AAIPHARMA INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period to
Commission File Number 0-21185
AAIPHARMA 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
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
þ
The number of shares of the registrants common stock outstanding as of October 31, 2005 was
28,585,582 shares.
The terms we, us or our in this Form 10-Q include AAIPharma Inc., its corporate predecessors
and its subsidiaries, except where the context may indicate otherwise. Our corporation was
incorporated in 1986, although its corporate predecessor was founded in 1979. Our Internet address
is www.AAIPharma.com. We make available through our Internet website our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
At September 30, 2005, we owned the following registered and unregistered trademarks referenced
herein: Brethine®, AzaSan®, AAIPharma® and AAI®. AzaSan® is a registered trademark owned by us and
licensed to Salix Pharmaceuticals. We also reference trademarks owned by other companies.
Darvocet®, Darvon®, Darvon-N®, Darvocet-N®, Darvocet A500®, Lynxorb, Oramorph® SR and Roxicodone®
are trademarks, or registered trademarks, owned by Xanodyne Pharmaceuticals, Inc. Unless the
context otherwise requires, references in this document to Darvon are to Darvon® and Darvon-N®,
collectively, and references to Darvocet are to Darvocet-N® and Darvocet A500®, collectively.
Duraclon® is a registered trademark owned by Fujisawa Healthcare, Inc. that was licensed to
Xanodyne Pharmaceuticals, Inc. M.V.I.®, M.V.I.-12®, M.V.I. Pediatric®, Aquasol®, Aquasol A® and
Aquasol E® are registered trademarks owned by Mayne Pharma (USA) Inc. Prilosec® is a registered
trademark owned by AstraZeneca. Unless the context otherwise requires, references to M.V.I. are to
M.V.I.-12® and M.V.I. Pediatric®, collectively, and references to Aquasol are to Aquasol A® and
Aquasol E®, collectively. All references in this document to any
of these terms lacking the ® or
TM symbols are defined terms that reference the products, technologies or businesses
bearing the trademarks with these symbols. See Note 1 to the financial statements for discussion
of the sale of substantially all of the assets of our Pharmaceuticals Division in July 2005,
including the sale or assignment of our rights to the Darvocet, Darvon, Lynxorb, Oramorph, Duraclon
and Roxicodone trademarks.
Table of Contents
|
|
|
|
|
|
|
PART I. |
|
FINANCIAL INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
Item 1. |
|
Financial Statements (unaudited) |
|
|
|
|
|
|
Consolidated Statements of Operations |
|
|
|
|
|
|
Consolidated Balance Sheets |
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
Consolidated Statements of Comprehensive Loss |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
|
|
|
|
Item 4. |
|
Controls and Procedures |
|
|
|
|
PART II. |
|
OTHER INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
Item 1. |
|
Legal Proceedings |
|
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
|
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
|
|
|
|
Item 6. |
|
Exhibits |
|
|
|
|
SIGNATURES |
|
|
|
|
EXHIBIT INDEX |
|
|
|
|
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AAIPharma Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
3,263 |
|
|
$ |
13,520 |
|
|
$ |
34,316 |
|
|
$ |
59,734 |
|
Product development (milestones and
royalties) |
|
|
282 |
|
|
|
4,481 |
|
|
|
8,326 |
|
|
|
14,522 |
|
Development services |
|
|
18,588 |
|
|
|
23,054 |
|
|
|
58,621 |
|
|
|
72,529 |
|
Reimbursed out-of-pocket |
|
|
1,823 |
|
|
|
4,631 |
|
|
|
6,866 |
|
|
|
13,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,956 |
|
|
|
45,686 |
|
|
|
108,129 |
|
|
|
160,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs (excluding depreciation
and royalty expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales (includes product
rights amortization of $872, $3,972,
$6,110 and $11,916) |
|
|
2,286 |
|
|
|
10,404 |
|
|
|
17,620 |
|
|
|
35,494 |
|
Development services |
|
|
14,802 |
|
|
|
12,749 |
|
|
|
41,670 |
|
|
|
42,248 |
|
Reimbursable out-of-pocket |
|
|
1,823 |
|
|
|
4,631 |
|
|
|
6,866 |
|
|
|
13,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs |
|
|
18,911 |
|
|
|
27,784 |
|
|
|
66,156 |
|
|
|
91,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
1,204 |
|
|
|
6,021 |
|
|
|
4,406 |
|
|
|
30,122 |
|
General and administrative expenses |
|
|
7,379 |
|
|
|
9,478 |
|
|
|
26,240 |
|
|
|
35,318 |
|
Research and development |
|
|
444 |
|
|
|
3,134 |
|
|
|
3,278 |
|
|
|
13,847 |
|
Depreciation |
|
|
2,033 |
|
|
|
2,367 |
|
|
|
6,337 |
|
|
|
6,404 |
|
Professional fees internal and
government investigations |
|
|
|
|
|
|
769 |
|
|
|
299 |
|
|
|
9,072 |
|
Reorganization expenses |
|
|
4,018 |
|
|
|
|
|
|
|
11,311 |
|
|
|
|
|
Pharmaceutical assets gain on sale |
|
|
(29,046 |
) |
|
|
|
|
|
|
(29,046 |
) |
|
|
|
|
M.V.I. contingent payment/(gain on sale) |
|
|
|
|
|
|
(1,567 |
) |
|
|
|
|
|
|
(8,112 |
) |
Restructuring charges |
|
|
|
|
|
|
13,719 |
|
|
|
|
|
|
|
17,119 |
|
Royalty expenses |
|
|
22 |
|
|
|
357 |
|
|
|
247 |
|
|
|
1,366 |
|
Intangible asset impairment |
|
|
|
|
|
|
5,250 |
|
|
|
1,190 |
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
4,965 |
|
|
|
67,312 |
|
|
|
90,418 |
|
|
|
201,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
18,991 |
|
|
|
(21,626 |
) |
|
|
17,711 |
|
|
|
(41,343 |
) |
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(2,093 |
) |
|
|
(9,469 |
) |
|
|
(22,174 |
) |
|
|
(23,866 |
) |
Loss from extinguishment of debt |
|
|
(5,644 |
) |
|
|
|
|
|
|
(12,432 |
) |
|
|
(6,229 |
) |
Other |
|
|
(438 |
) |
|
|
(275 |
) |
|
|
(1,190 |
) |
|
|
(2,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,175 |
) |
|
|
(9,744 |
) |
|
|
(35,796 |
) |
|
|
(32,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
10,816 |
|
|
|
(31,370 |
) |
|
|
(18,085 |
) |
|
|
(73,549 |
) |
Provision for income taxes |
|
|
|
|
|
|
4,583 |
|
|
|
219 |
|
|
|
4,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,816 |
|
|
$ |
(35,953 |
) |
|
$ |
(18,304 |
) |
|
$ |
(78,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.38 |
|
|
$ |
(1.26 |
) |
|
$ |
(0.64 |
) |
|
$ |
(2.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.38 |
|
|
$ |
(1.26 |
) |
|
$ |
(0.64 |
) |
|
$ |
(2.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
AAIPharma Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,471 |
|
|
$ |
7,130 |
|
Restricted cash |
|
|
6,346 |
|
|
|
|
|
Accounts receivable, net |
|
|
7,850 |
|
|
|
12,756 |
|
Work-in-progress |
|
|
10,513 |
|
|
|
10,172 |
|
Inventories, net |
|
|
3,122 |
|
|
|
10,722 |
|
Income tax recoverable |
|
|
|
|
|
|
11,110 |
|
Prepaid and other current assets |
|
|
4,020 |
|
|
|
7,751 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
36,322 |
|
|
|
59,641 |
|
Property and equipment, net |
|
|
44,254 |
|
|
|
52,942 |
|
Goodwill, net |
|
|
12,898 |
|
|
|
14,350 |
|
Intangible assets, net |
|
|
6,537 |
|
|
|
190,099 |
|
Other assets |
|
|
14,004 |
|
|
|
22,038 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
114,015 |
|
|
$ |
339,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
|
|
|
$ |
351,645 |
|
Accounts payable |
|
|
8,244 |
|
|
|
22,031 |
|
Customer advances |
|
|
10,658 |
|
|
|
11,043 |
|
Accrued wages and benefits |
|
|
3,686 |
|
|
|
4,881 |
|
Interest payable |
|
|
132 |
|
|
|
5,738 |
|
Deferred product revenue |
|
|
|
|
|
|
4,127 |
|
Other accrued liabilities |
|
|
3,575 |
|
|
|
51,481 |
|
Liabilities subject to compromise |
|
|
219,771 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
246,066 |
|
|
|
450,946 |
|
Other liabilities |
|
|
9 |
|
|
|
14 |
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock |
|
|
29 |
|
|
|
29 |
|
Paid-in capital |
|
|
91,425 |
|
|
|
91,425 |
|
Accumulated deficit |
|
|
(225,782 |
) |
|
|
(207,478 |
) |
Accumulated other comprehensive income |
|
|
2,281 |
|
|
|
4,398 |
|
Deferred compensation |
|
|
(13 |
) |
|
|
(264 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(132,060 |
) |
|
|
(111,890 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
114,015 |
|
|
$ |
339,070 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
5
AAIPharma Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(18,304 |
) |
|
$ |
(78,307 |
) |
Adjustments to reconcile net loss to
net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,730 |
|
|
|
18,320 |
|
Intangible asset impairment |
|
|
1,190 |
|
|
|
5,250 |
|
Write-off of deferred financing and related costs |
|
|
8,482 |
|
|
|
6,229 |
|
Net gain from asset sale |
|
|
(29,046 |
) |
|
|
(39,113 |
) |
Noncash stock based compensation |
|
|
251 |
|
|
|
104 |
|
Loss on disposal of assets and other |
|
|
221 |
|
|
|
237 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
4,592 |
|
|
|
27,895 |
|
Work-in-progress |
|
|
(1,483 |
) |
|
|
1,083 |
|
Inventories |
|
|
3,892 |
|
|
|
(1,824 |
) |
Income taxes recoverable |
|
|
11,110 |
|
|
|
8,728 |
|
Prepaid and other assets |
|
|
1,773 |
|
|
|
(5,889 |
) |
Accounts payable |
|
|
(5,187 |
) |
|
|
(318 |
) |
Customer advances |
|
|
337 |
|
|
|
(3,768 |
) |
Accrued wages and benefits |
|
|
(463 |
) |
|
|
1,542 |
|
Interest payable |
|
|
7,205 |
|
|
|
4,760 |
|
Deferred product revenue |
|
|
(4,127 |
) |
|
|
(35,032 |
) |
Other accrued liabilities |
|
|
(18,204 |
) |
|
|
24,525 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(25,031 |
) |
|
|
(65,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of property and equipment |
|
|
19 |
|
|
|
97 |
|
Purchases of property and equipment |
|
|
(1,707 |
) |
|
|
(5,475 |
) |
Proceeds from disposition of pharmaceutical assets |
|
|
205,952 |
|
|
|
92,944 |
|
Funds deposited in restricted cash account |
|
|
(8,000 |
) |
|
|
|
|
Payments from restricted cash account |
|
|
1,654 |
|
|
|
|
|
Other |
|
|
35 |
|
|
|
(199 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
197,953 |
|
|
|
87,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
180,000 |
|
|
|
147,500 |
|
Payments on long-term borrowings |
|
|
(355,500 |
) |
|
|
(164,000 |
) |
Payments on interest rate swaps, net |
|
|
(129 |
) |
|
|
(10,203 |
) |
Proceeds from stock option exercises |
|
|
|
|
|
|
3,574 |
|
Other |
|
|
68 |
|
|
|
(292 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(175,561 |
) |
|
|
(23,421 |
) |
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Net decrease in cash and cash equivalents |
|
|
(2,639 |
) |
|
|
(1,632 |
) |
Effect of exchange rate changes on cash |
|
|
(20 |
) |
|
|
(10 |
) |
Cash and cash equivalents, beginning of period |
|
|
7,130 |
|
|
|
8,785 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,471 |
|
|
$ |
7,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information, cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
10,990 |
|
|
$ |
17,868 |
|
|
|
|
|
|
|
|
Income taxes (refunds) |
|
$ |
(11,060 |
) |
|
$ |
5,923 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
7
AAIPharma Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
10,816 |
|
|
$ |
(35,953 |
) |
|
$ |
(18,304 |
) |
|
$ |
(78,307 |
) |
Currency translation
adjustments, net of tax |
|
|
42 |
|
|
|
384 |
|
|
|
(2,117 |
) |
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
10,858 |
|
|
$ |
(35,569 |
) |
|
$ |
(20,421 |
) |
|
$ |
(78,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
8
AAIPharma Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of presentation and other matters
AAIPharma Inc. (AAIPharma or the Company) is a science-based company with corporate
headquarters in Wilmington, North Carolina with over 25 years experience in drug development. The
Company offers comprehensive drug development services to the pharmaceutical, biotechnology,
generic and medical device industries. The Company also sold branded pharmaceutical products,
primarily in the area of pain management, prior to the asset sale in July 2005, as discussed below.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and applicable Securities and
Exchange Commission (the SEC) regulations for interim financial information. These financial
statements do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for annual financial statements. The consolidated
financial information as of December 31, 2004 has been derived from audited financial statements;
certain amounts from the three and nine months ended September 30, 2004 have been reclassified for
consistent presentation with current year financial statements. 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, which were included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004 (the 2004 Form 10-K). In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for the fair presentation have
been included in these interim financial statements. Operating results for the interim periods
presented are not necessarily indicative of the results that may be expected for the full year.
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ from such estimates and changes in such estimates may affect amounts
reported in future periods.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations in accounting for its stock option plans;
therefore, compensation expense has not been recognized for options granted at fair value. Under
APB 25, if the exercise price of the Companys stock options is not less than the estimated fair
market value of the underlying stock on the date of grant, no compensation expense is recognized.
If compensation cost for the Companys plans had been determined based on the fair value at the
grant dates for awards under those plans consistent with the fair value method of Statement of
Financial Accounting Standards No. 123 Accounting for
Stock Based Compensation (SFAS 123), the
Companys net income (loss) and income (loss) per share would have been changed to the pro forma
amounts indicated below:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
Net income (loss), as reported |
|
$ |
10,816 |
|
|
$ |
(35,953 |
) |
|
$ |
(18,304 |
) |
|
$ |
(78,307 |
) |
Add back deferred compensation
expense, net of tax |
|
|
18 |
|
|
|
49 |
|
|
|
151 |
|
|
|
62 |
|
Less pro forma stock-based
compensation cost, net of tax |
|
|
829 |
|
|
|
1,088 |
|
|
|
3,721 |
|
|
|
4,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
10,005 |
|
|
$ |
(36,992 |
) |
|
$ |
(21,874 |
) |
|
$ |
(82,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.38 |
|
|
|
($1.26 |
) |
|
|
($0.64 |
) |
|
|
($2.74 |
) |
Diluted |
|
$ |
0.38 |
|
|
|
($1.26 |
) |
|
|
($0.64 |
) |
|
|
($2.74 |
) |
Pro forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.35 |
|
|
|
($1.29 |
) |
|
|
($0.77 |
) |
|
|
($2.90 |
) |
Diluted |
|
$ |
0.35 |
|
|
|
($1.29 |
) |
|
|
($0.77 |
) |
|
|
($2.90 |
) |
Going Concern and Bankruptcy Filing
On May 10, 2005, AAIPharma Inc. and its domestic subsidiaries (the Debtors) filed voluntary
petitions for relief (the Chapter 11 Cases) under chapter 11 of title 11 of the United States
Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware
(the Bankruptcy Court). The filing is intended to allow AAIPharma to continue normal business
operations during the restructuring proceedings. The Company is currently operating as a
debtor-in-possession (DIP) under the jurisdiction of the Bankruptcy Court. As a
debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an
ongoing business, but may not engage in transactions outside the ordinary course of business
without the prior approval of the Bankruptcy Court. In connection with the Chapter 11 filing,
AAIPharma has entered into agreements to obtain DIP financing. See Note 8 for additional
information on the DIP financing.
In order to emerge from Chapter 11 successfully, the Company must obtain confirmation by the
Bankruptcy Court of a Chapter 11 plan that satisfies the requirements of the Bankruptcy Code. As
provided by the Bankruptcy Code, the Company has the exclusive right to solicit a Chapter 11 plan
for 120 days from the date of filing its petition for relief, which exclusive period has been
extended by the Bankruptcy Court to November 28, 2005. In addition, the general deadline for
creditors to file claims against the Company was August 19, 2005, with the exception of federal and
state governmental agencies, which generally had until November 7, 2005 to file claims.
On November 4, 2005, the Debtors filed a Chapter 11 plan (the Plan) in the Chapter 11 Cases. The
Plan proposes that 100% of the equity of the reorganized Company (subject to dilution from a
potential employee equity incentive plan) would be owned by the Companys secured noteholders, $4.0
million in cash and the litigation causes of action against KUDCO and Athlon Pharmaceuticals, which
are described in Note 11, would be respectively distributed to the unsecured creditors of the
Debtors and to a litigation trust for the benefit of such unsecured creditors, and the existing
common stock of AAIPharma Inc. would be cancelled, among other
10
provisions. In addition, the Company will pay $0.2 million to a plan administrator to be selected
by the Companys unsecured creditors to fund the claims objection and allowance process with
respect to unsecured claims. In order to emerge from Chapter 11, the Debtors will need to (a)
obtain Bankruptcy Court approval of the adequacy of the Debtors disclosures in the disclosure
statement, (b) obtain approval of the Plan by a requisite vote of our noteholders and unsecured
creditors, and (c) obtain confirmation of the Plan at a hearing before the Bankruptcy Court,
during which the Debtors will seek to show that the Plan complies with all of the requirements of
the Bankruptcy Code. The hearing to consider the adequacy of the disclosure statement is scheduled
for December 2, 2005. The Plan, as filed, is the result of extensive negotiations among the
Company, the official committee of unsecured creditors and the advisors to an ad hoc committee of
the Companys secured noteholders. The Plan has the support of the official committee of unsecured
creditors and based upon discussions with the advisors to the ad hoc committee, the Company
believes that the ad hoc committee will support the Plan. There can be no assurances, however,
that the Plan will be accepted by the requisite creditors or confirmed by the Bankruptcy Court.
The Plan and disclosure statement filed by the Company with the Bankruptcy Court were included as
Exhibits 10.1 and 10.2 to the Companys Form 8-K filed with the Securities and Exchange Commission
on November 7, 2005.
These unaudited consolidated financial statements have been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7 Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). Pursuant to SOP 90-7, the
Companys pre-petition liabilities that are subject to compromise are reported separately on the
balance sheet as an estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
The following table sets forth the liabilities subject to compromise as of September 30, 2005:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(In thousands) |
|
Current maturities of long-term debt |
|
$ |
176,067 |
|
Accounts payable |
|
|
7,746 |
|
Accrued wages and benefits |
|
|
576 |
|
Interest payable |
|
|
12,811 |
|
Deferred product revenue |
|
|
|
|
Other accrued liabilities |
|
|
22,571 |
|
|
|
|
|
|
|
$ |
219,771 |
|
|
|
|
|
The following table reconciles the liabilities subject to compromise from June 30, 2005 to
September 30, 2005:
|
|
|
|
|
Balance at June 30, 2005 |
|
$ |
235,015 |
|
Settlement of minimum purchase commitment |
|
|
(11,695 |
) |
Bankruptcy Court approved settlement |
|
|
(1,032 |
) |
Other adjustments |
|
|
(2,517 |
) |
|
|
|
|
Balance at September 30, 2005 |
|
$ |
219,771 |
|
|
|
|
|
Because of the ongoing nature of the Chapter 11 Cases, the consolidated financial statements
contained herein are subject to material uncertainties and may not be indicative of the results of
the Companys future operations
11
or financial position. No assurance can be given that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy proceedings.
As a result of the items discussed above, there is substantial doubt about the Companys ability to
continue as a going concern. The ability of the Company to continue as a going concern is
dependent upon, but not limited to, formulation, approval and confirmation of a plan of
reorganization and the ability to obtain positive results of operations. The consolidated
financial statements contained herein have been prepared in accordance with generally accepted
accounting principles applicable to a going concern. The consolidated financial statements do not
include any adjustments to the recorded amounts or reflect any amounts that may be ultimately paid
to settle liabilities and contingencies which may be required in the Chapter 11 reorganization or
the effect of any changes, which may be made in connection with the Companys operations resulting
from a plan of reorganization.
Asset Sale
On July 25, 2005, the Company completed the sale of substantially all of the assets of the
Companys Pharmaceuticals Division to Xanodyne Pharmaceuticals, Inc. (Xanodyne). The Company had
previously received approval of the transaction on July 18, 2005 from the Bankruptcy Court.
Under the terms of the agreement, Xanodyne paid $209.25 million upon closing of the transaction,
with $8 million of that amount paid to an escrow account to satisfy AAIPharmas post-closing
obligations. AAIPharma used a portion of the proceeds of the sale to repay the outstanding term
and revolver loans under its debtor-in-possession financing facility. A portion of the remaining
proceeds was used to pay fees and expenses arising from the transaction, including payments to cure
defaults under contracts assigned to Xanodyne in the sale. The escrow account is reflected on the
consolidated balance sheet as restricted cash. The restricted cash balance represents amounts
still available to satisfy the Companys post-closing obligations or, in the absence of chargeable
obligations against the escrow during its remaining duration, payment over to the Company.
In addition, and as part of the sale transaction, AAIPharma is entitled to receive royalties based
on future sales of certain development stage products, if those products are successfully
developed, approved and commercially launched. Xanodyne also committed to purchase a minimum of
$20 million of services to be provided by AAIPharmas Development Services Division over the next
three years, and an additional $10 million over that period if certain milestones are achieved on a
specifically identified pipeline product. There can be no assurance that such milestones will be
met, particularly in light of certain delays in the development program which may result in
regulatory delays. The Company also entered into a seven-year manufacturing agreement for certain
of the products acquired by Xanodyne.
The Company recorded a gain on the sale of these assets of $29.0 million. The gain on the sale was
based on the net cash received, including the amount in escrow, less the book value of the
intangible assets, inventories and other items related to the product lines sold. The gain also
included an amount assigned to the services agreements discussed above. This amount has been
recorded as an intangible asset and will be amortized over the period that services are rendered to
Xanodyne.
Reorganization Expenses
In the three and nine months ended September 30, 2005, the Company recorded $4.0 million and $11.3
million, respectively, of legal, financial and consulting professional fees associated with debt
restructuring and reorganization activities, and expects that these expenses will continue to be
significant through the pendency of the Chapter 11 Cases.
12
Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which amends SFAS 123, and
supersedes APB 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation
expense to be recognized for all share-based payments made to employees based on the fair value of
the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS 123.
SFAS 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values (i.e., pro forma
disclosure is no longer an alternative to financial statement recognition). SFAS 123(R) must be
adopted in the first annual period beginning after June 15, 2005.
The Company currently plans to adopt SFAS 123(R) on January 1, 2006. This change in accounting is
not expected to materially impact the Companys financial position. However, because the Company
currently accounts for share-based payments to its employees under APB No. 25, the results of
operations have not included the recognition of compensation expense for the issuance of stock
option awards. Had the Company applied the fair-value criteria established by SFAS 123(R) to
previous stock option grants, the impact to its results of operations would have approximated the
impact of applying SFAS 123, which was a reduction to net income of approximately $0.8 million and
$1.0 million in the three months ended September 30, 2005 and 2004, respectively, and $3.6 million
and $4.6 million in the nine months ended September 30, 2005 and 2004, respectively.
No other recently issued, but not yet effective, accounting standards are believed to have a
material impact on the Company.
2. M.V.I. and Aquasol Product Line Sale and Contingent Payment
On April 26, 2004, the Company sold its M.V.I. and Aquasol product lines to Mayne Pharma (USA) Inc.
for $105 million, subject to certain adjustments based on inventory levels at closing and other
post-closing obligations (the M.V.I. and Aquasol Sale). A portion of the closing payment was held
in escrow to satisfy post-closing obligations under the agreement. The Company received
approximately $1.6 million from this escrow in September 2004 and does not anticipate receiving any
additional payments out of this escrow. The M.V.I. and Aquasol Sale resulted in a gain of $39.1
million that the Company recorded in the second and third quarters of 2004. The gain on the sale
was based on the net cash received from the sale less the book value of the intangible assets,
inventories and other items related to the product lines sold.
The Companys M.V.I. and Aquasol product line acquisition agreement with AstraZeneca AB, as
amended, provided for a future contingent payment of $43.5 million potentially due in August 2004,
depending on the status of certain reformulation activities being carried out by the seller and
regulatory approval of the reformulations by the U.S. Food and Drug Administration. The amount of
the $43.5 million contingent payment was to be reduced by $1 million per month if the conditions
for the contingent payment had not occurred by December 31, 2002. The amount of the contingent
payment had decreased by $12.0 million by December 31, 2003. Such conditions were satisfied in
January and February 2004, fixing the previously contingent liability under the amendment at $31.5
million. The Company recorded this expense in the first quarter of 2004. As a result of an
amendment to the original acquisition agreement, the Company was precluded from recognizing this
obligation (the M.V.I. Contingent Payment) as additional purchase price for the M.V.I. and
Aquasol product lines; therefore, this adjustment was expensed in the first quarter of 2004. As
discussed above, the Company sold its M.V.I. and Aquasol product lines on April 26, 2004.
Concurrently with the closing of the M.V.I. and Aquasol Sale on April 26, 2004, the Company paid to
AstraZeneca AB the M.V.I. Contingent Payment, which was discounted to approximately $31.0 million
as a result of the early payment.
13
3. Income taxes
The Company recorded no net U.S. federal income tax benefit or expense in the three and nine months
ended September 30, 2005, primarily as a result of a forecasted net loss before taxes for the year
ended December 31, 2005. Any tax benefit would be offset by a valuation allowance for the entire
amount because it is more likely than not that the deferred tax asset resulting from this benefit
will not be realized.
4. Income (loss) per share
Basic income (loss) per share is based on the weighted average number of common shares outstanding
during the year. Diluted income (loss) per share is computed assuming that the actual weighted
average number of common shares outstanding was increased by the exercise of stock options issued
to employees and members of the Companys Board of Directors under the treasury stock method. The
diluted per share amounts reflect a change in the number of shares outstanding (the denominator)
to include the options as if they were exercised and converted to shares and issued, unless their
inclusion would be anti-dilutive. During the three and nine months ended September 30, 2004, no
options and approximately 360,000 options, respectively, were exercised for aggregate proceeds to
the Company of $3.6 million. No options were exercised in the three and nine months ended
September 30, 2005. In the three months ended September 30, 2005, 5.3 million options had no
dilutive effect due to their exercise prices being in excess of the market price of the Companys
common stock. In the three months ended September 30, 2004, 5.2 million options were excluded as
they were anti-dilutive. In the nine months ended September 30, 2005 and 2004, 6.1 million and 4.4
million options, respectively, were excluded as they were anti-dilutive.
The following table provides a reconciliation of the denominator for the basic and diluted earnings
(loss) per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares |
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average number of
shares and assumed conversions |
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,586 |
|
|
|
28,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Financial information by business segment and geographic area
Prior to the Companys sale of substantially all of the assets of its Pharmaceuticals Division on
July 25, 2005, as discussed in Note 1, the Company operated in three business segments consisting
of a product sales business, primarily comprised of its Pharmaceuticals Division, a product
development business, primarily the research and development business unit, and a development
services business, primarily the AAI Development Services business unit. The product sales
business provided for the sales of the Companys pharmaceutical product lines. In the product
development segment, the Company internally develops drugs and technologies for future sales by the
product sales business or with the objective of licensing marketing rights to third parties in
exchange for license fees and royalties. The core services provided by the development services
business on a fee-for-service
14
basis to pharmaceutical and biotechnology industries worldwide include comprehensive formulation,
testing and manufacturing expertise, in addition to the ability to take investigational products
into and through human clinical trials. As discussed in the Form 10-Q for the quarter ended March
31, 2005, the operational structure of the Company has been reorganized as a result of the transfer
of all research and development business unit employees to either the Pharmaceuticals Division or
the Development Services Division, however, the financial information for three segments was still
reported to the chief executive officer. Therefore, the Company continues to have three reportable
segments for the period ended September 30, 2005. The majority of the Companys non-U.S.
operations are located in Germany.
Corporate income (loss) from operations includes general corporate overhead costs which are not
directly attributable to a business segment. Financial data by segment and geographic region are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
3,263 |
|
|
$ |
13,520 |
|
|
$ |
34,316 |
|
|
$ |
59,734 |
|
Product development (milestones
and
royalties) |
|
|
282 |
|
|
|
4,481 |
|
|
|
8,326 |
|
|
|
14,522 |
|
Development services |
|
|
18,588 |
|
|
|
23,054 |
|
|
|
58,621 |
|
|
|
72,529 |
|
Reimbursed out-of-pockets |
|
|
1,823 |
|
|
|
4,631 |
|
|
|
6,866 |
|
|
|
13,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,956 |
|
|
$ |
45,686 |
|
|
$ |
108,129 |
|
|
$ |
160,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
18,060 |
|
|
$ |
39,912 |
|
|
$ |
91,406 |
|
|
$ |
142,140 |
|
Germany |
|
|
5,855 |
|
|
|
5,755 |
|
|
|
16,794 |
|
|
|
18,253 |
|
Other |
|
|
95 |
|
|
|
191 |
|
|
|
570 |
|
|
|
1,095 |
|
Less intercompany |
|
|
(54 |
) |
|
|
(172 |
) |
|
|
(641 |
) |
|
|
(1,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,956 |
|
|
$ |
45,686 |
|
|
$ |
108,129 |
|
|
$ |
160,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
28,671 |
|
|
$ |
(7,090 |
) |
|
$ |
37,915 |
|
|
$ |
(7,096 |
) |
Product development (milestones
and
royalties) |
|
|
282 |
|
|
|
4,481 |
|
|
|
8,326 |
|
|
|
14,522 |
|
Development services |
|
|
(1,691 |
) |
|
|
(5,004 |
) |
|
|
(604 |
) |
|
|
(4,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,262 |
|
|
|
(7,613 |
) |
|
|
45,637 |
|
|
|
3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
(514 |
) |
|
|
(3,748 |
) |
|
|
(3,525 |
) |
|
|
(14,663 |
) |
Corporate |
|
|
(7,757 |
) |
|
|
(10,265 |
) |
|
|
(24,401 |
) |
|
|
(29,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,991 |
|
|
$ |
(21,626 |
) |
|
$ |
17,711 |
|
|
$ |
(41,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
18,985 |
|
|
$ |
(21,963 |
) |
|
$ |
17,540 |
|
|
$ |
(43,110 |
) |
Germany |
|
|
176 |
|
|
|
493 |
|
|
|
586 |
|
|
|
1,850 |
|
Other |
|
|
(170 |
) |
|
|
(156 |
) |
|
|
(415 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,991 |
|
|
$ |
(21,626 |
) |
|
$ |
17,711 |
|
|
$ |
(41,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
1,029 |
|
|
$ |
4,240 |
|
|
$ |
7,083 |
|
|
$ |
12,629 |
|
Development services |
|
|
1,583 |
|
|
|
1,322 |
|
|
|
3,980 |
|
|
|
3,703 |
|
Research and development expense |
|
|
70 |
|
|
|
145 |
|
|
|
247 |
|
|
|
347 |
|
Corporate |
|
|
507 |
|
|
|
632 |
|
|
|
1,420 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,189 |
|
|
$ |
6,339 |
|
|
$ |
12,730 |
|
|
$ |
18,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Total assets: |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
12,350 |
|
|
$ |
233,682 |
|
Product development (milestones and royalties) |
|
|
1,380 |
|
|
|
14,777 |
|
Development services |
|
|
54,537 |
|
|
|
51,939 |
|
Corporate |
|
|
45,748 |
|
|
|
38,672 |
|
|
|
|
|
|
|
|
|
|
$ |
114,015 |
|
|
$ |
339,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
87,093 |
|
|
$ |
308,018 |
|
Germany |
|
|
26,312 |
|
|
|
29,077 |
|
Other |
|
|
610 |
|
|
|
1,975 |
|
|
|
|
|
|
|
|
|
|
$ |
114,015 |
|
|
$ |
339,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net: |
|
|
|
|
|
|
|
|
Development services |
|
$ |
12,898 |
|
|
$ |
14,350 |
|
|
|
|
|
|
|
|
6. Accounts receivable, net
The following table presents the components of accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Gross accounts receivable |
|
$ |
20,156 |
|
|
$ |
39,885 |
|
Allowance for uncollectible accounts |
|
|
(2,912 |
) |
|
|
(2,564 |
) |
Allowance for customer credits |
|
|
(9,394 |
) |
|
|
(24,565 |
) |
|
|
|
|
|
|
|
Total accounts receivable, net |
|
$ |
7,850 |
|
|
$ |
12,756 |
|
|
|
|
|
|
|
|
16
7. Inventories, net
The following table presents the components of inventories:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Finished goods |
|
$ |
1,220 |
|
|
$ |
11,613 |
|
Work-in-process |
|
|
83 |
|
|
|
799 |
|
Raw materials and supplies |
|
|
3,531 |
|
|
|
5,747 |
|
Inventory reserves |
|
|
(1,712 |
) |
|
|
(7,437 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
3,122 |
|
|
$ |
10,722 |
|
|
|
|
|
|
|
|
8. Debt
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Current maturities of long-term debt |
|
$ |
|
|
|
$ |
351,645 |
|
|
|
|
|
|
|
|
The following table presents the components of long-term debt:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Term loan |
|
$ |
|
|
|
$ |
165,000 |
|
Revolving credit facility |
|
|
|
|
|
|
10,500 |
|
11% senior subordinated notes due 2010, net of original issue
discount |
|
|
174,300 |
|
|
|
174,249 |
|
Interest rate swap monetization deferred income, net |
|
|
1,767 |
|
|
|
1,896 |
|
Fair value of interest rate swap |
|
|
|
|
|
|
|
|
Less liabilities subject to compromise |
|
|
(176,067 |
) |
|
|
|
|
Less current maturities of long-term debt |
|
|
|
|
|
|
(351,645 |
) |
|
|
|
|
|
|
|
Total long-term debt due after one year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
In March 2002, the Company issued $175 million of senior subordinated notes due April 1, 2010. The
proceeds from the issuance of these notes were $173.9 million, which was net of the original issue
discount. These notes initially had a fixed interest rate of 11% per annum and are guaranteed on a
subordinated basis by all existing domestic subsidiaries and all future domestic subsidiaries that
are owned 80% or more by the Company. When issued, the notes were not secured.
In April 2004, following the completion of a solicitation seeking the consent of holders of its
senior subordinated notes, the Company entered into a supplemental indenture to, among other
things, grant a lien to secure the Companys obligations under the senior subordinated notes, which
lien was junior to the liens securing the Companys then-existing senior credit facilities but
covered the same collateral, and to increase the interest rate of the senior subordinated notes
from 11% per annum to 11.5% per annum effective April 1, 2004.
On October 29, 2004, the Company, following the completion of a solicitation seeking the consent of
holders of its senior subordinated notes, entered into an additional supplemental indenture to,
among other things:
|
|
provide that the liens on assets that secure obligations under the senior subordinated
notes will continue if all senior debt is repaid, but will resume as junior liens if the
Company thereafter incurs any new senior debt; and |
17
|
|
temporarily increase the interest rate on the senior subordinated notes by 0.5% per annum
(to 12% per annum), commencing to accrue on October 1, 2004 and ending on March 31, 2005. |
The filing of the Chapter 11 Cases constituted an event of default under the senior subordinated
notes. The indenture governing the notes provides that as a result of this event of default, the
outstanding amount of the notes became immediately due and payable without further action by any
holder of the notes or the trustee under the indenture. In addition, the continuing failure of the
Company to pay the interest payment due on the notes on April 1, 2005 within 30 days thereafter
also constituted an event of default under the notes permitting acceleration thereof. However, the
filing of the Chapter 11 Cases stayed all actions by the noteholders with respect to such defaults.
The Company ceased accruing interest on the senior subordinated notes upon the filing of the
Chapter 11 Cases and also stopped amortizing deferred debt issuance costs related to these notes.
Interest expense would have been higher by $5.7 million and $8.9 million for the three and nine
months ended September 30, 2005, respectively, had the Company not ceased accruing interest and
amortizing these deferred debt issuance costs. The Bankruptcy Court order approving the DIP
Facilities, described below, granted, as adequate protection for use during the pendency of the
Chapter 11 Cases of the collateral securing the notes prior to the filing of the Chapter 11 Cases,
second priority post-petition liens on all of the assets of the Company to secure the notes in an
amount equal to the aggregate diminution in the value or amount of the lenders interest in such
collateral. Such liens were made subject to the liens securing the DIP Facilities and certain
other permitted priority liens, fees and expenses.
On April 23, 2004, AAIPharma entered into $140 million of senior credit facilities with a syndicate
of lenders, Silver Point Finance LLC (Silver Point) as collateral agent, and Bank of America,
N.A., as administrative agent. These senior credit facilities consisted of a two-year, $125
million senior secured term loan facility, which was fully drawn at closing, and a two-year, $15
million senior secured revolving credit facility, of which the entire amount was available for
borrowing at closing. These senior credit facilities were secured by a security interest on
substantially all of the Companys domestic assets, all of the stock of domestic subsidiaries and
65% of the stock of material foreign subsidiaries.
Through a series of amendments, waivers and consents, the size of these senior secured credit
facilities was increased to consist of a term loan of $165 million and a revolving credit facility
of up to $15 million, of which approximately $179.3 million was outstanding immediately prior to
the filing of the Chapter 11 Cases.
The filing of the Chapter 11 Cases constituted an event of default under these senior credit
facilities. The credit agreement for these senior credit facilities provided that as a result of
this event of default, all commitments under the senior credit facilities were automatically
terminated and all debt outstanding under the facilities became automatically and immediately due
and payable. In addition, as of the expiration of a forbearance period on May 1, 2005, other
events of default existed under these senior credit facilities that would have permitted the
acceleration of the indebtedness thereunder. However, the filing of the Chapter 11 Cases stayed
all actions by the noteholders with respect to such defaults.
In connection with the filing of the Chapter 11 Cases, on May 12, 2005, the Company and its
domestic subsidiaries received interim approval of the Bankruptcy Court for, and entered into, a
financing agreement (the DIP Facilities) with Silver Point Finance, LLC, as collateral agent,
Bank of America, N.A., as a lender and as administrative agent and Sea Pines Funding LLC, TRS Thebe
LLC, SIL Loan Funding LLC, SPCP Group LLC, SPF CDO I, LLC and Goldman Sachs Credit Partners, L.P.,
as lenders. The DIP Facilities provided a $15 million interim, 30-day revolving credit facility to
meet immediate liquidity needs of the Company. Upon final
approval of the DIP Facilities by the Bankruptcy Court (which was received on June 3, 2005), the
DIP Facilities consisted of a revolving credit facility in an aggregate principal amount not to
exceed $30 million and a term loan facility in the aggregate principal amount of $180 million.
18
The proceeds of the DIP Facilities were used to repay in full the Companys obligations under its
then-existing senior credit facilities (described above) on June 7, 2005, and to pay fees and
expenses in connection with the DIP Facilities, and will continue to be used to fund the Companys
working capital and general corporate requirements while the Chapter 11 Cases are pending. The
term loan facility bore interest at an annual rate of LIBOR plus 8.25% or an annual reference rate
plus 7.25%, increasing by 1% three months after a sale of the Companys Pharmaceuticals Division
or, if earlier, six months after the closing of the interim facility under the DIP Facilities, and
then again every three months thereafter. The revolving credit facility bears interest at an
annual rate of LIBOR plus 5% or an annual reference rate plus 4%, increasing by 0.5% three months
after a sale of the Companys Pharmaceuticals Division or, if earlier, six months after the closing
of the interim facility under the DIP Facilities, and then again every three months thereafter. On
September 30, 2005, 30-day LIBOR was 3.86%. In addition, the Company became obligated to pay
certain fees to the lenders, as described in separate agreements.
The DIP Facilities are scheduled to mature twelve months after the closing thereof; however, the
Company would be obligated to repay the DIP Facilities earlier upon completion of a plan of
reorganization of the Company that had been confirmed by an order of the Bankruptcy Court. The DIP
Facilities also require mandatory prepayment with the net cash proceeds of non-ordinary course
asset sales, including the sale of the Companys Pharmaceuticals Division, extraordinary receipts
and any payments made to the lenders under the Companys existing credit facility that are required
to be disgorged to the Company in the Chapter 11 Cases.
On July 25, 2005, the entire term loan portion of the DIP Facilities was paid off from the proceeds
of the sale of substantially all of the assets of the Companys Pharmaceuticals Division and all
outstanding loans under the revolving credit portion of the DIP Facilities were repaid as well.
Only the $30 million revolving credit facility remains available under the DIP Facilities, which
amount, at September 30, 2005, was subject to a $3.6 million reserve against availability.
Obligations under the DIP Facilities are secured by:
|
|
|
100% of the capital stock of the Companys domestic subsidiaries; |
|
|
|
|
65% of the capital stock of the Companys first-tier foreign subsidiaries; and |
|
|
|
|
All of the Companys assets and the assets of the Companys existing and future
domestic subsidiaries. |
The obligations under the DIP Facilities are entitled to super-priority administrative expense
claim status under the Bankruptcy Code, subject to the payment of (i) a fee payable to Rothschild
Inc. in connection with the sale of the assets of the Companys Pharmaceuticals Division and (ii) a
basket of professional fees permitted by the Bankruptcy Court in the Chapter 11 Cases. The DIP
Facilities will generally permit the ordinary course payment of professionals and administrative
expenses prior to the occurrence of an event of default under the DIP Facilities or a default under
the bankruptcy court orders approving the DIP Facilities. The Bankruptcy Court order approving the
DIP Facilities authorized the Company to use its cash (which secures the obligations under the DIP
Facilities) in accordance with the restrictions of the DIP Facilities, which generally permit
ordinary course uses of cash.
9. Other Accrued Liabilities and Restructuring Charges
The following table represents the components of other accrued liabilities:
19
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Reserve for restructuring |
|
$ |
11,153 |
|
|
$ |
14,953 |
|
Consignment inventory returns reserve |
|
|
8,524 |
|
|
|
12,412 |
|
Guaranteed purchase commitments |
|
|
|
|
|
|
11,695 |
|
Advance royalty payments |
|
|
|
|
|
|
7,209 |
|
Other |
|
|
6,469 |
|
|
|
5,212 |
|
Less liabilities subject to compromise |
|
|
(22,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities, net |
|
$ |
3,575 |
|
|
$ |
51,481 |
|
|
|
|
|
|
|
|
The restructuring reserve represents pre-petition liabilities and has been reclassed to be included
in liabilities subject to compromise on the consolidated balance sheet for September 30, 2005.
In June and September 2004, the Company announced and implemented restructuring plans, which
included work force reductions, separation payments to the former chief executive officer and a
facility closure plan. The Company recorded expenses of $3.4 million and $13.7 million,
respectively, primarily representing severance costs and related employee-benefit related expenses
and costs for leased facilities and aircraft which are no longer in use. The facilities included
the Companys New Jersey lab facility, along with smaller facilities in North Carolina and
California.
The following table represents the components of the restructuring reserve (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
Less |
|
|
September 30, |
|
|
|
2004 |
|
|
|
|
|
|
Payments/ |
|
|
2005 |
|
|
|
Balance |
|
|
Charges |
|
|
Write-downs |
|
|
Balance |
|
Lease costs, net of estimated sub-lease income |
|
$ |
10,277 |
|
|
$ |
|
|
|
$ |
(1,547 |
) |
|
$ |
8,730 |
|
Severance costs |
|
|
4,082 |
|
|
|
|
|
|
|
(1,834 |
) |
|
|
2,248 |
|
Other costs |
|
|
594 |
|
|
|
|
|
|
|
(419 |
) |
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,953 |
|
|
$ |
|
|
|
$ |
(3,800 |
) |
|
$ |
11,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Intangible Asset Impairment
In the second quarter of 2005, the Company recorded an asset impairment charge of $1.2 million
related to writing-down the remaining intangible assets related to its Brethine product. Brethine
was not included in the assets sold to Xanodyne. In the third quarter of 2004, and as a result of
the introduction of generic competition for our Brethine product, the Company performed a
discounted cash flow analysis of the carrying value of the intangible assets associated with the
product line. The Company determined that the intangible assets were impaired and recorded an
impairment charge of $5.3 million.
11. Commitments and Contingencies
The Company may have to make contingent payments of $4.7 million over three years in connection
with the purchase of its Charleston, South Carolina manufacturing facility, based on the level of
manufacturing revenues at this facility. At September 30, 2005, these contingent payment
obligations are not liabilities and have not been recorded on the Companys consolidated balance
sheet.
On May 10, 2005 (the Filing Date), the Debtors filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code with the Bankruptcy Court in the Chapter 11 Cases. On June 24, 2005, the
Debtors filed their schedules of assets and liabilities (the Schedules) with the Bankruptcy
Court. On June 27, 2005, the Court
20
entered an order setting August 19, 2005 as the deadline (the
General Bar Date) for all creditors, other than governmental agencies, to file proofs of claim
against the Debtors, setting forth the amounts to which the claimants contend that they are
entitled, subject to the rights of the Debtors to contest both the validity and amount of the
claims. The Court also set November 7, 2005 as the deadline (the Governmental Bar Date) for
governmental entities to file their proofs of claim.
As a result of the commencement of the Chapter 11 Cases, pursuant to Section 362 of the Bankruptcy
Code, all litigation pending against the Debtors as of the Filing Date were automatically stayed
against the Debtors. In order to preserve any causes of action or potential causes of action
against the Debtors based on pre-Filing Date conduct, parties were required to file proofs of claim
asserting such claims against the Debtors prior to the General Bar Date or the Governmental Bar
Date, as applicable. Pursuant to the Bankruptcy Code, the Debtors will have the ability to dispute
both the validity and amount of any such claims in the Chapter 11 Cases.
As part of its reorganization process, on November 4, 2005, the Debtors filed a Chapter 11 plan
(and corresponding disclosure statement) in the Chapter 11 Cases. A Chapter 11 plan sets forth,
among other things, the proposed distributions to be made, if any, to holders of secured and
unsecured claims against a debtor and to holders of equity interests in the debtor.
The Plan, as filed by the Debtors in the Chapter 11 Cases, contemplates, among other things, that
100% of the equity of the reorganized Company (subject to dilution from a potential employee equity
incentive plan) would be distributed to secured noteholders of the Company and the secured notes
would be canceled, $4.0 million in cash and the Companys litigation causes of action against KUDCO
and Athlon Pharmaceuticals would be distributed to a litigation trust for the benefit of the
Companys unsecured creditors, and the existing common stock of AAIPharma Inc. would be cancelled,
among other provisions. In addition, the Company will pay $0.2 million to a plan administrator to
be selected by the Companys unsecured creditors to fund the claims objection and allowance process
with respect to unsecured claims. In order to emerge from Chapter 11, the Debtors will need to (a)
obtain Bankruptcy Court approval of the adequacy of the Debtors disclosure statement filed with
the Plan, (b) obtain approval of the Plan by a vote of its noteholders and unsecured creditors, and
(c) obtain confirmation of the Plan by the Bankruptcy Court. The hearing to consider the
adequacy of the disclosure statement is scheduled for December 2, 2005. The Plan, as filed, is the
result of extensive negotiations among the Company, the official committee of unsecured creditors
and the advisors to an ad hoc committee of the Companys secured noteholders. The Plan has the
support of the official committee of unsecured creditors and based upon discussions with the
advisors to the ad hoc committee, the Company believes that the ad hoc committee will support the
Plan. There can be no assurances, however, that the Plan will be accepted by the requisite
creditors or confirmed by the Bankruptcy Court.
In April 2004, in connection with an investigation conducted by the United States Attorneys Office
for the Western District of North Carolina (the U.S. Attorneys Office), the Company received
federal grand jury subpoenas for document production and potential testimony related to, among
other things, certain transactions regarding its 2002 and 2003 financial information, the terms,
conditions of employment and compensation arrangements of certain of its senior management
personnel, compensation and incentive arrangements for employees responsible for the sale of its
Brethine, Darvocet, calcitriol, azathioprine and Darvon Compound products, quantities of the
foregoing products in distribution channels, financial benefits with respect to specified corporate
transactions to its senior management and others, certain loans obtained by the Company, extensions
of credit, if any, by AAIPharma to officers or directors, accounting for sales and returns of the
Companys foregoing products, its analysts conference calls on financial results, internal and
external investigations of pharmaceutical product sales activities, and related matters. The
Securities and Exchange Commission (the SEC) also commenced an investigation, and the Company
received a subpoena from the SEC covering similar matters. In addition, both the U.S. Attorneys
Office and the SEC made informal requests
21
for documents and other information related to these
matters. In July 2004, the Company shared the results of its internal review with representatives
from the U.S. Attorneys Office and the SEC in response to their requests and the SEC subpoena.
Following the filing of its voluntary petition for Chapter 11 reorganization on the Filing Date,
the Company has continued to cooperate with these government investigations and has continued to
voluntarily produce documents to the U.S. Attorneys Office and to the SEC in response to government
requests. Certain of the Companys current and former officers, directors and
employees have received subpoenas to appear before the federal grand jury or requests to provide
information to the U.S. Attorneys Office. A former officer of the Company, David M. Hurley, has
pled guilty to charges that he conspired to commit wire, mail and securities fraud, to falsify
books and records, and to falsify statements to the government in violation of 18 U.S.C. Section
371. He faces a maximum sentence of five years in prison and a fine of $250,000. Without
admitting or denying the allegations, Mr. Hurley also settled a civil action brought against him by
the SEC for violations of certain securities laws. The U.S. Attorneys Office, SEC and other
government agencies that are investigating or might commence an investigation of the Company could
impose, based on a claim of fraud, material misstatements or omissions, violation of false claims
law or otherwise, civil and/or criminal sanctions, including fines, penalties, and/or
administrative remedies. If any government sanctions are imposed, which the Company cannot predict
or reasonably estimate at this time, AAIPharmas business and financial condition, results of
operations or cash flows could be materially adversely affected. These matters have resulted, and
may result in the future, in a significant diversion of managements attention and resources and in
significant professional fees. The Company has in the past agreed to advance expenses reasonably
incurred by certain of its current directors and current and former officers in connection with
these investigations. This advancement of expenses was conditioned upon the execution by such
persons of undertakings to assist and cooperate with the Company in connection with the
investigations and to repay to the Company any advanced funds in the event that (i) AAIPharma
determines that certain representations made by such directors and officers are inaccurate, (ii)
AAIPharma is prohibited from providing indemnification to such directors or officers pursuant to
Delaware law or its organizational documents, or (iii) such directors or officers stop cooperating
with AAIPharma on the investigations. The Company has obtained authorization from the Bankruptcy
Court to continue to pay certain defense costs, subject to a number of conditions.
The Company, certain of its current and former officers and directors, and its former independent
registered public accountants have been named as defendants in purported stockholder class action
lawsuits alleging violations of federal securities laws. These lawsuits were filed beginning in
February 2004 and are pending in the U.S. District Court for the Eastern District of North
Carolina. By order dated April 16, 2004, the district court consolidated the securities lawsuits
into one consolidated action, and on February 11, 2005 the plaintiffs filed a consolidated amended
complaint. The amended securities complaint asserts claims arising under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 there under on behalf of a class of
purchasers of the Companys common stock during the period from April 24, 2002 through and
including June 15, 2004 (the Class Period). The securities complaints allege generally that the
defendants knowingly or recklessly made false or misleading statements during the Class Period
concerning the Companys financial condition and that the Companys financial statements did not
present its true financial condition and were not prepared in accordance with generally accepted
accounting principles. The amended securities complaint seeks certification as a class action,
unspecified compensatory damages, attorneys fees and costs, and other relief. The Company has not
yet replied to the complaint in this litigation, which response was originally due by May 26, 2005.
However, this case has been automatically stayed as a result of the commencement of the Chapter 11
Cases. No discovery has yet occurred in this case. No trial date has been set in this litigation.
The Company believes that the claims asserted in the securities litigation are subject to
subordination under section 510(b) of
the Bankruptcy Code, and as such, the Plan treats these claims as Old Equity Interests, as
defined in the Plan, which receive no distributions.
22
A stockholder derivative suit was filed in the United States District Court for the Eastern
District of North Carolina on August 26, 2004 by two putative shareholders against current and
former members of the Companys Board of Directors and senior management. AAIPharma is named as a
nominal defendant. The complaint alleges that the individual director and officer defendants
breached fiduciary and contractual obligations to the Company by implementing an inadequate system
of internal controls, and causing the Company to issue false and misleading statements exposing it
to securities fraud liability, and that certain defendants engaged in insider trading. The
complaint seeks unspecified compensatory damages, attorneys fees and costs, and other relief.
Plaintiffs did not make any demand on the Board of Directors prior to bringing this litigation. On
March 15, 2005, the court entered the parties stipulated pretrial scheduling order. Pursuant to
the order, the individual defendants are not required to respond to the current complaint. The
order provides that the plaintiffs are required to file an amended complaint no later than 60 days
following entry of an order granting or denying the individual defendants motion to dismiss in the
related securities litigation class action. To date, no such order has been entered in the
securities litigation class action. This litigation is currently stayed as a result of the filing
of the Chapter 11 Cases.
In addition, the Company and certain of its current and former directors, officers and employees
have been named in a purported class action brought in U.S. District Court for the Eastern District
of North Carolina by an AAIPharma pension plan participant and beneficiary asserting claims under
ERISA on behalf of a class of all persons who are or were participants or beneficiaries of the
AAIPharma Inc. Retirement and Savings Plan during the period from April 24, 2002 to June 15, 2004.
An amended complaint was filed on March 14, 2005 which alleges generally that the defendants
breached fiduciary duties owed under ERISA with respect to the prudence and lack of diversification
of investment of plan assets in the Companys common stock, by misleading participants and
beneficiaries of the plan regarding the Companys earnings, prospects, and business condition, by
failing to act in the sole interest of plan participants, and by failing to monitor the actions of
other plan fiduciaries. The complaint seeks certification as a class action, unspecified
compensatory damages, attorneys fees and costs, and other equitable relief. The proceedings in
this matter will be coordinated with the securities lawsuits described above. This ERISA lawsuit
is at an early stage, and no answer is currently required to be filed by the Company due to the
existence of the automatic stay resulting from the filing of the Chapter 11 Cases. A limited
amount of discovery has occurred in this lawsuit. No trial date has been set. The Company
believes that the claims asserted in the ERISA litigation are subject to subordination under
section 510(b) of the Bankruptcy Code, and as such, the Plan treats these claims as Old Equity
Interests that receive no distributions.
By, and subject to, the terms of the Companys bylaws, the Company has certain obligations to
indemnify its current and former officers, directors and employees who have been named as
defendants in the lawsuits noted above. Any such indemnification would, however, be a pre-petition
liability, and would be treated in accordance with the terms of the Plan. The Company has
purchased directors and officers liability insurance (D&O insurance) that may provide coverage
for some or all of the securities class action lawsuits and governmental investigations. The
primary D&O carrier has denied coverage for the Company and for David Hurley. It has not at this
time denied coverage with respect to the other individual defendants in the securities class action
litigations. The two excess D&O insurance carriers have also reserved their rights to rescind
their excess policies. The Companys fiduciary liability insurance carrier has denied
coverage of claims made in connection with the ERISA litigation complaint.
The Company is a party to a number of legal actions with generic drug companies. The Company is
involved in two lawsuits centered on its omeprazole-related patents, including one lawsuit brought
by it against an alleged
infringer of its patents and another lawsuit which was brought by a third party against the Company
and is currently essentially inactive. Omeprazole is the active ingredient found in Prilosec, a
drug sold by AstraZeneca PLC.
23
An omeprazole-related case has been filed against the Company by Dr. Reddys Laboratories Ltd. and
Reddy-Cheminor Inc. (collectively, Dr. Reddy) in the U.S. District Court for the Southern
District of New York in November 2001. The plaintiffs in this case have challenged the validity of
five patents that AAIPharma has obtained relating to omeprazole and are seeking a declaratory
judgment that their generic form of Prilosec does not infringe these patents. Additionally, they
have alleged misappropriation of trade secrets, tortious interference, unfair competition and
violations of the North Carolina Unfair Trade Practice Act. The Company has denied the substantive
allegations made in these cases. While these plaintiffs have sought approval from the FDA to
market a generic form of Prilosec, to the best of the Companys knowledge as of November 1, 2005,
no such FDA approval has been granted to them. In addition, these plaintiffs omeprazole product
has been found in separate litigation to infringe certain patents of AstraZeneca and the
infringement findings have been upheld on appeal. A second lawsuit brought by the plaintiffs
involving omeprazole was filed against the Company in July 2001 and was dismissed without prejudice
in March 2005.
This lawsuit is in its initial stages and the parties have filed their initial pleadings, but no
discovery has yet occurred, no date has been set for trial, and the lawsuit has been inactive for
an extended period. The parties have reached an oral understanding to file a stipulated dismissal
without prejudice and without cost, but such dismissal has not yet been filed. In the event that
the litigation is not settled on terms acceptable to the Company and becomes active hereafter, the
Company intends to defend the patents validity and the allegations by Dr. Reddy and to determine
whether or not Dr. Reddys product infringes any of AAIPharmas relevant patents. As a
pre-petition claimant, should Dr. Reddys claim be deemed or adjudicated to be allowed i.e.,
entitled to recovery on its claims the recovery on account of such claim will be determined by
the Plan.
The other lawsuit involving the Companys omeprazole patents was brought in December 2002 by it
against Kremers Urban Development Co., Schwarz Pharma Inc. and Schwarz Pharma AG (collectively,
together with the other named defendants, KUDCO) in the U.S. District Court for the Southern
District of New York. KUDCO has a generic omeprazole product with FDA marketing approval, was
found not to infringe the AstraZeneca patents in the separate AstraZeneca patent litigation, and is
currently selling its generic substitute for Prilosec in the U.S. marketplace.
The Company initially brought the lawsuit alleging infringement of the Companys U.S. Patent No.
6,268,385. Following the collection of additional information concerning KUDCOs commercially
marketed product, the Company sought leave of the court to file an amended complaint, adding
additional claims of infringement and contributory infringement under the Companys U.S. Patent No.
6,326,384 and joining as defendants Schwarz Pharma Manufacturing Inc. and Schwarz Pharma USA
Holdings Inc. These two patents include, among other claims, claims directed to compositions and
methods wherein certain characteristics of solid state omeprazole are essentially the same in
formulated drug product as in its active ingredient.
In September 2003, the judge granted AAIPharma leave to file the first amended complaint adding the
Companys second patent and the additional KUDCO affiliates to the lawsuit. Following initial
discovery, the Company sought leave of the court to file a second amended complaint, adding Kremers
Urban Inc., another KUDCO affiliate, to the lawsuit. On February 26, 2004, the judge granted the
Company leave to file the second amended complaint, adding Kremers Urban Inc. to the lawsuit.
KUDCO has filed its answer to AAIPharmas complaint, denying its claims, asserting various
affirmative defenses to its claims (including patent invalidity and product non-infringement), and
asserting counterclaims
and antitrust violations under federal and state antitrust laws. KUDCO is also contesting the
personal jurisdiction of the court over all of the defendants in this lawsuit other than Kremers
Urban Development Co., Kremers Urban Inc. and Schwarz Pharma Inc. Motions on the jurisdictional
issues are pending before the court.
24
The Company has denied the substantive allegations made by
KUDCO in its counterclaims, and the court has granted AAIPharmas motion to stay antitrust
discovery.
Substantial discovery of both sides documents and of defendants product samples has occurred in
the lawsuit, although both sides asserted numerous discovery deficiencies against the other. On
February 26, 2004, the judge assigned the discovery disputes to a federal magistrate for
resolution. Discovery is continuing at this time. No trial date has been set.
The Company has previously indicated to KUDCO a willingness to grant a license under its omeprazole
patents for an appropriate royalty. In the absence of KUDCO taking a royalty-bearing license,
AAIPharma is seeking damages equal to a reasonable royalty on all infringing sales by the KUDCO
defendants since commercial launch of their generic substitute for Prilosec on December 9, 2002
through the date of a judicial decision in the litigation, and a permanent injunction on subsequent
sales thereafter (unless KUDCO takes a license), among other remedies, in the event that the
Company ultimately prevails in the litigation. The KUDCO defendants have publicly confirmed sales
of their generic omeprazole product during the first twenty-two months after launch of their
product of approximately $1.3 billion. In the absence of a license or settlement, subject to the
confirmation and consummation of the Plan, the Company intends to vigorously prosecute the case,
defend its patent rights and defend against the foregoing defenses and counterclaims asserted by
KUDCO. Pursuant to the terms of the Plan, as filed, the Companys causes of action in this
litigation against KUDCO will be transferred to a litigation trust for the benefit of the
unsecured creditors of the Debtors.
It is possible that the omeprazole-related patents subject to the foregoing lawsuits will be found
invalid, unenforceable or not infringed and, while currently stayed by the court, it is possible
that the defendants antitrust counterclaims in the KUDCO litigation will ultimately be allowed to
proceed and be litigated and, if successful, lead to determination of a monetary judgment. Such a
judgment would be a pre-petition claim and, should KUDCOs claim be allowed, the recovery on
account of such claim will be determined by the Plan.
On April 15, 2004, the Company filed a lawsuit against Athlon Pharmaceuticals, Inc. in the U.S.
District Court for the Northern District of Georgia seeking a declaratory judgment that it was
entitled to terminate the Service Agreement (the Athlon Service Agreement) dated July 16, 2003,
as amended, between the Company and Athlon as well as damages and injunctive relief for material
breaches of the Athlon Service Agreement by Athlon. The Athlon Service Agreement incorporated the
terms and conditions pursuant to which representatives of Athlon would promote the sale of the
Companys Darvocet A500 product to physicians. The Company initially paid Athlon $3,350,000 to
build its sales force to promote the sale of the Companys Darvocet A500, and the terms of the
Athlon Service Agreement would require the Company to pay Athlon an additional $1,200,000 each
month for such services for the contract period of 36 months, commencing in October 2003, subject
to Athlons compliance with certain representations, warranties and covenants, some of which are
described below.
The lawsuit asserts that Athlon has materially breached the Athlon Service Agreement in several
ways, including failure to: (i) provide the required number of sales representatives during the
Companys launch of Darvocet A500 commencing in October 2003, (ii) use its best efforts to promote
Darvocet A500 at the targeted levels of first and second pharmaceutical details to physicians,
(iii) perform the services to the best of its ability, as contractually required, and (iv) require
its sales representatives to perform the contracted services, as required, in a professional manner
consistent with industry standards and in conformance with that level of care and skill ordinarily
exercised by professional contract sales organizations in similar circumstances. The lawsuit
also asserts that Athlon breached its representation and warranty that it would perform, and would
require its sales representatives to perform, the contracted services in substantially the same
manner that it would promote Athlons own products.
25
Athlon has asserted several counterclaims, including breach of an implied covenant of good faith in
fair dealing and anticipatory breach of the contract. The Company has filed a reply denying these
allegations.
In May 2004, the Company ceased making payments under the Athlon Service Agreement, and on June 4,
2004, it sent a notice of termination of the agreement to Athlon. On July 7, 2004, the Company
amended the lawsuit to assert claims of fraud and breaches of contract and implied covenants,
seeking to recover compensatory and punitive damages and attorneys fees. Athlon has amended its
counterclaim to assert fraud claims and to seek punitive damages.
On August 11, 2004, Athlon filed a lawsuit against the Company, also in the U.S. District Court for
the Northern District of Georgia, alleging that the Company breached the Asset Purchase Agreement
(the Purchase Agreement) dated July 16, 2003 pursuant to which the Company acquired Darvocet A500
from Athlon. Athlon is seeking royalties it alleges the Company failed properly to calculate and
pay under the Purchase Agreement, as well as attorneys fees. The Company has denied the
substantive allegations in this case and filed counterclaims seeking to recover an overpayment in
the royalties owed to Athlon.
The lawsuits with Athlon were at an early stage of litigation and discovery was occurring as of the
Filing Date, when the automatic stay in the Chapter 11 Cases became effective. No trial date has
been set. Should Athlons claim be allowed, the recovery on account of such claim will be
determined by the Plan. Pursuant to the terms of the Plan, as filed, the Companys causes of
action in this litigation against Athlon will be transferred to a litigation trust for the benefit
of the unsecured creditors of the Debtors.
CIMA Labs, Inc. (CIMA) commenced an action against the Company in the Fourth Judicial District,
State of Minnesota, Hennepin County, on August 11, 2004. In its complaint, CIMA alleges that the
Company is liable for fraudulent inducement, negligent fraudulent misrepresentation, fraudulent
concealment, breach of contract, and attorneys fees and interest, all arising out of an Agreement
and Plan of Merger dated as of August 5, 2003, between CIMA and AAIPharma (Merger Agreement).
CIMA alleges that in the negotiations leading up to the Merger Agreement, the Company engaged in
misrepresentations and concealments relating to its financial condition, and that in the Merger
Agreement, the Company made false representations and warranties concerning its financial
statements, regulatory filings, and absence of material adverse effects, among other things. Much
of CIMAs claims are based on disclosures made by the Company in its Amended Form 10-Q, filed with
the SEC on June 24, 2004, for the period ended June 30, 2003. CIMA seeks to recover the amount of
$11.5 million, which it paid to AAIPharma as a termination fee under the Merger Agreement, plus
additional sums it spent for professional fees and due diligence activities (which it claims are in
excess of $5 million), attorneys fees, litigation expenses, and interest. The Company answered
CIMAs complaint on September 17, 2004, denying all liability and raising a number of affirmative
defenses. Among other things, the Company asserted that CIMAs termination of the Merger Agreement
barred any claims except those based on the Companys willful breach of its representations,
warranties, covenants, or other agreements as set forth in that Agreement. In addition, the
Company affirmatively alleged that CIMA terminated the Merger Agreement and paid the termination
fee not as the result of any alleged breach by AAIPharma, but rather as part of CIMAs plan to
secure and act on a Superior Proposal from another bidder, which allowed it to consummate a
transaction with that other bidder on terms that it believed were more favorable to it than those
set forth in the Merger Agreement. As of the Filing Date and the imposition of the automatic stay
under the Bankruptcy Code, the case was scheduled for trial in the fall of 2005 and the parties
were involved in litigation discovery. Should CIMAs claim be allowed, the recovery on account
of such claim will be determined by the Plan.
The Company cannot predict the outcomes of these lawsuits.
26
12. Financial information for subsidiary guarantors and non-guarantors
The Companys senior subordinated notes, due April 1, 2010, are guaranteed by certain of the
Companys subsidiaries.
The following presents condensed consolidating financial information for the Company, segregating:
(1) AAIPharma Inc., which issued the notes (the Issuer); (2) the domestic subsidiaries, which
guarantee the notes (the Guarantor Subsidiaries); and (3) all other subsidiaries (the
Non-Guarantor Subsidiaries). The Guarantor Subsidiaries are wholly-owned direct subsidiaries of
the Company and their guarantees are full, unconditional and joint and several. Wholly-owned
subsidiaries are presented on the equity basis of accounting. Certain reclassifications have been
made to conform all of the financial information to the financial presentation on a consolidated
basis. The principal adjusting entries eliminate investments in subsidiaries and inter-company
balances and transactions. The financial information for the Guarantor Subsidiaries includes the
results of operations, assets, liabilities and cashflows for the Pharmaceuticals Division,
including the assets which were sold to Xanodyne. Financial information presented for the Issuer
and the Guarantor Subsidiaries also represents the financial information of the Debtors in the
Chapter 11 Cases.
The following information presents consolidating statements of operations, balance sheets and cash
flows for the periods and as of the dates indicated:
AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
10,416 |
|
|
$ |
7,644 |
|
|
$ |
5,950 |
|
|
$ |
(54 |
) |
|
$ |
23,956 |
|
Equity earnings from subsidiaries |
|
|
21,196 |
|
|
|
|
|
|
|
|
|
|
|
(21,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
31,612 |
|
|
|
7,644 |
|
|
|
5,950 |
|
|
|
(21,250 |
) |
|
|
23,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs (excluding
depreciation and royalty
expense) |
|
|
8,621 |
|
|
|
6,252 |
|
|
|
4,091 |
|
|
|
(53 |
) |
|
|
18,911 |
|
Selling expenses |
|
|
419 |
|
|
|
367 |
|
|
|
418 |
|
|
|
|
|
|
|
1,204 |
|
General and administrative
expenses |
|
|
8,943 |
|
|
|
(2,760 |
) |
|
|
1,196 |
|
|
|
|
|
|
|
7,379 |
|
Research and development |
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
444 |
|
Depreciation |
|
|
1,576 |
|
|
|
219 |
|
|
|
238 |
|
|
|
|
|
|
|
2,033 |
|
Reorganization expenses |
|
|
|
|
|
|
4,018 |
|
|
|
|
|
|
|
|
|
|
|
4,018 |
|
Pharmaceutical assets gain on
sale |
|
|
|
|
|
|
(29,046 |
) |
|
|
|
|
|
|
|
|
|
|
(29,046 |
) |
Royalty expenses |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,559 |
|
|
|
(20,484 |
) |
|
|
5,943 |
|
|
|
(53 |
) |
|
|
4,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
12,053 |
|
|
|
28,128 |
|
|
|
7 |
|
|
|
(21,197 |
) |
|
|
18,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense:) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(4,899 |
) |
|
|
2,642 |
|
|
|
164 |
|
|
|
|
|
|
|
(2,093 |
) |
Net intercompany interest |
|
|
4,036 |
|
|
|
(3,868 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(374 |
) |
|
|
(5,625 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
(6,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
|
|
(6,851 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
(8,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Income (loss) before income taxes |
|
|
10,816 |
|
|
|
21,277 |
|
|
|
(80 |
) |
|
|
(21,197 |
) |
|
|
10,816 |
|
Provision for (benefit from)
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,816 |
|
|
$ |
21,277 |
|
|
$ |
(80 |
) |
|
$ |
(21,197 |
) |
|
$ |
10,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
12,911 |
|
|
$ |
27,000 |
|
|
$ |
5,946 |
|
|
$ |
(171 |
) |
|
$ |
45,686 |
|
Equity earnings from subsidiaries |
|
|
(12,824 |
) |
|
|
|
|
|
|
|
|
|
|
12,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
87 |
|
|
|
27,000 |
|
|
|
5,946 |
|
|
|
12,653 |
|
|
|
45,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs (excluding
depreciation and royalty expense) |
|
|
8,057 |
|
|
|
16,238 |
|
|
|
3,612 |
|
|
|
(123 |
) |
|
|
27,784 |
|
Selling expenses |
|
|
1,563 |
|
|
|
3,924 |
|
|
|
534 |
|
|
|
|
|
|
|
6,021 |
|
General and administrative expenses |
|
|
6,487 |
|
|
|
1,832 |
|
|
|
1,159 |
|
|
|
|
|
|
|
9,478 |
|
Research and development |
|
|
(1 |
) |
|
|
3,135 |
|
|
|
|
|
|
|
|
|
|
|
3,134 |
|
Depreciation |
|
|
1,541 |
|
|
|
522 |
|
|
|
304 |
|
|
|
|
|
|
|
2,367 |
|
Professional fees internal inquiry |
|
|
|
|
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
769 |
|
M.V.I. Contingent payment/(gain on
sale) |
|
|
|
|
|
|
(1,567 |
) |
|
|
|
|
|
|
|
|
|
|
(1,567 |
) |
Restructuring charges |
|
|
|
|
|
|
13,719 |
|
|
|
|
|
|
|
|
|
|
|
13,719 |
|
Royalty expenses |
|
|
|
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
357 |
|
Intangible asset impairment |
|
|
|
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,647 |
|
|
|
44,179 |
|
|
|
5,609 |
|
|
|
(123 |
) |
|
|
67,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(17,560 |
) |
|
|
(17,179 |
) |
|
|
337 |
|
|
|
12,776 |
|
|
|
(21,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(192 |
) |
|
|
(9,355 |
) |
|
|
78 |
|
|
|
|
|
|
|
(9,469 |
) |
Net intercompany interest |
|
|
(513 |
) |
|
|
593 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(13,253 |
) |
|
|
13,067 |
|
|
|
(89 |
) |
|
|
|
|
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,958 |
) |
|
|
4,305 |
|
|
|
(91 |
) |
|
|
|
|
|
|
(9,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(31,518 |
) |
|
|
(12,874 |
) |
|
|
246 |
|
|
|
12,776 |
|
|
|
(31,370 |
) |
Provision for income taxes |
|
|
4,435 |
|
|
|
147 |
|
|
|
1 |
|
|
|
|
|
|
|
4,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(35,953 |
) |
|
$ |
(13,021 |
) |
|
$ |
245 |
|
|
$ |
12,776 |
|
|
$ |
(35,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
32,486 |
|
|
$ |
58,919 |
|
|
$ |
17,364 |
|
|
$ |
(640 |
) |
|
$ |
108,129 |
|
Equity earnings from subsidiaries |
|
|
11,897 |
|
|
|
|
|
|
|
|
|
|
|
(11,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
44,383 |
|
|
|
58,919 |
|
|
|
17,364 |
|
|
|
(12,537 |
) |
|
|
108,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs (excluding
depreciation and royalty expense) |
|
|
24,695 |
|
|
|
30,026 |
|
|
|
11,881 |
|
|
|
(446 |
) |
|
|
66,156 |
|
Selling expenses |
|
|
1,409 |
|
|
|
1,608 |
|
|
|
1,389 |
|
|
|
|
|
|
|
4,406 |
|
General and administrative
expenses |
|
|
29,352 |
|
|
|
(6,270 |
) |
|
|
3,158 |
|
|
|
|
|
|
|
26,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
3,278 |
|
|
|
|
|
|
|
|
|
|
|
3,278 |
|
Depreciation |
|
|
3,961 |
|
|
|
1,613 |
|
|
|
763 |
|
|
|
|
|
|
|
6,337 |
|
Professional fees internal and
government investigations |
|
|
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
299 |
|
Reorganization expenses |
|
|
|
|
|
|
11,311 |
|
|
|
|
|
|
|
|
|
|
|
11,311 |
|
Pharmaceutical assets gain on sale |
|
|
|
|
|
|
(29,046 |
) |
|
|
|
|
|
|
|
|
|
|
(29,046 |
) |
Royalty expenses |
|
|
|
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
247 |
|
Intangible asset impairment |
|
|
|
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,417 |
|
|
|
14,256 |
|
|
|
17,191 |
|
|
|
(446 |
) |
|
|
90,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(15,034 |
) |
|
|
44,663 |
|
|
|
173 |
|
|
|
(12,091 |
) |
|
|
17,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense:) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(5,417 |
) |
|
|
(16,998 |
) |
|
|
241 |
|
|
|
|
|
|
|
(22,174 |
) |
Net intercompany interest |
|
|
2,617 |
|
|
|
(2,366 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(470 |
) |
|
|
(12,598 |
) |
|
|
(554 |
) |
|
|
|
|
|
|
(13,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,270 |
) |
|
|
(31,962 |
) |
|
|
(564 |
) |
|
|
|
|
|
|
(35,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(18,304 |
) |
|
|
12,701 |
|
|
|
(391 |
) |
|
|
(12,091 |
) |
|
|
(18,085 |
) |
Provision for (benefit from) income
taxes |
|
|
|
|
|
|
254 |
|
|
|
(35 |
) |
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(18,304 |
) |
|
$ |
12,447 |
|
|
$ |
(356 |
) |
|
$ |
(12,091 |
) |
|
$ |
(18,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
41,852 |
|
|
$ |
100,286 |
|
|
$ |
19,349 |
|
|
$ |
(1,330 |
) |
|
$ |
160,157 |
|
Equity earnings from subsidiaries |
|
|
(25,232 |
) |
|
|
|
|
|
|
|
|
|
|
25,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
16,620 |
|
|
|
100,286 |
|
|
|
19,349 |
|
|
|
23,902 |
|
|
|
160,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs (excluding
depreciation and royalty
expense) |
|
|
28,653 |
|
|
|
51,681 |
|
|
|
11,607 |
|
|
|
(827 |
) |
|
|
91,114 |
|
Selling expenses |
|
|
5,098 |
|
|
|
23,226 |
|
|
|
1,798 |
|
|
|
|
|
|
|
30,122 |
|
General and administrative
expenses |
|
|
32,529 |
|
|
|
(496 |
) |
|
|
3,285 |
|
|
|
|
|
|
|
35,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
5 |
|
|
|
13,842 |
|
|
|
|
|
|
|
|
|
|
|
13,847 |
|
Depreciation |
|
|
4,165 |
|
|
|
1,349 |
|
|
|
890 |
|
|
|
|
|
|
|
6,404 |
|
Professional fees internal
inquiry |
|
|
|
|
|
|
9,072 |
|
|
|
|
|
|
|
|
|
|
|
9,072 |
|
M.V.I. Contingent
payment/(gain on sale) |
|
|
|
|
|
|
(8,112 |
) |
|
|
|
|
|
|
|
|
|
|
(8,112 |
) |
Restructuring charges |
|
|
|
|
|
|
17,119 |
|
|
|
|
|
|
|
|
|
|
|
17,119 |
|
Royalty expenses |
|
|
|
|
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
1,366 |
|
Intangible asset impairment |
|
|
|
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,450 |
|
|
|
114,297 |
|
|
|
17,580 |
|
|
|
(827 |
) |
|
|
201,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(53,830 |
) |
|
|
(14,011 |
) |
|
|
1,769 |
|
|
|
24,729 |
|
|
|
(41,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(209 |
) |
|
|
(23,838 |
) |
|
|
181 |
|
|
|
|
|
|
|
(23,866 |
) |
Net intercompany interest |
|
|
(1,470 |
) |
|
|
1,657 |
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(18,327 |
) |
|
|
10,259 |
|
|
|
(272 |
) |
|
|
|
|
|
|
(8,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,006 |
) |
|
|
(11,922 |
) |
|
|
(278 |
) |
|
|
|
|
|
|
(32,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(73,836 |
) |
|
|
(25,933 |
) |
|
|
1,491 |
|
|
|
24,729 |
|
|
|
(73,549 |
) |
Provision for income taxes |
|
|
4,471 |
|
|
|
288 |
|
|
|
(1 |
) |
|
|
|
|
|
|
4,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(78,307 |
) |
|
$ |
(26,221 |
) |
|
$ |
1,492 |
|
|
$ |
24,729 |
|
|
$ |
(78,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
AAIPharma Inc.
CONSOLIDATING BALANCE SHEET
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,131 |
|
|
$ |
47 |
|
|
$ |
293 |
|
|
$ |
|
|
|
$ |
4,471 |
|
Restricted cash |
|
|
6,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,346 |
|
Accounts receivable, net |
|
|
8,890 |
|
|
|
(3,771 |
) |
|
|
2,731 |
|
|
|
|
|
|
|
7,850 |
|
Work-in-progress |
|
|
2,873 |
|
|
|
4,974 |
|
|
|
8,013 |
|
|
|
(5,347 |
) |
|
|
10,513 |
|
Inventories, net |
|
|
1,787 |
|
|
|
94 |
|
|
|
1,241 |
|
|
|
|
|
|
|
3,122 |
|
Prepaid and other current assets |
|
|
2,210 |
|
|
|
1,501 |
|
|
|
309 |
|
|
|
|
|
|
|
4,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
26,237 |
|
|
|
2,845 |
|
|
|
12,587 |
|
|
|
(5,347 |
) |
|
|
36,322 |
|
Investments in and advances to subsidiaries |
|
|
66,099 |
|
|
|
(46,240 |
) |
|
|
|
|
|
|
(19,859 |
) |
|
|
|
|
Property and equipment, net |
|
|
35,713 |
|
|
|
5,290 |
|
|
|
3,251 |
|
|
|
|
|
|
|
44,254 |
|
Goodwill, net |
|
|
726 |
|
|
|
1,229 |
|
|
|
10,943 |
|
|
|
|
|
|
|
12,898 |
|
Intangible assets, net |
|
|
6,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,537 |
|
Other assets |
|
|
132 |
|
|
|
13,730 |
|
|
|
142 |
|
|
|
|
|
|
|
14,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
135,444 |
|
|
$ |
(23,146 |
) |
|
$ |
26,923 |
|
|
$ |
(25,206 |
) |
|
$ |
114,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,678 |
|
|
$ |
934 |
|
|
$ |
632 |
|
|
$ |
|
|
|
$ |
8,244 |
|
Customer advances |
|
|
5,747 |
|
|
|
3,133 |
|
|
|
5,683 |
|
|
|
(3,905 |
) |
|
|
10,658 |
|
Accrued wages and benefits |
|
|
1,515 |
|
|
|
405 |
|
|
|
1,766 |
|
|
|
|
|
|
|
3,686 |
|
Interest payable |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
Other accrued liabilities |
|
|
3,809 |
|
|
|
1,298 |
|
|
|
(588 |
) |
|
|
(944 |
) |
|
|
3,575 |
|
Liabilities subject to compromise |
|
|
14,362 |
|
|
|
205,409 |
|
|
|
|
|
|
|
|
|
|
|
219,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
32,243 |
|
|
|
211,179 |
|
|
|
7,493 |
|
|
|
(4,849 |
) |
|
|
246,066 |
|
Other liabilities |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Investments in and advances to subsidiaries |
|
|
198,830 |
|
|
|
(203,265 |
) |
|
|
3,289 |
|
|
|
1,146 |
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(95,638 |
) |
|
|
(31,060 |
) |
|
|
16,141 |
|
|
|
(21,503 |
) |
|
|
(132,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$ |
135,444 |
|
|
$ |
(23,146 |
) |
|
$ |
26,923 |
|
|
$ |
(25,206 |
) |
|
$ |
114,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
AAIPharma Inc.
CONSOLIDATING BALANCE SHEET
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,696 |
|
|
$ |
276 |
|
|
$ |
158 |
|
|
$ |
|
|
|
$ |
7,130 |
|
Accounts receivable, net |
|
|
10,831 |
|
|
|
(756 |
) |
|
|
2,681 |
|
|
|
|
|
|
|
12,756 |
|
Work-in-progress |
|
|
2,079 |
|
|
|
4,830 |
|
|
|
9,745 |
|
|
|
(6,482 |
) |
|
|
10,172 |
|
Inventories, net |
|
|
1,871 |
|
|
|
7,449 |
|
|
|
1,402 |
|
|
|
|
|
|
|
10,722 |
|
Deferred tax assets |
|
|
11,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,110 |
|
Prepaid and other current assets |
|
|
4,600 |
|
|
|
2,940 |
|
|
|
211 |
|
|
|
|
|
|
|
7,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
37,187 |
|
|
|
14,739 |
|
|
|
14,197 |
|
|
|
(6,482 |
) |
|
|
59,641 |
|
Investments in and advances to subsidiaries |
|
|
66,099 |
|
|
|
(46,240 |
) |
|
|
|
|
|
|
(19,859 |
) |
|
|
|
|
Property and equipment, net |
|
|
36,108 |
|
|
|
12,501 |
|
|
|
4,333 |
|
|
|
|
|
|
|
52,942 |
|
Goodwill, net |
|
|
725 |
|
|
|
1,229 |
|
|
|
12,396 |
|
|
|
|
|
|
|
14,350 |
|
Intangibles assets, net |
|
|
1,159 |
|
|
|
188,940 |
|
|
|
|
|
|
|
|
|
|
|
190,099 |
|
Other assets |
|
|
155 |
|
|
|
21,757 |
|
|
|
126 |
|
|
|
|
|
|
|
22,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
141,433 |
|
|
$ |
192,926 |
|
|
$ |
31,052 |
|
|
$ |
(26,341 |
) |
|
$ |
339,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
10,500 |
|
|
$ |
341,145 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
351,645 |
|
Accounts payable |
|
|
7,057 |
|
|
|
13,093 |
|
|
|
1,881 |
|
|
|
|
|
|
|
22,031 |
|
Customer advances |
|
|
5,208 |
|
|
|
4,327 |
|
|
|
6,154 |
|
|
|
(4,646 |
) |
|
|
11,043 |
|
Accrued wages and benefits |
|
|
2,553 |
|
|
|
993 |
|
|
|
1,335 |
|
|
|
|
|
|
|
4,881 |
|
Interest payable |
|
|
160 |
|
|
|
5,578 |
|
|
|
|
|
|
|
|
|
|
|
5,738 |
|
Deferred product revenue |
|
|
|
|
|
|
4,127 |
|
|
|
|
|
|
|
|
|
|
|
4,127 |
|
Other accrued liabilities |
|
|
18,940 |
|
|
|
33,698 |
|
|
|
(408 |
) |
|
|
(749 |
) |
|
|
51,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
44,418 |
|
|
|
402,961 |
|
|
|
8,962 |
|
|
|
(5,395 |
) |
|
|
450,946 |
|
Other liabilities |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
Investments in and advances to subsidiaries |
|
|
162,690 |
|
|
|
(166,510 |
) |
|
|
3,457 |
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(65,689 |
) |
|
|
(43,525 |
) |
|
|
18,633 |
|
|
|
(21,309 |
) |
|
|
(111,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$ |
141,433 |
|
|
$ |
192,926 |
|
|
$ |
31,052 |
|
|
$ |
(26,341 |
) |
|
$ |
339,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
AAIPharma Inc.
CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(18,304 |
) |
|
$ |
12,447 |
|
|
$ |
(356 |
) |
|
$ |
(12,091 |
) |
|
$ |
(18,304 |
) |
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,962 |
|
|
|
8,005 |
|
|
|
763 |
|
|
|
|
|
|
|
12,730 |
|
Intangible asset impairment |
|
|
|
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
1,190 |
|
Write-off of deferred financing and other
costs |
|
|
|
|
|
|
8,482 |
|
|
|
|
|
|
|
|
|
|
|
8,482 |
|
Noncash stock based compensation |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251 |
|
Net gain from asset sale |
|
|
(5,801 |
) |
|
|
(23,245 |
) |
|
|
|
|
|
|
|
|
|
|
(29,046 |
) |
Loss on disposal of assets and other |
|
|
6 |
|
|
|
14 |
|
|
|
201 |
|
|
|
|
|
|
|
221 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
1,941 |
|
|
|
3,014 |
|
|
|
(363 |
) |
|
|
|
|
|
|
4,592 |
|
Work-in-progress |
|
|
(794 |
) |
|
|
(144 |
) |
|
|
591 |
|
|
|
(1,136 |
) |
|
|
(1,483 |
) |
Inventories |
|
|
84 |
|
|
|
3,812 |
|
|
|
(4 |
) |
|
|
|
|
|
|
3,892 |
|
Income taxes recoverable |
|
|
11,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,110 |
|
Prepaid and other assets |
|
|
944 |
|
|
|
983 |
|
|
|
(154 |
) |
|
|
|
|
|
|
1,773 |
|
Accounts payable |
|
|
1,794 |
|
|
|
(5,952 |
) |
|
|
(1,029 |
) |
|
|
|
|
|
|
(5,187 |
) |
Customer advances |
|
|
539 |
|
|
|
(1,193 |
) |
|
|
250 |
|
|
|
741 |
|
|
|
337 |
|
Accrued wages and benefits |
|
|
(462 |
) |
|
|
(588 |
) |
|
|
587 |
|
|
|
|
|
|
|
(463 |
) |
Interest payable |
|
|
(29 |
) |
|
|
7,234 |
|
|
|
|
|
|
|
|
|
|
|
7,205 |
|
Deferred product revenue |
|
|
|
|
|
|
(4,127 |
) |
|
|
|
|
|
|
|
|
|
|
(4,127 |
) |
Other accrued liabilities |
|
|
(2,889 |
) |
|
|
(15,297 |
) |
|
|
177 |
|
|
|
(195 |
) |
|
|
(18,204 |
) |
Intercompany receivables and payables |
|
|
25,078 |
|
|
|
(37,591 |
) |
|
|
(168 |
) |
|
|
12,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
17,430 |
|
|
|
(42,956 |
) |
|
|
495 |
|
|
|
|
|
|
|
(25,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of property and equipment |
|
|
17 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Purchases of property and equipment |
|
|
(3,201 |
) |
|
|
1,834 |
|
|
|
(340 |
) |
|
|
|
|
|
|
(1,707 |
) |
Proceeds from disposition of pharmaceutical
assets |
|
|
|
|
|
|
205,952 |
|
|
|
|
|
|
|
|
|
|
|
205,952 |
|
Funds deposited in restricted cash account |
|
|
(8,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,000 |
) |
Payments from restricted cash account |
|
|
1,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,654 |
|
Other |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,495 |
) |
|
|
207,788 |
|
|
|
(340 |
) |
|
|
|
|
|
|
197,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Payments on long-term borrowings |
|
|
(10,500 |
) |
|
|
(345,000 |
) |
|
|
|
|
|
|
|
|
|
|
(355,500 |
) |
Payments on interest rate swaps, net |
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
(129 |
) |
Other |
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities |
|
|
(10,500 |
) |
|
|
(165,061 |
) |
|
|
|
|
|
|
|
|
|
|
(175,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
(2,565 |
) |
|
|
(229 |
) |
|
|
155 |
|
|
|
|
|
|
|
(2,639 |
) |
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
Cash and cash equivalents, beginning of period |
|
|
6,696 |
|
|
|
276 |
|
|
|
158 |
|
|
|
|
|
|
|
7,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,131 |
|
|
$ |
47 |
|
|
$ |
293 |
|
|
$ |
|
|
|
$ |
4,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
AAIPharma Inc.
CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(78,307 |
) |
|
$ |
(26,221 |
) |
|
$ |
1,492 |
|
|
$ |
24,729 |
|
|
$ |
(78,307 |
) |
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,917 |
|
|
|
13,513 |
|
|
|
890 |
|
|
|
|
|
|
|
18,320 |
|
Intangible asset impairment |
|
|
|
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
5,250 |
|
Write-off of deferred financing and other
costs |
|
|
|
|
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
Net gain from asset sale |
|
|
|
|
|
|
(39,113 |
) |
|
|
|
|
|
|
|
|
|
|
(39,113 |
) |
Non-cash stock based compensation |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
Other |
|
|
7 |
|
|
|
12 |
|
|
|
218 |
|
|
|
|
|
|
|
237 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(662 |
) |
|
|
27,373 |
|
|
|
1,184 |
|
|
|
|
|
|
|
27,895 |
|
Work-in-progress |
|
|
1,071 |
|
|
|
200 |
|
|
|
(920 |
) |
|
|
732 |
|
|
|
1,083 |
|
Inventories |
|
|
(317 |
) |
|
|
(1,490 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
(1,824 |
) |
Deferred tax assets |
|
|
8,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,728 |
|
Prepaid and other assets |
|
|
1,242 |
|
|
|
(7,125 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(5,889 |
) |
Accounts payable |
|
|
1,412 |
|
|
|
(222 |
) |
|
|
(1,508 |
) |
|
|
|
|
|
|
(318 |
) |
Customer advances |
|
|
(2,393 |
) |
|
|
(940 |
) |
|
|
1,216 |
|
|
|
(1,651 |
) |
|
|
(3,768 |
) |
Accrued wages and benefits |
|
|
768 |
|
|
|
61 |
|
|
|
713 |
|
|
|
|
|
|
|
1,542 |
|
Interest payable |
|
|
86 |
|
|
|
4,674 |
|
|
|
|
|
|
|
|
|
|
|
4,760 |
|
Deferred product revenue |
|
|
|
|
|
|
(35,032 |
) |
|
|
|
|
|
|
|
|
|
|
(35,032 |
) |
Other accrued liabilities |
|
|
6,771 |
|
|
|
17,198 |
|
|
|
145 |
|
|
|
411 |
|
|
|
24,525 |
|
Intercompany receivables and payables |
|
|
50,378 |
|
|
|
(23,942 |
) |
|
|
(2,215 |
) |
|
|
(24,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating
activities |
|
|
(7,195 |
) |
|
|
(59,575 |
) |
|
|
1,192 |
|
|
|
|
|
|
|
(65,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(2,489 |
) |
|
|
(1,887 |
) |
|
|
(1,099 |
) |
|
|
|
|
|
|
(5,475 |
) |
Proceeds from sales of property and equipment |
|
|
9 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
97 |
|
Proceeds from disposition of pharmaceutical
assets |
|
|
|
|
|
|
92,944 |
|
|
|
|
|
|
|
|
|
|
|
92,944 |
|
Other |
|
|
(237 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in (provided by) investing
activities |
|
|
(2,717 |
) |
|
|
91,183 |
|
|
|
(1,099 |
) |
|
|
|
|
|
|
87,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
12,500 |
|
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
|
147,500 |
|
Payments on long-term borrowings |
|
|
(8,000 |
) |
|
|
(156,000 |
) |
|
|
|
|
|
|
|
|
|
|
(164,000 |
) |
Proceeds from interest rate swaps, net |
|
|
|
|
|
|
(10,203 |
) |
|
|
|
|
|
|
|
|
|
|
(10,203 |
) |
Proceeds from stock option exercises |
|
|
3,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,574 |
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non-Debtor |
|
|
|
|
|
|
|
|
|
Debtor Entities |
|
|
Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Other |
|
|
|
|
|
|
(292 |
) |
|
|
|
|
|
|
|
|
|
|
(292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
8,074 |
|
|
|
(31,495 |
) |
|
|
|
|
|
|
|
|
|
|
(23,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents |
|
|
(1,838 |
) |
|
|
113 |
|
|
|
93 |
|
|
|
|
|
|
|
(1,632 |
) |
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
Cash and cash equivalents, beginning of period |
|
|
8,161 |
|
|
|
192 |
|
|
|
432 |
|
|
|
|
|
|
|
8,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
6,323 |
|
|
$ |
305 |
|
|
$ |
515 |
|
|
$ |
|
|
|
$ |
7,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Our quarterly results have been, and we expect them to continue to be, subject to fluctuations.
Quarterly results can fluctuate as a result of a number of factors, including without limitation,
demand for our product development services, costs and results of ongoing and future litigation by
and against us, contractual disputes with customers, progress of ongoing contracts, amounts
recognized for licensing and royalty revenues, the commencement, completion or cancellation of
large contracts, timing and amounts of start-up expenses for new facilities, changes in the mix of
services, restructuring charges, goodwill and intangible asset impairments and debt refinancing
costs. Because a large percentage of our development services operating costs are relatively
fixed, variations in the timing and progress of large contracts, changes in the demand for our
services, or the recognition of licensing and royalty revenues (on projects for which associated
expenses may have been recognized in prior periods) can materially affect our quarterly results.
Accordingly, we believe that comparisons of our quarterly financial results may not be meaningful.
In addition, the filing of the Chapter 11 Cases, described below, during the second quarter of
2005, and the sale of the pharmaceutical assets in July 2005, represent fundamental changes in the
nature of our business going forward. There have been no significant changes in our critical
accounting policies previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2004 (the 2004 Form 10-K).
Summary
On May 10, 2005, AAIPharma and its domestic subsidiaries (the Debtors) filed voluntary petitions
in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) seeking
relief under the provisions of Chapter 11 of the United States Bankruptcy Code (the Chapter 11
Cases). We are presently operating our businesses as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and
orders of the Bankruptcy Court.
As a result of the Chapter 11 filing, generally, actions to enforce or otherwise effect payment of
pre-Chapter 11 liabilities are stayed. Pre-petition claims secured by our assets are also stayed,
although the holders of such claims have the right to move the court for relief from the stay.
Although pre-petition claims are generally stayed, as part of the first day orders issued by the
Bankruptcy Court, the Bankruptcy Court authorized us to honor certain pre-petition obligations,
including: (i) pre-petition return and chargeback obligations to customers, (ii) Medicaid rebate
obligations, (iii) payments to clinical investigators and clinical research monitors, and (iv)
payment of certain employee wages and related benefits and reimbursement of employee business
expenses. We have been and intend to continue to pay undisputed post-petition obligations of all
vendors and other suppliers in the ordinary course of business. In addition, we have rejected
certain pre-petition executory contracts and unexpired leases with the approval of the Bankruptcy
Court and we may reject additional pre-petition executory contracts and unexpired leases. Any
damages resulting from rejection of executory contracts and unexpired leases are treated as general
unsecured claims under a Chapter 11 plan.
As a general matter, the Bankruptcy Court set a bar date of August 19, 2005 for non-governmental
entities and November 7, 2005 for governmental entities. A bar date is the date by which claims
against us must be filed if claimants wish to receive any distribution in the Chapter 11 Cases.
Differences between liability amounts asserted by us and claims filed by creditors will be
investigated and the Bankruptcy Court will make a final determination of the allowable claim. The
determination of how
38
liabilities will ultimately be settled and treated cannot be made until the Bankruptcy Court
confirms a Chapter 11 plan.
As a result of our pre-petition losses, the Chapter 11 Cases and circumstances relating to those
events, including our debt structure and current economic conditions, realization of assets and
liquidation of liabilities are subject to significant uncertainty. We believe that existing cash,
including the remaining proceeds from the sale of substantially all of the assets of our
Pharmaceuticals Division, and cash from operations, along with the financing provided through our
debtor-in-possession financing facility (the DIP Facility), as described below, should provide
liquidity to allow us to continue as a going concern during the term of the DIP Facility. However,
there can be no assurance that these sources of liquidity will be sufficient. Our ability to
continue as a going concern is dependent upon our ability to maintain compliance with covenants
under the DIP Facility, the ability to generate sufficient cash from operations to meet our
obligations as they become due and the ability to have a Chapter 11 plan that provides a manageable
debt load for our continuing operations. In the event a Chapter 11 plan is confirmed by the
Bankruptcy Court and becomes effective, continuation of our business thereafter will be dependent
on our ability to generate sufficient contracts with customers, achieve successful operations,
maintain satisfactory capital and liquidity, and obtain access to funds under a credit facility.
Until a Chapter 11 plan is confirmed by the Bankruptcy Court and becomes effective, there can be no
assurance that we will emerge from the Chapter 11 proceedings, and the effect of the terms and
conditions of such Chapter 11 plan on our business cannot be determined.
On July 25, 2005, pursuant to an agreement entered into in May 2005, as amended, we completed the
sale of substantially all of the assets of our Pharmaceuticals Division to Xanodyne
Pharmaceuticals, Inc. (Xanodyne) for $209.25 million, subject to potential adjustment and royalty
payments. A portion of the sale proceeds were used to repay our outstanding term and revolving
loans under our DIP Facility. A portion of the remaining proceeds was used to pay fees and
expenses arising from the transaction, including payments to cure defaults under contracts assigned
to Xanodyne in the sale.
The assets sold or licensed to Xanodyne included, among other things: (i) substantially all
currently marketed pharmaceutical products (including the inventory of such products); (ii) the
rights to three pipeline products (i.e. products which we are currently developing); (iii) the
option to purchase certain products being developed or which may be developed in the future by us,
concerning certain compounds, and (iv) a 50% interest in an additional pipeline product.
Xanodyne has agreed to pay us certain royalties based on the aggregate net sales of certain of the
pipeline products through December 31, 2011. However, there can be no assurance that the
pipeline products will be approved by the FDA or, if approved, will be successfully
commercialized; therefore there is substantial uncertainty regarding our ability to receive
royalties based on the aggregate net sales of those products. Xanodyne has also committed to
purchase a minimum of $20 million of services to be provided by our Development Services Division
over the next three years, and an additional $10 million over that period if certain milestones are
achieved on a specifically identified pipeline product. There can be no assurance that such
milestones will be met, particularly in light of certain delays in the development program which
may result in regulatory delays. We also entered into a seven-year manufacturing agreement for
certain of the products acquired by Xanodyne.
We recorded a gain on the sale of these assets of $29.0 million. The gain on the sale was based on
the net cash received, including the amount in escrow, less the book value of the intangible
assets,
39
inventories and other items related to the product lines sold. The gain also included an amount
assigned to the services agreements discussed above. This amount has been recorded as an
intangible asset and will be amortized over the period that services are rendered to Xanodyne.
Subsequent to the sale of these assets to Xanodyne, we do not expect any significant pharmaceutical
product revenue or expenses. As of September 30, 2005, the only product that we continued to
make available for sale was our Brethine tablet product.
On November 4, 2005, the Debtors filed a Chapter 11 plan (the Plan) in the Chapter 11 Cases. The
Plan proposes that 100% of the equity of the reorganized Company would be owned by our secured
noteholders, subject to dilution from a potential employee equity incentive plan, $4.0 million in
cash and our litigation causes of action against KUDCO and Athlon Pharmaceuticals, which are
discussed in Note 11 to the Consolidated Financial Statements, would be respectively distributed to
the unsecured creditors of the Debtors and to a litigation trust for the benefit of such unsecured
creditors, and the existing common stock AAIPharma Inc. would be cancelled. In addition, we will
pay $0.2 million to a plan administrator to be selected by our unsecured creditors to fund the
claims objection and allowance process with respect to unsecured claims. In order to emerge from
Chapter 11, the Debtors will need to (a) obtain Bankruptcy Court approval of the adequacy of the
Debtors disclosures in the disclosure statement, (b) obtain approval of the Plan by a requisite
vote of our noteholders, and (c) obtain confirmation of the Plan at a hearing before the
Bankruptcy Court, during which the Debtors will seek to show that the Plan complies with all of the
requirements of the Bankruptcy Code. The hearing to consider the adequacy of the disclosure
statement is scheduled for December 2, 2005. The Plan, as filed, is the result of extensive
negotiations among us, the official committee of unsecured creditors and the advisors to an ad hoc
committee of our secured noteholders. The Plan has the support of the official committee of
unsecured creditors and based upon discussions with the advisors to the ad hoc committee, we
believe that the ad hoc committee will support the Plan. There can be no assurances, however, that
the Plan will be accepted by the requisite creditors or confirmed by the Bankruptcy Court. The
Chapter 11 Plan and related disclosure statement filed by us with the Bankruptcy Court were
included as Exhibits 10.1 and 10.2 to our Form 8-K, filed with the Securities and Exchange
Commission on November 7, 2005.
Results of Operations
The following table presents the net revenues and our consolidated expenses and net (loss) income
for the three and nine months ended September 30, 2005 and 2004, with each item expressed as a
percentage of consolidated net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
3,263 |
|
|
|
14 |
% |
|
$ |
13,520 |
|
|
|
30 |
% |
|
$ |
34,316 |
|
|
|
32 |
% |
|
$ |
59,734 |
|
|
|
37 |
% |
Product development (milestones and
royalties) |
|
|
282 |
|
|
|
1 |
% |
|
|
4,481 |
|
|
|
10 |
% |
|
|
8,326 |
|
|
|
8 |
% |
|
|
14,522 |
|
|
|
9 |
% |
Development services |
|
|
18,588 |
|
|
|
77 |
% |
|
|
23,054 |
|
|
|
50 |
% |
|
|
58,621 |
|
|
|
54 |
% |
|
|
72,529 |
|
|
|
46 |
% |
Reimbursed out-of-pocket |
|
|
1,823 |
|
|
|
8 |
% |
|
|
4,631 |
|
|
|
10 |
% |
|
|
6,866 |
|
|
|
6 |
% |
|
|
13,372 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,956 |
|
|
|
100 |
% |
|
$ |
45,686 |
|
|
|
100 |
% |
|
$ |
108,129 |
|
|
|
100 |
% |
|
$ |
160,157 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands) |
|
Direct costs (excluding depreciation
and royalty expense) |
|
$ |
18,911 |
|
|
|
79 |
% |
|
$ |
27,784 |
|
|
|
61 |
% |
|
$ |
66,156 |
|
|
|
61 |
% |
|
$ |
91,114 |
|
|
|
57 |
% |
Selling expenses |
|
|
1,204 |
|
|
|
5 |
|
|
|
6,021 |
|
|
|
13 |
|
|
|
4,406 |
|
|
|
4 |
|
|
|
30,122 |
|
|
|
19 |
|
General and administrative expenses |
|
|
7,379 |
|
|
|
31 |
|
|
|
9,478 |
|
|
|
21 |
|
|
|
26,240 |
|
|
|
24 |
|
|
|
35,318 |
|
|
|
22 |
|
Research and development |
|
|
444 |
|
|
|
2 |
|
|
|
3,134 |
|
|
|
7 |
|
|
|
3,278 |
|
|
|
3 |
|
|
|
13,847 |
|
|
|
9 |
|
Depreciation |
|
|
2,033 |
|
|
|
8 |
|
|
|
2,367 |
|
|
|
5 |
|
|
|
6,337 |
|
|
|
6 |
|
|
|
6,404 |
|
|
|
4 |
|
Professional fees internal and
government investigations |
|
|
|
|
|
|
|
|
|
|
769 |
|
|
|
2 |
|
|
|
299 |
|
|
|
|
|
|
|
9,072 |
|
|
|
6 |
|
Reorganization expenses |
|
|
4,018 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
11,311 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Pharmaceutical assets gain on sale |
|
|
(29,046 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
(29,046 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
M.V.I. contingent payment (gain on sale) |
|
|
|
|
|
|
|
|
|
|
(1,567 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(8,112 |
) |
|
|
(5 |
) |
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
13,719 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
17,119 |
|
|
|
11 |
|
Royalty expenses |
|
|
22 |
|
|
|
|
|
|
|
357 |
|
|
|
1 |
|
|
|
247 |
|
|
|
|
|
|
|
1,366 |
|
|
|
1 |
|
Intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
5,250 |
|
|
|
11 |
|
|
|
1,190 |
|
|
|
1 |
|
|
|
5,250 |
|
|
|
3 |
|
Income (loss) from operations |
|
|
18,991 |
|
|
|
79 |
|
|
|
(21,626 |
) |
|
|
(47 |
) |
|
|
17,711 |
|
|
|
16 |
|
|
|
(41,343 |
) |
|
|
(26 |
) |
Interest expense, net |
|
|
2,093 |
|
|
|
9 |
|
|
|
9,469 |
|
|
|
21 |
|
|
|
22,174 |
|
|
|
21 |
|
|
|
23,866 |
|
|
|
15 |
|
Loss from extinguishment of debt |
|
|
(5,644 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
(12,432 |
) |
|
|
(11 |
) |
|
|
(6,229 |
) |
|
|
(4 |
) |
Other (expense) income, net |
|
|
(438 |
) |
|
|
(2 |
) |
|
|
(275 |
) |
|
|
(1 |
) |
|
|
(1,190 |
) |
|
|
(1 |
) |
|
|
(2,111 |
) |
|
|
(1 |
) |
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
4,583 |
|
|
|
10 |
|
|
|
219 |
|
|
|
|
|
|
|
4,758 |
|
|
|
3 |
|
Net income (loss) |
|
|
10,816 |
|
|
|
45 |
|
|
|
(35,953 |
) |
|
|
(79 |
) |
|
|
(18,304 |
) |
|
|
(17 |
) |
|
|
(78,307 |
) |
|
|
(49 |
) |
As is customary in the pharmaceutical industry, we accept returns of products we have sold as
the products near their expiration date. At the time we recognize revenue from product sales, we
record an adjustment, or decrease, to revenue for estimated chargebacks, rebates, discounts and
returns. The following table sets forth our gross revenues and the amount of dilution to revenues
resulting from allowances for customer credits, including discounts, rebates, chargebacks, product
returns and other allowances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands) |
|
Gross revenues |
|
$ |
26,871 |
|
|
$ |
58,569 |
|
|
$ |
129,516 |
|
|
$ |
205,093 |
|
Less allowance for customer credits |
|
|
2,915 |
|
|
|
12,883 |
|
|
|
21,387 |
|
|
|
44,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
23,956 |
|
|
$ |
45,686 |
|
|
$ |
108,129 |
|
|
$ |
160,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for customer credits as a percentage of consolidated gross revenues were 11% and 17% for
the three and nine months ended September 30, 2005, respectively, as compared to 22% for each of
the three and nine months ended September 30, 2004. This change is due to the sale of the
pharmaceutical assets in July 2005 and the resulting decrease in the need to take reserves for
pharmaceutical returns and chargebacks. Allowances for customer credits for the development
services business are minimal.
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
Our consolidated net revenues for the three months ended September 30, 2005 decreased 48% to $24.0
million, from $45.7 million in the same period in 2004. Net revenues from product sales decreased
76%
41
in the
three months ended September 30, 2005 to $3.3 million, from
$13.5 million in the comparable 2004
period. The decrease resulted from the sale of substantially all of our remaining pharmaceutical
product lines in July 2005, as discussed above. Our net revenues for the three months ended
September 30, 2005 and 2004 included $0.2 million and $1.3 million, respectively, recognized under
the consignment sales method.
The following table presents the net revenues for each of our major pharmaceutical product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Darvon/Darvocet |
|
$ |
1,026 |
|
|
$ |
2,685 |
|
|
$ |
15,518 |
|
|
$ |
12,676 |
|
Brethine |
|
|
(275 |
) |
|
|
(1,169 |
) |
|
|
(1,156 |
) |
|
|
4,380 |
|
MVI/Aquasol |
|
|
|
|
|
|
1,351 |
|
|
|
|
|
|
|
7,075 |
|
CII Pain Products |
|
|
1,727 |
|
|
|
8,287 |
|
|
|
16,151 |
|
|
|
27,488 |
|
All Other |
|
|
785 |
|
|
|
2,366 |
|
|
|
3,803 |
|
|
|
8,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
3,263 |
|
|
$ |
13,520 |
|
|
$ |
34,316 |
|
|
$ |
59,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brethine net revenues were negative due to higher than anticipated actual returns received in the
three and nine months ended September 30, 2005 and additional returns reserves recorded based on
the estimated level of Brethine ampoule product in wholesaler inventories. The M.V.I. and Aquasol
product lines were sold to Mayne Pharma (USA) Inc. in April 2004.
Net revenues from our development services business decreased 19% in the three months ended
September 30, 2005 to $18.6 million, from $23.0 million in the 2004 period. The decrease was
principally attributable to lower revenues from our clinical and analytical services. Customer
concerns with respect to our uncertain financial condition have adversely affected our ability to
obtain new development service projects, particularly long-term projects. This trend, if it
continues, will adversely affect future period net revenues.
Net revenues from product development decreased 94% in the three months ended September 30, 2005 to
$0.3 million, or 1% of net revenues, from $4.5 million, or 10% of net revenues, in the 2004 period,
primarily due to product development revenues under our significant development agreement having
ended in June 2005. Revenues under this agreement were $4.6 million in the three months ended
September 30, 2004. We received the cash associated with this revenue in April 2004. We do not
expect any further cash receipts or revenues under this agreement. Based on the development status
and anticipated sales levels of other products subject to existing royalty and product development
agreements, it is likely that revenues from product development will be substantially lower than
historical levels for the near future.
Reimbursed out-of-pocket revenues represent out-of-pocket expenses we incur that are reimbursed to
us by our clients. Reimbursed out-of-pocket revenues decreased to $1.8 million in the three months
ended September 30, 2005, from $4.6 million in the 2004 period. This decrease is primarily related
to fewer projects in our clinical trials operations during this period and is expected to fluctuate
from one period to another as a result of changes in the level of activity in the clinical trials
that we conduct.
42
Direct costs (excluding depreciation and amortization) decreased $8.9 million, or 32%, to $18.9
million in the three months ended September 30, 2005, from $27.8 million in the same period in
2004. This decrease in direct costs resulted primarily from reduced revenues as a result of the
sale of substantially all of the assets of our Pharmaceuticals Division and a decrease in
reimbursable out-of-pocket expenses, as discussed above. Direct costs as a percentage of net
revenues were 79% in the three months ended September 30, 2005 as compared to 61% in the 2004
period. We anticipate that our direct costs as a percentage of revenues will be greater going
forward as compared to historical periods because the gross margins from our product sales business
had historically been greater than the gross margins from our development services business.
Selling expenses decreased 80% in the three months ended September 30, 2005 to $1.2 million, or 5%
of net revenues, from $6.0 million, or 13% of net revenues, in the 2004 period. This decrease is
primarily due to reduced personnel and marketing and promotional costs. We terminated our entire
internal pharmaceutical product sales force in the fourth quarter of 2004.
General and administrative costs decreased $2.1 million in the three months ended September 30,
2005 to $7.4 million, or 31% of net revenues, from $9.5 million, or 21% of net revenues, in the
2004 period. This decrease was primarily due to lower employee-related expenses resulting from
staff reductions made in 2004.
Research and development expenses were $0.4 million, or 2% of net revenues, in the three months
ended September 30, 2005, compared to $3.1 million, or 7% of net revenues, in the 2004 period. The
decrease in research and development expenses was primarily attributable to decisions to reduce our
active research and development projects due to the liquidity issues we face in 2005. As a result
of the sale of the pharmaceutical assets, we have ceased all on-going research and development
projects.
In the three months ended September 30, 2005, we recorded $4.0 million of reorganization expenses,
consisting of legal, financial and consulting professional fees associated with debt restructuring
activities, and we expect that these expenses will continue to be significant through the pendency
of the Chapter 11 Cases.
In the third quarter of 2004, we recorded $0.8 million of legal, financial and consulting
professional fees associated with the internal investigation conducted by a special committee of
directors formed by our board of directors to investigate certain matters, as more fully discussed
in our Annual Report on Form 10-K for the year ended December 31, 2004.
In the third quarter of 2005, we recorded a gain on the sale of substantially all of the assets of
the Pharmaceuticals Division of $29.0 million.
In September 2004, the Company received $1.6 million from the escrow established in connection with
the April 2004 sale our M.V.I. and Aquasol product lines to Mayne Pharma (USA) Inc. This was
recorded as additional gain on sale in the third quarter of 2004.
In September 2004, we announced and implemented a restructuring plan, which included a work force
reduction and a facility closure plan. We recorded a $13.7 million expense in the three months
ended September 30, 2004, primarily representing severance costs and related employee-benefit
related expenses of $1.5 million, separation payments of $1.9 million to our former chief executive
officer and
43
costs of $10.3 million for leased facilities which are no longer in use. These leased facilities
included our New Jersey lab facility, smaller facilities in North Carolina and California, and
aircraft leased by us.
Royalty expenses for the three months ended September 30, 2005 were less than $0.1 million. We
accrued royalties based on revenues generated by certain acquired products, almost all of which
were sold to Xanodyne in July. Royalty expenses were $0.4 million for the 2004 period.
In September 2004, we recorded a $5.3 million charge due to the impairment of an intangible asset
associated with our acquired Brethine product. The introduction of generic competition affected
our future anticipated revenues, which negatively impacted the carrying value of the acquired
intangible assets.
Other expense for the three months ended September 30, 2005 included $0.4 million related to the
anticipated recall of a product manufactured by us. We also recorded reserves of $0.2 million and
$0.2 million to our product sales and development services revenues, respectively, related to
product that may be returned in this anticipated recall.
Our consolidated income from operations was $19.0 million in the three months ended September 30,
2005, as compared to a loss from operations of $21.6 million in the 2004 period. This change is
primarily attributable to the $29.0 million gain on the sale of the pharmaceutical assets, without
which we would have recognized a substantial net loss for the 2005 period. The change is also
partially attributable to lower 2005 selling, research and development and general and
administrative expenses, which were partially offset by the lower revenues and resulting decrease
in gross margin dollars, increased professional fees and the charges taken in 2004 for
restructuring and asset impairment.
Income from operations for our product sales business was $28.7 million in the three months ended
September 30, 2005, compared to a loss from operations of $7.1 million in the comparable 2004
period. This change is attributable to the gain on sale, partially offset by a decrease in revenue
and resulting decrease in gross margin dollars, and the charges taken in 2004 for restructuring and
asset impairment.
The loss from operations for our development services business was $1.7 million in the three months
ended September 30, 2005, compared to a loss from operations of $5.0 million in the comparable 2004
period. This change is primarily due to reduced overhead costs, resulting from selling, general
and administrative expense restructuring actions taken in 2004, partially offset by the lower
revenues, as discussed above, and the resulting decrease in gross margin dollars.
Income from operations for our product development business was $0.3 million in the three months
ended September 30, 2005, compared to income from operations of $4.5 million in the comparable 2004
period. This change resulted from the decreased revenues from our significant development
agreement, as discussed above.
Unallocated corporate expenses decreased in the three months ended September 30, 2005 to $7.8
million, from $10.3 million in the 2004 period. This decrease is primarily related to the lower
employee-related expenses attributable to reductions in force completed in 2004, as discussed
above.
Net interest expense was $2.1 million in the three months ended September 30, 2005 as compared to
$9.5 million in the 2004 period. This change was due to reduced interest expense related to our
senior
44
subordinated notes, partially offset by lower interest on our senior debt facilities, which were
repaid in July 2005 with proceeds from the pharmaceutical asset sale. The accrual of interest on
the senior subordinated notes was suspended at the time of the filing of the Chapter 11 Cases and
we suspended the amortization of deferred debt issuance costs related to these notes. Interest
expense for the three months ended September 30, 2005 would have been higher by $5.7 million had we
not suspended accruing interest and amortizing these deferred costs. See Liquidity and Capital
Resources for additional information on changes to our debt.
We recorded no U.S. federal income tax benefit or expense in the three months ended September 30,
2005. We currently believe that it is more likely than not that any deferred tax assets generated
during 2005 will not be utilized; therefore, no tax benefit was recorded. Our effective tax rate
for the three months ended September 30, 2005 and 2004 was zero.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Our consolidated net revenues for the nine months ended September 30, 2005 decreased 32% to $108.1
million, from $160.2 million in the same period in 2004. Net revenues from product sales decreased
43% in the nine months ended September 30, 2005 to $34.3 million, from $59.7 million in the
comparable 2004 period. The decrease resulted from the sale of substantially all of our remaining
pharmaceutical product lines in July 2005, as discussed above, decreased sales volumes in our
Roxicodone, Oramorph and Brethine product lines, as well as the divestiture of our M.V.I. and
Aquasol product lines in the second quarter of 2004 and calcitriol product line in December 2004,
which was partially offset by increases in sales volumes of our Darvon/Darvocet product lines in
the first quarter of 2005. Sales volumes of Roxicodone and Brethine decreased in part due to the
introduction of generic versions of these products in the first and second quarters of 2004,
respectively. In addition, we decreased the price of our Brethine product significantly in the
second half of 2004 due to the introduction of generic competition. Our net revenues for the nine
months ended September 30, 2005 and 2004 included $1.2 million and $10.4 million, respectively,
recognized under the consignment sales method.
Net revenues from our development services business decreased 19% in the nine months ended
September 30, 2005 to $58.6 million, from $72.5 million in the 2004 period. The decrease was
principally attributable to lower revenues from our clinical and analytical services. As discussed
above, customer concerns with respect to our uncertain financial condition have adversely affected
our ability to obtain new development service projects, particularly long-term projects.
Net revenues from product development decreased 43% in the nine months ended September 30, 2005 to
$8.3 million, or 8% of net revenues, from $14.5 million, or 9% of net revenues, in the 2004 period,
primarily due to lower product development revenues under our significant development agreement, as
discussed above. Revenues under this agreement were $7.2 million and $13.7 million in the nine
months ended September 30, 2005 and 2004, respectively.
Reimbursed out-of-pocket revenues decreased to $6.9 million in the nine months ended September 30,
2005, from $13.3 million in the 2004 period. This decrease is primarily related to fewer projects
in our clinical trials operations during the period, as discussed above.
45
Direct costs (excluding depreciation and amortization) decreased $25.0 million, or 27%, to $66.2
million in the nine months ended September 30, 2005, from $91.1 million in the same period in 2004.
This decrease in direct costs resulted primarily from the lower pharmaceutical product and
development services revenues and resulting lower costs related to those product and service
revenues, and a decrease in reimbursable out-of-pocket expenses. Direct costs as a percentage of
net revenues were 61% in the nine months ended September 30, 2005 as compared to 57% in the 2004
period.
Selling expenses decreased 85% in the nine months ended September 30, 2005 to $4.4 million, or 4%
of net revenues, from $30.1 million, or 19% of net revenues, in the 2004 period. We terminated our
contract sales force agreement with Athlon Pharmaceuticals, Inc. in the second quarter of 2004 and
we terminated our entire internal pharmaceutical product sales force in the fourth quarter of 2004.
General and administrative costs decreased $9.1 million in the nine months ended September 30, 2005
to $26.2 million, or 24% of net revenues, from $35.3 million, or 22% of net revenues, in the 2004
period. This decrease was primarily due to lower employee-related expenses resulting from staff
reductions made in 2004, as discussed above.
Research and development expenses were $3.3 million, or 3% of net revenues, in the nine months
ended September 30, 2005, compared to $13.8 million, or 9% of net revenues, in the 2004 period. As
discussed above, the decrease in research and development expenses was primarily attributable to
decisions to reduce our active research and development projects due to the liquidity issues we
faced in 2005. Significant project spending in 2005 was related to our Lynxorb pain management
product and Darvocet line extension program.
In the nine months ended September 30, 2005, we recorded $11.3 million of reorganization expenses,
consisting of legal, financial and consulting professional fees associated with debt restructuring
activities.
In the nine months ended September 30, 2004, we recorded $9.1 million of legal, financial and
consulting professional fees associated with the investigation conducted by the special committee,
as discussed above.
As discussed above, in the third quarter of 2005, we recorded a gain on the sale of substantially
all of the assets of the Pharmaceuticals Division of $29.0 million.
Also as discussed above, in April 2004, we sold our M.V.I. and Aquasol product lines to Mayne
Pharma (USA) Inc. for $105 million, subject to certain adjustments. The sale resulted in a gain of
$39.1 million that we recorded in the second and third quarters of 2004. The gain was partially
offset by a $31.0 million expense we recorded in the first quarter of 2004 for a contingent payment
to AstraZeneca AB based on the status of the reformulation of the M.V.I.-12 product. The FDAs
approval in the first quarter of 2004 of the reformulation of this product created an obligation
under our product line acquisition agreement for us to make this payment.
In the nine months ended September 30, 2004, we recorded restructuring charges of $17.1 million
related to work force reductions and facility closing costs. These costs represent severance costs
and related employee benefit expenses for those affected by the reduction, separation payments to
our former chief executive officer and rent and other facility related costs through lease
terminations.
46
In the second quarter of 2005, we recorded an asset impairment charge of $1.2 million related to
writing-down the remaining intangible assets related to our Brethine product. Brethine was not
included in the assets we sold to Xanodyne. In September 2004, we recorded a $5.3 million charge
due to the impairment of an intangible asset associated with our acquired Brethine product, as
discussed above.
Other expense for the nine months ended September 30, 2005 included $0.4 million related to the
anticipated recall of a product manufactured by us. We also recorded reserves of $0.2 million and
$0.2 million to our product sales and development services revenues, respectively, related to
product that may be returned in this anticipated recall. Other expense for the nine months ended
September 30, 2004 included a $1.6 million charge representing the fee we paid to terminate an
asset purchase agreement for a product that we no longer believed was commercially viable.
Terminating the agreement eliminated a contingent payment obligation of $13.8 million. No future
obligations remained under this terminated agreement.
Our consolidated income from operations was $17.7 million in the nine months ended September 30,
2005, as compared to a loss from operations of $41.3 million in the 2004 period. This change is
primarily attributable to the items discussed above, including the gain on the sale of the
pharmaceutical assets, lower selling, research and development and general and administrative
expenses, which were partially offset by the lower revenues and resulting decrease in gross margin
dollars, increased professional fees, the gain on the sale of the M.V.I. and Aquasol product line
recorded in 2004 and the charges taken in 2004 for restructuring and asset impairment.
Income from operations for our product sales business was $37.9 million in the nine months ended
September 30, 2005, compared to a loss of $7.1 million in the comparable 2004 period. This change
is attributable to the gain on sale from the 2005 sale of substantially all of the remaining assets
of the Pharmaceuticals Division, partially offset by a decrease in revenue and resulting decrease
in gross margin dollars, the net impact from the gain on the sale of the M.V.I. and Aquasol product
line recorded in 2004 and the charges taken in 2004 for restructuring and asset impairment.
The loss from operations for our development services business was $0.6 million in the nine months
ended September 30, 2005, compared to a loss from operations of $4.2 million in the comparable 2004
period. This change is primarily due to reduced overhead costs, resulting from selling, general
and administrative expense restructuring actions taken in 2004, partially offset by the lower
revenues, as discussed above, and the resulting decrease in gross margin dollars.
Income from operations for our product development business was $8.3 million in the nine months
ended September 30, 2005, compared to income from operations of $14.5 million in the comparable
2004 period. This change resulted from the decreased revenues from our significant development
agreement, as discussed above.
Unallocated corporate expenses decreased in the nine months ended September 30, 2005 to $24.4
million, from $29.9 million in the 2004 period. This decrease is primarily related to the lower
employee-related expenses attributable to reductions in force completed in 2004, as discussed
above.
47
Net interest expense was $22.2 million in the nine months ended September 30, 2005 as compared to
$23.9 million in the 2004 period. This change was due to increased borrowings and interest rates
under our senior credit facilities, which were repaid in July 2005, offset by reduced interest
expense related to our senior subordinated notes. The accrual of interest on the senior
subordinated notes was suspended at the time of the filing of the Chapter 11 Cases and we suspended
the amortization of deferred debt issuance costs related to these notes. Interest expense for the
nine months ended September 30, 2005 would have been higher by $8.9 million had we not suspended
accruing interest and amortizing these deferred costs.
We recorded no U.S. federal income tax benefit or expense in the nine months ended September 30,
2005. We currently believe that it is more likely than not that any deferred tax assets generated
during 2005 will not be utilized; therefore, no tax benefit was recorded. Our effective tax rate
for the nine months ended September 30, 2005 and 2004 was zero.
Liquidity and Capital Resources
Historically, we have funded our businesses with cash flows provided by operations and proceeds
from asset sales and borrowings. Cash flow used in continuing operations in the first nine months
of 2005 was $25.0 million, compared to cash flow used in continuing operations of $65.6 million in
the first nine months of 2004. This change was primarily due to a decrease in the loss from
operations in the 2005 period, the impact of the sale of the pharmaceutical assets and an $11.3
million income tax refund we received in March 2005, partially offset by restructuring payments in
2005 that were reserved for as of December 31, 2004.
Cash used provided by investing activities was $198.0 million in the first nine months of 2005,
primarily related to the cash proceeds from the sale of the pharmaceutical assets, partially offset
by capital spending of $1.7 million. Cash provided by investing activities was $87.4 million in
the first nine months of 2004, primarily related to the cash proceeds from the M.V.I. and Aquasol
sale, partially offset by $5.5 million of capital spending.
Net cash used in financing activities during the first nine months of 2005 was $175.6 million,
primarily representing refinancing of our term and revolving loan facilities and subsequent
repayments from the proceeds of the sale of the pharmaceutical assets, compared to net cash used in
financing activities of $23.4 million in the first nine months of 2004, which primarily represented
debt repayments of $164.0 million under previous debt agreements and a termination payment of $9.4
million under our previous interest rate hedging agreement, partially offset by $147.5 million of
borrowings under our senior credit facilities and $3.6 million in proceeds from the issuance of
common stock related to the exercise of stock options.
Other Commitments and Contingencies
We may have to make contingent payments of $4.7 million over the three-year period ending July
2006, related to the purchase of our Charleston, South Carolina manufacturing facility, based on
the level of future manufacturing revenues at this facility. At September 30, 2005, these
contingent payment obligations are not liabilities and have not been recorded on our consolidated
balance sheet.
48
For additional information about other contingencies to which we are subject, including litigation
and governmental investigations, see Note 11 to the Notes to the Consolidated Financial Statements
and Legal Proceedings in this report and Managements Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources-Commitments and Contingencies
in our Annual Report on Form 10-K for the year ended December 31, 2004.
Analysis of Liquidity
We incurred a substantial net loss and loss from operations for 2004 and a substantial net loss in
2005 through the date of the filing of the Chapter 11 Cases. As our financial condition continued
to deteriorate, we experienced reduced purchases of our pharmaceutical products by wholesalers who
were concerned with our ability to reimburse them for (i) product chargebacks that become due once
the pharmaceutical product is purchase by retail outlets and (ii) returns of dated products. In
addition, our ability to consummate long-term development contracts was also negatively affected by
our financial condition. As a result of our recurring substantial net losses, we did not have
available sufficient cash on hand, or the ability to borrow under our then-existing senior credit
facilities, to pay the approximately $10.5 million of scheduled interest due on April 1, 2005 on
our $175 million of senior subordinated notes due 2010. In addition to attempting to alleviate
customer concerns and obtain new contracts to support the business, we sought to mitigate our
liquidity issues by exploring the sale of our pharmaceutical assets as well as securing acceptable
additional or replacement financing. We and our advisors expended significant effort to meet our
liquidity needs.
As a result of our substantial net losses and lack of liquidity, on May 10, 2005, we filed the
Chapter 11 Cases. The filing is intended to allow us to continue normal business operations during
the restructuring proceedings. We are currently operating as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court. As a debtor-in-possession, we are authorized under Chapter
11 to continue to operate as an ongoing business, but may not engage in transactions outside the
ordinary course of business without the prior approval of the Bankruptcy Court.
On July 25, 2005, we completed the sale of substantially all of the assets of our Pharmaceuticals
Division to Xanodyne. We had previously received approval of the transaction on July 18, 2005 from
the Bankruptcy Court.
Under the terms of the agreement, Xanodyne paid $209.25 million upon closing of the transaction,
with $8 million of that amount paid to an escrow account to satisfy our post-closing obligations.
We used a portion of the proceeds of the sale to repay in full the outstanding term and revolving
loans under our DIP Facility. A portion of the remaining proceeds was used to pay fees and
expenses arising from the transaction, including payments to cure defaults under contracts assigned
to Xanodyne in the sale.
In March 2002, we issued $175 million of senior subordinated notes due April 1, 2010. The proceeds
from the issuance of these notes were $173.9 million, which was net of the original issue discount.
These notes initially had a fixed interest rate of 11% per annum and are guaranteed on a
subordinated basis by all existing domestic subsidiaries and all future domestic subsidiaries that
are owned 80% or more by us. When issued, the notes were not secured.
In April 2004, following the completion of a solicitation seeking the consent of holders of our
senior subordinated notes, we entered into a supplemental indenture to, among other things, grant a
lien to
49
secure our obligations under the senior subordinated notes, which lien was junior to the liens
securing our then-existing senior credit facilities but covered the same collateral, and to
increase the interest rate of our senior subordinated notes from 11% per annum to 11.5% per annum
effective April 1, 2004.
On October 29, 2004, following the completion of a solicitation seeking the consent of holders of
our senior subordinated notes, we entered into an additional supplemental indenture to, among other
things:
|
|
provide that the liens on assets that secure obligations under the senior subordinated
notes will continue if all senior debt is repaid, but will resume as junior liens if we
thereafter incur any new senior debt; and |
|
|
|
temporarily increase the interest rate on our senior subordinated notes by 0.5% per annum
(to 12% per annum), commencing to accrue on October 1, 2004 and ending on March 31, 2005. |
The filing of the Chapter 11 Cases constituted an event of default under our senior subordinated
notes. The indenture governing the notes provides that as a result of this event of default, the
outstanding amount of the notes became immediately due and payable without further action by any
holder of the notes or the trustee under the indenture. In addition, our continuing failure to pay
the interest payment due on the notes on April 1, 2005 within 30 days thereafter also constituted
an event of default under the notes permitting acceleration thereof. However, the filing of the
Chapter 11 Cases stayed all actions by the noteholders with respect to such defaults. The
Bankruptcy Court order approving the DIP Facilities, described below, granted, as adequate
protection for use during the pendency of the Chapter 11 Cases of the collateral securing the notes
prior to the filing of the Chapter 11 Cases, second priority post-petition liens on all of our
assets to secure the notes in an amount equal to the aggregate diminution in the value or amount of
the noteholders interest in such collateral. Such liens were made subject to the liens securing
the DIP Facilities and certain other permitted priority liens, fees and expenses.
On April 23, 2004, we entered into $140 million of senior credit facilities with a syndicate of
lenders, Silver Point Finance LLC (Silver Point) as collateral agent, and Bank of America, N.A.,
as administrative agent. These senior credit facilities consisted of a two-year, $125 million
senior secured term loan facility, which was fully drawn at closing, and a two-year, $15 million
senior secured revolving credit facility, of which the entire amount was available for borrowing at
closing. These senior credit facilities were secured by a security interest on substantially all
of our domestic assets, all of the stock of our domestic subsidiaries and 65% of the stock of our
material foreign subsidiaries.
Through a series of amendments, waivers and consents, the size of these senior secured credit
facilities was increased to consist of a term loan of $165 million and a revolving credit facility
of up to $15 million, of which approximately $179.3 million was outstanding immediately prior to
the filing of the Chapter 11 Cases.
The filing of the Chapter 11 Cases constituted an event of default under these senior credit
facilities. The credit agreement for these senior credit facilities provided that as a result of
this event of default, all commitments under the senior credit facilities were automatically
terminated and all debt outstanding under the facilities became automatically and immediately due
and payable. In addition, as of the expiration of a forbearance period on May 1, 2005, other
events of default existed under these senior credit facilities that would have permitted the
acceleration of the indebtedness thereunder. However, filing of the Chapter 11 Cases stayed all
actions by the lenders with respect to such defaults.
50
In connection with the filing of the Chapter 11 Cases, on May 12, 2005, we, and our domestic
subsidiaries, received interim approval of the Bankruptcy Court for, and entered into, a financing
agreement (the DIP Facilities) with Silver Point Finance, LLC, as collateral agent, Bank of
America, N.A., as a lender and as administrative agent and Sea Pines Funding LLC, TRS Thebe LLC,
SIL Loan Funding LLC, SPCP Group LLC, SPF CDO I, LLC and Goldman Sachs Credit Partners, L.P., as
lenders. The DIP Facilities provided a $15 million interim, 30-day revolving credit facility to
meet our immediate liquidity needs. Upon final approval of the DIP Facilities by the Bankruptcy
Court (which was received on June 3, 2005), the DIP Facilities consisted of a revolving credit
facility in an aggregate principal amount not to exceed $30 million and a term loan facility in the
aggregate principal amount of $180 million. The DIP Facilities expire on the earlier of the
effective date of a plan of reorganization or May 12, 2006.
The proceeds of the DIP Facilities were used to repay in full the obligations under our
then-existing senior credit facilities (described above) on June 7, 2005, and to pay fees and
expenses in connection with the DIP Facilities, and will continue to be used to fund our working
capital and general corporate requirements while the Chapter 11 Cases are pending. The term loan
facility bore interest at an annual rate of LIBOR plus 8.25% or an annual reference rate plus
7.25%, increasing by 1% three months after a sale of our Pharmaceuticals Division or, if earlier,
six months after the closing of the interim facility under the DIP Facilities, and then again every
three months thereafter. The revolving credit facility bears interest at an annual rate of LIBOR
plus 5% or an annual reference rate plus 4%, increasing by 0.5% three months after a sale of the
our Pharmaceuticals Division or, if earlier, six months after the closing of the interim facility
under the DIP Facilities, and then again every three months thereafter. On September 30, 2005,
30-day LIBOR was 3.86%. In addition, we became obligated to pay certain fees to the lenders, as
described in separate agreements.
The DIP Facilities are scheduled to mature twelve months after the closing thereof; however, we
would be obligated to repay the DIP Facilities earlier upon completion of a plan of reorganization
that had been confirmed by an order of the Bankruptcy Court. The DIP Facilities also require
mandatory prepayment with the net cash proceeds of non-ordinary course asset sales, including the
sale our Pharmaceuticals Division, extraordinary receipts and any payments made to the lenders
under our existing credit facility that are required to be disgorged to us in the Chapter 11 Cases.
On July 25, 2005, the entire term loan portion of our DIP Facilities was paid off from the proceeds
of the sale of substantially all of the assets of our Pharmaceuticals Division and all outstanding
loans under the revolving credit portion of our DIP Facilities were repaid as well. Only the $30
million revolving credit facility remains available under the DIP Facilities, which amount, at
September 30, 2005, was subject to a $3.6 million reserve against availability.
Obligations under the DIP Facilities are secured by:
|
|
|
100% of the capital stock of our domestic subsidiaries; |
|
|
|
|
65% of the capital stock of our first-tier foreign subsidiaries; and |
|
|
|
|
All of our assets and the assets our existing and future domestic subsidiaries. |
51
The obligations under the DIP Facilities are entitled to super-priority administrative expense
claim status under the Bankruptcy Code, subject to the payment of (i) a fee payable to Rothschild
Inc. in connection with the sale of the assets of our Pharmaceuticals Division and (ii) a basket of
professional fees permitted by the Bankruptcy Court in the Chapter 11 Cases. The DIP Facilities
will generally permit the ordinary course payment of professionals and administrative expenses
prior to the occurrence of an event of default under the DIP Facilities or a default under the
bankruptcy court orders approving the DIP Facilities. The Bankruptcy Court order approving the DIP
Facilities authorized us to use our cash (which secures our obligations under the DIP Facilities)
in accordance with the restrictions of the DIP Facilities, which generally permit ordinary course
uses of cash.
As a result of the items discussed above, there is substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern is dependent upon, but not limited
to, formulation, approval and confirmation of a plan of reorganization and the ability to obtain
positive results of operations. The consolidated financial statements contained herein have been
prepared in accordance with generally accepted accounting principles applicable to a going concern.
The consolidated financial statements do not include any adjustments to the recorded amounts or
reflect any amounts that may be ultimately paid to settle liabilities and contingencies which may
be required in the Chapter 11 reorganization or the effect of any changes, which may be made in
connection with our operations resulting from a plan of reorganization.
New Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which amends Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires
compensation expense to be recognized for all share-based payments made to employees based on the
fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed
by SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair values
(i.e., pro forma disclosure is no longer an alternative to financial statement recognition). SFAS
123(R) must be adopted in the first annual period beginning after June 15, 2005.
We currently plan to adopt SFAS 123(R) on January 1, 2006. This change in accounting is not
expected to materially impact our financial position. However, because we currently account for
share-based payments to our employees under APB 25, our results of operations have not included the
recognition of compensation expense for the issuance of stock option awards. Had we applied the
fair-value criteria established by SFAS 123(R) to previous stock option grants, the impact to our
results of operations would have approximated the impact of applying SFAS 123, which was a
reduction to net income of approximately $0.8 million and $1.1 million in the three months ended
September 30, 2005 and 2004, respectively, and $3.6 million and $4.6 million in the nine months
ended September 30, 2005 and 2004, respectively.
We do not believe that any other recently issued, but not yet effective, accounting standards will
have a material impact on the company.
52
Potential Applicability of Fresh Start Accounting
We may be required, as part of our emergence from bankruptcy protection, to adopt fresh start
accounting in a future period. If fresh start accounting is applicable, our assets and liabilities
will be recorded at fair value as of the fresh start reporting date. The fair value of our assets
and liabilities may differ materially from the recorded values of assets and liabilities on our
unaudited condensed consolidated balance sheets. In addition, if fresh start accounting is
required, our financial results after the application of fresh start accounting will be different
than historical trends and those differences may be material.
Risk Factors and Forward Looking Statements
Forward-Looking Statements and Safe Harbor Language
This report contains forward-looking statements within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Words such as estimate, project,
intend, anticipate, believe and similar expressions are intended to identify forward-looking
statements. The forward-looking statements contained in this report include statements about
future financial and operating results, including the anticipated financial condition, results of
operations, business strategies, operating efficiencies, competitive positions, growth
opportunities for existing products and businesses, and markets for our common stock.
Forward-looking statements also include statements about any plan of reorganization in the Chapter
11 Cases (and any debt or equity restructuring or financing obtained or effected in connection
therewith), potential asset sales, our internal control over financial reporting, and plans and
objectives of our management. These statements are based on the current expectations and beliefs
of our management and are subject to a number of factors and uncertainties, including the matters
noted above, that could cause actual outcomes to differ materially from those described in the
forward-looking statements. These statements are not guarantees of future outcomes, involve
certain risks, uncertainties and assumptions that are difficult to predict, and are based upon
assumptions as to future events that may not prove accurate. Therefore, actual outcomes may differ
materially from what is expressed in the forward-looking statement. Additional risks and
uncertainties pertaining to the following factors, among others, could cause actual results to
differ materially from those described in the forward-looking statements:
|
|
|
our ability to obtain requisite approval of the Plan or any other Chapter 11
plan that would permit AAIPharma to emerge from bankruptcy proceedings as a going
concern, |
|
|
|
|
the uncertainty whether a Chapter 11 plan, as approved in the bankruptcy
proceedings, would provide for any continuing ownership interest in the Company for the
current holders of our common stock, |
|
|
|
|
our ability to continue to operate our business effectively in light of the
significant diversion of resources, including management attention, in connection with
our pending bankruptcy proceedings, |
|
|
|
|
the uncertainty of the timing of any approval of a Chapter 11 plan and the
consequent continuation of our bankruptcy proceedings until such approval is obtained,
including the impact of heightened legal fees and other expenses during the pendency of
these proceedings, |
53
|
|
|
our ability to attract, retain and complete product development projects and
other customer relationships, which ability has been significantly adversely affected
by the uncertainties regarding our financial condition and our bankruptcy proceedings, |
|
|
|
|
our ability to comply with the DIP Facilities, |
|
|
|
|
our ability to obtain sufficient sources of capital to fund operating needs
upon termination or expiration of the DIP Facilities, |
|
|
|
|
our ability to generate sufficient cash from operations for our cash needs, |
|
|
|
|
our ability to continue to operate in the ordinary course and to manage our
relationships with our lenders, noteholders, customers, vendors and suppliers and
employees, |
|
|
|
|
our ability to obtain critical supplies, |
|
|
|
|
the impact of material weaknesses in internal control over financial reporting
on our ability to timely prepare accurate financial statements and to avoid material
adverse effects on our financial and operational results, |
|
|
|
|
our ability to timely remediate identified material weaknesses in internal
control over financial reporting, |
|
|
|
|
the investigations by the U.S. Attorneys office and the SEC into our financial
reporting and related activity, |
|
|
|
|
the outcome of pending litigation filed against us, if not included within the
Plan, |
|
|
|
|
the outcome of pending litigation we have filed against others, if not included
within the Plan, |
|
|
|
|
significant changes in our management team and the loss of critical personnel, |
|
|
|
|
our ability to attract critical personnel, |
|
|
|
|
demand for our services, |
|
|
|
|
the prices that we can obtain for our services, |
|
|
|
|
the level of competition we face, |
|
|
|
|
the amounts and timing of product returns and chargebacks and their impact on
our ability to receive the portion of the purchase price for assets of the
Pharmaceuticals Division held in escrow, |
|
|
|
|
timely success in product development and regulatory approvals for new products
and line extensions for which we may be entitled to receive royalty payments, |
54
|
|
|
actions by the United States Food and Drug Administration (FDA) in connection
with submissions related to products with respect to which we may be entitled to
receive royalties, |
|
|
|
|
activities of third parties to successfully commercialize products to which we
may be entitled to royalties, |
|
|
|
|
other governmental regulations and actions affecting our services or the
products with respect to which we may be entitled to receive royalties, |
|
|
|
|
developments in patent or other proprietary rights owned by us or others, and |
|
|
|
|
general conditions in the economy and capital markets. |
The ultimate outcome of matters with respect to which we make forward-looking statements and the
terms of any Chapter 11 plan ultimately confirmed can affect the value of our various pre-petition
liabilities and common stock. No assurance can be given as to what value, if any, will be
distributed in the bankruptcy proceedings to holders of claims against and equity interests in our
company. If confirmed by the Bankruptcy Court, the Plan that we have proposed would result in the
cancellation of our outstanding shares of common stock, which would mean that holders of our common
stock would receive no distributions under the Chapter 11 Plan and their shares of common stock
would be cancelled. Accordingly, we urge that appropriate caution be exercised with respect to
existing and future investments in our common stock or any claims relating to pre-petition
liabilities.
Some of these factors and additional factors that may cause our actual results to differ materially
are discussed in our 2004 Form 10-K under the heading Managements Discussion and Analysis of
Financial Condition and Results of Operations Risk Factors and Forward Looking Statements Risk
Factors. Whenever you read or hear any subsequent written or oral forward-looking statements
attributable to us or any person acting on our behalf, you should keep in mind the cautionary
statements contained or referred to in this report.
We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking
statements, whether as a result of new information, future events or otherwise, except as required
under the securities laws.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a result of global operating activities, we are exposed to risks associated with changes in
foreign exchange rates, principally exchange rates between the U.S. dollar and the euro. As
foreign exchange rates change, the U. S. dollar equivalent of revenues and expenses denominated in
foreign currencies changes. If foreign exchange rates were to increase by 10%, our net loss would
have been higher by approximately $29,000 in the nine months ended September 30, 2005 due to the
reduction in reported results from European operations.
55
We are also exposed to fluctuations in interest rates on borrowings under our senior credit
facilities. The interest rates payable on these borrowings are based on LIBOR. At September 30,
2005, there were no borrowings under these facilities.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934, as amended, of the effectiveness of the design and operation of
our disclosure controls and procedures as of September 30, 2005, the end of the period covered by
this Quarterly Report on Form 10-Q. Disclosure controls and procedures are to be designed to
reasonably assure that material information we must disclose in our reports filed or submitted
under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is (i)
recorded, processed, summarized and reported on a timely basis and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding disclosure. As a result of that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were not effective as of September 30, 2005 due to the material weaknesses described in
our managements report on internal control over financial reporting included in Item 8 of our 2004
Form 10-K and outlined below. As of September 30, 2005, none of the material weaknesses identified
in the 2004 Form 10-K, which are listed below, have been fully remediated:
1. The Companys controls over revenue recognition from Development Services activities do not
ensure that the revenue is not recorded in amounts in excess of the amount stated in the purchase
order or contract.
2. The Companys controls over the accounting for inventory of certain supplies used in the
non-clinical portion of the Development Services business lack adequate control processes to ensure
that timely adjustments are made to the recorded amount of inventory as the asset is consumed.
3. The Company lacks effective controls over the period-end financial closing process due to
ineffective controls existing in the review processes, a lack of timely closing of the Companys
financial books and records and reporting of those results, and segregation of duties conflicts
within the accounting functions involved in the closing process.
4. The Company lacks effective controls over the processes and procedures involved in the
accounting for income taxes in connection with the preparation of consolidated financial
statements.
5. The Company lacks effective controls over the process for reviewing its intangible assets for
impairment in connection with the preparation of the Companys consolidated financial statements.
6. The Company lacks effective controls over the process for determining appropriate product
returns reserves for product sales.
56
Changes in Internal Controls
We did not make any changes in our internal control over financial reporting during the third
quarter of 2005 that materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
We do not believe that the changes to internal control over financial reporting that we implemented
during 2004 as well as the first half of 2005, to address the material weaknesses described in
managements report of its assessment of internal control over financial reporting (for information
about these 2004 and first and second quarter 2005 enhancements, please see Item 9A of our 2004
Form 10-K and Item 4 of our Form 10-Qs for the first and second quarters of 2005), fully remediate
the material weaknesses. Accordingly, we are in the process of implementing the following specific
enhancements to our internal control over financial reporting related to the material weaknesses
described in our 2004 Form 10-K:
|
|
|
Management is currently reviewing the invoicing processes for our Development Services
Division and determining areas where more control and review processes should be added. We
are currently in the process of developing these new procedures; however, we do not expect
these to be in place until the fourth quarter of 2005. To provide assurance on the
financials as they relate to the invoicing function, management is performing quarterly
internal audits of the Development Services invoicing function. |
|
|
|
|
While new procedures were implemented during the second quarter of 2005 for the
accounting for the issuance of certain inventory used in the non-clinical portion of our
Development Services business, management is continuing to review the processes used in
this area and determining where additional controls may be implemented. |
Management is still considering additional control implementations that will be needed to
adequately address the identified material weaknesses and is also monitoring the implemented
control procedures to ensure they are performed properly. In order to remediate the numerous
material weaknesses in our internal control over financial reporting, we will be required to devote
significant financial resources and management attention to our remediation efforts. Due to the
demands of our bankruptcy proceedings and human resources constraints, we may not be able to devote
sufficient financial resources to successfully remediate the material weaknesses in our internal
controls that we have identified. In addition, our management is currently focused on matters
arising in our bankruptcy proceedings, including the development of a plan of reorganization, while
continuing to operate our business, and thus may not be able to devote sufficient time and
attention to our remediation efforts.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments in the legal proceedings described in Legal Proceedings
in our 2004 Form 10-K, which was filed with the SEC on April 27, 2005, except as described in
Commitments and Contingencies in Note 11 of the Notes to the Consolidated Financial Statements,
which is incorporated herein by reference.
57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The purchase of Company common stock as the employer match under the Companys Retirement and
Savings Plan was discontinued in the first quarter of 2005.
Item 3. Defaults Upon Senior Securities
We have not paid the $10.5 million of scheduled interest due on April 1, 2005 on our $175 million
of senior subordinated unsecured notes due 2010. An event of default occurred under the indenture
governing the notes because this interest payment was not made within 30 days after April 1. This
event of default entitles the trustee under the indenture for the notes or the holders of 25% of
the principal amount of the notes to accelerate the notes.
The filing of the Chapter 11 Cases constituted an event of default under our senior subordinated
notes. The indenture governing the notes provides that as a result of this event of default, the
outstanding amount of the notes became immediately due and payable without further action by any
holder of the notes or the trustee under the indenture. In addition, our continuing failure to pay
the interest payment due on the notes on April 1, 2005 within 30 days thereafter also constituted
an event of default under the notes permitting acceleration thereof. However, the acceleration of
the notes has been stayed as a result of the filing of our Chapter 11 Cases.
Item 6. Exhibits
A list of the exhibits required to be filed as part of this Quarterly Report on Form 10-Q is set
forth in the Exhibit Index, which immediately precedes such exhibits, and is incorporated herein
by reference.
58
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 thereunto duly authorized.
|
|
|
|
|
|
AAIPharma Inc.
|
|
Date: November 9, 2005 |
By: |
/s/ Ludo J. Reynders
|
|
|
|
Ludo J. Reynders |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: November 9, 2005 |
By: |
/s/ Matthew E. Czajkowski
|
|
|
|
Matthew E. Czajkowski |
|
|
|
Chief Financial Officer |
|
|
59
AAIPharma Inc.
Exhibit Index
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
10.1
|
|
Second Amendment to Asset Purchase Agreement between Xanodyne Pharmaceuticals, Inc.,
AAIPharma Inc. and AAIPharma LLC dated as of July 18, 2005, incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K of AAIPharma Inc. dated July 22, 2005 |
|
|
|
10.2
|
|
Master Services Agreement between Xanodyne Pharmaceuticals, Inc. and AAIPharma Inc. dated as
of June 25, 2005, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K
of AAIPharma Inc. dated July 29, 2005 |
|
|
|
10.3
|
|
AAIPharma Inc. Key Employee Retention Plan and Severance Plan, incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K of AAIPharma Inc. dated August 9, 2005 |
|
|
|
31.1
|
|
Certification pursuant to Exchange Act Rule 13a 14(a) of Dr. Ludo J. Reynders |
|
|
|
31.2
|
|
Certification pursuant to Exchange Act Rule 13a 14(a) of Matthew E. Czajkowski |
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350 |
60