##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q/A (Amendment No. 1)
 [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2003[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
 to
 Commission File Number 0-21185 AAIPHARMA INC.  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    04-2687849
(I.R.S. employer
identification no.)
 2320 SCIENTIFIC PARK DRIVE, WILMINGTON, NC 28405
(Address of principal executive office)                           (Zip code)
 (910) 254-7000
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES
[   ] NO [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes
[ü] No o The number of shares of the Registrants common stock outstanding, as of
September 30, 2003 was 27,842,394 shares. 1




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Explanatory Note: This Amendment No. 1 to aaiPharma Inc.s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 includes unaudited restated
consolidated financial statements for the three and nine months ended September
30, 2003 and 2002 and an audited restated consolidated balance sheet at
December 31, 2002. The accompanying restated consolidated financial statements
and supplementary data, including the notes to the accompanying restated
consolidated financial statements, have been revised to reflect the restatement
occurring subsequent to the filing of the original Quarterly Report on Form
10-Q for the period ended September 30, 2003. The restatement impacts the
first three quarters of 2003 and each quarter of 2002. The restated amounts
for the first and second quarters of 2003 and 2002 are presented in the
Companys Quarterly Reports on Form 10-Q/A for the quarterly periods ended
March 31, 2003 and June 30, 2003. This restatement:  
    
    corrects the recognition of revenue for certain
transactions in the first nine months of 2003 that did not satisfy
all of the conditions for revenue recognition contained in SFAS 48
and/or SAB 101,  
    
    increases reserves for product returns and makes other
adjustments to our revenue reserves in the first nine months of
2003, and  
    
    with respect to 2002 and 2003, changes the accounting for
our major product line acquisitions which had been accounted for
as business combinations to treat such acquisitions as
acquisitions of assets that do not constitute a business. The restatement adjustments decreased our net revenues and diluted earnings per
share for the three and nine months ended September 30, 2003 by approximately
$31.3 million and $51.0 million and $0.65 per share and $1.14 per share,
respectively. The restatement adjustments decreased our diluted earnings per
share for the three and nine months ended September 30, 2002 by approximately
$0.05 per share and $0.10 per share, respectively. For further discussion, see
our Annual Report on Form 10-K for the year ended December 31, 2003 (the 2003
Form 10-K), Item 7, which discloses the nature of the restatement adjustments
and shows the impact of the restatement adjustments. This Quarterly Report on Form 10-Q/A amends and restates Items 1, 2 and 4 of
Part I and Items 3 and 6 of Part II of the original Quarterly Report on Form
10-Q, and no other information included in the original Quarterly Report on
Form 10-Q is amended hereby. For a discussion of events and developments subsequent to September 30, 2003
through the filing on June 15, 2004 of our 2003 Form 10-K, see our 2003 Form
10-K. This Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 has not been updated to reflect any
events or developments occurring subsequent to June 15, 2004. In accordance
with Rule 12b-15 under the Securities Exchange Act of 1934, this amendment
includes only those items of the Quarterly Report on Form 10-Q affected by our
restatement. The terms we, us or our in this Quarterly Report on Form 10-Q/A 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 2




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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. On September 30, 2003, we owned the following registered
and unregistered trademarks referenced herein: Darvon®, Darvon-N®, Darvocet-N®, Darvocet A500TM,
M.V.I.®, M.V.I.-12®, M.V.I. Pediatric®, M.V.I.
Adult, Aquasol®, Aquasol A®,
Aquasol E®, Brethine®, ProSorb-D, AzaSanTM, aaiPharma®, and AAI®.
Unless the context otherwise requires, references in this document to Darvon are to Darvon® and Darvon-N® collectively, references
to Darvocet are to Darvocet-N® and references to Darvocet A500 are to Darvocet
A500TM. Unless the context otherwise requires, references in this document to M.V.I. are to
M.V.I.-12®, M.V.I. Pediatric® and M.V.I. Adult,
collectively, and references in this document 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. 
 aaiPharma Inc.
Table of Contents Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements(unaudited)Restated Consolidated Statements of Operations
    
    
    4Restated Consolidated Balance Sheets
    
    
    5Restated Consolidated Statements of Cash Flows
    
    
    6Restated Consolidated Statements of Comprehensive (Loss) Income
    
    
    7Notes to Restated Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    26Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 3. Defaults Upon Senior Securities
    
    
    40Item 6. Exhibits and Reports on Form 8-K
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEX
    
    
    42
 3




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##### 



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements.
 The restated consolidated financial statements and supplementary data,
including the notes to the restated consolidated financial statements, set
forth in this Item 1, have been revised to reflect the restatement occurring
subsequent to the filing of the original Quarterly Report on Form 10-Q. aaiPharma Inc. 
 RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net revenues:Product sales
    
    $
    14,331
    
    
    $
    35,925
    
    
    $
    80,393
    
    
    $
    90,775Product development (royalties and fees)
    
    
    3,524
    
    
    
    5,663
    
    
    
    11,231
    
    
    
    14,267Development services
    
    
    21,845
    
    
    
    19,621
    
    
    
    63,159
    
    
    
    63,23439,700
    
    
    
    61,209
    
    
    
    154,783
    
    
    
    168,276Operating costs and expenses:Direct costs (excluding depreciation
and royalty expense):Product sales (includes product rights
amortization of $2,969, $2,969, $8,906
and $6,270)
    
    
    11,265
    
    
    
    11,124
    
    
    
    38,522
    
    
    
    30,565Development services
    
    
    12,304
    
    
    
    11,620
    
    
    
    36,685
    
    
    
    37,921Total direct costs
    
    
    23,569
    
    
    
    22,744
    
    
    
    75,207
    
    
    
    68,486Selling expenses
    
    
    9,071
    
    
    
    6,044
    
    
    
    25,006
    
    
    
    16,028General and administrative expenses
    
    
    9,793
    
    
    
    10,345
    
    
    
    31,112
    
    
    
    29,261Research and development
    
    
    5,367
    
    
    
    5,511
    
    
    
    15,441
    
    
    
    15,375Depreciation
    
    
    1,912
    
    
    
    1,729
    
    
    
    5,747
    
    
    
    5,314Royalty expense
    
    
    325
    
    
    
    
    
    
    
    452
    
    
    
    Total operating costs and expenses
    
    
    50,037
    
    
    
    46,373
    
    
    
    152,965
    
    
    
    134,464(Loss) income from operations
    
    
    (10,337
    )
    
    
    14,836
    
    
    
    1,818
    
    
    
    33,812Other income (expense):Interest, net
    
    
    (5,140
    )
    
    
    (5,506
    )
    
    
    (15,621
    )
    
    
    (13,882
    )Loss from extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,053
    )Other income (expense), net
    
    
    (122
    )
    
    
    (77
    )
    
    
    21
    
    
    
    126(5,262
    )
    
    
    (5,583
    )
    
    
    (15,600
    )
    
    
    (21,809
    )(Loss) income before income taxes
    
    
    (15,599
    )
    
    
    9,253
    
    
    
    (13,782
    )
    
    
    12,003Provision for (benefit from) income taxes
    
    
    (6,207
    )
    
    
    3,505
    
    
    
    (5,414
    )
    
    
    4,882Net (loss) income
    
    $
    (9,392
    )
    
    $
    5,748
    
    
    $
    (8,368
    )
    
    $
    7,121Basic (loss) earnings per share
    
    $
    (0.34
    )
    
    $
    0.21
    
    
    $
    (0.30
    )
    
    $
    0.26Weighted average shares outstanding
    
    
    27,810
    
    
    
    27,417
    
    
    
    27,664
    
    
    
    27,297Diluted (loss) earnings per share
    
    $
    (0.34
    )
    
    $
    0.20
    
    
    $
    (0.30
    )
    
    $
    0.25Weighted average shares outstanding
    
    
    27,810
    
    
    
    28,062
    
    
    
    27,664
    
    
    
    28,421
 The accompanying notes are an integral part of these financial statements. 4




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aaiPharma Inc. 
 RESTATED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 September 30,
    
    December 31,2003
    
    2002(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,110
    
    
    $
    6,532Accounts receivable, net
    
    
    31,313
    
    
    
    29,467Work-in-progress
    
    
    15,520
    
    
    
    10,515Inventories, net
    
    
    17,169
    
    
    
    17,004Deferred tax assets
    
    
    1,271
    
    
    
    1,271Prepaid and other current assets
    
    
    7,336
    
    
    
    6,362Total current assets
    
    
    83,719
    
    
    
    71,151Property and equipment, net
    
    
    57,267
    
    
    
    53,125Goodwill, net
    
    
    12,490
    
    
    
    11,378Intangible assets, net
    
    
    278,796
    
    
    
    281,669Other assets
    
    
    13,093
    
    
    
    16,179Total assets
    
    $
    445,365
    
    
    $
    433,502LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    6,567
    
    
    $
    5,921Accounts payable
    
    
    16,444
    
    
    
    17,671Customer advances
    
    
    19,487
    
    
    
    15,051Accrued wages and benefits
    
    
    8,416
    
    
    
    6,718Interest payable
    
    
    9,798
    
    
    
    5,232Deferred product revenue
    
    
    45,198
    
    
    
    Other accrued liabilities
    
    
    4,570
    
    
    
    5,201Total current liabilities
    
    
    110,480
    
    
    
    55,794Long-term debt, less current portion
    
    
    243,092
    
    
    
    277,899Deferred tax liability
    
    
    (5,279
    )
    
    
    3,840Other liabilities
    
    
    5,386
    
    
    
    715Stockholders equity:Common stock
    
    
    28
    
    
    
    27Paid-in capital
    
    
    81,867
    
    
    
    79,049Retained earnings
    
    
    8,028
    
    
    
    16,396Accumulated other comprehensive income (loss)
    
    
    1,763
    
    
    
    (218
    )Total stockholders equity
    
    
    91,686
    
    
    
    95,254Total liabilities and stockholders equity
    
    $
    445,365
    
    
    $
    433,502
 The accompanying notes are an integral part of these financial statements. 5




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aaiPharma Inc. 
 RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months Ended September 30,2003
    
    2002Cash flows from operating activities:Net (loss) income
    
    $
    (8,368
    )
    
    $
    7,121Adjustments to reconcile net (loss) income to
net cash provided by operating activities:Depreciation and amortization
    
    
    14,653
    
    
    
    11,584Write-off of deferred financing and other costs, net of tax
    
    
    
    
    
    
    8,053Other
    
    
    138
    
    
    
    476Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (1,570
    )
    
    
    (6,958
    )Work-in-progress
    
    
    (4,520
    )
    
    
    156Inventories, net
    
    
    (90
    )
    
    
    (4,610
    )Deferred tax assets
    
    
    
    
    
    
    919Prepaid and other assets
    
    
    273
    
    
    
    (12,842
    )Accounts payable
    
    
    (1,420
    )
    
    
    (667
    )Customer advances
    
    
    4,158
    
    
    
    1,646Interest payable
    
    
    4,566
    
    
    
    10,766Deferred product revenue
    
    
    45,198
    
    
    
    Accrued wages and benefits and other accrued liabilities
    
    
    (9,080
    )
    
    
    3,951Net cash provided by operating activities
    
    
    43,938
    
    
    
    19,595Cash flows from investing activities:Purchases of property and equipment
    
    
    (9,867
    )
    
    
    (6,659
    )Purchase of property and equipment previously leased
    
    
    
    
    
    
    (14,145
    )Proceeds from sales of property and equipment
    
    
    508
    
    
    
    13Acquisitions of product rights and other intangibles
    
    
    (6,050
    )
    
    
    (211,997
    )Other
    
    
    (334
    )
    
    
    (529
    )Net cash used in investing activities
    
    
    (15,743
    )
    
    
    (233,317
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    
    
    
    
    244,450Payments on long-term borrowings
    
    
    (29,500
    )
    
    
    (39,400
    )Proceeds from interest rate swaps, net
    
    
    2,191
    
    
    
    10,848Proceeds from stock option exercises
    
    
    2,819
    
    
    
    3,193Other
    
    
    805
    
    
    
    (2,839
    )Net cash (used in) provided by financing activities
    
    
    (23,685
    )
    
    
    216,252Net increase in cash and cash equivalents
    
    
    4,510
    
    
    
    2,530Effect of exchange rate changes on cash
    
    
    68
    
    
    
    93Cash and cash equivalents, beginning of period
    
    
    6,532
    
    
    
    6,371Cash and cash equivalents, end of period
    
    $
    11,110
    
    
    $
    8,994Supplemental information, cash paid for:Interest
    
    $
    13,520
    
    
    $
    4,759Income taxes
    
    $
    6,152
    
    
    $
    2,405
 The accompanying notes are an integral part of these financial statements. 6




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aaiPharma Inc. 
 RESTATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net (loss) income
    
    $
    (9,392
    )
    
    $
    5,748
    
    
    $
    (8,368
    )
    
    $
    7,121Currency translation adjustments
    
    
    (42
    )
    
    
    (269
    )
    
    
    1,981
    
    
    
    1,068Comprehensive (loss) income
    
    $
    (9,434
    )
    
    $
    5,479
    
    
    $
    (6,387
    )
    
    $
    8,189
 The accompanying notes are an integral part of these financial statements. 7




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aaiPharma Inc. 
   1. Basis of presentation and other matters The accompanying unaudited restated consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and applicable Securities and Exchange Commission regulations for
interim financial information. These restated 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 restated financial information as of December 31, 2002 has been
derived from audited financial statements; certain amounts for the three and
nine months ended September 30, 2002 have been reclassified for consistent
presentation with current year financial statements. On January 30, 2003,
aaiPharmas Board of Directors approved a 3-for-2 stock split of the Companys
common shares. On March 10, 2003, each stockholder received one additional
share of common stock for every two shares they owned on the record date of
February 19, 2003. All share and per share amounts have been restated to
reflect the stock split for all periods presented. Users of this interim
restated financial information should read the audited financial statements for
the preceding fiscal year, which are included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included in these interim restated
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. In 2003, the Company adopted Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections (SFAS 145). SFAS 145 no longer requires
companies to report gains or losses associated with the extinguishment of debt
as a component of extraordinary gains or losses, net of tax. In addition, any
extraordinary gains or losses on extinguishment of debt in prior periods
presented would require reclassification. As required by SFAS 145, the
extraordinary loss recognized in the nine months ended September 30, 2002 of
approximately $8.1 million ($5.3 million net of tax) to record the write-off of
deferred financing and other costs related to its prior debt facilities has
been reclassified to other expense. 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 Companys 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 Companys 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 SFAS 123, the Companys net income
(loss) and earnings per share would have been changed to the pro forma amounts
indicated below: 8




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Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002(In thousands, except per share data)Net (loss) income, as reported
    
    $
    (9,392
    )
    
    $
    5,748
    
    
    $
    (8,368
    )
    
    $
    7,121Pro forma stock-based
compensation cost,
net of tax
    
    
    1,961
    
    
    
    1,719
    
    
    
    5,610
    
    
    
    4,061Pro forma net (loss) income
    
    
    (11,553
    )
    
    
    4,029
    
    
    
    (13,978
    )
    
    
    3,060(Loss) earnings per share:As reported -Basic
    
    $
    (0.34
    )
    
    $
    0.21
    
    
    $
    (0.30
    )
    
    $
    0.26Diluted
    
    $
    (0.34
    )
    
    $
    0.20
    
    
    $
    (0.30
    )
    
    $
    0.25Pro forma -Basic
    
    $
    (0.41
    )
    
    $
    0.15
    
    
    $
    (0.51
    )
    
    $
    0.11Diluted
    
    $
    (0.41
    )
    
    $
    0.14
    
    
    $
    (0.51
    )
    
    $
    0.11
 2. Restatement of Previously Issued Financial Statements The Company has restated its consolidated statements of operations, cash flows,
and comprehensive income for the three and nine months ended September 30, 2003
and 2002 and its consolidated balance sheets as of September 30, 2003 and
December 31, 2002. The restatement does not affect periods prior to 2002. The
restatement, among other things, corrects the Companys accounting treatment of
certain transactions that did not satisfy all of the conditions of FASB
Statement No. 48 Revenue Recognition When Right of Return Exists (SFAS 48)
and/or Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
Statements (SAB 101) or were subsequently deemed to involve subjective
determinations for which the Company has determined alternative accounting
treatments should be used. Set forth below are the restatement adjustments
included in the restatement of the previously issued financial statements for
the three and nine months ended September 30, 2003 and 2002. The following table presents the impact of the restatement adjustments
described below on net income (loss) for the three and nine months ended
September 30, 2003 and 2002. Net Income (Loss)
    
    Net Income (Loss)for the Three
    
    for the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,(In thousands)2003
    
    2002
    
    2003
    
    2002As previously reported
    
    $
    8,928
    
    
    $
    7,104
    
    
    $
    24,072
    
    
    $
    9,958Consignment sale / reversal of
revenue (i)
    
    
    (13,730
    )
    
    
    
    
    
    
    (18,866
    )
    
    
    Returns reserves (ii)
    
    
    (2,612
    )
    
    
    
    
    
    
    (8,271
    )
    
    
    Intangible asset amortization (iii)
    
    
    (1,356
    )
    
    
    (1,370
    )
    
    
    (4,068
    )
    
    
    (2,947
    )Change in tax rate (iv)
    
    
    (622
    )
    
    
    14
    
    
    
    (1,235
    )
    
    
    110As restated
    
    $
    (9,392
    )
    
    $
    5,748
    
    
    $
    (8,368
    )
    
    $
    7,121
 The adjustments to restate the 2002 and 2003 quarterly periods relate to the
following:  (i)
    
    for 2003, the correction of the Companys revenue recognition of certain
transactions, including specific product sales in the nine months ended
September 30, 2003, that did not satisfy all of the conditions for
recognition of revenue under SFAS 48 and/or SAB 101, 9




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(ii)
    
    for 2003, significant increases in reserves for product returns and other
adjustments to the Companys revenue and product inventory reserves,(iii)
    
    for 2002 and 2003, a change in the accounting treatment used with
respect to the Companys product line acquisitions from accounting for the
acquisitions as business combinations to recording such transactions as
asset acquisitions. Accordingly the Company adjusted the related
allocations to reverse the recording of goodwill and allocate all amounts
specifically to identifiable tangible and intangible assets, and(iv)
    
    for the change in effective tax rate resulting from the above
adjustments. The following table presents the impact of the restatement adjustments on the
Companys previously reported results for the three and nine months ended
September 30, 2003 on a condensed basis: Three Months Ended
    
    Nine Months EndedSeptember 30, 2003
    
    September 30, 2003As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share data)Statements of operations:Net revenues
    
    $
    71,012
    
    
    $
    39,700
    
    
    $
    205,793
    
    
    $
    154,783Total costs and expenses
    
    
    62,084
    
    
    
    49,092
    
    
    
    181,721
    
    
    
    163,151Net income (loss)
    
    $
    8,928
    
    
    $
    (9,392
    )
    
    $
    24,072
    
    
    $
    (8,368
    )Basic earnings (loss) per share
    
    $
    0.32
    
    
    $
    (0.34
    )
    
    $
    0.87
    
    
    $
    (0.30
    )Diluted earnings (loss) per share
    
    $
    0.31
    
    
    $
    (0.34
    )
    
    $
    0.84
    
    
    $
    (0.30
    )
 Three Months Ended
    
    Nine Months EndedSeptember 30, 2002
    
    September 30, 2002As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share data)Statements of operations:Net revenues
    
    $
    61,209
    
    
    $
    61,209
    
    
    $
    168,276
    
    
    $
    168,276Total costs and expenses
    
    
    54,105
    
    
    
    55,461
    
    
    
    158,318
    
    
    
    161,155Net income (loss)
    
    $
    7,104
    
    
    $
    5,748
    
    
    $
    9,958
    
    
    $
    7,121Basic earnings per share
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.36
    
    
    $
    0.26Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.35
    
    
    $
    0.25
 10




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##### 



September 30, 2003
    
    December 31, 2002As
    
    
    
    
    
    AsPreviously
    
    
    
    
    
    Previously
    
    AsReported
    
    As Restated
    
    Reported
    
    Restated(In thousands)Balance sheets:ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,110
    
    
    $
    11,110
    
    
    $
    6,532
    
    
    $
    6,532Accounts receivable, net
    
    
    37,122
    
    
    
    31,313
    
    
    
    29,467
    
    
    
    29,467Inventory, net
    
    
    11,858
    
    
    
    17,169
    
    
    
    17,004
    
    
    
    17,004Other current assets
    
    
    25,243
    
    
    
    24,127
    
    
    
    18,148
    
    
    
    18,148Total current assets
    
    
    85,333
    
    
    
    83,719
    
    
    
    71,151
    
    
    
    71,151Goodwill, net
    
    
    211,904
    
    
    
    12,490
    
    
    
    210,792
    
    
    
    11,378Intangible assets, net
    
    
    89,221
    
    
    
    278,796
    
    
    
    89,078
    
    
    
    281,669Other assets
    
    
    72,593
    
    
    
    70,360
    
    
    
    69,304
    
    
    
    69,304Total assets
    
    $
    459,051
    
    
    $
    445,365
    
    
    $
    440,325
    
    
    $
    433,502LIABILITIES AND STOCKHOLDERS EQUITYDeferred product revenue
    
    $
    
    
    
    $
    45,198
    
    
    $
    
    
    
    $
    Current liabilities
    
    
    71,019
    
    
    
    65,282
    
    
    
    55,794
    
    
    
    55,794Long-term debt, less current portion
    
    
    243,092
    
    
    
    243,092
    
    
    
    277,899
    
    
    
    277,899Deferred tax liability
    
    
    11,232
    
    
    
    (5,279
    )
    
    
    6,467
    
    
    
    3,840Other liabilities
    
    
    5,386
    
    
    
    5,386
    
    
    
    715
    
    
    
    715Stockholders equity
    
    
    128,322
    
    
    
    91,686
    
    
    
    99,450
    
    
    
    95,254Total liabilities and stockholders equity
    
    $
    459,051
    
    
    $
    445,365
    
    
    $
    440,325
    
    
    $
    433,502
 3. Earnings (loss) per share Basic (loss) earnings per share is based on the weighted average number of
common shares outstanding during the year. Diluted (loss) earnings per share
is computed assuming that the weighted average number of common shares was
increased by the conversion of stock options issued to employees and members of
the Companys Board of Directors. The diluted per share amounts reflect a
change in the number of shares outstanding (the denominator) to include the
options as if they were converted to shares and issued, unless their inclusion
would be anti-dilutive. In the three and nine months ended September 30, 2003,
2,193,853 and 1,693,586 options, respectively, were excluded as they were
anti-dilutive. In the three and nine months ended September 30, 2002,
2,746,559 and 1,812,787 options, respectively, were excluded as they were
anti-dilutive. In each period presented, the net income (the numerator) is
the same for both basic and diluted per share computations. The following table provides a reconciliation of the denominators for the basic
and diluted earnings per share computations (in thousands): 11




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##### 



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Basic (loss) earnings per share:Weighted average number of shares
    
    
    27,810
    
    
    
    27,417
    
    
    
    27,664
    
    
    
    27,297Effect of dilutive securities:Stock options
    
    
    
    
    
    
    645
    
    
    
    
    
    
    
    1,124Diluted (loss) earnings per share:Adjusted weighted average number of shares
and assumed conversions
    
    
    27,810
    
    
    
    28,062
    
    
    
    27,664
    
    
    
    28,421
 4. Financial information by business segment and geographic area The Company operates in three business segments, consisting of a product sales
business, primarily comprised of the pharmaceuticals business unit, 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 provides for the sales of the
Companys pharmaceutical product lines and for the commercial manufacturing of
small quantity products outsourced by other pharmaceutical companies. 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 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. The majority of the Companys
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 (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(In thousands)Net revenues:Product sales
    
    $
    14,331
    
    
    $
    35,925
    
    
    $
    80,393
    
    
    $
    90,775Product development
    
    
    3,524
    
    
    
    5,663
    
    
    
    11,231
    
    
    
    14,267Development services
    
    
    21,845
    
    
    
    19,621
    
    
    
    63,159
    
    
    
    63,234$
    39,700
    
    
    $
    61,209
    
    
    $
    154,783
    
    
    $
    168,276United States
    
    $
    34,783
    
    
    $
    62,684
    
    
    $
    140,453
    
    
    $
    167,385Germany
    
    
    5,007
    
    
    
    4,526
    
    
    
    15,550
    
    
    
    11,440Other
    
    
    458
    
    
    
    315
    
    
    
    1,066
    
    
    
    711Less intercompany
    
    
    (548
    )
    
    
    (6,316
    )
    
    
    (2,286
    )
    
    
    (11,260
    )$
    39,700
    
    
    $
    61,209
    
    
    $
    154,783
    
    
    $
    168,276
 12




---



##### 



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(In thousands)(Loss) income from operations:Product sales
    
    $
    (5,079
    )
    
    $
    19,376
    
    
    $
    20,123
    
    
    $
    46,750Product development
    
    
    3,524
    
    
    
    5,663
    
    
    
    11,231
    
    
    
    14,267Development services
    
    
    1,553
    
    
    
    226
    
    
    
    1,676
    
    
    
    1,328(2
    )
    
    
    25,265
    
    
    
    33,030
    
    
    
    62,345Research and development
    
    
    (5,464
    )
    
    
    (5,618
    )
    
    
    (15,748
    )
    
    
    (15,691
    )Corporate
    
    
    (4,871
    )
    
    
    (4,811
    )
    
    
    (15,464
    )
    
    
    (12,842
    )$
    (10,337
    )
    
    $
    14,836
    
    
    $
    1,818
    
    
    $
    33,812United States
    
    $
    (10,766
    )
    
    $
    14,414
    
    
    $
    502
    
    
    $
    33,853Germany
    
    
    376
    
    
    
    439
    
    
    
    1,396
    
    
    
    227Other
    
    
    53
    
    
    
    (17
    )
    
    
    (80
    )
    
    
    (268
    )$
    (10,337
    )
    
    $
    14,836
    
    
    $
    1,818
    
    
    $
    33,812Depreciation and amortization:Product sales
    
    $
    3,187
    
    
    $
    3,158
    
    
    $
    9,447
    
    
    $
    6,796Development services
    
    
    1,093
    
    
    
    949
    
    
    
    3,331
    
    
    
    2,890Product development
    
    
    98
    
    
    
    107
    
    
    
    307
    
    
    
    316Corporate
    
    
    503
    
    
    
    484
    
    
    
    1,568
    
    
    
    1,582$
    4,881
    
    
    $
    4,698
    
    
    $
    14,653
    
    
    $
    11,584
 September 30,
    
    December 31,2003
    
    2002Total assets:Product sales
    
    $
    332,164
    
    
    $
    340,773Product development
    
    
    12,215
    
    
    
    6,024Development services
    
    
    58,076
    
    
    
    49,952Corporate
    
    
    42,910
    
    
    
    36,753$
    445,365
    
    
    $
    433,502United States
    
    $
    417,632
    
    
    $
    411,174Germany
    
    
    26,105
    
    
    
    21,167Other
    
    
    1,628
    
    
    
    1,161$
    445,365
    
    
    $
    433,502Goodwill, net:Development services
    
    $
    12,490
    
    
    $
    11,378
 5. Transactions with related parties The Company has revenue, accounts receivable and work-in-progress with Aesgen,
Inc. (Aesgen) and Endeavor Pharmaceuticals, Inc. (Endeavor). Both Endeavor
and Aesgen were organized by aaiPharma Inc., its principal
shareholders and others, and
continued to be related parties at September 30, 2003. No revenues were
recognized from Aesgen for the three and nine months ended September 30, 2003.
Revenues recognized from Aesgen totaled $0.1 million and $0.5 million for the
three and nine months ended September 30, 2002. Services performed by the
Company for Aesgen are covered by a 13




---



##### 



Subscription Agreement, whereby the Company has agreed to receive Aesgen
preferred stock in lieu of cash for the services performed.In February 2002,
the Company acquired a calcitriol product from Aesgen, under an agreement which
included potential royalty payments. The Company launched its calcitriol
product in March 2003 and expensed royalties of $0.4 million and $0.2 million
under that agreement in the three and nine months ended September 30, 2003.
Revenues recognized from Endeavor totaled $0.1 million and $0.7 million for the
three and nine months ended September 30, 2003, and were $32,000 and $1.0
million for the three and nine months ended September 30, 2002. Certain
services performed by the Company for Endeavor were covered by a Securities
Payment Agreement between the Company and Endeavor, whereby the Company may
receive Endeavor preferred stock in lieu of cash for services performed. At
September 30, 2003, the Company had no accounts receivable or work-in-progress
related to Aesgen, and had approximately $0.8 million of accounts receivable
and work-in-progress related to Endeavor. 6. Inventories, net The following table presents the components of inventories: September 30,
    
    December 31,2003
    
    2002(In thousands)Finished goods (including consigned inventory of $7,589 in 2003)
    
    $
    15,896
    
    
    $
    11,110Work-in-process
    
    
    335
    
    
    
    1,866Raw materials and supplies
    
    
    5,585
    
    
    
    4,749Inventory reserves
    
    
    (4,647
    )
    
    
    (721
    )Total inventories, net
    
    $
    17,169
    
    
    $
    17,004
 7. Debt The following table presents the components of current maturities of long-term debt: September 30,
    
    December 31,2003
    
    2002(In thousands)Current maturities of long-term debt
    
    $
    6,567
    
    
    $
    5,921
 The following table presents the components of long-term debt: September 30,
    
    December 31,2003
    
    2002(In thousands)U.S. bank term loan
    
    $
    40,000
    
    
    $
    50,000U.S. revolving credit facility
    
    
    28,000
    
    
    
    47,50011% senior subordinated notes due 2010, net of original issue discount
    
    
    174,070
    
    
    
    173,963Interest rate swap monetization deferred income
    
    
    12,677
    
    
    
    10,486
 14




---



##### 



September 30,
    
    December 31,2003
    
    2002(In thousands)Fair value of interest rate swap
    
    
    (5,088
    )
    
    
    1,871Less current maturities of long-term debt
    
    
    (6,567
    )
    
    
    (5,921
    )Total long-term debt due after one year
    
    $
    243,092
    
    
    $
    277,899
 In March 2002, the Company entered into a $175 million senior secured credit
facility consisting of a $75 million five-year revolving credit facility and a
$100 million five-year term loan facility. The term loan facility was
scheduled to be amortized over the full five-year term. The senior credit
facility was subsequently reduced due to repayments made under the term loan
facility. The availability of borrowings under the revolving credit facility
was not limited by a borrowing base. At September 30, 2003, the Company had
unused availability under the revolving credit facility of $47.0 million. The
senior credit facility provided for variable interest rates based on LIBOR or
an alternate base rate, at the Companys option. On September 30, 2003, 30-day
LIBOR was 1.12%. Such facility was guaranteed by all domestic subsidiaries and
secured by a security interest on substantially all domestic assets, all of the
stock of domestic subsidiaries and 65% of the stock of material foreign
subsidiaries. The senior credit facility required the payment of certain
commitment fees based on the unused portion of the revolving credit facility
and could be prepaid at any time without a premium. Also 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. This discount
will be charged to interest expense over the term of the notes. At September
30, 2003, these notes had a fixed interest rate of 11% per annum and were
guaranteed on a subordinated basis by all existing domestic subsidiaries and
all future domestic subsidiaries that are owned 80% or more by the Company. At
September 30, 2003, the notes were not secured. Prior to the third anniversary
of the date of issuance of the notes, up to 35% of the notes are redeemable
with the proceeds of qualified sales of equity at 111% of par value. On or
after the fourth anniversary of the date of issuance of the notes, all or any
portion of the notes are redeemable at declining premiums to par value,
beginning at 105.5%. Concurrent with the issuance of the senior subordinated notes, the Company
entered into an interest rate hedging agreement to effectively convert interest
expense on a portion of the senior subordinated notes for the term of the notes
from an 11% fixed annual rate to a floating annual rate equal to 6-month LIBOR
plus a base rate. On February 27, 2003, and again on June 23, 2003, the
Company sold the then outstanding interest rate hedging agreement for $2.3
million and $3.7 million, respectively, and replaced it with a similar interest
rate hedging agreement. The amounts received, less the interest benefits
earned through the dates of sale, have been recorded as premiums to the
carrying amount of the notes and are being amortized into interest income over
their remaining life. At September 30, 2003, the Company had an interest rate
hedging agreement in place covering $150 million of the notes, at a rate of
6-month LIBOR plus 7.41%. On September 30, 2003, 6-month LIBOR was 1.18%,
giving the Company an estimated all-in rate of 8.59%. The terms of the
interest rate hedging agreements, other than the base rate, were identical and
were perfectly matched with the terms of the related hedged instrument. Under the terms of the senior secured credit facility and the senior
subordinated notes, the Company was required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios and incurring additional indebtedness. After giving effect to
the restatement described in Note 2, the Company was not in compliance with
these covenants at September 30, 2003. The Company has since
replaced its senior secured credit facility and received waivers of
any defaults under its senior subordinated notes (see Note 1 to the Annual Report on Form
10-K for the year ended December 31, 2003 for additional
discussion). 15




---



##### 



8. Asset Acquisitions The Company acquired a product, which it subsequently launched as Darvocet
A500, from Athlon Pharmaceuticals in July 2003 for a cash closing payment and
royalties based on the sales of this product and other defined propoxyphene and
acetaminophen products the Company subsequently developed or acquired. The
Company received FDA approval of Darvocet A500 on September 10, 2003, and
launched the product nationally in early October 2003. The Company also entered a three-year services agreement with Athlon
Pharmaceuticals in July 2003 to provide sales support in designated territories
throughout the United States for the Darvocet A500 product. Under this
agreement, Athlon received an initial payment and was entitled to a fixed
monthly fee of $1.2 million for the sales support services, as well as
potential milestone payments based on the sales of this product and other
defined propoxyphene and acetaminophen products the Company subsequently
developed or acquired. This agreement was effective October 1, 2003 and had a
stated term of 36 months. The Company has initiated legal proceedings against
Athlon and has terminated this agreement. See Liquidity and Capital
ResourcesCommitments and Contingencies and Note 11 of Notes to Consolidated
Financial Statements contained in the Companys Annual Report on Form 10-K for
the year ended December 31, 2003. Upon the acquisition of this product, the Company originally recorded an
intangible asset in the amount of the closing payment with a definite life of
18.5 years. The Company has re-evaluated its allocation of values associated
with the concurrent agreements discussed above and, with the assistance of
third-party valuation consultants, has determined the fair value of the
intangible asset acquired as of the date of the acquisition to be greater than
the closing date payment. Accordingly, the Company has re-allocated a portion
of the value associated with the service agreement to the purchase price of the
intangible asset. The Companys adjusted financial statements for the third
quarter of 2003 reflect an intangible asset of $4.7 million. The Company
subsequently performed an impairment analysis using an updated sales forecast
as of December 31, 2003 and has written off the entire value of the intangible
asset. On March 28, 2002, the Company acquired the U.S. rights to the Darvon and
Darvocet branded product lines, which treat mild-to-moderate pain, and existing
inventory from Eli Lilly and Company, in an asset purchase. The Company
acquired these product lines and related intangible assets for $211.4 million,
exclusive of transactional costs. To finance this acquisition, which included
$1.8 million of inventory, the Company used the proceeds from the then existing
senior secured credit facility and senior subordinated notes, as described in
note 7. The Darvon and Darvocet product lines did not have separable assets
and liabilities associated with them, other than inventory, therefore the
Company allocated the purchase price, including acquisition related expenses,
to acquired identifiable tangible and intangible assets. The identified
intangible assets are being amortized over 20 years. In December 2001, the Company acquired from Novartis Pharmaceutical Corporation
and Novartis Corporation a line of asthma products used in the prevention and
reversal of bronchospasm in patients age 12 and older with asthma and
reversible bronchospasm associated with bronchitis and emphysema, in an asset
purchase. The product line acquired is marketed under the Brethine brand name.
The Company acquired this product line and related intangible assets for $26.6
million, exclusive of transactional costs. The Brethine product line did not
have separable assets and liabilities associated with it, therefore the Company
allocated the purchase price, including acquisition related expenses, to
acquired identifiable intangible assets, which are being amortized over 20
years. In August 2001, the Company completed the acquisition of a line of critical
care injectable and oral nutrition products from AstraZeneca AB, an affiliate
of AstraZeneca PLC, in an asset purchase. The product lines acquired are
marketed under the M.V.I. and Aquasol brand names. The Company acquired these
product lines and related intangible assets for $52.5 million, exclusive of
transactional costs, paid at closing, plus additional consideration described
below. The product line acquisition agreement was amended in July 2003. As
amended, it provided for two $1.0 million guaranteed payments, which were made
in August 2002 and 2003, eliminated a contingent payment of $2.0 million that
was potentially due in August 2003 under the original agreement, and 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 (FDA). 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 $9.0 million by September 30, 2003. Such
conditions were satisfied in January and February 2004, fixing the previously
contingent liability under the amendment at $31.5 million. The Company was
precluded from recognizing this obligation as additional purchase price for the
M.V.I. and Aquasol product line under Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets and No. 141 Business
Combinations; therefore, this adjustment resulting from a preacquisition
contingency will be expensed in the first quarter of 2004. As of September 30,
2003, this contingent obligation had not been recorded as a liability on the
Companys consolidated balance sheet. Also in July 2003, the M.V.I. supply
agreement with the seller was extended through 2008, subject to early
termination rights by the Company on six months notice given at any time, and
by the supplier on twenty-four months notice given at any time on or after
August 17, 2004. The M.V.I. and Aquasol product lines did not have separable
assets and liabilities associated with them, other than inventory; therefore
the Company allocated the purchase price, including acquisition related
expenses, to acquired identifiable tangible and intangible assets. In connection with the M.V.I. and Aquasol acquisition, the Company recorded
intangible assets which meet the criteria for having an indefinite life. In
accordance with SFAS 142, these intangible assets are not being amortized but
are evaluated for impairment on at least an annual basis. The intangible assets
recorded in connection with this acquisition represent the trademarks,
technology and know-how associated with the product lines. 16




---



##### 



9. Subsequent Events On August 5, 2003, aaiPharma, CIMA LABS INC. (CIMA), Scarlet Holding
Corporation, a direct, wholly owned subsidiary of aaiPharma (Holding
Company), Scarlet MergerCo, Inc., a direct, wholly owned subsidiary of Holding
Company (S MergerCo), and Crimson MergerCo, Inc., a direct, wholly owned
subsidiary of Holding Company (C MergerCo), entered into an Agreement and
Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement,
Holding Company would acquire all of the capital stock of each of CIMA and
aaiPharma through the merger of S MergerCo with and into aaiPharma and the
merger of C MergerCo with and into CIMA, with aaiPharma and CIMA surviving as
wholly owned subsidiaries of Holding Company (together, the Transaction).
The completion of the Transaction was subject to several conditions, including
the approval of the Transaction by the stockholders of CIMA and aaiPharma and
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. On November 3, 2003, CIMA terminated the Merger Agreement and paid an $11.5
million termination fee to aaiPharma. This fee was used to offset
merger-related expenses. On October 22, 2003, the Company entered into an agreement with certain
subsidiaries of Elan Corporation, plc to acquire a portfolio of pain management
products for $100 million in cash, subject to adjustment for the inventory to
be acquired. The Company completed this acquisition in the fourth quarter of
2003. The Company has received from its current lenders a term loan facility
in an amount necessary to fund the purchase of this product line, pay related
fees and expenses and repay indebtedness outstanding under the Companys
existing term loan facility. In connection with this acquisition, the Company
revised and increased the amount of its then existing revolving credit
facility. 10. Financial Information for Subsidiary Guarantors and Non-Guarantors In the first quarter of 2002, the Company issued senior subordinated notes,
which are guaranteed by certain of the Companys 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
intercompany balances and transactions. The following information presents consolidating statements of operations,
balance sheets and cash flows for the periods and as of the dates indicated: 17




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands) Three Months Ended September 30, 2003Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    11,134
    
    
    $
    23,649
    
    
    $
    5,465
    
    
    $
    (548
    )
    
    $
    39,700Equity earnings from subsidiaries
    
    
    (9,579
    )
    
    
    
    
    
    
    
    
    
    
    9,579
    
    
    
    Total revenues
    
    
    1,555
    
    
    
    23,649
    
    
    
    5,465
    
    
    
    9,031
    
    
    
    39,700Operating costs and expenses:Direct costs (excluding
depreciation and
royalty expense)
    
    
    6,478
    
    
    
    14,255
    
    
    
    3,294
    
    
    
    (458
    )
    
    
    23,569Selling
    
    
    1,557
    
    
    
    7,039
    
    
    
    475
    
    
    
    
    
    
    
    9,071General and administrative
    
    
    6,889
    
    
    
    1,920
    
    
    
    984
    
    
    
    
    
    
    
    9,793Research and development
    
    
    
    
    
    
    5,367
    
    
    
    
    
    
    
    
    
    
    
    5,367Depreciation
    
    
    1,321
    
    
    
    310
    
    
    
    281
    
    
    
    
    
    
    
    1,912Royalty expense
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    32516,245
    
    
    
    29,216
    
    
    
    5,034
    
    
    
    (458
    )
    
    
    50,037(Loss) income from operations
    
    
    (14,690
    )
    
    
    (5,567
    )
    
    
    431
    
    
    
    9,489
    
    
    
    (10,337
    )Other income (expense):Interest, net
    
    
    (395
    )
    
    
    (4,874
    )
    
    
    129
    
    
    
    
    
    
    
    (5,140
    )Net intercompany interest
    
    
    (497
    )
    
    
    538
    
    
    
    (41
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (15
    )
    
    
    19
    
    
    
    (126
    )
    
    
    
    
    
    
    (122
    )(907
    )
    
    
    (4,317
    )
    
    
    (38
    )
    
    
    
    
    
    
    (5,262
    )(Loss) income before income taxes
    
    
    (15,597
    )
    
    
    (9,884
    )
    
    
    393
    
    
    
    9,489
    
    
    
    (15,599
    )Benefit from income taxes
    
    
    (6,205
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (6,207
    )Net (loss) income
    
    $
    (9,392
    )
    
    $
    (9,883
    )
    
    $
    394
    
    
    $
    9,489
    
    
    $
    (9,392
    )
 18




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands) Three Months Ended September 30, 2002Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    15,598
    
    
    $
    47,085
    
    
    $
    4,843
    
    
    $
    (6,317
    )
    
    $
    61,209Equity earnings from subsidiaries
    
    
    15,920
    
    
    
    
    
    
    
    
    
    
    
    (15,920
    )
    
    
    Total revenues
    
    
    31,518
    
    
    
    47,085
    
    
    
    4,843
    
    
    
    (22,237
    )
    
    
    61,209Operating costs and expenses:Direct costs (excluding depreciation)
    
    
    10,919
    
    
    
    14,926
    
    
    
    2,813
    
    
    
    (5,914
    )
    
    
    22,744Selling
    
    
    1,523
    
    
    
    4,074
    
    
    
    447
    
    
    
    
    
    
    
    6,044General and administrative
    
    
    7,255
    
    
    
    2,161
    
    
    
    929
    
    
    
    
    
    
    
    10,345Research and development
    
    
    164
    
    
    
    5,347
    
    
    
    
    
    
    
    
    
    
    
    5,511Depreciation
    
    
    1,260
    
    
    
    237
    
    
    
    232
    
    
    
    
    
    
    
    1,72921,121
    
    
    
    26,745
    
    
    
    4,421
    
    
    
    (5,914
    )
    
    
    46,373Income (loss) from operations
    
    
    10,397
    
    
    
    20,340
    
    
    
    422
    
    
    
    (16,323
    )
    
    
    14,836Other income (expense):Interest, net
    
    
    (1,693
    )
    
    
    (3,798
    )
    
    
    (15
    )
    
    
    
    
    
    
    (5,506
    )Net intercompany interest
    
    
    (592
    )
    
    
    639
    
    
    
    (47
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    1,188
    
    
    
    (1,257
    )
    
    
    (8
    )
    
    
    
    
    
    
    (77
    )(1,097
    )
    
    
    (4,416
    )
    
    
    (70
    )
    
    
    
    
    
    
    (5,583
    )Income (loss) before income taxes
    
    
    9,300
    
    
    
    15,924
    
    
    
    352
    
    
    
    (16,323
    )
    
    
    9,253Provision for (benefit from) income taxes
    
    
    3,552
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    3,505Net income (loss)
    
    $
    5,748
    
    
    $
    15,924
    
    
    $
    399
    
    
    $
    (16,323
    )
    
    $
    5,748
 19




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands) Nine Months Ended September 30, 2003Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    33,395
    
    
    $
    107,059
    
    
    $
    16,615
    
    
    $
    (2,286
    )
    
    $
    154,783Equity earnings from subsidiaries
    
    
    6,408
    
    
    
    
    
    
    
    
    
    
    
    (6,408
    )
    
    
    Total revenues
    
    
    39,803
    
    
    
    107,059
    
    
    
    16,615
    
    
    
    (8,694
    )
    
    
    154,783Operating costs and expenses:Direct costs (excluding depreciation and
royalty expense)
    
    
    19,527
    
    
    
    47,675
    
    
    
    9,886
    
    
    
    (1,881
    )
    
    
    75,207Selling
    
    
    4,503
    
    
    
    18,907
    
    
    
    1,596
    
    
    
    
    
    
    
    25,006General and administrative
    
    
    22,736
    
    
    
    5,390
    
    
    
    2,986
    
    
    
    
    
    
    
    31,112Research and development
    
    
    
    
    
    
    15,441
    
    
    
    
    
    
    
    
    
    
    
    15,441Depreciation
    
    
    4,022
    
    
    
    895
    
    
    
    830
    
    
    
    
    
    
    
    5,747Royalty expense
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    45250,788
    
    
    
    88,760
    
    
    
    15,298
    
    
    
    (1,881
    )
    
    
    152,965(Loss) income from operations
    
    
    (10,985
    )
    
    
    18,299
    
    
    
    1,317
    
    
    
    (6,813
    )
    
    
    1,818Other income (expense):Interest, net
    
    
    (1,439
    )
    
    
    (14,314
    )
    
    
    132
    
    
    
    
    
    
    
    (15,621
    )Net intercompany interest
    
    
    (1,533
    )
    
    
    1,661
    
    
    
    (128
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    145
    
    
    
    34
    
    
    
    (158
    )
    
    
    
    
    
    
    21(2,827
    )
    
    
    (12,619
    )
    
    
    (154
    )
    
    
    
    
    
    
    (15,600
    )(Loss) income before income taxes
    
    
    (13,812
    )
    
    
    5,680
    
    
    
    1,163
    
    
    
    (6,813
    )
    
    
    (13,782
    )(Benefit from) provision for income taxes
    
    
    (5,444
    )
    
    
    31
    
    
    
    (1
    )
    
    
    
    
    
    
    (5,414
    )Net (loss) income
    
    $
    (8,368
    )
    
    $
    5,649
    
    
    $
    1,164
    
    
    $
    (6,813
    )
    
    $
    (8,368
    )
 20




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands) Nine Months Ended September 30, 2002Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    46,271
    
    
    $
    121,113
    
    
    $
    12,153
    
    
    $
    (11,261
    )
    
    $
    168,276Equity earnings from subsidiaries
    
    
    32,088
    
    
    
    
    
    
    
    
    
    
    
    (32,088
    )
    
    
    Total revenues
    
    
    78,359
    
    
    
    121,113
    
    
    
    12,153
    
    
    
    (43,349
    )
    
    
    168,276Operating costs and expenses:Direct costs (excluding depreciation)
    
    
    29,486
    
    
    
    41,888
    
    
    
    7,761
    
    
    
    (10,649
    )
    
    
    68,486Selling
    
    
    4,845
    
    
    
    9,923
    
    
    
    1,260
    
    
    
    
    
    
    
    16,028General and administrative
    
    
    20,260
    
    
    
    6,564
    
    
    
    2,437
    
    
    
    
    
    
    
    29,261Research and development
    
    
    580
    
    
    
    14,795
    
    
    
    
    
    
    
    
    
    
    
    15,375Depreciation and amortization
    
    
    3,802
    
    
    
    776
    
    
    
    736
    
    
    
    
    
    
    
    5,31458,973
    
    
    
    73,946
    
    
    
    12,194
    
    
    
    (10,649
    )
    
    
    134,464Income (loss) from operations
    
    
    19,386
    
    
    
    47,167
    
    
    
    (41
    )
    
    
    (32,700
    )
    
    
    33,812Other income (expense):Interest, net
    
    
    (1,240
    )
    
    
    (12,650
    )
    
    
    8
    
    
    
    
    
    
    
    (13,882
    )Net intercompany interest
    
    
    (1,740
    )
    
    
    1,896
    
    
    
    (156
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (4,266
    )
    
    
    (3,693
    )
    
    
    32
    
    
    
    
    
    
    
    (7,927
    )(7,246
    )
    
    
    (14,447
    )
    
    
    (116
    )
    
    
    
    
    
    
    (21,809
    )Income (loss) before income taxes
    
    
    12,140
    
    
    
    32,720
    
    
    
    (157
    )
    
    
    (32,700
    )
    
    
    12,003Provision for (benefit from) income taxes
    
    
    5,019
    
    
    
    
    
    
    
    (137
    )
    
    
    
    
    
    
    4,882Net income (loss)
    
    $
    7,121
    
    
    $
    32,720
    
    
    $
    (20
    )
    
    $
    (32,700
    )
    
    $
    7,121
 21




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING BALANCE SHEET
(In thousands) September 30, 2003Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,279
    
    
    $
    345
    
    
    $
    486
    
    
    $
    
    
    
    $
    11,110Accounts receivable, net
    
    
    8,725
    
    
    
    19,079
    
    
    
    3,509
    
    
    
    
    
    
    
    31,313Work-in-progress
    
    
    4,360
    
    
    
    5,605
    
    
    
    7,817
    
    
    
    (2,262
    )
    
    
    15,520Inventories
    
    
    4,140
    
    
    
    12,257
    
    
    
    772
    
    
    
    
    
    
    
    17,169Deferred tax assets
    
    
    1,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,271Prepaid and other current assets
    
    
    2,597
    
    
    
    4,401
    
    
    
    338
    
    
    
    
    
    
    
    7,336Total current assets
    
    
    31,372
    
    
    
    41,687
    
    
    
    12,922
    
    
    
    (2,262
    )
    
    
    83,719Investments in and advances to subsidiaries
    
    
    66,061
    
    
    
    (46,202
    )
    
    
    
    
    
    
    (19,859
    )
    
    
    Property and equipment, net
    
    
    39,419
    
    
    
    13,675
    
    
    
    4,173
    
    
    
    
    
    
    
    57,267Goodwill, net
    
    
    725
    
    
    
    1,229
    
    
    
    10,536
    
    
    
    
    
    
    
    12,490Intangibles, net
    
    
    1,085
    
    
    
    277,711
    
    
    
    
    
    
    
    
    
    
    
    278,796Other assets
    
    
    4,529
    
    
    
    8,458
    
    
    
    106
    
    
    
    
    
    
    
    13,093Total assets
    
    $
    143,191
    
    
    $
    296,558
    
    
    $
    27,737
    
    
    $
    (22,121
    )
    
    $
    445,365LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    6,567
    
    
    $
    
    
    
    $
    
    
    
    $
    6,567Accounts payable
    
    
    3,573
    
    
    
    11,013
    
    
    
    1,858
    
    
    
    
    
    
    
    16,444Customer advances
    
    
    7,553
    
    
    
    7,983
    
    
    
    4,149
    
    
    
    (198
    )
    
    
    19,487Accrued wages and benefits
    
    
    4,667
    
    
    
    2,148
    
    
    
    1,601
    
    
    
    
    
    
    
    8,416Interest payable
    
    
    19
    
    
    
    9,779
    
    
    
    
    
    
    
    
    
    
    
    9,798Deferred product revenue
    
    
    
    
    
    
    45,198
    
    
    
    
    
    
    
    
    
    
    
    45,198Other accrued liabilities
    
    
    164
    
    
    
    6,117
    
    
    
    (339
    )
    
    
    (1,372
    )
    
    
    4,570Total current liabilities
    
    
    15,976
    
    
    
    88,805
    
    
    
    7,269
    
    
    
    (1,570
    )
    
    
    110,480Long-term debt, less current portion
    
    
    28,000
    
    
    
    215,092
    
    
    
    
    
    
    
    
    
    
    
    243,092Other liabilities
    
    
    (4,981
    )
    
    
    5,088
    
    
    
    
    
    
    
    
    
    
    
    107Investments in and advances to subsidiaries
    
    
    111,547
    
    
    
    (117,472
    )
    
    
    5,901
    
    
    
    24
    
    
    
    Total stockholders equity
    
    
    (7,351
    )
    
    
    105,045
    
    
    
    14,567
    
    
    
    (20,575
    )
    
    
    91,686Total liabilities and stockholders equity
    
    $
    143,191
    
    
    $
    296,558
    
    
    $
    27,737
    
    
    $
    (22,121
    )
    
    $
    445,365
 22




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING BALANCE SHEET
(In thousands) December 31, 2002Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,725
    
    
    $
    180
    
    
    $
    627
    
    
    $
    
    
    
    $
    6,532Accounts receivable, net
    
    
    10,104
    
    
    
    16,758
    
    
    
    2,605
    
    
    
    
    
    
    
    29,467Work-in-progress
    
    
    4,135
    
    
    
    2,951
    
    
    
    4,568
    
    
    
    (1,139
    )
    
    
    10,515Inventories
    
    
    5,504
    
    
    
    11,114
    
    
    
    697
    
    
    
    (311
    )
    
    
    17,004Deferred tax assets
    
    
    1,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,271Prepaid and other current assets
    
    
    2,511
    
    
    
    3,642
    
    
    
    209
    
    
    
    
    
    
    
    6,362Total current assets
    
    
    29,250
    
    
    
    34,645
    
    
    
    8,706
    
    
    
    (1,450
    )
    
    
    71,151Investments in and advances to subsidiaries
    
    
    66,061
    
    
    
    (46,202
    )
    
    
    
    
    
    
    (19,859
    )
    
    
    Property and equipment, net
    
    
    42,055
    
    
    
    7,070
    
    
    
    4,000
    
    
    
    
    
    
    
    53,125Goodwill, net
    
    
    624
    
    
    
    1,230
    
    
    
    9,524
    
    
    
    
    
    
    
    11,378Intangibles, net
    
    
    952
    
    
    
    280,717
    
    
    
    
    
    
    
    
    
    
    
    281,669Other assets
    
    
    4,514
    
    
    
    11,569
    
    
    
    96
    
    
    
    
    
    
    
    16,179Total assets
    
    $
    143,456
    
    
    $
    289,029
    
    
    $
    22,326
    
    
    $
    (21,309
    )
    
    $
    433,502LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    5,921
    
    
    $
    
    
    
    $
    
    
    
    $
    5,921Accounts payable
    
    
    4,410
    
    
    
    11,447
    
    
    
    1,814
    
    
    
    
    
    
    
    17,671Customer advances
    
    
    7,840
    
    
    
    5,731
    
    
    
    2,618
    
    
    
    (1,138
    )
    
    
    15,051Accrued wages and benefits
    
    
    4,922
    
    
    
    929
    
    
    
    867
    
    
    
    
    
    
    
    6,718Interest payable
    
    
    285
    
    
    
    4,947
    
    
    
    
    
    
    
    
    
    
    
    5,232Other accrued liabilities
    
    
    1,244
    
    
    
    3,379
    
    
    
    (77
    )
    
    
    655
    
    
    
    5,201Total current liabilities
    
    
    18,701
    
    
    
    32,354
    
    
    
    5,222
    
    
    
    (483
    )
    
    
    55,794Long-term debt, less current portion
    
    
    47,500
    
    
    
    230,399
    
    
    
    
    
    
    
    
    
    
    
    277,899Other liabilities
    
    
    4,555
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,555Investments in and advances to subsidiaries
    
    
    68,094
    
    
    
    (72,423
    )
    
    
    4,984
    
    
    
    (655
    )
    
    
    Total stockholders equity
    
    
    4,606
    
    
    
    98,699
    
    
    
    12,120
    
    
    
    (20,171
    )
    
    
    95,254Total liabilities and stockholders equity
    
    $
    143,456
    
    
    $
    289,029
    
    
    $
    22,326
    
    
    $
    (21,309
    )
    
    $
    433,502
 23




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands) Nine Months Ended September 30, 2003Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (8,368
    )
    
    $
    5,649
    
    
    $
    1,164
    
    
    $
    (6,813
    )
    
    $
    (8,368
    )Adjustments to reconcile net (loss) income to net cash
provided
by operating activities:Depreciation and amortization
    
    
    3,675
    
    
    
    10,149
    
    
    
    829
    
    
    
    
    
    
    
    14,653Other
    
    
    (65
    )
    
    
    (4
    )
    
    
    207
    
    
    
    
    
    
    
    138Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,378
    
    
    
    (2,321
    )
    
    
    (627
    )
    
    
    
    
    
    
    (1,570
    )Work-in-progress
    
    
    (226
    )
    
    
    (2,654
    )
    
    
    (2,764
    )
    
    
    1,124
    
    
    
    (4,520
    )Inventories
    
    
    1,364
    
    
    
    (1,143
    )
    
    
    
    
    
    
    (311
    )
    
    
    (90
    )Prepaid and other assets
    
    
    (103
    )
    
    
    481
    
    
    
    (105
    )
    
    
    
    
    
    
    273Accounts payable
    
    
    (836
    )
    
    
    (435
    )
    
    
    (149
    )
    
    
    
    
    
    
    (1,420
    )Customer advances
    
    
    (287
    )
    
    
    2,252
    
    
    
    1,252
    
    
    
    941
    
    
    
    4,158Interest payable
    
    
    (265
    )
    
    
    4,831
    
    
    
    
    
    
    
    
    
    
    
    4,566Deferred product revenue
    
    
    
    
    
    
    45,198
    
    
    
    
    
    
    
    
    
    
    
    45,198Accrued wages and benefits and other accrued liabilities
    
    
    (10,869
    )
    
    
    3,959
    
    
    
    (142
    )
    
    
    (2,028
    )
    
    
    (9,080
    )Intercompany receivables and payables
    
    
    37,045
    
    
    
    (45,048
    )
    
    
    916
    
    
    
    7,087
    
    
    
    Net cash provided by operating activities
    
    
    22,443
    
    
    
    20,914
    
    
    
    581
    
    
    
    
    
    
    
    43,938Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,264
    )
    
    
    (7,813
    )
    
    
    (790
    )
    
    
    
    
    
    
    (9,867
    )Proceeds from sales of property and equipment
    
    
    390
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    508Acquisitions of product rights and other intangibles
    
    
    
    
    
    
    (6,050
    )
    
    
    
    
    
    
    
    
    
    
    (6,050
    )Other
    
    
    (334
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334
    )Net cash used in investing activities
    
    
    (1,208
    )
    
    
    (13,745
    )
    
    
    (790
    )
    
    
    
    
    
    
    (15,743
    )Cash flows from financing activities:Payments on long-term borrowings
    
    
    (19,500
    )
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    (29,500
    )Proceeds from interest rate swaps, net
    
    
    
    
    
    
    2,191
    
    
    
    
    
    
    
    
    
    
    
    2,191Proceeds from stock option exercises
    
    
    2,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,819Other
    
    
    
    
    
    
    805
    
    
    
    
    
    
    
    
    
    
    
    805Net cash used in financing activities
    
    
    (16,681
    )
    
    
    (7,004
    )
    
    
    
    
    
    
    
    
    
    
    (23,685
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,554
    
    
    
    165
    
    
    
    (209
    )
    
    
    
    
    
    
    4,510Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    68Cash and cash equivalents, beginning of period
    
    
    5,725
    
    
    
    180
    
    
    
    627
    
    
    
    
    
    
    
    6,532Cash and cash equivalents, end of period
    
    $
    10,279
    
    
    $
    345
    
    
    $
    486
    
    
    $
    
    
    
    $
    11,110
 24




---



##### 



aaiPharma Inc.
RESTATED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands) Nine Months Ended September 30, 2002Non-Guarantor
    
    GuarantorIssuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    7,121
    
    
    $
    32,720
    
    
    $
    (20
    )
    
    $
    (32,700
    )
    
    $
    7,121Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    3,499
    
    
    
    7,349
    
    
    
    736
    
    
    
    
    
    
    
    11,584Write-off of deferred financing and other costs
    
    
    
    
    
    
    8,053
    
    
    
    
    
    
    
    
    
    
    
    8,053Other
    
    
    (5
    )
    
    
    11
    
    
    
    470
    
    
    
    
    
    
    
    476Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,663
    
    
    
    (12,008
    )
    
    
    87
    
    
    
    2,300
    
    
    
    (6,958
    )Work-in-progress
    
    
    (146
    )
    
    
    918
    
    
    
    189
    
    
    
    (805
    )
    
    
    156Inventories
    
    
    (1,548
    )
    
    
    (3,675
    )
    
    
    
    
    
    
    613
    
    
    
    (4,610
    )Deferred tax assets
    
    
    919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919Prepaid and other assets
    
    
    1,324
    
    
    
    (13,989
    )
    
    
    (177
    )
    
    
    
    
    
    
    (12,842
    )Accounts payable
    
    
    (607
    )
    
    
    407
    
    
    
    (467
    )
    
    
    
    
    
    
    (667
    )Customer advances
    
    
    3,915
    
    
    
    (120
    )
    
    
    (655
    )
    
    
    (1,494
    )
    
    
    1,646Interest payable
    
    
    265
    
    
    
    10,501
    
    
    
    
    
    
    
    
    
    
    
    10,766Accrued wages and benefits and other accrued liabilities
    
    
    1,815
    
    
    
    1,840
    
    
    
    (54
    )
    
    
    350
    
    
    
    3,951Intercompany receivables and payables
    
    
    (19,749
    )
    
    
    (12,512
    )
    
    
    539
    
    
    
    31,722
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (534
    )
    
    
    19,495
    
    
    
    648
    
    
    
    (14
    )
    
    
    19,595Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,968
    )
    
    
    (1,423
    )
    
    
    (1,268
    )
    
    
    
    
    
    
    (6,659
    )Purchases of property and equipment previously leased
    
    
    (14,145
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,145
    )Proceeds from sales of property and equipment
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Acquisitions of product rights and other intangibles
    
    
    
    
    
    
    (211,997
    )
    
    
    
    
    
    
    
    
    
    
    (211,997
    )Other
    
    
    (579
    )
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    (529
    )Net cash used in investing activities
    
    
    (18,679
    )
    
    
    (213,370
    )
    
    
    (1,268
    )
    
    
    
    
    
    
    (233,317
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    49,401
    
    
    
    195,049
    
    
    
    
    
    
    
    
    
    
    
    244,450Payments on long-term borrowings
    
    
    (27,400
    )
    
    
    (12,014
    )
    
    
    
    
    
    
    14
    
    
    
    (39,400
    )Proceeds from interest rate swaps, net
    
    
    
    
    
    
    10,848
    
    
    
    
    
    
    
    
    
    
    
    10,848Proceeds from stock option exercises
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,193Other
    
    
    (2,855
    )
    
    
    (11
    )
    
    
    27
    
    
    
    
    
    
    
    (2,839
    )Net cash provided by financing activities
    
    
    22,339
    
    
    
    193,872
    
    
    
    27
    
    
    
    14
    
    
    
    216,252Net increase (decrease) in cash and cash equivalents
    
    
    3,126
    
    
    
    (3
    )
    
    
    (593
    )
    
    
    
    
    
    
    2,530Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    93Cash and cash equivalents, beginning of period
    
    
    5,300
    
    
    
    154
    
    
    
    917
    
    
    
    
    
    
    
    6,371Cash and cash equivalents, end of period
    
    $
    8,426
    
    
    $
    151
    
    
    $
    417
    
    
    $
    
    
    
    $
    8,994
 25




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. The information set forth in this Item 2 has been revised to reflect the
restatement occurring subsequent to the filing of the original Quarterly Report
on Form 10-Q. Restatement of Previously Issued Financial Statements We have restated our consolidated statements of operations, cash flows, and
comprehensive income for the three and nine months ended September 30, 2003 and
2002 and our consolidated balance sheets as of September 30, 2003 and December
31, 2002. The restatement did not affect periods prior to 2002. The
restatement is reported in our Annual Report on Form 10-K for the year ended
December 31, 2003 (the 2003 Form 10-K) and is reported in this Amendment No.
1 to our Quarterly Report for the quarterly period ended September 30, 2003 and
in amendments to our Quarterly Reports on Form 10-Q/A for the quarterly periods
ended March 31, 2003 and June 30, 2003. The restatement corrects our revenue
recognition of certain transactions, including specific product sales in 2003,
that did not satisfy all of the revenue recognition conditions under FASB
Statement No. 48 Revenue Recognition When Right of Return Exists (SFAS 48)
and/or Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
Statements (SAB 101), increases reserves for product returns and records
other adjustments to our revenue reserves for 2003, and reflects a different
treatment for our acquired products. The following table summarizes the adjustments we have made to the financial
information previously reported for the three months ended September 30, 2003. Revenue
    
    Pre-Tax Income
    
    Net Income($ in millions, except per share data)Consignment Sale / Reversal of
Revenue:Calcitriol
    
    $
    1.0
    
    
    $
    0.7
    
    
    $
    0.4AzaSan 75mg and 100 mg
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.0Darvocet A500
    
    
    (8.9
    )
    
    
    (8.0
    )
    
    
    (4.8
    )Calcitriol (Puerto Rican
wholesaler)
    
    
    (4.6
    )
    
    
    (4.5
    )
    
    
    (2.7
    )Brethine and other products (new
wholesaler)
    
    
    (16.2
    )
    
    
    (12.8
    )
    
    
    (7.7
    )Return Reserves:Brethine (second-tier wholesaler)
    
    
    (0.9
    )
    
    
    (0.9
    )
    
    
    (0.5
    )Brethine (10 and 100 count)
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.8
    )Darvon/Darvocet
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.8
    )Other products
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.5
    )Change in Accounting for Product
Acquisitions
    
    
    
    
    
    
    (2.2
    )
    
    
    (1.4
    )Change in Tax Rate (adjusted for
rounding)
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Total Adjustments
    
    $
    (31.3
    )
    
    $
    (29.4
    )
    
    $
    (18.3
    )Diluted earnings (loss) per share
    
    
    
    
    
    
    
    
    
    $
    (0.65
    )
 26




---



##### 



The following table summarizes the adjustments we have made to the financial
information previously reported for the nine months ended September 30, 2003. Revenue
    
    Pre-Tax Income
    
    Net Income($ in millions, except per share data)Consignment Sale / Reversal of
Revenue:Calcitriol
    
    $
    (2.7
    )
    
    $
    (1.9
    )
    
    $
    (1.1
    )AzaSan 75mg and 100 mg
    
    
    (4.9
    )
    
    
    (4.3
    )
    
    
    (2.6
    )Darvocet A500
    
    
    (8.9
    )
    
    
    (8.0
    )
    
    
    (4.8
    )Calcitriol (Puerto Rican
wholesaler)
    
    
    (4.6
    )
    
    
    (4.5
    )
    
    
    (2.7
    )Brethine and other products (new
wholesaler)
    
    
    (16.2
    )
    
    
    (12.8
    )
    
    
    (7.7
    )Return Reserves:Brethine (second-tier wholesaler)
    
    
    (6.8
    )
    
    
    (6.8
    )
    
    
    (4.1
    )Brethine (10 and 100 count)
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.8
    )Darvon/Darvocet
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.8
    )Other products
    
    
    (4.3
    )
    
    
    (4.3
    )
    
    
    (2.6
    )Change in Accounting for Product
Acquisitions
    
    
    
    
    
    
    (6.6
    )
    
    
    (4.1
    )Change in Tax Rate (adjusted for
rounding)
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Total Adjustments
    
    $
    (51.0
    )
    
    $
    (51.8
    )
    
    $
    (32.4
    )Diluted earnings (loss) per share
    
    
    
    
    
    
    
    
    
    $
    (1.14
    )
 In connection with our new product launches in 2003 of calcitriol, AzaSan 75 mg
and 100 mg and Darvocet A500, initial launch quantities of these products were
sold pursuant to guaranteed sale conditions under which we agreed to accept
returned product six months after the date of purchase, if not resold by then.
Revenue was recognized for these sales upon shipment without the establishment
of any special reserves to account for these return rights. Because these
launches were into new markets or were products with which we did not have
applicable or analogous historical experience, and because most of the sales
for these products had returns provisions inconsistent with our normal returns
provisions, we have concluded that we did not have the ability to reasonably
estimate returns, and that revenue for these sales should not have been
recognized until all of the conditions of SFAS 48 were met. 27




---



##### 



Since all of the conditions of SFAS 48 had not been met for sales in the nine
months ended September 30, 2003 of calcitriol, AzaSan 75mg and 100mg, and
Darvocet A500 products, revenue has been recorded as if the sales were
consignments. Calcitriol revenues have been reduced by $2.7 million, AzaSan
revenues have been reduced by $4.9 million and Darvocet A500 revenues have been
reduced by $8.9 million. Under the consignment model, upon shipment of product
we invoice the wholesaler, record deferred revenue at gross invoice sales price
and classify the inventory held by the wholesalers as consignment inventory at
our cost of such inventory. We will recognize revenue (net of discounts,
rebates, sales allowances and accruals for returns) when the consignment
inventory is sold by the wholesalers, as quantified using data from the
wholesalers and other third-party information sources. We will continue to
recognize revenue on these products on this basis until such time as we develop
sufficient historical experience on which to reasonably estimate returns and
all other conditions under SFAS 48 are met. The build-up of inventory
to support the initial launch of our Darvocet A500 product increased
our inventory by $1.5 million in the third quarter of 2003. In connection with the initial
launch of Darvocet A500, we also increased our standard payment terms by 60
days for this product, thereby allowing our customers up to 90 days to pay for the initial
launch quantity of product they purchased. We originally recorded approximately $4.6 million in revenue in the third
quarter of 2003 for the sale of calcitriol product to a Puerto Rican wholesaler
that we have now concluded should be reversed in the period in which it was
originally recorded. Our adjusted financial statements for the third quarter
of 2003 reflects our reversal of such sales and that we have reserved for
substantially the full amount of the resulting inventory, as a substantial
amount has been returned and we do not expect the remainder of this inventory
to be sold. There were substantial sales transactions at the end of the third quarter of
2003 with a new wholesaler of our Brethine product resulting in wholesaler
channel inventory levels significantly exceeding our target levels. We also
continued to sell Brethine product during the fourth quarter of 2003 to our
established wholesaler customers, further adding to channel inventory levels.
The specialty wholesaler was expected to open new distribution channels, for
which we have concluded we did not have the ability to reasonably estimate
returns, and all conditions of SFAS 48 were not met. In addition, sales of
other products to this new wholesaler during the third quarter of 2003 appear
to have been on special terms that do not satisfy the conditions of SFAS 48.
We had recorded revenue for these sales upon shipment of the products. The net revenues for these sales to the new specialty wholesaler of $12.3
million of Brethine and $3.9 million of other products in the third quarter of
2003 have been reversed. Revenue will be recognized as sales meet the criteria
of SFAS 48. In addition, the significant increase in inventory levels in the
channel due to transactions with this new wholesaler caused us to re-evaluate
our overall reserves for our Brethine products. As a result of our analyses,
we have increased our inventory obsolescence reserves by $1.3 million for
specific inventory not expected to sell through before product expiration. There were significant returns in the first quarter of 2004 from a second-tier
wholesaler of our Brethine products that were inconsistent with our historical
returns experience. The bulk of these products was initially sold by us during
the first half of 2003 and was acquired by the second-tier wholesaler in
purchases from us and from one of our principal wholesalers. Based on our
knowledge regarding the market factors affecting these requested returns, we
now believe that this inventory was purchased by the wholesaler for a
particular opportunity that did not materialize. A specific returns reserve of
$0.9 million in the third quarter of 2003 has been recorded for these sales and
for the related inventory. 28




---



##### 



At the time we recognize revenue from product sales, we record an adjustment,
or decrease, to revenue for estimated chargebacks, rebates, discounts and
returns. Revenue reserves are established on a product-by-product basis.
These revenue reductions are established by management as its best estimate at
the time of sale based on each products historical experience adjusted to
reflect known changes in the factors that impact such reserves. Reserves for
chargebacks, rebates and discounts are established based on the contractual
terms with our customers; analysis of historical levels of discounts,
chargebacks and rebates; communications with customers and purchased
information about the rate of prescriptions being written and the levels of
inventory remaining in the distribution channel as well as our expectations
about the market for each product and anticipated introduction of competitive
products. The reserve for chargebacks is the most significant estimate used in
the recognition of our revenue from product sales. In brief, we have
established contract prices for certain indirect customers that are supplied by
our wholesale customers. A chargeback represents the difference between the
current published wholesale acquisition cost and the indirect customers
contract prices. Prior to 2003, the amount of actual product returns experienced by the Company
had not been significant. As a result, actual returns were charged against
revenue in the period they occurred and aggregate revenue reserves were
evaluated quarterly to determine if they were sufficient to cover estimated
chargebacks, rebates and related allowances, as well as the expected rate of
returns, and adjusted as deemed necessary. In 2003, we began segregating our
products return reserve, which prior thereto we believed was adequately covered
by our aggregate revenue reserves for chargebacks, rebates and related
allowances. We increased the level of detail included in our analyses to
include analyzing inventory in the channel to determine remaining shelf life.
Our returns reserve needs are primarily related to the number of months of
inventory estimated to be in the distribution channel. Levels of inventory in
the distribution channel are monitored and estimated based on information we
purchase from the wholesalers, combined with active discussions between our
sales personnel and the wholesalers we supply. In addition, our actual sales,
returns and chargeback history are used to assess the reasonableness of the
estimated number of months of inventory on hand at our wholesalers. The shelf
life of products remaining in the distribution channel is estimated based on an
analysis of each lot sold. Each batch has a specific expiration date. A
review of the actual returns history is performed and the run rate of sales out
of the distribution channel is estimated. Estimated product returns reserves
are adjusted based on these reviews. Reserves may also be adjusted to reflect
any significant changes in trends or based upon new information that we believe
may affect the reserve needs. Allowances for new product introductions are
estimated based on our experiences for similar products that we currently
market and are adjusted as deemed necessary based on our experience with each
product. Our reserve analysis also includes a review for the potential
introduction of generic competition and the resulting impact on pricing and
returns reserves. Existing reserves may be adjusted accordingly to reflect our
estimate for any impact these factors may have. We continually monitor our
assumptions with respect to our revenue reserves for product sales and modify
them if necessary. In addition to the consignment sales and other adjustments
described above, we have adjusted our net revenues in the third quarter by
increasing our returns reserve for other products based on a historical returns
analysis, including a specific increase of $1.3 million in our returns reserve
for our Brethine injectable product in the 100 count presentation, which we
discontinued selling in the second quarter, and an increase of $1.3 million in
our Darvon and Darvocet returns reserve due to a competitors reintroduction of
a generic product. 29




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##### 



In addition to the 2003 adjustments identified above, we are restating our
consolidated financial statements for the three and nine-month periods ended
September 30, 2003 and 2002 to treat each of our major product line
acquisitions as acquisitions of assets that do not constitute a business. We
have changed the accounting treatment used from treating the acquisitions as
business combinations to treating them as asset acquisitions. Accordingly, no
portion of the purchase price for these acquisitions is allocated to goodwill,
and the amount previously allocated to goodwill is instead allocated to the
other identifiable acquired assets, including assets with definite lives. As a
result, our direct costs in the three and nine months ended September 30, 2002
are greater than the amount previously reported by $2.2 million and $4.6
million, respectively, due to the increase in amortization expense resulting
from a greater amount of purchase price being allocated to assets with definite
lives, and our directs costs in the three and nine months ended September 30,
2003 are greater than the amount we previously reported by $2.2 million and
$6.6 million, respectively. We acquired a product, which
we subsequently launched as Darvocet A500, from Athlon
Pharmaceuticals in July 2003 for a cash closing payment and royalties
based on the sales of this product and other defined propoxyphene and
acetaminophen products we subsequently developed or acquired. We
received FDA approval of Darvocet A500 on September 10, 2003,
and launched the product nationally in early October 2003. We also entered a three-year
services agreement with Athlon Pharmaceuticals in July 2003 to
provide sales support in designated territories throughout the Untied
States for the Darvocet A500 product. Under this agreement, Athlon
received an initial payment and was entitled to a fixed monthly fee
of $1.2 million for the sales support services, as well as
potential milestone payments based on the sales of this product and
other defined propoxyphene and acetaminophen products we
subsequently developed or acquired. This agreement was effective
October 1, 2003 and had a stated term of 36 months. We have
initiated legal proceedings against Athlon and have terminated this
agreement. See
Liquidity and Capital
ResourcesCommitments and Contingencies and Note 11
of Notes to Consolidated Financial Statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2003. Upon the acquisition of this
product, we originally recorded an intangible asset in the amount of
the closing payment with a definite life of 18.5 years. We have
re-evaluated our allocation of values associated with the concurrent
agreements discussed above and, with the assistance of third-party
valuation consultants, have determined the fair value of the
intangible asset acquired as of the date of the acquisition to be
greater than the closing date payment. Accordingly, we have
re-allocated a portion of the value associated with the service
agreement to the purchase price of the intangible asset. Our adjusted
financial statements for the third quarter of 2003 reflect an
intangible asset of $4.7 million. We subsequently performed an
impairment analysis using an updated sales forecast as of
December 31, 2003 and have written off the entire value of the
intangible asset. 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 pharmaceutical product
lines, the amount and timing of product returns, ability of contract
manufacturers to supply conforming products on a timely basis, costs and
results of ongoing and future litigation by and against us, 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, timing and level of research and
development expenditures, and changes in the mix of products and services.
There have been no significant changes in our critical accounting policies
previously disclosed in our 2003 Form 10-K. 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
and products, or the recognition of licensing and royalty revenues (on projects
for which associated expense 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. 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 EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Gross revenues
    
    $
    54,502
    
    
    $
    78,745
    
    
    $
    219,536
    
    
    $
    207,259Allowance for customer credits
    
    
    14,802
    
    
    
    17,536
    
    
    
    64,753
    
    
    
    38,983Net revenues
    
    $
    39,700
    
    
    $
    61,209
    
    
    $
    154,783
    
    
    $
    168,276
 The following table presents the net revenues for each of our business units
and our consolidated expenses and net income, with each item expressed as a
percentage of consolidated net revenues: 30




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##### 



Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002(dollars in thousands)Net revenues:Product sales
    
    $
    14,331
    
    
    
    36
    %
    
    $
    35,925
    
    
    
    59
    %
    
    $
    80,393
    
    
    
    52
    %
    
    $
    90,775
    
    
    
    54
    %Product development
    
    
    3,524
    
    
    
    9
    
    
    
    5,663
    
    
    
    9
    
    
    
    11,231
    
    
    
    7
    
    
    
    14,267
    
    
    
    8Development services
    
    
    21,845
    
    
    
    55
    
    
    
    19,621
    
    
    
    32
    
    
    
    63,159
    
    
    
    41
    
    
    
    63,234
    
    
    
    38$
    39,700
    
    
    
    100
    %
    
    $
    61,209
    
    
    
    100
    %
    
    $
    154,783
    
    
    
    100
    %
    
    $
    168,276
    
    
    
    100
    %Direct costs (excluding depreciation
and royalty expense)
    
    $
    23,569
    
    
    
    59
    %
    
    $
    22,744
    
    
    
    37
    %
    
    $
    75,207
    
    
    
    49
    %
    
    $
    68,486
    
    
    
    41
    %Selling
    
    
    9,071
    
    
    
    23
    
    
    
    6,044
    
    
    
    10
    
    
    
    25,006
    
    
    
    16
    
    
    
    16,028
    
    
    
    10General and administrative
    
    
    9,793
    
    
    
    25
    
    
    
    10,345
    
    
    
    17
    
    
    
    31,112
    
    
    
    20
    
    
    
    29,261
    
    
    
    17Research and development
    
    
    5,367
    
    
    
    14
    
    
    
    5,511
    
    
    
    9
    
    
    
    15,441
    
    
    
    10
    
    
    
    15,375
    
    
    
    9Depreciation and amortization
    
    
    1,912
    
    
    
    5
    
    
    
    1,729
    
    
    
    3
    
    
    
    5,747
    
    
    
    4
    
    
    
    5,314
    
    
    
    3Royalty expense
    
    
    325
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (10,337
    )
    
    
    (26
    )
    
    
    14,836
    
    
    
    24
    
    
    
    1,818
    
    
    
    1
    
    
    
    33,812
    
    
    
    20Interest expense, net
    
    
    (5,140
    )
    
    
    (13
    )
    
    
    (5,506
    )
    
    
    (9
    )
    
    
    (15,621
    )
    
    
    (10
    )
    
    
    (13,882
    )
    
    
    (8
    )Loss from extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,053
    )
    
    
    (5
    )Other income (expense), net
    
    
    (122
    )
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    126
    
    
    
    (Benefit from) provision for income
taxes
    
    
    (6,207
    )
    
    
    (16
    )
    
    
    3,505
    
    
    
    6
    
    
    
    (5,414
    )
    
    
    (3
    )
    
    
    4,882
    
    
    
    3Net (loss) income
    
    
    (9,392
    )
    
    
    (24
    )
    
    
    5,748
    
    
    
    9
    
    
    
    (8,368
    )
    
    
    (5
    )
    
    
    7,121
    
    
    
    4
 Third Quarter 2003 Compared to Third Quarter 2002 Our consolidated net revenues for the quarter ended September 30, 2003
decreased 35% to $39.7 million, from $61.2 million in the third quarter of
2002. Net revenues from product sales decreased to $14.3 million in 2003, from
$35.9 million in 2002, due to lower sales of our Darvocet-N 100 500-count
bottle product, which we believe to be due to lower purchases by repackagers of this product as
well as decreases in sales of our MVI and Brethine products. As discussed
above, in September 2003, we began shipping products to a new wholesaler. We
shipped approximately $16.2 million to this wholesaler in September 2003. We
did not recognize revenues upon shipment due to all the conditions under SFAS
48 not having been met. We also recorded returns reserves of approximately
$4.4 million for products we estimated may have wholesaler channel inventory
levels exceeding anticipated demand. Net revenues from commercial manufacturing
of products marketed by other pharmaceutical companies, which is included in
product sales, contributed $0.7 million and $0.3 million to net revenues from
product sales in the third quarters of 2003 and 2002, respectively. Net revenues from product development decreased 38% in the third quarter of
2003 to $3.5 million, or 9% of net revenues, from $5.7 million, or 9% of net
revenues, in the 2002 period, primarily due to royalties under our significant
development agreement, which decreased from $5.4 million in the third quarter
of 2002 to $3.4 million in the third quarter of 2003. This development
agreement is described in the Managements Discussion and Analysis of
Financial Condition and Results of Operations section of our 2003 Form 10-K. Net revenues from our development services business increased 11% in the third
quarter of 2003 to $21.8 million, from $19.6 million in 2002. This increase
was principally attributable to higher demand for 31




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##### 



our analytical and clinical capabilities, partially offset by lower
fee-for-service revenues under our significant development agreement. Direct costs (excluding depreciation and royalty expense) increased $0.8
million, or 4%, to $23.6 million in the third quarter of 2003, from $22.7
million in the same period in 2002. The increased amortization expense offset
the reduced product costs which resulted from lower product sales in the
quarter. Direct costs as a percentage of net revenues were 59% for the third
quarter of 2003, as compared to 37% in the third quarter of 2003. The increase
in direct costs as a percentage of net revenue is primarily due to the mix in
revenues in the quarter. Significantly lower product revenues in the third
quarter of 2003, which generally have a higher margin than development services
revenues, resulted in this increase. Selling expenses increased 50% in the third quarter of 2003 to $9.1 million, or
23% of net revenues, from $6.0 million, or 10% of net revenues, in 2002. This
increase was primarily due to expenses incurred by our product sales business
associated with developing our product sales force and marketing and promoting
our new products. At September 30, 2003, our pharmaceutical sales force was
approximately 85, as compared to 20 at September 30, 2002. General and administrative costs decreased 5% in the third quarter of 2003 to
$9.8 million, or 25% of net revenues, from $10.3 million, or 17% of net
revenues, in 2002. This decrease was primarily due to decreases in employee
benefit related expenses. Research and development expenses were $5.4 million, or 14% of net revenues, in
the third quarter of 2003, a slight dollar decrease from $5.5 million, or 9% of
net revenues, in 2002. In the third quarter of 2003, significant project
spending was related to our ProSorb-D pain management product and development
work on line extensions for our pain management and critical care products. Royalty expenses for the third quarter of 2003 were $0.3 million. We accrue
royalties based on revenues generated by certain acquired products. No similar
royalty expenses were incurred in 2002. Consolidated loss from operations was $10.3 million in the third quarter of
2003, compared to $17.1 million of income from operations in the prior year.
This decrease was primarily due to the revenue decreases discussed above. Loss from operations for our product sales business was $5.1 million in the
third quarter of 2003, compared to income from operations of $19.4 million in
the third quarter of 2002. This decrease was attributable to the increased
selling expenses and the revenue decreases from our Brethine, MVI and
Darvon/Darvocet product lines, as discussed above. Income from operations for our product development business was $3.5 million in
the third quarter of 2003, compared to income from operations of $5.7 million
in 2002. This change resulted from the decreased revenues from our significant
development agreement, as discussed above. Income from operations for our development services business was $1.6 million
in the third quarter of 2003, compared to $0.2 million in the third quarter of
2002. This improvement was primarily due to the increase in revenues, as
described above. 32




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##### 



Unallocated corporate expenses increased slightly in the third quarter of 2003
to $4.9 million, from $4.8 million in 2002. As a percentage of net revenues,
unallocated corporate expenses in the third quarter of 2003 increased to 12%,
from 8% in the third quarter of 2002. Net interest expense decreased to $5.1 million in the third quarter of 2003,
from $5.5 million in the third quarter of 2002. This $0.4 million decrease is
primarily attributable to a lower debt balance due to debt repayments on our
senior secured credit facility. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September
30, 2002 Our consolidated net revenues for the nine months ended September 30, 2003
decreased 8% to $154.8 million, from $168.3 million in the first nine months of
2002. Net revenues from product sales decreased to $80.4 million in 2003, from
$90.8 million in 2002, due to lower sales of our Darvocet-N 100 500-count
bottle product, which we believe to be due to lower purchases by repackagers of this product,
lower revenues for our MVI products due to lower average sales prices
for these products during the first nine months of 2003, and lower unit
sales of the 100 count presentation of our injectable Brethine product. These
decreases were partially offset by a significant price increase in our
injectable Brethine product that was implemented in June 2002, contributions
from our Darvon and Darvocet products, which we acquired in March 2002,
contributions from our 50mg Azasan product, which was launched in June 2002,
and contributions from our calcitriol generic product, which was launched in
March 2003. Net revenues from commercial manufacturing of products marketed by
other pharmaceutical companies, which are included in product sales,
contributed $2.0 million and $3.5 million to net revenues from product sales in
the first nine months of 2003 and 2002, respectively. Net revenues from product development decreased 21% in the first nine months of
2003 to $11.2 million, or 7% of net revenues, from $14.3 million, or 8% of net
revenues, in 2002, primarily due to lower revenues related to our significant
development agreement in the second and third quarters of 2003 and to
third-party licensing payments which we had previously deferred and were
amortized into revenue in 2002 and prior years. No previously deferred
revenues were recognized in 2003. Net revenues from our development services business were $63.2 million in the
first nine months of both 2003 and 2002. Direct costs (excluding depreciation and royalty expense) increased $6.7
million, or 10%, to $75.2 million in the first nine months of 2003, from $68.5
million in the same period in 2002. This increase in direct cost dollars
resulted from increased amortization expense of $2.6 million related to product
rights for acquired products, which was partially offset by lower product costs
resulting from lower product sales during the period. Direct costs as a
percentage of net revenues were 49% for the third quarter of 2003, as compared
to 41% in the third quarter of 2003. Selling expenses increased 56% in the first nine months of 2003 to $25.0
million, or 16% of net revenues, from $16.0 million, or 10% of net revenues, in
2002. This increase was primarily due to expenses incurred by our product
sales business associated with developing our product sales force and marketing
and promoting our new products. 33




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##### 



General and administrative costs increased 6% in the first nine months of 2003
to $31.1 million, or 20% of net revenues, from $29.3 million, or 17% of net
revenues, in 2002. This increase was primarily due to expenses related to the
management build-up for our product sales business. Research and development expenses were $15.4 million in the first nine months
of both 2003 and 2002. This represented 10% of net revenues in 2003 and 9% of
net revenues in 2002. Consistent with the third quarter of 2003, we incurred
significant project spending in the first nine months of 2003 related to our
ProSorb-D pain management product and development work on line extensions for
our pain management and critical care products. Royalty expenses for the first nine months of 2003 were $0.5 million. We
accrue royalties based on revenues generated by certain acquired products. No
similar royalty expenses were incurred in 2002. Consolidated income from operations was $1.8 million in the first nine months
of 2003, or $32.0 million lower than the first nine months of 2002. This
decrease was primarily due to the lower revenues from our product sales
business, the increased selling expenses related to our product sales force and
increased product rights amortization expense. Income from operations for our product sales business was $20.1 million in the
first nine months of 2003, compared to $46.8 million in the first nine months
of 2002. This decrease was also attributable to the lower revenues from our
product sales business, the increased selling expenses related to our product
sales force and increased product rights amortization. Income from operations for our product development business was $11.2 million
in the first nine months of 2003, compared to income from operations of $14.3
million in 2002. This change resulted from the lower revenues under our
significant development agreement. Income from operations for our development services business was $1.7 million
in the first nine months of 2003, compared to $1.3 million in the first nine
months of 2002. This increase is primarily due to lower direct costs in our
bioanalytical and analytical businesses in 2003. Unallocated corporate expenses increased in the first nine months of 2003 to
$15.5 million, from $12.8 million in 2002. This higher level was due to
additions to our corporate infrastructure to accommodate the expansion of our
overall business. As a percentage of net revenues, unallocated corporate
expenses in the first nine months of 2003 were 10% and were 8% in 2002. Net interest expense increased to $15.6 million in the first nine months of
2003, from $13.9 million in 2002. This $1.7 million increase is primarily
attributable to the borrowings that funded our product line acquisitions in
March 2002. A loss from the extinguishment of debt of $8.1 million was recorded in 2002.
This loss was due to the write-off of deferred financing and other costs
related to our prior debt facilities that were refinanced in March 2002. 34




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##### 



Liquidity and Capital Resources Historically, we have funded our businesses with cash flows provided by
operations and proceeds from borrowings. Cash flow provided by operations in
the first nine months of 2003 was $43.9 million, compared to cash flow provided
by operations of $19.6 million in the first nine months of 2002. This change
was primarily due to an increase in net income and positive changes in working
capital. In addition, the first nine months of 2002 included $13.1 million of
prepaid financing fees related to our senior credit facility and senior
subordinated notes, which did not recur in the first nine months of 2003. Cash used in investing activities was $15.7 million in the first nine months of
2003 which included $9.9 million for capital spending. Cash used in investing
activities was $233.3 million in the first nine months of 2002, which included
$211.4 million related to our 2002 acquisition of the Darvon and Darvocet
branded product lines, and $14.1 million for the purchase of assets formerly
covered by our tax retention operating lease, including our corporate
headquarters in Wilmington, N.C. and a laboratory and clinical facility in
Chapel Hill, N.C. Net cash used in financing activities during the first nine months of 2003 was
$23.7 million, primarily representing debt payments of $29.5 million, partially
offset by $2.2 million of interest rate swap proceeds and $2.8 million in
proceeds from the issuance of common stock related to the exercise of stock
options. On March 28, 2002, we acquired the U.S. rights to the Darvon and Darvocet
branded product lines and existing inventory from Eli Lilly and Company for
$211.4 million in cash. In connection with the acquisition, we entered into a
$175 million senior credit facility, issued $175 million of senior subordinated
notes due 2010, repaid all $78 million of borrowings outstanding under our
prior senior credit facilities, and terminated our tax retention operating
lease and purchased the underlying properties. At September 30, 2003, our $175 million senior secured credit facility
consisted of a $75 million five-year revolving credit facility and a $100
million five-year term loan facility. The term loan facility was scheduled to
be amortized over the full five-year term. The senior facility was subsequently
reduced due to early repayments we made under the term loan facility. The
availability of borrowings under our revolving credit facility is not limited
by a borrowing base. At September 30, 2003, we had unused availability under
the revolving credit facility of $47.0 million. Our senior credit facility
provided for variable interest rates based on LIBOR or an alternate base rate,
at our option. Such facility was guaranteed by all of our domestic
subsidiaries and 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. Our senior credit facility
required the payment of certain commitment fees based on the unused portion of
the revolving credit facility and could be prepaid at our option at any time
without a premium. Under the terms of the credit agreement for our senior credit facility, we were
required to comply with various covenants including, but not limited to, those
pertaining to maintenance of certain financial ratios and incurrence of
additional indebtedness. After giving effect to the restatement described in
this Quarterly Report on Form 10-Q/A, we were not in compliance with some of
these covenants at September 30, 2003. See Notes 1 and 6 to our 2003 Form 10-K
for additional discussion and a description of our new senior credit facility
that has replaced the credit facility in effect at September 30, 2003. 35




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##### 



On March 28, 2002, we issued $175 million of senior subordinated unsecured
notes due 2010, which had a fixed interest rate of 11% per annum and were
guaranteed on a subordinated basis by all of our existing domestic subsidiaries and
all of our future domestic subsidiaries of which we own 80% or more of the
equity interests. At September 30, 2003, these notes were not secured. Prior
to March 28, 2005, up to 35% of the notes are redeemable with the proceeds of
qualified sales of equity at 111% of par value. The terms of our senior credit
facility required us to repay all of the indebtedness under this facility
before we could repurchase any of the notes. On or after March 28, 2006, all
or any portion of the notes are redeemable at declining premiums to par value,
beginning at 105.5%. Under the terms of the indenture for the notes, we are
required to comply with various covenants including, but not limited to, a
covenant relating to incurrence of additional indebtedness. After giving
effect to the restatement described in this Quarterly Report on Form 10-Q/A, we
were not in compliance with some of these covenants at September 30, 2003. See
Note 6 to our 2003 Form 10-K for additional discussion and a description of the
consent solicitation approved in April 2004 that waived all then existing
defaults under such indenture (including those in effect at September 30,
2003). Concurrent with the issuance of our senior subordinated notes, we entered into
an interest rate hedging agreement to effectively convert interest expense on a
portion of the senior subordinated notes for the term of the notes from an 11%
fixed annual rate to a floating annual rate equal to 6-month LIBOR plus a base
rate. On February 27, 2003, and again on June 23, 2003, we sold the then
outstanding interest rate hedging agreement for $2.3 million and $3.7 million,
respectively, and replaced it with a similar interest rate hedging agreement.
The amounts we received, less the interest benefits earned through the dates of
sale, have been recorded as premiums to the carrying amount of the notes and
are being amortized into interest income over their remaining life. This
amortization will be approximately $2.0 million annually. At September 30,
2003, we had an interest rate hedging agreement in place covering $150 million
of the notes, at a rate of 6-month LIBOR plus 7.41%. On September 30, 2003,
6-month LIBOR was 1.18%, giving us an estimated all-in rate of 8.59%. The
terms of the interest rate hedging agreements, other than the base rate, were
identical and were perfectly matched with the terms of the related hedged
instrument. Our M.V.I. and Aquasol product line acquisition
agreement was amended on July 22, 2003. As amended, it provided for two $1.0 million guaranteed payments, which were
made in August 2002 and 2003, eliminated a contingent payment of $2.0 million
that was potentially due in August 2003 under the original agreement, and
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 (FDA). 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 $9.0 million by September 30, 2003.
Such conditions were satisfied in January and February 2004, fixing the
previously contingent liability under the amendment at $31.5 million. We were
precluded from recognizing this obligation as additional purchase price for the
M.V.I. and Aquasol product line under Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets and No. 141 Business
Combinations; therefore, this adjustment resulting from a preacquisition
contingency will be expensed in the first quarter of 2004. As of September 30,
2003, this contingent obligation had not been recorded as a liability on our
consolidated balance sheet. Also in July 2003, the M.V.I. supply agreement
with the seller was extended through 2008, subject to early termination rights
by us on six months notice given at any time, and by the supplier on
twenty-four months notice given at any time on or after August 17, 2004. In addition, we
may have to make contingent payments of $4.7 million over four years in
connection with the purchase of our Charleston, South Carolina manufacturing
facility, based on the level of manufacturing revenues at this facility. At
September 30, 2003, these contingent payment obligations, including the
contingent payments potentially due in connection with the acquisition of the
M.V.I. and Aquasol product lines, had not yet been recorded as a liability on
our consolidated balance sheet. At September 30, 2003, we had $6.6 million of
principal repayments due in the next twelve months under our senior credit
facility. We made interest payments on the senior subordinated notes of $9.6
million in April 2003 and $9.6 36




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million in October 2003. The October 2003 interest payment was offset by
approximately $0.9 million received under our interest rate swap agreement. On August 5, 2003, aaiPharma, CIMA LABS INC., (CIMA), Scarlet Holding
Corporation, a direct, wholly owned subsidiary of aaiPharma (Holding
Company), Scarlet MergerCo, Inc., a direct, wholly owned subsidiary of Holding
Company (S MergerCo), and Crimson MergerCo, Inc., a direct, wholly owned
subsidiary of Holding Company (C MergerCo), entered into an Agreement and
Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement,
Holding Company would acquire all of the capital stock of each of CIMA and
aaiPharma through the merger of S MergerCo with and into aaiPharma and the
merger of C MergerCo with and into CIMA, with aaiPharma and CIMA surviving as
wholly owned subsidiaries of Holding Company (together, the Transaction).
The completion of the Transaction was subject to several conditions, including
the approval of the Transaction by the stockholders of CIMA and aaiPharma and
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. On November 3, 2003, CIMA terminated the Merger Agreement and paid an $11.5
million termination fee to us. This fee was used to offset merger-related
expenses. On October 22, 2003, we entered into an agreement with certain subsidiaries of
Elan Corporation, plc to acquire a portfolio of pain management products for
$100 million in cash, subject to adjustment for the inventory to be acquired.
We completed this acquisition in the fourth quarter of 2003. We financed this
acquisition with proceeds from our then existing term loan facility. Forward-Looking Statements, Risk Factors and Safe Harbor Language This document 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 document 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, plans and objectives of management and markets for our common stock.
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 results to differ materially
from those described in the forward-looking statements. These statements are
not guarantees of future performance, 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 and
results may differ materially from what is expressed in the forward-looking
statement. In any forward-looking statement in which we express an expectation
or belief as to future results, that expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement or expectation or belief will result or be achieved or
accomplished. 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:  
    
    demand by consumers for our products and the products we produces for others;
    
    the prices that we can obtain for such products; 37




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
    
    the level of product and price competition;
    
    competitive new product introductions, including generic competition;
    
    distributors and wholesalers ordering patterns;
    
    levels of our products in the distribution channels;
    
    the outcome and costs of governmental investigations;
    
    the outcome and costs of litigation brought by and against us;
    
    timely success in product development and regulatory approvals for
new products and line extensions;
    
    actions by the FDA in connection with submissions related to our
products or those of our competitors;
    
    other governmental regulations and actions affecting our products or
those of our competitors;
    
    third-party payer decisions and actions affecting our products or those of our competitors; and
    
    developments in patent or other proprietary rights owned by us or others. Additional factors that may cause the actual results to differ materially are
discussed in our recent filings with the SEC, including, but not limited to,
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of OperationsRisk Factors and Forward Looking Statements of our 2003
Form 10-K, our Current Reports on Form 8-K, and other periodic filings.
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
section. We do not undertake any obligation to (and expressly disclaim any obligation
to) update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise. 
 Item 4. Controls and Procedures The Company has carried out an evaluation, under the supervision and with the
participation of its newly appointed Chief Executive Officer and interim 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 its disclosure controls and procedures as of December 31, 2003,
which includes the period covered by this Quarterly Report on Form 10-Q/A.
Disclosure controls and procedures are to be designed to ensure that material
information the Company must disclose in its reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported on a timely basis. As a result of that review, our Chief Executive
Officer and interim Chief Financial Officer have concluded that, as of December
31, 2003 and for the year then ended, including the period covered by this
Quarterly Report on Form 10-Q/A, the Companys disclosure controls and
procedures were not adequate. The internal control deficiencies related to, among other things, a lack of
adequate policies with respect to revenue recognition, and a lack of sufficient
control processes and procedures to effectively monitor and manage wholesaler
inventory levels, to ensure adequate contract-approval oversight, and to ensure
effective and timely communication among sales, marketing, finance and legal
staff regarding the terms and conditions of certain transactions, including new
product launches. Also, with respect to the sales of pharmaceutical products,
the Companys finance and accounting personnel lacked adequate training on the
application of revenue recognition principles and the establishment of product
return reserves. 38




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In addition, in April 2004, in connection with their audit of the Companys
consolidated financial statements for the year ended December 31, 2003, the
Companys independent auditors identified and communicated to the Company and
the Audit Committee two material weaknesses (as defined under standards
established by the American Institute of Certified Public Accountants) relating
to the Companys accounting and public financial reporting of significant
matters and to its initial recording and management review and oversight of
certain accounting matters. The material weaknesses were with respect to the
calculation and procedures for the analysis of revenue reserves for product
sales and lack of procedures for timely communications from the Legal
Department and operating divisions to the Finance Department impairing the
ability to properly evaluate the accounting treatment for certain transactions
the Company had entered into and assess the impact of such transactions in a
timely manner. In addition, at that time, the Companys independent auditors
identified and communicated to the Company and the Audit Committee a
reportable condition (as defined under standards established by the American
Institute of Certified Public Accountants) relating to the Companys internal
controls over its financial reporting for investments. The reportable
condition identified the Companys failure to perform a formal review of its
investments and its failure to timely record patents or trademarks or to timely
analyze the patents and trademarks for usefulness and possible impairment. In view of the fact that the financial information presented in this Quarterly
Report on Form 10-Q/A was prepared in the absence of adequate internal controls
over financial reporting, the Company devoted a significant amount of time and
resources to the analysis of the financial information and documentation
underlying the financial statements contained in this Quarterly Report,
resulting in the restatement of certain interim financial information. In
particular, the Company reviewed significant product sales transactions to
confirm the terms of the transaction and our accounting for the transaction,
including whether all criteria for the recognition of revenue had been
satisfied and whether we had properly estimated allowances for returns and
other customer credits. In addition, the Company reviewed in detail each of
the matters identified by the Special Committee of the Companys Board of
Directors and its independent counsel and independent forensic accountants.
The investigation of the Special Committee is discussed in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
OperationsSpecial Committee Investigation of the Companys 2003 Form 10-K. In light of the foregoing, the Company has taken the following actions, in
addition to those described above, after the end of 2003 to address the
deficiencies as described above:  
    
    reassigned all financial controllers from operating units into
the Finance Department reporting to the Companys Controller and
Chief Accounting Officer who reports directly to the Chief Financial
Officer;
    
    commenced a company-wide education effort regarding our Code of
Conduct and contract-approval policies;
    
    implemented a more vigorous contract-approval process;
    
    implemented formal revenue recognition protocols and training programs; and
    
    contracted with a third-party consulting group, FTI Consulting,
to provide transitional management services in the area of operations
and finance. In addition, since December 31, 2003, the Companys then Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer have left the
Company. In March of 2004, Dr. Sancilio, the Companys Executive Chairman and
Chief Scientific Officer, was appointed Chief Executive Officer, and Gregory F.
Rayburn, a senior managing director with FTI Consulting, was appointed Interim
Chief 39




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Operating Officer. In April 2004, Timothy R. Wright was appointed President of
the Companys Pharmaceuticals Products Division. Gina Gutzeit, a senior
managing director with FTI Consulting, was appointed as interim Chief Financial
Officer in May 2004. The Company is fully committed to implementing controls identified by the
Companys independent auditors and the Special Committee. The Companys
efforts to strengthen its financial and internal controls continue, and the
Company expects to complete remediation of the material weaknesses and
reportable condition identified by its independent auditors by the end of 2004. 
 PART II. OTHER INFORMATION 
 Item 3. Defaults Upon Senior Securities. Under the terms of the credit agreement for our senior credit facility in
effect at September 30 2003, we were required to comply with various covenants
including, but not limited to, those pertaining to maintenance of certain
financial ratios and incurrence of additional indebtedness. After giving
effect to the restatement described in this Quarterly Report on Form 10-Q/A, we
were not in compliance with some of these covenants at September 30, 2003. See
Notes 1 and 6 to our 2003 Form 10-K for additional discussion and a description
of our new senior credit facility that has replaced the credit facility in
effect at September 30, 2003. Under the terms of the
indenture for our $175 million senior subordinated notes due
2010, we are required to comply with various covenants including, but not
limited to a covenant relating to incurrence of additional indebtedness. After
giving effect to the restatement described in this Quarterly Report on Form
10-Q/A, we were not in compliance with some of these covenants at September 30,
2003. See Note 6 to our 2003 Form 10-K for additional discussion and a
description of the consent solicitation approved in April 2004 that waived all
then existing defaults under such indenture (including those in effect at
September 30, 2003). 
 Item 6. Exhibits and Reports on Form 8-K Exhibits: A list of the exhibits required to be filed as part of this Quarterly Report on
Form 10-Q/A is set forth in the Exhibit Index, which immediately precedes
such exhibits, and is incorporated herein by reference. Reports on Form 8-K: During the third quarter of 2003, we furnished the following Form 8-Ks:  
    
    Dated July 25, 2003, reporting our results of operations for the quarter ended June 30, 2003.
    
    Dated August 5, 2003, reporting our Merger Agreement for a potential
merger with CIMA LABS INC.
    
    Dated August 6, 2003, to file as an exhibit the Merger Agreement to
include the annexes and exhibits attached to the Merger Agreement and
incorporated therein.
    
    Dated August 21, 2003, reporting our receipt of notification from CIMA LABS
INC. that CIMA has an unsolicited proposal from Cephalon, Inc., concerning its
potential interest in acquiring CIMA. 40




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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:
    
    June 24, 2004
    
    By:
    
    /s/ Frederick D. SancilioFrederick D. Sancilio, Ph.D.Executive Chairman of the Board,Chief Executive OfficerDate:
    
    June 24, 2004
    
    By:
    
    /s/ Gina GutzeitGina GutzeitInterim Chief Financial Officer
 41




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aaiPharma Inc. 
 Exhibit Index
 ExhibitNo.
    
    Description31.1
    
    Certification pursuant to Exchange Act Rule 13a  14(a) of Frederick D. Sancilio31.2
    
    Certification pursuant to Exchange Act Rule 13a  14(a) of Gina Gutzeit32.1
    
    Certification pursuant to 18 U.S.C. Section 1350
 42