SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<Table>
[ ] 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
</Table>
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:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
[aaiPharma Inc. LOGO]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2002
---------------------
To the Company's stockholders:
The annual meeting of stockholders of aaiPharma Inc., a Delaware
corporation, will be held on Friday, May 17, 2002 at 10:00 a.m., North Carolina
time, at the Company's corporate office, located at 2320 Scientific Park Drive,
Suite 185, Wilmington, North Carolina 28405. The purpose of the meeting is:
1. To elect three (3) directors to serve for three-year terms and until
their successors are elected and qualified;
2. To approve an Amendment to the 1997 Stock Option Plan authorizing the
issuance of an additional 1,250,000 options to purchase shares of
Company common stock;
3. To approve an Amendment to the 2000 Stock Option Plan for
Non-Employee Directors authorizing the issuance of an additional
250,000 options to purchase shares of Company common stock;
4. To amend the Company's Certificate of Incorporation to increase the
number of directors from nine (9) to ten (10);
5. To ratify and approve the appointment of Ernst & Young LLP as the
independent auditors for the Company for the fiscal year ending
December 31, 2002; and
6. To consider and act upon any other matters that may properly come
before the meeting or any adjournment thereof.
The record date for the determination of the stockholders entitled to vote
at the Annual Meeting or at any adjournment thereof is the close of business
March 25, 2002.
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, 2002
YOUR VOTE IS IMPORTANT. ACCORDINGLY, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING.
[AAIPHARMA INC. LOGO]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 9, 2002
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 17, 2002 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 2001 Annual Report to Stockholders commencing on or about April
10, 2002.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the common stock of the Company at the close
of business on March 25, 2002 will be entitled to vote at the Annual Meeting. As
of that date, a total of 18,162,076 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 1,250,000
options, FOR the amendment to the 2000 Stock Option Plan for Non-Employee
Directors authorizing the issuance of an additional 250,000 options, FOR the
approval to amend the Company's certificate of incorporation to increase the
size of the Board of Directors to ten (10), and FOR the ratification and
approval of Ernst & Young LLP as the Company's independent auditors for the year
ending December 31, 2002. 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.
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 nine members. The Board
of Directors is classified, with the directors serving staggered three-year
terms. Three 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 2005 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 three 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 2005
John M. Ryan (age 57) 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.
Joseph H. Gleberman (age 44) 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., IPC Communications, Inc., MCG Capital,
Inc., and BackWeb Technologies Ltd.
Richard G. Morrison, Ph.D. (age 65) joined the Company's Board of Directors
in 1999. Prior to his retirement in May 2001, Dr. Morrison was an Adjunct
Professor of Business at the Cameron School of Business, University of North
Carolina at Wilmington for over six years. Dr. Morrison also has more than 30
years of pharmaceutical industry experience, recently acting as a private
consultant for medium-sized international pharmaceutical businesses, and having
served as General Manager and President of Eli Lilly's operations in Venezuela,
Mexico and Brazil.
TERM TO EXPIRE 2004
James L. Waters (age 76) 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, Secretary of Trans-Tek, Inc., an instrument measurement
company, and is the founder of Waters Associates, Inc., now known as Waters
Corporation, a scientific instrumentation manufacturer.
James G. Martin, Ph.D. (age 66) joined the Company's Board of Directors in
1999. Dr. Martin has served since 1995 as Corporate Vice President and since
1993 as Chairman of the Research Development Board of Carolinas HealthCare
System, a regional healthcare system. Prior to joining Carolinas HealthCare, Dr.
Martin served as Governor of the State of North Carolina from 1984 to 1992. Dr.
Martin also serves as a director of Duke Energy Corporation, Palomar Medical
Technologies, Inc., and Family Dollar Stores, Inc.
Kurt M. Landgraf (age 55) joined the Company's Board of Directors in 2001.
Mr. Landgraf has served since August 2000 as the President and Chief Executive
Officer of the Educational and Testing Service in
2
Princeton, New Jersey, the world's largest private educational testing and
measurement organization. He served in various positions at E.I. Dupont de
Nemours Company and its affiliates from 1980 until 2000, including Chairman and
Chief Executive Officer of Dupont Pharmaceuticals Company from January 2000 to
May 2000, Executive Vice President and Chief Operating Officer from April 1998
to August 2000, Executive Vice President from November 1997 to April 1998, and
Chief Financial Officer from December 1996 to October 1997 of E.I. Dupont de
Nemours and Company. Mr. Landgraf serves as director of IKON Office Solutions,
Inc., and NDC Health Corporation.
TERM TO EXPIRE 2003
John E. Avery, (age 73) 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. Mr. Avery served
from 1993 to 1996 as Chairman of each of the Americas Society and the Council of
the Americas, each a non-profit organization.
Frederick D. Sancilio, Ph.D. (age 52) is Chairman of the Board of Directors
and Chief Executive Officer 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 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.
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,
Mr. Avery 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 four times during the fiscal year
ended December 31, 2001. The Compensation Committee's function is to review and
make certain determinations with respect to matters concerning the remuneration
of employees, officers and directors and administer the Company's stock option
plans. The Compensation Committee met two times during the 2001 fiscal year. The
Board of Directors does not have a standing nominating committee.
During the 2001 fiscal year, the Board of Directors held nine (9) meetings.
Each incumbent director attended at least 75% of the total number of meetings of
the Board of Directors and committees on which he served that were held during
the period he was a member of the Board of Directors or such committees.
COMPENSATION OF DIRECTORS
In July 2001, 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. In addition, for each meeting of a committee of the Board of
Directors not held in connection with a regular Board meeting the participating
non-employee director receives $3,000 for attending in person. Non-employee
directors receive $500 for each telephonic Board, each committee meeting held in
conjunction with a Board meeting and each committee meeting held telephonically
that is not held in conjunction with a Board meeting, in each case which exceeds
a one hour duration. All directors are reimbursed for expenses incurred in
connection with attending meetings of the Board of Directors and committees
thereof.
3
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
1, 2002 by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table and (iv) all executive
officers and directors as a group.
<Table>
<Caption>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(a) SHARES(b)
------------------------ --------------------- ----------
Frederick D. Sancilio, Ph.D. (c)............................ 4,193,845 23.2%
Brown Capital Management, Inc. (d).......................... 3,055,100 16.9%
James L. Waters (e)......................................... 2,293,383 12.7%
The Goldman Sachs Group, L.P. (f)........................... 2,276,832 12.6%
John E. Avery............................................... 43,334 *
Joseph H. Gleberman (g)..................................... 0 --
Kurt M. Landgraf............................................ 0 --
James G. Martin, Ph.D. ..................................... 54,500 *
Richard Morrison, Ph.D. .................................... 78,333 *
John M. Ryan................................................ 57,667 *
William H. Underwood (h).................................... 228,670 1.3%
Phillip S. Tabbiner, D.B.A. ................................ 30,900 *
Gregory S. Bentley.......................................... 48,318 *
William L. Ginna, Jr. ...................................... 32,635 *
David Johnston, Ph.D. ...................................... 29,034 *
All executive officers and directors as a group (15
persons).................................................. 7,050,569 39.0%
</Table>
- ---------------
* Less than 1%
(a) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Information in the table reflects options granted under the Company's 1995
Stock Option Plan, 1996 Stock Option Plans, 1997 Stock Option Plan and the
2000 Non Employee Director 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, 56,667 shares; Mr. Underwood, 64,681 shares; Dr. Martin, 53,000
shares; Dr. Morrison, 28,333 shares; Mr. Bentley, 33,318 shares; Dr.
Sancilio, 24,000 shares; Mr. Waters, 0 shares; Mr. Avery 23,334 shares; Mr.
Gleberman, 0 shares; Mr. Landgraf, 0 shares, Mr. Ginna, 32,635 shares; Dr.
Johnston, 28,984 shares; and Dr. Tabbiner, 28,400 shares; and all executive
officers and directors as a group, 383,302 shares.
(b) These calculations are based on an aggregate of 18,083,102 shares issued
and outstanding as of March 1, 2002. Options to purchase shares held by a
person that are exerciseable or become exercisable within the 60-day period
are deemed to be outstanding for the purpose of calculating the percentage
of outstanding shares owned by that person but are not deemed to be
outstanding for the purpose of calculating the percentage owned by any
other person.
(c) Dr. Sancilio's address is 2320 Scientific Park Drive, Wilmington, North
Carolina 28405.
(d) Based on Schedule 13G filed by Brown Capital Management, Inc. with the
Securities and Exchange Commission dated February 5, 2002. The address of
Brown Capital Management, Inc. is 1201 N. Calvert Street, Baltimore,
Maryland 21202. This Schedule 13G indicates that Brown Capital Management,
Inc. has sole dispositive power for 3,055,100 shares and sole voting power
for 2,582,246 shares.
(e) 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.
(f) 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
4
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 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 investment partnerships. The
address of GS is 85 Broad Street, New York, New York 10004.
(g) Mr. Gleberman, a managing director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,276,832 shares which may be deemed
beneficially owned by GSG as described in note (f) 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.
(h) Includes 925 shares beneficially owned by Mr. Underwood's children.
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, 2001, all officers and directors
complied with all applicable Section 16(a) filing requirements except for the
Form 3 filed on behalf of Mr. Landgraf which was filed six days late. The
Company has instituted a program to assist directors and executive officers with
compliance requirements of Section 16(a).
5
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 2001 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, 2001 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
NAME AND -------------------------- SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(a) BONUS($)(b) OPTIONS/SARs(#) COMPENSATION($)(c)
- ------------------ ---- ------------ ----------- --------------------- ------------------
Frederick D. Sancilio, Ph.D. 2001 400,000 0 45,000 13,047(d)
Chief Executive Officer 2000 400,000 24,000 45,000 9,750(d)
1999 395,385 0 0 34,072(d)
Philip Tabbiner, D.B.A.(e) 2001 285,000 0 8,000 71,160(f)
President and Chief 2000 30,692 0 80,000 1,400(g)
Operating Officer 1999 -- -- -- --
William L. Ginna, Jr.(h) 2001 209,750 0 0 6,000(i)
Executive Vice President and 2000 180,000 33,000 0 16,998(j)
Chief Financial Officer 1999 -- -- -- --
David Johnston, Ph.D.(k) 2001 209,750 0 0 6,000(l)
Executive Vice President 2000 200,000 33,000 45,000 65,802(m)
1999 3,846 0 35,000 0
Gregory S. Bentley(n) 2001 184,750 0 0 14,243(o)
Executive Vice President, 2000 175,000 19,250 30,000 5,500(p)
Secretary and General 1999 100,288 22,750 40,000 918(q)
Counsel
</Table>
- ---------------
(a) Includes salary amounts deferred pursuant to the Company's 401(k) plan.
(b) In addition, the following executives were granted discretionary bonuses in
March 2002 in the following amounts: Dr. Sancilio, $140,000; Dr. Tabbiner,
$99,750; Mr Ginna, $75,250; Dr. Johnston, $21,500; and Mr. Bentley,
$66,500. The bonuses are to be paid in April 2002 unless the executive
elects to defer receipt of the bonus until the future. If the deferral
election is made, the executive will receive 100% of the bonus in January
2003 and an additional 100% of the bonus in January 2004, provided that the
deferring executive continues to be employed by the Company on such dates.
Dr. Sancilio, Dr. Tabbiner, Mr. Ginna and Mr. Bentley each elected to defer
the bonus payment.
(c) Such amounts include the Company's contributions under its 401(k) and
profit sharing plans in the following amounts: Dr. Sancilio, $3,000 in
1999, 0 in 2000 and 2001; Dr. Tabbiner, 0 in 2000 and 2001; William Ginna,
0 in 2000 and $3,000 in 2001; Dr. Johnston 0 in 1999 and 2000 and $3,000 in
2001; and Mr. Bentley, 0 in 1999, $3,000 in 2000 and $3,000 in 2001.
(d) Reimbursement for expenses paid pursuant to Dr. Sancilio's employment
agreement with the Company.
(e) Dr. Tabbiner commenced employment with the Company on November 15, 2000.
(f) Includes $6,000 car allowance and $65,160 in reimbursed relocation
expenses.
(g) Entire amount was for relocation expense.
(h) Mr. Ginna commenced employment with the Company on February 1, 2000.
(i) Entire amount was for a car allowance.
(j) Includes $2,500 car allowance and $13,998 in reimbursed relocation expense.
(k) Dr. Johnston commenced employment with the Company on December 20, 1999.
(l) Entire amount was for a car allowance.
(m) Includes $2,500 for car allowance and $63,302 in reimbursed relocation
expenses.
(n) Mr. Bentley commenced employment with the Company on June 1, 1999.
(o) Includes $6,000 car allowance, $8,036 reimbursed child educational expenses
and $207 for executive medical program.
(p) Entire amount was for a car allowance.
(q) Reimbursement for relocation expenses.
6
The following table sets forth certain information with respect to options
granted during 2001 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 2001
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARs APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(a)
NAME AND GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION (#)(b) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------ ------------ ---------------- -------- ---------- --------- ---------
Frederick D. Sancilio........... 45,000 10.1% 11.13 01/12/11 315,067 798,441
Philip Tabbiner................. 8,000 1.8% 16.50 06/29/11 83,014 210,374
Bill Ginna...................... 0 0 0 0 0 0
David Johnston, Ph.D. .......... 0 0 0 0 0 0
Gregory S. Bentley.............. 0 0 0 0 0 0
</Table>
- ---------------
(a) Potential realizable value is based on an assumption that the price of the
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term. The
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(b) The options 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 2001 YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(a)
SHARES --------------------- ---------------------
NAME AND ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE)
------------------ ----------- ----------- --------------------- ---------------------
Frederick D. Sancilio, Ph.D. ...... 0 0 9,000/81,000 156,375/1,215,765
Philip Tabbiner, Ph.D. ............ 0 0 28,400/59,600 434,600/897,400
Bill Ginna......................... 0 0 20,968/54,032 312,806/835,549
David Johnston, Ph.D. ............. 5,300 78,350 28,984/45,716 473,344/758,639
Gregory S. Bentley................. 0 0 33,318/36,682 499,603/591,762
</Table>
- ---------------
(a) Market value of underlying securities at fiscal year end minus the exercise
price of "in-the-money" options.
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995 (the "Signing Date"), the Company and Frederick D.
Sancilio entered into an employment agreement (the "Employment Agreement") to
secure Dr. Sancilio's services as Chairman of the Board and Chief Executive
Officer 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 and Chief Executive Officer, and the Company
is required to use its best efforts to cause Dr. Sancilio to be re-elected to
the Company's Board of Directors and to the boards of directors of affiliates of
the Company on which boards of directors Dr. Sancilio was serving on the Signing
Date and to be elected a director of any majority-owned subsidiary of the
Company acquired after the Signing Date.
7
The Employment Agreement was amended in March 1999 such that Dr. Sancilio's
annual salary was increased to $400,000 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 position of Chairman of the
Board, 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 "Compensation
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 Compensation 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
Compensation Committee is composed entirely of outside directors of the Company.
The Compensation 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 Compensation Committee has implemented a program to review and approve
the initial compensation packages of all new executives. In addition, the
Compensation Committee regularly reviews competitive salary information
concerning the compensation practices of other companies within the industry.
These compensation surveys analyze 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.
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 departmental and individual goals. The maximum bonus that is
payable is 35% of the executives' base salary. Earned bonuses are to be paid in
the first quarter of the following year. Four executive officers, Dr. Fred
Sancilio, Dr. David Johnston, William Ginna and Gregory S. Bentley, received
bonuses of $24,000, $33,000, $33,000 and $19,250, in 2001, respectively.
STOCK OPTIONS
The Compensation 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
8
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
Compensation Committee periodically reviews the Plans to ensure that they are
structured to reflect the benefits offered by other companies in the Company's
industry.
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 1997 Plan
in 1998, 2000 and 2001 to increase the number of options which may be granted.
The Company granted 98,000 options to the executive officers, as a group, in
2001.
COMPENSATION PAYABLE TO THE CHIEF EXECUTIVE OFFICER
The 2001 salary of the Company's Chief Executive Officer, 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
Compensation 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. The agreement provides that base salary may be increased in
light of Dr. Sancilio's performance, competitive levels of compensation and
other factors the Compensation Committee deems relevant. Dr. Sancilio agreed to
forego any salary increase in 2001. 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, of up to 50% of base salary, if
the Company attains target performance objectives agreed upon by the
Compensation Committee and Dr. Sancilio. Dr. Sancilio received a cash bonus of
$24,000 in 2001.
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 Compensation 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 $11.13 per share. The exercise
price was determined by multiplying (x) the average of the high and low trading
prices on the date the options were granted by (y) 110%, as required under the
1997 Stock Option Plan.
CAP ON DEDUCTION OF EXECUTIVE COMPENSATION
Under Section 162(m) of the Internal Revenue Code, a public company may not
deduct more than $1 million in compensation paid to one of its senior executive
officers, unless the excess amount is performance-based compensation satisfying
certain rules. The Company's stock option plans are designed to qualify under
the performance-based compensation requirements of this provision. Due to
current salary levels and anticipated bonus targets, the Compensation 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 Avery
James G. Martin, Ph.D.
John M. Ryan, Chairman
9
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 January 1, 1997 and ending on
December 31, 2001 with a published industry index or line-of-business index. In
the past, the Company selected the Nasdaq Industrial Average and a composite
peer group consisting of Parexel International, Pharmaceutical Product
Development, Inc. and Quintiles Transnational Corp. (the "CRO Peer Group").
Beginning this year, the company will use a new peer group consisting of Biovail
Corp., KV Pharmaceutical Company, and Watson Pharmaceuticals, Inc. (the
"Specialty Pharmaceutical Peer Group"), and continue using the Nasdaq Industrial
Average. The Company believes that the Specialty Pharmaceutical Peer Group is
aligned with the strategic direction of the Company. Both graphs assume that
$100 was invested on January 1, 1997 in AAI stock and in the index and
applicable peer group, and the reinvestment of all dividends. The past
performance of Company Common Stock is not necessarily indicative of future
performance.
[Performance Graph]
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
- -----------------------------------------------------------------------------------------------------------
AAI 100 86.27451 90.849673 47.712418 53.267974 131.55556
NASDAQ Industrial 100 110.03938 117.53918 201.77627 133.64725 125.19398
Specialty Pharmaceutical Peer Group 100 132.50044 172.40313 236.15873 234.84046 253.74159
</Table>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1995, GS Capital Partners II, L.P., G.S. Capital Partners II
Offshore, L.P., Bridge Street Fund 1995, L.P., Stone Street Fund, L.P., and
Goldman Sachs & Co., Verwaltungs GmbH, each an investment partnership managed by
an affiliate of The Goldman Sachs Group Ltd., 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. These Goldman Sachs investment partnerships own
2,276,832 shares of the Company's Common Stock. Pursuant to a stockholder
agreement entered into in connection with their 1995 investment, the Goldman
Sachs investment partnerships have the right to designate one member of the
Company's Board of Directors for so long as they and their affiliates (which
include Goldman, Sachs & Co.) beneficially own 10% or more of the outstanding
shares of the Company's Common Stock. Pursuant to the stockholders agreement,
Joseph Gleberman, a managing director of Goldman, Sachs & Co., serves as one of
the Company's directors.
10
In connection with the 1995 investment, the Company agreed that so long as
the Goldman Sachs investment partnerships beneficially own 5% or more of the
outstanding shares of the Company's 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. If the Company
cannot agree to the terms of an engagement with Goldman, Sachs & Co., their
affiliates after good faith discussions, the agreement permits the Company to
engage any other investment banking firm. However, Goldman, Sachs & Co. would be
entitled to serve as co-managing underwriter in any underwritten offering of the
Company's capital stock.
In addition, in that 1995 investment transaction, the Company granted to
the Goldman Sachs investment partnerships, and other stockholders including Dr.
Frederick Sancilio, James Waters and William Underwood, all current directors of
the Company, rights to cause the Company to register for sale the shares of
Common Stock they beneficially owned at that time.
In 1994, as part of the Company's internal development program, the Company
organized Endeavor Pharmaceuticals, Inc. to continue development of products
that the Company had been developing on the Company's own. The Company assigned
the Company's rights to these products to Endeavor in return for approximately
47% of Endeavor's fully diluted equity. The Company also entered into a contract
with Endeavor to continue product development and clinical supply manufacture
and granted to Endeavor, under certain circumstances, the first right to
purchase additional propriety hormone pharmaceutical products that the Company
develop. Although this contract terminated in April 2001, Endeavor's right to
purchase internally developed hormone products that the Company may develop
survives through April 2004. As the result of subsequent investments in Endeavor
by third parties, including the Goldman Sachs investment partnerships, the
Company's ownership interest in Endeavor has been diluted to approximately 13%
of the common stock of Endeavor outstanding on a fully diluted basis at December
31, 2001. At December 31, 2001, the Goldman Sachs investment partnerships
beneficially owned approximately 13.9% of Endeavor's common stock on a fully
diluted basis, while Dr. Frederick D. Sancilio owned 0.8% and the Waters
Foundation, an affiliate of James Waters owned 0.6%. Pursuant to an agreement
among the Endeavor stockholders, the Company has the right to designate one of
the eight members of Endeavor's board of directors. David Johnston currently
serves as the Company's designee on Endeavor's board.
Pursuant to the Company's product development and supply agreements with
Endeavor, the Company had net sales to Endeavor of approximately $0.2 million in
2001, $0.7 million in 2000 and $2.8 million in 1999. These amounts were charged
at the Company's commercial rates similar to those charged to other clients. The
Company had approximately $79,000 and $147,000 in related accounts receivable
from Endeavor at December 31, 2001 and 2000, respectively. In February 2000, the
Company purchased product rights to an estradiol product and validated
manufacturing equipment from Endeavor as consideration for reducing Endeavor's
outstanding receivable and work-in-progress balances. Endeavor assigned to the
Company the rights to this estradiol product, a generic version of estradiol
approved by the FDA, and the related commercialization contract between Endeavor
and a third party. Under the commercialization agreement, the Company will be
entitled to certain minimum royalties if the third party manufactures and
distributes estradiol. Endeavor also sold a piece of manufacturing equipment and
related accessories to the Company. As consideration for these product and
contract rights and equipment, the Company agreed to reduce Endeavor's
outstanding receivable balance from approximately $2.9 million, including
work-in-process, to $950,000. The terms of this transaction resulted from
negotiations between Endeavor and the Company. The Company believes this
transaction was fair to the Company based on the Company's estimate of the value
of the outstanding receivable and work-in-progress balances the Company reduced
compared to the value of the rights and equipment the Company acquired.
The Company organized Aesgen, Inc. with an affiliate of the Mayo Clinic in
1994 and funded it in 1995 with an affiliate of the Mayo Clinic, MOVA
Pharmaceutical Corporation and certain other investors. The Company's initial
common stock investment in Aesgen was distributed to Company shareholders prior
to the Company's initial public offering in 1996. As a result, the Company's
directors and executive officers beneficially own the following percentages of
the fully diluted common equity of Aesgen as of January 31,
11
2002: Dr. Sancilio, 4.1%, Mr. Waters, 5.0% and Mr. Underwood, 0.3%. In addition,
the Goldman Sachs investment partnerships own 1.8% of the fully diluted common
equity of Aesgen as of January 31, 2002. In January 2001, the terms of the
non-convertible, redeemable preferred stock the Company received in connection
with the Company's 1995 investment in Aesgen were amended to make that class of
stock convertible into Aesgen common stock. In October 2001 the Company agreed
to provide research services to Aesgen, in exchange for up to $1.1 million of
Aesgen convertible preferred stock. Through December 31, 2001, the Company had
performed $86,000 of services under the agreement but had not been issued any
shares of convertible preferred stock. As of January 31, 2002, the Company owned
approximately 3.8% of the common equity of Aesgen on a fully diluted basis. If
all $1.1 million of services are performed, the Company expects to own 14.2% of
Aesgen on a fully diluted basis.
At the time of the Company's 1995 investment in Aesgen, the Company entered
into a development agreement with Aesgen. Under this agreement, the Company had
the right to provide product development and support services to Aesgen with
respect to the generic drugs being developed by Aesgen, provided that the
Company's fees for such services were comparable to those of a competitor. In
addition, the Company was obligated not to develop for the Company's own account
or for any other person, any formulation of the generic products then under
development by Aesgen. In 1996, the Company sold to Aesgen marketing rights to a
pharmaceutical product that the Company was developing. Under the agreement,
Aesgen paid a license fee and would pay additional royalties upon marketing the
product. In December 2001 the Company agreed to purchase from Aesgen a number of
generic product development projects including the rights to associated
abbreviated new drug applications that have been filed with or approved by the
FDA. In exchange for the rights to these products, the Company agreed to
terminate the 1995 development agreement and the 1996 license agreement with
Aesgen described above, and to release Aesgen from any and all liabilities owed
to the Company under these contracts, including approximately $0.7 million of
work-in-progress and accounts receivable. Furthermore, as a result of this
transaction, the Company will have the right to receive royalties that were
formerly payable to Aesgen by MOVA Pharmaceutical Corporation with respect to
the abbreviated new drug applications the Company acquired from Aesgen. The
terms of this transaction resulted from negotiations between Aesgen and the
Company. The Company believes this transaction was fair to the Company.
In February 2002, the Company purchased a generic injectable vitamin D
product from Aesgen that the Company intends to market and promote under the
Company's Aquasol brand name as Aquasol D. The Company made an initial payment
of $1.0 million for this product and agreed to make additional contingent
milestone payments of up to $1.5 million and royalty payments equal to 30% of
the net sales of Aquasol D, less costs incurred in its manufacture and
marketing, for the eight-year period following the first commercial sale of this
product.
The Company recognized net revenues of approximately $86,000, $100,000, and
$100,000 from Aesgen in 2001, 2000 and 1999, respectively. The Company had no
accounts receivable or work-in-progress at December 31, 2001, and had
approximately $248,000 of accounts receivable and $377,000 of work-in-progress
at December 31, 2000.
In 1999, the Company advanced $300,000 to Cetan Technologies, Inc.,
formerly PharmComm, Inc., a company whose principal stockholders include Dr.
Sancilio, Mr. Waters and Mr. Underwood. The advance payment was for scanning and
indexing services to be rendered by Cetan Technologies during 1999 and 2000 as
required as part of the Company's regulatory compliance and record retention
policies. The services were performed by Cetan Technologies at market rates
after considering the timing of the advance payment. The Company has engaged
Cetan Technologies to perform these services since 1996 and has compensated
Cetan Technologies pursuant to written agreements for the services. Cetan
Technologies also provides computer validation services to the Company at market
rates. These validation services are required for compliance with regulatory
requirements. The Company stopped using the services of Cetan Technologies in
2001. Total payments for scanning and validations services provided to the
Company by Cetan Technologies were approximately $277,000 in 1999, $308,000 in
2000 and $4,000 in 2001. At December 31, 2001, the $300,000 advance had been
fully utilized. In addition, two of the Company's directors serve as directors
of Cetan Technologies, Inc.
12
Mr. Waters and Dr. Sancilio have agreed to sell the Company up to a total
of 242,539 shares of the Company's Common Stock to provide the shares for
issuance pursuant to the Company's 1995 Stock Option Plan. Upon the exercise of
a stock option awarded under the 1995 plan, the Company is entitled to purchase
from Mr. Waters and Dr. Sancilio the same number of shares at the exercise price
of the option, $8.35 per share. As of December 31, 2001, options to acquire
6,225 shares of the Company's Common Stock were outstanding under the Company's
1995 Stock Option Plan. The Company acquired from Mr. Waters 26,132 shares in
2001 for $218,202, 2,778 shares in 2000 for $23,296, and 3,154 shares in 1999
for $26,336, and the Company acquired from Dr. Sancilio 31,940 shares in 2001
for $266,699, 3,396 shares in 2000 for $28,356, and 3,856 shares in 1999 for
$32,198.
APPROVAL OF AMENDMENT TO THE 1997 STOCK OPTION PLAN
Under the proposed amendment to the 1997 Stock Option Plan, the Company
will be authorized to grant options to purchase up to 3,894,000 shares of Common
Stock, an increase of 1,250,000 shares from the current 1997 Stock Option Plan.
The Board anticipates that the 1,250,000 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 end
of the year 2003, unless the Company undertakes a significant acquisition in
such period. The Compensation Committee has recommended, and the Board has
approved, amending the 1997 Stock Option Plan, authorizing the Company to issue
up to 3,894,000 options to purchase the Company's Common Stock.
The Board of Directors recommends the Company's Stockholders vote FOR the
amending the 1997 Stock Option Plan.
The following is a summary description of the principal terms of the
proposed 1997 Stock Option Plan but does not purport to be complete and is
qualified in its entirety by the full text of the 1997 Stock 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 Stock 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 Stock 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 Stock Option Plan and to make all
other determinations necessary and advisable for the administration of the 1997
Stock 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 Stock Option Plan. A total of 1,909,308 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 Stock 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 Stock 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 25, 2002
was $ 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 Stock 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
13
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.
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 Stock 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.
14
APPROVAL OF AMENDMENT TO THE 2000 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
Under the proposed amendment to the 2000 Stock Option Plan for Non-Employee
Directors ("2000 Option Plan"), the Company will be authorized to grant options
to purchase up to 660,000 shares of Common Stock, an increase of 250,000 shares
from the current 2000 Option Plan. The Board anticipates that the 250,000
additional options, combined with the options currently available for grant
under the 2000 Option Plan, should be sufficient for non-employee director
grants through the year 2003. The Board has approved amending the 2000 Option
Plan authorizing the Company to issue up to 660,000 options to purchase the
Company's Common Stock.
The Board of Directors recommends the Company's Stockholders vote FOR the
amendment to 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 has 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. The Company has previously granted 390,000 Options to
non-employee directors under the 2000 Option Plan.
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 25, 2002 was $ 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 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 .
PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION
By a Board of Directors vote on March 24, 2002, the Board of Directors
unanimously recommended to the stockholders that the Company amend the Company's
Certificate of Incorporation (the "Charter") to increase the maximum number of
directors from nine (9) to ten (10). The Company's Board of Directors consists
of nine members. An affirmative vote of 75% of the issued and outstanding shares
of the Company's Common Stock is required to approve the proposed amendment. The
Board of Directors believes that the number of Directors should be increased to
provide greater breadth of industry and international experience to oversee the
Company's business affairs. The Company intends to have the Company's President,
Philip Tabbiner, fill the proposed new directorship.
The Board of Directors recommends a vote FOR the approval of the amendment
of the Company's Certificate of Incorporation.
15
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'
beneficial ownership of approximately 12.7% 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 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 or Form 10-K 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 adopted a written
Charter of the Audit Committee in 2001.
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 four (4) meetings during fiscal 2001. The Company incurred the
following fees for services performed by Ernst & Young LLP in fiscal 2001.
AUDIT FEES
The Company has been billed $387,018 for fees for the fiscal year 2001
audit and the review of Forms 10-Q ("Audit Services").
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Ernst & Young LLP did not perform any services related to financial
information systems design and implementation for the fiscal year ended December
31, 2001.
16
ALL OTHER FEES
Aggregate fees billed for all other services rendered by Ernst & Young LLP
for the fiscal year ended December 31, 2001 are $476,179, including $99,175 for
audit-related services. Audit related services include services performed on
registration statement procedures, benefit plan audits, consents, accounting
assistance for transactions, statutory auditing fees in Germany and other
special projects.
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, 2001 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 2002.
James G. Martin, Ph.D.
Richard G. Morrison, Ph.D.
John M. Ryan, Chairman
APPROVAL OF
INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 2002. 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
FORratifying the appointment of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending December 31, 2002.
STOCKHOLDER PROPOSALS FOR 2003 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 2003 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than December 11,
2002.
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.
17
Accordingly, any notice of nominations or other business to be brought before
the 2003 annual meeting of stockholders must be received by the Secretary of the
Company by December 11, 2002. The notice of any stockholder proposal or
nomination for election as a director must set forth the various information
required under the By-laws. The person submitting the notice of nomination and
any person acting in concert with such person must provide, among other things,
the name and address under which they appear on the Company's books (if they so
appear) and the class and number of shares of the Company's capital stock that
are beneficially owned by them. Any stockholder desiring a copy of the Company's
By-laws will be furnished one without charge upon written request to the
Secretary of the Company at 2320 Scientific Park Drive, Wilmington, North
Carolina 28405.
OTHER MATTERS
The Board knows of no other matters which will be presented to the Annual
Meeting. If, however, any other matter is properly presented at the Annual
Meeting, the proxy solicited by this Proxy Statement will be voted in accordance
with the judgment of the person or persons holding such proxy.
By Order of the Board of Directors,
Gregory S. Bentley
Secretary
Wilmington, North Carolina
April 9, 2002
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.
18
- FOLD AND DETACH HERE -
REVOCABLE PROXY AAIPHARMA INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2002
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 25, 2002 at the annual meeting of stockholders to be held on May 17,
2002 or any adjournment thereof.
1. ELECTION OF DIRECTORS
<Table>
FOR the nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for the nominees listed below [ ]
</Table>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR A NOMINEE, STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
John M. Ryan
Joseph H. Gleberman
Richard G. Morrison, Ph.D.
2. PROPOSAL TO APPROVE the Amendment to the 1997 Stock Option Plan authorizing
the issuance of an additional 1,250,000 options;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the Amendment to the 2000 Stock Option Plan for
Non-Employee Directors authorizing the issuance of an additional 250,000
options;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO APPROVE the Amendment to the Company's Certificate of
Incorporation to increase the number of directors from nine (9) to ten (10);
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. PROPOSAL TO RATIFY AND APPROVE the appointment of Ernst & Young LLP as the
independent auditors for the Company for the fiscal year ending December 31,
2002; and
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. 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.
- 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 AMENDMENT TO THE 2000 STOCK
OPTION PLAN FOR NON-EMPLOYEE DIRECTORS, FOR THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION 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, 2002, 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: , 2002
-------------------
-------------------------------
Signature
-------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.