<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): March 16, 1999
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 0-21185 04-2687849
(State or other jurisdiction of (Commission File Number) (I.R.S. employer
incorporation or organization) identification no.)
5051 NEW CENTRE DRIVE, WILMINGTON, NC 28403
(Address of principal executive office) (Zip code)
(910) 392-1606
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
<PAGE> 2
This amendment on Form 8-K/A amends the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on March 31, 1999, to
report the Registrant's acquisition of Medical & Technical Research
Associates, Inc. ("MTRA").
Item 7 is hereby amended and restated as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
(a) Financial Statements of MTRA
1) Financial Statements of MTRA for the
year ended December 31, 1998
a. Report of Independent Auditors 4
b. Balance Sheet as of December 31, 1998 5
c. Statement of Operations for the year ended
December 31, 1998 7
d. Statement of Stockholders' Equity for the
year ended December 31, 1998 8
e. Statement of Cash Flows for the year ended
December 31, 1998 9
f. Notes to Financial Statements 10
2) Financial Statements of MTRA for the
years ended December 31, 1997 and 1996
a. Independent Auditors' Report 22
b. Balance Sheets as of December 31, 1997 and 1996 23
c. Statements of Operations for the years ended
December 31, 1997 and 1996 24
d. Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996 25
e. Statements of Cash Flows for the years ended
December 31, 1997 and 1996 26
f. Notes to Financial Statements 27
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
(b) Pro Forma Financial Information
1) Unaudited Pro Forma Combined Condensed Financial Statements of
the Company and MTRA
a. Introduction to the Unaudited Pro Forma Combined
Condensed Financial Data 38
b. Unaudited Pro Forma Combined Condensed Balance Sheet
as of December 31, 1998 39
c. Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1998 40
d. Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1997 41
e. Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1996 42
f. Notes to the Unaudited Pro Forma Combined Condensed
Balance Sheet as of December 31, 1998 and Statements
of Operations for the years ended December 31, 1998,
1997 and 1996 43
</TABLE>
<TABLE>
<CAPTION>
(c) Exhibits
Exhibit No. Exhibit
----------- -------
<S> <C>
Exhibit 2.1* Agreement and Plan of Merger between Applied Analytical Industries, Inc.,
Medical and Technical Research Associates, Inc. and Wilmington Acquisition
Corp. dated as of February 12, 1999 (incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 31, 1999)
Exhibit 23.1 Consent of Ernst & Young LLP
Exhibit 23.2 Consent of Rogers, Suleski & Associates, LLC
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Schedules and exhibits to the document have been omitted and will be
supplementary provided to the Securities and Exchange Commission upon request.
3
<PAGE> 4
Report of Independent Auditors
Board of Directors and Stockholders
Medical & Technical Research Associates, Inc.
We have audited the accompanying balance sheet of Medical & Technical Research
Associates, Inc. (the "Company") as of December 31, 1998 and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical & Technical Research
Associates, Inc. at December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 12, 1999
4
<PAGE> 5
Medical & Technical Research Associates, Inc.
Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,496,524
Accounts receivable, net 4,007,607
Deferred income tax benefits 1,568,500
Prepaid expenses and other 971,942
-----------
Total current assets 8,044,573
Property and equipment, net 1,202,502
Other noncurrent assets:
Loans and advances to stockholders and related parties 707,796
Deferred income tax benefits 73,000
Other 222,854
-----------
1,003,650
-----------
Total assets $10,250,725
===========
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,674,841
Accrued expenses 1,455,933
Unearned contract revenue 3,090,671
Current portion of long-term debt and capital lease obligations 410,756
-----------
Total current liabilities 6,632,201
Long-term debt and capital lease obligations, less current portion 1,443,600
Stockholders' equity:
Common stock, no par value; 1,400,000 shares authorized; 815,751
issued and outstanding at December 31, 1998 883,498
Retained earnings 1,291,426
-----------
Total stockholders' equity 2,174,924
-----------
Total liabilities and stockholders' equity $10,250,725
===========
</TABLE>
See accompanying notes
6
<PAGE> 7
Medical & Technical Research Associates, Inc.
Statement of Operations
Year ended December 31, 1998
<TABLE>
<S> <C>
Revenues:
Contract revenues $ 22,171,955
Reimbursed costs (4,308,767)
------------
Net revenues 17,863,188
Direct costs:
Salaries and labor 6,744,656
Other direct costs 4,062,778
------------
Total direct costs 10,807,434
------------
Gross margin 7,055,754
Operating expenses:
Selling, general & administrative 5,151,994
Depreciation 435,758
------------
Total operating expenses 5,587,752
------------
Income from operations 1,468,002
Other income (expense):
Interest expense (26,064)
Other income, net 176,906
Loss on sale of assets (83,769)
------------
Total other income 67,073
------------
Income before income taxes 1,535,075
Income tax expense 697,500
------------
Net income $ 837,575
============
</TABLE>
See accompanying notes.
7
<PAGE> 8
Medical & Technical Research Associates, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 800,800 $872,883 $ 453,851 $1,326,734
Net income -- -- 837,575 837,575
Exercise of stock options 14,951 10,615 -- 10,615
--------------------------------------------------------
Balance at December 31, 1998 815,751 $883,498 $1,291,426 $2,174,924
========================================================
</TABLE>
See accompanying notes.
8
<PAGE> 9
Medical & Technical Research Associates, Inc.
Statement of Cash Flows
Year ended December 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 837,575
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 435,758
Loss on sale and disposal of assets 83,769
Changes in operating assets and liabilities:
Deferred income taxes 688,500
Accounts receivable (2,257,878)
Prepaid expenses and other (465,601)
Other noncurrent assets 20,842
Accounts payable 599,955
Accrued expenses 356,015
Accrued expenses of discontinued operations (318,864)
Unearned contract revenue 1,251,676
-----------
Net cash provided by operating activities 1,231,747
INVESTING ACTIVITIES
Purchases of property and equipment (488,658)
Decrease in loans and advances to stockholders and related parties 33,067
-----------
Net cash used in investing activities (455,591)
FINANCING ACTIVITIES
Proceeds from long-term debt 1,763,958
Payments made on long-term debt (2,197,562)
Repayments of capital leases (74,129)
Proceeds from exercise of stock options 10,615
-----------
Net cash used by financing activities (497,118)
-----------
Net increase in cash and cash equivalents 279,038
Cash and cash equivalents, beginning of year 1,217,486
-----------
Cash and cash equivalents, end of year $ 1,496,524
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 202,918
===========
Income taxes paid $ 6,977
===========
</TABLE>
See accompanying notes.
9
<PAGE> 10
Medical & Technical Research Associates, Inc.
Notes to Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
DESCRIPTION OF BUSINESS
Medical & Technical Research Associates, Inc. (the "Company") manages clinical
trials involving new drug products on behalf of pharmaceutical, biotechnology
and medical device companies.
REVENUE RECOGNITION
Revenue on long-term contracts is accounted for principally on an accrual basis,
using the percentage-of-completion method, based upon work completed. The
Company's exposure to credit loss is equal to the outstanding accounts
receivable and unbilled services balance. Although the Company does not require
collateral for unpaid balances, credit losses have consistently been within
management's expectations. Certain contracts contain provisions for price
redetermination for cost overruns. Such redetermined amounts are included in
service revenue when realization is assured and the amounts can be reasonably
determined. In the period in which it is determined that a loss will result from
the performance of a contract, the entire amount of the estimated ultimate loss
is charged against income.
UNBILLED SERVICES AND UNEARNED INCOME
In general, prerequisites for billings are established by contractual provisions
including predetermined payment schedules, the achievement of contract
milestones or submission of appropriate billing detail. Unbilled services arise
when services have been rendered but clients have not been billed. Similarly,
unearned income represents prebillings for services that have not yet been
rendered.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from such estimates and changes in such estimates
may affect amounts reported in future periods.
10
<PAGE> 11
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, money market accounts and short-term
investments with original maturity dates of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation for furniture and equipment and motor vehicles is
computed using the straight-line method over the estimated useful lives of the
assets ranging from five to seven years. Leasehold improvements are amortized on
a straight-line basis over the term of the estimated useful life of the asset or
the remaining lease term, whichever is less.
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Furniture and equipment $ 3,843,671
Leasehold improvements 343,500
Motor vehicles 82,690
-----------
4,269,861
Less accumulated depreciation and amortization (3,067,359)
-----------
$ 1,202,502
===========
</TABLE>
Depreciation expense, including amortization of equipment under capital leases,
was $435,758 for the year ended December 31, 1998.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. The company recognized
advertising expense of $143,035 for the year ended December 31, 1998.
11
<PAGE> 12
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, the liability method is used in accounting for income
taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities.
STOCK-BASED COMPENSATION
The Company currently accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Since the Company is not required to adopt the
fair value based recognition provisions prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," it has
elected only to comply with the disclosure requirements set forth in the
Statement, which include disclosing pro forma net income as if the fair value
based method of accounting had been applied. Under APB 25, because the exercise
price of the Company's stock options is not less than the estimated fair value
of the underlying stock on the date of the grant, no compensation expense is
recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, debt and other liabilities approximate fair value at December 31, 1998.
EFFECTS OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 addresses reporting
amounts of other comprehensive income and SFAS No. 131 addresses reporting
segment information. As of January 1, 1998, the Company implemented SFAS No.
130. There are no material differences between net income and comprehensive
income as defined by SFAS 130 for the periods presented. SFAS 131 uses a
management approach to report financial and descriptive information about a
Company's operating segments. Operating segments are revenue-producing
components of the enterprise for
12
<PAGE> 13
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
which separate financial information is produced internally for the Company's
management. Under this definition, the Company operated, for the year ended
December 31, 1998, as a single segment.
In 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits" and
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The Company does not expect any significant additional disclosure requirements
or other financial statement impacts to result from the adoption of these
statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Earnings in excess of billings on long-term contracts $ 165,441
Unpaid billings on contracts 3,906,958
Allowance for doubtful accounts (64,792)
-----------
Accounts receivable, net $ 4,007,607
===========
</TABLE>
3. LOANS AND ADVANCES TO STOCKHOLDERS AND RELATED PARTIES
Loans and advances to stockholders represent unsecured amounts advanced to
stockholders and related parties. The stockholder's loan that represents the
majority of the outstanding balance is pledged as security for the Company's
primary bank note payable (see Note 5). The stockholder's note provides for
quarterly payments of interest at 9% per annum on the unpaid principal balance
and principal in the amount of $6,021, so long as the terms of this note, as
well as the terms of the Company's agreement with the bank, are not in default.
In the event of default, principal payments under the note would be accelerated
with the payments made directly to the bank as partial settlement of the
Company's indebtedness to the bank. Any outstanding principal balance and
accrued interest and costs are due in full on April 30, 2000.
13
<PAGE> 14
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
4. LINE OF CREDIT
During 1998, the Company entered into an agreement with a bank for a line of
credit facility. The line of credit provides for a maximum borrowing limit of
$750,000 at an interest rate of prime (7.75% at December 31, 1998) plus 1.25%
and is secured the Company's accounts receivable. The agreement expires on
December 15, 2000. There were no borrowings on the line of credit during 1998.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Note payable, bank, bearing interest at 7.64% per annum, secured by the
Company's accounts receivable, due in monthly payments of $27,250
plus interest, with all remaining principal due in full on December 15,
2000. $1,635,000
Term notes payable to sublessor and bank, bearing interest at rates
ranging from 8.7% to 10.5%, partially secured by equipment, due in
monthly payments of principal and interest through April 2003 180,450
----------
Total long-term debt 1,815,450
Less current portion 378,979
----------
Long-term debt, less current portion $1,436,471
==========
</TABLE>
Future principal maturities of long-term debt are as follows for the years ended
December 31:
<TABLE>
<S> <C>
1999 $ 378,979
2000 1,364,672
2001 59,528
2002 12,271
----------
$1,815,450
==========
</TABLE>
14
<PAGE> 15
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
6. LEASES
The Company leases its facilities and certain equipment under various operating
and capital lease agreements expiring at various dates through 2002. The
Company's annual future minimum payments required and annual minimum sublease
payments to be received under these leases are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
OPERATING
LEASE SUBLEASE
EXPENSE INCOME CAPITAL
-------------------------------------------
<S> <C> <C> <C>
1999 $ 981,428 $(267,500) $33,236
2000 967,350 (97,500) 7,210
2001 123,765 (24,375) --
2002 23,095 -- --
-------------------------------------------
Total minimum lease payments $ 2,095,638 $(398,972) 40,446
============================
Less amount representing interest 1,540
-------
Present value of minimum lease payments 38,906
Less current portion (31,777)
-------
$ 7,129
=======
</TABLE>
On October 15, 1997, the Company entered into a sublease arrangement through
September 2002 for new space in Natick, Massachusetts for its headquarters
operations. The sublease provides for the Company to share in certain annual
operating cost increases measured from the sublessor's 1997 actual costs. In
addition, the sublessor has agreed not to execute an early termination option on
December 31, 2000, unless so requested by the Company. The Company has various
lease obligations and offsetting sublease arrangements for its previous
headquarters location.
Rental expense under all operating leases was approximately $793,622, net of
sub-rental income of $238,854 for the year ended December 31, 1998.
15
<PAGE> 16
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
6. LEASES (CONTINUED)
Equipment and property includes the following amounts for capital leases as of
December 31, 1998:
<TABLE>
<S> <C>
Equipment $ 221,007
Accumulated amortization (75,404)
---------
$ 145,603
=========
</TABLE>
7. INCOME TAXES
Total income tax expense for the year ended December 31, 1998, is comprised of
the following amounts:
<TABLE>
<S> <C>
Current:
Federal $ --
State 9,000
--------
9,000
--------
Deferred:
Federal 536,600
State 151,900
--------
688,500
--------
$697,500
========
</TABLE>
The reconciliation of the statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
RATE AMOUNT
--------------------------
<S> <C> <C>
Federal tax at statutory rate 35% $536,600
State tax at statutory rate 10% 160,900
-------- --------
45% $697,500
======== ========
</TABLE>
16
<PAGE> 17
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at
December 31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $1,228,248
Compensated absences, principally due to accrual for financial
reporting purposes 165,218
Unearned revenue, recognized for tax purposes 91,024
Other loss reserves 190,255
Other 8,354
----------
Total deferred tax assets 1,683,098
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation 41,598
----------
Net deferred tax asset $1,641,500
==========
</TABLE>
As of December 31, 1998, the Company had approximately $2.3 million of Federal
operating loss carryforwards available to offset future Federal taxable income
and $4.5 million of Massachusetts operating loss carryforwards available to
offset future Massachusetts taxable income. The Federal carryforwards expire in
2012. Of the Massachusetts carryforwards, $600,000 expire in 2000 and $3.9
million expire in 2002.
17
<PAGE> 18
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS
The Company maintains a deferred contribution 401(k) plan (the "Plan") for its
employees. To be eligible to participate, an employee must be 21 years of age
and have completed one year of service with at least 1,000 hours. Under the
Plan, the Company matches 100% of the first 2% of employee salary deferrals, 50%
of the next 2% and may make additional discretionary contributions of up to an
additional 2% of employee salary deferrals. Company contributions under the Plan
for the year ended December 31, 1998 was $332,247.
9. CONTINGENCIES
Environmental inspections on land sold by the Company during 1997 disclosed the
presence of gasoline in the soil. The Company maintained an escrow account of
approximately $111,000 and had a reserve of $175,000 at December 31, 1998, to
cover potential remediation costs. The reserve for potential remediation costs
is classified as accrued expenses in the accompanying balance sheets. Management
believes that the amounts will be sufficient to obtain a level of either No
Significant Risk or Downgradient Property Status, each as defined by the
Massachusetts Contingency Plan. In addition, the Company has filed suit against
the prior environmental site engineer seeking reimbursement for costs and
damages related to this matter. Management believes that the Company has
sufficient basis to prevail in this action. Due to uncertainties as to when
remediation costs will be incurred, the liability has not been calculated on a
discounted basis.
The Company is involved in various legal proceedings arising out of, and
incidental to, its business. Based on its review with outside counsel,
management does not anticipate that any losses incurred as a result of these
legal proceedings would have a materially adverse effect on the Company's
financial position, results of operations or cash flows.
18
<PAGE> 19
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
10. DISPOSITION OF ASSETS
On February 28, 1997, the Company completed its sale of the remaining assets
from its discontinued clinical pharmacology unit. During 1998, the Company
refinanced the outstanding debt related to this disposition as part of a broader
corporate debt restructuring. As a result, all remaining accruals were reduced
to zero as of the date of the refinancing and netted against the loss on sale of
assets in the 1998 statement of operations.
11. CONCENTRATIONS
The Company maintained cash account balances in excess of FDIC limits with two
financial institutions at December 31, 1998. Based on the size, financial
strength and historic performance of the institution, management believes that
risk of loss is very minimal. Two customers accounted for 20% and 17% of 1998
net revenues, respectively.
12. STOCK OPTION PLAN
During 1996, the Company adopted the 1996 Incentive and Non-Qualified Stock
Option Plan (the "Option Plan") which permits issuance of 599,200 shares of
common stock to key employees, directors and suppliers. Under the terms of the
Option Plan, options granted may be either incentive or non-qualified stock
options, and are issued at market value as of the date of the grant. The options
vest over periods ranging from the date of grant to thirty-six months, and
expire on the tenth anniversary of the date of grant.
Following is a summary of 1998 stock option activity:
<TABLE>
<CAPTION>
SHARES
--------
<S> <C>
Outstanding options, December 31, 1997 550,200
Forfeited options (8,749)
Exercised options (14,951)
--------
Outstanding options, December 31, 1998 526,500
========
</TABLE>
19
<PAGE> 20
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
The Company elected to account for the Option Plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for the stock options. Had compensation expense for the
Option Plan been determined based on the fair value of the options at the grant
date, consistent with the methodology prescribed under Statement of Financial
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income would have been decreased by approximately $1,700 for 1998. The fair
value of options granted was estimated using a minimum value option pricing
model with the following weighted average assumptions:
<TABLE>
<S> <C>
Risk free interest rate 6.42%
Expected option lives 10 years
Expected dividends none
</TABLE>
The following summarizes outstanding options as of December 31, 1998:
<TABLE>
<S> <C>
Weighted average exercise price $.71
Weighted average remaining contractual life 7.4 years
Options exercisable 519,500
</TABLE>
13. SUBSEQUENT EVENTS
On March 16, 1999, the Company merged with Applied Analytical Industries, Inc.
("AAI") and exchanged all of its outstanding common stock and options for
approximately 1.3 million shares of stock, including conversion of the Company's
options. AAI is a multinational provider of contract research services with its
principal offices in the United States and Germany. The merger will be accounted
for as a pooling-of-interests in accordance with Accounting Principles Board No.
16, "Business Combinations."
20
<PAGE> 21
Medical & Technical Research Associates, Inc.
Notes to Financial Statements (continued)
14. YEAR 2000 ISSUE (UNAUDITED)
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming changes in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, infrastructure, embedded
computer chips, networks and telecommunications equipment. The Company also
relies, directly and indirectly, on external systems of business enterprises
such as customers, suppliers, creditors, financial organizations, and of
governmental entities, for accurate exchange of data. The Company's current
estimate is that the costs associated with the year 2000 issue, and the
consequences of incomplete or untimely resolution of the year 2000 issue, will
not have a material adverse effect on the combined result of operations or
combined financial position of the Company in any given year. However, despite
the Company's efforts to address the year 2000 impact on its internal systems,
the Company has not fully identified such impact or whether it can resolve it
without disruption of its business and without incurring significant expense. In
addition, even if the internal systems of the Company are not materially
affected by the year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company interacts.
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Medical & Technical Research Associates, Inc.
We have audited the accompanying balance sheets of Medical & Technical Research
Associates, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical & Technical Research
Associates, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ ROGERS, SULESKI & ASSOCIATES, LLC
Needham Heights, Massachusetts
February 20, 1998
22
<PAGE> 23
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,217,486 $ 2,260,701
Accounts receivable, net 2,047,785 2,355,602
Income tax receivable -- 240,000
Assets of discontinued operations held for sale -- 1,828,818
Deferred income tax benefits 994,000 326,250
Prepaid expenses and other assets 506,341 507,375
---------- ------------
Total current assets 4,765,612 7,518,746
Property and equipment, net 1,233,371 1,576,819
Loans and advances to stockholders & related parties 740,863 740,535
Deferred income tax benefits 1,336,000 1,527,313
Other assets 243,696 117,315
---------- ------------
TOTAL ASSETS $8,319,542 $ 11,480,728
========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 395,422 $ 2,124,203
Notes payable -- 87,000
Accounts payable 1,074,886 1,817,962
Accrued expenses 1,096,358 756,328
Accrued income taxes 3,560 21,099
Accrued expenses of discontinued operations 171,976 361,078
Unearned contract revenue 2,137,051 3,820,633
---------- ------------
Total current liabilities 4,879,253 8,988,303
Long-term debt, less current portion 1,966,667 2,221,479
Accrued expenses of discontinued operations - noncurrent 146,888 187,316
---------- ------------
Total liabilities 6,992,808 11,397,098
---------- ------------
Contingencies
Stockholders' equity:
Common stock, no par value. Authorized 1.4 million
shares; 800,800 shares issued and outstanding 872,883 872,883
Retained earnings 453,851 (789,253)
---------- ------------
Total stockholders' equity 1,326,734 83,630
---------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $8,319,542 $ 11,480,728
========== ============
</TABLE>
See Accompanying Notes to Financial Statements
23
<PAGE> 24
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Contract revenues $ 18,841,599 $ 18,359,253
Reimbursed costs (4,136,518) (6,793,372)
------------ ------------
NET REVENUES 14,705,081 11,565,881
------------ ------------
DIRECT COSTS:
Salaries and labor 5,543,583 4,122,173
Other direct costs 3,404,006 3,231,476
------------ ------------
TOTAL DIRECT COSTS 8,947,589 7,353,649
------------ ------------
GROSS MARGIN 5,757,492 4,212,232
------------ ------------
OPERATING EXPENSES:
Selling, general & administrative 3,927,097 3,461,212
Depreciation 378,970 388,318
Relocation costs 648,705 --
------------ ------------
TOTAL OPERATING EXPENSES 4,954,772 3,849,530
------------ ------------
INCOME FROM OPERATIONS 802,720 362,702
OTHER EXPENSE (INCOME):
Interest expense 78,694 72,765
Other expense (income), net (80,641) (67,799)
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 804,667 357,736
Income tax expense (benefit) 194,069 (328,809)
------------ ------------
INCOME FROM CONTINUING OPERATIONS 610,598 686,545
Discontinued operations:
Estimated gain on disposal of clinical pharmacology
unit, including provisions for operating losses during
phase out period, net of applicable income tax benefits 632,506 1,523,985
------------ ------------
NET INCOME $ 1,243,104 $ 2,210,530
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
24
<PAGE> 25
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 800,800 $872,883 $(2,999,783) $(2,126,900)
Net income -- -- 2,210,530 2,210,530
------- -------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 800,800 $872,883 $ (789,253) $ 83,630
Net income -- -- 1,243,104 1,243,104
------- -------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 800,800 $872,883 $ 453,851 $ 1,326,734
======= ======== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
25
<PAGE> 26
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,243,104 $ 2,210,530
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation expense 674,287 388,318
Gain on sale and disposal of assets (48,364) (12,422)
Deferred income taxes (476,437) (1,853,563)
Decrease in accounts receivable 307,817 965,968
(Increase) decrease in income tax receivable 240,000 (240,000)
(Increase) decrease in prepaid expenses and other assets 1,034 (175,543)
Decrease in accounts payable (743,076) (651,884)
Increase (decrease) in accrued expenses 327,139 (332,203)
Decrease in accrued income taxes (17,539) (151,605)
Decrease in accrued expenses of discontinued operations (229,530) (442,759)
Increase (decrease) in accrued pension and profit sharing 12,892 (28,731)
Increase (decrease) in unearned contract revenue (1,683,582) 2,694,989
----------- -----------
Net cash provided (used) by operating activities (392,255) 2,371,095
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (470,157) (497,978)
Proceeds from sale of assets 2,016,500 48,004
Net increase in loans and advances to stockholders (328) (1,681)
Increase in other assets (126,382) (42,605)
----------- -----------
Net cash provided (used) by investing activities 1,419,633 (494,260)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable, net (87,000) 87,000
Borrowings under term notes 126,855 --
Payments made on term notes (4,778) --
Payments made on long-term debt (2,014,015) (220,000)
Borrowings under capital leases -- 257,555
Repayments of capital leases (91,655) (52,865)
----------- -----------
Net cash provided (used) by financing activities (2,070,593) 71,690
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,043,215) 1,948,525
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,260,701 312,176
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,217,486 $ 2,260,701
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
26
<PAGE> 27
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. THE COMPANY
Medical & Technical Research Associates, Inc. (the Company) manages
clinical trials involving new drug products on behalf of
pharmaceutical, biotechnology and medical device companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue on long-term contracts is accounted for principally on an
accrual basis, using the percentage-of-completion method, based upon
work completed to date. Adjustments to contract cost estimates and
contract revenue are made in the period in which the qualifying facts
or conditions become known. Cash received in advance which has not been
earned on contracts is reported as unearned contract revenue.
Reimbursed costs comprise investigator fees and certain other contract
costs which are reimbursed by clients. Accordingly, such reimbursed
costs are deducted in determining net revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, money market accounts and
short-term investments with original maturity dates of three months or
less.
PROPERTY AND EQUIPMENT
Equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, or over the terms of the
related leases, if such periods are shorter. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any remaining gain or loss is
reflected as income or expense. The cost of maintenance and repairs is
charged to expense when incurred.
27
<PAGE> 28
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company records income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement 109). Statement 109 utilizes the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered
or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
ASSETS OF DISCONTINUED OPERATIONS HELD FOR SALE
Assets of discontinued operations held for sale consist of property and
equipment of the discontinued clinical pharmacology unit and are
recorded at the lower of net book value or estimated fair value less
anticipated selling costs.
STOCK-BASED COMPENSATION
The Company currently accounts for its stock-based compensation plans
using the accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Since the Company
is not required to adopt the fair value based recognition provisions
prescribed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," it has elected only to
comply with the disclosure requirements set forth in the Statement,
which include disclosing pro forma net income as if the fair value
based method of accounting had been applied.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with
current year presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Earnings in excess of billings on long-term contracts $ 718,249 $ 941,534
Unpaid billings on contracts 1,359,536 1,471,162
Allowance for doubtful accounts (30,000) (57,094)
----------- -----------
Accounts receivable, net $ 2,047,785 $ 2,355,602
=========== ===========
</TABLE>
28
<PAGE> 29
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
4. LOANS AND ADVANCES TO STOCKHOLDERS AND RELATED PARTIES
Loans and advances to stockholders and related parties represent
unsecured amounts advanced to stockholders and related parties. The
shareholder's loans that represent the majority of the outstanding
balance are pledged as security for the Company's primary bank note
payable. The shareholder's note provides for quarterly payments of
interest and principal, with the principal portion deferred until
maturity of the note in April 2000, so long as the terms of this note,
as well as the terms of the Company's forbearance agreement with the
bank, are not in default. In the event of default, principal payments
under the note would be accelerated. The bank also retains the right
under default provisions to have the shareholder make payments directly
to the bank for application against the Company's note payable to the
bank.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Furniture and equipment $ 3,375,480 $ 2,920,626
Leasehold improvements 655,185 794,007
Motor vehicles 82,690 82,690
----------- -----------
4,113,355 3,797,323
Less accumulated depreciation and amortization (2,879,984) (2,220,504)
----------- -----------
$ 1,233,371 $ 1,576,819
=========== ===========
</TABLE>
Depreciation expense totaled $674,287 and $388,318 for the years ended
December 31, 1997 and 1996, respectively.
6. NOTES PAYABLE
Notes payable consists of amounts outstanding under the line of credit
facility that was terminated by the Company in July 1997. The maximum
month-end borrowings during 1997 and 1996 were $87,000 and $267,000,
respectively. Average month-end borrowings under this facility during
1997 and 1996 were $44,333 and $158,083, respectively. The weighted
average interest rate during 1997 and 1996 was 12%.
29
<PAGE> 30
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable, bank, bearing interest at 9.5% secured by
all assets of the Company, due in monthly principal
payments of $20,000, plus minimum principal repayments
tied to quarterly net operating income, and interest with all
remaining unpaid principal due in full on March 31, 1999 $2,126,977 $ --
Mortgage payable to bank, bearing interest at prime plus
1%, secured by real estate and certain notes receivable,
due in monthly installments of $3,825 plus interest with all
remaining unpaid principal due in full December 15, 1995 -- 4,140,992
Term notes payable to sublessor and bank, bearing interest
at rates ranging from 8.7% to 10.5%, partially secured by
equipment, due in monthly payments of principal and
interest through November 2001 122,077 --
Capitalized equipment leases (Note 8) 113,035 204,690
---------- ----------
Total long-term debt 2,362,089 4,345,682
Less current portion 395,422 2,124,203
---------- ----------
Long-term portion $1,966,667 $2,221,479
========== ==========
</TABLE>
Future maturities of long-term debt, excluding capital leases,
are as follows:
<TABLE>
<S> <C>
1998 $ 322,128
1999 1,875,511
2000 28,054
2001 23,361
----------
Total $2,249,054
==========
</TABLE>
30
<PAGE> 31
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. LONG-TERM DEBT (continued)
On February 28, 1997, the Company executed a note payable (the 1997
Note) in an amount representing the shortfall of proceeds from the sale
of its Brighton facility against related costs and the mortgage note
payable then outstanding. The Company is permitted to pursue other
sources of working capital financing secured by accounts receivable
under a Forbearance Agreement related to the 1997 Note. In this
Agreement, the bank agreed to release its priority interest in accounts
receivable if it elects not to enter into a working capital financing
arrangement with the same terms as received by the Company from a third
party. Under the Agreement, the bank additionally forbore from
exercising its various rights for a period ending on the earlier of the
maturity date of the 1997 Note or the occurrence of a forbearance event
of default.
8. LEASES
The Company leases its facilities and certain equipment under various
operating and capital lease agreements expiring at various dates
through 2002. At December 31, 1997, the Company's annual future minimum
payments required under these leases are as follow:
<TABLE>
<CAPTION>
Operating Capital
---------- ---------
<S> <C> <C>
1998 $ 710,760 $ 80,697
1999 910,344 33,168
2000 898,565 5,150
2001 779,184 --
2002 628,500 --
---------- ---------
Total minimum lease payments $3,927,353 119,015
==========
Less amount representing interest (5,980)
---------
Present value of minimum lease payments $ 113,035
=========
</TABLE>
On October 15, 1997, the Company entered into a sublease arrangement
through September 2002 for new space in Natick, Massachusetts for its
headquarters operations. The sublease provides for the Company to share
in certain annual operating cost increases measured from the
sublessor's 1997 actual costs. In addition, the sublessor has agreed
not to execute an early termination option on December 31, 2000, unless
so requested by the Company. The Company has various lease obligations
and offsetting sublease arrangements for its previous headquarters
location.
Rental expense under all operating leases was approximately $556,206
and $383,800, for the years ended December 31, 1997 and 1996,
respectively. Equipment and accumulated depreciation for assets held
under capital leases totaled $257,555 and $83,587, respectively for the
years ended December 31, 1997.
31
<PAGE> 32
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. INCOME TAXES
Total income tax expense (benefits) for the years ended December 31,
1997 and 1996 are comprised of the following amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal $ 8,082 $ (40,000)
State 10,422 (175,539)
----------- -----------
18,504 (215,539)
----------- -----------
Deferred:
Federal (211,590) (1,455,439)
State (264,847) (398,124)
----------- -----------
(476,437) (1,853,563)
----------- -----------
$ (457,933) $(2,069,102)
=========== ===========
</TABLE>
The tax provision differs from the amount that would be calculated by
applying federal statutory rates to income before income taxes due
primarily to items such as the change in the deferred asset valuation
allowance and reserves that are currently deductible for financial
statement purposes, but deductible in future periods for income tax
purposes.
Total income tax expense (benefits) for the years ended December 31,
1997 and 1996, were allocated as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income/loss from continuing operations $ 194,069 $ (328,809)
Loss on disposal of discontinued division (652,002) (1,740,293)
---------- -----------
$ (457,933) $(2,069,102)
========== ===========
</TABLE>
Deferred income taxes result from timing differences in the recognition
of income and expense items for tax and financial reporting purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented following:
32
<PAGE> 33
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. INCOME TAXES (continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Write-down of assets of discontinued operations held
for sale and related accruals $ 138,706 $ 1,928,884
Net operating loss carryforwards 1,884,294 283,613
Compensated absences, principally due to accrual
for financial reporting purposes 122,273 80,802
Property and equipment, principally due to
differences in depreciation 38,133 --
Unearned revenue, recognized for tax purposes 4,172 359,059
Other loss reserves 136,132 91,958
Other 6,290 40,102
---------- -----------
Total gross deferred tax assets 2,330,000 2,784,418
Less valuation allowance -- (835,326)
---------- -----------
Net deferred tax assets 2,330,000 1,949,092
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation -- (95,529)
---------- -----------
Net deferred tax asset $2,330,000 $ 1,853,563
========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31,
1995, amounted to $2,665,385. The changes in the valuation allowance
for the years ended December 31, 1997 and 1996 were decreases of
$835,326 and $1,830,059 respectively.
As of December 31, 1997, the Company had approximately $3.7 million of
Federal operating loss carryforwards available to offset future Federal
taxable income and $6.0 million of Massachusetts operating loss
carryforwards available to offset future Massachusetts taxable income.
The Federal carryforwards expire in 2012. Of the Massachusetts
carryforwards, $1.7 million expire in 1998, $700,000 expire in 2000 and
$3.6 million expire in 2002.
33
<PAGE> 34
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan (the Plan) for its employees. To be
eligible to participate, an employee must be 21 years of age and have
completed one year of service with at least 1,000 hours. Under the
Plan, the Company matches employee salary deferrals up to a
predetermined level and may make additional discretionary
contributions. Company contributions under this plan for the years
ended December 31, 1997 and 1996 were $260,895 and $195,414
respectively. The Company also maintains pension and profit sharing
plans, both of which were frozen in 1994.
11. CONTINGENCIES
Environmental inspections on land sold by the Company during 1997
disclosed the presence of gasoline in the soil. The Company established
an escrow account in the amount of $125,000 to cover potential
remediation costs. Management believes that this amount will be
sufficient to obtain a level of either No Significant Risk or
Downgradient Property Status, each as defined by the Massachusetts
Contingency Plan. In addition, the Company has filed suit against the
prior environmental site engineer seeking reimbursement for costs and
damages related to this matter. Management believes that the Company
has sufficient basis to prevail in this action. Due to uncertainties as
to when remediation costs will be incurred, the liability has not been
calculated on a discounted basis.
The Company is involved in various legal proceedings arising out of,
and incidental to, its business. Based on its review with outside
counsel, management does not anticipate that any losses incurred as a
result of these legal proceedings would have a materially adverse
effect on the Company's financial position.
12. RELOCATION COSTS
In 1997, the Company moved to new facilities which better meet its
growth and strategic requirements. The expenses and costs related to
the relocation have been reported on a separate line item in operating
expenses.
34
<PAGE> 35
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
13. DISCONTINUED OPERATIONS
In April 1994, the Company announced a formal plan to discontinue its
clinical pharmacology unit located in Brighton, Massachusetts. This
plan called for the disposal of certain fixed assets, including the
building which housed the operation, during fiscal year 1995, as well
as the elimination of most positions at the Brighton facility. The
estimated loss on the disposal of the Brighton facility was recorded in
the 1994 statement of operations and amounted to $3,227,909, net of
applicable income tax benefits of $545,163. The estimated loss included
a provision of $1,200,341 for operating losses during the phase-out
period.
During 1995, the Company was unable to sell its Brighton facility and
accordingly, updated its estimated loss on the disposal of the
facility. The 1995 statement of operations included charges of
$110,632, primarily for 1995 facilities-related costs of the
discontinued operation in excess of the 1994 provision and $1,075,276
related to anticipated costs up to disposition of the building and the
related mortgage note payable.
The Company entered into a purchase and sale agreement during 1996 to
sell the facility and accordingly, updated its estimated loss on the
Brighton facility through February 28, 1997, the revised estimated date
of disposal. The 1996 statement of operations includes credits of
$1,740,293 related to the recognition of certain deferred tax benefits
resulting from the discontinued operations, as well as charges of
$45,162 related to the costs of the discontinued operations not
previously accrued and $171,146 related to anticipated costs up to
disposition of the building and the related mortgage note payable.
The Company sold the Brighton facility on February 28, 1997. The 1997
statement of operations includes credits of $652,002 related to the
recognition of certain deferred tax benefits resulting from the
discontinued operations, as well as charges of $12,948 related to the
costs of the discontinued operations not previously accrued and $6,548
related to anticipated costs up to repayment of the outstanding loan
balance related to the sold facility.
14. CONCENTRATIONS
The Company maintained cash account balances in excess of FDIC limits
with two financial institutions at December 31, 1997. Based on the
size, financial strength and historic performance of the institution,
management believes that risk of loss is very minimal. In addition, two
customers accounted for 29% and 17%, respectively, of 1997 net
revenues.
35
<PAGE> 36
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
15. STOCKHOLDERS' EQUITY
The Company's Board of Directors authorized a 110-for-one stock split
effective May 5, 1996, which resulted in the issuance of 793,520
additional shares of the Company. In conjunction with this action, the
Board also approved an increase to the number of authorized shares of
the Company to 1,400,000.
15. STOCK OPTION PLAN
During 1996 the Company adopted the 1996 Incentive and Non-Qualified
Stock Option Plan which permits issuance of 599,200 shares of common
stock to key employees, directors and suppliers. Under the terms of the
plan, options granted may be either incentive or non-qualified stock
options, and are issued at market value as of the date of the grant.
The options vest over periods ranging from the date of grant to
thirty-six months, and expire on the tenth anniversary of the date of
grant. During 1996, the Company issued options to purchase 571,200
shares. All of these options were outstanding as of December 31, 1996,
and substantially all were vested. During 1997, options to purchase
21,000 shares were canceled, resulting in total options outstanding to
purchase 550,200 shares, as of December 31, 1997.
The Company elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements
for the stock options. Had compensation expense for the stock option
plan been determined based on the fair value of the options at the
grant date, consistent with the methodology prescribed under Statement
of Financial Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have been increased by
approximately $3,800 in 1997 and reduced by approximately $108,300 in
1996. The fair value of options granted in 1996 was estimated using an
option pricing model with the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate 6.42%
Expected option lives 10 years
Expected dividends none
</TABLE>
As of December 31, 1997, the exercise price for all outstanding options
was $0.71 per share and the weighted average remaining contractual life
of the shares outstanding was 8.45 years.
36
<PAGE> 37
MEDICAL & TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
16. CASH FLOW INFORMATION
Interest and income taxes paid for the years ending December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest $ 354,515 $ 481,063
========= =========
Income Taxes $ 35,555 $ 4,247
========= =========
</TABLE>
37
<PAGE> 38
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL AND TECHNICAL RESEARCH
ASSOCIATES, INC.
Unaudited Pro Forma Condensed Consolidated Financial Data
The following unaudited pro forma combined condensed financial data and
notes are presented to show the impact on the historical financial position and
results of operations of Applied Analytical Industries, Inc. ("AAI") and Medical
and Technical Research Associates, Inc. ("MTRA") assuming the business
combination, which has been accounted for as a pooling-of-interests, had
occurred. AAI's fiscal year end is December 31. MTRA's fiscal year end is
December 31.
In the business combination, which was completed on March 16, 1999
(the "Merger Date"), each outstanding share of MTRA was exchanged for
approximately .98277 shares of AAI stock. On March 16, 1999, 801,691 shares of
AAI stock were issued to the prior holders of MTRA common stock. No other
classes of stock were outstanding. All MTRA stock options outstanding were also
converted into AAI stock options at the same exchange ratio.
The unaudited pro forma combined condensed balance sheet at December
31, 1998 reflects the combined historical financial position of AAI and MTRA at
December 31, 1998.
The unaudited pro forma combined condensed statements of operations for
the years ended December 31, 1998, 1997 and 1996 reflect the combined historical
operating results of AAI and MTRA for those periods.
The unaudited pro forma combined condensed results presented do not
reflect any incremental direct costs, potential cost savings or revenue
enhancements which may result form the consolidation of certain operations of
AAI and MTRA. Therefore, the unaudited pro forma combined condensed statements
of operations for those periods may not be indicative of the results of past or
future operations. No assurance can be given with respect to the ultimate level
of cost savings and/or revenue enhancements which may be realized following the
consummation of the transaction.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combination occurred on the dates indicated. The unaudited pro forma
combined condensed financial data should be read in conjunction with the related
historical financial statements and notes thereto of AAI included in its annual
report on Form 10-K and of MTRA, included elsewhere in this Current Report on
Form 8-K/A.
38
<PAGE> 39
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL & TECHNICAL RESEARCH
ASSOCIATES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA AAI AND MTRA
AAI MTRA ADJUSTMENTS(1) PRO FORMA
-------- ------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,802 $ 1,497 $ $ 12,299
Accounts receivable 22,130 3,843 25,973
Work-in-progress 15,570 165 15,735
Prepaid and other current assets 5,352 2,540 7,892
-------- ------- --------- --------
Total current assets 53,854 8,045 0 61,899
Property and equipment, net 37,600 1,203 38,803
Goodwill and other intangibles 15,509 0 15,509
Other assets 2,294 1,003 3,297
-------- ------- --------- --------
Total assets $109,257 $10,251 $ 0 $119,508
======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 6,627 $ 411 $ $ 7,038
Accounts payable 5,494 1,675 7,169
Customer advances 6,818 3,091 9,909
Accrued wages and benefits 4,323 1,028 5,351
Other accrued liabilities 6,579 427 7,006
-------- ------- --------- --------
Total current liabilities 29,841 6,632 0 36,473
Long-term debt 6,306 1,444 7,750
Other liabilities 160 0 160
Commitments and contingencies -- -- -- --
Stockholders' equity:
Common stock 16 884 (883) 17
Paid-in capital 68,687 0 883 69,570
Retained earnings 4,365 1,291 5,656
Accumulated other comprehensive losses (53) 0 (53)
Stock subscriptions receivable (65) 0 (65)
-------- ------- --------- --------
Total stockholders' equity 72,950 2,175 0 75,125
-------- ------- --------- --------
Total liabilities and stockholders' equity $109,257 $10,251 $ 0 $119,508
======== ======= ========= ========
</TABLE>
(1) To reflect that each outstanding share of MTRA will be exchanged for
0.98277 shares of AAI common stock. Based on MTRA shares outstanding of
815,751, AAI issued 801,691 shares to MTRA shareholders at the Merger date.
39
<PAGE> 40
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL & TECHNICAL RESEARCH
ASSOCIATES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL AAI AND
--------------------- PRO FORMA MTRA
AAI MTRA ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $80,380 $17,863 $ 0 $98,243
------- ------- --------- -------
Operating costs and expenses:
Direct costs 39,962 11,112 51,074
Selling 8,618 1,336 9,954
General and administrative 17,536 3,947 21,483
Research and development 6,131 0 6,131
Unusual item 0 0 0
------- ------- --------- -------
72,247 16,395 0 88,642
------- ------- --------- -------
Income (loss) from operations 8,133 1,468 0 9,601
Other income:
Interest income, net of expense 239 32 271
Other, net 198 35 233
------- ------- --------- -------
437 67 0 504
------- ------- --------- -------
Income (loss) before income taxes 8,570 1,535 0 10,105
Provision (benefit) for income taxes 2,869 697 0 3,566
------- ------- --------- -------
Net income (loss) from continuing operations $ 5,701 $ 838 $ 0 $ 6,539
======= ======= ========= =======
Discontinued operations:
Income tax (expense) 0 0 0 0
------- ------- --------- -------
Net income $ 5,701 $ 838 $ 0 $ 6,539
======= ======= ========= =======
Basic earnings (loss) per share $ 0.35 $ 0.38
======= =======
Weighted average shares outstanding - basic 16,322 17,138
======== =======
Diluted earnings (loss) per share $ 0.35 $ 0.37
======= =======
Weighted average shares outstanding - diluted 16,417 17,759
======= =======
</TABLE>
40
<PAGE> 41
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL & TECHNICAL RESEARCH
ASSOCIATES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL AAI AND
-------------------- PRO FORMA MTRA
AAI MTRA ADJUSTMENTS (1) PRO FORMA
------- ------- --------------- ---------
<S> <C> <C> <C> <C>
Net sales $65,401 $14,705 $ 0 $80,106
------- ------- ------- -------
Operating costs and expenses:
Direct costs 33,378 9,290 13 42,681
Selling 8,362 1,176 9,538
General and administrative 15,207 3,436 18,643
Research and development 7,791 0 7,791
Unusual item 0 0 0
------- ------- ------- -------
64,738 13,902 13 78,653
------- ------- ------- -------
Income (loss) from operations 663 803 (13) 1,453
Other income:
Interest income, net of expense 608 2 610
Other, net 765 0 (7) 758
------- ------- ------- -------
1,373 2 (7) 1,368
------- ------- ------- -------
Income (loss) before income taxes 2,036 805 (20) 2,821
Provision (benefit) for income taxes 781 194 (652) 323
------- ------- ------- -------
Net income (loss) from continuing operations $ 1,255 $ 611 $ 632 $ 2,498
======= ======= ======= =======
Discontinued operations:
Income tax (expense) 0 632 (632) 0
------- ------- ------- -------
Net income $ 1,255 $ 1,243 $ 0 $ 2,498
======= ======= ======= =======
Basic earnings (loss) per share $ 0.08 $ 0.15
======= =======
Weighted average shares outstanding - basic 16,290 17,091
======= =======
Diluted earnings (loss) per share $ 0.08 $ 0.14
======= =======
Weighted average shares outstanding - diluted 16,459 17,810
======= =======
</TABLE>
(1) For the year ended December 31, 1997, MTRA historical classification of
discontinued operations represent continuing operations for the combined
companies. All costs and tax benefits have been reclassified to ongoing
operations to be consistent with the classification used by AAI. The
reclassifications include tax benefits of $652, expenses related to the
disposal of a facility of $7 and costs related to the closing of MTRA's
clinical pharmacology unit of $13.
41
<PAGE> 42
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL & TECHNICAL RESEARCH
ASSOCIATES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL AAI AND
--------------------- PRO FORMA MTRA
AAI MTRA ADJUSTMENTS (1) PRO FORMA
------- ------- --------------- ---------
<S> <C> <C> <C> <C>
Net sales $42,162 $11,566 $ $53,728
------- ------- ----------- -------
Operating costs and expenses:
Direct costs 17,621 7,586 45 25,252
Selling 6,357 1,138 7,495
General and administrative 8,908 2,480 11,388
Research and development 4,216 4,216
Unusual item 6,600 6,600
------- ------- ----------- -------
43,702 11,204 45 54,951
------- ------- ----------- -------
Income (loss) from operations (1,540) 362 (45) (1,223)
Other income:
Interest income, net of expense 511 (5) 506
Other, net (17) (171) (188)
------- ------- ----------- -------
494 (5) (171) 318
------- ------- ----------- -------
Income (loss) before income taxes (1,046) 357 (216) (905)
Provision (benefit) for income taxes 2,102 (329) (1,740) 33
------- ------- ----------- -------
Net income (loss) from continuing operations $(3,148) $ 686 $ 1,524 $ (938)
======= ======= =========== =======
Discontinued operations:
Income tax (expense) 0 1,524 (1,524) 0
======= ======= =========== =======
Net income $(3,148) $ 2,210 $ 0 $ (938)
======= ======= =========== =======
Basic earnings (loss) per share $ (0.26) $ (0.07)
======= =======
Weighted average shares outstanding - basic 12,039 12,840
======= =======
Diluted earnings (loss) per share $ (0.26) $ (0.07)
======= =======
Weighted average shares outstanding - diluted 12,039 13,411
======= =======
</TABLE>
(1) For the year ended December 31, 1996, MTRA historical classification of
discontinued operations Represent continuing operations for the combined
companies. All costs and tax benefits have been reclassified to ongoing
operations to be consistent with the classification used by AAI. The
reclassifications include tax benefits of $1,740, expenses related to the
disposal of a facility of $171 and costs related to the closing of MTRA's
clinical pharmacology unit of $45.
42
<PAGE> 43
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL AND
TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The unaudited pro forma combined condensed balance sheet and statements
of operations for all periods presented are based on the following adjustments
and assumptions.
NOTE 1. BASIS OF PRESENTATION
The AAI and MTRA business combination has been accounted for as a
pooling-of-interests in accordance with Accounting Principles Board Opinion No.
16. As such, no goodwill has been recorded and the operations of the companies
have been combined on a historical basis and all periods are being restated to
reflect such combination.
NOTE 2. RECLASSIFICATIONS
For the years ended December 31, 1998, 1997 and 1996, certain
historical financial statement presentations have been reclassified to conform
with AAI's financial statement presentation. Reclassifications include the
separation of selling from other general and administrative costs and the
reclassification of depreciation expense from separate presentation on the
statement of operations to inclusion in other lines of the statement of
operations such as cost of sales, selling, and general and administrative
expenses.
NOTE 3. DISCONTINUED OPERATIONS
The historical presentation of discontinued operations by MTRA has been
adjusted in each of the statements of operations for the years ended December
31, 1998, 1997 and 1996 to conform the presentation of operations with those of
AAI. The discontinued operations previously reported by MTRA represent costs and
related tax benefits associated with the closing of the clinical pharmacology
unit of MTRA in Brighton, Massachusetts. The clinical pharmacology unit of MTRA
would not represent a segment of the combined operations and therefore, the
expenses and related tax benefits have been reclassified and included in the
costs of continuing operations.
NOTE 4. TRANSACTION COSTS
At the Merger Date, certain costs directly related to the transaction
were incurred relating to investment advisor fees, legal and accounting fees,
filing fees and certain other direct costs of the transaction. The transaction
was consummated on March 16, 1999 and as such, no accrual to reflect these
charges has been recorded in the balance sheet or in the statement of operations
for the year ended December 31, 1998. The direct costs of the transaction were
approximately $1.9 million, consisting of approximately $1.1 million in
investment advisor fees, $.6 million in legal, accounting and filing fees, and
$.2 million in other direct expenses of the transaction.
43
<PAGE> 44
APPLIED ANALYTICAL INDUSTRIES, INC. AND MEDICAL AND
TECHNICAL RESEARCH ASSOCIATES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 5. RECONCILIATION OF CHANGE IN STOCKHOLDERS' EQUITY
Each share of MTRA common stock was exchanged for approximately .98277
shares of common stock of AAI at the date of the merger. At the date of merger,
MTRA had outstanding 815,751 shares of common stock. These shares were converted
into 801,691 shares of AAI common stock. All MTRA stock options were converted
into AAI stock options at the same exchange ratio.
Reconciliation of change in Stockholders' Equity:
<TABLE>
<S> <C>
Stockholders' equity as previously reported by AAI at
December 31, 1998 $ 72,950
Add: Common Stock and Paid-in-capital of MTRA
As of December 31, 1998 2,175
--------
Pro Forma balance of Stockholders' Equity of
AAI and MTRA combined $ 75,125
========
</TABLE>
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned thereunto duly authorized.
APPLIED ANALYTICAL INDUSTRIES, INC.
Date: May 29, 1999 By: /s/ EUGENE T. HALEY
------------------------------------------------
Eugene T. Haley
Executive Vice President and Chief Financial Officer
45
<PAGE> 46
APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
2.1* Agreement and Plan of Merger between Applied Analytical
Industries Inc., Medical and Technical Research Associates, Inc.
and Wilmington Acquisition Corp. dated as of February 12,
1999, (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 31, 1999)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rogers, Suleski & Associates, LLC
</TABLE>
- --------------------------------------------------------------------------------
* Schedules and exhibits to the document have been omitted and will be
supplementally provided to the Securities and Exchange Committee upon request.
46
<PAGE> 1
EXHIBIT 23.1 Consent of Ernst & Young LLP
Consent of Ernst & Young LLP Independent Auditors
We consent to the use of our report dated March 12, 1999, with respect to the
financial statements of Medical and Technical Research Associates, Inc. included
in this Current Report on Form 8-K/A of Applied Analytical Industries, Inc.
/s/ Ernst & Young LLP
Raleigh, North Carolina
June 1, 1999
47
<PAGE> 1
EXHIBIT 23.2 Consent of Rogers, Suleski & Associates, LLC
Consent of Independent Auditors
We consent to the incorporation of our report, dated February 20, 1998 with
respect to the financial statements of Medical & Technical Research Associates,
Inc. for the years ended December 31, 1997 and 1996, included in this Current
Report on Form 8-K/A to be filed on or about June 1, 1999 with the Securities
and Exchange Commission.
/s/ Rogers, Suleski & Associates, LLC
Needham Heights, Massachusetts
June 1, 1999
48
