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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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Filed by a Party other than the Registrant [ ]
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[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
aaiPharma Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
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or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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[aaiPharma Inc. LOGO]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 11, 2001
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To the Stockholders of aaiPharma Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of aaiPharma
Inc., formerly known as Applied Analytical Industries, Inc. (the "Company"),
will be held on Friday, May 11, 2001 at 10:00 a.m., North Carolina time, at the
corporate office of the Company, located at 2320 Scientific Park Drive, Suite
185, Wilmington, North Carolina 28405.
1. To elect two (2) directors to serve for three-year terms and until
their successors are elected and qualified;
2. To approve the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 500,000 options to purchase Company
common stock;
3. To approve and adopt the 2000 Stock Option Plan for Non-Employee
Directors authorizing the issuance of up to 410,000 options to
purchase Company common stock;
4. To ratify and approve the appointment of Ernst & Young LLP as the
independent public accountants for the Company for the fiscal year
ending December 31, 2001; and
5. To consider and act upon any other matters that may properly come
before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of business
on March 22, 2001 as the record date for the determination of stockholders
entitled to notice of and to vote at the meeting or any adjournment thereof.
Only stockholders of record of the Company's Common Stock at the close of
business on that date will be entitled to vote.
You are cordially invited to attend the meeting. However, whether or not
you plan to be personally present at the meeting, please complete, date and sign
the enclosed proxy and return it promptly in the enclosed envelope. If you later
desire to revoke your proxy, you may do so at any time before it is exercised.
By Order of the Board of Directors,
Gregory S. Bentley
Secretary
Wilmington, North Carolina
April 9, 2001
YOUR VOTE IS IMPORTANT. ACCORDINGLY, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING.
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[AAIPHARMA INC. LOGO]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 9, 2001
This Proxy Statement is furnished in connection with the solicitation of
the enclosed proxy by the Board of Directors of aaiPharma Inc. (the "Company")
for use at the annual meeting of stockholders (the "Annual Meeting") to be held
on Friday, May 11, 2001 at 10:00 a.m., North Carolina time, at the corporate
office of the Company, located at 2320 Scientific Park Drive, Suite 185,
Wilmington, North Carolina 28405, and at any adjournment thereof, for the
purposes set forth in the Notice of Annual Meeting of Stockholders. This Proxy
Statement and the form of proxy enclosed are being mailed to stockholders with
the Company's 2000 Annual Report to Stockholders commencing on or about April
10, 2001.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the common stock of the Company at the close
of business on March 22, 2001 will be entitled to vote at the Annual Meeting. As
of that date, a total of 17,655,001 shares of common stock ("Common Stock") were
outstanding, each share being entitled to one vote. There is no cumulative
voting. If a stockholder returns a proxy withholding authority to vote the proxy
with respect to any or all of the nominees for director, then the shares of the
Common Stock covered by such proxy shall be deemed present at the Annual Meeting
for purposes of determining a quorum and for purposes of calculating the vote
with respect to such nominee, but shall not be deemed to have been voted for
such nominee or nominees. If a stockholder abstains from voting as to any
matter, then the shares held by such stockholder shall be deemed present at the
meeting for purposes of determining a quorum and for purposes of calculating the
vote with respect to such matter, but shall not be deemed to have been voted in
favor of such matter. If a broker returns a "non-vote" proxy, indicating a lack
of authority to vote on such matter, then the shares covered by such non-vote
shall be deemed present at the Annual Meeting for purposes of determining a
quorum, but shall not be deemed to be present and entitled to vote at the Annual
Meeting for purposes of calculating the vote with respect to any such matter.
Shares of the Company's Common Stock represented by proxies in the form
solicited will be voted in the manner directed by the stockholder. If no
direction is given, the proxy will be voted for the election of the nominees for
director named in this Proxy Statement, for the approval of the amendment to the
1997 Stock Option Plan authorizing the issuance of an additional 500,000
options, for the approval of the 2000 Stock Option Plan for Non-Employee
Directors authorizing the issuance of up to 410,000 options, and for the
ratification and approval of Ernst & Young LLP as the Company's independent
public accountants for the year ending December 31, 2001. Management of the
Company is not aware of any matters to be acted upon at the Annual Meeting other
than those set forth in the accompanying Notice of Annual Meeting. In the event
that any other matters properly come before the Annual Meeting and call for a
vote of stockholders, the persons named as proxies in the enclosed form of proxy
will vote in accordance with their best judgment on these matters. A proxy may
be revoked at any time before being exercised by delivery to an officer of the
Company of a written notice of termination of the proxy's authority or a duly
elected proxy bearing a later date.
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ELECTION OF DIRECTORS
The business and affairs of the Company are managed under the direction of
its Board of Directors, which is presently comprised of eight members. The Board
of Directors is classified, with the directors serving staggered three-year
terms. Two directors have been nominated for election to the Company's Board of
Directors at the Annual Meeting to hold office until the meeting of stockholders
in year 2004 and until their successors have been duly elected and qualified
(except in the case of earlier death, resignation or removal). The accompanying
proxy may not be voted for more than two directors. The nominees for director
have indicated their willingness to serve, but in case they are not candidates
at the Annual Meeting, the person named as proxies in the enclosed form of proxy
may vote for a substitute nominee in their discretion. The Board of Directors
has no reason to believe that any nominee will be unable or unwilling to serve
as director if elected. The affirmative vote of a majority of the shares of
Common Stock present and entitled to vote at the Annual Meeting is necessary to
elect the nominees for director. The Board of Directors recommends a vote FOR
the election of the nominees for director. Information concerning the nominees
for director and for each director whose term will continue after the Annual
Meeting is set forth below.
NOMINEES FOR DIRECTOR
TERM TO EXPIRE 2004
James L. Waters (age 75) has served as a director of the Company since 1981
and as a non-employee officer from 1982 until 1996. Mr. Waters is a private
investor in numerous companies, is president of Cetek Corporation, a drug
discovery company, and is the founder of Waters Associates, Inc., now known as
Waters Corporation, a scientific instrumentation manufacturer.
James G. Martin, Ph.D. (age 65) joined the Company's Board of Directors in
1999. Dr. Martin served as Governor of the State of North Carolina from
1984-1992 and currently is Corporate Vice President, Carolinas HealthCare
System, a regional healthcare system. Dr. Martin also serves as a director of
Duke Energy Corporation, Palomar Medical Technologies, Inc., and Family Dollar
Stores, Inc.
TERM TO EXPIRE 2003
John E. Avery (age 71) joined the Company's Board of Directors in 2000. Mr.
Avery is a retired senior executive of Johnson & Johnson, a leading
multinational healthcare products company, having served as Company Group
Chairman of all operations in Latin America and the Caribbean.
Frederick D. Sancilio, Ph.D. (age 51) is Chairman of the Board of
Directors, Chief Executive Officer and President of the Company. With more than
25 years' experience in the pharmaceutical industry, Dr. Sancilio worked with
Burroughs-Wellcome Co., Schering-Plough Corporation, and Hoffmann-LaRoche, Inc.
before founding the Company in 1979.
William H. Underwood (age 53) is Executive Vice President, Corporate
Development and Licensing, and has served as Chief Operating Officer from 1995
to 1997, as Executive Vice President of the Company since 1992, as Vice
President from 1986 to 1992, and as a director since 1996. He has held positions
in the pharmaceutical and cosmetic industries for more than 17 years, in
positions including Director of Quality Assurance and Director of Manufacturing
at Mary Kay Cosmetics, Inc. and Group Leader of Bacteriological Quality Control
at Burroughs-Wellcome Co.
TERM TO EXPIRE 2002
John M. Ryan (age 56) has served as a director of the Company since 1996.
Mr. Ryan serves as managing partner of Ryan Partners, a business advisory and
venture capital firm he founded in July 1996, and vice president of Cetek
Corporation, a drug discovery company. Prior to founding Ryan Partners, Mr. Ryan
served as a partner of Coopers & Lybrand, LLP (now PricewaterhouseCoopers LLP),
an accounting firm, with which he was associated from 1972 to 1996. Mr. Ryan has
served as a director of numerous private companies and as an officer and
director of several not-for-profit corporations.
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Joseph H. Gleberman (age 43) joined the Company's Board of Directors in
1995. Mr. Gleberman has been employed by Goldman, Sachs & Co., an
investment-banking firm, since 1982 and has been a Partner of Goldman, Sachs &
Co. since 1990 and Managing Director since 1996. Mr. Gleberman serves as a
director of Dade Behring Holdings, Inc. and BackWeb Technologies Ltd.
Richard G. Morrison, Ph.D. (age 63) joined the Company's Board of Directors
in 1999. Dr. Morrison is an Adjunct Professor of Business at the Cameron School
of Business, University of North Carolina at Wilmington. Dr. Morrison has more
than 30 years of pharmaceutical industry experience having served as president
of Eli Lilly and Company's operations in Venezuela, Mexico and Brazil.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee consisting of Mr. Ryan and
Drs. Martin and Morrison, and a Compensation Committee consisting of Mr. Ryan
and Dr. Martin. The Audit Committee's function is to review and make
recommendations to the Board of Directors with respect to certain financial and
accounting matters. The Audit Committee met five (5) times during the fiscal
year ended December 31, 2000. The Compensation Committee's function is to review
and make certain determinations with respect to matters concerning the
remuneration of employees, officers and directors and administer the Company's
stock option plans. The Compensation Committee met three (3) times during the
2000 fiscal year. The Board of Directors does not have a standing nominating
committee.
During the 2000 fiscal year, the Board of Directors held six (6) meetings.
Each director attended all of the total number of meetings of the Board of
Directors and committees on which he served that were held during the period he
was a member of the Board of Directors or such committees.
COMPENSATION OF DIRECTORS
In March 1999, the Company amended its policy to compensate non-employee
directors for Board participation. Under the amended policy, all non-employee
directors of the Company receive $3,000 for each meeting of the Board of
Directors and $1,000 for each meeting of a committee of the Board of Directors
not held in connection with a regular Board meeting attended by such
non-employee director. Non-employee directors receive $500 for each telephonic
Board or committee meeting in which they participate. All directors are
reimbursed for expenses incurred in connection with attending meetings of the
Board of Directors and committees thereof.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
22, 2001 by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table and (iv) all executive
officers and directors as a group.
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(a) SHARES
- ------------------------ --------------------- ----------
Frederick D. Sancilio, Ph.D. (b)............................ 4,663,891 26.4%
James L. Waters (c)......................................... 2,415,126 13.7%
The Goldman Sachs Group, L.P. (d)........................... 2,850,381 16.1%
Brown Capital Management, Inc. (e).......................... 2,640,300 15.0%
Joseph H. Gleberman (f)..................................... -- --
John M. Ryan................................................ 51,000 *
James G. Martin, Ph.D....................................... 34,834 *
John E. Avery............................................... 15,000 *
Richard G. Morrison, Ph.D................................... 16,666 *
William H. Underwood (g).................................... 236,669 1.3%
Eugene T. Haley............................................. 56,300 *
Gregory S. Bentley.......................................... 34,334 *
Richard Parker.............................................. 350,886 2.0%
All executive officers and directors as a group (15
persons).................................................. 7,895,489 44.7%
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* Less than 1%
(a) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Information in the table reflects options granted under the Company's 1995
Stock Option Plan, 1996 Stock Option Plan and the 1997 Stock Option Plan to
the extent such options are or become exercisable within 60 days.
Accordingly, the totals for the following executive officers and directors
and all executive officers and directors as a group includes the following
shares represented by options: Mr. Ryan, 50,000 shares; Mr. Underwood,
51,680 shares; Mr. Haley, 49,000 shares; Dr. Martin, 33,334 shares; Dr.
Morrison, 16,666 shares; Mr. Bentley, 18,334 shares; Mr. Parker, 6,500
shares; and all executive officers and directors as a group, 248,848
shares.
(b) Dr. Sancilio's address is 2320 Scientific Park Drive, Wilmington, North
Carolina 28405.
(c) Includes 461,057 shares of Common Stock beneficially owned by Mr. Waters's
spouse. Mr. Waters's address is 47 New York Avenue, Framingham,
Massachusetts 01701.
(d) Goldman, Sachs & Co. ("GS)" is an indirect wholly-owned subsidiary of The
Goldman Sachs Group, Inc. ("GSG"). GS, an NASD member, is an investment
banking firm that regularly performs services such as acting as a financial
advisor and serving as principal or agent in the purchase and sale of
securities. GSG and GS may be deemed to own beneficially and indirectly in
the aggregate 2,276,832 shares of the Company's Common Stock through
certain investment partnerships (the "Limited Partnerships") of which
affiliates of GS and GSG are the general partner, managing general partner
or managing partner. GS is the investment manager of one or more of the
Limited Partnerships. The address of GS is 85 Broad Street, New York, New
York 10004.
(e) Based on Schedule 13G filed by Brown Capital Management, Inc. with the
Securities and Exchange Commission dated February 14, 2001. The address of
Brown Capital Management, Inc. is 1201 N. Calvert Street, Baltimore,
Maryland 21202.
(f) Mr. Gleberman, a managing director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,875,385 shares which may be deemed
beneficially owned by GSG as described in note (d) above. Mr. Gleberman, a
managing director of GS, disclaims beneficial ownership of the securities
reported herein except to the extent of his pecuniary interest therein.
(g) Includes 925 shares beneficially owned by Mr. Underwood's children.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, as well as any holders of more
than 10% of the Company's Common Stock, to file with the Securities Exchange
Commission certain reports of ownership and changes in ownership of Common Stock
and other equity securities of the Company. Based solely on review of such
reports and certain representations furnished to it, the Company believes that
during the fiscal year ended December 31, 2000, all officers and directors
complied with all applicable Section 16(a) filing requirements.
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EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation
awarded to, earned by or paid for services rendered to the Company in all
capacities in 2000 by: (i) the Company's chief executive officer and (ii) the
Company's next four most highly compensated employees who were serving as
executive officers on December 31, 2000, (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------
NAME AND ----------------------- SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(a) BONUS($) OPTIONS/SARS(#) COMPENSATION($)(b)
- ------------------ ---- ------------ -------- ---------------------- ------------------
Frederick D. Sancilio, Ph.D. 2000 400,000 0 45,000 9,750(c)
President and 1999 395,385 0 0 34,072(d)
Chief Executive Officer 1998 341,667(e) 0 0 19,818(f)
Eugene T. Haley (g) 2000 250,000 0 25,000 5,844(h)
Executive Vice President 1999 259,616 0 0 3,108(i)
1998 201,923 0 65,000 7,488(j)
Richard Parker (k) 2000 216,154 21,100 0 2,000(l)
President 1999 153,846 36,507 16,250 423
Medical & Technical 1998 0 0 0 0
Research Associates, Inc.
David Johnston, Ph.D. (m) 2000 200,000 0 45,000 65,802
Executive Vice President 1999 3,846 0 35,000 0
1998 0 0 0 0
Gregory S. Bentley (o) 2000 175,000 22,750 30,000 5,500(p)
Executive Vice President, 1999 100,288 0 40,000 918(q)
Secretary and General 1998 0 0 0 0
Counsel
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(a) Includes salary amounts deferred pursuant to the Company's 401(k) plan.
(b) Such amounts include the Company's contributions under its 401(k) and
profit sharing plans in the following amounts: Dr. Sancilio, $2,348 in
1998, $3,000 in 1999 and 0 in 2000; Mr. Haley, $3,000 in 1999 and $3,000 in
2000; Richard Parker $423 in 1999 and 0 in 2000; Mr. Johnston 0 in both
1999 and 2000; and Mr. Bentley, 0 in 1999, and $3,000 in 2000.
(c) Reimbursement for expenses paid pursuant to Dr. Sancilio's employment
agreement with the Company.
(d) Includes $31,072 in expense reimbursements paid pursuant to Dr. Sancilio's
employment agreement with the Company.
(e) Includes $91,667 in salary paid by Endeavor Pharmaceuticals, Inc.
("Endeavor"), a company 14% owned by the Company.
(f) Includes $17,470 in expense reimbursements paid pursuant to Dr. Sancilio's
employment agreement with the Company.
(g) Mr. Haley joined the Company in February 1998.
(h) Includes $2,500 for executive car allowance and $344 in reimbursed medical
expenses.
(i) Includes $108 gift certificate.
(j) Entire amount was for relocation expense payments.
(k) Mr. Parker joined the Company in March 1999 and serves as the President of
the Company's wholly-owned subsidiary, Medical & Technical Research
Associates, Inc.
(l) Executive car allowance.
(m) Dr. Johnston became an employee of the Company in December 1999.
(n) Includes $2,500 for executive car allowance and $63,302 in reimbursed
relocation expenses.
(o) Mr. Bentley became an employee of the Company in May 1999.
(p) Executive car allowance.
(q) Reimbursement for relocation expenses.
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The following table sets forth certain information with respect to options
granted during 2000 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 2000
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(a)
NAME AND GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION (#)(b) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------ ---------- ---------------- -------- ---------- --------- ---------
Frederick D. Sancilio, Ph.D..... 45,000 5.5% 6.875 05-27-10 194,564 493,064
Eugene T. Haley................. 25,000 3.1% 6.875 05-27-10 108,091 273,924
Richard Parker.................. 0 0 0 0 0 0
David Johnston, Ph.D............ 30,000 3.7% 6.875 05-27-10 129,709 328,660
15,000 1.8% 9.227 12-26-10 87,042 220,582
Gregory S. Bentley.............. 25,000 3.1% 6.875 05-27-10 108,091 273,925
5,000 0.6% 9.227 12-26-10 29,014 73,528
- ---------------
(a) Potential realizable value is based on an assumption that the price of the
common stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term. The
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(b) The options granted on May 27, 2000 vest on the seventh anniversary of the
grant date, however, such vesting schedule may accelerate if certain
financial targets are met. The options granted on December 26, 2000 vest in
33 1/3% increments at each of the twelfth, twenty-fourth, and thirty-six
month anniversaries of the grant date.
The following table sets forth certain information with respect to the
value of options held at fiscal year end by the Named Executive Officers:
AGGREGATED 2000 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(a)
SHARES --------------------- ---------------------
NAME AND ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE)
- ------------------ ----------- ----------- --------------------- ---------------------
Frederick D. Sancilio, Ph.D........ 0 0 0/45,000 0/149,085
Eugene T. Haley.................... 0 0 32,667/57,333 0/82,825
Richard Parker..................... 0 0 3,250/13,000 0/0
David Johnston, Ph.D............... 0 0 11,667/68,333 26,612/167,028
Gregory S. Bentley................. 0 0 13,334/56,666 22,402/132,428
- ---------------
(a) Market value of underlying securities at fiscal year end minus the exercise
price of "in-the-money" options.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and President of the
Company. The Employment Agreement has an initial three-year term that is
automatically extended for an additional one-year period on each anniversary of
the Signing Date unless either party gives the other notice prior to the
anniversary date of its intention not to extend the term of the Employment
Agreement. Under the Employment Agreement, Dr. Sancilio will serve as the
Company's Chairman of the Board, President and Chief Executive Officer, and the
Company is required to use its best
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efforts to cause Dr. Sancilio to be re-elected to the Company's Board of
Directors and to the boards of directors of affiliates of the Company on which
boards of directors Dr. Sancilio was serving on the Signing Date and to be
elected a director of any majority-owned subsidiary of the Company acquired
after the Signing Date.
The Employment Agreement was amended in March 1999 such that Dr. Sancilio's
annual salary was increased to $400,000 (including any Endeavor Pharmaceuticals
Inc. salary paid to Dr. Sancilio) from the initial annual aggregate salary of
$350,000 set in November 1995. The salary amount may be increased by the Board
of Directors and once increased may not be reduced. The Employment Agreement
provides that Dr. Sancilio will be eligible to receive bonus compensation of up
to 50% of his annual salary if the Company attains certain performance
objectives set jointly by the Board of Directors and Dr. Sancilio. In addition,
Dr. Sancilio will be eligible to participate in employee benefit plans made
available generally to the Company's executive officers and any other Company
compensation or incentive plans of a long or short-term nature, to receive an
automobile allowance and to receive other perquisites not to exceed, in the
aggregate, $35,000 per year.
Under the Employment Agreement, the Company may terminate Dr. Sancilio's
employment at any time, with or without cause, as defined in the Employment
Agreement. In the event that the Company terminates Dr. Sancilio's employment
without cause or in the event that Dr. Sancilio terminates his employment within
90 days of an event of constructive discharge (defined in the Employment
Agreement to include, among other things, the removal of Dr. Sancilio from, or
the failure of Dr. Sancilio to be elected to, the positions of Chairman of the
Board or President, a reduction in Dr. Sancilio's responsibilities or relocation
of the Company's principal executive offices by more than 30 miles from its
current location), Dr. Sancilio would be entitled to receive payments
aggregating three times his then current annual salary to be paid in monthly
installments over two years, during which time Dr. Sancilio would continue to
receive medical and life insurance benefits. The Employment Agreement requires
Dr. Sancilio to refrain from certain activities in competition with the Company
for a period of two years after the termination of his employment for any
reason.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION POLICY
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for establishing compensation policies applicable to the Company's
executive officers and administering the Company's stock option plans. The goal
of the Committee is to attract, retain and reward high-quality executives by
aligning their compensation with the long-term financial health of the Company
and long-term stockholder interests. The Committee is composed entirely of
outside directors of the Company. The Committee's compensation policies are
intended to provide compensation at levels competitive with other companies of
similar size in the same industry.
BASE SALARIES
The Company has not utilized specific formulas to determine executive
compensation. The Committee has implemented a program to review and approve the
initial compensation packages of all new executives. In addition, the Company in
March 2000 conducted an industry survey (the "Survey") of the compensation
practices of other companies within the industry. The Survey analyzed the mix of
cash, bonus and equity components of compensation of each executive officer to
ensure that each member of management and the Company's long-term interests are
sufficiently aligned. The Survey resulted in one salary increase.
CASH BONUSES
In 2000, the Company instituted an Executive Bonus Plan wherein executive
officers of the Company are eligible for bonuses upon achieving established
year-end corporate and departmental goals. The maximum
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bonus that is payable is 35% of the executive's base salary. Earned bonuses are
to be paid in the first quarter of the following year. No bonuses have been paid
under this plan.
Under previous agreements between certain executive officers and the
Company, three executive officers, Gregory S. Bentley, Richard Parker, and
William J. Blank received bonuses of $22,750, $21,100 and $12,000 respectively,
in 2000.
STOCK OPTIONS
The Committee recognizes the importance of stock ownership by its senior
executives and that such options are an integral component of executive
compensation. The goals of the Company's option plans are to promote the growth
and profitability of the Company and its subsidiaries by increasing the personal
participation of officers and key employees in the financial performance of the
Company. The opportunity for individual financial growth tied to the financial
growth of the Company helps ensure that the executives' and Company's interests
are similarly focused. The Committee periodically reviews the Plans to ensure
that they are structured to reflect the benefits offered by other companies in
the Company's industry. For the options granted to executive officers in May
2000, the Committee extended from five years to seven years the option period
previously provided for executive option grants with all options vesting in year
seven; however, the vesting schedule may accelerate to annual pro rata amounts
over either five or three years if certain corporate financial targets are met.
At December 31, 2000, the financial targets were not met.
The Company adopted two stock option plans in November 1995, but did not
grant any options to employees until April 1996. The Company's stockholders
approved an additional Stock Option Plan in May 1997 and amended the Plan in
1998 and 2000 to increase the number of options which may be granted. The
Company granted 385,000 options to the executive officers, as a group, in 2000.
COMPENSATION PAYABLE TO THE CHIEF EXECUTIVE OFFICER
The 2000 salary of the Company's Chief Executive Officer and President, Dr.
Sancilio, was determined pursuant to a renewable three-year employment agreement
with the Company dated November 17, 1995. The Company entered into the
employment agreement in connection with, and as a part of, the Company's sale of
preferred stock to certain institutional investors on November 17, 1995 (the
preferred stock was converted into common stock upon completion of the Company's
initial public offering in September 1996). The Board of Directors has delegated
to the Committee its authority under the agreement to set Dr. Sancilio's base
salary and determine the amount and performance criteria for the payment of
bonuses. Under the agreement, Dr. Sancilio's base salary is to be reviewed at
least annually. Dr. Sancilio agreed to forego any salary increase in 2000. The
agreement provides that base salary may be increased in light of Dr. Sancilio's
performance, competitive levels of compensation and other factors the Committee
deems relevant. Dr. Sancilio's Employment Agreement was amended in March 1999
increasing the base salary to $400,000 from $350,000.
The agreement also provides for a bonus, at least equal to 50% of base
salary, if the Company attains target performance objectives agreed upon by the
Committee and Dr. Sancilio. At Dr. Sancilio's request, the Committee agreed not
to pay a bonus for 2000. This decision does not reflect the Committee's view of
Dr. Sancilio's and the Company's performance in 2000, and the Committee
anticipates that bonuses may be paid in the future for the level of performance
increases attained in 2000.
Under the agreement, Dr. Sancilio is also eligible to participate in other
compensation or incentive plans in which other senior executives are eligible to
participate. The Committee recommended, and the Board of Directors unanimously
approved with Dr. Sancilio abstaining, to award Dr. Sancilio 45,000 options to
purchase shares of AAI common stock at $6.875 per share. The exercise price was
determined by the average of the high and low trading prices on the date the
options were granted.
CAP ON DEDUCTION OF EXECUTIVE COMPENSATION
Under Section 162(m) of the Internal Revenue Code, a public company may not
deduct more than $1 million in compensation paid to one of its senior executive
officers, unless the excess amount is performance-
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based compensation satisfying certain rules. The Company's stock option plans
are designed to qualify under the performance-based compensation requirements of
this provision. Due to current salary levels and anticipated bonus targets, the
Committee believes that it is unlikely that application of Section 162(m) will
prevent the Company from claiming a deduction for the amount of compensation
paid to senior executive officers.
Compensation Committee
John M. Ryan
James G. Martin, Ph.D.
PERFORMANCE GRAPH
The rules of the Securities and Exchange Commission require the Company to
include in this Proxy Statement a line graph presentation comparing cumulative
total stockholder returns for the period beginning September 19, 1996 and ending
on December 31, 2000 with a published industry index or line-of-business index.
The Company has selected the Nasdaq Industrial Average and a composite peer
group consisting of ClinTrials Research Inc., Parexel International,
Pharmaceutical Product Development, Inc. and Quintiles Transnational Corp. The
above graph assumes that $100 was invested on September 19, 1996 in AAI stock
(at the initial public offering price) and in the index and peer group on
September 19, 1996, and the reinvestment of all dividends. The past performance
of Company Common Stock is not necessarily indicative of future performance.
AAI NASDAQ INDUSTRIAL PEER GROUP
--- ----------------- ----------
9/20/96 100.00 100.00 100.00
12/31/96 119.53 100.18 91.54
12/31/97 103.13 110.24 82.15
12/31/98 108.59 117.75 78.85
12/31/99 57.03 202.14 52.64
12/31/00 63.67 133.89 82.84
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CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING MANAGEMENT
Approximately 14% of the capital stock of Endeavor Pharmaceuticals, Inc.
("Endeavor") on a fully diluted basis is held by the Company and one executive
officer of the Company serves as a director of Endeavor. Pursuant to an
agreement among the Endeavor stockholders, the Company has the right to
designate one of the eight members of the Endeavor board of directors. The
management team at Endeavor is composed of three former employees of the
Company. The Company has provided product development and manufacturing services
pursuant to agreements with Endeavor. The Company realized $700,000 in net sales
to Endeavor in 2000.
In February 2000, the Company purchased certain product rights and
validated manufacturing equipment from Endeavor. Endeavor assigned the rights to
an FDA approved hormone product and the related commercialization contract to
the Company. Under the commercialization agreement, the Company will be entitled
to certain minimum royalties upon the successful transfer of the manufacturing
process to the third party. Endeavor also sold a piece of manufacturing
equipment and related accessories to the Company. As consideration for the
product rights and equipment, the Company agreed to reduce Endeavor's
outstanding receivable balance from approximately $2.9 million, including
work-in-progress, to $950,000.
The Company provides product development services to Aesgen, which develops
pharmaceutical products. Approximately 30% of Aesgen's outstanding common stock
is held by the holders of a majority of the Company's currently outstanding
shares of capital stock. In addition, Mr. Waters and Dr. Sancilio serve on the
ten-member board of directors of Aesgen. The Company realized $100,000 in net
sales to Aesgen in 2000. The Company has the right under its development
agreement with Aesgen to provide certain product development and support
services to Aesgen with respect to certain drugs currently being developed by
Aesgen, provided that the Company's fees for such services are comparable to
those of a reasonably comparable firm. In addition, under such development
agreement, the Company has agreed, absent certain circumstances, not to develop
for its own account or for any other person, any formulation of a product
intended to be therapeutically equivalent to the same reference product for any
of the products currently under development by Aesgen and any additional drugs
that the Company agrees to develop for Aesgen under the development agreement.
The Company believes that the terms of such agreement are no less favorable than
terms that would be obtained in a transaction with an unrelated third party.
The Company holds a $1.6 million nonconvertible, non-voting preferred stock
investment in Aesgen, and the Company's directors and executive officers
beneficially own the following percentages of the fully diluted common equity of
Aesgen: Dr. Sancilio, 12.7%, Mr. Waters, 6.3% and Mr. Underwood, 1.0%.
In November 1995, in connection with the purchase by GS Capital Partners
II, L.P., G.S. Capital Partners II Offshore, L.P., Bridge Street Fund 1995,
L.P., Stone Street Fund 1995, L.P., and Goldman, Sachs & Co. Verwaltungs GmbH
(the "Goldman Investors") and certain other investors of shares of preferred
stock described below, Mr. Waters purchased shares of preferred stock
(convertible into 119,833 shares of Common Stock), on substantially the same
terms and conditions, including price, as other purchasers of shares of
preferred stock. In connection with such transaction, the Company granted
certain stockholders, including Mr. Waters and Dr. Sancilio, rights to cause the
Company to register for sale shares of Common Stock acquired upon conversion of
the preferred stock. All shares of preferred stock were converted into Common
Stock automatically upon completion of the Company's initial public offering in
September 1996. In addition, in connection with the Company's issuance of shares
of preferred stock, Mr. Waters and Dr. Sancilio agreed to indemnify the Company
against certain matters including the imposition of certain federal income tax
liabilities, if any, in connection with the Company's election to be treated as
an S corporation, and the payment of any amount due in connection with the
resolution of an assessment against the Company of a North Carolina use tax
deficiency of approximately $340,000 plus penalties and interest assessed
against the Company. In addition, and as part of the same transaction, Mr.
Waters and Dr. Sancilio have agreed to sell to the Company up to a total of
242,539 shares of Common Stock to provide the shares for issuance pursuant to
the 1995 Stock Option Plan. Such shares are required to be sold by Mr. Waters
and Dr. Sancilio upon the
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exercise of options under the 1995 Stock Option Plan at the exercise price of
such options. As of December 31, 2000, options to acquire 64,297 shares of
Common Stock were granted and outstanding under the 1995 Stock Option Plan at an
exercise price per share of $8.35. In 2000, 6,174 options were exercised under
the 1997 Stock Option Plan under this arrangement.
The Company has advanced $300,000 to Cetan Technologies, Inc. formerly
PharmComm, Inc. ("Cetan"), a company whose principal stockholders include Dr.
Frederick Sancilio, Mr. James Waters and Mr. William Underwood, all directors of
AAI. One other stockholder of Cetan is a member of AAI management. The advance
payment was for services to be rendered by Cetan during 1999 and 2000 for
scanning and indexing services required as part of AAI's regulatory compliance
and record retention policies. The services were performed by Cetan at market
rates after considering the timing of the advance payment. AAI has engaged Cetan
to perform these services since 1996 and has compensated Cetan pursuant to
written agreements for the services. Cetan also provides computer validation
services to AAI at market rates. These validation services are required for
compliance with regulatory requirements. Total payments for scanning and
validations services provided to AAI by Cetan were approximately $436,000,
$277,000 and $308,000 for the years ended December 31, 1998, 1999 and 2000
respectively. At December 31, 2000, the $300,000 advance had been fully
utilized.
In 1988, the Company secured financing with variable rate North Carolina
industrial revenue bonds which are supported by a letter of credit issued by a
bank. Dr. Sancilio and Mr. Waters guaranteed the Company's obligation to repay
amounts drawn under such letter of credit. The industrial revenue bonds were
paid in full at their maturity in November 2000.
Prior to the Company's merger with MTRA in March 1999, MTRA's president was
the recipient of two loans from MTRA totaling $680,000. A promissory note, which
accrues interest at 6%, is secured by shares of the Company's common stock owned
by this executive.
CERTAIN BUSINESS RELATIONSHIPS
In November 1995, the Goldman Investors and certain other investors
purchased shares of preferred stock of the Company. All outstanding shares of
preferred stock were converted into Common Stock in conjunction with the
Company's public offering of Common Stock in September 1996. The Goldman
Investors own 2,276,832 shares of Common Stock, which were purchased at $8.35
per share. Pursuant to a Stockholder Agreement entered into in November 1995 in
connection with the purchase of preferred stock, the Goldman Investors have the
right to designate one member of the Board of Directors for so long as the
Goldman Investors and their affiliates (which include Goldman, Sachs & Co.)
beneficially own 10% or more of the outstanding shares of Common Stock. Pursuant
to such Agreement, Mr. Gleberman, a managing director of Goldman, Sachs & Co.,
serves as one of the Company's directors.
In connection with the purchase by the Goldman Investors and certain other
investors of shares of preferred stock in November 1995, the Company agreed that
so long as the Goldman Investors beneficially own 5% or more of the outstanding
shares of Common Stock, the Company will retain Goldman, Sachs & Co. or an
affiliate to perform all investment banking services for the Company for which
an investment banking firm is retained and to serve as managing underwriter of
any offering of the Company's capital stock on customary terms, consistent with
an arm's-length transaction. In the event that the Company and Goldman, Sachs &
Co. or their affiliates cannot agree to the terms of such engagement after good
faith discussions, the agreement permits the Company to engage any other
investment banking firm, although Goldman, Sachs & Co. are entitled to serve as
co-managing underwriter in any underwritten offering of the Company's capital
stock. Goldman, Sachs & Co. served as lead underwriter in the Company's initial
public offering of its Common Stock in September 1996 and in connection
therewith the underwriting syndicate purchased approximately 3.1 million shares
of Common Stock at an underwriting discount of $3.5 million to the aggregate
public offering price. The Company has agreed to indemnify Goldman, Sachs & Co.
and their affiliates against certain liabilities, including liabilities under
the Securities Act of 1933.
Goldman Sachs & Co. makes a market in the Common Stock. Because of the
affiliation of Goldman, Sachs & Co. with the Company, Goldman, Sachs & Co. is
required to deliver a current prospectus to any
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purchaser in connection with any such market-making transactions. The Company
agreed with Goldman, Sachs & Co. to register such transactions under the
Securities Act of 1933, and effected such registration in connection with its
initial public offering by including in its registration statement for the
initial public offering a market-making prospectus required to be used by
Goldman, Sachs & Co. The Company has agreed to make from time to time certain
amendments or supplements to the market-making prospectus and to pay certain
expenses relating to such amendments or supplements. Such expenses were less
than $60,000 in 2000.
APPROVAL OF AMENDMENT TO THE 1997 STOCK OPTION PLAN
Under the proposed amendment to the 1997 Stock Option Plan (the "Amended
Plan"), the Company will be authorized to grant options to purchase up to
2,644,000 shares of Common Stock, an increase of 500,000 shares from the current
1997 Option Plan. The Board anticipates that the 500,000 additional options,
combined with the options currently available for grant under the 1996 Stock
Option Plan and the 1997 Stock Option Plan, should be sufficient for employee
grants through the year 2001, unless the Company undertakes a significant
acquisition in such period. The Compensation Committee has recommended, and the
Board has approved, adopting the Amended Plan authorizing the Company to issue
up to 2,644,000 options to purchase the Company's Common Stock.
The Board of Directors recommends the Company's Stockholders vote FOR the
adoption of the Amended Plan.
The following is a summary description of the principal terms of the
proposed 1997 Option Plan but does not purport to be complete and is qualified
in its entirety by the full text of the 1997 Option Plan. Stockholders may
obtain a copy of the 1997 Stock Option Plan free of charge by contacting the
Company at 2320 Scientific Park Drive, Wilmington, North Carolina 28405,
attention: Investor Relations.
The purpose of the 1997 Option Plan is to promote the growth and
profitability of the Company and its subsidiaries by increasing the personal
participation of officers and key employees in the financial performance of the
Company. The 1997 Option Plan will be administered by the Compensation
Committee. The Compensation Committee will have the authority to interpret the
terms and provisions of, and adopt, amend and rescind general and special rules
relating to the administration of, the 1997 Option Plan and to make all other
determinations necessary and advisable for the administration of the 1997 Option
Plan. All of the Company's employees will be eligible to receive stock options
to purchase shares of Common Stock ("Options") pursuant to the 1997 Option Plan.
A total of 1,537,982 options have been awarded and are outstanding under the
1997 Stock Option Plan.
Awards of Options may be made to officers and other key employees of the
Company or its subsidiaries ("Optionees"). The 1997 Option Plan permits awards
of Options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code and nonqualified options. The Compensation Committee
is authorized to establish the exercise price of Options, although the per share
exercise price for Options intended to qualify as incentive stock options may
not be less than 100% of the fair market value of a share of Common Stock on the
date of grant (110% for certain 10% stockholders). The exercise price per share
of any Option awarded under the 1997 Option Plan may not be less than 100% of
the fair market value of a share of Common Stock on the date of grant of the
Option. The market value of Common Stock at March 22, 2001 was $11.38 per share.
The Compensation Committee is authorized to set the term of the Options, which
may be no longer than 10 years (5 years for certain Options intended to qualify
as incentive stock options).
Options awarded under the 1997 Option Plan will become exercisable as
determined by the Compensation Committee. The Options become immediately
exercisable upon completion of certain transactions involving a change in
control of the Company or a sale by the Company of all or substantially all of
its assets. Unexercised Options will expire thirty days after termination of the
Optionee's employment, other than as a result of death, disability or
retirement, in which cases Options may be exercised for a specified period after
termination of employment. Options may not be transferred other than by will or
the laws of descent and distribution or pursuant to certain qualified domestic
relations orders.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
brief summary of the principal United States federal income tax consequences
under current federal income tax laws relating to Options awarded under the
Stock 1997 Option Plan. This summary is not intended to be exhaustive and, among
other things, does not describe state, local or foreign income and other tax
consequences.
An Optionee will not recognize any taxable income upon the grant of a
nonqualified option, and the Company will not be entitled to a tax deduction
with respect to such grant. Upon exercise of a nonqualified option, the excess
of the fair market value of the shares on the exercise date over the exercise
price will be taxable as compensation income to the Optionee. Subject to the
Optionee including such excess amount in income or the Company satisfying
applicable reporting requirements, the Company should be entitled to a tax
deduction in the amount of such compensation income. The Optionee's tax basis
for the shares received pursuant to such exercise will equal the sum of the
compensation income recognized and the exercise price.
In the event of a sale of shares received upon the exercise of a
nonqualified option, any appreciation or depreciation after the exercise date
generally will be taxed as capital gain or loss and will be long-term gain or
loss if the holding period for such stock was more than one year.
Generally, an Optionee should not recognize taxable income at the time of
grant or exercise of an incentive stock option and the Company should not be
entitled to a tax deduction with respect to such grant or exercise. The exercise
of an incentive stock option generally will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
Optionee.
A sale or other disposition by an Optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such Optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain or loss
to the Optionee with no deduction being allowed to the Company. Upon a sale or
other disposition of shares acquired upon the exercise of an incentive stock
option within one year after the transfer of the shares to the Optionee or
within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the lesser
of (i) the fair market value of the shares at the time of exercise of the Option
and (ii) the amount realized on such disqualifying sale or other disposition of
the shares over (b) the exercise price of such shares, should constitute
ordinary income to the Optionee and the Company should be entitled to a
deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market value of the shares at the
time of the exercise of the Option generally will constitute short-term or
long-term capital gain and will not be deductible by the Company. Special rules
may apply to Optionees who are subject to Section 16 of the Exchange Act.
Under certain circumstances the accelerated vesting or exercise of Options
in connection with a change of control of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
section 280G of the Internal Revenue Code. To the extent it is so considered,
the Optionee may be subject to a 20% excise tax and the Company may be denied a
tax deduction.
SECTION 162(m). Section 162(m) of the Internal Revenue Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1 million in any taxable year to the chief
executive officer or any of the four other most highly compensated executive
officers who are employed by the Company on the last day of the taxable year.
Compensation attributable to Options granted under the 1997 Option Plan should
not be subject to such deduction limitations.
APPROVAL AND ADOPTION OF 2000 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
Under the proposed 2000 Stock Option Plan for Non-Employee Directors ("2000
Option Plan"), the Company will be authorized to grant options to purchase up to
410,000 shares of Common Stock. The Board has approved adopting the 2000 Option
Plan authorizing the Company to issue 410,000 options to purchase the Company's
Common Stock.
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The affirmative vote of a majority of the shares of Common Stock present
and entitled to vote at the Annual Meeting is necessary to approve the adoption
of the 2000 Option Plan. The Board of Directors recommends the Company's
stockholders approve the adoption of the 2000 Option Plan.
The following summary description of the principal terms of the proposed
2000 Option Plan does not purport to be complete and is qualified in its
entirety by the full text of the 2000 Option Plan. Stockholders may obtain a
copy of the 2000 Stock Option Plan free of charge by contacting the Company at
2320 Scientific Park Drive, Wilmington, North Carolina 28405, Attention:
Investor Relations.
The purpose of the 2000 Option Plan is to promote the growth and
profitability of the Company and its subsidiaries by attracting and retaining
knowledgeable members of the business and scientific community to serve as
members of the Company's Board of Directors, and thus furthering the financial
performance of the Company. The 2000 Option Plan will be administered by the
full Board of Directors. The Board of Directors have authority to interpret the
terms and provisions of, and adopt, amend and rescind general and special rules
relating to the administration of, the 2000 Option Plan and to make all other
determinations necessary and advisable for the administration of the 2000 Option
Plan. All of the Company's non-employee directors will be eligible to receive
stock options ("Options") to purchase shares of Common Stock pursuant to the
2000 Option Plan. No Options have been awarded under the 2000 Stock Option Plan.
The Company has previously granted 310,000 Options to non-employee
directors under the 1997 Stock Option Plan. Upon approval of the 2000 Option
Plan, all 310,000 Options will be surrendered and replaced with Options granted
under the 2000 Option Plan. All replacement Options will contain the same
vesting schedules and exercise prices of the surrendered options.
The Board of Directors is authorized to establish the exercise price of
Options, although the per share exercise price for Options may not be less than
100% of the fair market value of a share of Common Stock on the date of grant.
The market value of common Stock at March 22, 2001 was $11.38 per share. The
Board of Directors is authorized to set the term of the Options, which may be no
longer than 10 years.
Options granted under the 2000 Option Plan are not intended to qualify as
incentive stock options as under Section 422 of the Internal Revenue Code of
1986, amended. For a discussion of the principal United States Federal Income
Tax consequences associated with non-qualified options, please refer to the
paragraph entitled, "Certain Federal Income Tax Consequences" on page 14.
The Board of Directors recommends a vote FOR the approval and adoption of
the 2000 Stock Option Plan for Non-Employee Directors.
AUDIT COMMITTEE REPORT
The Board of Directors maintains an Audit Committee comprised of three of
the Company's outside directors. The Board of Directors and the Audit Committee
believe that the Audit Committee's current member composition satisfies the rule
of the National Association of Securities Dealers, Inc. ("NASD") that governs
Audit Committee composition. The requirement that Audit Committee members all be
"independent directors" as that term is defined by NASD Rule 4200 (a)(14). One
Committee member, John Ryan, is an officer of a company which, due to the
ownership interest of James L. Waters, another AAI director, and Mr. Waters's
beneficial ownership of approximately 13.7% of the outstanding shares of the
Company's Common Stock, may technically qualify the other company as an
affiliate of AAI and thus call into question Mr. Ryan's independence under the
NASDAQ rules and his ability to serve on the Company's Audit Committee. The full
board, with Mr. Ryan abstaining, determined that in light of (a) his long tenure
and experience on the Company's Audit Committee and intimate knowledge of the
Company's activities and systems coming within the scope of the Audit Committee,
(b) his function as Chairman of said Committee during the entire time since the
Company went public, (c) his experience, unique among the members of the
Company's Board of Directors and Audit Committee, as a certified public
accountant and expert in accounting matters; (d) his long experience as an audit
partner at Coopers & Lybrand, (e) the distant and tenuous nature of the
technical factual basis for his lack of independence as defined by NASDAQ Rule
4200(a)(14), and (f) his actual independence as a non-employee director of the
Company, pursuant to
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NASDAQ Rule 4350(d)(2), under these exceptional and limited circumstances, that
membership on the Audit Committee by John Ryan is required in the best interests
of the Company and its stockholders.
The Audit Committee oversees the Company's financial process on behalf of
the Board of Directors. Management has the primary responsibility for preparing
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements. The Board has adopted a
written Charter of the Audit Committee, a copy of which is attached as a
Appendix A hereto.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Company's
accounting principles and such other matters as are required to be discussed
with the committee under generally accepted auditing standards, including
Statement on Auditing Standards No. 61. In addition, the Audit Committee has
discussed with the independent auditors the auditors' independence from
management and the Company including the matters in the written disclosures and
the letter from the independent auditors required by the Independence Standards
Board, Standard No. 1.
The Audit Committee discussed with the Company's independent auditors the
overall scope and plans for their audit. The committee meets with the
independent auditors, with and without management present, to discuss the
results of their examination, their evaluation of the Company's internal
controls, and the overall quality of the Company's financial reporting. The
committee held five meetings during fiscal 2000. The Company incurred the
following fees for services performed by Ernst & Young LLP in fiscal 2000.
AUDIT FEES
The Company has been billed $380,000 for fees for the fiscal year 2000
audit and the review of Forms 10-Q ("Audit Services").
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Ernst & Young LLP has not performed any services related to financial
information systems design and implementation for the fiscal year ended December
31, 2000.
ALL OTHER FEES
Aggregate fees billed for all other services rendered by Ernst & Young LLP
for the fiscal year ended December 31, 2000 are $432,000, including $77,000 for
audit-related services.
The Audit Committee considered whether the provision of all services
unrelated to the Audit Services are compatible with maintaining Ernst & Young
LLP's independence in performing its Audit Services.
In reliance on the reviews and discussions referred to above, the committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 for filing with the Securities
and Exchange Commission. The committee and the Board have also recommended,
subject to shareholder approval, the selection of Ernst & Young LLP as the
Company's independent auditors for fiscal year 2001.
James G. Martin, Ph.D.
Richard G. Morrison, Ph.D.
John M. Ryan, Chairman
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APPROVAL OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as independent
public accountants of the Company for the fiscal year ending December 31, 2001.
A proposal to ratify the appointment of Ernst & Young LLP will be presented at
the Annual Meeting. Representatives of Ernst & Young LLP are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they desire to do so, and will be available to answer appropriate questions from
stockholders.
The Board of Directors recommends the Company's stockholders vote FOR
ratifying the appointment of Ernst & Young LLP as independent public accountants
of the Company for the fiscal year ending December 31, 2001.
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Under the applicable rules of the Securities and Exchange Commission, a
stockholder who wishes to submit a proposal for inclusion in the proxy statement
of the Board of Directors for the annual meeting of stockholders to be held in
the spring of 2002 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than December 10,
2001.
The By-laws of the Company establish an advance notice procedure for
stockholder proposals to be brought before a meeting of stockholders of the
Company and for nominations by stockholders of candidates for election as
directors at an annual meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of stockholders as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors or by a
committee of the Board of Directors designated to make nominations, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected, will
be eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to stockholders. Accordingly, any notice of nominations or other
business to be brought before the 2002 annual meeting of stockholders must be
received by the Secretary of the Company by December 10, 2001. The notice of any
stockholder proposal or nomination for election as a director must set forth the
various information required under the By-laws. The person submitting the notice
of nomination and any person acting in concert with such person must provide,
among other things, the name and address under which they appear on the
Company's books (if they so appear) and the class and number of shares of the
Company's capital stock that are beneficially owned by them. Any stockholder
desiring a copy of the Company's By-laws will be furnished one without charge
upon written request to the Secretary of the Company at 2320 Scientific Park
Drive, Wilmington, North Carolina 28405.
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OTHER MATTERS
The Board knows of no other matters which will be presented to the Annual
Meeting. If, however, any other matter is properly presented at the Annual
Meeting, the proxy solicited by this Proxy Statement will be voted in accordance
with the judgment of the person or persons holding such proxy.
By Order of the Board of Directors,
Gregory S. Bentley
Secretary
Wilmington, North Carolina
April 9, 2001
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
REQUESTED TO SIGN AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED POSTPAID ENVELOPE.
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21
ANNEX A
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the audit committee. The committee
shall review and reassess the charter at least annually and obtain the approval
of the board of directors. The committee shall be appointed by the board of
directors and shall comprise at least three directors, each of whom are
independent of management and aaiPharma Inc. ("AAI"). Members of the committee
shall be considered independent if they have no relationship that may interfere
with the exercise of their independence from management and AAI. All committee
members shall be financially literate, and at least one member shall have
accounting or related financial management expertise.
STATEMENT OF POLICY
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to AAI's financial
statements and the financial reporting process, the systems of internal
accounting and financial controls, the annual independent audit of AAI financial
statements, and the legal compliance and ethics programs as established by
management and the board. In so doing, it is the responsibility of the committee
to maintain free and open communication between the committee, independent
auditors, and management of AAI. In discharging its oversight role, the
committee is empowered to investigate any matter brought to its attention with
full access to all books, records, facilities, and personnel of AAI and the
power to retain outside counsel or other experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the audit committee is to oversee AAI's
financial reporting process on behalf of the board and report the results of
their activities to the board. Management is responsible for preparing AAI's
financial statements and the independent auditors are responsible for auditing
those financial statements. The committee in carrying out its responsibilities
believes its policies and procedures should remain flexible, in order to best
react to changing conditions and circumstances. The committee should take the
appropriate actions to set the overall corporate "tone" for quality financial
reporting, sound business risk practices, and ethical behavior.
The following shall be the principal recurring processes of the audit
committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the committee may supplement them
as appropriate.
The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable to
the board and the audit committee, as representatives of AAI's shareholders. The
committee shall have the ultimate authority and responsibility to evaluate and,
where appropriate, replace the independent auditors. The committee shall discuss
with the auditors their independence from management and AAI and the matters
included in the written disclosures required by the Independence Standards
Board. Annually, the committee shall review and recommend to the board the
selection of AAI's independent auditors, subject to shareholders' approval.
The committee shall discuss with the independent auditors the overall scope
and plans for their audit including the adequacy of staffing and compensation.
Also, the committee shall discuss with management and the independent auditors
the adequacy and effectiveness of the accounting and financial controls,
including AAI's system to monitor and manage business risk, and legal and
ethical compliance programs. Further, the committee shall meet separately with
the independent auditors, with and without management present, to discuss the
results of their examinations.
The committee shall review the interim financial statements with management
and the independent auditors prior to the filing of AAI's Quarterly Report on
Form 10-Q. Also, the committee shall discuss the
A-1
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results of the quarterly review and any other matters required to be
communicated to the committee by the independent auditors under generally
accepted auditing standards. The chair of the committee may represent the entire
committee for the purposes of this review.
The committee shall review with management and the independent auditors the
financial statements to be included in AAI's Annual Report on Form 10-K (or the
annual report to shareholders if distributed prior to the filing of Form 10-K),
including their judgment about the quality, not just acceptability, of
accounting principles, the reasonableness of significant judgments, and the
clarity of the disclosures in the financial statements. Also, the committee
shall discuss the results of the annual audit and any other matters required to
be communicated to the committee by the independent auditors under generally
accepted auditing standards.
A-2
23
- FOLD AND DETACH HERE -
REVOCABLE PROXY AAIPHARMA INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 11, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Gregory S. Bentley and Albert N. Cavagnaro
as Proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock of aaiPharma Inc. (the "Company") held of record by the undersigned
on March 22, 2001 at the annual meeting of stockholders to be held on May 11,
2001 or any adjournment thereof.
1. ELECTION OF DIRECTORS
FOR the nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for the nominees listed below [ ]
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR A NOMINEE, STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
James L. Waters
James G. Martin, Ph.D.
2. PROPOSAL TO APPROVE the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 500,000 options;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE AND ADOPT the 2000 Stock Option Plan for Non-Employee
Directors authorizing the issuance of up to 410,000 options;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO RATIFY AND APPROVE the appointment of Ernst & Young LLP as the
independent public accountants for the Company for the fiscal year ending
December 31, 2001; and
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
24
- FOLD AND DETACH HERE -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEE DIRECTORS, FOR THE
AMENDMENT TO THE 1997 STOCK OPTION PLAN, FOR THE APPROVAL AND ADOPTION OF THE
2000 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AND FOR APPOINTMENT OF ERNST &
YOUNG LLP AS INDEPENDENT AUDITORS AND THIS PROXY WILL BE VOTED FOR THE NOMINEE
DIRECTORS AND EACH PROPOSAL UNLESS THE STOCKHOLDER DIRECTS OTHERWISE, IN WHICH
CASE IT WILL BE VOTED AS DIRECTED.
The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy
Statement dated April 9, 2001, and revokes all proxies heretofore given by the
undersigned.
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Dated: , 2001
-------------------
-------------------------------
Signature
-------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.