $ 98,243 $ 80,105
======== ======== ========
United States.................................... $ 85,289 $ 78,194 $ 62,663
Non-U.S.......................................... 20,066 22,101 18,862
Less inter-geographic............................ (3,180) (2,052) (1,420)
-------- -------- --------
$102,175 $ 98,243 $ 80,105
======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
Fee-for-service.................................. $ 7,178 $ 16,211 $ 10,380
Product development.............................. (1,263) 1,123 (2,021)
Corporate........................................ (8,297) (7,731) (6,894)
Restructuring costs.............................. (6,400) -- --
-------- -------- --------
$ (8,782) $ 9,603 $ 1,465
======== ======== ========
United States.................................... $ (8,726) $ 9,818 $ 2,601
Non-U.S.......................................... (56) (215) (1,136)
-------- -------- --------
$ (8,782) $ 9,603 $ 1,465
======== ======== ========
TOTAL ASSETS:
Fee-for-service.................................. $ 88,930 $ 72,013 $ 59,451
Product development.............................. 8,840 4,874 5,812
Corporate........................................ 25,716 42,621 43,505
-------- -------- --------
$123,486 $119,508 $108,768
======== ======== ========
United States.................................... $ 99,471 $ 91,783 $ 86,647
Non-U.S.......................................... 24,015 27,725 22,121
-------- -------- --------
$123,486 $119,508 $108,768
======== ======== ========
</TABLE>
No single customer accounted for more then 10% of the Company's revenue in
1999, 1998 or 1997.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL RESULTS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net sales............................................. $26,115 $21,691 $22,715 $31,654
Gross profit.......................................... 11,517 9,431 10,054 14,267
Net income (loss)..................................... (3,763) (2,973) (1,458) 281
Basic earnings (loss) per share....................... (0.23) (0.17) (0.08) 0.02
Diluted earnings (loss) per share..................... (0.23) (0.17) (0.08) 0.02
1998
Net sales............................................. $20,973 $23,811 $25,164 $28,295
Gross profit.......................................... 10,018 12,147 12,509 12,736
Net income (loss)..................................... 1,160 1,448 1,913 2,017
Basic earnings (loss) per share....................... 0.07 0.08 0.11 0.12
Diluted earnings (loss) per share..................... 0.07 0.08 0.11 0.11
</TABLE>
37
<PAGE> 39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1997............................. 288 1,036 (27)(1) 1,297
1998............................. 1,297 325 48(2) (450)(1) 1,220
1999............................. 1,220 2,935 875(3) (1,916)(1) 3,114
</TABLE>
- ---------------
(1) Represents amounts written off as uncollectible accounts receivable
(2) Represents allowance on accounts assumed in acquisition
(3) Represents restructuring reserve usage
38
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors of the Company and their business experience are set forth on
pages 2 and 3 of the Proxy Statement for Annual Meeting of Stockholders, dated
approximately April 7, 2000 (the "Proxy Statement") and are incorporated herein
by reference. The discussion of executive officers of the Company is included in
Part I under "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of the Company's executive officers is
set forth on pages 6 through 8 of the Proxy Statement and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A description of the security ownership of certain beneficial owners and
management is set forth on page 4 of the Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain relationships and related transactions with management are
described on pages 12 and 13 of the Proxy Statement and in Items 11 and 12, and
are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) and (2) -- The response to this portion of Item 14 is submitted as
a separate section of this report and reference is hereby made to Item 8.
(b) REPORTS ON FORM 8-K:
The Company has recently filed the following Form 8-Ks:
Dated November 4, 1999, to file two press releases, one reporting the
Company's results of operations for the quarter ended September 30, 1999 and one
reporting the signing of contract.
(c) Exhibits
39
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <C> <S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996)...................................
3.2 -- Restated By-laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535)).......................
4.1 -- Articles Fourth, Seventh, Eleventh and Twelfth of the form
of Amended and Restated Certificate of Incorporation of the
Company (included in Exhibit 3.1)...........................
4.2 -- Article II of the form of Restated By-laws of the Company
(included in Exhibit 3.2)...................................
4.3 -- Specimen Certificate for shares of Common Stock, $.001 par
value, of the Company (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))................................
10.1 -- Employment Agreement dated November 17, 1995 between the
Company and Frederick D. Sancilio (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535)).......................
10.2 -- Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))..................................................
10.3 -- Applied Analytical Industries, Inc. 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))................................
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).......................
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <C> <S> <C>
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................................
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 subsidiaries of the
Company and Bank of America, N.A............................
21 -- Subsidiaries of Applied Analytical Industries, Inc..........
23.1 -- Consent of Ernst and Young LLP..............................
23.2 -- Consent of Rogers, Suleski & Associates, LLC................
23.3 -- Report of Independent Auditors..............................
27 -- Financial Data Schedule (for SEC use only)..................
</TABLE>
41
<PAGE> 43
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.
<TABLE>
<C> <S> <C>
/s/ FREDERICK D. SANCILIO Chairman of the Board, March 30, 2000
- ----------------------------------------------------- President and Chief Executive
Frederick D. Sancilio, Ph.D. Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, or in their behalf by
their duly appointed attorney-in-fact, on behalf of the Registrant in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ FREDERICK D. SANCILIO Chairman of the Board, March 30, 2000
- ----------------------------------------------------- President, Chief Executive
Frederick D. Sancilio, Ph.D. Officer and Director
(Principal Executive Officer)
/s/ WILLIAM L. GINNA, JR. Vice President and Chief March 30, 2000
- ----------------------------------------------------- Financial Officer
William L. Ginna, Jr.
/s/ THOMAS J. ALUISE Acting Controller (Principal March 30, 2000
- ----------------------------------------------------- Accounting Officer)
Thomas J. Aluise
/s/ WILLIAM H. UNDERWOOD Executive Vice President March 30, 2000
- ----------------------------------------------------- and Director
William H. Underwood
/s/ JOSEPH H. GLEBERMAN Director March 30, 2000
- -----------------------------------------------------
Joseph H. Gleberman
/s/ JAMES G. MARTIN Director March 30, 2000
- -----------------------------------------------------
James G. Martin, Ph.D.
/s/ RICHARD G. MORRISON Director March 30, 2000
- -----------------------------------------------------
Richard G. Morrison Ph.D.
/s/ JOHN M. RYAN Director March 30, 2000
- -----------------------------------------------------
John M. Ryan
/s/ JAMES L. WATERS Director March 30, 2000
- -----------------------------------------------------
James L. Waters
</TABLE>
42
<PAGE> 1
Exhibit 10.17
APPLIED ANALYTICAL INDUSTRIES, INC.
1996 STOCK OPTION PLAN
AMENDED AND RESTATED
This 1996 Stock Option Plan has been amended and restated effective March 27,
2000 to (1) reflect changes effected due to the 1996 stock splits and subsequent
conversion of Class B Non-Voting Stock to Common Stock in 1996, and (2) amend
the 1996 Stock Option Plan Section 6 to provide employees thirty (30) days to
exercise options after termination of employment.
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1996 Stock
Option Plan (the "Plan") is to promote the growth and profitability of
Applied Analytical Industries, Inc. (the "Company") and its
subsidiaries ("Subsidiaries") from time to time by increasing the
personal participation of officers and key employees in the financial
performance of the Company and by providing such officers and key
employees with an equity opportunity in the Company. This purpose will
be achieved through the grant of stock options ("Options") to purchase
shares of Common Stock of the Company (the "Common Stock") subject to
restrictions on transfer or such other restrictions as the
administrators of the Plan may determine.
2. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board").
The Board shall have complete authority to: (i) interpret all terms and
provisions of the Plan consistent with law; (ii) select from the group
of officers and key employees eligible to participate in the Plan the
officers and key employees to whom Options shall be granted; (iii)
within the limits established herein, determine the number of shares to
be subject to and the exercise price of, each Option; (iv) prescribe
the form of instruments) evidencing Options granted under the Plan; (v)
determine the time or times at which Options shall be granted to
officers or key employees; (vi) provide, if appropriate, for the
exercisability of Options in installments or subject to specified
conditions; (vii) determine the method of exercise of Options; (viii)
adopt, amend and rescind general and special rules and regulations for
the Plan's administration; and (ix) make all other determinations
necessary or advisable for the administration of the Plan.
Any action which the Board is authorized to take may be taken without a
meeting if all the members of the Board sign a written document
authorizing such action to be taken, unless different provision is made
by the By-Laws of the Company or by resolution of the Board.
The Board may designate selected Board members or certain employees of
the Company to assist the Board in the administration of the Plan and
may grant authority to such persons to execute documents, including
Options, on behalf of the Board.
No member of the Board or employee of the Company assisting the Board
pursuant to the preceding paragraph shall be liable for any action
taken or determination made in good faith.
<PAGE> 2
3. STOCK SUBJECT TO PLAN
The stock to be offered under the Plan shall be authorized but unissued
shares of Common Stock. An aggregate of 495,627 shares of Common Stock
are reserved for issuance upon exercise of Options. Any or all of the
Options granted under Section 4 hereof may, at the Board's discretion,
be intended to qualify as incentive stock options (`Incentive Stock
Options') under Section 422 of the Internal Revenue Code of 1986, as
amended (the `Code'). The number of shares reserved under the Plan may
be adjusted to reflect any change in the capitalization of the Company
as contemplated by Section 9 hereof and occurring after the adoption of
the Plan. The Board will maintain records showing the cumulative total
of all shares subject to Options outstanding under the Plan.
4. OPTION AWARDS
(a) Eligibility and Factors Considered in Granting Options
The grant of Options under this Section 4 shall be limited to those
officers and key employees of the Company or any of its Subsidiaries
who have the greatest contribution to the Company's long-term
performance and are selected by the Board. In making any determination
as to the officer(s) and key employees) to whom Options shall be
granted under this Section 4 and as to the number of shares to be
subject thereto, the Board shall take into account, in each case, the
level and responsibility of the person's position, the level of the
person's performance, the person's level of compensation, the assessed
potential of the person and such additional factors as the Board shall
deem relevant to the accomplishment of the purposes of the Plan.
(b) Allotment of Shares
The Board, in its sole discretion and subject to the provisions of the
Plan, may grant to participants eligible under this Section 4, on or
after the date hereof, Options. Options may be, at the discretion of
the Board: (i) Options that are intended to qualify as Incentive Stock
Options; or (ii) Options that are not intended to be Incentive Stock
Options; or (iii) both of the foregoing, if granted separately, and not
in tandem. Each Option granted under the Plan must be clearly
identified as to its status as an Incentive Stock Option or not.
Options granted under this Section 4 may be allotted to participants in
such amounts, subject to the limitations specified in the Plan, as the
Board, in its sole discretion, may from time to time determine,
provided that no participant may be granted Options with respect to
more than 253,000 shares of Common Stock.
In the case of Options intended to be Incentive Stock Options, the
aggregate fair market value (determined at the time of such Incentive
Stock Options' respective grants) of the shares with respect to which
Incentive Stock Options are exercisable for the first time by a
participant hereunder during any calendar year (under all plans taken
into account pursuant to Section 422(d) of the Code) shall not exceed
$100,000. Options under this Section 4 not intended to qualify as
Incentive Stock Options may be granted to any Plan participant without
regard to the Section 422(d) limitations.
<PAGE> 3
(c) Time of Granting Options
The date of grant of an Option under this Section 4 shall be, for all
purposes, the date on which the Board makes the determination of
granting such Option (each such date, a "Grant Date"). Notice of the
determination shall be given to each officer or key employee to whom an
Option is so granted under this Section 4 within a reasonable time
after the Grant Date.
(d) Exercise Price for Options
The price per share at which each Option granted under this Section 4
may be exercised shall be such price as shall be determined by the
Board at the time of grant based on such criteria as may be adopted by
the Board at the time of grant in good faith, taking into account, in
each case, the market price of the common stock, the level and
responsibility of the person's position, the level of the person's
performance, the person's level of compensation, the assessed potential
of the person, and such additional factors as the Board shall deem
relevant to the accomplishment of the purposes of the Plan; provided,
however, that in no event shall the exercise price per share of an
Option be less than 100% of the fair market value of the Company's
shares of common stock on the Grant Date for such Option unless such
grant is approved by all directors and in no event shall be less than
75% of the fair market value of the Company's shares of common stock on
the Grant Date for such Option. In the case of an Option intended to
qualify as an Incentive Stock Option, the price per share shall not be
less than 100% (or 110% for owners of more than 10% of the total
combined voting power of all classes of stock of the Company or any
Subsidiary) of the fair market value of the Common Stock on the Grant
Date for such Option.
If the Company's shares of Common Stock are:
(1) actively traded on any national securities exchange or NASDAQ
system that reports their sales prices, fair market value
shall be the average of the high and low sales prices per
share on any Grant Date;
(2) otherwise traded over the counter, fair market value shall be
the average of the final bid and asked prices for the shares
of Common Stock as reported for any Grant Date; or
(3) not traded, the Board shall consider any factor or factors
that it believes affects fair market value, and shall
determine fair market value without regard to any restriction
other than a restriction that by its terms will never lapse.
(e) Term of Options
The term of each Option granted under this Section 4 shall be
established by the Board, but shall not exceed 10 years (or 5
years for owners of more than 10% of the total combined voting
power of all classes of stock of the Company or of a
Subsidiary) from the Grant Date for such Option.
(f) Cancellation and Replacement of Options
The Board may at any time or from time to time permit the
voluntary surrender by the holder of any outstanding Option
granted under this Section 4 where such surrender is
<PAGE> 4
conditioned upon the granting under this Section 4 to such
holder of new Option(s) for such number of shares as the Board
shall determine, or may require such a voluntary surrender as
a condition precedent to the grant under this Section 4 of new
Option(s) to such holder.
The Board shall determine the terms and conditions of any such
new Option(s), including their exercise price and the periods
during which they may be exercised, subject to and in
accordance with the provisions of the Plan, all or any of
which may differ from the terms and conditions of the
Option(s) surrendered. Any such new Option(s) shall be subject
to all the relevant provisions of the Plan.
The shares subject to any Option so surrendered or terminated
shall no longer be charged against the limitation or
limitations provided in Section 3 of the Plan and may
thereafter become the subject of new Option grants under the
Plan.
The granting of new Option(s) in connection with the surrender
of outstanding Option(s) under the Plan shall be considered
for the purposes of the Plan as the grant of new Option(s) and
not an alteration, amendment or modification of the Plan or of
the Option(s) being surrendered.
(g) Vesting
Except as otherwise determined by the Board or the Committee,
Options shall vest as follows:
Aggregate Percentage of
Shares under Options
Date Vested on such Date
---- -----------------------
Six months after Grant Date 25%
Eighteen months after Grant Date 50%
Thirty months after Grant Date 75%
Forty-two months after Grant Date 100%
Notwithstanding the foregoing, any Option granted pursuant to this Plan shall be
deemed fully vested immediately prior to an Acquisition Transaction. For the
purposes of the Plan, an "Acquisition Transaction" shall mean and include the
following:
(i) The consummation of a tender offer or exchange
offer for the ownership of securities of the Company
representing 51 % or more of the combined voting
powers of the Company's then outstanding voting
securities;
(ii) The adoption by the Company's stockholders of a
plan of merger or consolidation providing for the
merger or consolidation of the Company with another
corporation (other than an affiliate of the Company
within the meaning of the Securities Exchange Act of
1934, as amended) and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
would then be owned in the aggregate by the former
stockholders of the Company; or
<PAGE> 5
(iii) The transfer by the Company of substantially
all of its assets to another corporation or entity
which is not a wholly owned subsidiary of the
Company.
5. NON-TRANSFERABILITY
An Option granted to a participant under the Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of
descent and distribution; or (iii) pursuant to a qualified domestic
relations order as defined by the Code or in Title I of the Employee
Retirement Income Security Act, or the rules thereunder. In the case of
an Option intended to be an Incentive Stock Option, such Option shall
not be transferable by a participant other than by will or the laws of
descent and distribution and during the optionee's lifetime shall be
exercisable only by him or her.
6. EXERCISABILITY OF OPTIONS
Subject to the provisions of the Plan, Options granted under Section 4
hereof shall be exercisable at such time or times after the Grant Date
to the extent such Options are vested.
Any Option shall terminate in full (whether or not previously
exercisable) prior to the expiration of its term on the date thirty
(30)days after the date the optionee ceases to be an employee of the
Company or any Subsidiary of the Company, unless (i) the optionee shall
(a) die while an employee of the Company or such Subsidiary, in which
case the participant's legatee(s) under his or her last will or the
participant's personal representative or representatives may exercise
all or part of the previously unexercised portion of such Option at any
time within one year, but not beyond the expiration of its term, after
the participant's death to the extent the optionee could have exercised
the Option immediately prior to his or her death, (b) become
permanently or totally disabled within the meaning of section 22(e)(3)
of the Code (or any successor provision) while an employee of the
Company or such Subsidiary, in which case the participant or his or her
personal representative may exercise the previously unexercised portion
of such Option at any time within one year, but not beyond the
expiration of its term, after termination of his or her employment or
directorship to the extent the optionee could have exercised the Option
immediately prior to such termination, or (c) resign or retire after
age 62 with the consent of the Company, in which case the participant
may exercise the previously unexercised portion of such Option at any
time within six months, but not beyond the expiration of its term,
after the participant's resignation or retirement to the extent the
optionee could have exercised the Option immediately prior to such
resignation or retirement, or (ii) the Board shall determine otherwise.
In no event may an Option be exercised after the expiration of its
fixed term.
7. METHOD OF EXERCISE
Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to
the Company, (b) shall at the same time tender to the Company payment
in full of the exercise price for the shares for which the Option is
exercised, which payment may be made in cash, and (e) shall comply with
such other reasonable requirements as the Board may establish; provided
that in order to enable an optionee (including but not limited to
officers) to exercise options granted under the Plan, the
<PAGE> 6
Board may determine, in the exercise of its discretion, to (i) cause
the Company to lend money or other property to such optionee upon such
terms and conditions and in such amounts as the Board may determine,
(ii) grant such optionee permission to pay the exercise price in
installments, or to accept such optionee's note as whole or partial
payment, (iii) permit such optionee to repay loans made by the Company
to such optionee for the exercise of options with issued and
outstanding shares of common stock, (iv) grant such optionee permission
to pay the exercise price by delivering for cancellation Options having
an aggregate value (calculated by subtracting the exercise price per
share from the fair market value of a share of Common Stock) equal to
the total amount of the exercise price, or (v) provide such financial
assistance to such optionee as the Board determines to be desirable.
The exercise of any option granted under the Plan may be made subject
to the condition that, if at any time the Board shall determine, in its
discretion, that the satisfaction of withholding tax or other
withholding liabilities under any state or federal law is necessary or
desirable as a condition of, or in connection with, such exercise or
the delivery or purchase of shares pursuant thereto, then in such
event, the exercise of the option shall not be effective unless such
withholding tax or other withholding liabilities shall have been
satisfied in a manner acceptable to the Company, which may include the
withholding by the Company of shares of Common Stock to be issued upon
exercise of an Option having a fair market value equal to the required
withholding amount. With respect to the foregoing sentences, the value
of the shares of Common Stock shall be the fair market value determined
in accordance with Section 4(d) of the Plan as of the day of such
payment or withholding.
No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a
certificate for the shares has been delivered.
An Option granted under the Plan may be exercised for any lesser number
of shares than the full amount for which it could be exercised. Such a
partial exercise of an Option shall not affect the right to exercise
the Option from time to time in accordance with the Plan for the
remaining shares subject to the Option.
8. TERMINATION OF OPTIONS
An Option granted under the Plan shall be considered terminated in
whole or in part, to the extent that, in accordance with the provisions
of the Plan and such Option, it can no longer be exercised for any
shares originally subject to the Option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Common Stock of the
Company by reason of a stock dividend, stock split, stock
consolidation, recapitalization, reorganization, merger, split up or
the like, the shares available for purposes of the Plan or under option
in outstanding option agreements pursuant to the Plan (and the option
price under such agreements) shall be appropriately adjusted so as to
preserve, but not increase, the benefits of the Plan to the Company and
the benefits to the holders of such Options; Provided, however, that
for any Incentive Stock Options, in the case of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the excess of the aggregate fair market
value of the shares subject to any Options immediately after such event
over the aggregate option price of such shares is not more than the
excess of the aggregate fair market
<PAGE> 7
value of all shares subject to such Options immediately before such
event over the aggregate option price of such shares.
Adjustments under this Section shall be made by the Board, whose
determination as to what adjustments shall be made and the extent
thereof, shall be final, binding and conclusive.
10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS
No certificate(s)for shares shall be executed and delivered upon
exercise of an Option until the Company shall have taken such action,
if any, as is then required to comply with the provisions of the
Securities Act of 1933, as amended, the North Carolina Uniform
Securities Act, as amended, any other applicable state securities
law(s) and the requirements of any exchange on which the Common Stock
may, at the time, be listed.
In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance,
the Board may require reasonable evidence as to the ownership of the
Option and may require such consents and releases of taxing authorities
as it may deem advisable.
11. NO RIGHT TO EMPLOYMENT
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer
upon any employee participant under the Plan any right to continue in
the employ of the Company, or shall in any way affect the right and
power of the Company to terminate the employment or position with the
Company of any participant under the Plan at any time with or without
assigning a reason therefor, to the same extent as the Company might
have done if the Plan had not been adopted.
12. EFFECTIVE DATE OF THE PLAN
The Plan was adopted by the Board on November 16, 1995, and shall be
effective until November 16, 2005, after which time no Option shall be
granted, but such termination shall not affect any Option previously
granted under the Plan.
13. STOCK CERTIFICATE LEGEND.
Each stock certificate issued for options intended to be Incentive
Stock Options shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED PURSUANT TO A
STOCK OPTION PLAN AND WERE INTENDED TO BE A QUALIFIED OPTION AS SET
FORTH IN SECTION 422 OF THE INTERNAL REVENUE CODE. IF THESE SHARES ARE
TRANSFERRED OR SOLD PRIOR TO ____________, ______, YOU ARE REQUIRED TO
NOTIFY THE CORPORATION'S HUMAN RESOURCES DEPARTMENT AT 910 254-7000.
<PAGE> 8
Dear
In accordance with the 1996 Stock Option Plan (the "Plan") of Applied Analytical
Industries, Inc. (the "Company"), you, as an officer or a key employee of the
Company or its subsidiaries, and in order to give you an added proprietary
interest in the Company and an additional incentive to advance the interest of
the Company, were granted on ___________, ______ an option to purchase _____
shares of the common stock of the Company upon the following terms and
conditions:
(1) The exercise price shall be $_______ (_____% of the fair
market value of a share as determined in accordance with
Section 4(d) of the Plan on the date of grant - ___________,
___);
(2) This Option will vest and become exercisable according to the
schedule set forth in the Plan;
(3) Once exercisable, this Option may be exercised until
________, ____ subject to the terms and conditions of the
Plan, a copy of which is attached hereto and incorporated
herein by reference. This Option is granted subject to the
Plan and shall be construed in accordance with the Plan.
(4) This Option is (is not) intended to be treated as an
"incentive stock option" for purposes of Section 422 of the
Internal Revenue Code.
(5) To exercise this Option, the holder must deliver written
notice of the decision to do so and at the same time tender to
the Company payment in full of the exercise price for the
shares for which the Option is exercised, which payment may be
made in cash or as otherwise provided for in accordance with
Section 7 of the Plan.
(6) The exercise of this Option shall be subject to the condition
that, if at any time the Board (as defined in the Plan) shall
determine, in its discretion, that the satisfaction of
withholding tax or other withholding liabilities under any
state or federal law is necessary or desirable as a condition
of, or in connection with, such exercise or the delivery or
purchase of shares pursuant thereto, then in such event, the
exercise of the option shall not be effective unless such
withholding tax or other withholding liabilities shall have
been satisfied in a manner acceptable to the Company, which
may include the withholding by the Company of shares of Common
Stock to be issued upon exercise of an Option having a fair
market value equal to the required withholding amount.
(7) Other terms and conditions: Prior to the issuance of any
shares of Common Stock upon exercise of an Option, you must
agree to be obligated by the terms of the Stockholder
Agreement between the Company and the holders of the Common
Stock as such Stockholder Agreement is then in effect.
<PAGE> 9
This Option is not transferable except pursuant to the terms and conditions of
the Plan.
Very truly yours,
APPLIED ANALYTICAL INDUSTRIES, INC.
By: _____________________________________
Title: __________________________________
I hereby accept the within Option and
acknowledge receipt of a copy of the Plan.
Optionee: _______________________________
Date: ___________________________________
Revised 2/18/00
<PAGE> 1
Exhibit 10.18
AMENDED AND RESTATED LOAN AGREEMENT
among
APPLIED ANALYTICAL INDUSTRIES, INC.
as U.S. Borrower
AAI APPLIED ANALYTICAL INDUSTRIES DEUTSCHLAND GmbH & CO. KG
as German Borrower
CERTAIN SUBSIDIARIES OF THE U.S. BORROWER
as Guarantors
and
BANK OF AMERICA, N.A.
as Bank
Dated as of November 30, 1999
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS......................................................1
1.01 DEFINED TERMS.....................................................1
1.02 ACCOUNTING TERMS..................................................7
ARTICLE II LOANS.............................................................7
2.01 REVOLVING LOANS...................................................7
2.02 REVOLVING NOTE....................................................7
2.03 INTEREST ON REVOLVING LOANS.......................................7
2.04 COMMITMENT FEE....................................................7
2.05 DEUTSCHE MARK LOAN................................................8
ARTICLE III ADDITIONAL PROVISIONS REGARDING REVOLVING LOANS................9
3.01 DEFAULT RATE......................................................9
3.02 PREPAYMENTS.......................................................9
3.03 CAPITAL ADEQUACY.................................................10
3.04 INCREASED COSTS..................................................10
3.05 TAXES, ETC.......................................................11
3.06 PAYMENTS AND COMPUTATIONS........................................11
ARTICLE IV CONDITIONS OF LENDING............................................12
4.01 CONDITIONS TO CLOSING DATE.......................................12
4.02 CONDITIONS TO EACH LOAN..........................................13
4.03 ADDITIONAL CONDITIONS TO THE DEUTSCHE MARK LOAN..................14
ARTICLE V REPRESENTATIONS AND WARRANTIES....................................14
5.01 CORPORATE EXISTENCE AND POWER....................................14
5.02 AUTHORIZATION OF LOAN AGREEMENT..................................14
5.03 NO VIOLATION OF CORPORATE RESTRICTIONS...........................14
5.04 GOVERNMENTAL CONSENTS............................................15
5.05 LITIGATION.......................................................15
5.06 OTHER AGREEMENTS.................................................15
5.07 TAXES............................................................15
5.08 LIENS............................................................15
5.09 ERISA............................................................16
5.10 SUBSIDIARIES.....................................................16
5.11 REGULATION U.....................................................16
5.12 PATENTS AND TRADEMARKS...........................................16
5.13 FINANCIAL INFORMATION PROVIDED...................................16
5.14 ENVIRONMENTAL COMPLIANCE.........................................16
5.15 YEAR 2000 COMPLIANCE.............................................17
ARTICLE VI AFFIRMATIVE COVENANTS............................................17
6.01 AFFIRMATIVE COVENANTS...............................................17
ARTICLE VII NEGATIVE COVENANTS..............................................22
7.01 NEGATIVE COVENANTS...............................................22
ARTICLE VIII EVENTS OF DEFAULT AND ACCELERATION.............................24
8.01 EVENTS OF DEFAULT................................................24
8.02 REMEDIES.........................................................25
ARTICLE IX MISCELLANEOUS....................................................26
9.01 NOTICES..........................................................26
i
<PAGE> 3
9.02 WAIVER...........................................................26
9.03 SURVIVAL.........................................................27
9.04 SUCCESSORS AND ASSIGNS...........................................27
9.05 COSTS............................................................27
9.06 AMENDMENT; WAIVER; CONSENTS......................................27
9.07 YEAR.............................................................27
9.08 PAYMENT ON BUSINESS DAY..........................................27
9.09 COUNTERPARTS.....................................................28
9.10 ASSIGNMENT.......................................................28
9.11 TERM.............................................................28
9.12 CAPTIONS.........................................................28
9.13 GOVERNING LAW....................................................28
9.14 ARBITRATION......................................................28
9.15 LOAN DOCUMENTS...................................................29
9.16 BINDING EFFECT; REPLACEMENT OF EXISTING LOAN AGREEMENT;
TERMINATION......................................................30
ARTICLE X GUARANTY..........................................................30
10.01 GUARANTY.........................................................30
10.02 OBLIGATIONS UNCONDITIONAL........................................31
10.03 REINSTATEMENT....................................................32
10.04 CERTAIN ADDITIONAL WAIVERS.......................................32
10.05 REMEDIES.........................................................32
10.06 CONTINUING GUARANTEE.............................................33
10.07 RIGHTS OF CONTRIBUTION...........................................33
ii
<PAGE> 4
Exhibits
Exhibit 2.02 Form of Revolving Note
Exhibit 2.05 Form of Deutsche Mark Note
Exhibit 5.05 Litigation
Exhibit 5.08 Liens
Exhibit 5.10 Subsidiaries
Exhibit 5.14 Environmental Compliance
Exhibit 6.01(b)(3) Form of Borrowing Base Certificate
Exhibit 6.01(c) Form of Officer's Certificate
Exhibit 7.01(a)(i) Indebtedness
iii
<PAGE> 5
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT, dated as of November 30, 1999
(the "Loan Agreement"), is by and between
APPLIED ANALYTICAL INDUSTRIES, INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal place
of business in Wilmington, North Carolina (the "U.S. Borrower");
AAI APPLIED ANALYTICAL INDUSTRIES DEUTSCHLAND GmbH & CO. KG, a
corporation organized and existing under the laws of Germany and having its
principal place of business in Neu-Ulm, Germany (the "German Borrower");
Certain Subsidiaries of the U.S. Borrower from time to time party
hereto (the "Guarantors"); and
BANK OF AMERICA, N.A., a national banking association formerly known as
NationsBank, N.A. organized and existing under the laws of the United States and
having offices in Wilmington, North Carolina (the "Bank").
RECITALS
A. The U.S. Borrower and the Bank are parties to that certain Loan
Agreement dated as of December 30, 1996 (as amended by a First Amendment to Loan
Agreement dated as of February 13, 1998, a Second Amendment to Loan Agreement
dated as of May 19, 1998 and an Amendment and Forbearance Agreement dated as of
August 27, 1999, the "Existing Loan Agreement").
B. The parties hereto desire that the Existing Loan Agreement be
further amended and restated as set forth herein.
C. The Bank has agreed to amend and restate the Existing Loan Agreement
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 DEFINED TERMS.
For the purposes hereof:
<PAGE> 6
"Adjusted LIBOR Rate" means the rate as determined by the Bank
at which U.S. dollar deposits in the requested amount and for one month
interest periods are offered to prime banks in the London Interbank
Market, as published weekly by the Federal Reserve Bank of New York in
its H-15 Statistical Release, such rate being adjusted for the cost of
reserve requirements as prescribed by the Federal Reserve System. The
Adjusted LIBOR Rate for any Saturday or Sunday or any other day on
which the London interbank market is not open shall be the Adjusted
LIBOR Rate for the immediately preceding day on which the London
interbank market is open;
"Bank" means Bank of America, N.A. or any successor thereto;
"Borrowers" means, collectively, the U.S. Borrower and the
German Borrower and "Borrower" means any one of them;
"Borrowing Base" means, as of any day, the sum of (a) 80% of
Eligible Receivables plus (b) the lesser of (i) 75% of Fixed Asset
Value and (ii) $32,754,000 minus (c) all indebtedness for borrowed
money, howsoever evidenced, or its equivalent (including but not
limited to leases required to be capitalized under Generally Accepted
Accounting Principles and letters of credit), other than Revolving
Loans outstanding hereunder, incurred by, or issued for the benefit of,
the Credit Parties; provided that (A) in the case of clauses (a) and
(b)(i) above, such amounts shall be as set forth in the most recent
Borrowing Base Certificate delivered to the Bank in accordance with the
terms of Section 6.01(b)(3) and (B) the advance rates set forth above
shall be subject to appraisals conducted from time to time by the Bank
and may be increased or decreased by the Bank at any time and from time
to time in the exercise of its reasonable credit judgment (it being
understood that the U.S. Borrower hereby consents to any such increases
or decreases and acknowledges that decreasing the advance rates or
increasing the reserves may limit or restrict the availability of
Revolving Loans requested by the U.S.
Borrower);
"Borrowing Base Certificate" shall have the meaning assigned
to such term in Section 6.01(b)(3);
"Business Day" means any day not a Saturday, Sunday or legal
holiday on which the Bank is open for business in Wilmington, North
Carolina; provided, however, that with respect to the Deutsche Mark
Loan such day shall also be a day on which dealings between banks are
carried on in U.S. dollar deposits and in Deutsche Marks in the London
interbank market;
"Cash Flow Coverage Ratio" means, for any consecutive four
fiscal quarterly periods of the U.S. Borrower, the ratio for the U.S.
Borrower and its consolidated Subsidiaries of (x) EBITDA minus cash
dividends (each computed for such four consecutive fiscal quarterly
periods) to (y) current maturities of long term debt and capitalized
leases (each computed for such four consecutive fiscal quarterly
periods) plus 20% of the average outstanding principal balance of the
Revolving Loans for such four consecutive fiscal quarterly periods plus
interest expense plus current provision for income taxes (each computed
for such four consecutive fiscal quarterly periods);
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<PAGE> 7
"Closing Date" means the date as of which this Loan Agreement
is executed by the Credit Parties and the Bank;
"Commitment" means the commitment by the Bank to make Loans to
the Borrowers hereunder;
"Consistent Basis" in reference to the application of
Generally Accepted Accounting Principles, means that the accounting
principles observed in the period referred to are comparable in all
material respects to those applied in the most recent preceding period,
except for the impact of implementing new rules or regulations;
"Credit Parties" means the Borrowers and the Guarantors and
"Credit Party" means any one of them;
"Deutsche Mark Loan" means the Loan made pursuant to Section
2.05(a) hereof;
"Deutsche Mark Note" means the promissory note of the German
Borrower executed and delivered as provided in Section 2.05(a) hereof;
"Domestic Subsidiary" means a direct or indirect Subsidiary of
the U.S. Borrower that is domiciled, incorporated or organized under
the laws of any State of the United States of America or the District
of Columbia;
"EBITDA" means, for any period of computation, earnings of the
U.S. Borrower and its consolidated Subsidiaries before interest
expense, provision for income taxes, depreciation and amortization,
other non-cash charges and lease expense under the tax retention
operating lease (or similar agreement) entered into with the Bank or
any of its affiliates;
"Eligible Receivables" means, as of any date of determination
and without duplication, the aggregate book value of all accounts
receivable, receivables, and obligations for payment created or arising
from the sale of inventory or the rendering of services in the ordinary
course of business (collectively, the "Receivables"), owned by or owing
to the U.S. Borrower or any of its Subsidiaries, net of allowances and
reserves for doubtful or uncollectible accounts and sales adjustments
consistent with such Person's internal policies and in any event in
accordance with Generally Accepted Accounting Principles, but excluding
in any event (i) any Receivable which is (a) not subject to a
perfected, first priority lien in favor of the Bank to secure the
Obligations or (b) subject to any other lien that is not permitted
hereunder, (ii) Receivables which are more than 120 days past due or
150 days past invoice date (net of reserves for bad debts in connection
with any such Receivables), (iii) 50% of the book value of any
Receivable not otherwise excluded by clause (ii) above but owing from
an account debtor which is the account debtor on any existing
Receivable then excluded by such clause (ii), unless the exclusion by
such clause (ii) is a result of a legitimate dispute by the account
debtor and the applicable Receivable is no more than 150 days past due,
(iv) Receivables evidenced by
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<PAGE> 8
notes, chattel paper or other instruments, unless such notes, chattel
paper or instruments have been delivered to and are in the possession
of the Bank, (v) Receivables owing by an account debtor which is not
solvent or is subject to any bankruptcy or insolvency proceeding of any
kind, (vi) Receivables which are contingent or subject to offset,
deduction, counterclaim, dispute or other defense to payment, in each
case to the extent of such offset, deduction, counterclaim, dispute or
other defense, (vii) Receivables for which any direct or indirect
Subsidiary or any affiliate of the U.S. Borrower is the account debtor,
(viii) Receivables representing a sale to the government of the United
States or any agency or instrumentality thereof unless the Federal
Assignment of Claims Act has been complied with to the satisfaction of
the Bank with respect to the granting of a security interest in such
Receivable, with or other similar applicable law and (ix) Receivables
which fail to meet such other specifications and requirements as may
from time to time be established by the Bank in its reasonable
discretion;
"Event of Default" shall have the meaning given to said term
in Section 8.01 hereof;
"Fixed Asset Value" means, as of any date of determination and
without duplication, the lower of the aggregate net book value (based
on a FIFO or a moving average cost valuation, consistently applied) or
fair market value (determined on the basis of the most recent appraisal
acceptable to the Bank) of all equipment, fixtures and real estate
owned by the U.S. Borrower and its Domestic Subsidiaries less
appropriate reserves determined in accordance with Generally Accepted
Accounting Principles but excluding in any event (i) any such asset
which is (a) not subject to a perfected, first priority lien in favor
of the Bank to secure the Obligations or (b) subject to any other lien
not permitted hereunder, (ii) any such asset which is not in good
condition or fails to meet standards for sale or use imposed by
governmental agencies, departments or divisions having regulatory
authority over such assets, (iii) any such asset located outside of the
United States, (iv) any such asset which is leased or on consignment,
and (v) any such asset which fails to meet such other specifications
and requirements as may from time to time be established by the Bank in
its reasonable discretion;
"Foreign Subsidiary" means each Subsidiary of the U.S.
Borrower that is not a Domestic Subsidiary;
"Funded Debt" means, without duplication, (i) all interest
bearing obligations of the U.S. Borrower and its consolidated
Subsidiaries including, without limitation, all obligations evidenced
by promissory notes or other similar contracts but excluding such items
as trade payables and accruals and (ii) all outstanding obligations
under the tax retention operating lease (or similar agreements) entered
into with the Bank or any of its affiliates;
"Funded TROL Obligations" means, at any time, the sum of the
then outstanding amount of each of (i) the Loans, (ii) the accrued but
unpaid interest on the Loans, (iii) the Holder Advances, and (iv) the
accrued but unpaid Holder Yield, as each of such capitalized terms is
defined in the Participation Agreement;
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<PAGE> 9
"Generally Accepted Accounting Principles" means those
principles of accounting set forth in pronouncements of the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants, or which have other substantial authoritative support and
are applicable in the circumstances as of the date of a report, as such
principles are from time to time supplemented and amended;
"German Borrower" shall have the meaning given to said term in
the Recitals hereof;
"German Borrower Obligations" means all obligations of the
German Borrower (in its capacity as such) hereunder, under the Deutsche
Mark Note or otherwise in connection with the Deutsche Mark Loan;
"Guaranteed Obligations" means, without duplication, (a) in
the case of a Guarantor that is a Domestic Subsidiary, all Obligations,
and (b) in the case of the Guarantor that is the U.S. Borrower or a
Foreign Subsidiary, all German Borrower Obligations;
"Guarantors" means, collectively, the U.S. Borrower and each
of its Subsidiaries and "Guarantor" means any one of them;
"Loan Documents" means this Loan Agreement, the Notes and the
Security Documents;
"Loans" means, collectively, the Revolving Loans and the
Deutsche Mark Loan;
"Maturity Date" means May 31, 2000;
"Mortgages" means those mortgage and security agreements to be
given by the U.S. Borrower and/or certain Domestic Subsidiaries
pursuant to Section 6.01(s) to secure the Obligations;
"Notes" means, collectively, the Revolving Note and the
Deutsche Mark Note;
"Obligations" means a collective reference to (a) all
obligations of the U.S. Borrower to the Bank in connection with the
Revolving Loans and (b) all German Borrower Obligations;
"Participation Agreement" means that certain Participation
Agreement, dated as of October 2, 1998 among the U.S. Borrower, First
Security Bank, N.A., as Owner Trustee under the AAI Realty Trust
1998-1, the lenders and holders identified therein and from time to
time party thereto, and NationsBank, N.A. (now known as Bank of
America, N.A.) as Agent, such Participation Agreement comprising part
of the documentation relating to the tax retention operating lease
transaction entered into by the U.S. Borrower;
5
<PAGE> 10
"Person" means an individual, a corporation, a partnership, a
joint venture, an association, a joint stock company, a trust, an
unincorporated organization or a government or any agency or political
subdivision thereof;
"Pledge Agreement" means that certain Pledge Agreement dated
as of August 27, 1999 among the U.S. Borrower, the Domestic
Subsidiaries and the Bank, as such agreement may be amended or modified
from time to time;
"Prime Rate" means the rate of interest publicly announced by
the Bank in Charlotte, North Carolina from time to time as its "prime
rate." The Prime Rate is not necessarily the best or lowest rate of
interest offered by the Bank;
"Revolving Loan" means a Loan made pursuant to Section 2.01
hereof;
"Revolving Note" means the promissory note of the U.S.
Borrower executed and delivered as provided in Section 2.02 hereof;
"Revolving Loan Committed Amount" shall have the meaning given
to said term in Section 2.01;
"Security Agreement" means that certain Security Agreement
dated as of August 27, 1999 among the U.S. Borrower, the Domestic
Subsidiaries and the Bank, as such agreement may be amended or modified
from time to time;
"Security Documents" means, collectively, the Mortgages, the
Pledge Agreement, the Security Agreement, each of the agreements and
documents executed by the German Borrower and the other Foreign
Subsidiaries in favor of the Bank to secure the German Borrower
Obligations and each other agreement or document executed by a Credit
Party in favor of the Bank to secure the Obligations, as each such
agreement or document may be amended or modified from time to time;
"Subsidiary" means any corporation, association, partnership,
limited liability company, joint venture or other business entity more
than 50% of the outstanding voting stock or other equity interests of
which at the time is owned or controlled directly or indirectly by the
U.S. Borrower and/or by one or more of its Subsidiaries;
"Tangible Net Worth" means total stockholders' equity of the
U.S. Borrower determined in accordance with Generally Accepted
Accounting Principles on a Consistent Basis, with no upward adjustments
due to a revaluation of assets, minus the book value of assets which
would be treated as intangibles under Generally Accepted Accounting
Principles, including, but not limited to, goodwill, trade-names,
trademarks, copyrights, patents and unamortized debt discount and minus
loans or advances to employees, stockholders, subsidiaries, affiliates
or related companies and minus investment in subsidiaries; and
"U.S. Borrower" shall have the meaning given to said term in
the Recitals hereof.
6
<PAGE> 11
1.02 ACCOUNTING TERMS.
All accounting terms not specifically defined herein shall be construed
in accordance with then current Generally Accepted Accounting Principles applied
on a Consistent Basis.
ARTICLE II
LOANS
2.01 REVOLVING LOANS.
Subject to the terms and conditions and relying upon the
representations and warranties herein set forth, the Bank agrees to make
Revolving Loans to the U.S. Borrower, at any time and from time to time until
the Maturity Date, in an aggregate principal amount at any time outstanding not
to exceed the lesser of (i) TWENTY-FIVE MILLION DOLLARS ($25,000,000) (the
"Revolving Loan Committed Amount") and (ii) the Borrowing Base, for purposes of
financing the U.S. Borrower's working capital needs. The U.S. Borrower may
borrow, repay and reborrow hereunder on or after the date hereof and prior to
the Maturity Date, subject to the terms, provisions and limitations set forth
herein. The outstanding principal balance of the Revolving Loans, together with
all accrued but unpaid interest, fees and other charges, shall be due and
payable in full on the Maturity Date.
2.02 REVOLVING NOTE.
The Revolving Loans made by the Bank shall be evidenced by the
Revolving Note duly executed by the U.S. Borrower, dated the Closing Date, in
substantially the form of Exhibit 2.02 attached hereto, payable to the order of
the Bank in a principal amount equal to the Revolving Loan Committed Amount.
2.03 INTEREST ON REVOLVING LOANS.
Subject to section 3.01 hereof, the outstanding principal balance of
the Revolving Loans shall bear interest at a rate equal to the Adjusted LIBOR
Rate plus 2.25%. Interest calculated at the foregoing rate shall be due and
payable monthly in arrears on the last day of each calendar month.
2.04 COMMITMENT FEE.
The U.S. Borrower agrees to pay the Bank a commitment fee in an amount
equal to 0.375% per annum of the average daily unused portion of the Revolving
Loan Committed Amount, such fee to be paid monthly in arrears on the last day of
each calendar month.
7
<PAGE> 12
2.05 DEUTSCHE MARK LOAN.
(a) Subject to the terms and conditions hereof, the Bank
agrees to make on or before March 31, 2000 a term loan to the German
Borrower in Deutsche Marks in an aggregate principle amount equal to DM
12,000,000 (the "Deutsche Mark Loan"). Amounts repaid on the Deutsche
Mark Loan may not be reborrowed. The outstanding principal balance of
the Deutsche Mark Loan, together with all accrued but unpaid interest,
fees and other charges, shall be due and payable in full on the
Maturity Date. The proceeds of the Deutsche Mark Loan will be used by
the German Borrower to repay in full loans made to the German Borrower
by its German banks, which loans have been supported by standby letters
of credit issued by the Bank.
(b) The Deutsche Mark Loan shall be made, shall be repaid and
shall bear interest in accordance with the terms of a Promissory Note
dated the Closing Date and executed by the German Borrower in favor of
the Bank in substantially the form of Exhibit 2.05 (the "Deutsche Mark
Note"), the terms of which are incorporated herein by reference.
(c) (i) If, as a result of the implementation of the European
economic and monetary union ("EMU"), (i) any currency
available for borrowing under this Credit Agreement (a
"national currency") ceases to be lawful currency of the state
issuing the same and is replaced by a European single or
common currency (the "Euro") or (ii) any national currency and
the Euro are at the same time both recognized by the central
bank or comparable governmental authority of the state issuing
such currency as lawful currency of such state, then any
amount payable hereunder by any party hereto in such national
currency shall instead be payable in the Euro and the amount
so payable shall be determined by redenominating or converting
such amount into the Euro at the exchange rate officially
fixed by the European Central Bank for the purpose of
implementing the EMU, provided, that to the extent any EMU
legislation provides that an amount denominated either in the
Euro or in the applicable national currency can be paid either
in Euros or in the applicable national currency, each party to
this Loan Agreement shall be entitled to pay or repay such
amount in Euros or in the applicable national currency. Prior
to the occurrence of the event or events described in clause
(i) or (ii) of the preceding sentence, each amount payable
hereunder in any such national currency will, except as
otherwise provided herein, continue to be payable only in that
national currency.
(ii) The Borrowers shall from time to time, at the
request of the Bank, pay to the Bank for the account of the
Bank the amount of any cost or increased cost incurred by, or
of any reduction in any amount payable to or in the effective
return on its capital to, or of interest or other return
foregone by, the Bank or any holding company of the Bank as a
result of the introduction of, changeover to or operation of
the Euro in any applicable state.
8
<PAGE> 13
(iii) In addition, this Loan Agreement and the
Deutsche Mark Note (including, without limitation, the
definition of Adjusted LIBOR Rate) will be amended to the
extent determined by the Bank (acting reasonably and in
consultation with the Borrowers) to be necessary to reflect
such implementation of the EMU and change in currency and to
put the Bank and the Borrowers in the same position, so far as
possible, that they would have been in if such implementation
and change in currency had not occurred. Except as provided in
the foregoing provisions of this Section, no such
implementation or change in currency nor any economic
consequences resulting therefrom shall (i) give rise to any
right to terminate prematurely, contest, cancel, rescind,
alter, modify or renegotiate the provisions of this Loan
Agreement or (ii) discharge, excuse or otherwise affect the
performance of any obligations of the German Borrower under
this Loan Agreement, the Deutsche Mark Note or other Loan
Documents.
ARTICLE III
ADDITIONAL PROVISIONS REGARDING REVOLVING LOANS
3.01 DEFAULT RATE.
If a Borrower shall default in the payment when due (subject to
applicable grace periods, if any) of the principal of or interest on any Loan or
any other amount becoming due hereunder, such Borrower shall on demand from time
to time pay interest on any overdue payment of principal and, to the extent
permitted by law, on overdue payments of interest up to the date of actual
payment (after as well as before judgment):
(i) in the case of principal of or interest on a Loan
at a rate equal to 2% per annum above the rate which would otherwise be
payable hereunder; and
(ii) in the case of any other amount payable
hereunder or under any of the other Loan Documents (other than
principal of or interest on any Loan referred to in clause (i) above),
at a rate 2% per annum above the Prime Rate.
3.02 PREPAYMENTS.
(a) Voluntary Prepayments. The Borrowers shall have the right
at any time and from time to time to prepay any Loan in whole or in
part, without premium or penalty; provided, however, partial
prepayments of any Loan shall be applied to principal installments
thereunder in the inverse order of maturities.
(b) Mandatory Prepayments. If at any time the aggregate
outstanding principal amount of Revolving Loans shall exceed the lesser
of (i) the Revolving Loan Committed Amount and (ii) the Borrowing Base,
the U.S. Borrower immediately shall prepay the Revolving Loans in an
amount sufficient to eliminate such excess.
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<PAGE> 14
3.03 CAPITAL ADEQUACY.
(a) In the event that the Bank shall have determined that the
adoption or implementation on or after the Closing Date under the
Existing Loan Agreement of any applicable law, rule, regulation or
guideline regarding capital adequacy, or any change therein, or any
change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof or by any court, or
compliance by the Bank (or any lending office of the Bank) with any
request or directive made or issued after the Closing Date regarding
capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on the Bank's capital as a
consequence of its obligations hereunder to a level below that which
the Bank could have achieved but for such adoption, change or
compliance (taking into consideration the Bank's policies as the case
may be, with respect to capital adequacy) by an amount deemed by the
Bank to be material, then from time to time the Borrowers shall pay to
the Bank such additional amount or amounts as will compensate the Bank
for any such reduction suffered; provided, however, that no such
amounts shall be payable with respect to a reduction in rate of return
incurred more than 90 days before the Bank demands compensation under
this Section.
(b) Failure on the part of the Bank to demand compensation for
any reduction in return on capital with respect to any period shall not
constitute a waiver of the Bank's rights to demand compensation for any
reduction in return on capital in such period or in any other period.
The protection of this Section shall be available to the Bank
regardless of any possible contention of invalidity or inapplicability
of the law, regulation or condition which shall have been imposed.
3.04 INCREASED COSTS.
At any time that the Bank shall incur increased costs or reductions in
the amounts received or receivable hereunder with respect to any Loan because of
any change since the Closing Date under the Existing Loan Agreement in any
applicable law, governmental rule, regulation, guideline or order (or in the
interpretation or administration thereof and including the introduction of any
new law or governmental rule, regulation, guideline or order) including without
limitation the imposition, modification or deemed applicability of any reserves,
deposits or similar requirements as related to such Deutsche Mark Loan (such as,
for example, but not limited to, a change in official reserve requirements, but,
in all events, excluding reserves to the extent included in the computation of
the Adjusted LIBOR Rate), then the Borrower shall pay to the Bank within 15 days
after written demand therefor (which demand shall state the basis therefor),
such additional amounts (in the form of an increased rate of, or a different
method of calculating, interest or otherwise as the Bank may determine in its
reasonable discretion) as may be required to compensate the Bank for such
increased costs or reductions in amounts receivable hereunder. Upon determining
in good faith that any additional amounts will be payable pursuant to this
subsection, the Bank will give prompt written notice thereof to the Borrower,
which notice shall set forth in reasonable detail the basis of the calculation
of such additional amounts.
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<PAGE> 15
3.05 TAXES, ETC.
(a) All payments made by a Borrower hereunder, under a Note or
under any Loan Document will be made without set-off, counterclaim,
deduction or other defense. All such payments shall be made free and
clear of and without deduction for any present or future income,
franchise, sales, use, excise, stamp or other taxes, levies, imposts,
deductions, charges, fees, withholdings, restrictions or conditions of
any nature now or hereafter imposed, levied, collected, withheld or
assessed by any jurisdiction (whether pursuant to United States
Federal, state, local or foreign law) or by any political subdivision
or taxing authority thereof or therein, and all interest, penalties or
similar liabilities, excluding taxes on the overall net income of the
Bank (such nonexcluded taxes are hereinafter collectively referred to
as the "Taxes"). If a Borrower shall be required by law to deduct or to
withhold any Taxes from or in respect of any amount payable hereunder,
(i) the amount so payable shall be increased to the extent necessary so
that after making all required deductions and withholdings (including
Taxes on amounts payable to the Bank pursuant to this sentence) the
Bank receives an amount equal to the sum it would have received had no
such deductions or withholdings been made, (ii) such Borrower shall
make such deductions or withholdings, and (iii) such Borrower shall pay
the full amount deducted or withheld to the relevant taxation authority
in accordance with applicable law. Whenever any Taxes are payable by a
Borrower, as promptly as possible thereafter, such Borrower shall send
the Bank an official receipt showing payment. In addition, each
Borrower agrees to pay any present or future taxes, charges or similar
levies which arise from any payment made hereunder or from the
execution, delivery, performance, recordation or filing of, or
otherwise with respect to, this Loan Agreement, the Notes or any other
Loan Document (hereinafter referred to as "Other Taxes").
(b) The U.S. Borrower will indemnify the Bank for the amount
of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this
Section 3.05) paid by the Bank (including penalties, interest and
expenses for nonpayment, late payment or otherwise) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. This indemnification shall be paid
within 30 days from the date on which the Bank makes written demand.
(c) If the U.S. Borrower fails to perform its obligations
under this Section 3.05, the U.S. Borrower shall indemnify the Bank for
any incremental taxes, interest or penalties that may become payable as
a result of any such failure.
3.06 PAYMENTS AND COMPUTATIONS.
Except as otherwise specifically provided herein or in another Loan
Document, all payments hereunder shall be made to the Bank in U.S. dollars in
immediately available funds at its offices in Wilmington, North Carolina not
later than 11:00 a.m. (Wilmington, North Carolina time) on the date when due.
Payments received after such time shall be deemed to have been received on the
next succeeding Business Day. Whenever any payment hereunder shall be stated to
be due
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<PAGE> 16
on a day which is not a Business Day, the due date thereof shall be extended to
the next succeeding Business Day (subject to accrual of interest and fees for
the period of such extension).
ARTICLE IV
CONDITIONS OF LENDING
4.01 CONDITIONS TO CLOSING DATE.
This Loan Agreement shall be and become effective as of the Closing
Date when all of the conditions set forth in this Section 4.01 shall have been
satisfied or waived in writing by the Bank.
(a) Execution of Loan Agreement and Notes. The Bank shall have
received a duly executed original of this Loan Agreement and the Notes.
(b) Closing Certificate. The Bank shall have received a
certificate from the chief financial officer of the U.S. Borrower, in
form and substance satisfactory to the Bank, certifying inter alia that
(i) no Event of Default nor any event which upon notice or lapse of
time or both would constitute such an Event of Default shall have
occurred and be continuing as of the Closing Date, and (ii) the
representations and warranties of the Credit Parties made in or
pursuant to the Loan Documents are true in all material respects on and
as of the Closing Date.
(c) Fees. The U.S. Borrower shall have paid all fees due and
owing to the Bank, including without limitation all reasonable fees and
expenses of the Bank and its counsel actually incurred in connection
with any of the Loan Documents and the transactions contemplated
thereby to the extent invoiced.
(d) Security Agreement and Financing Statements. The Bank
shall have received (i) a duly executed original of an amendment to the
Security Agreement in form and substance acceptable to the Bank, (ii)
executed UCC-1 financing statements from the U.S. Borrower and each
Domestic Subsidiary with respect to each location in which each such
Credit Party has or maintains personal property, and (iii) searches of
Uniform Commercial Code filings in the jurisdiction of the U.S.
Borrower's and each Domestic Subsidiary's chief executive office and
each jurisdiction where any Collateral (as defined in the Security
Agreement) is located or where a filing would need to be made in order
to perfect the Bank's security interest in the Collateral, together
with copies of the financing statements on file in each such
jurisdiction and evidence that no liens exist thereon other than as
expressly approved by the Bank or permitted by the Loan Documents.
(e) Pledge Agreement. The Bank shall have received (i) a duly
executed original of an amendment to the Pledge Agreement in form and
substance acceptable to the Bank, (ii) evidence satisfactory to the
Bank that it has a first priority pledge of 100% of the ownership
interests in each Domestic Subsidiary and a first priority pledge of
65%
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of the ownership interests in each first tier Foreign Subsidiary; (iii)
all stock certificates evidencing the stock pledged to the Bank
pursuant to the Pledge Agreement, together with duly executed in blank
undated stock powers attached thereto, and (iv) evidence and
information satisfactory to the Bank regarding the capital and
ownership structure of the U.S. Borrower and its Subsidiaries.
(f) Guaranty. Each of the Guarantors other than the Foreign
Subsidiaries shall have executed this Loan Agreement.
(g) Corporate Documents. The Bank shall have received, in form
and content satisfactory to the Bank, (i) copies of resolutions of the
board of directors of the U.S. Borrower and each Domestic Subsidiary
approving and adopting the execution and delivery of this Loan
Agreement, the other Loan Documents, and each other document or
instrument executed and delivered in connection herewith, certified by
a secretary or assistant secretary of each such Credit Party to be true
and correct and in force and effect as of the Closing Date; (ii)
incumbency information for the U.S. Borrower and each Domestic
Subsidiary certified by a secretary or assistant secretary to be true
and correct as of the Closing Date; (iii) good standing certificates
from appropriate governmental authorities dated as of a recent date
with respect to the U.S. Borrower and the Domestic Subsidiaries; and
(iv) an opinion of legal counsel to the U.S. Borrower and each Domestic
Subsidiary, which shall cover, among other things, authority, legality,
validity, binding effect and enforceability of the Loan Documents and
the attachment, perfection and validity of liens, addressed to the Bank
and dated as of the Closing Date.
(h) TROL Facility. The Bank shall have received a duly
executed original of an amendment to the Participation Agreement and
the related agreements, such amendment to be in form and substance
acceptable to the Bank, the effect of which is to reduce the Holder
Commitments thereunder to $450,000 and the Lender Commitments
thereunder to $14,550,000, thereby capping the tax retention operating
lease transaction described therein at $15,000,000.
(i) Evidence of Insurance. The Bank shall have received
certificates of insurance of the U.S. Borrower and its Domestic
Subsidiaries evidencing liability and casualty insurance meeting the
requirements set forth in the Loan Documents and naming the Bank as
additional insured, sole loss payee or mortgagee, as appropriate.
4.02 CONDITIONS TO EACH LOAN.
The Bank shall not be obligated to make any Loan hereunder unless (a)
the conditions set forth in Section 4.01 hereof have been satisfied or waived in
writing by the Bank, (b) the representations and warranties contained in Article
V hereof are true and correct as of the date of the making of such Loan and (c)
immediately after the making of such Loan no Event of Default nor any event
which upon notice or lapse of time or both would constitute such an Event of
Default shall have occurred and be continuing.
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4.03 ADDITIONAL CONDITIONS TO THE DEUTSCHE MARK LOAN.
On or prior to the funding date of any installment of the Deutsche Mark
Loan, the Bank shall have received (a) evidence satisfactory to the Bank that
(i) the proceeds of the Deutsche Mark Loan will be used to immediately repay in
full the German Borrower's indebtedness to its German banks and (ii) the letters
of credit previously issued by the Bank to support such indebtedness will be
returned to the Bank for cancellation immediately upon such repayment, (b) such
security documents and evidence of collateral filings as the Bank may request
with respect to the assets of the German Borrower and the other Foreign
Subsidiaries, all such documents and filings to be in form and substance
satisfactory to the Bank and its counsel and (c) such corporate authority
documents, officer's certificates, insurance certificates, legal opinions and
similar documents as the Bank reasonably requests in connection with the
Deutsche Mark Loan, the German Borrower and the Foreign Subsidiaries, all such
documents to be in form and substance satisfactory to the Bank and its counsel.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Each Credit Party hereby represents and warrants to the Bank that:
5.01 CORPORATE EXISTENCE AND POWER.
Such Credit Party is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and is duly
qualified and in good standing as a foreign corporation authorized to do
business in every jurisdiction where the failure to so qualify would have a
material adverse effect on such Person. Further, each Credit Party has all power
and authority to own and operate its properties and to carry on its business as
now conducted.
5.02 AUTHORIZATION OF LOAN AGREEMENT.
Each Credit Party has the power and authority to enter into this Loan
Agreement and to perform its obligations under and consummate the transactions
contemplated by this Loan Agreement and has by proper corporate action duly
authorized the execution and delivery of this Loan Agreement. When executed and
delivered, this Loan Agreement and the other Loan Documents will be valid and
binding obligations of each Credit Party which is a party thereto, enforceable
in accordance with their respective terms.
5.03 NO VIOLATION OF CORPORATE RESTRICTIONS.
Neither the execution and delivery of this Loan Agreement, nor the
performance of the obligations under or consummation of the transactions
contemplated by this Loan Agreement, violates or will violate any law or
governmental order, conflicts or will conflict with any provision of any charter
document or by-law of any Credit Party or any material term or
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provision of any agreement or instrument to which any Credit Party is a party or
by which any Credit Party is bound, or constitutes or will constitute a breach
of or a default under any such agreement or instrument (unless appropriate
written waivers have been received and delivered to the Bank).
5.04 GOVERNMENTAL CONSENTS.
No consent, approval or authorization of, or filing, registration or
qualification with, any governmental authority on the part of any Credit Party
is required as a condition to the execution, delivery or performance of this
Loan Agreement or any of the other Loan Documents by the Credit Parties.
5.05 LITIGATION.
Except as set forth on Exhibit 5.05 attached hereto, there are no
material pending, or to the best knowledge of a Credit Party, threatened, legal
proceedings to which any Credit Party is a party or of which any of its
properties are the subject.
5.06 OTHER AGREEMENTS.
No Credit Party is in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
material agreement or instrument to which it is a party.
5.07 TAXES.
Each Credit Party has filed or caused to be filed all federal, state
and local tax returns which are required to be filed by such Credit Party and
has paid or caused to be paid all taxes as shown on said returns or on any
assessment to the extent such taxes have become due, except for taxes which are
being contested in good faith and against which reserves in accordance with
Generally Accepted Accounting Principles will be established. No Credit Party
knows of any proposed material tax assessments against it. No extension of time
for assessment or payment of any federal, state or local tax by a Credit Party
is in effect.
5.08 LIENS.
None of the assets of the Credit Parties is subject to any mortgage,
pledge, title retention lien or other lien, encumbrance or security interest,
except (i) for current taxes not delinquent or taxes being contested in good
faith and by appropriate proceedings, (ii) liens arising in the ordinary course
of business for sums not due or sums being contested in good faith and by
appropriate proceedings, but not involving any borrowed money or the deferred
purchase price of property or services, (iii) mechanics' and materialmen's
liens, reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases and other similar title exceptions
or encumbrances affecting real property which do not in the aggregate materially
detract from the value of said properties or materially interfere with their use
in the ordinary conduct of the Credit Parties' business and (iv) to the extent
shown in Exhibit 5.08.
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5.09 ERISA.
No Credit Party has incurred any accumulated unfunded deficiency within
the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA") or
incurred any material liability to the Pension Benefit Guaranty Corporation
("PBGC") established under such Act (or any successor thereto under such Act) in
connection with the employee benefit plans established or maintained by the
Credit Parties. Each Credit Party is in compliance in all material respects with
those provisions of ERISA and the regulations and public interpretations
thereunder which are applicable to the U.S. Borrower and its Subsidiaries. No
Reportable Event (as defined in ERISA) has occurred with respect to any Plan.
5.10 SUBSIDIARIES.
The U.S. Borrower has no Subsidiaries as of the date hereof except as
set forth on Exhibit 5.10 attached hereto.
5.11 REGULATION U.
No Borrower is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System). The proceeds of the Loans will be used
for the purposes described in Article II and not for the purpose of purchasing
or carrying margin stock.
5.12 PATENTS AND TRADEMARKS.
Each Credit Party possesses all of the necessary patents, licenses,
trademarks, trademark rights, tradenames, tradename rights and copyrights
material to conduct its business as now conducted, without known conflict with
any patent, license, trademark, tradename or copyright of any other Person.
5.13 FINANCIAL INFORMATION PROVIDED.
The U.S. Borrower represents that the financial information it has
heretofore furnished to the Bank dated September 30, 1999 with regard to its
operations is true and correct, and presents fairly the financial position of
the U.S. Borrower, and there have been no material adverse changes since that
date.
5.14 ENVIRONMENTAL COMPLIANCE.
Each Credit Party has fully complied with all laws, ordinances,
regulations and orders, including without limitation all zoning, safety and
environmental laws, ordinances, regulations and orders, applicable to its
business or properties and the present uses by such Credit Party of its
properties do not violate any such laws, ordinances, regulations or orders.
There is not currently and in the past there has not been (i) any use,
treatment, storage or disposal of any hazardous
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substance or material or pollutant on any of the such Credit Party's properties,
except as of the date hereof as disclosed on Exhibit 5.14 attached hereto, (ii)
any spill, leakage, discharge or release of any hazardous substance or material
or pollutant thereon or therefrom, or (iii) any off-site disposal by the such
Credit Party of any hazardous substance or material or pollutant in any
location, except as disclosed on Exhibit 5.14 attached hereto.
5.15 YEAR 2000 COMPLIANCE.
The U.S. Borrower has (i) initiated a review and assessment of all
areas within its and each of its Subsidiaries' businesses and operations
(included those affected by suppliers, vendors and customers) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications may not be able to recognize and properly perform date-sensitive
functions after December 31, 1999), (ii) developed a plan and timeline for
addressing the Year 2000 Problem on a timely basis, and (iii) to date,
implemented that plan in accordance with that timetable. Based on the foregoing,
each Credit Party believes that all computer applications (including those of
its suppliers, vendors and customers) that are material to its or any of its
Subsidiaries' business and operations are reasonably expected on a timely basis
to be able to perform properly date-sensitive functions for all dates before and
after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent
that a failure to do so could not reasonably be expected to have a material
adverse effect on such Credit Party.
ARTICLE VI
AFFIRMATIVE COVENANTS
6.01 AFFIRMATIVE COVENANTS
Each Credit Party agrees that as long as its obligations hereunder
remain outstanding and until the Commitment hereunder is terminated (unless the
Bank shall otherwise consent in writing), such Credit Party will, and will cause
its Subsidiaries to with respect to the subsections (e) through (o) below:
(a) within ninety (90) days of the end of each fiscal year,
deliver or cause to be delivered to the Bank either (i) the U.S.
Borrower's Annual Report on Form 10-K for such fiscal year or (ii) a
detailed consolidated financial report of the U.S. Borrower and its
Subsidiaries as of the end of such fiscal year (including a balance
sheet, income statement and statements of cash flows and stockholders'
equity) based on Generally Accepted Accounting Principles applied on a
Consistent Basis containing an unqualified opinion of nationally
recognized independent certified public accountants;
(b) deliver or cause to be delivered:
(1) within forty-five (45) days after the end of each
fiscal quarter of each fiscal year, either (i) the copy of
Form 10-Q for such quarter as filed with the Securities and
Exchange Commission or (ii) financial information and reports
as
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of the end of such fiscal quarter (including a balance sheet
and income statement, in form and detail satisfactory to the
Bank) of the U.S. Borrower and its Subsidiaries (in
consolidated form) certified by the chief financial officer of
the U.S. Borrower to be true and correct; and
(2) as soon as available, and in any event within
twenty-five (25) days after the close of each of the first
eleven calendar months of the fiscal year of the U.S.
Borrower, (i) a consolidated balance sheet and income
statement of the U.S. Borrower and its Subsidiaries, as of the
end of such month, together with related consolidated
statements of operations and consolidated statements of
retained earnings and of cash flows for such month, in each
case setting forth in comparative form consolidated figures
for (A) the corresponding period of the preceding fiscal year
and (B) management's proposed budget for such period, all such
financial information to be in form and detail reasonably
acceptable to the Bank, and (ii) an accounts receivable aging,
accounts payable aging, and a collateral value maintenance
calculation, each in form and detail reasonably acceptable to
the Bank.
(3) within twenty-five (25) days after the end of
each calendar month, a certificate as of the end of the
immediately preceding month, substantially in the form of
Exhibit 6.01(b)(3) and certified by chief financial officer of
the U.S. Borrower to be true and correct as of the date
thereof (a "Borrowing Base Certificate").
(c) together with each delivery of financial reports required
by Section 6.01(a) and (b) hereof, deliver or cause to be delivered to
the Bank a statement signed by the chief financial officer of the U.S.
Borrower substantially in the form of Exhibit 6.01(c) hereto, setting
forth that each Credit Party has kept, observed, performed and
fulfilled each and every agreement binding on it contained in this Loan
Agreement and the Loan Documents and is not at the time in default in
the keeping, observance, performance or fulfillment of any of the
terms, provisions and conditions of this Loan Agreement or any of the
Loan Documents and that no Event of Default specified in Article VIII
hereof, nor any event, which, upon notice or lapse of time or both,
would constitute such an Event of Default, has occurred, or if such
Event of Default exists or would occur as the case may be, stating the
nature thereof, the period of existence thereof and what action the
Credit Parties propose to take with respect thereto;
(d) promptly, from time to time, deliver or cause to be
delivered to the Bank a copy of all filings made under the Securities
and Exchange Act of 1934 and such other information regarding the U.S.
Borrower's operations, business affairs and financial condition as the
Bank may reasonably request. The Bank is hereby authorized to deliver a
copy of any such financial information delivered hereunder to the Bank
to any regulatory authority having jurisdiction over the Bank with
appropriate confidential restrictions being noted on any submissions of
such information;
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(e) maintain or cause to be maintained all personal property
material to its business in good working order and condition and make
all needed repairs, replacements and renewals as are necessary to
conduct its business in accordance with prudent business practices;
(f) do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence, rights and
franchises;
(g) (i) comply with or contest in good faith all statutes and
governmental regulations of which any Credit Party has knowledge and
the noncompliance of which would have a material adverse effect on the
financial condition of such Credit Party; and (ii) pay all taxes,
assessments, governmental charges, claims for labor, supplies, rent and
any other obligation which, if unpaid, might become a lien against any
of its properties except liabilities being contested in good faith and
against which adequate reserves have been established;
(h) at all times keep its insurable properties insured to such
extent and against such risks, including, without limitation, public
liability insurance, hazard insurance, worker's compensation and other
insurance required by law and is customary with companies of comparable
size in the same or similar business but at all times of the type and
at least in the amount of the present coverage of the Credit Parties;
(i) preserve and protect its patents, licenses trademarks,
trademark rights, tradenames, tradename rights and copyrights and
maintain all of its other material properties and assets used or useful
in the conduct of its business in good repair, working order and
condition and from time to time cause to be made all proper
replacements, betterments and improvements thereto;
(j) keep true books of records and accounts in accordance with
Generally Accepted Accounting Principles applied on a Consistent Basis,
and in which full, true and correct entries will be made of the Credit
Parties' dealings and transactions;
(k) permit any officer of the Bank designated by the Bank to
visit and inspect any of the Credit Parties' properties, books and
financial records at such times as the Bank may reasonably request upon
reasonable notice and during ordinary business hours;
(l) upon the request of the Bank, authorize any officer of the
Bank to discuss its financial statements and financial affairs at any
time and from time to time with the U.S. Borrower's independent
certified public accountants upon reasonable notice and during ordinary
business hours with a representative of the U.S. Borrower present;
(m) deliver to the Bank forthwith, upon any officer of a
Credit Party obtaining knowledge of an Event of Default or an event
which would constitute such an Event of Default but for the requirement
that notice be given or time elapse or both, a certificate signed by
the chief executive officer of the U.S. Borrower specifying the nature
and
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period of existence thereof and what action the Credit Parties propose
to take with respect thereto;
(n) within ten (10) days of the event becoming known to any
officer of a Credit Party, notify the Bank in writing of the occurrence
of any of the following events:
(i) the pendency or commencement of any action, suit
or proceeding at law or in equity under which a party or
parties seek an amount equal to or exceeding $250,000.00;
(ii) any event or condition which shall constitute an
event of default under any other agreement for borrowed money
or any known or potential materially adverse change in any
other material contractual agreement;
(iii) any levy of an attachment, execution or other
process against its assets; and
(iv) any change in any existing agreement or contract
which may materially adversely affect any of its businesses or
affairs, financial or otherwise;
(o) the U.S. Borrower shall (i) at all times, make prompt
payment of all contributions required under all employee benefit plans
("Plans") to meet the minimum funding standard set forth in ERISA (as
defined in Section 5.09) with respect to its Plans; (ii) within thirty
(30) days after the filing thereof, furnish to the Bank copies of each
annual report/return (Form 5500 Series), as well as all schedules and
attachments required to be filed with the Department of Labor and/or
the Internal Revenue Service pursuant to ERISA, and the regulations
promulgated thereunder, in connection with each of its Plans for each
Plan Year (as defined in ERISA); (iii) notify the Bank immediately of
any fact, including, but not limited to, any Reportable Event (as
defined in ERISA) arising in connection with any of its Plans, which
might constitute grounds for termination thereof by the PBGC or for,
the appointment by the appropriate United States District Court of a
trustee to administer such Plan, together with a statement, if
requested by the Bank, as to the reason therefor and the action, if
any, proposed to be taken with respect thereof; and (iv) furnish to the
Bank, upon its request, such additional information concerning any of
the U.S. Borrower's Plans as may be reasonably requested;
(p) satisfy or cause to be satisfied the following financial
tests:
(i) the U.S. Borrower will maintain as of the end of
each fiscal quarter (commencing with the fiscal quarter ending
December 31, 1999) Tangible Net Worth of not less than
$40,000,000.00;
(ii) the U.S. Borrower shall maintain a Cash Flow
Coverage Ratio computed as of the last day of each fiscal
quarter (commencing with the fiscal quarter ending December
31, 1999) of (A) with respect to the fiscal quarter
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ending December 31, 1999, not less than 1.25 to 1.0 and (B)
with respect to the fiscal quarter ending March 31, 2000, not
less than 1.00 to 1.0;
(iii) the U.S. Borrower shall maintain a ratio of
Funded Debt to EBITDA computed as of the last day of each
fiscal quarter (commencing with the fiscal quarter ending
December 31, 1999) of (A) with respect to the fiscal quarter
ending December 31, 1999 (such ratio to be calculated using
annualized EBITDA for the fiscal quarter then ended, i.e.
EBITDA for the fiscal quarter ending December 31, 1999 times
4), not greater than 5.30 to 1.0 and (B) with respect to the
fiscal quarter ending March 31, 2000 (such ratio to be
calculated using annualized EBITDA for the two fiscal quarter
period then ended, i.e. aggregate EBITDA for the fiscal
quarters ending December 31, 1999 and March 31, 2000 times 2),
not greater than 3.90 to 1.0; and
(iv) the U.S. Borrower shall maintain at all times
Eligible Receivables such that, on each day, the product of
(A) Eligible Receivables times (B) 80% is no less than
$13,000,000.
(q) at any time any Person becomes a Subsidiary of the U.S.
Borrower, the U.S. Borrower shall promptly (but in any event within 30
days after the date thereof or within such longer period of time as
agreed to by the Bank): (a) notify the Bank thereof, (b) cause such
Subsidiary to become a Guarantor hereunder by execution of a joinder
agreement in form and substance satisfactory to the Bank, (c) cause
such Subsidiary to pledge its material assets to the Bank pursuant to
security documents in form and substance satisfactory to the Bank and
(d) deliver to the Bank with the joinder agreement and other documents
referred to above, such supporting resolutions, incumbency
certificates, corporate formation and organizational documentation and
opinions of counsel as the Bank may reasonably request;
(r) the Credit Parties will, and will cause each of their
respective Subsidiaries to, take all actions reasonably necessary to
assure that the Credit Parties' computer based systems (which if not
functional would have a material adverse effect on the Credit Parties)
are able to operate and effectively process data in a manner that is
Year 2000 Compliant (as defined in Section 5.15). At the request of the
Bank, the Credit Parties shall provide information to the Bank
concerning the Credit Parties' Year 2000 compliance; and
(s) within 30 days from the Closing Date, the Credit Parties
shall (i) execute and provide for the recordation of the Mortgages and
UCC financing statements evidencing the Bank's liens pursuant to the
Mortgages, (ii) perform all other acts reasonably necessary to perfect
the Bank's liens, (iii) arrange for title insurance acceptable to the
Bank in respect of the properties covered by the Mortgages, and (iv)
deliver to the Bank opinions of local counsel, satisfactory in form and
substance to the Bank, concerning the Mortgages and related UCC
financing statements and the perfection of the Bank's interest therein.
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ARTICLE VII
NEGATIVE COVENANTS
7.01 NEGATIVE COVENANTS
Each Credit Party agrees that as long as its obligations hereunder
remain outstanding and until the Commitment is terminated (unless the Bank shall
otherwise consent in writing), no Credit Party shall:
(a) incur, create, assume or permit to exist any indebtedness
for borrowed money, howsoever evidenced, or its equivalent (including
but not limited to leases required to be capitalized under Generally
Accepted Accounting Principles), except
(i) indebtedness set forth in the financial
statements referred to in Section 5.13 hereof and as set forth
in Exhibit 7.01(a)(i);
(ii) additional indebtedness extended by the Bank;
and
(iii) purchase money indebtedness incurred to finance
the acquisition of equipment on installment contracts with
terms not to exceed 6 months;
(b) incur, create or permit to exist any pledge, lien, charge
or other encumbrance of any nature whatsoever on the property of the
U.S. Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired, other than
(i) liens as disclosed in Exhibit 5.08 hereto;
(ii) any unfiled lien of materialmen, mechanics,
workmen, warehousemen, carriers, landlords or repairmen;
provided that if such a lien shall be perfected and shall not
be contested in good faith, it shall be discharged of record
immediately by payment, bond or otherwise;
(iii) tax liens which are being contested in good
faith, or which constitute liens for taxes the payment of
which is not yet required;
(iv) liens in favor of the Bank;
(v) liens incurred in connection with the purchase
money indebtedness permitted under Section 1.01(a)(iii); and
(vi) liens on assets securing indebtedness or
obligations in amounts less than $10,000.00;
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(c) sell, lease, transfer or otherwise dispose of any of the
properties and assets of the U.S. Borrower or any of its Subsidiaries
to any Person other than sales in the ordinary course of business;
(d) seek or permit dissolution or liquidation of any Credit
Party in whole or in part; provided, however, that any Subsidiary other
than a Borrower that is not material to the U.S. Borrower and its
Subsidiaries taken as a whole may liquidate, wind-up or dissolve itself
(i) into a Credit Party or (ii) otherwise in a transaction in which the
assets of such dissolving Subsidiary become owned by a Credit Party;
(e) guaranty, or become liable for, the obligations of any
other Person other than the Obligations (provided, however, (i) this
shall not prevent the U.S. Borrower or any of its Subsidiaries from
endorsing negotiable instruments for collections in the ordinary course
of business and (ii) this shall not prevent the U.S. Borrower from
entering into (A) those guarantees, endorsements or debt assumptions
for related, affiliate or subsidiary entities of the U.S. Borrower
described on Schedule 7.01(a)(i) or (B) additional guarantees,
endorsements or debt assumptions for related, affiliate or subsidiary
entities of the U.S. Borrower so long as the aggregate amount of such
guaranties, endorsements or debt assumptions shall not exceed
$4,000,000.00 at any time);
(f) make any loans or advances in excess of $500,000.00 in the
aggregate; provided, however, the U.S. Borrower may make loans or
advances to related, affiliate or subsidiary entities of the U.S.
Borrower so long as the aggregate amount of such loans or advances
shall not exceed, at any time, an amount equal to $6,100,000.00 or such
greater amount as the Bank may designate in writing to the U.S.
Borrower;
(g) consolidate with, merge into or be acquired by any Person;
provided, however, a Credit Party shall be permitted to enter into
merger and/or consolidation transactions so long as such Credit Party
is the surviving entity; provided further that, if a Borrower is a
party to any such transaction, such Borrower shall be the surviving
entity;
(h) change the general character of business of the U.S.
Borrower or any of its Subsidiaries or engage in any type of business
not reasonably related to the business of the U.S.
Borrower or any of its Subsidiaries as presently conducted;
(i) (1) pay any cash dividends to the shareholders of the U.S.
Borrower, (2) make any distribution on any shares of any class of the
capital stock of the U.S. Borrower which results in a reduction to
stockholders' equity, (3) apply any Credit Party's property or assets
to the purchase, redemption or other retirement of any shares of any
class of capital stock resulting in a reduction to stockholders' equity
or (4) amend in any way the capital structure of the U.S. Borrower;
(j) create or permit to exist or become effective, directly or
indirectly, any prohibition or restriction on the creation or existence
of any lien upon the assets of the U.S. Borrower or any of its
Subsidiaries other than as set forth herein; or
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(k) create or permit to exist any Subsidiary unless such
Subsidiary becomes a Guarantor hereunder pursuant to a joinder
agreement.
ARTICLE VIII
EVENTS OF DEFAULT AND ACCELERATION
8.01 EVENTS OF DEFAULT.
Any of the following shall constitute an "Event of Default" under this
Loan Agreement:
(a) Nonpayment. Nonpayment when and as due of any principal,
interest or other payment hereunder or under the Revolving Notes and
the continuation of such nonpayment for a period of five (5) days.
(b) Breach of Covenants. Other than as set forth in Section
8.01(a) hereof, the failure to perform and observe any covenant or
other obligation contained herein or in any other Loan Documents and
the continuation of such failure for a period of thirty (30) days after
receipt of written notice from the Bank thereof.
(c) False Statements. If any representation or warranty made
by a Credit Party in this Loan Agreement, any other Loan Document or in
any document, certificate, statement or report heretofore or hereafter
made shall be untrue in any material respect.
(d) Bankruptcy. In the event that a Borrower or any Guarantor
(1) shall make an assignment for the benefit of
creditors; or
(2) has a petition initiating a proceeding under any
section or chapter of the Bankruptcy Code or its amendments,
filed by or against a Borrower or any Guarantor and, if
against a Borrower or any Guarantor, such petition is not set
aside within ninety (90) days after such filing; or
(3) shall file any proceedings for dissolution or
liquidation; or
(4) has a receiver, trustee or custodian appointed
for all or part of its or his assets; or
(5) seeks to make an adjustment, settlement or
extension of its or his debts with its or his creditors
generally; or
(6) has a notice of an action for enforcement of a
lien filed or recorded or a judgment lien or execution
obtained against it or him in excess of an aggregate of
$50,000.00 which notice of lien is not removed, insured,
reserved for
24
<PAGE> 29
(in amounts satisfactory to the Bank), satisfied, bonded or
contested in good faith within thirty (30) days after any
officer of a Credit Party becomes aware of such lien;
(e) if an event of default occurs under any agreement for
Funded Debt by and between a Credit Party and the Bank which is in
existence as of the date hereof or which is entered into subsequent to
the date hereof;
(f) if a Credit Party in the performance of any other
agreement for Funded Debt between it and any other lender defaults and
such default permits such other lender to accelerate such other
indebtedness of such Credit Party for borrowed money;
(g) any change shall occur with respect to the chief executive
officer management position of the U.S. Borrower; or
(h) any Guarantor shall default in the performance of any
obligation hereunder.
8.02 REMEDIES.
Upon the occurrence of any such Event of Default and after the
applicable grace period, if any, and unless the Bank agrees to waive in writing
such an Event of Default:
(a) Termination of Commitment. The Bank, in its sole
discretion, may terminate the Commitment.
(b) Acceleration of Indebtedness. All of the indebtedness of
any and every kind owing by a Credit Party to the Bank, howsoever
evidenced, now existing or hereafter arising, shall become due and
payable upon written notice to the U.S. Borrower (other than an Event
of Default described in Section 8.01(d) in which case such indebtedness
shall become due and payable immediately without necessity of written
demand) without the necessity of any other demand, presentment, protest
or notice upon a Credit Party, all of which are hereby expressly waived
by the Credit Parties.
(c) Acceleration of Obligations. All of the obligations of the
Credit Parties under the Loan Documents shall thereupon be immediately
due and payable without the necessity of any other demand, presentment,
protest or notice upon a Credit Party, all of which are hereby
expressly waived by the Credit Parties.
(d) Right of Set-Off. Regardless of the adequacy of the
collateral, the Bank shall have the right, immediately and without
further action by it, to set-off against a Note, all money owed by the
Bank in any capacity to a Credit Party, whether or not due, and the
Bank shall be deemed to have exercised such right of set-off and to
have made a charge against any such money immediately upon the
occurrence of such event of default even though such charge is made or
entered on the books of the Bank subsequent thereto.
25
<PAGE> 30
If the Bank exercises its right of set-off described in this paragraph,
it will provide the U.S. Borrower, in adequate detail, a description of
all amounts set-off against a Note.
ARTICLE IX
MISCELLANEOUS
9.01 NOTICES.
All notices and other communications hereunder shall be sufficiently
given and shall be deemed given when delivered or when mailed by registered or
certified mail, postage prepaid, addressed as follows:
(a) if to the Borrower:
Applied Analytical Industries, Inc.
2320 Scientific Park Drive
Wilmington, North Carolina 28405
Attention: Eugene T. Haley
Phone: (910) 254-7000
Telecopy: (910) 815-2354
(b) if to the Bank
Bank of America, N.A.
155 North Front Street
Wilmington, North Carolina 28401
Attention: David Houston
Phone: (910) 251-5325
Telecopy: (910) 251-5251
9.02 WAIVER.
No failure or delay on the part of the Bank in the exercise of any
right, power or privilege hereunder or under any other Loan Document shall
operate as a waiver of any such right, power or privilege nor shall any such
failure or delay preclude any other or further exercise thereof. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.
26
<PAGE> 31
9.03 SURVIVAL.
All covenants, agreements, representations and warranties made herein
and in the other Loan Documents shall survive the making by the Bank of the
Loans and the execution and delivery to the Bank of the Loan Documents and shall
continue in full force and effect so long as any of the indebtedness of the
Borrower to the Bank evidenced by the Notes or any obligations under the
Commitment remain outstanding.
9.04 SUCCESSORS AND ASSIGNS.
This Loan Agreement and the Loan Documents shall inure to the benefit
of and be binding upon successors and assigns of the Bank; provided, however, no
Credit Party shall assign any of its rights or obligations hereunder without the
prior written consent of the Bank.
9.05 COSTS.
The U.S. Borrower agrees to pay all reasonable costs and expenses in
connection with the preparation, execution, delivery and administration of the
Loan Documents and any amendments or modifications thereto, including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel to the
Bank (including the allocated costs of internal counsel), and, after the
occurrence of an Event of Default, costs and expenses of the Bank in connection
with the enforcement of this Loan Agreement or the other Loan Documents
(including without limitation reasonable attorneys fees) and to hold the Bank
harmless from any and all such costs, expenses and liabilities.
9.06 AMENDMENT; WAIVER; CONSENTS.
No approval, decision, option or action required of the Bank
("Approval") hereunder nor any modification, amendment or waiver ("Waiver") of
any provision of this Loan Agreement or any other Loan Document nor any consent
to any departure by a Credit Party therefrom ("Consent") shall in any event be
effective unless the same shall be in writing signed by the Bank and delivered
in accordance with the provisions of Section 9.01 hereof, and then such
Approval, Waiver or Consent shall be effective only in the specific instance and
for the purpose for which given but any such Approval, Waiver or Consent when
signed shall be effective and binding upon the Bank. No notice to or demand on a
Credit Party in any case shall entitle the recipient any other or further notice
or demand in the same, similar or other circumstances.
9.07 YEAR.
Interest, fees and premiums hereunder shall be computed on the basis of
a three hundred sixty (360) day year for the actual number of days in the
billing period.
9.08 PAYMENT ON BUSINESS DAY.
Should any installment or other payment of the principal of or interest
on the Notes become due and payable on other than a Business Day, the maturity
thereof shall be extended to
27
<PAGE> 32
the next succeeding Business Day thereafter and in the case of an installment of
principal, interest shall be payable thereon at the rate per annum herein
specified during such extension.
9.09 COUNTERPARTS.
This Loan Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original, and it
shall not be necessary in making proof of this Loan Agreement to produce or
account for more than one such counterpart.
9.10 ASSIGNMENT.
The Bank may, at any time, transfer or assign all or any portion of the
indebtedness evidenced by a Note held by the Bank and the terms hereof shall
extend to any subsequent holder of a Note.
9.11 TERM.
The term of this Loan Agreement shall be until the Bank is no longer
obligated to lend under the Commitment and the Bank has received payment in full
of the unpaid principal and interest of the Notes.
9.12 CAPTIONS.
The captions herein are inserted only as a matter of convenience and
for reference and in no way define, limit or describe the scope of this Loan
Agreement nor the interest of any provisions hereof.
9.13 GOVERNING LAW.
This Loan Agreement and the other Loan Documents and all matters
relating thereto shall be governed by and construed and interpreted in
accordance with the laws of the State of North Carolina. Each Credit Party
hereby submits to the jurisdiction and venue of the state and federal courts of
North Carolina and agrees that the Bank may, at its option, enforce its rights
under the Loan Documents in such courts. The Credit Parties hereby agrees that
both the federal and state courts in Mecklenburg County, North Carolina are a
convenient forum and agrees not to raise as a defense that such courts are not a
convenient forum.
9.14 ARBITRATION.
ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING
BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT,
AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS,
INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE
DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT
(OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
28
<PAGE> 33
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS LOAN AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS LOAN
AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
CITY OF THE BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OR CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION
PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE
APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
ARBITRATION PROVISION; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION
AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW;
OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES
SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR
PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR
ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF
HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER
THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN
ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASSIONING RESORT TO SUCH
REMEDIES.
9.15 LOAN DOCUMENTS.
The Bank agrees to provide the U.S. Borrower with copies of all of the
Loan Documents in acceptable electronic format.
29
<PAGE> 34
9.16 BINDING EFFECT; REPLACEMENT OF EXISTING LOAN AGREEMENT;
TERMINATION.
(a) This Loan Agreement shall become effective at such time on
or after the Closing Date when it shall have been executed by the
Credit Parties and the Bank, and thereafter this Loan Agreement shall
be binding upon and inure to the benefit of the Credit Parties and the
Bank and their respective successors and assigns. The Credit Parties
and the Bank each hereby agrees that, at such time as this Loan
Agreement shall have become effective pursuant to the terms of the
immediately preceding sentence, (i) the Existing Loan Agreement
automatically shall be deemed amended, restated and replaced in its
entirety by this Loan Agreement, and all obligations and commitments
outstanding under the Existing Loan Agreement shall be governed by the
terms of this Loan Agreement (as such obligations or commitments may be
modified or amended hereunder) and (ii) the promissory notes executed
by the U.S. Borrower in connection with the Existing Loan Agreement
automatically shall be substituted and replaced by the promissory notes
executed in connection with this Loan Agreement. The Credit Parties
further agree, upon the request of the Bank, to promptly take such
actions, as reasonably requested, as are appropriate to carry out the
intent of this Loan Agreement and the other Loan Documents, including,
but not limited to, such actions as are reasonably necessary to ensure
that the Bank has a perfected security interest in any and all
collateral securing the Credit Parties' obligations hereunder and under
the other Loan Documents, subject to no Liens other than Permitted
Liens.
(b) The term of this Loan Agreement shall commence on the
effective date pursuant to subsection (a) above and shall continue
until no Loans or any other amounts payable hereunder or under any of
the other Loan Documents shall remain outstanding and until the
Commitment hereunder shall have expired or been terminated.
ARTICLE X
GUARANTY
10.01 GUARANTY.
Each of the Guarantors hereby jointly and severally guarantees to the
Bank as hereinafter provided the prompt payment of the Guaranteed Obligations in
full when due (whether at stated maturity, as a mandatory prepayment, by
acceleration or otherwise and after giving effect to any grace periods) strictly
in accordance with the terms hereof. Each of the Guarantors hereby further
agrees that if any of the Guaranteed Obligations are not paid in full when due
(whether at stated maturity, as a mandatory prepayment, by acceleration or
otherwise and after giving effect to any grace periods), such Guarantor will
promptly pay the same, without any demand or notice whatsoever, and that in the
case of any extension of time of payment or renewal of any of the Guaranteed
Obligations, the same will be promptly paid in full when due (whether at
extended maturity, as a mandatory prepayment, by acceleration or otherwise and
after giving effect to any
30
<PAGE> 35
grace periods) in accordance with the terms of such extension or renewal. This
is a guaranty of payment and not of collection.
Notwithstanding any provision to the contrary contained herein or in
any other of the Loan Documents, to the extent the obligations of any Guarantor
as guarantor hereunder shall be adjudicated to be invalid or unenforceable for
any reason (including, without limitation, because of any applicable state or
federal law relating to fraudulent conveyances or transfers) then the
obligations of such Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Federal Bankruptcy Code).
10.02 OBLIGATIONS UNCONDITIONAL.
The obligations of the Guarantors under Section 10.01 hereof are
absolute and unconditional, irrespective of the value, genuineness, validity,
regularity or enforceability of this Agreement or any of the other Loan
Documents, or any other agreement or instrument referred to herein or therein or
relating hereto or thereto, or any substitution, release or exchange of any
other guarantee of or security for any of the Guaranteed Obligations, and, to
the fullest extent permitted by applicable law, irrespective of any other
circumstance whatsoever which might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor, it being the intent of this
Section 10.02 that the obligations of the Guarantors hereunder shall be absolute
and unconditional under any and all circumstances. Each of the Guarantors agrees
that it shall have no right of subrogation, indemnity, reimbursement or
contribution against a Borrower or any other guarantor for amounts paid under
this Guaranty until such time as the Bank has been paid in full, the Commitment,
if any, has been terminated and no Person or governmental authority shall have
any right to request any return or reimbursement of funds from the Bank in
connection with monies received under the Loan Documents. Without limiting the
generality of the foregoing, it is agreed that, to the fullest extent permitted
by law, the occurrence of any one or more of the following shall not alter or
impair the liability of the Guarantors hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to the
Guarantors, the time for any performance of or compliance with any of
the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of
this Agreement or any of the other Loan Documents or any other
agreement or instrument referred to herein or therein or relating
hereto or thereto shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall
be accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under any of the
Loan Documents or any other agreement or instrument referred to in the
Loan Documents shall be waived or any other guarantee of any of the
Guaranteed Obligations or any security therefor shall be released or
exchanged in whole or in part or otherwise dealt with;
31
<PAGE> 36
(iv) any lien granted to, or in favor of, the Bank as security
for any of the Guaranteed Obligations shall fail to attach or be
perfected or shall be released or discharged in whole or in part; or
(v) any of the Guaranteed Obligations shall be determined to
be void or voidable (including, without limitation, for the benefit of
any creditor of any Guarantor or any other guarantor) or shall be
subordinated to the claims of any Person (including, without
limitation, any creditor of any guarantor).
With respect to its obligations hereunder, each of the Guarantors
hereby expressly waives diligence, presentment, demand of payment, protest and
all notices whatsoever, and any requirement that the Bank exhaust any right,
power or remedy or proceed against any Person under this Agreement or any of the
other Loan Documents or any other agreement or instrument referred to herein or
therein or relating hereto or thereto, or against any other Person under any
other guarantee of, or security for, any of the Guaranteed Obligations.
10.03 REINSTATEMENT.
The obligations of the Guarantors under this Article X shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Guaranteed Obligations is rescinded
or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each of the Guarantors agrees that it will
indemnify the Bank on demand for all reasonable costs and expenses (including,
without limitation, fees and expenses of counsel) incurred by the Bank in
connection with such rescission or restoration, including any such costs and
expenses incurred in defending against any claim alleging that such payment
constituted a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency or similar law.
10.04 CERTAIN ADDITIONAL WAIVERS.
Without limiting the generality of the provisions of this Article X,
each Guarantor hereby specifically waives the benefits of N.C. Gen. Stat. ss.ss.
26-7 through 26-9 inclusive. Each of the Guarantors agrees that it shall have no
right of recourse to security for the Guaranteed Obligations, except through the
exercise of the rights of subrogation pursuant to Section 10.02.
10.05 REMEDIES.
Each of the Guarantors agrees that, to the fullest extent permitted by
law, as between the Guarantors, on the one hand, and the Bank, on the other
hand, the Guaranteed Obligations may be declared to be forthwith due and payable
as provided in Article VIII hereof (and shall be deemed to have become
automatically due and payable in the circumstances provided in said Article
VIII) for purposes of Section 10.01 hereof notwithstanding any stay, injunction
or other prohibition preventing such declaration (or preventing the Guaranteed
Obligations from becoming automatically due and payable) as against any other
Person and that, in the event of such declaration (or the Guaranteed Obligations
being deemed to have become automatically due and payable), the Guaranteed
Obligations (whether or not due and payable by any other Person) shall forthwith
32
<PAGE> 37
become due and payable by the Guarantors for purposes of said Section 10.01. The
Guarantors acknowledge and agree that their obligations hereunder are secured in
accordance with the terms of the Security Documents and that the Bank may
exercise remedies thereunder in accordance with the terms thereof.
10.06 CONTINUING GUARANTEE.
The guarantee in this Article X is a continuing guarantee, and shall
apply to all Guaranteed Obligations whenever arising.
10.07 RIGHTS OF CONTRIBUTION.
(a) With respect to the Domestic Subsidiaries in their
capacities as Guarantors, such Guarantors agree among themselves that,
in connection with payments made hereunder, each such Guarantor shall
have contribution rights against the other such Guarantors as permitted
under applicable law. Such contribution rights shall be subordinate and
subject in right of payment to the obligations of such Guarantors under
the Loan Documents and no such Guarantor shall exercise such rights of
contribution until all Guaranteed Obligations have been paid in full
and the Commitment terminated.
(b) With respect to the U.S. Borrower and the Foreign
Subsidiaries in their capacities as Guarantors, such Guarantors agree
among themselves that, in connection with payments made hereunder, each
such Guarantor shall have contribution rights against the other such
Guarantors as permitted under applicable law. Such contribution rights
shall be subordinate and subject in right of payment to the obligations
of such Guarantors under the Loan Documents and no such Guarantor shall
exercise such rights of contribution until all Guaranteed Obligations
have been paid in full and the Commitment terminated.
33
<PAGE> 38
IN WITNESS WHEREOF, the parties hereto have executed or caused this
instrument to be executed under seal as of the day and year first above written.
U.S. BORROWER
AND A GUARANTOR: APPLIED ANALYTICAL INDUSTRIES, INC.
By
------------------------------------
Name:
Title:
GERMAN BORROWER: AAI APPLIED ANALYTICAL INDUSTRIES
DEUTSCHLAND GmbH & CO. KG
By
------------------------------------
Name:
Title:
DOMESTIC SUBSIDIARIES: APPLIED ANALYTICAL INDUSTRIES
LEARNING CENTER, INC.
By
------------------------------------
Name:
Title:
AAI TECHNOLOGIES, INC.
By
------------------------------------
Name:
Title:
AAI PROPERTIES, INC.
By
------------------------------------
Name:
Title:
KANSAS CITY ANALYTICAL SERVICES, INC.
By
------------------------------------
Name:
Title:
<PAGE> 39
MEDICAL & TECHNICAL RESEARCH
ASSOCIATES, INC.
By
------------------------------------
Name:
Title:
AAI JAPAN, INC.
By
------------------------------------
Name:
Title:
FOREIGN SUBSIDIARIES: APPLIED ANALYTICAL INDUSTRIES
ITALY, S.r.l.
By
------------------------------------
Name:
Title:
AAI UK LTD.
By
------------------------------------
Name:
Title:
AAI VERMOGENSVER-
WALTUNGSGESELLSCHAFT mgH
By
------------------------------------
Name:
Title:
L.A.B. VERWALTUNGS-GESELLSCHAFT mbH
By
------------------------------------
Name:
Title:
APPLIED ANALYTICAL INDUSTRIES
DEUTSCHLAND GmbH
By
------------------------------------
Name:
Title:
<PAGE> 40
L.A.B. BENELUX B.V.
By
------------------------------------
Name:
Title:
APPLIED ANALYTICAL INDUSTRIES
FRANCE S.A.R.L.
By
------------------------------------
Name:
Title:
NEOSAN ARZNEIMITTEL-
VERTRIEBSGESELLSCHAFT mbH
By
------------------------------------
Name:
Title:
I.P.A.- INTERNATIONALE PHARMA
AGENTUR GmbH
By
------------------------------------
Name:
Title:
INPHARMCO GESELLSCHAFT zur
VERMARKTUNG VON ARZNEIMITTELN mbH
By
------------------------------------
Name:
Title:
LAB (GREAT BRITAIN) LIMITED
By
------------------------------------
Name:
Title:
PROSCIENTIA HOLDING AG
By
------------------------------------
Name:
Title:
<PAGE> 41
TECHNOPHARM S.A.
By
------------------------------------
Name:
Title:
BANK: BANK OF AMERICA, N.A.
By
------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF APPLIED ANALYTICAL INDUSTRIES, INC.
1. Applied Analytical Industries Italy, S.r.l.
2. Applied Analytical Industries Deutschland GmbH
3. AAI Applied Analytical Industries Deutschland Verwaltungsgesellschaft mbH
4. AAI Applied Analytical Industries Deutschland GmbH & Co. KG
5. AAI UK Limited
6. AAI Japan, Inc.
7. AAI Technologies, Inc.
8. AAI Properties, Inc.
9. Applied Analytical Industries Learning Center, Inc.
10. Kansas City Analytical Services, Inc.
11. Medical & Technical Research Associates, Inc.
12. Applied Analytical Industries Holdings Limited
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-78453, 333-50877 and 333-50841) and the Registration
Statement on Form S-3 (No. 333-5535) of our report dated February 17, 2000 with
respect to the consolidated financial statements and schedule of Applied
Analytical Industries, Inc. and subsidiaries included in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 2000
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-78453, 333-74515, 333-50877 and 333-50841) and the
Registration Statement on Form S-3 (No. 333-5535) of our report dated February
20, 1998 with respect to the financial statements of Medical & Technical
Research Associates, Inc. for the year ended December 31, 1997 included in this
Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ Rogers, Suleski & Associates, LLC
March 30, 2000
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Medical & Technical Research Associates, Inc.
We have audited the accompanying balance sheet of Medical & Technical Research
Associates, Inc. as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical & Technical Research
Associates, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ ROGERS, SULESKI & ASSOCIATES, LLC
Needham Heights, Massachusetts
February 20, 1998
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,013
<SECURITIES> 0
<RECEIVABLES> 36,678
<ALLOWANCES> 3,114
<INVENTORY> 0
<CURRENT-ASSETS> 61,192
<PP&E> 76,872
<DEPRECIATION> 31,846
<TOTAL-ASSETS> 123,486
<CURRENT-LIABILITIES> 54,685
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 66,541
<TOTAL-LIABILITY-AND-EQUITY> 123,486
<SALES> 102,175
<TOTAL-REVENUES> 102,175
<CGS> 56,906
<TOTAL-COSTS> 110,957
<OTHER-EXPENSES> 153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,256
<INCOME-PRETAX> (10,191)
<INCOME-TAX> (2,278)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,913)
<EPS-BASIC> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
