<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2320 SCIENTIFIC PARK DRIVE, WILMINGTON, NC 28405
(Address of principal executive office) (Zip code)
(910) 254-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's common stock outstanding, as of August
11, 2000, was 17,491,074 shares.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Table of Contents
The terms "Company", "Registrant" or "AAI" in this Form 10-Q include Applied
Analytical Industries, Inc. and its subsidiaries, except where the context may
indicate otherwise. Any item which is not applicable or to which the answer is
negative has been omitted.
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $27,776 $21,691 $52,682 $47,806
------- ------- ------- -------
Operating costs and expenses:
Direct costs 13,471 12,260 26,997 26,858
Selling 3,139 3,407 6,017 6,075
General and administrative 7,376 5,826 13,504 11,089
Research and development 1,852 4,091 3,319 5,959
Transaction, integration, and restructuring costs -- -- -- 6,400
------- ------- ------- -------
25,838 25,584 49,837 56,381
------- ------- ------- -------
Income (loss) from operations 1,938 (3,893) 2,845 (8,575)
Other income (expense):
Interest expense (543) (255) (1,040) (434)
Other, net 140 (17) 254 (49)
------- ------- ------- -------
(403) (272) (786) (483)
------- ------- ------- -------
Income (loss) before income taxes 1,535 (4,165) 2,059 (9,058)
Provision for (benefit from) income taxes -- (1,192) -- (2,322)
------- ------- ------- -------
Net income (loss) $ 1,535 $(2,973) $ 2,059 $(6,736)
======= ======= ======= =======
Basic earnings (loss) per share $ 0.09 $ (0.17) $ 0.12 $ (0.39)
======= ======= ======= =======
Weighted average shares outstanding 17,473 17,205 17,381 17,202
======= ======= ======= =======
Diluted earnings (loss) per share $ 0.09 $ (0.17) $ 0.12 $ (0.39)
======= ======= ======= =======
Weighted average shares outstanding 17,737 17,205 17,726 17,202
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,262 $ 2,013
Accounts receivable 34,584 35,064
Work-in-progress 11,246 12,689
Prepaid and other current assets 12,723 11,426
-------- --------
Total current assets 61,815 61,192
Property and equipment, net 43,349 45,026
Goodwill and other intangibles, net 11,655 13,040
Other assets 3,770 4,228
-------- --------
Total assets $120,589 $123,486
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 27,323 $ 28,387
Accounts payable 9,088 6,969
Customer advances 6,922 9,146
Accrued wages and benefits 3,935 4,081
Other accrued liabilities 3,195 6,102
-------- --------
Total current liabilities 50,463 54,685
Long-term debt, less current portion 692 962
Other long-term liabilities 730 1,281
Stockholders' equity:
Common stock 17 17
Paid-in capital 70,146 69,732
Accumulated deficit (201) (2,260)
Accumulated other comprehensive losses (1,234) (906)
Stock subscriptions receivable (24) (25)
-------- --------
Total stockholders' equity 68,704 66,558
-------- --------
Total liabilities and stockholders' equity $120,589 $123,486
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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APPLIED ANALYTICAL INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,059 $(6,736)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,603 3,791
Issuance of stock for services 225 --
Other (12) (2)
Changes in operating assets and liabilities:
Accounts receivable 324 497
Work-in-progress 1,192 (1,377)
Prepaid and other assets, net (886) (2,580)
Accounts payable 2,183 (1,887)
Customer advances (2,095) (2,672)
Other accrued liabilities (3,048) 3,056
------- -------
Net cash provided by (used in) operating activities 3,545 (7,910)
------- -------
Cash flows from investing activities:
Disposition of assets 287 --
Purchases of property and equipment, net (2,374) (6,763)
Pre-acquisition tax settlement 602 --
Other (117) (43)
------- -------
Net cash used in investing activities (1,602) (6,806)
------- -------
Cash flows from financing activities:
Net (payments on) proceeds from short-term borrowings (481) 12,987
Payments on long-term borrowings (389) (1,644)
Exercise of stock options 189 --
Other 2 (44)
------- -------
Net cash (used in) provided by financing activities (679) 11,299
------- -------
Net increase (decrease) in cash and cash equivalents 1,264 (3,417)
Effect of exchange rate on cash (15) (108)
Cash and cash equivalents, beginning of period 2,013 12,299
------- -------
Cash and cash equivalents, end of period $ 3,262 $ 8,774
======= =======
Supplemental information, cash paid for:
Interest $ 1,005 $ 178
Income taxes $ 6 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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APPLIED ANALYTICAL INDUSTRIES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and applicable
Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The consolidated financial information as of December 31,
1999 has been derived from audited financial statements; certain amounts from
the year ended December 31, 1999 and the second quarter of 1999 have been
reclassified for consistent presentation with current year financial statements.
In addition, business segment data presented in Footnote 5 has been restated to
more accurately depict management's view of the Company's business lines. It is
presumed that users of this interim financial information have read or have
access to the audited financial statements for the preceding fiscal year. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have been included.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the full year.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 specifically addresses revenue recognition issues related to
certain upfront payments or fees. Under SAB 101, certain upfront fees and
payments recognized as income in prior periods would be required to be deferred
and recognized in revenue over future periods. The Company is currently
evaluating SAB 101 and the effect it will have on its financial statements and
revenue recognition polices. Although the Company expects to implement SAB 101
in the fourth quarter of 2000, the cumulative effect of a change in accounting
principle must be retroactively adopted as of the beginning of the first quarter
of 2000.
2. MERGERS AND ACQUISITIONS
On March 16, 1999, the Company merged with Medical & Technical Research
Associates, Inc. ("MTRA"), a clinical contract research organization located
near Boston, Massachusetts, in exchange for approximately 1.3 million shares of
AAI stock, including the conversion of MTRA options. The merger has been
accounted for as a pooling-of-interests, and accordingly, the accompanying
consolidated financial statements include operations of the combined entities
for the three and six months ended June 30, 2000 and 1999.
In connection with the merger, the Company recorded a nonrecurring charge to
operating income reflecting the costs to complete the transaction, integrate the
businesses and realign its workforce to its new combined operating structure.
The items included in this charge are detailed in Note 7.
6
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3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and fully diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) (1) $ 1,535 $(2,973) $ 2,059 $(6,736)
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares 17,473 17,205 17,381 17,202
Effect of dilutive securities:
Employee stock options (2) 264 -- 345 --
------- ------- ------- -------
Denominator for fully diluted earnings per share -
weighted average shares 17,737 17,205 17,726 17,202
======= ======= ======= =======
Basic earnings per share $ 0.09 $ (0.17) $ 0.12 $ (0.39)
Diluted earnings per share $ 0.09 $ (0.17) $ 0.12 $ (0.39)
</TABLE>
(1) Numerator for basic and diluted earnings per share
(2) Options to purchase 519,000 weighted average shares in the second quarter of
1999 and 567,000 shares in the first six months of 1999 were not included in
diluted earnings per share since their inclusion would be antidilutive.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner sources. The
following table presents the components of the Company's comprehensive income
(loss) (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(In thousands) (In thousands)
------------------- ----------------------
2000 1999 2000 1999
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net income (loss) $1,535 $(2,973) $2,059 $(6,736)
Other comprehensive income (loss):
Currency translation adjustments 32 (370) (328) (1,004)
------ ------- ------ -------
Comprehensive income (loss) $1,567 $(3,343) $1,731 $(7,740)
====== ======= ====== =======
</TABLE>
7
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5. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA (IN THOUSANDS):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands) (in thousands)
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES:
Research revenues
Non-clinical $13,686 $11,946 $27,073 $25,036
Clinical 7,542 6,949 14,533 14,565
------- ------- ------- -------
21,228 18,895 41,606 39,601
Product sales 2,010 2,175 4,559 3,687
Product development
(royalties & fees) 4,538 621 6,517 4,518
------- ------- ------- -------
$27,776 $21,691 $52,682 $47,806
======= ======= ======= =======
United States $22,660 $17,918 $42,725 $37,989
Non-U.S 6,135 4,208 11,788 11,256
Less inter-geographic sales (1,019) (435) (1,831) (1,439)
------- ------- ------- -------
$27,776 $21,691 $52,682 $47,806
======= ======= ======= =======
INCOME (LOSS) FROM OPERATIONS:
Research revenues
Non-clinical $ 3,143 $ 1,963 $ 5,740 $ 4,191
Clinical 327 (361) 550 (127)
------- ------- ------- -------
3,470 1,602 6,290 4,064
Product sales 39 106 16 (151)
Product development 2,276 (3,920) 2,435 (3,104)
Corporate (3,847) (1,681) (5,896) (2,984)
Corporate restructuring charges -- -- -- (6,400)
------- ------- ------- -------
$ 1,938 $(3,893) $ 2,845 $(8,575)
======= ======= ======= =======
United States $ (540) $(3,030) $(1,881) $(9,701)
Non-U.S 2,478 (863) 4,726 1,126
------- ------- ------- -------
$ 1,938 $(3,893) $ 2,845 $(8,575)
======= ======= ======= =======
</TABLE>
6. PROVISION FOR INCOME TAXES
The Company's effective tax rate has been affected by prior year losses in
Europe. These losses have created a tax asset, which has been fully reserved,
and no tax benefit has been recognized. For the three and six months ended June
30, 2000, the provisions for income taxes have been fully eliminated by use of
net operating loss carryforwards.
8
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7. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS
In connection with the Company's merger with MTRA, certain expenses of the
transaction and costs to integrate the two organizations and reorganize the
combined business were accrued and recorded in the first quarter of 1999.
Transaction costs were comprised of amounts owed to investment bankers and
advisors as a percentage of the total merger consideration and other expenses
directly related to the completion of the transaction, including financial
reviews and legal fees. Personnel separation costs include the separation of
approximately 58 employees in the U.S. and Europe to combine the clinical
operations of the companies and realign the workforce in the new organization.
Facility and other costs include lease payments required under non-cancelable
leases for vacant properties and the write-off of leasehold improvements and
equipment, which will become redundant or obsolete due to the transaction. Other
costs include integration costs directly related to the merger and other costs
resulting from actions taken to merge the operations.
The following table presents the components of the expense recorded and the
amounts paid through June 30, 2000 (in thousands):
Total Paid to
Expense Date
-------------- --------------
Transaction costs $ 1,913 $ 1,913
Personnel separation costs 1,919 1,729
Facility costs 2,568 2,457
-------------- --------------
$ 6,400 $ 6,099
============== ==============
8. TRANSACTIONS WITH RELATED PARTIES
In 1999, the Company advanced $300,000 to PharmComm, Inc. ("PharmComm"), a
company whose principal stockholders include Dr. Frederick Sancilio, Mr. James
Waters and Mr. William Underwood, all directors of AAI. One other stockholder of
PharmComm is a member of AAI management.
The advance payment was for services to be rendered by PharmComm during 1999 and
2000 for scanning and indexing services required as part of AAI's regulatory
compliance and record retention policies. AAI has engaged PharmComm to perform
these services since 1996 and has compensated PharmComm pursuant to written
agreements for the services. PharmComm also provides computer validation
services to AAI, which are required for compliance with regulatory requirements.
The remaining balance on the $300,000 prepayment was approximately $148,000 at
June 30, 2000.
The Company also has work-in-progress and receivables due from Aesgen, Inc.
("Aesgen") and Endeavor Pharmaceuticals, Inc. ("Endeavor"). Both Endeavor and
Aesgen were organized by AAI and its principal shareholders, and continue to be
related parties. The total amount of work-in-progress and receivables at June
30, 2000 related to Aesgen was approximately $624,000 and the amount related to
Endeavor was approximately $1,128,000. Revenues recognized from Aesgen and
Endeavor totaled $102,000 and $383,000 for the three and six months ended June
30, 2000, and were $467,000 and $1,249,000 for the three and six months ended
June 30, 1999.
9
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9. DEBT
The following table presents the components of current maturities of long-term
and short-term debt (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- -------
<S> <C> <C>
Industrial revenue bonds $ 600 $ 600
Revolving credit agreement 18,653 18,153
German bank debt 7,454 4,780
Current maturities of long-term debt 616 4,854
------------------------------------------------------------- ------- -------
Current maturities of long-term debt and short-term debt $27,323 $28,387
------------------------------------------------------------- ======= =======
U.S. bank term loans $ 1,308 $ 1,697
German term loans -- 4,119
Less current maturities of long-term debt (616) (4,854)
------------------------------------------------------------- ------- -------
Total long-term debt due after one year $ 692 $ 962
------------------------------------------------------------- ======= =======
</TABLE>
The Company has a revolving credit facility with a U.S. bank which expires on
November 30, 2000. The agreement provides for borrowings of up to $25 million,
based upon a borrowing base consisting of portions of fixed assets and accounts
receivable, at variable interest rates based on the 30-day London Inter-Bank
Offering Rate ("LIBOR"). At the end of the revolving credit period, any
outstanding balances under this facility must be repaid. The agreement requires
the payment of certain commitment fees based on the unused portion of the line
of credit. At June 30, 2000, the Company qualified for the entire $25 million
borrowing base of the facility; actual borrowings totaled $18.7 million.
Under the terms of the revolving credit facility and the stand-by letter of
credit agreement, the Company is required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios, and incurring additional indebtedness. The Company was in
compliance with those covenants at June 30, 2000.
10. CONTINGENCIES
In July 1999, AAI filed a demand for arbitration against a former client seeking
approximately $700,000 for manufacturing services rendered. The former client
counterclaimed for $5 million alleging various misrepresentations by the
Company. In December 1999, the former client filed suit in North Carolina State
Court contesting the arbitration and seeking several million in alleged damages.
The Company counter sued the former client for approximately $3.6 million,
including interest, for various services rendered in addition to the amounts
owed for manufacturing services. The State Court ruled in February 2000 that all
claims under the manufacturing agreement are to be decided under arbitration.
Discovery has not yet commenced in the litigation. The Company and the former
client are attempting to negotiate a settlement in lieu of the arbitration and
legal proceedings;
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however, there can be no assurance that any settlement will occur. The Company
vigorously contests the misrepresentation claims and believes it is entitled to
the value of the services rendered. The Company does not believe that any future
settlement will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company currently leases a facility adjacent to the Company's laboratories
from two banks. The facility was built in 1999 in Wilmington, North Carolina.
The Company's operating lease for this facility covers an initial period of
three years with two one-year renewal periods. At the end of the initial term,
the Company may elect to purchase the facility at fair market value, extend the
lease or the property may be sold.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's quarterly results have been, and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including without limitation, the commencement, completion or
cancellation of large contracts, progress of ongoing contracts, achieving
expected levels of licensing and royalty revenues, potential acquisitions, the
timing of start-up expenses for new facilities, timing and level of research and
development expenditures and changes in the mix of services. Since a large
percentage of the Company's operating costs are relatively fixed, variations in
the timing and progress of large contracts or the recognition of licensing and
royalty revenues (on projects for which associated expense may have been
recognized in prior periods) can materially affect quarterly results.
Accordingly, the Company believes that comparisons of its quarterly financial
results may not be meaningful. The Company has also updated the presentation of
business segment data, including the restatement of prior year information, to
more accurately depict management's view of the Company's business lines. The
following discussion and analysis reflects this new segment presentation.
RESULTS OF OPERATIONS:
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Overall net revenues for the second quarter of 2000 grew 28% to $27.8 million,
compared to $21.7 million in the second quarter of 1999. Research revenues
(non-clinical and clinical) were $21.2 million, an increase of 12% over the
$18.9 million recorded in the second quarter of 1999. Non-clinical research
revenues were up 15% to $13.7 million in the second quarter of 2000, from $12.0
million in the same period of 1999. Non-clinical research revenues increased
primarily due to the revenue generated from a significant Product Life Cycle
Management ("PLCM") project begun in the second half of 1999. This project is
expected to continue through the second half of 2000 and into 2001. Clinical
research revenues were up 9% to $7.5 million in the second quarter of 2000, from
$6.9 million in the same period of 1999. Clinical research revenues were higher
due to increased selling efforts in the U.S.
Product development revenues (royalties & fees) were $4.5 million in the second
quarter of 2000 compared to $0.6 million in the prior year period. A significant
portion of these revenues resulted from the sale of the rights to methimazole, a
drug indicated in the treatment of hyperthyroidism. This transaction also
includes a manufacturing supply agreement that the Company believes will benefit
future periods. An equally important factor in the revenue increase was the
achievement of substantial royalties earned through a PLCM project, which is the
Company's way of adding
<PAGE> 12
11
significant value to pioneer products. The Company anticipates that product
development revenues will increase in future quarters as additional agreements
are signed, but expects that revenues from these contract signings will be
intermittent until royalty streams exceed the development fees earned. However,
there can be no assurance that the Company will be successful in executing
additional product development agreements and increase its future revenue or
that the products developed will be commercially successful. Sales of
manufactured products were $2.0 million compared to $2.2 million in the second
quarter of 1999.
Gross margin dollars were $14.3 million, or $4.9 million higher than the second
quarter of 1999. Gross margin as a percentage of revenues was approximately 52%
for the second quarter of 2000, compared to 43% for the same period of 1999. The
higher gross margin percentage reflects the increase in royalty & fee revenue,
as well as on-going cost containment programs initiated late last year and
continuing this year. In addition, the second quarter of 1999 was negatively
impacted by industry-wide volume decreases, which resulted in capacity
underutilization and lower than normal research revenue margins. The Company
believes gross margins for the remainder of 2000 will continue to be higher than
those achieved in 1999.
Selling, general and administrative costs as a percentage of net revenues
decreased to approximately 38% in 2000 compared to 43% for the same quarter in
1999. Selling, general and administrative expenses, in dollars, increased by
approximately 14%, primarily due to the recording of reserves related to
accounts receivable and work-in-progress. The Company expects SG&A costs to be
lower as a percentage of revenues over the remainder of the year.
Research and development expenses were approximately 7% of net revenues in the
second quarter of 2000, compared with approximately 19% of revenues for the same
period in 1999. Although research and development expenses were lower than the
prior year, a substantial increase in such expenditures is anticipated in the
second half of 2000 in continuing support of the Company's product development
pipeline.
Income from operations was $1.9 million in the second quarter of 2000 as
compared to a loss of $3.9 million for the same period of 1999. This substantial
turnaround was largely due to the strong mix in revenues, the higher gross
margins achieved, and lower R&D spending.
The Company recorded no provision for income taxes in the second quarter of 2000
because the distribution of income was heavily weighted in Europe, where net
operating loss carryforwards have been utilized to shelter income from taxation.
Based on the above factors, net income for the second quarter of 2000 was $1.5
million, or $0.09 per share, compared to a net loss of $3.0 million, or ($0.17)
per share in the 1999 period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Overall net revenues for the first half of 2000 grew 10% to $52.7 million,
compared to $47.8 million in the first half of 1999. Research revenues
(non-clinical and clinical) were $41.6 million, an increase of 5% over the $39.6
million recorded in the first half of 1999. Non-clinical research revenues were
up 8% to $27.1 million in the first half of 2000, from $25.0 million in the same
period of 1999. Non-clinical research revenues increased primarily due to the
benefits achieved from the previously mentioned PLCM project, which was begun in
the second half of 1999. Clinical
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<PAGE> 13
research revenues were $14.5 million in the first half of 2000, slightly down
from the $14.6 million in the same period of 1999.
Product development revenues were $6.5 million in the first half of 2000
compared to $4.5 million in the prior year period. These revenues were primarily
from the sale of the rights to methimazole and the achievement of substantial
royalties earned through a PLCM project. Sales of manufactured products were
$4.6 million compared to $3.7 million in the first half of 1999.
Gross margin dollars were $25.7 million, or $4.7 million higher than the first
half of 1999. Gross margin as a percentage of revenues was approximately 49% for
the first half of 2000, compared to 44% for the same period of 1999. The higher
gross margin percentage reflects the increase in royalty & fee revenue, as well
as on-going cost containment programs initiated late last year and continuing
this year.
Selling, general and administrative costs as a percentage of net revenues
increased to approximately 37% in 2000 compared to 36% for the same period in
1999. Selling, general and administrative expenses, in dollars, increased by
approximately 14%, primarily due to the recording of reserves related to
accounts receivable and work-in-progress, the expansion of selling efforts in
the first quarter of 2000, as well as continued investment in information
systems. The Company expects SG&A costs to be lower as a percentage of revenues
over the remainder of the year.
Research and development expenses were approximately 6% of net revenues in the
first half of 2000, compared with approximately 12% of revenues for the same
period in 1999. As previously discussed, a substantial increase in such
expenditures is anticipated in the second half of 2000 in continuing support of
the Company's product development pipeline.
Income from operations was $2.8 million in the first half of 2000 as compared to
a loss of $8.6 million for the same period of 1999. This substantial turnaround
was largely due to the strong mix in revenues, the higher gross margins
achieved, and lower R&D spending. Also, in 1999 the Company incurred a $6.4
million pretax charge for costs associated with the merger of MTRA and
subsequent restructuring.
The Company recorded no provision for income taxes in the first half of 2000
because the distribution of income was heavily weighted in Europe, where net
operating loss carryforwards have been utilized to shelter income from taxation.
Based on the above factors, net income for the first half of 2000 was $2.1
million, or $0.12 per share, compared to a net loss of $6.7 million, or ($0.39)
per share in the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its business through operating cash flows
and proceeds from borrowings. Operating cash provided in the first half of 2000
was $3.5 million, a significant improvement over last year with its net cash
usage from operating activities of $7.9 million. Cash payments on borrowings
during the first half of 2000 were approximately $.9 million.
Capital expenditures were $2.4 million during the first six months of 2000
compared to $6.8 million during the same period last year. This reduction is
part of the Company's plan to lower capital
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expenditures during 2000. Generally, the Company anticipates total capital
expenditures for 2000 to be less than depreciation for the year.
The Company has a revolving credit facility with a U.S. bank which expires on
November 30, 2000. The agreement provides for borrowings of up to $25 million,
based upon a borrowing base consisting of portions of fixed assets and accounts
receivable, at variable interest rates based on the 30-day LIBOR. At the end of
the revolving credit period, any outstanding balances under this facility must
be repaid. The agreement requires the payment of certain commitment fees based
on the unused portion of the line of credit. At June 30, 2000, the Company
qualified for the entire $25 million borrowing base of the facility; actual
borrowings totaled $18.7 million.
Under the terms of the revolving credit facility and the stand-by letter of
credit agreement, the Company is required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios, and incurring additional indebtedness. The Company was in
compliance with these covenants at June 30, 2000.
AAI expects that near term growth can be accommodated utilizing existing
facilities. The Company is currently in discussions with its major lender to
provide a long-term financing solution. The Company is reducing capital
expenditures and operating costs in order to increase cash flow available to
reduce reliance on bank facilities and reduce borrowing costs. The Company may
from time to time seek to supplement cash flow from operations with the issuance
of equity securities and additional borrowings. At some point in the future
there may be opportunities that require additional external financing, and the
Company may from time-to-time seek to obtain funds through the public or private
issuance of equity or debt securities. While the Company remains confident that
it can secure additional financing if necessary, there can be no assurances that
such financing will be available or that the terms will be acceptable to the
Company.
FORWARD LOOKING STATEMENTS, RISK FACTORS AND "SAFE HARBOR" LANGUAGE
This quarterly report contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on the
Company's belief and assumptions, as well as information currently available to
the Company. These forward-looking statements involve risks and uncertainties
that could cause the actual results of Applied Analytical Industries, Inc. to
differ materially from management's expectations as expressed or implied.
These forward-looking statements include, among others:
- All statements discussing liquidity; future, planned or targeted
operational or financial expectations, goals or objectives; future,
planned or targeted cost reductions and capital expenditures; continued
access to financing; and effects of non-compliant computer systems due
to Year 2000 issues; and
- All statements using the words "expect", "may", "believe", "anticipate",
"estimate", "project", "intend", "will", "plan", "target", "objective",
"goal", "should" and similar expressions are intended to identify
forward-looking statements.
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Although the Company believes that the expectations reflected in any such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Any such statements are subject to
certain risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions or projections prove
incorrect, actual results, performance or financial condition may vary
materially from those anticipated, estimated or expected.
The Company assumes no obligation to update its forward-looking statements, or
other statements, contained herein. Additional factors that may cause the actual
results to differ materially are discussed in Exhibit 99.1 attached hereto and
incorporated herein by reference and in the Company's recent filings with the
SEC, including, but not limited to, the Company's registration statement, as
amended, its Annual Report on Form 10-K filed with the SEC on March 30, 2000,
its Quarterly report on Form 10-Q filed with the SEC on May 15, 2000, its Form
8-K's, and its other periodic filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of global operating activities, is exposed to risks
associated with changes in foreign exchange rates. As foreign exchange rates
change, the U. S. dollar equivalent of revenues and expenses denominated in
foreign currencies change and can have an adverse impact on the Company's
operating results. To seek to minimize its risk from foreign exchange movement,
the Company uses local debt to fund its foreign operations. If foreign exchange
rates were to increase by 10%, year to date operating results would have been
lower by $411,000 due to the reduction in reported results from European
operations.
The Company is also exposed to fluctuations in interest rates on its variable
rate debt instruments and leases tied to LIBOR. If interest rates were to
increase by 1%, annual interest expense on variable rate debt and leases tied to
interest rates would increase by approximately $288,000, or $72,000 per quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 2000, the Company held its annual meeting of stockholders. The total
number of shares outstanding as of the record date, May 3, 2000, was 17,343,248.
The matters voted on at the meeting and the results are as follows:
Election of Directors - Terms to expire in 2003:
For Withheld
--- --------
Dr. Frederick D. Sancilio 14,756,738 174,925
William H. Underwood 14,756,538 175,125
Ratify the appointment of Ernst & Young LLP as independent auditors for the
Company for the year ending December 31, 2000:
For Against Abstentions
--- ------- -----------
14,296,513 5,050 100
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Approve the amendment to the 1997 Stock Option Plan authorizing the issuance of
an additional 500,000 options:
For Against Abstentions
--- ------- -----------
14,255,874 420,294 255,495
Approve the amendment to the Company's Certificate of Incorporation to increase
the Board of Directors from seven (7) to nine (9):
For Against Abstentions
--- ------- -----------
14,911,927 17,936 1,800
No other matters were voted on at the meeting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
A list of the exhibits required to be filed as part of this Report on Form 10-Q
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.
REPORTS ON FORM 8-K:
During the second quarter of 2000, the Company filed the following Form 8-K's:
- Dated May 3, 2000, to file a press release reporting the Company's
results of operations for the period ended March 31, 2000.
- Dated June 2, 2000, to file a press release announcing an alliance with
Pharmaceutical Development Center.
- Dated June 16, 2000, to file a press release concerning comments the
Company's Chief Executive Officer made at the Goldman Sachs Healthcare
Conference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
APPLIED ANALYTICAL INDUSTRIES, INC.
Date: August 11, 2000 By: /s/ FREDERICK D. SANCILIO
---------------------------
Frederick D. Sancilio, Ph.D.
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: August 11, 2000 By: /s/ WILLIAM L. GINNA, JR.
--------------------------
William L. Ginna, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996)
3.2 - Amendment to Certificate of Incorporation dated May 24, 2000
3.3 - Amended By-laws of the Company
4.1 - Articles Fourth, Seventh, Eleventh and Twelfth of the form of
Amended and Restated Certificate of Incorporation of the Company
(included in Exhibit 3.1)
4.2 - Article II of the form of Restated By-laws of the Company (included
in Exhibit 3.2)
4.3 - Specimen Certificate for shares of Common Stock, $.001 par value, of
the Company (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.1 - Employment Agreement dated November 17, 1995 between the Company and
Frederick D. Sancilio (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.2 - Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.3 - Applied Analytical Industries, Inc. 1997 Stock Option Plan, as
amended on May 8, 1998, (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998)
10.4 - Stockholder Agreement dated as of November 17, 1995 among the
Company, GS Capital Partners II, L.P., GS Capital Partners II
Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street
Fund 1995, L.P., Bridge Street Fund 1995, L.P., Noro-Moseley
Partners III, L.P., Wakefield Group Limited Partnership, James L.
Waters, Frederick D. Sancilio and the parties listed on Schedule 1
thereto (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.5 - Development Agreement dated as of April 25, 1994 between the Company
and Endeavor Pharmaceuticals Inc. (formerly, GenerEst, Inc.)
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5535))
10.6 - Development Agreement dated as of April 4, 1995 between the Company
and Aesgen, Inc. (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
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10.7 - Underwriting Agreement dated September 19, 1996 between the Company
and Goldman Sachs & Co., Cowen & Company and Lehman Brothers, Inc.,
as representatives of the underwriters listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.8 - Partnership Agreement dated as of October 2, 1998 between the
Company, First Security Bank, N. A. and the Various Banks and Other
Lending Institutions Which are Parties Hereto from time to time, as
the Holders and as the Lenders and NationsBank, N. A. (incorporated
by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
10.9 - Security Agreement dated as of October 2, 1998 between First
Security Bank, N. A., and NationsBank, N. A. (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
10.10 - Amendment No. 1 to the Employment Agreement dated November 17, 1995
between the Company and Frederick D. Sancilio (incorporated by
reference to Exhibit 10.14 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.11 - Amendment and Forbearance Agreement dated August 26, 1999 between
the Company and the Bank of America, N.A. (incorporated by reference
to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999)
10.12 - Pledge Agreement dated August 26, 1999 between the Company and the
Bank of America, N.A. (incorporated by reference to Exhibit 10.16 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.13 - Security Agreement dated August 26, 1999 between the Company and the
Bank of America, N.A. (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.14 - Applied Analytical Industries, Inc. 1996 Stock Option Plan, as
amended on March 27, 2000 (incorporated by reference to exhibit to
the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1999)
10.15 - Amended and Restated Loan Agreement dated as of November 30, 1999
between the Company, AAI Applied Analytical Industries Deutschland
GmbH & Co. KG, certain subsidiaries of the Company and Bank of
America, N.A. (incorporated by reference to exhibit to the Company's
Annual Report on Form 10-K filed for the year ended December 31,
1999)
10.16 - First Amendment, dated May 31, 2000, to the Amended and Restated
Loan Agreement dated as of November 30, 1999 between the Company,
AAI Applied Analytical Industries Deutschland GmbH & Co. KG, certain
subsidiaries of the Company and Bank of America, N.A.
27 - Financial Data Schedule (for SEC use only)
99.1 - Risk Factors
19
