APPLIED ANALYTICAL INDUSTRIES INC
8-K, 2000-02-25
MEDICAL LABORATORIES
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                       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) February 24, 2000

                      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.)

                           2320 Scientific Park Drive
                        Wilmington, North Carolina 28405
                    ----------------------------------------
                    (Address of Principal Executive Offices)
                                   (Zip Code)

                                 (910) 254-7000
              ----------------------------------------------------
              (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 February 24, 2000, Applied Analytical Industries, Inc. (the
"Company") issued two press releases. The first press release reported the
Company's consolidated financial results for the quarter and fiscal year ended
December 31, 1999. The second press release contained additional information
concerning the Company's financial results. The press releases are filed as
Exhibits 99.1 and 99.2 hereto and are incorporated by reference herein.

         The Company does not undertake to update any of the information set
forth in the Release, which information constitutes only the Company's current
estimate with respect to revenues and net income for the periods identified in
the Release. Information in the Release may contain 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 following: the ability of acquired businesses
to be integrated with AAI's operations; the company's dependence on continued
strict government regulation of the drug development process; the company's
dependence on research and development expenditures and production-related
compliance testing expenditures by the pharmaceutical and biotechnology
industries (and the consequent risk that a general economic decline in these
industries or any reduction in the outsourcing of research, development and
testing activities within these industries could adversely affect the company's
business); fluctuation in the company's quarterly results due to 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 and changes in the mix of
services; the ability to acquire and maintain large client contracts; the
ability to hire and retain qualified employees; the reliance on certain key
executive officers; and other items that may cause the actual results to differ
materially, which may be discussed in the company's recent Form 10-K and Form
10-Q, its registration statement on Form S-3, and other filings with the
Securities and Exchange Commission.

Item 7.           Financial Statements and Exhibits.

         (a)      Financial Statements

                  Not applicable.

         (b)      Pro Forma Financial Information

                  Not applicable.

         (c)      Exhibits

                  Exhibit 99.1 -- First press release dated February 24, 2000
                  Exhibit 99.2 -- Second press release dated February 24, 2000


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<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: February 24, 2000

                                            APPLIED ANALYTICAL INDUSTRIES, INC.



                                            By: /s/ Frederick D. Sancilio
                                               -------------------------------
                                               Frederick D. Sancilio
                                               Chief Executive Officer


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<PAGE>   4

                                 EXHIBIT INDEX

Exhibit No.                Exhibit

Exhibit 99.1               First press release dated February 24, 2000
Exhibit 99.2               Second press release dated February 24, 2000


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<PAGE>   1
                                                                   EXHIBIT 99.1

APPLIED ANALYTICAL INDUSTRIES, INC. (AAI) REPORTS RECORD REVENUES FOR FOURTH
QUARTER AND FULL YEAR

HIGHLIGHTS:
       - RECORD REVENUES FOR 1999 EXCEED $100 MILLION
       - QUARTERLY REVENUES OF OVER $31 MILLION REACH HIGHEST LEVEL IN 20 YEARS
       - FOURTH QUARTER PRODUCT DEVELOPMENT REVENUE GROWTH EXCEEDS 95% YEAR-
         OVER-YEAR

WILMINGTON, N.C. (FEBRUARY 24, 2000) -- Applied Analytical Industries, Inc.
(NASDAQ: AAII) announced record fourth quarter revenues of $31.7 million, up
12% over the fourth quarter of 1998 and up 39% from the third quarter of 1999.
Fourth quarter revenues include a 97% increase in product development revenues
compared to a year ago. Fourth quarter earnings per share of $.02 include the
impact of a special charge in the quarter of $2.2 million pre-tax for reserves
taken on certain customer balances. Full year revenues were up 4%, including a
39% increase in product development revenues.

"Revenues in the fourth quarter and the full year were the largest in AAI's
history, exceeding our goal of $100 million" said Frederick D. Sancilio, Ph.D.,
CEO and Chairman of AAI. "We believe the value of our unique capabilities for
solving pharmaceutical customers' drug development problems is evident in the
dramatic growth of our product development program, which nearly doubled
compared to the fourth quarter of 1998. Our fee-for-service business provides
the scientific insights that enable the product development program to grow at
these high rates."

Quarterly revenues for the company's fee-for-service business were $28.2
million, an increase of 6% over the fourth quarter of 1998 and 37% over the
third quarter of 1999. Product development revenues for the quarter of $3.5
million represent an increase of 97% over the year-ago quarter, the third 1999
quarter with double-digit increases compared to the previous year. Product
development revenues rose 65% in the fourth quarter over the third quarter of
1999.

Gross margin for the quarter remained at 45%, consistent with 1998. For the
full year 1999, gross margins were 44% compared to 48% in 1998, resulting
largely from capacity under-utilization in the second and third quarters. S,G&A
spending for the quarter and the year increased as a percentage of sales,
reflecting expansion of the company's sales and marketing infrastructure,
increases in accounts receivable valuation allowances and the addition of
several senior personnel to AAI's management team. The valuation allowances of
$2.2 million reflect provisions for fourth quarter credit quality issues in
certain accounts receivable.

 "1999 has been a pivotal year for AAI," continued Sancilio. "When we were
faced with industry wide volume decreases in the second and third quarters in
our fee-for-service business, we kept our


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<PAGE>   2

eye on our long-term product development strategy. R&D efforts were substantial
in 1999, and the benefits from those expenditures are being realized in the
near term. For example:

         1.       In 1999, we made significant investments to establish
                  intellectual property positions in proton pump inhibitors.
                  Patents filed during 1999 and subsequent filings have given
                  us an opportunity to receive substantial revenues. In fact,
                  the $5 million invested in this area has already yielded
                  revenues in excess of that figure in 1999. The agreement we
                  signed with AstraZeneca in the third quarter returned
                  meaningful revenues in 1999. We expect revenues from this
                  relationship to continue for several years. In addition,
                  we've begun early contract negotiations with other major
                  pharmaceutical firms for applications of similar technology.
                  We plan to invest strongly in our R&D program, and especially
                  our Product Life Cycle Management projects, in 2000 and
                  beyond.

         2.       Our revenue from azathioprine in the fourth quarter exceeded
                  $7 million, primarily consisting of "niche" manufacturing
                  revenue from Novartis' Geneva Pharmaceuticals, our marketing
                  partner. Significant royalties from these and additional
                  shipments will be realized in subsequent quarters.

         3.       The company has received tentative approval in early 2000
                  from the Food and Drug Administration (FDA) for Buspirone 5,
                  10 and 15 mg tablets. We plan to launch the products through
                  our pharmaceutical industry licensee when the innovator
                  patents expire.

         4.       Several applications are under review at the FDA, with three
                  expected approvals in 2000. Marketing arrangements have been
                  made for these products with our pharmaceutical industry
                  partners. Each of these new products will generate royalties
                  once approved and launched.

"It is our intention to continue to grow the proportion of product development
revenues versus fee-for-service revenues. Our goal is to increase product
development revenues so that they account for half of our consolidated
revenues, although we're a long way from achieving that balance. Profitability
and earnings visibility should accelerate as we approach our revenue mix
goals," said Sancilio.

Research and development expenditures for the quarter totaled $1.6 million, a
13% increase from the level spent in the year ago period. For the full year
1999, R&D expenditures were $10.3 million, or 10% of sales.

"In summary", said Sancilio, "1999 featured significant gains for our product
development program, the commencement of significant new customer
relationships, and expansion of our capabilities through acquisition and
geographic expansion. We believe that we have all the right ingredients in
place for continued growth and success in 2000 and beyond."

- --end--

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


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<PAGE>   3

AAI's operations, actual operational performance, results of the Company's
research and development program, the ability to hire and retain qualified
employees, the ability to maintain large client contracts or enter into new
contracts or licenses, 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.

For further information contact Meg Humphrey, VP, AAI at 704-367-5119 or Ken
Rabb, Phoenix Communications at 919-383-7779.


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<PAGE>   4

                      Applied Analytical Industries, Inc.
                       Consolidated Statements of Income
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                            Three months ended            Twelve months ended
                                                               December 31,                   December 31,
                                                         ------------------------       -----------------------
                                                           1999            1998            1999          1998
<S>                                                      <C>            <C>             <C>             <C>
Net revenues:
   Fee-for-service                                       $ 28,204       $  26,545       $  92,110       $90,989
   Product development                                      3,450           1,750          10,065         7,254
                                                         --------       ---------       ---------       -------
                                                           31,654          28,295         102,175        98,243
                                                         --------       ---------       ---------       -------

Operating costs and expenses:
   Direct costs                                            17,387          15,559          56,905        50,833
   Selling, general and administrative*                    11,358           8,101          37,347        31,677
   Research and development                                 1,570           1,391          10,305         6,130
   Transaction, integration and restructuring costs            --              --           6,400            --
                                                         --------       ---------       ---------       -------
                                                           30,315          25,051         110,957        88,640
                                                         --------       ---------       ---------       -------

   Income (loss) from operations                            1,339           3,244          (8,782)        9,603

Other income:
   Interest income, net of expense                           (548)            (73)         (1,256)          270
   Other, net                                                (107)            132            (153)          232
                                                         --------       ---------       ---------       -------
                                                             (655)             59          (1,409)          502
                                                         --------       ---------       ---------       -------

Income (loss) before income taxes                             684           3,303         (10,191)       10,105
Provision (benefit) for income taxes                          403           1,284          (2,278)        3,567
                                                         --------       ---------       ---------       -------
Net income (loss)                                        $    281       $   2,019       $  (7,913)      $ 6,538
                                                         ========       =========       =========       =======


Basic earnings (loss) per share                          $   0.02       $    0.12       $   (0.46)      $  0.38
                                                         ========       =========       =========       =======
Weighted average shares outstanding                        17,206          17,180          17,204        17,124
                                                         ========       =========       =========       =======

Diluted earnings (loss) per share                        $   0.02       $    0.11       $   (0.46)      $  0.37
                                                         ========       =========       =========       =======
Weighted average shares outstanding                        17,713          17,892          17,204        17,722
                                                         ========       =========       =========       =======
</TABLE>

*  The 1999 periods include a special charge for valuation reserve on
   receivables from certain customers totaling $2.2 million.


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<PAGE>   5

                      Applied Analytical Industries, Inc.
                  Pro Forma Consolidated Statements of Income
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                            Three months ended            Twelve months ended
                                                               December 31,                   December 31,
                                                         ------------------------       -----------------------
                                                           1999            1998            1999           1998
<S>                                                      <C>            <C>             <C>             <C>
Net revenues:
   Fee-for-service                                       $ 28,204       $  26,545       $  92,110       $90,989
   Product development                                      3,450           1,750          10,065         7,254
                                                         --------       ---------       ---------       -------
                                                           31,654          28,295         102,175        98,243
                                                         --------       ---------       ---------       -------

Operating costs and expenses:
   Direct costs                                            17,387          15,559          56,905        50,833
   Selling, general and administrative*                    11,358           8,101          37,347        31,677
   Research and development                                 1,570           1,391          10,305         6,130
   Transaction, integration and restructuring costs**          --              --              --            --
                                                         --------       ---------       ---------       -------
                                                           30,315          25,051         104,557        88,640
                                                         --------       ---------       ---------       -------

   Income (loss) from operations                            1,339           3,244          (2,382)        9,603

Other income:
   Interest income, net of expense                           (548)            (73)         (1,256)          270
   Other, net                                                (107)            132            (153)          232
                                                         --------       ---------       ---------       -------
                                                             (655)             59          (1,409)          502
                                                         --------       ---------       ---------       -------

Income (loss) before income taxes                             684           3,303          (3,791)       10,105
Provision (benefit) for income taxes                          403           1,284          (1,178)        3,567
                                                         --------       ---------       ---------       -------
Net income (loss)                                        $    281       $   2,019       $  (2,613)      $ 6,538
                                                         ========       =========       =========       =======


Basic earnings (loss) per share                          $   0.02       $    0.12       $   (0.15)      $  0.38
                                                         ========       =========       =========       =======
Weighted average shares outstanding                        17,206          17,180          17,204        17,124
                                                         ========       =========       =========       =======

Diluted earnings (loss) per share                        $   0.02       $    0.11       $   (0.15)      $  0.37
                                                         ========       =========       =========       =======
Weighted average shares outstanding                        17,713          17,892          17,204        17,722
                                                         ========       =========       =========       =======
</TABLE>

*  The 1999 periods include a special charge for a valuation reserve on
   receivables from certain customers totaling $2.2 million.

** Excludes first quarter 1999 charge of $6.4 million.


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<PAGE>   1
                                                                   EXHIBIT 99.2

APPLIED ANALYTICAL INDUSTRIES, INC.'S (AAI) - NEW ORDER GROWTH ACCELERATES

WILMINGTON, N.C. (FEBRUARY 24, 2000) - Following its 1999 earnings release this
morning, Applied Analytical Industries, Inc. (NASDAQ: AAI) is providing
additional details regarding its fourth quarter and full year 1999 results.

"We want to provide information that helps our investors understand our
business model," said Fred Sancilio, Ph.D., CEO and Chairman of AAI. "The
majority of what we do in our fee-for-service business is short-term,
mission-critical projects with durations far shorter that what is seen in a
clinical trial."

"New business signings in the fourth quarter were strong, with the value of
signed fee-for-service contracts increasing approximately 30% over third
quarter signings, faster than prior quarters. This new business excludes
anticipated royalties and other fees that will be generated by our product
development program, for which our goal is to grow by 50% over last year. What
we are also comfortable saying is that the level of new business signings
allows us to set a goal of 15% growth in the fee-for-service business,"
Sancilio said.

- --END--

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 to successfully complete scheduled product
development projects, continue historic success in entering into beneficial
royalty agreements with pharmaceutical companies, obtain timely regulatory
approvals of the Company's internally developed products, the ability of
acquired businesses to be integrated with AAI's operations, actual operational
performance, the ability to hire and retain qualified employees, other
regulatory approvals and industry outsourcing trends. Additional factors that
may cause the actual results to differ materially are discussed in the
Company's recent filing with the Securities and Exchange Commission, including,
but not limited to its registration statement, as amended, its Annual Report on
form 10-K, its for 8-Ks and its other periodic filings.

For further information contact Meg Humphrey, VP, AAI at 704-367-5119 or Ken
Rabb at Phoenix Communications at 919-383-7779.


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