##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period  to
 Commission File Number 0-21185
 AAIPHARMA INC.
  DELAWARE
    
    04-2687849(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 2320 SCIENTIFIC PARK DRIVE, WILMINGTON, NC 28405
 (910) 254-7000
 o þ
 þ o
 o þ




---



##### 



TM
  PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements(unaudited)Consolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of Cash FlowsConsolidated Statements of Comprehensive LossNotes to Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 6.
    
    ExhibitsSIGNATURESEXHIBIT INDEX
 2




---



##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements.
 AAIPharma Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Product sales
    
    $
    14,887
    
    
    $
    21,781
    
    
    $
    31,053
    
    
    $
    46,214Product development (milestones and
royalties)
    
    
    4,039
    
    
    
    5,126
    
    
    
    8,044
    
    
    
    10,041Development services
    
    
    19,965
    
    
    
    24,581
    
    
    
    40,033
    
    
    
    49,475Reimbursed out-of-pocket
    
    
    1,817
    
    
    
    4,496
    
    
    
    5,043
    
    
    
    8,74140,708
    
    
    
    55,984
    
    
    
    84,173
    
    
    
    114,471Operating costs and expenses:Direct costs (excluding depreciation
and royalty expense):Product sales (includes product
rights amortization of $2,619,
$3,972, $5,237 and $7,944)
    
    
    7,295
    
    
    
    10,943
    
    
    
    15,334
    
    
    
    25,090Development services
    
    
    13,838
    
    
    
    14,751
    
    
    
    26,868
    
    
    
    29,499Reimbursable out-of-pocket
    
    
    1,817
    
    
    
    4,496
    
    
    
    5,043
    
    
    
    8,741Total direct costs
    
    
    22,950
    
    
    
    30,190
    
    
    
    47,245
    
    
    
    63,330Selling expenses
    
    
    1,398
    
    
    
    11,074
    
    
    
    3,202
    
    
    
    24,101General and administrative expenses
    
    
    8,576
    
    
    
    12,700
    
    
    
    18,861
    
    
    
    25,840Research and development
    
    
    1,147
    
    
    
    4,306
    
    
    
    2,834
    
    
    
    10,713Depreciation
    
    
    2,097
    
    
    
    2,025
    
    
    
    4,304
    
    
    
    4,037Professional fees  internal and
government
investigations
    
    
    
    
    
    
    5,103
    
    
    
    299
    
    
    
    8,303Reorganization expenses
    
    
    5,740
    
    
    
    
    
    
    
    7,293
    
    
    
    M.V.I. contingent payment/(gain on sale)
    
    
    
    
    
    
    (37,546
    )
    
    
    
    
    
    
    (6,545
    )Restructuring charges
    
    
    
    
    
    
    3,400
    
    
    
    
    
    
    
    3,400Royalty expenses
    
    
    124
    
    
    
    509
    
    
    
    225
    
    
    
    1,009Intangible asset impairment
    
    
    1,190
    
    
    
    
    
    
    
    1,190
    
    
    
    Total operating costs and expenses
    
    
    43,222
    
    
    
    31,761
    
    
    
    85,453
    
    
    
    134,188(Loss) income from operations
    
    
    (2,514
    )
    
    
    24,223
    
    
    
    (1,280
    )
    
    
    (19,717
    )
 3




---



##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Other income (expense):Interest, net
    
    
    (8,702
    )
    
    
    (8,752
    )
    
    
    (20,081
    )
    
    
    (14,397
    )Loss from extinguishment of debt
    
    
    (6,788
    )
    
    
    (6,229
    )
    
    
    (6,788
    )
    
    
    (6,229
    )Other
    
    
    (354
    )
    
    
    (1,855
    )
    
    
    (752
    )
    
    
    (1,836
    )(15,844
    )
    
    
    (16,836
    )
    
    
    (27,621
    )
    
    
    (22,462
    )(Loss) income before taxes
    
    
    (18,358
    )
    
    
    7,387
    
    
    
    (28,901
    )
    
    
    (42,179
    )Provision for income taxes
    
    
    173
    
    
    
    169
    
    
    
    219
    
    
    
    175Net (loss) income
    
    $
    (18,531
    )
    
    $
    7,218
    
    
    $
    (29,120
    )
    
    $
    (42,354
    )Basic (loss) earnings per share
    
    $
    (0.65
    )
    
    $
    0.25
    
    
    $
    (1.02
    )
    
    $
    (1.48
    )Weighted average shares outstanding
    
    
    28,586
    
    
    
    28,586
    
    
    
    28,586
    
    
    
    28,544Diluted (loss) earnings per share
    
    $
    (0.65
    )
    
    $
    0.25
    
    
    $
    (1.02
    )
    
    $
    (1.48
    )Weighted average shares outstanding
    
    
    28,586
    
    
    
    28,653
    
    
    
    28,586
    
    
    
    28,544
  4




---



##### 



AAIPharma Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,758
    
    
    $
    7,130Accounts receivable, net
    
    
    12,843
    
    
    
    12,756Work-in-progress
    
    
    10,363
    
    
    
    10,172Inventories, net
    
    
    6,731
    
    
    
    10,722Income tax recoverable
    
    
    
    
    
    
    11,110Prepaid and other current assets
    
    
    5,326
    
    
    
    7,751Total current assets
    
    
    40,021
    
    
    
    59,641Property and equipment, net
    
    
    48,377
    
    
    
    52,942Goodwill, net
    
    
    12,916
    
    
    
    14,350Intangible assets, net
    
    
    183,649
    
    
    
    190,099Other assets
    
    
    16,350
    
    
    
    22,038Total assets
    
    $
    301,313
    
    
    $
    339,070LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Current maturities of long-term debt
    
    $
    184,000
    
    
    $
    351,645Accounts payable
    
    
    5,858
    
    
    
    22,031Customer advances
    
    
    12,634
    
    
    
    11,043Accrued wages and benefits
    
    
    4,111
    
    
    
    4,881Interest payable
    
    
    1,073
    
    
    
    5,738Deferred product revenue
    
    
    91
    
    
    
    4,127Other accrued liabilities
    
    
    1,460
    
    
    
    51,481Liabilities subject to compromise
    
    
    235,015
    
    
    
    Total current liabilities
    
    
    444,242
    
    
    
    450,946Other liabilities
    
    
    18
    
    
    
    14Stockholders equity (deficit):Common stock
    
    
    29
    
    
    
    29Paid-in capital
    
    
    91,425
    
    
    
    91,425Accumulated deficit
    
    
    (236,598
    )
    
    
    (207,478
    )Accumulated other comprehensive income
    
    
    2,239
    
    
    
    4,398Deferred compensation
    
    
    (42
    )
    
    
    (264
    )Total stockholders equity (deficit)
    
    
    (142,947
    )
    
    
    (111,890
    )Total liabilities and stockholders equity (deficit)
    
    $
    301,313
    
    
    $
    339,070
  5




---



##### 



AAIPharma Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (29,120
    )
    
    $
    (42,354
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation and amortization
    
    
    9,541
    
    
    
    11,981Intangible asset impairment
    
    
    1,190
    
    
    
    Write-off of deferred financing and related costs
    
    
    6,788
    
    
    
    6,229Net gain from asset sale
    
    
    
    
    
    
    (37,546
    )Noncash stock based compensation
    
    
    221
    
    
    
    23Loss on disposal of assets and other
    
    
    176
    
    
    
    148Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (397
    )
    
    
    32,442Work-in-progress
    
    
    (1,319
    )
    
    
    403Inventories
    
    
    3,828
    
    
    
    (2,366
    )Income taxes recoverable
    
    
    11,110
    
    
    
    Prepaid and other assets
    
    
    1,286
    
    
    
    (7,181
    )Accounts payable
    
    
    (5,106
    )
    
    
    736Customer advances
    
    
    2,302
    
    
    
    (4,685
    )Accrued wages and benefits
    
    
    (40
    )
    
    
    1,076Interest payable
    
    
    8,146
    
    
    
    (356
    )Deferred product revenue
    
    
    (1,197
    )
    
    
    (20,427
    )Other accrued liabilities
    
    
    (17,413
    )
    
    
    12,590Net cash used in operating activities
    
    
    (10,004
    )
    
    
    (49,287
    )Cash flows from investing activities:Proceeds from sales of property and equipment
    
    
    19
    
    
    
    88Purchases of property and equipment
    
    
    (677
    )
    
    
    (4,719
    )Proceeds from disposition of pharmaceutical assets
    
    
    
    
    
    
    91,377Other
    
    
    (61
    )
    
    
    (133
    )Net cash (used in) provided by investing activities
    
    
    (719
    )
    
    
    86,613Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    180,000
    
    
    
    132,500Payments on long-term borrowings
    
    
    (171,500
    )
    
    
    (164,000
    )Payments on interest rate swaps, net
    
    
    (129
    )
    
    
    (10,112
    )Proceeds from stock option exercises
    
    
    
    
    
    
    3,573Other
    
    
    (5
    )
    
    
    (379
    )Net cash provided by (used in) financing activities
    
    
    8,366
    
    
    
    (38,418
    )Net decrease in cash and cash equivalents
    
    
    (2,357
    )
    
    
    (1,092
    )
 6




---



##### 



Six Months EndedJune 30,2005
    
    
    2004Effect of exchange rate changes on cash
    
    
    (15
    )
    
    
    (16
    )Cash and cash equivalents, beginning of period
    
    
    7,130
    
    
    
    8,785Cash and cash equivalents, end of period
    
    $
    4,758
    
    
    $
    7,677Supplemental information, cash paid for:Interest
    
    $
    9,311
    
    
    $
    14,702Income taxes (refunds)
    
    $
    (11,076
    )
    
    $
    10,372
  7




---



##### 



AAIPharma Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (18,531
    )
    
    $
    7,218
    
    
    $
    (29,120
    )
    
    $
    (42,354
    )Currency translation
adjustments, net of tax
    
    
    (1,133
    )
    
    
    (228
    )
    
    
    (2,159
    )
    
    
    (1,048
    )Comprehensive (loss)
income
    
    $
    (19,664
    )
    
    $
    6,990
    
    
    $
    (31,279
    )
    
    $
    (43,402
    )
  8




---



##### 



AAIPharma Inc.
 1. Basis of presentation and other matters
   ( )
 9




---



##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)Net (loss) income, as reported
    
    $
    (18,531
    )
    
    $
    7,218
    
    
    $
    (29,120
    )
    
    $
    (42,354
    )Add back deferred compensation
expense, net of tax
    
    
    57
    
    
    
    
    
    
    
    133
    
    
    
    14Less pro forma stock-based
compensation cost, net of tax
    
    
    1,084
    
    
    
    2,720
    
    
    
    2,760
    
    
    
    5,792Pro forma net (loss) income
    
    $
    (19,558
    )
    
    $
    4,498
    
    
    $
    (31,747
    )
    
    $
    (48,132
    )(Loss) income per share:As reported -Basic
    
    
    ($0.65
    )
    
    $
    0.25
    
    
    
    ($1.02
    )
    
    
    ($1.48
    )Diluted
    
    
    ($0.65
    )
    
    $
    0.25
    
    
    
    ($1.02
    )
    
    
    ($1.48
    )Pro forma -Basic
    
    
    ($0.68
    )
    
    $
    0.16
    
    
    
    ($1.11
    )
    
    
    ($1.69
    )Diluted
    
    
    ($0.68
    )
    
    $
    0.16
    
    
    
    ($1.11
    )
    
    
    ($1.69
    )
 Going Concern and Bankruptcy Filing
    10




---



##### 



June 30,2005(In thousands)Current maturities of long-term debt
    
    $
    176,067Accounts payable
    
    
    10,849Accrued wages and benefits
    
    
    576Interest payable
    
    
    12,811Deferred product revenue
    
    
    2,839Other accrued liabilities
    
    
    31,873$
    235,015
   11




---



##### 



Asset Sale
    Reorganization Expenses
  Impact of Recently Issued Accounting Standards
   12




---



##### 



2. M.V.I. and Aquasol Product Line Sale and Contingent Payment
   3. Income taxes
  4. Loss per share
  13




---



##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)
    
    
    (in thousands)Basic loss per share:Weighted average number of shares
    
    
    28,586
    
    
    
    28,586
    
    
    
    28,586
    
    
    
    28,544Effect of dilutive securities:Stock options
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    Diluted loss per share:Adjusted weighted average number of
shares and assumed conversions
    
    
    28,586
    
    
    
    28,653
    
    
    
    28,586
    
    
    
    28,544
 5. Financial information by business segment and geographic area
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Net revenues:Product sales
    
    $
    14,887
    
    
    $
    21,781
    
    
    $
    31,053
    
    
    $
    46,214Product development (milestones
and
royalties)
    
    
    4,039
    
    
    
    5,126
    
    
    
    8,044
    
    
    
    10,041
 14




---



##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Development services
    
    
    19,965
    
    
    
    24,581
    
    
    
    40,033
    
    
    
    49,475Reimbursed out-of-pockets
    
    
    1,817
    
    
    
    4,496
    
    
    
    5,043
    
    
    
    8,741$
    40,708
    
    
    $
    55,984
    
    
    $
    84,173
    
    
    $
    114,471United States
    
    $
    34,851
    
    
    $
    49,676
    
    
    $
    73,346
    
    
    $
    102,228Germany
    
    
    6,072
    
    
    
    6,380
    
    
    
    10,939
    
    
    
    12,498Other
    
    
    125
    
    
    
    350
    
    
    
    475
    
    
    
    904Less intercompany
    
    
    (340
    )
    
    
    (422
    )
    
    
    (587
    )
    
    
    (1,159
    )$
    40,708
    
    
    $
    55,984
    
    
    $
    84,173
    
    
    $
    114,471(Loss) income from operations:Product sales
    
    $
    3,915
    
    
    $
    33,919
    
    
    $
    9,244
    
    
    $
    (6
    )Product development (milestones
and
royalties)
    
    
    4,039
    
    
    
    5,126
    
    
    
    8,044
    
    
    
    10,041Development services
    
    
    524
    
    
    
    735
    
    
    
    1,087
    
    
    
    8368,478
    
    
    
    39,780
    
    
    
    18,375
    
    
    
    10,871Research and development expense
    
    
    (1,232
    )
    
    
    (4,406
    )
    
    
    (3,011
    )
    
    
    (10,915
    )Corporate
    
    
    (9,760
    )
    
    
    (11,151
    )
    
    
    (16,644
    )
    
    
    (19,673
    )$
    (2,514
    )
    
    $
    24,223
    
    
    $
    (1,280
    )
    
    $
    (19,717
    )United States
    
    $
    (2,960
    )
    
    $
    23,431
    
    
    $
    (1,445
    )
    
    $
    (21,147
    )Germany
    
    
    635
    
    
    
    805
    
    
    
    410
    
    
    
    1,357Other
    
    
    (189
    )
    
    
    (13
    )
    
    
    (245
    )
    
    
    73$
    (2,514
    )
    
    $
    24,223
    
    
    $
    (1,280
    )
    
    $
    (19,717
    )Depreciation and amortization:Product sales
    
    $
    2,978
    
    
    $
    4,198
    
    
    $
    6,054
    
    
    $
    8,389Development services
    
    
    1,201
    
    
    
    1,198
    
    
    
    2,397
    
    
    
    2,381Research and development expense
    
    
    84
    
    
    
    100
    
    
    
    177
    
    
    
    202Corporate
    
    
    452
    
    
    
    501
    
    
    
    913
    
    
    
    1,009$
    4,715
    
    
    $
    5,997
    
    
    $
    9,541
    
    
    $
    11,981
 June 30,
    
    
    December 31,2005
    
    
    2004Total assets:Product sales
    
    $
    218,334
    
    
    $
    233,682Product development (milestones and royalties)
    
    
    4,546
    
    
    
    14,777Development services
    
    
    44,555
    
    
    
    51,939Corporate
    
    
    33,878
    
    
    
    38,672$
    301,313
    
    
    $
    339,070
 15




---



##### 



June 30,
    
    
    December 31,2005
    
    
    2004United States
    
    $
    273,536
    
    
    $
    308,018Germany
    
    
    27,173
    
    
    
    29,077Other
    
    
    604
    
    
    
    1,975$
    301,313
    
    
    $
    339,070Goodwill, net:Development services
    
    $
    12,916
    
    
    $
    14,350
 6. Accounts receivable, net
  June 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Gross accounts receivable
    
    $
    29,972
    
    
    $
    39,885Allowance for uncollectible accounts
    
    
    (2,650
    )
    
    
    (2,564
    )Allowance for customer credits
    
    
    (14,479
    )
    
    
    (24,565
    )Total accounts receivable, net
    
    $
    12,843
    
    
    $
    12,756
 7. Inventories, net
  June 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Finished goods
    
    $
    7,441
    
    
    $
    11,613Work-in-process
    
    
    365
    
    
    
    799Raw materials and supplies
    
    
    3,688
    
    
    
    5,747Inventory reserves
    
    
    (4,763
    )
    
    
    (7,437
    )Total inventories, net
    
    $
    6,731
    
    
    $
    10,722
 8. Debt
 June 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Current maturities of long-term debt
    
    $
    184,000
    
    
    $
    351,645
 16




---



##### 



June 30,
    
    
    December 31,2005
    
    
    2004(In thousands)DIP term loan
    
    $
    180,000
    
    
    $
    DIP revolving credit facility
    
    
    4,000
    
    
    
    Term loan
    
    
    
    
    
    
    165,000Revolving credit facility
    
    
    
    
    
    
    10,50011% senior subordinated notes due 2010, net of original issue
discount
    
    
    174,300
    
    
    
    174,249Interest rate swap monetization deferred income, net
    
    
    1,767
    
    
    
    1,896Fair value of interest rate swap
    
    
    
    
    
    
    Less liabilities subject to compromise
    
    
    (176,067
    )
    
    
    Less current maturities of long-term debt
    
    
    (184,000
    )
    
    
    (351,645
    )Total long-term debt due after one year
    
    $
    
    
    
    $
    
    
    
    provide that the liens on assets that secure obligations under the senior subordinated
notes will continue if all senior debt is repaid, but will resume as junior liens if the
Company thereafter incurs any new senior debt; and
    
    temporarily increase the interest rate on the senior subordinated notes by 0.5% per annum
(to 12% per annum), commencing to accrue on October 1, 2004 and ending on March 31, 2005.
  17




---



##### 



18




---



##### 




    
    100% of the capital stock of the Companys domestic subsidiaries;
    
    65% of the capital stock of the Companys first-tier foreign subsidiaries; and
    
    All of the Companys assets and the assets of the Companys existing and future
domestic subsidiaries.
  9. Other Accrued Liabilities and Restructuring Charges
  June 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Reserve for restructuring
    
    $
    10,682
    
    
    $
    14,953Consignment inventory returns reserve
    
    
    6,720
    
    
    
    12,412Guaranteed purchase commitments
    
    
    11,695
    
    
    
    11,695Advance royalty payments
    
    
    
    
    
    
    7,209Other
    
    
    4,236
    
    
    
    5,212Less liabilities subject to compromise
    
    
    (31,873
    )
    
    
    Total other accrued liabilities, net
    
    $
    1,460
    
    
    $
    51,481
   19




---



##### 



December 31,
    
    
    
    
    
    
    Less
    
    
    June 30,2004
    
    
    
    
    
    
    Payments/
    
    
    2005Balance
    
    
    Charges
    
    
    Write-downs
    
    
    BalanceLease costs, net of estimated sub-lease income
    
    $
    10,277
    
    
    $
    
    
    
    $
    (1,947
    )
    
    $
    8,330Severance costs
    
    
    4,082
    
    
    
    
    
    
    
    (1,905
    )
    
    
    2,177Other costs
    
    
    594
    
    
    
    
    
    
    
    (419
    )
    
    
    175Total
    
    $
    14,953
    
    
    $
    
    
    
    $
    (4,271
    )
    
    $
    10,682
 10. Commitments and Contingencies
      20




---



##### 



21




---



##### 



22




---



##### 



23




---



##### 



24




---



##### 



25




---



##### 



11. Financial information for subsidiary guarantors and non-guarantors
    26




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
 Three Months Ended June 30, 2005Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    11,037
    
    
    $
    23,813
    
    
    $
    6,197
    
    
    $
    (339
    )
    
    $
    40,708Equity earnings from subsidiaries
    
    
    (7,445
    )
    
    
    
    
    
    
    
    
    
    
    7,445
    
    
    
    Total revenues
    
    
    3,592
    
    
    
    23,813
    
    
    
    6,197
    
    
    
    7,106
    
    
    
    40,708Operating costs and expenses:Direct costs (excluding
depreciation and royalty
expense)
    
    
    8,350
    
    
    
    10,896
    
    
    
    3,932
    
    
    
    (228
    )
    
    
    22,950Selling expenses
    
    
    435
    
    
    
    475
    
    
    
    488
    
    
    
    
    
    
    
    1,398General and administrative
expenses
    
    
    11,113
    
    
    
    (3,628
    )
    
    
    1,071
    
    
    
    
    
    
    
    8,576Research and development
    
    
    
    
    
    
    1,147
    
    
    
    
    
    
    
    
    
    
    
    1,147Depreciation
    
    
    1,115
    
    
    
    723
    
    
    
    259
    
    
    
    
    
    
    
    2,097Reorganization expenses
    
    
    
    
    
    
    5,740
    
    
    
    
    
    
    
    
    
    
    
    5,740Royalty expenses
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    124Intangible asset impairment
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    1,19021,033
    
    
    
    16,667
    
    
    
    5,750
    
    
    
    (228
    )
    
    
    43,222(Loss) income from operations
    
    
    (17,441
    )
    
    
    7,146
    
    
    
    447
    
    
    
    7,334
    
    
    
    (2,514
    )Other income (expense:)Interest, net
    
    
    (251
    )
    
    
    (8,448
    )
    
    
    (3
    )
    
    
    
    
    
    
    (8,702
    )Net intercompany interest
    
    
    (786
    )
    
    
    786
    
    
    
    
    
    
    
    
    
    
    
    Other expense, net
    
    
    (53
    )
    
    
    (6,875
    )
    
    
    (214
    )
    
    
    
    
    
    
    (7,142
    )(1,090
    )
    
    
    (14,537
    )
    
    
    (217
    )
    
    
    
    
    
    
    (15,844
    )(Loss) income before income taxes
    
    
    (18,531
    )
    
    
    (7,391
    )
    
    
    230
    
    
    
    7,334
    
    
    
    (18,358
    )Provision for (benefit from)
income taxes
    
    
    
    
    
    
    172
    
    
    
    1
    
    
    
    
    
    
    
    173Net (loss) income
    
    $
    (18,531
    )
    
    $
    (7,563
    )
    
    $
    229
    
    
    $
    7,334
    
    
    $
    (18,531
    )
 27




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
 Three Months Ended June 30, 2004Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    14,484
    
    
    $
    35,191
    
    
    $
    6,731
    
    
    $
    (422
    )
    
    $
    55,984Equity earnings from subsidiaries
    
    
    26,174
    
    
    
    
    
    
    
    
    
    
    
    (26,174
    )
    
    
    Total revenues
    
    
    40,658
    
    
    
    35,191
    
    
    
    6,731
    
    
    
    (26,596
    )
    
    
    55,984Operating costs and expenses:Direct costs (excluding
depreciation and royalty expense)
    
    
    10,713
    
    
    
    15,721
    
    
    
    3,927
    
    
    
    (171
    )
    
    
    30,190Selling expenses
    
    
    1,807
    
    
    
    8,626
    
    
    
    641
    
    
    
    
    
    
    
    11,074General and administrative expenses
    
    
    13,931
    
    
    
    (2,286
    )
    
    
    1,055
    
    
    
    
    
    
    
    12,700Research and development
    
    
    (2
    )
    
    
    4,308
    
    
    
    
    
    
    
    
    
    
    
    4,306Depreciation
    
    
    1,301
    
    
    
    410
    
    
    
    314
    
    
    
    
    
    
    
    2,025Professional fees  internal inquiry
    
    
    
    
    
    
    5,103
    
    
    
    
    
    
    
    
    
    
    
    5,103M.V.I. Contingent payment/(gain on
sale)
    
    
    
    
    
    
    (37,546
    )
    
    
    
    
    
    
    
    
    
    
    (37,546
    )Restructuring charges
    
    
    
    
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    3,400Royalty expenses
    
    
    
    
    
    
    509
    
    
    
    
    
    
    
    
    
    
    
    50927,750
    
    
    
    (1,755
    )
    
    
    5,937
    
    
    
    (171
    )
    
    
    31,761Income (loss) from operations
    
    
    12,908
    
    
    
    36,946
    
    
    
    794
    
    
    
    (26,425
    )
    
    
    24,223Other expense:Interest, net
    
    
    
    
    
    
    (8,817
    )
    
    
    65
    
    
    
    
    
    
    
    (8,752
    )Net intercompany interest
    
    
    (464
    )
    
    
    532
    
    
    
    (68
    )
    
    
    
    
    
    
    Other (expense) income, net
    
    
    (5,196
    )
    
    
    (2,815
    )
    
    
    (73
    )
    
    
    
    
    
    
    (8,084
    )(5,660
    )
    
    
    (11,100
    )
    
    
    (76
    )
    
    
    
    
    
    
    (16,836
    )Income (loss) before income taxes
    
    
    7,248
    
    
    
    25,846
    
    
    
    718
    
    
    
    (26,425
    )
    
    
    7,387Provision for income taxes
    
    
    30
    
    
    
    141
    
    
    
    (2
    )
    
    
    
    
    
    
    169Net income (loss)
    
    $
    7,218
    
    
    $
    25,705
    
    
    $
    720
    
    
    $
    (26,425
    )
    
    $
    7,218
 28




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
 Six Months Ended June 30, 2005Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    22,070
    
    
    $
    51,275
    
    
    $
    11,414
    
    
    $
    (586
    )
    
    $
    84,173Equity earnings from subsidiaries
    
    
    (9,299
    )
    
    
    
    
    
    
    
    
    
    
    9,299
    
    
    
    Total revenues
    
    
    12,771
    
    
    
    51,275
    
    
    
    11,414
    
    
    
    8,713
    
    
    
    84,173Operating costs and expenses:Direct costs (excluding
depreciation and royalty
expense)
    
    
    16,074
    
    
    
    23,774
    
    
    
    7,790
    
    
    
    (393
    )
    
    
    47,245Selling expenses
    
    
    990
    
    
    
    1,241
    
    
    
    971
    
    
    
    
    
    
    
    3,202General and administrative
expenses
    
    
    20,409
    
    
    
    (3,510
    )
    
    
    1,962
    
    
    
    
    
    
    
    18,861Research and development
    
    
    
    
    
    
    2,834
    
    
    
    
    
    
    
    
    
    
    
    2,834Depreciation
    
    
    2,385
    
    
    
    1,394
    
    
    
    525
    
    
    
    
    
    
    
    4,304Professional fees  internal
and government investigations
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    
    
    
    
    299Reorganization expenses
    
    
    
    
    
    
    7,293
    
    
    
    
    
    
    
    
    
    
    
    7,293Royalty expenses
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    225Intangible asset impairment
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    1,19039,858
    
    
    
    34,740
    
    
    
    11,248
    
    
    
    (393
    )
    
    
    85,453(Loss) income from operations
    
    
    (27,087
    )
    
    
    16,535
    
    
    
    166
    
    
    
    9,106
    
    
    
    (1,280
    )Other income (expense:)Interest, net
    
    
    (518
    )
    
    
    (19,640
    )
    
    
    77
    
    
    
    
    
    
    
    (20,081
    )Net intercompany interest
    
    
    (1,419
    )
    
    
    1,502
    
    
    
    (83
    )
    
    
    
    
    
    
    Other expense, net
    
    
    (96
    )
    
    
    (6,973
    )
    
    
    (471
    )
    
    
    
    
    
    
    (7,540
    )(2,033
    )
    
    
    (25,111
    )
    
    
    (477
    )
    
    
    
    
    
    
    (27,621
    )(Loss) income before income taxes
    
    
    (29,120
    )
    
    
    (8,576
    )
    
    
    (311
    )
    
    
    9,106
    
    
    
    (28,901
    )Provision for (benefit from)
income taxes
    
    
    
    
    
    
    254
    
    
    
    (35
    )
    
    
    
    
    
    
    219Net (loss) income
    
    $
    (29,120
    )
    
    $
    (8,830
    )
    
    $
    (276
    )
    
    $
    9,106
    
    
    $
    (29,120
    )
 29




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
 Six Months Ended June 30, 2004Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    28,941
    
    
    $
    73,286
    
    
    $
    13,403
    
    
    $
    (1,159
    )
    
    $
    114,471Equity earnings from subsidiaries
    
    
    (12,408
    )
    
    
    
    
    
    
    
    
    
    
    12,408
    
    
    
    Total revenues
    
    
    16,533
    
    
    
    73,286
    
    
    
    13,403
    
    
    
    11,249
    
    
    
    114,471Operating costs and expenses:Direct costs (excluding
depreciation and royalty
expense)
    
    
    20,596
    
    
    
    35,443
    
    
    
    7,995
    
    
    
    (704
    )
    
    
    63,330Selling expenses
    
    
    3,535
    
    
    
    19,302
    
    
    
    1,264
    
    
    
    
    
    
    
    24,101General and administrative
expenses
    
    
    26,042
    
    
    
    (2,328
    )
    
    
    2,126
    
    
    
    
    
    
    
    25,840Research and development
    
    
    6
    
    
    
    10,707
    
    
    
    
    
    
    
    
    
    
    
    10,713Depreciation
    
    
    2,624
    
    
    
    827
    
    
    
    586
    
    
    
    
    
    
    
    4,037Professional fees  internal
inquiry
    
    
    
    
    
    
    8,303
    
    
    
    
    
    
    
    
    
    
    
    8,303M.V.I. Contingent
payment/(gain on sale)
    
    
    
    
    
    
    (6,545
    )
    
    
    
    
    
    
    
    
    
    
    (6,545
    )Restructuring charges
    
    
    
    
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    3,400Royalty expenses
    
    
    
    
    
    
    1,009
    
    
    
    
    
    
    
    
    
    
    
    1,00952,803
    
    
    
    70,118
    
    
    
    11,971
    
    
    
    (704
    )
    
    
    134,188(Loss) income from operations
    
    
    (36,270
    )
    
    
    3,168
    
    
    
    1,432
    
    
    
    11,953
    
    
    
    (19,717
    )Other expense:Interest, net
    
    
    (17
    )
    
    
    (14,483
    )
    
    
    103
    
    
    
    
    
    
    
    (14,397
    )Net intercompany interest
    
    
    (957
    )
    
    
    1,064
    
    
    
    (107
    )
    
    
    
    
    
    
    Other (expense) income, net
    
    
    (5,074
    )
    
    
    (2,808
    )
    
    
    (183
    )
    
    
    
    
    
    
    (8,065
    )(6,048
    )
    
    
    (16,227
    )
    
    
    (187
    )
    
    
    
    
    
    
    (22,462
    )(Loss) income before income taxes
    
    
    (42,318
    )
    
    
    (13,059
    )
    
    
    1,245
    
    
    
    11,953
    
    
    
    (42,179
    )Provision for income taxes
    
    
    36
    
    
    
    141
    
    
    
    (2
    )
    
    
    
    
    
    
    175Net (loss) income
    
    $
    (42,354
    )
    
    $
    (13,200
    )
    
    $
    1,247
    
    
    $
    11,953
    
    
    $
    (42,354
    )
 30




---



##### 



AAIPharma Inc.
CONSOLIDATING BALANCE SHEET
(In thousands)
 June 30, 2005Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,511
    
    
    $
    95
    
    
    $
    152
    
    
    $
    
    
    
    $
    4,758Accounts receivable, net
    
    
    9,790
    
    
    
    (1,199
    )
    
    
    4,252
    
    
    
    
    
    
    
    12,843Work-in-progress
    
    
    3,249
    
    
    
    4,931
    
    
    
    7,093
    
    
    
    (4,910
    )
    
    
    10,363Inventories, net
    
    
    1,501
    
    
    
    3,992
    
    
    
    1,238
    
    
    
    
    
    
    
    6,731Prepaid and other current assets
    
    
    3,023
    
    
    
    1,858
    
    
    
    445
    
    
    
    
    
    
    
    5,376Total current assets
    
    
    22,074
    
    
    
    9,677
    
    
    
    13,180
    
    
    
    (4,910
    )
    
    
    40,021Investments in and advances to subsidiaries
    
    
    66,099
    
    
    
    (46,240
    )
    
    
    
    
    
    
    (19,859
    )
    
    
    Property and equipment, net
    
    
    34,111
    
    
    
    10,772
    
    
    
    3,494
    
    
    
    
    
    
    
    48,377Goodwill, net
    
    
    725
    
    
    
    1,229
    
    
    
    10,962
    
    
    
    
    
    
    
    12,916Intangible assets, net
    
    
    1,146
    
    
    
    182,503
    
    
    
    
    
    
    
    
    
    
    
    183,649Other assets
    
    
    150
    
    
    
    16,058
    
    
    
    142
    
    
    
    
    
    
    
    16,350Total assets
    
    $
    124,305
    
    
    $
    173,999
    
    
    $
    27,778
    
    
    $
    (24,769
    )
    
    $
    301,313LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)Current liabilities:Current maturities of long-term debt
    
    $
    4,000
    
    
    $
    180,000
    
    
    $
    
    
    
    $
    
    
    
    $
    184,000Accounts payable
    
    
    4,364
    
    
    
    111
    
    
    
    1,383
    
    
    
    
    
    
    
    5,858Customer advances
    
    
    6,528
    
    
    
    3,870
    
    
    
    5,791
    
    
    
    (3,555
    )
    
    
    12,634Accrued wages and benefits
    
    
    1,965
    
    
    
    573
    
    
    
    1,573
    
    
    
    
    
    
    
    4,111Interest payable
    
    
    161
    
    
    
    912
    
    
    
    
    
    
    
    
    
    
    
    1,073Deferred product revenue
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Other accrued liabilities
    
    
    3,965
    
    
    
    (1,331
    )
    
    
    (463
    )
    
    
    (711
    )
    
    
    1,460Liabilities subject to compromise
    
    
    15,690
    
    
    
    219,325
    
    
    
    
    
    
    
    
    
    
    
    235,015Total current liabilities
    
    
    36,673
    
    
    
    403,551
    
    
    
    8,284
    
    
    
    (4,266
    )
    
    
    444,242Other liabilities
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Investments in and advances to subsidiaries
    
    
    172,903
    
    
    
    (177,144
    )
    
    
    3,241
    
    
    
    1,000
    
    
    
    Total stockholders equity (deficit)
    
    
    (85,289
    )
    
    
    (52,408
    )
    
    
    16,253
    
    
    
    (21,503
    )
    
    
    (142,947
    )Total liabilities and stockholders
equity (deficit)
    
    $
    124,305
    
    
    $
    173,999
    
    
    $
    27,778
    
    
    $
    (24,769
    )
    
    $
    301,313
 31




---



##### 



AAIPharma Inc.
CONSOLIDATING BALANCE SHEET
(In thousands)
 December 31, 2004Non-DebtorDebtor Entities
    
    
    EntitiesGuarantor
    
    
    Non-GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,696
    
    
    $
    276
    
    
    $
    158
    
    
    $
    
    
    
    $
    7,130Accounts receivable, net
    
    
    10,831
    
    
    
    (756
    )
    
    
    2,681
    
    
    
    
    
    
    
    12,756Work-in-progress
    
    
    2,079
    
    
    
    4,830
    
    
    
    9,745
    
    
    
    (6,482
    )
    
    
    10,172Inventories, net
    
    
    1,871
    
    
    
    7,449
    
    
    
    1,402
    
    
    
    
    
    
    
    10,722Deferred tax assets
    
    
    11,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,110Prepaid and other current assets
    
    
    4,600
    
    
    
    2,940
    
    
    
    211
    
    
    
    
    
    
    
    7,751Total current assets
    
    
    37,187
    
    
    
    14,739
    
    
    
    14,197
    
    
    
    (6,482
    )
    
    
    59,641Investments in and advances to subsidiaries
    
    
    66,099
    
    
    
    (46,240
    )
    
    
    
    
    
    
    (19,859
    )
    
    
    Property and equipment, net
    
    
    36,108
    
    
    
    12,501
    
    
    
    4,333
    
    
    
    
    
    
    
    52,942Goodwill, net
    
    
    725
    
    
    
    1,229
    
    
    
    12,396
    
    
    
    
    
    
    
    14,350Intangibles assets, net
    
    
    1,159
    
    
    
    188,940
    
    
    
    
    
    
    
    
    
    
    
    190,099Other assets
    
    
    155
    
    
    
    21,757
    
    
    
    126
    
    
    
    
    
    
    
    22,038Total assets
    
    $
    141,433
    
    
    $
    192,926
    
    
    $
    31,052
    
    
    $
    (26,341
    )
    
    $
    339,070LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)Current liabilities:Current maturities of long-term debt
    
    $
    10,500
    
    
    $
    341,145
    
    
    $
    
    
    
    $
    
    
    
    $
    351,645Accounts payable
    
    
    7,057
    
    
    
    13,093
    
    
    
    1,881
    
    
    
    
    
    
    
    22,031Customer advances
    
    
    5,208
    
    
    
    4,327
    
    
    
    6,154
    
    
    
    (4,646
    )
    
    
    11,043Accrued wages and benefits
    
    
    2,553
    
    
    
    993
    
    
    
    1,335
    
    
    
    
    
    
    
    4,881Interest payable
    
    
    160
    
    
    
    5,578
    
    
    
    
    
    
    
    
    
    
    
    5,738Deferred product revenue
    
    
    
    
    
    
    4,127
    
    
    
    
    
    
    
    
    
    
    
    4,127Other accrued liabilities
    
    
    18,940
    
    
    
    33,698
    
    
    
    (408
    )
    
    
    (749
    )
    
    
    51,481Total current liabilities
    
    
    44,418
    
    
    
    402,961
    
    
    
    8,962
    
    
    
    (5,395
    )
    
    
    450,946Other liabilities
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Investments in and advances to subsidiaries
    
    
    162,690
    
    
    
    (166,510
    )
    
    
    3,457
    
    
    
    363
    
    
    
    Total stockholders equity (deficit)
    
    
    (65,689
    )
    
    
    (43,525
    )
    
    
    18,633
    
    
    
    (21,309
    )
    
    
    (111,890
    )Total liabilities and stockholders
equity (deficit)
    
    $
    141,433
    
    
    $
    192,926
    
    
    $
    31,052
    
    
    $
    (26,341
    )
    
    $
    339,070
 32




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
 Six Months Ended June 30, 2005Non-DebtorDebtor Entities
    
    
    EntitiesNon-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (29,120
    )
    
    $
    (8,830
    )
    
    $
    (276
    )
    
    $
    9,106
    
    
    $
    (29,120
    )Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    2,385
    
    
    
    6,631
    
    
    
    525
    
    
    
    
    
    
    
    9,541Intangible asset impairment
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    1,190Write-off of deferred financing and related
costs
    
    
    
    
    
    
    6,788
    
    
    
    
    
    
    
    
    
    
    
    6,788Noncash stock based compensation
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221Loss on disposal of assets and other
    
    
    (1
    )
    
    
    12
    
    
    
    165
    
    
    
    
    
    
    
    176Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,041
    
    
    
    443
    
    
    
    (1,881
    )
    
    
    
    
    
    
    (397
    )Work-in-progress
    
    
    (1,172
    )
    
    
    (101
    )
    
    
    1,525
    
    
    
    (1,571
    )
    
    
    (1,319
    )Inventories
    
    
    370
    
    
    
    3,456
    
    
    
    2
    
    
    
    
    
    
    
    3,828Income taxes recoverable
    
    
    11,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,110Prepaid and other assets
    
    
    1,583
    
    
    
    (8
    )
    
    
    (289
    )
    
    
    
    
    
    
    1,286Accounts payable
    
    
    315
    
    
    
    (5,140
    )
    
    
    (281
    )
    
    
    
    
    
    
    (5,106
    )Customer advances
    
    
    1,320
    
    
    
    (457
    )
    
    
    349
    
    
    
    1,090
    
    
    
    2,302Accrued wages and benefits
    
    
    (12
    )
    
    
    (421
    )
    
    
    393
    
    
    
    
    
    
    
    (40
    )Interest payable
    
    
    1
    
    
    
    8,145
    
    
    
    
    
    
    
    
    
    
    
    8,146Deferred product revenue
    
    
    
    
    
    
    (1,197
    )
    
    
    
    
    
    
    
    
    
    
    (1,197
    )Other accrued liabilities
    
    
    (2,866
    )
    
    
    (14,878
    )
    
    
    293
    
    
    
    38
    
    
    
    (17,413
    )Intercompany receivables and payables
    
    
    19,514
    
    
    
    (10,634
    )
    
    
    (217
    )
    
    
    (8,663
    )
    
    
    Net cash provided by (used in) operating
activities
    
    
    4,689
    
    
    
    (15,001
    )
    
    
    308
    
    
    
    
    
    
    
    (10,004
    )Cash flows from investing activities:Proceeds from sales of property and equipment
    
    
    17
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    19Purchases of property and equipment
    
    
    (330
    )
    
    
    (48
    )
    
    
    (299
    )
    
    
    
    
    
    
    (677
    )Other
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Net cash used in investing activities
    
    
    (374
    )
    
    
    (46
    )
    
    
    (299
    )
    
    
    
    
    
    
    (719
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    180,000Payments on long-term borrowings
    
    
    (6,500
    )
    
    
    (165,000
    )
    
    
    
    
    
    
    
    
    
    
    (171,500
    )Payments on interest rate swaps, net
    
    
    
    
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Other
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Net cash (used in) provided by financing
activities
    
    
    (6,500
    )
    
    
    14,866
    
    
    
    
    
    
    
    
    
    
    
    8,366
 33




---



##### 



Six Months Ended June 30, 2005Non-DebtorDebtor Entities
    
    
    EntitiesNon-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet (decrease) increase in cash and cash
equivalents
    
    
    (2,185
    )
    
    
    (181
    )
    
    
    9
    
    
    
    
    
    
    
    (2,357
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )Cash and cash equivalents, beginning of period
    
    
    6,696
    
    
    
    276
    
    
    
    158
    
    
    
    
    
    
    
    7,130Cash and cash equivalents, end of period
    
    $
    4,511
    
    
    $
    95
    
    
    $
    152
    
    
    $
    
    
    
    $
    4,758
 34




---



##### 



AAIPharma Inc.
CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
 Six Months Ended June 30, 2004Non-DebtorDebtor Entities
    
    
    EntitiesNon-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (42,354
    )
    
    $
    (13,200
    )
    
    $
    1,247
    
    
    $
    11,953
    
    
    $
    (42,354
    )Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    2,471
    
    
    
    8,924
    
    
    
    586
    
    
    
    
    
    
    
    11,981Write-off of deferred financing and related
costs
    
    
    
    
    
    
    6,229
    
    
    
    
    
    
    
    
    
    
    
    6,229Net gain from asset sale
    
    
    
    
    
    
    (37,546
    )
    
    
    
    
    
    
    
    
    
    
    (37,546
    )Non-cash stock based compensation
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Other
    
    
    1
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    148Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,399
    
    
    
    32,467
    
    
    
    1,297
    
    
    
    (3,721
    )
    
    
    32,442Work-in-progress
    
    
    1,027
    
    
    
    430
    
    
    
    (1,763
    )
    
    
    709
    
    
    
    403Inventories
    
    
    (589
    )
    
    
    (1,765
    )
    
    
    (12
    )
    
    
    
    
    
    
    (2,366
    )Prepaid and other assets
    
    
    21
    
    
    
    (7,132
    )
    
    
    (70
    )
    
    
    
    
    
    
    (7,181
    )Accounts payable
    
    
    3,485
    
    
    
    (1,948
    )
    
    
    (801
    )
    
    
    
    
    
    
    736Customer advances
    
    
    (2,439
    )
    
    
    (2,126
    )
    
    
    882
    
    
    
    (1,002
    )
    
    
    (4,685
    )Accrued wages and benefits
    
    
    526
    
    
    
    18
    
    
    
    532
    
    
    
    
    
    
    
    1,076Interest payable
    
    
    (5
    )
    
    
    (351
    )
    
    
    
    
    
    
    
    
    
    
    (356
    )Deferred product revenue
    
    
    
    
    
    
    (20,427
    )
    
    
    
    
    
    
    
    
    
    
    (20,427
    )Other accrued liabilities
    
    
    (5,923
    )
    
    
    15,235
    
    
    
    316
    
    
    
    2,962
    
    
    
    12,590Intercompany receivables and payables
    
    
    39,322
    
    
    
    (27,011
    )
    
    
    (1,410
    )
    
    
    (10,901
    )
    
    
    Net cash (used in) provided by operating
activities
    
    
    (2,035
    )
    
    
    (48,203
    )
    
    
    951
    
    
    
    
    
    
    
    (49,287
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,995
    )
    
    
    (1,794
    )
    
    
    (930
    )
    
    
    
    
    
    
    (4,719
    )Proceeds from sales of property and equipment
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Proceeds from disposition of pharmaceutical
assets
    
    
    
    
    
    
    91,377
    
    
    
    
    
    
    
    
    
    
    
    91,377Other
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )Net cash used in (provided by) investing
activities
    
    
    (2,128
    )
    
    
    89,671
    
    
    
    (930
    )
    
    
    
    
    
    
    86,613Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    7,500
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    132,500Payments on long-term borrowings
    
    
    (8,000
    )
    
    
    (156,000
    )
    
    
    
    
    
    
    
    
    
    
    (164,000
    )Proceeds from interest rate swaps, net
    
    
    
    
    
    
    (10,112
    )
    
    
    
    
    
    
    
    
    
    
    (10,112
    )Proceeds from stock option exercises
    
    
    3,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,573Other
    
    
    
    
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    (379
    )
 35




---



##### 



Six Months Ended June 30, 2004Non-DebtorDebtor Entities
    
    
    EntitiesNon-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) financing
activities
    
    
    3,073
    
    
    
    (41,491
    )
    
    
    
    
    
    
    
    
    
    
    (38,418
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (1,090
    )
    
    
    (23
    )
    
    
    21
    
    
    
    
    
    
    
    (1,092
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Cash and cash equivalents, beginning of period
    
    
    8,161
    
    
    
    192
    
    
    
    432
    
    
    
    
    
    
    
    8,785Cash and cash equivalents, end of period
    
    $
    7,071
    
    
    $
    169
    
    
    $
    437
    
    
    $
    
    
    
    $
    7,677
 36




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Summary
    37




---



##### 



38




---



##### 



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Net revenues:Product sales
    
    $
    14,887
    
    
    
    37
    %
    
    $
    21,781
    
    
    
    39
    %
    
    $
    31,053
    
    
    
    37
    %
    
    $
    46,214
    
    
    
    40
    %Product development (milestones and
royalties)
    
    
    4,039
    
    
    
    10
    %
    
    
    5,126
    
    
    
    9
    %
    
    
    8,044
    
    
    
    10
    %
    
    
    10,041
    
    
    
    9
    %Development services
    
    
    19,965
    
    
    
    49
    %
    
    
    24,581
    
    
    
    44
    %
    
    
    40,033
    
    
    
    47
    %
    
    
    49,475
    
    
    
    43
    %Reimbursed out-of-pocket
    
    
    1,817
    
    
    
    4
    %
    
    
    4,496
    
    
    
    8
    %
    
    
    5,043
    
    
    
    6
    %
    
    
    8,741
    
    
    
    8
    %$
    40,708
    
    
    
    100
    %
    
    $
    55,984
    
    
    
    100
    %
    
    $
    84,173
    
    
    
    100
    %
    
    $
    114,471
    
    
    
    100
    %
 39




---



##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Direct costs (excluding depreciation
and royalty expense)
    
    $
    22,950
    
    
    
    56
    %
    
    $
    30,190
    
    
    
    54
    %
    
    $
    47,245
    
    
    
    56
    %
    
    $
    63,330
    
    
    
    55
    %Selling expenses
    
    
    1,398
    
    
    
    3
    
    
    
    11,074
    
    
    
    20
    
    
    
    3,202
    
    
    
    4
    
    
    
    24,101
    
    
    
    21General and administrative expenses
    
    
    8,576
    
    
    
    21
    
    
    
    12,700
    
    
    
    23
    
    
    
    18,861
    
    
    
    22
    
    
    
    25,840
    
    
    
    23Research and development
    
    
    1,147
    
    
    
    3
    
    
    
    4,306
    
    
    
    8
    
    
    
    2,834
    
    
    
    3
    
    
    
    10,713
    
    
    
    9Depreciation
    
    
    2,097
    
    
    
    5
    
    
    
    2,025
    
    
    
    4
    
    
    
    4,304
    
    
    
    5
    
    
    
    4,037
    
    
    
    4Professional fees  internal and
government investigations
    
    
    
    
    
    
    
    
    
    
    5,103
    
    
    
    9
    
    
    
    299
    
    
    
    
    
    
    
    8,303
    
    
    
    7Reorganization expenses
    
    
    5,740
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    7,293
    
    
    
    9
    
    
    
    
    
    
    
    M.V.I. contingent payment (gain on sale)
    
    
    
    
    
    
    
    
    
    
    (37,546
    )
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    (6,545
    )
    
    
    (6
    )Restructuring charges
    
    
    
    
    
    
    
    
    
    
    3,400
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    3,400
    
    
    
    3Royalty expenses
    
    
    124
    
    
    
    
    
    
    
    509
    
    
    
    1
    
    
    
    225
    
    
    
    
    
    
    
    1,009
    
    
    
    1Intangible asset impairment
    
    
    1,190
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    1,190
    
    
    
    1
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (2,514
    )
    
    
    (6
    )
    
    
    24,223
    
    
    
    43
    
    
    
    (1,280
    )
    
    
    (2
    )
    
    
    (19,717
    )
    
    
    (17
    )Interest expense, net
    
    
    8,702
    
    
    
    21
    
    
    
    8,752
    
    
    
    16
    
    
    
    20,081
    
    
    
    24
    
    
    
    14,397
    
    
    
    13Loss from extinguishment of debt
    
    
    (6,788
    )
    
    
    (17
    )
    
    
    (6,229
    )
    
    
    (11
    )
    
    
    (6,788
    )
    
    
    (8
    )
    
    
    (6,229
    )
    
    
    (5
    )Other (expense) income, net
    
    
    (354
    )
    
    
    (1
    )
    
    
    (1,855
    )
    
    
    (3
    )
    
    
    (752
    )
    
    
    (1
    )
    
    
    (1,836
    )
    
    
    (2
    )Provision for income taxes
    
    
    173
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    219
    
    
    
    
    
    
    
    175
    
    
    
    Net (loss) income
    
    
    (18,531
    )
    
    
    (46
    )
    
    
    7,218
    
    
    
    13
    
    
    
    (29,120
    )
    
    
    (35
    )
    
    
    (42,354
    )
    
    
    (37
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Gross revenues
    
    $
    48,726
    
    
    $
    70,292
    
    
    $
    102,645
    
    
    $
    146,525Less allowance for customer credits
    
    
    8,018
    
    
    
    14,308
    
    
    
    18,472
    
    
    
    32,054Net revenues
    
    $
    40,708
    
    
    $
    55,984
    
    
    $
    84,173
    
    
    $
    114,471
  Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
  40




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##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Darvon/Darvocet
    
    $
    6,676
    
    
    $
    6,835
    
    
    $
    14,492
    
    
    $
    9,992Brethine
    
    
    (306
    )
    
    
    3,471
    
    
    
    (882
    )
    
    
    5,549MVI/Aquasol
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    5,733CII Pain Products
    
    
    7,071
    
    
    
    8,531
    
    
    
    14,423
    
    
    
    19,198All Other
    
    
    1,446
    
    
    
    2,699
    
    
    
    3,020
    
    
    
    5,742Total net revenues
    
    $
    14,887
    
    
    $
    21,781
    
    
    $
    31,053
    
    
    $
    46,214
     41




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##### 



42




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##### 



43




---



##### 



Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
      44




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##### 



45




---



##### 



Liquidity and Capital Resources
    46




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##### 



Other Commitments and Contingencies
   Analysis of Liquidity
     47




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##### 




    
    provide that the liens on assets that secure obligations under the senior subordinated
notes will continue if all senior debt is repaid, but will resume as junior liens if we
thereafter incur any new senior debt; and
    
    temporarily increase the interest rate on our senior subordinated notes by 0.5% per annum
(to 12% per annum), commencing to accrue on October 1, 2004 and ending on March 31, 2005.
   48




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##### 



49




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##### 




    
    100% of the capital stock of our domestic subsidiaries;
    
    65% of the capital stock of our first-tier foreign subsidiaries; and
    
    All of our assets and the assets our existing and future domestic subsidiaries.
   New Accounting Standards
   50




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##### 



Potential Applicability of Fresh Start Accounting
  Risk Factors and Forward Looking Statements
 Forward-Looking Statements and Safe Harbor Language
  
    
    our ability to obtain requisite approval of the Plan or any other Chapter 11
plan that would permit AAIPharma to emerge from bankruptcy proceedings as a going
concern,
 51




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##### 




    
    the uncertainty whether a Chapter 11 plan, as approved in the bankruptcy
proceedings, would provide for any continuing ownership interest in the Company for the
current holders of our common stock,
    
    our ability to continue to operate our business effectively in light of the
significant diversion of resources, including management attention, in connection with
our pending bankruptcy proceedings,
    
    the uncertainty of the timing of any approval of a Chapter 11 plan and the
consequent continuation of our bankruptcy proceedings until such approval is obtained,
including the impact of heightened legal fees and other expenses during the pendency of
these proceedings,
    
    our ability to attract, retain and complete product development projects and
other customer relationships, which ability has been significantly adversely affected
by the uncertainties regarding our financial condition and our bankruptcy proceedings,
    
    our ability to comply with the DIP Facilities,
    
    our ability to obtain sufficient sources of capital to fund operating needs
upon termination or expiration of the DIP Facilities,
    
    our ability to generate sufficient cash from operations for our cash needs,
    
    our ability to continue to operate in the ordinary course and to manage our
relationships with our lenders, noteholders, customers, vendors and suppliers and
employees,
    
    our ability to obtain critical supplies,
    
    the impact of material weaknesses in internal control over financial reporting
on our ability to timely prepare accurate financial statements and to avoid material
adverse effects on our financial and operational results,
    
    our ability to timely remediate identified material weaknesses in internal
control over financial reporting,
    
    the investigations by the U.S. Attorneys office and the SEC into our financial
reporting and related activity,
    
    the outcome of pending litigation filed against us, if not included within the
Plan,
    
    the outcome of pending litigation we have filed against others, if not included
within the Plan,
    
    significant changes in our management team and the loss of critical personnel,
    
    our ability to attract critical personnel,
    
    demand for our services,
 52




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##### 




    
    the prices that we can obtain for our services,
    
    the level of competition we face,
    
    the amounts and timing of product returns and chargebacks and their impact on
our ability to receive the portion of the purchase price for assets of the
Pharmaceuticals Division held in escrow,
    
    timely success in product development and regulatory approvals for new products
and line extensions for which we may be entitled to receive royalty payments,
    
    actions by the United States Food and Drug Administration (FDA) in connection
with submissions related to products with respect to which we may be entitled to
receive royalties,
    
    activities of third parties to successfully commercialize products to which we
may be entitled to royalties,
    
    other governmental regulations and actions affecting our services or the
products with respect to which we may be entitled to receive royalties,
    
    developments in patent or other proprietary rights owned by us or others, and
    
    general conditions in the economy and capital markets.
    Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 53




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##### 



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
      54




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##### 



Changes in Internal Controls
  
    
    During the second quarter of 2005 a review of the process used for accounting for the
issuance of supplies inventory used in the non-clinical portion of our Development Services
business was performed by a task force identified to address this issue and determine the
appropriate control procedures to implement in this process. The process improvements
identified were implemented during the second quarter of 2005. These procedures provide
additional control over the accounting for inventory of certain supplies used in the
non-clinical portion of the Development Services business. Management is continuing to
perform physical counts of this inventory quarterly in order to gain assurance as to the
reported non-clinical supplies inventory amounts as well as continuing to review the
processes used in this area in order to develop additional control procedures.
  
    
    Management is currently reviewing the invoicing processes for our Development Services
Division and determining areas where more control and review processes should be added. We
are currently in the process of developing these new procedures; however, we do not expect
these to be in place until the fourth quarter of 2005. To provide assurance on the
financials as they relate to the invoicing function, management is performing quarterly
internal audits of the Development Services invoicing function.
    
    While new procedures were implemented during the second quarter of 2005 for the
accounting for the issuance of certain inventory used in the non-clinical portion of our
Development Services business, management is continuing to review the processes used in
this area and determining where additional controls may be implemented.
  55




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##### 



PART II. OTHER INFORMATION
 Item 1. Legal Proceedings.
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
   Item 6. Exhibits
  56




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##### 



SIGNATURES
  AAIPharma Inc.Date: November 9, 2005
    By:
    /s/Ludo J. ReyndersLudo J. ReyndersChief Executive Officer Date: November 9, 2005
    By:
    /s/ Matthew E. CzajkowskiMatthew E. CzajkowskiChief Financial Officer 57




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##### 



AAIPharma Inc.
Exhibit Index
 ExhibitNo.
    
    Description10.1
    
    Asset Purchase Agreement between Xanodyne Pharmaceuticals, Inc., AAIPharma Inc. and aaiPharma
LLC dated as of May 6, 2005, incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K of AAIPharma Inc. dated May 12, 200510.2
    
    Financing Agreement, dated as of May 12, 2005, by and among AAIPharma Inc., Applied
Analytical Industries Learning Center, Inc., AAI Technologies, Inc., AAI Properties, Inc., AAI
Japan, Inc., Kansas City Analytical Services, Inc., AAI Development Services, Inc., aaiPharma
LLC, AAI Development Services, Inc., the financial institutions from time to time party
thereto, Silver Point Finance, LLC, as collateral agent for the lenders, and Bank of America,
as administrative agent for the lenders, incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K of AAIPharma Inc. dated May 12, 200510.3
    
    First Amendment to Asset Purchase Agreement between Xanodyne Pharmaceuticals, Inc., aaiPharma
Inc. and aaiPharma LLC dated as of June 7, 2005, incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K of AAIPharma Inc. dated July 22, 200531.1
    
    Certification pursuant to Exchange Act Rule 13a  14(a) of Dr. Ludo J. Reynders31.2
    
    Certification pursuant to Exchange Act Rule 13a  14(a) of Matthew E. Czajkowski32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350**
 58