Aaipharma 8-K In the United States Bankruptcy Court for the District of Delaware

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:	)	Chapter 11
	)
AAIPHARMA INC.,et al.,	)	Case Nos. 05-11341 through 05-11345 and
	)	05-11347 through 05-11350 (PJW)
Debtors.	)
	)	Jointly Administered
	)

UPDATED PROJECTIONS TO FIRST AMENDED DISCLOSURE STATEMENT
FOR DEBTORS’ FIRST AMENDED JOINT CHAPTER 11 PLAN

Dated:	Wilmington, Delaware
	January 6, 2006
RICHARDS, LAYTON & FINGER, P.A.		FRIED, FRANK, HARRIS, SHRIVER
One Rodney Square		& JACOBSON LLP
920 North King Street		One New York Plaza
Wilmington, Delaware 19801		New York, New York 10004-1980
Attn:	Mark D. Collins, Esq.	Attn:	Bonnie Steingart, Esq.
	Rebecca L. Booth, Esq.		Gary L. Kaplan, Esq.
	Karen M. McKinley, Esq.		Arik Preis, Esq.
Tel:	(302) 651-7700	Tel:	(212) 859-8000
Fax:	(302) 651-7701	Fax:	(212) 859-4000

UPDATED PROJECTIONS

     On December 5, 2005, the Debtors filed their First Amended Disclosure Statement for Debtors’ First Amended Joint Chapter 11 Plan (the “Disclosure Statement”). Section 19.02 (Financial Projections) of the Disclosure Statement stated that:

In light of the fact that the actual results for the third quarter of 2005 were lower than projected in the Business Plan, the Projections for the remainder of 2005 in the Disclosure Statement were adjusted downward. Since the filing of the Disclosure Statement in early November, the Debtors have received the actual results for another month of 2005, which were also lower than forecasted in the Business Plan. As a result of this negative trend, the Debtors’ management is currently reviewing the projections for 2006 (and beyond) contained in the Business Plan and in the Disclosure Statement to determine whether or not the forecasts should be revised downwards. To the extent that the Debtors determine that the Projections are no longer reasonable, the Debtors intend to file with the Court a supplement to this Disclosure Statement containing revised projections prior to the Voting Deadline. Whether or not the Debtors determine that the Projections must be revised, there can be no assurances that the Debtors will be able to reach their Projections, and the Projections should not be relied upon as a guaranty, representation, or other assurance of actual results that will occur.

     Since the filing of the Disclosure Statement, the Debtors have determined to revise the 2006 projections downward. In that regard, set forth herein are the Debtors’ revised projections for 2006, along with the projections for 2007-2010 (the “Updated Projections”). The projected revenue and EBITDA in the projections for the years 2007-2010 remain unchanged but do contain some minor balance sheet adjustments due to continued analysis of the business. In reviewing the Updated Projections, please note the following:

1.	The main reason for the revised projections for 2006 is that the Debtors have refined their view of expected development services revenues to be received from Xanodyne Pharmaceuticals, Inc. during 2006. This refinement can be seen in the Debtors’ net revenues from U.S. Non-Clinical Operations for 2006, which has decreased by approximately $7 million.
2.	Given that projections for 2005 are now outdated, the Updated Projections do not include projections for 2005. Nevertheless, the Debtors note that the 2005 Projections forecasted revenue for the three operating Development Services divisions (U.S. Non-Clinical Operations, U.S. Clinical Operations, and Europe Operations) of $78.8 million. In light of actual results through November, the Debtors are now projecting $77.1 million in revenue for these three divisions.
3.	For the years 2007-2010, the only changes in the Debtors’ Updated P&L Projections are: (i) Increased depreciation in 2007 and 2008 stemming

from a requirement to amortize certain projected intangible assets, (ii) Increased interest and other expenses from the Debtors’ exit financing facility, (iii) Additional line items for Indemnification Reserve Expense and Restructuring Severance were added for items that were unavailable when the Debtors developed the Disclosure Statement projections or not separately accounted for, and (iv) Restructuring Professional Fees have been broken out separately from General and Administrative Expenses. None of these changes affect total projected revenue or EBITDA for these years.

4. The Consolidated Balance Sheet and the Consolidated Pro Forma Fresh Start Balance Sheet contain the following changes:

(a)	The Company now projects that the outstanding credit facility balance as of the Effective Date of the Plan will be approximately $17.0 million. The $17.0 million balance is derived from the $12.9 million balance per the projected Fresh Start Balance Sheet plus additional borrowing of $4.1 million related to use of cash from operations and capital expenditures during the month of January 2006.
(b)	“Accumulated Deficit” has been renamed “Retained Earnings (Deficit).”
(c)	“Other Capital subs” has been renamed “Other Equity”
(d)	Pharma Net Reserves, originally included in “Other Assets”, are now included as a separate line item.
(e)	With regard specifically to the Fresh Start Balance Sheet, this balance sheet is based on a December 31, 2005 balance. The actual pre-confirmation balance sheet and the related journal entries associated with Fresh Start may change.

     THESE PROJECTIONS ARE INTENDED TO BE READ IN CONJUNCTION WITH THE DISCLOSURE STATEMENT, INCLUDING, WITHOUT LIMITATION, SECTION 19.02 AND APPENDIX A TO THE DISCLOSURE STATEMENT. THE DISCLOSURES, DISCLAIMERS, ASSUMPTIONS, FOOTNOTES, ETC. CONTAINED IN THE DISCLOSURE STATEMENT ARE AN INTEGRAL PART OF THESE UPDATED PROJECTIONS AND ARE INCORPORATED HEREIN BY REFERENCE.

     SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: These Projected Financial Statements contain statements which constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. “Forward-looking statements” in these Projected Financial Statements include the intent, belief or current expectations of the Debtors and members of their Management teams with respect to the timing of, completion of and scope of the current restructuring, reorganization plan, strategic business plan, bank financing, and debt and equity market conditions and the Debtors’ future liquidity, as well as the assumptions upon which such statements are based.

While Management believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from these contemplated by such forward-looking statements. Important factors currently known to Management that could cause actual results to differ materially from those contemplated by the forward-looking statements in these Projected Financial Statements include, but are not limited to, further adverse developments with respect to the Debtors’ liquidity position or operations of the various businesses of the Reorganized Debtors, adverse developments in the bank financing or public or private markets for debt or equity securities, or adverse developments in the timing or results of the Debtors’ current strategic business plan (including the timeline to emerge from chapter 11) and the possible negative effects that could result from potential economic and political factors around the world in the various foreign markets in which the Reorganized Debtors operate.

Dated: Wilmington, North Carolina
January 6, 2006

	Respectfully submitted,
	aaiPharma Inc. (for itself and on behalf of each of the other Debtors)
	By:	/s/ Matthew E. Czajkowski
		Matthew E. Czajkowski
		Chief Financial Officer and
		Chief Administrative Officer
/s/ Karen M. McKinley
Mark D. Collins (No. 2981)
Rebecca L. Booth (No. 4031)
Karen M. McKinley (No. 4372)
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Tel: (302) 651-7700
Fax: (302) 651-7701
- and -
Bonnie Steingart, Esq.
Gary L. Kaplan, Esq.
Arik Preis, Esq.
FRIED, FRANK, HARRIS, SHRIVER
& JACOBSON LLP
One New York Plaza
New York, New York 10004
Tel: (212) 859-8000
Fax: (212) 859-4000
Counsel for Debtors and
Debtors in Possession

	AAIPharma Inc.
	CONSOLIDATED STATEMENTS OF OPERATIONS
	Unaudited
	(In thousands)
	Years Ending December 31
	Projected			Projected			Projected			Projected			Projected
	Post-			Post-			Post-			Post-			Post-
	Confirmation			Confirmation			Confirmation			Confirmation			Confirmation
	2006			2007			2008			2009			2010
Net revenues:
U.S. Non-Clinical Operations	$	62,075		$	72,171		$	78,444		$	85,131		$	96,225
U.S. Clinical Operations		15,335			19,866			27,711			38,671			54,123
Europe Operations		26,300			28,940			34,439			44,082			56,425
Other Revenues		2,497			3,070			10,206			11,591			14,164
Total revenues		106,206			124,047			150,800			179,475			220,938
Direct costs (excluding depreciation)		72,069			79,213			85,649			99,083			116,602
Sales and marketing expense		9,997			9,956			12,721			13,799			16,065
General and administrative expenses		23,033			22,640			24,848			28,030			32,315
Depreciation		8,487			10,046			8,765			9,712			12,000
Pharma Residual Expense		197			1			1			1			1
Research and Development		—			—			—			—			—
Other		—			—			—			—			—
Total operating costs and expenses		113,782			121,855			131,985			150,625			176,983
Income (Loss) from operations		(7,576	)		2,192			18,815			28,851			43,954
Other income (expense):
Interest expense, net		(2,668	)		(3,372	)		(2,669	)		(1,330	)		(420	)
Restructuring Professional Fees		(4,152	)		—			—			—			—
Indemnification Reserve Expense		(3,000	)		—			—			—			—
Restructuring Severance		(222	)		—			—			—			—
Amortization of New Credit Facility Financing Fee		(400	)		(400	)		(400	)		—			—
Gain on Pharma sale		—			—			—			—			—
(Loss) from extinguishment of debt		—			—			—			—			—
Intangible asset impairment		—			—			—			—			—
Other		—			—			—			—			—
		(10,442	)		(3,772	)		(3,069	)		(1,330	)		(420	)
Income (Loss) before income taxes		(18,018	)		(1,580	)		15,746			27,521			43,534
Provision (benefit) for income taxes		—			—			—			6,492			14,868
Net (loss) income	$	(18,018	)	$	(1,580	)	$	15,746		$	21,029		$	28,666
EBITDA1	$	911		$	12,236		$	27,579		$	38,561		$	55,953

¹ Represents the sum of income (loss) before income taxes plus the amount of depreciation, interest expense, net and amortization of new credit facility financing fee. For 2006, represents the sum of income (loss) before income taxes plus the amount of depreciation, interest expense, net, restructuring professional fees, indemnification reserve expense, restructuring severance and amortization of new credit facility financing fee. The amounts shown as EBITDA are not financial measures under generally accepted accounting principles.

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	AAIPharma Inc.
	CONSOLIDATED BALANCE SHEETS
	Unaudited
	(In thousands)
	December 31
	Projected			Projected			Projected			Projected			Projected
	Post-			Post-			Post-			Post-			Post-
	Confirmation			Confirmation			Confirmation			Confirmation			Confirmation
	2006			2007			2008			2009			2010
ASSETS
Current assets:
Cash and cash equivalents	$	4,537		$	4,537		$	4,537		$	14,202		$	38,971
Restricted cash		—			—			—			—			—
Pharma Net Reserves		(1,194	)		(1,194	)		(1,194	)		(1,194	)		(1,194	)
Accounts receivable, net and Work-in-progress		31,043			31,313			35,380			40,964			48,964
Inventories, net		3,819			3,841			4,050			4,233			4,354
Prepaid and other current assets		4,082			4,082			4,082			4,082			4,082
Total current assets		42,286			42,577			46,854			62,286			95,176
Property and equipment, net		42,514			38,568			39,903			41,991			45,291
Goodwill and other intangible assets, net		111,437			111,437			111,437			111,437			111,437
Other assets		1,308			908			508			508			508
Total assets	$	197,545		$	193,490		$	198,702		$	216,222		$	252,412
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		5,889			9,475			9,925			11,050			12,741
Customer advances		17,497			20,087			23,030			27,123			32,957
Accrued wages and benefits		4,216			4,216			4,216			4,216			4,216
Interest payable		132			132			132			132			132
Other accrued liabilities		6,423			6,423			6,423			6,423			6,423
Total current liabilities		34,157			40,333			43,725			48,945			56,468
Other Long-term debt, less current portion		31,305			22,655			8,728			—			—
Liabilities Subject to Compromise		—			—			—			—			—
Other liabilities		—			—			—			—			—
Stockholders’ equity (deficit):
Old Common stock, at par		—			—			—			—			—
Old Paid-in capital		—			—			—			—			—
New Common Stock		150,100			150,100			150,100			150,100			150,100
Retained Earnings (Deficit)		(18,018	)		(19,598	)		(3,851	)		17,178			45,844
Other Equity		—			—			—			—			—
Deferred compensation		—			—			—			—			—
Total stockholders’ equity (deficit)		132,082			130,502			146,249			167,278			195,944
Total liabilities and stockholders’ equity (deficit)	$	197,545		$	193,490		$	198,702		$	216,222		$	252,412

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	AAIPharma Inc.
	CONSOLIDATED PRO FORMA FRESH START BALANCE SHEET
	Unaudited
	(In thousands)
	Projected												Projected
	Pre-												Reorganized
	Confirmation			Debt Discharge			Exchange of Stock			Fresh Start			Balance Sheet
ASSETS
Current assets:
Cash and cash equivalents	$	3,499											$	3,499
Restricted Cash		4,950												4,950
Pharma Net Reserves		(4,841	)											(4,841	)
Accounts receivable, net and Work-in-progress		23,624												23,624
Inventories, net		3,442												3,442
Prepaid and other current assets		4,080												4,080
Total current assets		34,754			—			—			—			34,754
Property and equipment, net		43,485												43,485
Goodwill, net		19,139									92,299			111,437
Other assets		14,004									(12,296	)		1,708
Total assets	$	111,381		$	—		$	—		$	80,003		$	191,384
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		8,156												8,156
Customer advances		11,137												11,137
Accrued wages and benefits		4,216												4,216
Interest payable		132												132
Other accrued liabilities		4,743												4,743
Total current liabilities		28,384			—			—			—			28,384
Long-term debt, less current portion		7,500			4,200						1,200			12,900
Liabilities Subject to Compromise		218,314			(218,314	)								—
Other liabilities		9			(9	)								—
Stockholders’ equity (deficit):
Old Common stock, at par		29						(29	)					—
Old Paid-in capital		91,425						29			(91,454	)		—
New Common Stock		—			150,100									150,100
Retained Earnings (Deficit)		(236,560	)		64,023						172,537			—
Other Equity		2,281									(2,281	)		—
Deferred compensation		—												—
Total stockholders’ equity (deficit)		(142,825	)		214,123			—			78,803			150,100
Total liabilities and stockholders’ equity (deficit)	$	111,381		$	—		$	—		$	80,003		$	191,384
	***The accompanying notes are an integral part of these financial statements***

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	AAIPharma Inc.
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Unaudited
	(In thousands)
	Years Ending December 31
	Projected			Projected			Projected			Projected			Projected
	Post-			Post-			Post-			Post-			Post-
	Confirmation			Confirmation			Confirmation			Confirmation			Confirmation
	2006			2007			2008			2009			2010
Cash flows from operating activities:
Net (loss) income	$	(18,018	)	$	(1,580	)	$	15,746		$	21,029		$	28,666
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		8,487			10,046			8,765			9,712			12,000
Amortization of New Credit Facility Financing Fee		400			400			400			—			—
Changes in operating assets and liabilities:
Accounts receivable, net and Work-in-progress		(7,419	)		(270	)		(4,067	)		(5,585	)		(8,000	)
Inventories		(377	)		(22	)		(210	)		(183	)		(121	)
Prepaid and other assets		(2	)		—			—			—			—
Restricted Cash		1,303			—			—			—			—
Accounts payable		(2,267	)		3,585			450			1,126			1,690
Customer advances		6,360			2,590			2,943			4,094			5,833
Interest payable		—			—			—			—			—
Accrued wages and benefits and other accrued liabilities		1,680			—			—			—			—
Net cash (used in) provided by operating activities		(9,852	)		14,750			24,028			30,193			40,069
Cash flows from investing activities:
Purchases of property and equipment		(7,516	)		(6,100	)		(10,100	)		(11,800	)		(15,300	)
Liabilities Subject to Compromise		—			—			—			—			—
Other		—			—			—			—			—
Net cash provided by (used in) investing activities		(7,516	)		(6,100	)		(10,100	)		(11,800	)		(15,300	)
Cash flows from financing activities:
Draw (Repayment) of New Credit Facility		18,405			(8,650	)		(13,928	)		(8,728	)		—
Other		—			—			—			—			—
Net cash provided by financing activities		18,405			(8,650	)		(13,928	)		(8,728	)		—
Net (decrease) increase in cash and cash equivalents	$	1,038		$	0		$	(0	)	$	9,665		$	24,769
Effect of exchange rate changes on cash		—			—			—			—			—
Cash and cash equivalents, beginning of period		3,499			4,537			4,537			4,537			14,202
Cash and cash equivalents, end of period	$	4,537		$	4,537		$	4,537		$	14,202		$	38,971
Beginning Other Long-term debt, less current portion		12,900			31,305			22,655			8,728			—
Ending Other Long-term debt, less current portion		31,305			22,655			8,728			—			—
Change In New Credit Facility	$	18,405		$	(8,650	)	$	(13,928	)	$	(8,728	)	$	—
	***The accompanying notes are an integral part of these financial statements***

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