APPLIED ANALYTICAL INDUSTRIES INC
8-K, 1999-08-02
MEDICAL LABORATORIES
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<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 8-K

                                 CURRENT REPORT


     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



         Date of Report (Date of earliest event reported) August 2, 1999



                       APPLIED ANALYTICAL INDUSTRIES, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)




          Delaware                        0-21185                 04-2687849
- ----------------------------     ------------------------    -------------------
(State or Other Jurisdiction     (Commission File Number)     (I.R.S. Employer
        of Incorporation)                                    Identification No.)


                              5051 New Centre Drive
                        Wilmington, North Carolina 28403
                    ----------------------------------------
                    (Address of Principal Executive Offices)
                                   (Zip Code)


                                 (910) 392-1606
              ----------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)


                                 Not Applicable
              -----------------------------------------------------
              (Former name or address, if changed from last report)




<PAGE>   2

Item 5.           Other Events.

         On August 2, 1999, Applied Analytical Industries, Inc. (the "Company")
issued a press release reporting the Company's unaudited consolidated financial
results for the period ended June 30, 1999. The press release is filed as
Exhibit 99.1 hereto and is incorporated by reference herein.

Item 7.           Financial Statements and Exhibits.

                  (a)      Exhibits

                  Exhibit 99.1  --        Press release dated August 2, 1999



                                       2
<PAGE>   3

                                   SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Date: August 2, 1999

                                  APPLIED ANALYTICAL INDUSTRIES, INC.


                                  By: /s/ Eugene T. Haley
                                      ------------------------------------------
                                      Eugene T. Haley
                                      Vice President and Chief Financial Officer






                                       3
<PAGE>   4

                                  EXHIBIT INDEX


         Exhibit No.                  Exhibit
         -----------                  -------

         Exhibit 99.1                 Press release dated August 2, 1999





                                       4





<PAGE>   1
[AAI Logo]                                                                  NEWS
                                                                         RELEASE

NASDAQ: AAII                           APPLIED ANALYTICAL INDUSTRIES, INC. - AAI
                                     5051 New Centre Drive * Wilmington NC 28403
                CONTACT: Gene Haley - EVP\Chief Financial Officer - 910-392-1606


FOR IMMEDIATE RELEASE


    APPLIED ANALYTICAL INDUSTRIES, INC. (AAI) REPORTS SECOND QUARTER RESULTS.

WILMINGTON, NORTH CAROLINA, AUGUST 2, 1999 - Applied Analytical Industries, Inc.
(NASDAQ:AAII) today reported results for the second quarter of 1999. Net sales
for the quarter were $21.7 million, a decrease of $2.1 million, or 9% from net
sales of $23.8 million reported for 1998's second quarter, including results
from acquisitions. The company reported a net loss for the quarter of $3.0
million, versus net income of $1.4 million in the year-ago quarter. This equates
to a loss of $0.17 per share compared with earnings per share of $0.08 a year
ago. Research and development expenses for the quarter were $4.1 million, or 19%
of sales, as compared with $2.0 million, or 8% of sales in the year-ago quarter.

"The second quarter year-on-year sales reduction of $2.1 million was caused by
two primary drivers," said Gene Haley, Chief Financial Officer. "First,
licensing revenue was down $1.6 million, reflecting unforeseen delays in signing
licensing contracts. We have since signed one of these licensing contracts.
Other negotiations we had expected to conclude in the second quarter remain
ongoing. Second, US fee-for-service revenues were approximately $0.7 million
below last year. This reflects both a lengthening of our selling cycle and a
focus by senior management on significant product development opportunities
during the quarter. Finally, SG&A costs of $9.2 million were $1.3 million ahead
of a year ago, reflecting increases in both our sales and G&A organizations."

CEO and Chairman Frederick Sancilio, Ph.D., noted "Since the beginning of the
year, our clients have been asking for fee-for-service projects with larger
contract values than in the past. Projects, and consequently our service
estimates for these complex programs, have taken longer to assemble and longer
to negotiate. Individual contract values have increased, but so has the cycle
time to close those high dollar contracts. The decline in revenues for the
second quarter reflects a timing issue rather than a decrease in demand. We
believe that the impact of this was primarily felt in the second quarter. These
larger and more predictable contracts will begin to have an impact late in the
3rd quarter and flow into future quarter revenues."



                                                                          Page 1
<PAGE>   2

"During the first half of 1999, we have increased staffing in our Sales and
Marketing and Administrative departments, added Dr. Sancilio. "High levels of
sophistication are necessitated by the growing complexity of contract
negotiations. These investments in both people and systems are expected to yield
profits in future quarters. We are moving through a transition from providing
task-oriented fee-for-service work to pharmaceutical companies toward becoming a
product development resource for them. This has and will continue to be the
vision of AAI. As a product development resource we can demand higher value for
our services and move away from both competition and commodity pricing."

Other significant events include:

         --       AAI solidified its intellectual property position in the area
                  of proton pump inhibitors. Additional investments were made to
                  advance the company's supporting proprietary technology. The
                  company's primary focus, product life cycle management,
                  targets currently marketed drugs in this category. Contract
                  negotiations with one dominant manufacturer in this field,
                  which were expected to have been completed in the second
                  quarter, continue.

         --       An agreement was signed in July with Hoechst Marion Roussel to
                  develop additional formulations of fexofenadine (Allegra(TM))
                  using AAI's patented ProSorb(R) technology. This agreement
                  highlights the contribution of AAI's formulation technology to
                  product life cycle management for key pharmaceutical
                  franchises. Contract terms provide for upfront and ongoing
                  licensing fees, with royalties to be paid upon successful
                  completion of the clinical program and subsequent product
                  approval. Contract signing had been expected in June, but was
                  delayed into the third quarter.

         --       In June and July, new and incremental business was signed in
                  the clinical and pharmaceutics fee-for-service sectors with
                  seven clients having a total contract value of approximately
                  $20 million. The average duration of these contracts is in
                  excess of twelve months. Work on these contracts will begin
                  late in the third quarter and will accelerate into the fourth
                  quarter.

         --       FDA approval was received for azathioprine in June. AAI's
                  marketing partner, Geneva Pharmaceuticals, launched the
                  product the week of July 26th. Azathioprine is an
                  immunosuppressive drug used to prevent rejection in kidney
                  transplant patients and to treat severe rheumatoid arthritis.
                  In 1998 azathioprine sales were approximately $88 million.
                  This approval is only the second for a generic azathioprine
                  tablet. In addition, AAI brings unique drug manufacturing and
                  handling techniques to the partnership with Geneva. Terms of
                  the agreement provide for AAI to receive significant royalties
                  and ongoing fees.


                                                                          Page 2
<PAGE>   3

In conclusion, Dr. Sancilio stated, "While we are disappointed with the
financial performance for the second quarter, we have made great strides toward
our research and business goals. Advancements made in research and certain
intellectual properties, paid for during the quarter, may have material impact
on negotiations that are currently ongoing. Furthermore, while our
fee-for-service revenues have declined in the quarter, new orders increased, as
did the size of those new orders. As we transition toward larger and longer
contracts, visibility of future earnings will be enhanced. We are committed to
being the finest product development resource available and growing both our
fee-for-service and our product development initiatives."

ABOUT AAI

AAI is a contract research and development organization providing pharmaceutical
product development and support services to the worldwide pharmaceutical and
biotechnology industries. The Company offers seamless outsourcing as well as an
integrated broad spectrum of pharmaceutical services, both clinical and
non-clinical. Additionally, AAI leverages its drug development expertise to
generate licensing and royalty revenues by licensing internally developed drugs
and drug technologies to pharmaceutical client companies worldwide.

For information about AAI, visit the company's website at www.aaiintl.com

Information in this press release contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements involve risks and
uncertainties that could cause actual results to differ materially, including
without limitation, the ability of acquired businesses to be integrated with
AAI's operations, actual operational performance, the ability to meet projected
revenue and earnings, the ability to acquire and maintain large client
contracts, the ability to hire and retain qualified employees, regulatory
approvals and industry outsourcing trends. Additional factors that may cause the
actual results to differ materially are discussed in the Company's recent
filings with the Securities and Exchange Commission, including, but not limited
to its registration statement, as amended, its Annual Report on Form 10-K, its
Form 8-Ks and its other periodic filings.



                                                                          Page 3

<PAGE>   4

                       Applied Analytical Industries, Inc.
                   Condensed Consolidated Statement of Income
                    (in thousands, except per share amounts)
                                    Unaudited

<TABLE>
<CAPTION>
                                            Three Months Ended           Six Months Ended
                                                June 30,                     June 30,
                                          ----------------------      ----------------------
                                             1999         1998*         1999          1998*
                                          ----------------------      ----------------------
<S>                                       <C>           <C>           <C>           <C>

Net sales:
    Fee for service                       $ 21,070      $ 21,584      $ 43,288      $ 41,022
     Internal product development              621         2,227         4,518         3,762
                                          ----------------------      ----------------------
                                            21,691        23,811        47,806        44,784

Operating costs and expenses:
   Direct costs                             12,260        11,664        26,857        22,619
   General and administrative                9,233         7,896        17,164        14,982
   Research and development                  4,091         1,965         5,960         3,367
   Transaction and integration costs          --            --           6,400          --
                                          ----------------------      ----------------------
                                          $ 25,584      $ 21,525      $ 56,381      $ 40,968
                                          ----------------------      ----------------------
Income from operations                      (3,893)        2,286        (8,575)        3,816

Other income (expense):
   Interest, net                              (255)          131          (434)          261
   Other                                       (16)          (28)          (48)          (17)
                                          ----------------------      ----------------------
                                          $   (271)     $    103      $   (482)     $    244
                                          ----------------------      ----------------------
Income before income taxes                  (4,164)        2,389        (9,057)        4,060
Provision for income taxes                  (1,192)          941        (2,322)        1,452
                                          ----------------------      ----------------------
Net income                                $ (2,972)     $  1,448      $ (6,735)     $  2,608
                                          ======================      ======================

Basic earnings per share                  $  (0.17)     $   0.08      $  (0.39)     $   0.15
                                          ----------------------      ----------------------
  Weighted average shares outstanding       17,205        17,105        17,202        17,102
                                          ----------------------      ----------------------

Diluted earnings per share                $  (0.17)     $   0.08      $  (0.38)     $   0.15
                                          ----------------------      ----------------------
  Weighted average shares outstanding       17,724        17,657        17,769        17,709
                                          ----------------------      ----------------------
</TABLE>


*    Restated to include the operations of MTRA which has been accounted for
     under the pooling-of-interests method.




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