Updated from 8:36 a.m. EDT

Shares of aaiPharma ( AAII) fell Tuesday following the company's announcement late Monday that second-quarter earnings rose while revenue fell in comparison to the same period last year.

The stock dropped 28 cents, or 8.3%, to $3.11 in morning trading.

The higher profit and the lower revenue were both due primarily to the company's sale of its injectable vitamin businesses on April 26. The company recorded a net gain of $37.5 million for the three months ended June 30.

The Wilmington, N.C.-based drug company, which announced its financial results Monday after markets had closed, earned $7.2 million, or 25 cents a share, on sales of $51.5 million for the second quarter of 2004.

For the same period last year, the company earned $3.5 million, or 12 cents a share, on revenue of $66.1 million.

The lower revenue for 2004's second quarter also was caused by lower sales among several products due to high inventories of those goods still being held by distributors. Higher expenses for the second quarter were caused, in part, by a dispute between aaiPharma and another drug company and by an investigation by board members into the reasons for the excessive inventories and the accounting problems linked to the inventories.

The company is "still clearing the decks in rough seas," said David W. Maris, of Banc of America Securities, in a research report issued Tuesday just before aaiPharma conducted a telephone conference call for investors and analysts.

Excluding the gain on the vitamin businesses' sale, aaiPharma lost 54 cents a share for this year's second quarter, Maris said. The consensus view of two analysts polled by Thomson First Call was a loss of 20 cents a share.

The company still has a long way to go to regain the confidence of investors and analysts; and it still must resuscitate its stock price, which hit a 52-week high of $31.85 on Jan. 21 and has dropped steadily since then. According to Thomson First Call, three analysts recommend holding aaiPharma's stock, while three analysts advocate selling it.

"Despite being a long way from returning to profitability, the company's principal focus may be liquidity," said Maris, who has a neutral rating on a stock that he calls extremely volatile.

Maris said aaiPharma still suffers from uncomfortably high levels of products still sitting in distributors' warehouses, "which restricts cash flow regardless of end-user demand." (He doesn't own shares; his firm has had an investment banking relationship with aaiPharma). Maris added that the company has made progress in reducing inventory levels.

Cutting inventory was one theme emphasized by Frederick D. Sancilio, aaiPharma's chairman and CEO, during the Tuesday telephone conference call with investors. He added that executives will complete a strategic review of the company during the third quarter, enabling aaiPharma to give Wall Street a clearer picture of the company's plans. Part of that strategy includes redirecting the sales efforts away from retail outlets and back to hospitals and pain clinics in an effort to return aaiPharma "to normal operations in 2005," Sancilio said. The revised sales activities already have begun, he said.

"The road ahead is not without challenges," Sancilio said. In addition to trying to develop improved versions of signature products such as the Darvon and Darvocet painkillers, he said the company will continue to work on strengthening its balance sheet and on improving its cash flow management. "We are not out of the woods yet," Sancilio said.

Earlier this year, the company restructured its debt with a new two-year $140 million credit facility. Earlier this month, aaiPharma amended the agreement to add up to $10 million to the loan, extended the credit facility by a year and raised the interest rate on the loans by 1.5%. Still, long-term debt was nine times greater than stockholders' equity as of June 30, and the total debt-to-equity ratio was about 12 to 1. In June, the company cut its workforce by 10%.

The company has cleared up a number of key issues. In mid-June, it filed its 2003 10-K report, restating full-year results for 2002 and 2003. In late June, it issued restatements of financial results for the first three quarters of 2003 and published 2004's first-quarter results.

And four weeks ago, the company said it had been informed by Nasdaq that its stock could continue trading on the market with its original AAII symbol. For several months, the stock was trading under the symbol AAIIE, an indication that the company hadn't met Nasdaq requirements, such as failure to file timely financial reports with the Securities and Exchange Commission. The company was late on its 2003 10-K statement and its first-quarter 2004 10-Q report.

To avoid being booted from Nasdaq, the company must file timely quarterly reports with the SEC through June 30, 2005 -- something aaiPharma has vowed to achieve.

Still, aaiPharma has many unresolved -- and potentially expensive -- legal and regulatory issues. In April, aaiPharma received subpoenas for documents and potential testimony issued by a grand jury of the U.S. District Court for the Western District of North Carolina related primarily to 2002 and 2003 financial information, certain loans and extensions of credit.

The company noted in its latest 10-Q report that it has been advised by the Office of the United States Attorney for the Western District of North Carolina and the SEC that it may receive a subpoena from the SEC. The company says it is cooperating with the various government investigations. David M. Hurley, the company's former chief operating officer, who resigned in February, is a target of an investigation by the U.S. Attorney, the aaiPharma 10-Q report says.
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