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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 September 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
November 10, 2000, was 17,631,385 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.
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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 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
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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 Nine Months Ended
September 30, September 30,
------------------------------ ---------------------------
2000 1999 2000 1999
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 23,899 $ 22,715 $76,581 $70,521
-------------- -------------- ------------ ------------
Operating costs and expenses:
Direct costs 13,678 12,661 40,675 39,519
Selling 2,967 3,030 8,984 9,105
General and administrative 6,507 5,794 20,011 16,883
Research and development 1,440 2,776 4,759 8,735
Transaction, integration, and restructuring costs - - - 6,400
-------------- -------------- ------------ ------------
24,592 24,261 74,429 80,642
-------------- -------------- ------------ ------------
Income (loss) from operations (693) (1,546) 2,152 (10,121)
Other income (expense):
Interest expense (559) (274) (1,599) (708)
Other, net 90 3 344 (46)
-------------- -------------- ------------ ------------
(469) (271) (1,255) (754)
-------------- -------------- ------------ ------------
Income (loss) before income taxes (1,162) (1,817) 897 (10,875)
Provision for (benefit from) income taxes (441) (359) (441) (2,681)
-------------- -------------- ------------ ------------
Net income (loss) $ (721) $ (1,458) $ 1,338 $(8,194)
============== ============== ============ ============
Basic earnings (loss) per share $ (0.04) $ (0.08) $ 0.08 $ (0.48)
============== ============== ============ ============
Weighted average shares outstanding 17,556 17,205 17,439 17,203
============== ============== ============ ============
Diluted earnings (loss) per share $ (0.04) $ (0.08) $ 0.08 $ (0.48)
============== ============== ============ ============
Weighted average shares outstanding 17,556 17,205 17,756 17,203
============== ============== ============ ============
</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>
September 30, December 31,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,364 $ 1,988
Accounts receivable 30,089 35,064
Work-in-progress 10,057 12,689
Prepaid and other current assets 12,448 11,426
---------------- ----------------
Total current assets 53,958 61,167
Property and equipment, net 42,347 45,026
Goodwill and other intangibles, net 10,864 13,040
Other assets 3,755 4,228
---------------- ----------------
Total assets $ 110,924 $ 123,461
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 24,517 $ 28,362
Accounts payable 5,547 6,969
Customer advances 5,014 9,146
Accrued wages and benefits 3,400 4,081
Other accrued liabilities 3,725 6,102
---------------- ----------------
Total current liabilities 42,203 54,660
Long-term debt, less current portion 626 962
Other long-term liabilities 730 1,281
Stockholders' equity:
Common stock 18 17
Paid-in capital 70,300 69,732
Accumulated deficit (922) (2,260)
Accumulated other comprehensive losses (2,009) (906)
Stock subscriptions receivable (22) (25)
---------------- ----------------
Total stockholders' equity 67,365 66,558
---------------- ----------------
Total liabilities and stockholders' equity $ 110,924 $ 123,461
================ ================
</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>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,338 $ (8,194)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,424 5,719
Issuance of stock for services 225 -
Other (74) (6)
Changes in operating assets and liabilities:
Accounts receivable 4,609 (1,986)
Work-in-progress 2,042 (1,532)
Prepaid and other assets, net (659) (5,555)
Accounts payable (1,272) (80)
Customer advances (3,828) (1,347)
Other accrued liabilities (2,959) 628
------------ -------------
Net cash provided by (used in) operating activities 4,846 (12,353)
------------ -------------
Cash flows from investing activities:
Disposition of assets 290 -
Purchases of property and equipment, net (3,320) (10,453)
Pre-acquisition tax settlement 557 -
Other (215) (45)
------------ -------------
Net cash used in investing activities (2,688) (10,498)
------------ -------------
Cash flows from financing activities:
Net (payments on) proceeds from short-term borrowings (2,585) 13,043
Payments on long-term borrowings (506) (1,761)
Exercise of stock options 344 -
Other 1 (22)
------------ -------------
Net cash (used in) provided by financing activities (2,746) 11,260
------------ -------------
Net decrease in cash and cash equivalents (588) (11,591)
Effect of exchange rate on cash (36) (83)
Cash and cash equivalents, beginning of period 1,988 12,299
------------ -------------
Cash and cash equivalents, end of period $ 1,364 $ 625
============ =============
Supplemental information, cash paid for:
Interest $ 1,318 $ 430
Income taxes $ 20 $ 33
</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 third 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 will 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. It is anticipated that the pre-tax cumulative effect adjustment will be
approximately $1.5 million as of January 1, 2000, approximately one-half of
which will be recognized as revenue in the current year.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133, as amended, is required to be
adopted in the first quarter of fiscal 2001. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of this
statement will have a material impact on net earnings or the financial position
of the Company.
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 nine months ended September 30, 2000 and 1999.
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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.
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 Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) (1) $ (721) $ (1,458) $ 1,338 $ (8,194)
============== ============== ============== ==============
Denominator:
Denominator for basic earnings per share -
weighted average shares 17,556 17,205 17,439 17,203
Effect of dilutive securities:
Employee stock options (2) - - 317 -
-------------- -------------- -------------- --------------
Denominator for fully diluted earnings per share -
weighted average shares 17,556 17,205 17,756 17,203
============== ============== ============== ==============
Basic earnings per share $ (0.04) $ (0.08) $ 0.08 $ (0.48)
Diluted earnings per share $ (0.04) $ (0.08) $ 0.08 $ (0.48)
</TABLE>
(1) Numerator for basic and diluted earnings per share.
(2) Options to purchase 244,000 and 493,000 weighted average shares in the third
quarters of 2000 and 1999, respectively, and 535,000 shares in the first nine
months of 1999 were not included in diluted earnings per share since their
inclusion would be anti-dilutive.
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 Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (721) $ (1,458) $ (1,338) $ (8,194)
Other comprehensive income (loss):
Currency translation adjustments (775) 209 (1,103) (742)
-------------- --------------- --------------- --------------
Comprehensive income (loss) $ (1,496) $ (1,249) $ (2,441) $ (8,936)
============== =============== =============== ==============
</TABLE>
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5. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA (IN THOUSANDS):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Research revenues:
Non-clinical $14,683 $11,383 $ 41,756 $ 36,419
Clinical 7,207 7,380 21,740 21,945
-------------- --------------- -------------- ---------------
21,890 18,763 63,496 58,364
Product sales 1,491 1,855 6,050 5,542
Product development 518 2,097 7,035 6,615
-------------- --------------- -------------- ---------------
$23,899 $22,715 $ 76,581 $ 70,521
============== =============== ============== ===============
United States $20,792 $19,094 $ 63,517 $ 57,083
Non-U.S. 3,926 4,255 15,714 15,511
Less inter-geographic sales (819) (634) (2,650) (2,073)
-------------- --------------- -------------- ---------------
$23,899 $22,715 $ 76,581 $ 70,521
============== =============== ============== ===============
Income (loss) from operations:
Research revenues:
Non-clinical $ 3,321 $ 991 $ 9,062 $ 5,182
Clinical (119) (375) 431 (502)
-------------- --------------- -------------- ---------------
3,202 616 9,493 4,680
Product sales (172) 49 (156) (102)
Product development (1,094) (399) 1,341 (3,503)
Corporate (2,629) (1,812) (8,526) (4,796)
Corporate restructuring charges - - - (6,400)
-------------- --------------- -------------- ---------------
$ (693) $(1,546) $ 2,152 $(10,121)
============== =============== ============== ===============
United States $ (751) $ (769) $ (2,632) $(10,470)
Non-U.S. 58 (777) 4,784 349
-------------- --------------- -------------- ---------------
$ (693) $(1,546) $ 2,152 $(10,121)
============== =============== ============== ===============
</TABLE>
6. PROVISION FOR (BENEFIT FROM) INCOME TAXES
Tax benefits have been recognized on U.S. losses, representing refunds available
from prior periods or the anticipated tax benefit of loss carryforwards to
future periods.
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
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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 September 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 $50,000 at
September 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
September 30, 2000 related to Aesgen was approximately $625,000 and the amount
related to Endeavor was approximately $93,000. Revenues recognized from Aesgen
and Endeavor totaled $223,000 and $715,000 for the three and nine months ended
September 30, 2000, and were $455,000 and $1,704,000 for the three and nine
months ended September 30, 1999.
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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>
September 30, December 31,
2000 1999
------------------ -----------------
<S> <C> <C>
Industrial revenue bonds $ 346 $ 575
Revolving credit agreement 16,753 18,153
German bank debt 6,853 4,780
Current maturities of long-term debt 565 4,854
-------------------------------------------------------------------- ------------------ -----------------
Current maturities of long-term debt and short-term debt $ 24,517 $ 28,362
-------------------------------------------------------------------- ================== =================
U.S. bank term loans $ 1,191 $ 1,697
German term loans - 4,119
Less current maturities of long-term debt (565) (4,854)
-------------------------------------------------------------------- ------------------ -----------------
Total long-term debt due after one year $ 626 $ 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 September 30, 2000, the Company qualified for the entire $25
million borrowing base of the facility; actual borrowings totaled $16.8 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 September 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. On August 31, 2000, the Company and the former
client entered into a settlement agreement to dispose of certain related
arbitration and litigation actions (the "Settlement Agreement"). Under the terms
of the Settlement Agreement, the Company will receive common stock issued by the
former client and each party releases the other from any liability with respect
to the alleged claims.
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
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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, 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:
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Overall net revenues for the third quarter of 2000 grew 5% to $23.9 million,
compared to $22.7 million in the third quarter of 1999. Research revenues
(non-clinical and clinical) were $21.9 million, an increase of 17% over the
$18.8 million recorded in the third quarter of 1999. Non-clinical research
revenues were up 29% to $14.7 million in the third quarter of 2000, from $11.4
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 fourth quarter of 1999. This project is
expected to continue through the rest of 2000 and into 2001. Clinical research
revenues were down 2% to $7.2 million in the third quarter of 2000, from $7.4
million in the same period of 1999. Clinical research revenues were lower due to
a slow down in the European clinical operation.
Product development revenues (royalties & fees) were $0.5 million in the third
quarter of 2000 compared to $2.1 million in the prior year period. 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 $1.5 million compared to $1.9
million in the third quarter of 1999.
Gross margin dollars were $10.2 million, which was slightly higher than the
third quarter of 1999. Gross margin as a percentage of revenues was
approximately 43% for the third quarter of 2000, compared to 44% for the same
period of 1999. The lower gross margin percentage reflects the decrease in
royalty & fee revenues, which have minimal associated direct costs. However,
gross
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margins for research revenues were up by five percentage points, primarily
resulting from on-going cost containment programs initiated late last year and
continuing this year. In addition, the third 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 2000 will be higher than those achieved in 1999.
Selling, general and administrative costs as a percentage of net revenues were
approximately 40% in 2000, compared to 39% for the same quarter in 1999.
Selling, general and administrative expenses, in dollars, increased by
approximately 7%, reflecting the strengthening of the management team and the
early stages of the Company's direct pharmaceutical sales effort. The Company
expects SG&A costs to remain generally unchanged as a percentage of revenues
over the remainder of the year.
Research and development expenses were approximately 6% of net revenues in the
third quarter of 2000, compared with approximately 12% of revenues for the same
period in 1999. The Company has utilized R&D spending more efficiently by
concentrating on its own niche products and has begun phasing out work on
generic drug development, which has not yielded profits to support the
associated risk.
The loss from operations was $0.7 million in the third quarter of 2000 as
compared to a loss of $1.5 million for the same period of 1999. This improvement
was largely due to the higher gross margins achieved on research revenues and
lower R&D spending, partially offset by the increase in SG&A expenses.
The Company recorded an income tax benefit of $0.4 million in the third quarter
of 2000, similar to the benefit taken in the third quarter of 1999. Tax benefits
have been recognized on U.S. losses, representing refunds available from prior
periods or the anticipated tax benefit of loss carryforwards to future periods.
Based on the above factors, the net loss for the third quarter of 2000 was $0.7
million, or ($0.04) per share, compared to a net loss of $1.5 million, or
($0.08) per share in the 1999 period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Overall net revenues for the nine months ended September 30, 2000 grew 9% to
$76.6 million, compared to $70.5 million in same period of 1999. Research
revenues (non-clinical and clinical) were $63.5 million, an increase of 9% over
the $58.4 million recorded in 1999. Non-clinical research revenues were up 15%
to $41.8 million in the first nine months of 2000, from $36.4 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 research revenues were $21.7 million
in the first nine months of 2000, slightly down from the $21.9 million in the
same period of 1999.
Product development revenues were $7.0 million in the first nine months of 2000
compared to $6.6 million in the prior year period. Sales of manufactured
products were $6.1 million compared to $5.5 million in the first nine months of
1999.
Gross margin dollars were $35.9 million or $4.9 million higher than the first
nine months of 1999. Gross margin as a percentage of revenues was approximately
47% for the first nine months of 2000, compared to 44% for the same period of
1999. The higher gross margin percentage reflects the
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strong mix in revenues, as well as the 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 38% in 2000 compared to 37% for the same period in
1999. Selling, general and administrative expenses, in dollars, increased by
approximately 12%, 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.
Research and development expenses were approximately 6% of net revenues in the
first nine months of 2000, compared with approximately 12% of revenues for the
same period in 1999. As previously discussed, the Company has taken several
steps to utilize R&D spending more efficiently.
Income from operations was $2.2 million in the first nine months of 2000 as
compared to a loss of $10.1 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.
Based on the above factors, net income for the first nine months of 2000 was
$1.3 million, or $0.08 per share, compared to a net loss of $8.2 million, or
($0.48) 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 nine months
of 2000 was $4.8 million, a significant improvement over last year with its net
cash usage from operating activities of $12.4 million. This improvement was
primarily due to the net income for the current period, as compared to the net
loss in 1999, and positive working capital management. Cash payments on
borrowings during the first nine months of 2000 were approximately $3.1 million.
Capital expenditures were $3.3 million during the first nine months of 2000
compared to $10.5 million during the same period last year. This reduction is
part of the Company's plan to lower capital 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. It is anticipated that this facility will be extended for an
as yet undetermined period. 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 September
30, 2000, the Company qualified for the entire $25 million borrowing base of the
facility; actual borrowings totaled $16.8 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 September 30, 2000.
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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:
o 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
o 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.
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 Reports on Form 10-Q filed with the SEC on May 15, 2000 and August
14, 2000, its Form 8-K's, and its other periodic filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 $410,000 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 $272,000, or $68,000 per quarter.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133, as amended, is required to be
adopted in the first quarter of fiscal 2001. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of this
statement will have a material impact on net earnings or the financial position
of the Company.
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 third quarter of 2000, the Company filed the following Form 8-K's:
o Dated August 1, 2000, to file a press release reporting the
Company's results of operations for the three and six months ended
June 30, 2000.
o Dated September 29, 2000, to file a press release concerning the
status of a development project and related contract negotiations,
and the potential effect the contract could have on the Company's
third quarter revenues and earnings.
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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: November 13, 2000 By: /s/ FREDERICK D. SANCILIO
---------------------------
Frederick D. Sancilio, Ph.D.
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: November 13, 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
(incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
3.3 - Amended By-laws of the Company (incorporated by reference to Exhibit
3.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000)
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))
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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))
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. (incorporated by
reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000)
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27 - Financial Data Schedule (for SEC use only)
99.1 - Risk Factors
19
