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>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</Table>
aaiPharma Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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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 Logo]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
-----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held May 15, 2003
----------------------------------------------------------------
To the Company's stockholders:
The annual meeting of stockholders of aaiPharma Inc., a Delaware
corporation, will be held on Thursday, May 15, 2003 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 directors to serve for three-year terms and
until their successors are elected and qualified;
2. To approve the Amended and Restated 1997 Stock Option Plan
which amends the existing plan by (a) increasing the amount of
options that may be granted to any individual under the plan,
and (b) authorizing the issuance of an additional one million
five hundred thousand (1,500,000) options to purchase shares
of Company common stock;
3. To amend the Company's Certificate of Incorporation to
increase the number of directors from ten to twelve;
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, 2003; and
5. 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 21, 2003.
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,
Albert N. Cavagnaro
Secretary
Wilmington, North Carolina
April 8, 2003
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 Logo]
AAIPHARMA INC.
2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NORTH CAROLINA 28405
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
April 8, 2003
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 Thursday, May 15, 2003 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 2002 Annual Report to Stockholders commencing on or about April 9,
2003.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record of the common stock of the Company at the
close of business on March 21, 2003 will be entitled to vote at the Annual
Meeting. As of that date, a total of 27,612,539 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 approving the Amended and Restated
1997 Stock Option Plan which (a) increases the amount of options that may be
granted to any individual under the 1997 Stock Option Plan and (b) authorizes
the issuing an additional one million five-hundred thousand (1,500,000) options
to purchase shares of Company Common Stock under the 1997 Stock Option Plan; FOR
the approval to amend the Company's certificate of incorporation to increase the
size of the Board of Directors to twelve; and FOR the ratification and approval
of Ernst & Young LLP as the Company's independent public accountants for the
year ending December 31, 2003. 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 ten 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 2006 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 once a quorum is in place 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 2006
John E. Avery, (age 74) 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 53) is Executive Chairman of the
Board of Directors and Chief Scientific 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 55) is Executive Vice President, Corporate
Development of the Company, and has served as Chief Operating Officer from 1995
to 1997, as Executive Vice President 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 2005
John M. Ryan (age 58) 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 45) 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 as Managing Director since 1996. Mr. Gleberman serves as a
director of BackWeb Technologies Ltd., Berry Plastics Corporation, IPC
Acquisition Corp. and MCG Capital Corporation. Pursuant to a stockholders'
agreement entered into in connection with a 1995 investment in the Company,
certain Goldman Sachs investment partnerships have the right to designate one
member of the Company's Board of Directors for as long as the investment
partnerships collectively own at least 10% of the Company's outstanding Common
Stock. Mr. Gleberman is their nominee.
Richard G. Morrison, Ph.D. (age 66) 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.
Philip S. Tabbiner, D.B.A. (age 47) was elected a director in August
2002 and has served as President and Chief Executive Officer of aaiPharma since
July 2002, having previously served as President and Chief Operating Officer
from February to June 2002, as Executive Vice President of aaiPharma and
President of the Company's Pharmaceutical Division from November 2000 to January
2002. Prior to joining aaiPharma, Dr. Tabbiner held various positions in the
pharmaceutical industry over a twenty-year career. Dr. Tabbiner served from
December 1998 to November 2000 as a Senior Vice President at Bayer Diagnostics,
Bayer Corporation, a manufacturer of medical instruments, and as President of
International at Chiron Diagnostics, a manufacturer of medical instruments, from
1997 until Bayer acquired Chiron Diagnostics in 1998. Prior to joining Chiron
Diagnostics, Dr. Tabbiner served from 1995 to 1997 as Vice President of
Worldwide Sales and Marketing at the Dupont Merck Pharmaceutical Company --
Radiopharm Division.
TERM TO EXPIRE 2004
James L. Waters (age 77) 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 67) 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 56) 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 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.
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, a Compensation Committee consisting of Mr. Ryan,
Mr. Avery, Mr. Landgraf and Dr. Martin, and an Executive and Corporate
Governance Committee consisting of Drs. Sancilio, Martin and Morrison and Mr.
Landgraf and Mr. Avery. 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 nine (9) times during the fiscal
year ended December 31, 2002. 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 to administer the
Company's stock option plans. The Compensation Committee met two (2) times
during the 2002 fiscal year. The Board of Directors does not have a standing
nominating committee. The Executive and Corporate Governance Committee provides
guidance and advice to senior management on strategic issues facing the Company
and met three (3) times during the fiscal year ended December 31, 2002.
During the 2002 fiscal year, the Board of Directors held seven (7)
meetings. Each director attended at least 75% of the total number of meetings of
the Board of Directors and Committees on which he served during the period he
was a member of the Board of Directors or such Committee.
COMPENSATION OF DIRECTORS
All non-employee directors receive $3,000 per meeting for attending in
person meetings of the Board of Directors and meetings of Board committees not
held in connection with a regular Board meeting. Non-employee directors also
receive $1,000 per meeting lasting longer than one hour for participating in
telephonic meetings of the Board of Directors and $500 for Board committee
telephonic meetings. In addition, non-employee directors who serve on the Audit
and the Executive and Corporate Governance Committees receive an annual retainer
of $15,000 and $10,000, respectively. Each non-employee chair of the Audit, the
Executive and Corporate Governance and the Compensation Committees receives an
annual retainer of $30,000, $15,000 and $10,000, respectively. Directors are
also reimbursed for expenses incurred in connection with attending meetings.
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
12, 2003 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 (1) SHARES (2)
------------------------ ---------------------- ----------
Frederick D. Sancilio, Ph.D. (3)(4) ........................ 6,220,622 22.4%
Brown Capital Management, Inc. (5) ......................... 4,871,001 17.7%
The Goldman Sachs Group, L.P. (6) .......................... 3,415,248 12.4%
James L. Waters (7) ........................................ 3,172,549 11.5%
Lazard Freres & Co. LLC (8) ................................ 1,883,715 6.8%
Royce Associates, LLC (9) .................................. 1,440,600 5.2%
John E. Avery .............................................. 105,000 *
Joseph H. Gleberman (10) ................................... 0 --
Kurt M. Landgraf ........................................... 34,650 *
James G. Martin, Ph.D ...................................... 90,749 *
Richard Morrison, Ph.D ..................................... 82,499 *
John M. Ryan ............................................... 101,500 *
William H. Underwood (11) .................................. 317,470 1.1%
Phillip S. Tabbiner, D.B.A ................................. 157,451 *
Gregory S. Bentley ......................................... 132,452 *
William L. Ginna, Jr ....................................... 112,444 *
David M. Hurley ............................................ 12,500 *
All executive officers and directors as a group (15 persons) 10,653,447 37.1%
* Less than 1%
(1) 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, 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, 100,000 shares;
Mr. Underwood, 138,987 shares; Dr. Martin, 88,499 shares; Dr. Morrison,
82,499 shares; Mr. Bentley, 109,952 shares; Dr. Sancilio, 107,455
shares; Mr. Waters, 0 shares; Mr. Avery, 75,000 shares; Mr. Landgraf,
34,650 shares; Mr. Ginna, 112,444 shares; Dr. Tabbiner, 116,201 shares;
and all executive officers and directors as a group, 1,091,748 shares.
The shares in the table reflect the three-for-two stock dividend that
was distributed March 10, 2003 to shareholders of record on February
19, 2003.
(2) These calculations are based on an aggregate of 27,608,540 shares
issued and outstanding as of March 12, 2003. Options to purchase shares
held by a person that are exercisable 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.
(3) Dr. Sancilio's address is 1001 North Highway 1, suite 308, Jupiter,
Florida 33477.
(4) Includes 2,325 shares owned by Dr. Sancilio's children.
(5) Based on Schedule 13G filed by Brown Capital Management, Inc. with the
Securities and Exchange Commission dated February 5, 2003. 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 4,871,001 shares and
sole voting power for 3,959,820 shares.
(6) 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 3,415,248 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.
(7) Includes 610,135 shares of Common Stock beneficially owned by Mr.
Waters' spouse. Mr. Waters' address is 47 New York Avenue, Framingham,
Massachusetts 01701.
(8) Based on Schedule 13G filed by Lazard Freres & Co. LLC with the
Securities and Exchange Commission dated February 14, 2003. The address
of Lazard Freres & Co. LLC is 30 Rockefeller Plaza, 59th Floor, New
York, NY 10020. This Schedule 13G indicates that Lazard Freres & Co.
LLC has sole dispositive power for 1,883,715 shares and sole voting
power for 1,759,365 shares.
(9) Based on Schedule 13G filed by Royce & Associates, LLC with the
Securities and Exchange Commission dated January 31, 2003. The address
of Royce & Associates, LLC is 1414 Avenue of Americas, New York, NY
10019. This Schedule 13G indicates that Royce & Associates, LLC has
sole dispositive power for 1,440,600 shares and sole voting power for
1,440,600 shares.
(10) Mr. Gleberman, a managing director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 3,415,248 shares which may be deemed
beneficially owned by GSG as described in note (6) 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, if any.
(11) Includes 1,387 shares 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, 2002, all officers and
directors complied with all applicable Section 16(a) filing requirements except
Frederick D. Sancilio submitted two late reports for four acquisition
transactions by his spouse for their children that occurred in fiscal years 1999
and 2001 and John Hogan submitted one late report for one acquisition
transaction.
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 2002 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, 2002 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARD
------------------------------------------------
ANNUAL COMPENSATION
----------------------------------------
SECURITIES
SALARY ($)(1) BONUS ($)(2) OTHER RESTRICTED UNDERLYING
NAME AND ANNUAL STOCK AWARDS OPTIONS/SARS ALL OTHER
PRINCIPAL POSITION YEAR COMPENSATION ($) (#)(3) COMPENSATION($)
Frederick D. Sancilio, Ph.D.(4) 2002 407,115 287,000 58,499(5) 0 82,500 0
Executive Chairman and 2001 400,000 0 (6) 0 67,500 0
Chief Scientific Officer 2000 400,000 24,000 (6) 0 67,500 0
Phillip S. Tabbiner, D.B.A.(7) 2002 397,942 260,750 (6) 418,000(8) 168,000 0
President & 2001 285,000 0 (6) 0 12,000 65,160(9)
Chief Executive Officer 2000 30,692 0 (6) 0 120,000 0
David M. Hurley (10) 2002 309,615 161,000 (6) 0 300,000 0
Executive Vice President 2001 - - - - - -
2000 - - - - - -
William L. Ginna, Jr. (11) 2002 260,000 122,050 30,000(12) 0 187,500 3,000
Executive Vice President & 2001 209,750 0 (6) 0 0 3,000
Chief Financial Officer 2000 180,000 33,000 (6) 0 112,500 14,498(9)
Gregory S. Bentley 2002 225,000 182,750 (6) 0 75,000 3,000
Executive Vice President 2001 184,750 0 (6) 0 0 3,000
& General Counsel 2000 175,000 19,250 (6) 0 45,000 3,000
William H. Underwood 2002 202,800 95,840 (6) 0 37,500 0
Executive Vice President 2001 191,769 0 (6) 0 0 1,005
2000 165,000 0 (6) 0 37,500 2,438
(1) Includes salary amounts deferred pursuant to the Company's 401(k) plan.
(2) Includes discretionary bonuses granted in March 2002 to the following
executives in the following amounts: Dr. Sancilio, $140,000; Dr.
Tabbiner, $99,750; Mr. Ginna, $75,250; Mr. Bentley, $66,500; and Mr.
Underwood, $35,000. The bonuses were paid in April 2002, unless the
executive elected to defer receipt of the bonus until the future. If
the deferral election was made, the executive received 100% of the
bonus in January 2003 and will receive an additional 100% of the bonus
in January 2004, unless the deferring executive voluntarily leaves our
employment prior to the payment date. Dr. Sancilio, Dr. Tabbiner, Mr.
Ginna, and Mr. Bentley each elected to defer the bonus payment.
(3) The aggregate value of the restricted shares at December 31, 2003 was
Share amounts have been adjusted to reflect the 3-for-2 stock split
effected by a stock dividend paid on March 10, 2003.
(4) Dr. Sancilio served as our Chief Executive Officer until July 1, 2002.
(5) Such amounts include $24,414 for reimbursement for non-business use of
the Company's aircraft and $20,946 for reimbursement for accounting
fees and club memberships pursuant to Dr. Sancilio's employment
agreement with the Company.
(6) Amounts received do not exceed the lesser of $50,000 or 10% of salary.
(7) Dr. Tabbiner commenced employment with the Company on November 15,
2000.
(8) The aggregate value of the restricted shares at December 31, 2002 was
$350,500. These shares will vest on August 2, 2005 and the shares have
a right to dividends declared by the Company.
(9) Relocation expense reimbursement.
(10) Mr. Hurley commenced employment with us on February 4, 2002.
(11) Mr. Ginna commenced employment with the Company on February 1, 2000.
(12) Includes reimbursement of $24,000 for a country club membership.
The following table sets forth certain information with respect to
options granted during 2002 to the executive officers named in the Summary
Compensation Table. Share amounts and exercise price per share have been
adjusted to reflect the 3-for-2 stock split effected by a stock dividend paid on
March 10, 2003.
STOCK OPTION GRANTS IN 2002
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (1)
NAME AND GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------
PRINCIPAL POSITION (#) (2) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
------------------ ------- ----------- ------ ---- ----- ------
Frederick D. Sancilio, Ph.D. 52,500 2.0% 16.29 1/13/12 411,026 1,160,882
30,000 1.1% 14.73 5/17/12 212,447 600,026
Philip S. Tabbiner, D.B.A. 40,500 1.5% 14.81 1/13/12 377,044 955,504
15,000 0.6% 19.38 4/26/12 182,788 463,221
37,500 1.4% 14.96 5/10/12 352,731 893,890
75,000 2.8% 11.45 8/2/12 539,749 1,367,829
David M. Hurley 37,500 1.4% 14.96 5/10/12 352,731 893,890
120,000 4.5% 11.71 7/25/12 883,722 2,239,527
142,500 5.4% 11.45 8/2/12 1,025,522 2,598,876
William L. Ginna, Jr. 45,000 1.7% 14.81 1/13/12 418,938 1,061,670
15,000 0.6% 14.96 5/10/12 141,093 357,556
127,500 4.8% 11.45 8/2/12 917,573 2,325,310
Gregory S. Bentley 45,000 1.7% 14.81 1/13/12 418,938 1,061,670
15,000 0.6% 14.96 5/10/12 141,093 357,556
15,000 0.6% 10.76 8/23/12 101,472 257,150
William H. Underwood 22,500 0.9% 14.81 1/13/12 209,469 530,835
15,000 0.6% 14.96 5/10/12 141,093 357,556
(1) 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.
(2) The options vest in one-third increments at each of the first, second,
and third anniversaries of the grant date except that the options
granted on August 2, 2002 vest on the seventh anniversary of the grant
date, but may vest sooner if certain financial targets are met.
The following table sets forth certain information with respect to the
number of shares underlying unexercised options adjusted for the 3-for-2 stock
split, and the value of unexercised options held at fiscal year end by the Named
Executive Officers:
AGGREGATED 2002 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL
AT FISCAL YEAR-END(#) YEAR-END($)(1)
NAME AND ---------------------- --------------
PRINCIPAL POSITION EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------ ------------------------- -------------------------
Frederick D. Sancilio, Ph.D. 67,455 / 150,045 222,150 / 152,295
Philip S. Tabbiner, D.B.A. 85,200 / 214,800 300,432 / 154,768
David M. Hurley 0 / 300,000 0 / 0
William L. Ginna, Jr. 74,961 / 225,039 256,146 / 128,334
Gregory S. Bentley 89,970 / 90,030 310,299 / 68,116
William H. Underwood 114,497 / 62,024 206,176 / 70,045
(1) Market value of underlying securities at fiscal year end minus the
exercise price of "in-the-money" options.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the aggregate number of options issued
and available for issuance as of December 31, 2002 and the weighted average
exercise price of the outstanding options in each case, adjusted for the 3-for-2
stock split.
Number of securities
to be issued upon Weighted average
exercise of exercise price of Number of securities
outstanding options, outstanding options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
------------- ------------------- -------------------- --------------------
Equity compensation plans approved by security 5,408,977 $10.71 1,321,517
holders
Equity compensation plans not approved by - - --
security holders
TOTAL 5,408,977 $10.71 1,321,517
EMPLOYMENT AND COMPENSATION AGREEMENTS
On November 17, 1995, the Company entered into an employment agreement
with Dr. Frederick D. Sancilio. The employment agreement renews automatically
for successive one-year periods unless either party notifies the other party of
an intention not to extend the term. Dr. Sancilio currently serves as
aaiPharma's Executive Chairman of the Board and Chief Scientific Officer. Prior
to July 2002, he served as Chairman of the Board of Directors and Chief
Executive Officer. The Company is required under this agreement to use best
efforts to cause Dr. Sancilio to be elected to the Company's board of directors,
the boards of directors of any of affiliated corporations on which Dr. Sancilio
served on November 17, 1995, and the board of directors of any majority-owned
subsidiary of aaiPharma acquired after November 17, 1995.
Dr. Sancilio's annual salary was increased from $400,000 to $440,000
effective January 1, 2002. The salary paid to Dr. Sancilio may be increased but
not reduced by the board of directors without Dr. Sancilio's approval. In July
2002, Dr. Sancilio's salary was adjusted to $400,000 to reflect his new role as
Executive Chairman and Chief Scientific Officer. 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 performance objectives set
jointly by the board of directors and Dr. Sancilio. In addition, Dr. Sancilio is
eligible to participate in the Company's employee benefit plans made available
generally to executive officers and any other aaiPharma compensation or
incentive plans, to receive an automobile allowance, and to receive other
perquisites not to exceed, in the aggregate, $35,000 per year.
The employment agreement permits the Company to terminate Dr.
Sancilio's employment at any time, with or without cause. However, if the
Company terminates Dr. Sancilio's employment without cause or if Dr. Sancilio
terminates his employment within 90 days after a "constructive discharge," Dr.
Sancilio would be entitled to receive payments aggregating three times his then
current annual salary. These payments would be made in monthly installments over
two years, during which time Dr. Sancilio would continue to receive his medical
and life insurance benefits. Under the employment agreement, a "constructive
discharge" includes, among other things, the removal of Dr. Sancilio from the
positions of Chairman of the Board, a reduction in Dr. Sancilio's
responsibilities, or the relocation of the Company's principal executive offices
by more than 30 miles from its current location. The employment agreement
requires Dr. Sancilio to refrain from certain activities in competition with
aaiPharma for a period of two years after the termination of his employment for
any reason.
All of the Company's executive officers will be entitled to a one-year
salary if they are terminated without cause. Other than these arrangements and
Dr. Sancilio's agreement described above, no executive officer of the Company
has an employment contract with aaiPharma.
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 with competitive with other companies of similar size in the
same industry.
BASE SALARIES
The Compensation Committee reviews and approves the initial
compensation packages of all new executives to ensure that such packages are
consistent with competitive practices and level of responsibility. The
Compensation Committee annually reviews each executive officer's salary and
determines the amount of increase based accomplishment of individual and
corporate goals. These goals include are based on financial, operational and
scientific achievements. The annual salary review is assisted by information
derived from published reports on other companies in our industry. The salary
analysis also contemplates the total 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 addition to base salary, executives and managers are eligible to
receive performance-based bonuses from time to time. The amount of the bonus and
any performance criteria vary with the position and role of the individual. A
cash bonus was awarded to each of the executive officers during 2002.
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 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, 2001 and 2002 to increase the number of options which may be
granted. The Company granted 1,188,000 options to the executive officers, as a
group, in 2002.
COMPENSATION PAYABLE TO THE EXECUTIVE CHAIRMAN
Until June 2002, Dr. Sancilio served as the Company's Chief Executive
Officer. His 2002 salary 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. The
salary paid to Dr. Sancilio may be increased but not reduced by the board of
directors without Dr. Sancilio's approval.
The Board of Directors increased Dr. Sancilio's annual salary from
$400,000 to $440,000 effective January 1, 2002. In July 2002, Dr. Sancilio's
salary was adjusted to $400,000 to reflect his new role as Executive Chairman
and Chief Scientific Officer. 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 was awarded a
bonus of $147,000 in March 2003.
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 two option grants to Dr. Sancilio, of 52,500
and 30,000 options to purchase shares of AAI common stock at $16.29 and $14.73,
respectively. 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.
Dr. Philip S. Tabbiner was elected Chief Executive Officer effective
July 1, 2002. Dr. Tabbiner's salary was determined after a review of his
accomplishments in furthering the strategic goals of the Company. Dr. Tabbiner's
base salary was set at $500,000.
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
Kurt Landgraf
James G. Martin, Ph.D.
John M. Ryan, Chairman
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, 1998
and ending on December 31, 2002 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 Biovail Corp., Forest Laboratories,
Inc., and Watson Pharmaceuticals, Inc. (the "Specialty Pharmaceutical Peer
Group"). The graph assumes that $100 was invested on January 1, 1998 in AAI
stock, the index and the peer group, and the reinvestment of all dividends. The
past performance of Company Common Stock is not necessarily indicative of future
performance.
[PERFORMANCE GRAPH OMITTED]
12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002
---------- ---------- ---------- ---------- ---------- ----------
AAI 100 105.30 53.30 61.74 152.48 84.97
NASDAQ 100 106.82 183.37 121.45 113.77 84.33
Specialty Pharmaceutical
Peer Group 100 130.12 178.23 177.24 191.50 137.66
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
3,415,248 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.
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. or 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 internally. The Company assigned
the its 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 develops.
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,
2002. At December 31, 2002, 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 seven members of Endeavor's board of directors. Dr. Sancilio 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 $1.1
million in 2002, $0.2 million in 2001, and $0.7 million in 2000. These amounts
were charged at the Company's commercial rates similar to those charged to other
clients. The Company had approximately $292,000 and $79,000, in related accounts
receivable from Endeavor at December 31, 2002 and 2001, 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 December 31, 2002: Dr. Sancilio,
3.7%, 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 $580,000
of services under the agreement but had not been issued any shares of
convertible preferred stock. As of December 31, 2002, the Company owned
approximately 10.0% 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 $494,000, $86,000,
and $100,000, from Aesgen in 2002, 2001 and 2000, 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.
Mr. Waters and Dr. Sancilio have agreed to sell the Company up to a
total of 363,809 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, $5.57 per share. As of December 31, 2002, options to acquire
9,338 shares of the Company's Common Stock were outstanding under the Company's
1995 Stock Option Plan. The Company acquired from Mr. Waters no shares in 2002,
39,198 shares in 2001 for $218,202, and 4,167 shares in 2000 for $23,296, and
the Company acquired from Dr. Sancilio no shares in 2002, 47,910 shares in 2001
for $266,699, 5,094 shares in 2000 for $28,356.
APPROVAL OF AMENDED AND RESTATED 1997 STOCK OPTION PLAN
Under the proposed Amended and Restated 1997 Stock Option Plan, the
Company will be authorized to grant options to purchase up to 6,591,000 shares
of Common Stock, an increase of 1,500,000 shares from the current 1997 Stock
Option Plan. The Board anticipates that the 1,500,000 additional options,
combined with the options currently available for grant under the 1996 Stock
Option Plan and the current 1997 Stock Option Plan, should be sufficient for
employee grants through the year 2005, unless the Company undertakes a
significant acquisition in such period. The Compensation Committee has
recommended, and the Board has approved, the Amended and Restated 1997 Stock
Option Plan, authorizing the Company to issue up to 6,591,000 options to
purchase the Company's Common Stock. In addition, the amendment will increase
the total number of options that may be granted any individual under the 1997
Stock Option Plan from 300,000 to 1,000,000.
The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Annual Meeting once a quorum is met, is
necessary to approve the Amended and Restated 1997 Stock Option Plan. The Board
of Directors recommends the Company's Stockholders vote FOR approving the
Amended and Restated 1997 Stock Option Plan.
The following is a summary description of the principal terms of the
proposed Amended and Restated 1997 Stock Option Plan but does not purport to be
complete and is qualified in its entirety by the full text of the Amended and
Restated 1997 Stock Option Plan. Stockholders may obtain a copy of the Amended
and Restated 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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 1997 Stock Option Plan and to make
all other determinations necessary and advisable for the administration of the
Amended and Restated 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 Amended and Restated 1997 Stock Option Plan. At
December 31, 2002, a total of 4,230,343 (adjusted for the 3-for-2 stock split
effected by a stock dividend paid March 10, 2003) options had been awarded and
were 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 Amended and Restated 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 Amended and
Restated 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 21, 2003 was $8.24 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 Amended and Restated 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 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.
The number of options that will be awarded under the Amended and
Restated 1997 Stock Option Plan in 2003 is not determinable. However, in 2002,
Frederick D. Sancilio, Executive Chairman and Chief Scientific officer, received
82,500 options, Philip S. Tabbiner, President and Chief Executive Officer,
received 168,000 options, David M. Hurley, Executive Vice President, received
300,000 options, William L. Ginna, Jr., Executive Vice President and Chief
Financial Officer, received 187,500 options, Gregory S. Bentley, Executive Vice
President and General Counsel, received 75,000 options, and William H.
Underwood, Executive Vice President, received 37,500 options, each under the
1997 Stock Option Plan. The aggregate options granted in 2002 under the 1997
Stock Option Plan to all (i) current executive officers as a group was
1,188,000, (ii) current directors who are not executive officers as a group was
105,000, and (iii) employees (including all current officers who are not
executive officers) was 1,347,821.
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
Amended and Restated 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 Amended and Restated 1997
Option Plan should not be subject to such deduction limitations.
PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION
By a Board of Directors vote on January 30, 2003, 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 ten (10) to twelve (12). The Company's Board of
Directors consists of ten 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 does not
presently have any candidates for the proposed new directorships, but intends to
seek candidates to augment the current array of experience resident on the
Board.
The Board of Directors recommends a vote FOR the approval of the
amendment of the Company's Certificate of Incorporation.
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)(15). One Committee member, John Ryan, is an officer of a company
which, due to the ownership interest of James L. Waters, another AAI director,
of that company 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 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)(15), 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 nine (9) meetings during fiscal 2002. The Company incurred the
following fees for services performed by Ernst & Young LLP in fiscal 2002.
AUDIT FEES
The Company has been billed $432,764 and $884,921 in 2001 and 2002,
respectively, for fees services rendered by Ernst & Young in the audit of the
Company's financial statements and the review of Forms 10-Q ("Audit Services").
AUDIT-RELATED FEES
The Company has been billed $51,776 and $330,921 in 2001 and 2002,
respectively, for fees related to the performance of the audit of the Company's
financial statements and the review of Forms 10-Q ("Audit-Related Services").
The Audit-Related Services include assistance in the purchase price allocation
of the Company's recently acquired pharmaceutical products, audit services
concerning the Company's 401k plan, and various accounting and audit related tax
accounting assistance.
TAX FEES
Aggregate fees billed for all tax compliance, tax advice and tax
planning services rendered by Ernst & Young LLP in 2001 and 2002 are $378,657
and $605,692. These fees are for services rendered in the areas of international
tax planning, transfer pricing documentation, state and local tax preparation
assistance, tax compliance and general tax consulting.
ALL OTHER FEES
No other fees were paid to Ernst & Young LLP in 2001 and 2002.
Consistent with SEC policies regarding auditor independence, the audit
committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, on
January 29, 2003 the audit committee adopted the policy described below to
pre-approve all audit and permissible non-audit services provided by the
independent auditor after such date.
Prior to engagement of the independent auditor for the next year's
audit, management will submit an aggregate of services expected to be rendered
during that year for each of the four categories of services listed below to the
audit committee for approval.
1. Audit services, which include audit work performed in the
preparation of financial statements, as well as work that generally only the
independent auditor can reasonably be expected to provide, including comfort
letters, statutory audits, and attest services and consultation regarding
financial accounting and/or reporting standards.
2. Audit-related services for assurance and related services that are
traditionally performed by the independent auditor, such as due diligence
related to mergers and acquisitions, employee benefit plan audits, and special
procedures required to meet certain regulatory requirements.
3. Tax services, which include services performed by the independent
auditor's tax personnel other than services specifically related to the audit of
the financial statements, such as tax compliance, tax planning, and tax advice.
4. Other services, which include services not captured in the other
categories.
Prior to engagement, the audit committee pre-approves these services by
category of service. The fees are budgeted and the audit committee requires the
independent auditor and management to report actual fees versus the budget
periodically throughout the year by category of service. During the year,
circumstances may arise that make it necessary to engage the independent auditor
for additional services not contemplated in the original pre-approval. In those
instances, the audit committee requires specific pre-approval of the services
before engaging the independent auditor.
The audit committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the audit committee
at its next scheduled meeting.
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, 2002 for filing with the
Securities and Exchange Commission. The committee and the Board have also
recommended, subject to stockholder ratification, the selection of Ernst & Young
LLP as the Company's independent auditors for fiscal year 2003.
James G. Martin, Ph.D.
Richard G. Morrison, Ph.D.
John M. Ryan, Chairman
RATIFICATION OF APPOINTMENT 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, 2003.
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, 2003.
STOCKHOLDER PROPOSALS FOR 2004 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 9,
2003.
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
- FOLD AND DETACH HERE -
REVOCABLE PROXY AAIPHARMA INC.
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 2003
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 21, 2003 at the annual meeting of stockholders to be held on May 15,
2003 or any adjournment thereof.
1. ELECTION OF DIRECTORS
FOR the nominees listed below WITHHOLD AUTHORITY
(except as marked to the to vote for the nominees
contrary below) [ ] listed below [ ]
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR A NOMINEE, STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
John E. Avery
Frederick D. Sancilio, Ph.D.
William H. Underwood
2. PROPOSAL TO APPROVE the Amended and Restated 1997 Stock Option Plan which
amends the existing plan by (a) increasing the amount of options that may be
granted to any individual under the plan, and (b) authorizing the issuance of
an additional one million five hundred thousand (1,500,000) options to
purchase shares of Company common stock;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the amendment to the Company's Certificate of
Incorporation to increase the number of directors from ten to twelve;
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, 2003; 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.
- FOLD AND DETACH HERE -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEE DIRECTORS, FOR THE
AMENDED AND RESTATED 1997 STOCK OPTION PLAN, FOR THE APPROVAL OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION AND FOR THE APPOINTMENT OF ERNST & YOUNG LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS 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 8, 2003, 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: ,2003
-------------------
--------------------------------
Signature
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Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.