Filed pursuant to Rule 424(b)(3)
Registration No. 33-65125
PROSPECTUS
BENTLEY PHARMACEUTICALS, INC.
6,000 Units
Each Consisting of One Thousand Dollars ($1,000) Principal
Amount 12% Convertible Senior Subordinated Debenture Due February 13, 2006
and
1,000 Class A Redeemable Warrants each to Purchase
One Share of Common Stock and One Class B Redeemable Warrant
-------------------
The Debentures, which are unsecured, are convertible prior to maturity,
unless previously redeemed, at any time commencing twelve months after the date
hereof (the "Anniversary Date") or immediately following a notice of redemption
(as discussed below), into shares of the common stock of Bentley
Pharmaceuticals, Inc., formerly Belmac Corporation (the "Company"), par value
$.02 per share (the "Common Stock"), at a conversion price per share of the
lesser of $2.50 or 80% of the average closing price of the Common Stock on the
American Stock Exchange for the 20 consecutive trading days immediately
preceding the Anniversary Date or earlier upon a notice of redemption. Interest
is payable quarterly. Commencing six months after the date hereof, the Company
may, on 30 days prior written notice redeem the Debentures, in whole or in part,
if the closing price of the Common Stock on the American Stock Exchange for each
of the 20 consecutive trading days immediately preceding the record date for
redemption equals or exceeds $7.00 per share. The redemption price will be 105%
of the principal amount of the Debentures or $1,050 per Debenture plus accrued
interest through the date of redemption and the conversion price per share
during the period following the notice of redemption, if prior to the
Anniversary Date, will be the lesser of $2.50 or 80% of the average closing
price of the Common Stock on the American Stock Exchange for the 20 consecutive
trading days immediately preceding the record date for redemption. See
"Description of Debentures."
Each Class A Redeemable Warrant entitles the holder, for a period of three
years from the date hereof but not prior to the Separation Date (as hereinafter
defined), to purchase one share of Common Stock and one Class B Redeemable
Warrant at a price of $3.00 per share. On or after the Separation Date on 30
days prior written notice, the Company may redeem all of the Class A Redeemable
Warrants for $.05 per Warrant if the per share closing price for the underlying
Common Stock on the American Stock Exchange for each of the 20 consecutive
trading days immediately preceding the record date for redemption equals or
exceeds 150% of the then exercise price. Two Class B Redeemable Warrants,
together, entitle a holder, for a period of five years from the date hereof, to
purchase one share of Common Stock at a price of $5.00 per share. On or after
the Separation Date, on 30 days prior written notice, the Company may redeem all
of the Class B Redeemable Warrants for $.05 per Warrant if the per share closing
price for the underlying Common Stock on the American Stock Exchange for each of
the 20 consecutive trading days immediately preceding the record date for
redemption equals or exceeds 130% of the then exercise price. See "Description
of Securities-- Redeemable Warrants."
The conversion price of the Debentures and the exercise price of the
Redeemable Warrants are subject to adjustment under certain circumstances. The
Debentures and the Redeemable Warrants may not be detached for six months after
the date hereof without the prior written consent of Coleman and Company
Securities, Inc. (the "Underwriter") after which the Debentures and the
Redeemable Warrants shall be separately transferable (the "Separation Date"). Of
the Unit purchase price of $1,000, for financial reporting purposes the
consideration allocated to the Debenture is $722, to the conversion discount
feature of the Debenture is $224 and to the 1,000 Class A Warrants is $54, and
for federal income tax purposes (including original issue discount) the
consideration allocated to the Debenture is $931 and to the 1,000 Class A
Warrants is $69. None of the Unit purchase price is allocated to the Class B
Warrants.
Concurrently with this offering (the "Offering"), the Company is registering
458,500 shares of Common Stock for concurrent or future sales by certain
shareholders of the Company. See "Concurrent Offering."
Prior to this Offering there has been no public market for the Units,
Debentures or Redeemable Warrants and there is no assurance that one will
develop. The Units, Debentures and Class A Redeemable Warrants have been
approved for listing on the American Stock Exchange and the Pacific Stock
Exchange under the symbols "BNTU," "BNTD" and "BNTA". Once a sufficient number
of Class B Redeemable Warrants are outstanding, it is anticipated that they will
be listed on the American Stock Exchange and the Pacific Stock Exchange under
the symbol "BNTB". If such listings are not maintained, the market for such
securities may be limited. See "Prospectus Summary--The Offering," and "Risk
Factors--No Assurance of Public Market."
The Company's Common Stock is traded on the American Stock Exchange under the
symbol "BNT." The last reported sale price of the Company's Common Stock on the
American Stock Exchange on February 12, 1996 was $2.125 per share. See "Price
Range of Common Stock and Dividend Policy." The Company's Common Stock has been
approved for listing on the Pacific Stock Exchange.
-------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND PROSPECTIVE PURCHASERS
SHOULD CAREFULLY CONSIDER THE FACTORS SPECIFIED UNDER THE CAPTION "RISK
FACTORS" LOCATED ON PAGE 9 OF THIS PROSPECTUS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
PRICE UNDERWRITING DISCOUNTS PROCEEDS TO THE
TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
---------- ---------------------- ---------------
Per Unit................ $ 1,000 $ 100 $ 900
Total(3)................ $6,000,000 $600,000 $ 5,400,000
(1) Does not include additional compensation to the Underwriter in the form of a
non-accountable expense allowance. The Company has agreed to indemnify the
Underwriter against certain civil liabilities including liabilities under
the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of this Offering, estimated at $250,000, which are
payable by the Company.
(3) The Company has granted the Underwriter an option exercisable for a period
of 30 days from the date hereof to purchase up to an additional 900 Units to
cover over-allotments, if any. Unless otherwise indicated, the information
contained in this Prospectus assumes that this option will not be exercised.
If all of the Units covered by the option are sold to the Underwriter, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to the Company will be $6,900,000, $690,000 and $6,210,000, respectively.
See "Underwriting."
-------------------
The Units, Debentures and Warrants are offered subject to prior sale, when,
as and if issued to and accepted by the Underwriter, subject to approval of
certain legal matters by counsel for the Underwriter, and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify the Offering and to reject any order, in whole or in part. It is expected
that delivery of the Units will be made in New York, New York against payment
therefor on or about February 21, 1996.
-------------------
COLEMAN AND COMPANY SECURITIES, INC.
The date of this Prospectus is February 14, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following Regional Offices of the Commission:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048; and Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006 on which the
Company's Common Stock is listed.
This Prospectus does not contain all the information set forth in the Form
S-1 Registration Statement (No. 33-65125) (the "Registration Statement") of
which this Prospectus is a part, including exhibits relating thereto, which has
been filed with the Commission in Washington, D.C. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is hereby made to the copy
of the contract or other document filed as an exhibit to the Registration
Statement for a full statement of the provisions thereof, and each such
statement in this Prospectus is qualified in all respects by such reference.
Copies of the Registration Statement and the exhibits thereto may be obtained,
upon payment of the fee prescribed by the Commission, or may be examined without
charge, at the office of the Commission.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any document incorporated by reference in this Prospectus
(other than exhibits unless such exhibits are expressly incorporated by
reference in such documents). Requests should be directed to Bentley
Pharmaceuticals, Inc., One Urban Centre, Suite 550, 4830 West Kennedy Boulevard,
Tampa, Florida 33609, (813) 286-4401, Attention: Michael D. Price, Chief
Financial Officer.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS AND THE
UNDERLYING SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus is based on the assumption that the Underwriter's
option to purchase Units from the Company to cover over-allotments is not
exercised and that all share and per share information has been adjusted to give
retroactive effect to a one-for-ten reverse stock split of the Company's Common
Stock effected on July 25, 1995 and an increase in the number of authorized
shares of Common Stock from 5,000,000 to 20,000,000 effected on January 1, 1996.
As used in this Prospectus, the terms "Company" and "Bentley" refer to Bentley
Pharmaceuticals, Inc. unless otherwise indicated by the context.
THE COMPANY
The Company is an international pharmaceutical and health care company
engaged primarily in the manufacturing, marketing and distribution of
pharmaceutical products in France and Spain, with limited distribution of health
care products and research and development activities in the United States. The
Company's operations in France consist of the brokerage of fine chemicals and
the marketing of the drug Ceredase, manufactured by Genzyme Corporation and used
in the treatment of Gaucher's Disease, under contracts of limited duration with
Genzyme Corporation, the most recent of which terminates on March 31, 1996. In
Spain, the Company manufactures, packages and distributes both its own and other
companies' pharmaceutical products and has recently begun to emphasize the
manufacture of pharmaceuticals under contract. In the United States, the Company
markets disposable linens to emergency health services which are manufactured
under contract. The percentage of the Company's total revenues for the nine
months ended September 30, 1995 which are attributable to its operations in
France, Spain and the United States are approximately 82%, 17% and 1%,
respectively. Limited research and development activities are conducted both in
the United States and Europe and the Company has several products under
development. The Company's chemical and pharmaceutical operations in France and
Spain are a result of its 1991 acquisition of Chimos S.A. and the establishment
of a pharmaceutical subsidiary in France, Laboratoires Belmac S.A. (these two
entities in France have since been merged into one entity named and referred to
herein as Chimos/LBF S.A.) and the 1992 acquisition of Rimafar S.A.
(subsequently renamed and referred to herein as Laboratorios Belmac S.A.),
respectively.
The strategic focus of the Company has shifted in response to the evolution
of the global health care environment. The Company has moved from a research and
development-oriented pharmaceutical company, developing products from the
chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one or two years,
and currently marketed products. As a result of this transition, the Company has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Company's
operations. The Company emphasizes product distribution in France and Spain,
strategic alliances and product acquisitions, which management of the Company
expects will move the Company closer to profitability in the near future.
Throughout its history, the Company has experienced negative cash flows from
operations, which have been reduced in the past three years as a result of the
shift in the Company's strategic focus. The Company has funded its operations
primarily from financing activities and the sale of rights to certain of its
pharmaceutical products. In October 1995 the Company completed private
placements of debt and equity securities, of which $1,770,000 of the debt must
be repaid from the proceeds of this Offering. A portion of the proceeds of this
Offering will be utilized for such payment.
3
<PAGE>
The address and telephone number of the Company's principal executive
offices are 4830 West Kennedy Boulevard, One Urban Centre, Suite 550, Tampa,
Florida 33609, (813) 286-4401. The Company was organized under the laws of the
State of Florida in February 1974.
CONCURRENT OFFERING
Concurrent with the Offering hereby, the Company has registered for
concurrent or future sale by certain selling shareholders 458,500 shares of
Common Stock pursuant to a separate prospectus. 150,000 of such shares are
issuable upon conversion of notes sold in a private placement conducted by the
Company in October 1995, to the extent such notes have been converted to Common
Stock prior to their repayment upon application of a portion of the proceeds of
this Offering. The notes were issued in two private placements in October 1995.
In the first placement, the Company received proceeds of $720,000 for the
issuance of 120,000 shares of Common Stock and 12% convertible promissory notes
in an aggregate principal amount of $720,000 due on the earlier of July 31, 1996
or the closing of this Offering. In the second placement, the Company received
proceeds of $1,050,000 for the issuance of 131,250 shares of Common Stock and
12% convertible promissory notes in an aggregate principal amount of $1,050,000
due on the earlier of September 30, 1996 or the closing of this Offering. See
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Private Placements,"
and "Underwriting--Private Placements." 102,250 of such shares of Common Stock
have been registered upon exercise of various "piggy back" registration rights
granted to Baytree Associates, Inc. and Martin E. Janis & Co., Inc. See
"Concurrent Offering."
RISK FACTORS
Investment in the Company involves certain risks. Risk factors include,
among others, the following: (i) the Company has a history of operating losses
and accumulated operating deficits; (ii) the Company has a negative cash flow
from operating activities and may not be able to fund current operations; (iii)
the Company is engaged in an extremely competitive business with many well
recognized and financed companies; and (iv) these matters may indicate that
there is substantial doubt about the Company's ability to continue as a going
concern. See "Risk Factors."
USE OF PROCEEDS
It is anticipated that the net proceeds of this Offering will be used for
retirement of debt, possible acquisitions, research and development and working
capital.
THE OFFERING
Securities Offered by the Company..... 6,000 Units
Offering Price per Unit............... $1,000
Units Comprising 12% Convertible
Senior Subordinated $1,000 Principal
Amount Unsecured Ten Year Debenture
due February 13, 2006............... 6,000
Class A Redeemable Warrants........... 6,000,000
Class B Redeemable Warrants........... 6,000,000
4
<PAGE>
<TABLE>
<S> <C>
Allocation of Consideration........... Of the Unit purchase price of $1,000, for financial
reporting purposes the consideration allocated to
the Debenture is $722, to the conversion discount
feature of the Debenture is $224 and to the 1,000
Class A Warrants is $54, and for federal income tax
purposes (including original issue discount) the
consideration allocated to the Debenture is $931
and to the 1,000 Class A Warrants is $69. No
consideration has been allocated to the Class B
Warrants.
Debenture Interest Payment Dates...... Quarterly on January 1, April 1, July 1, and
October 1, commencing April 1, 1996.
Debenture Covenants................... Restrictions on cash dividends and other cash
distributions to stockholders as well as
limitations on certain dealings with its officers
and directors under certain circumstances.
Debenture Conversion Rights........... Commencing twelve months after the date hereof or
earlier upon a notice of redemption (as discussed
below) at the lesser of $2.50 per share of Common
Stock or 80% of the average closing price of the
Common Stock on the American Stock Exchange for the
20 consecutive trading days immediately preceding
the first anniversary of the issuance of the
Debentures. See "Risk Factors-- Discount on
Conversion of Debentures."
Debenture Redemption.................. Commencing six months after the date hereof, the
Company may, on 30 days prior written notice,
redeem the Debentures, in whole or in part, if the
closing price of the Common Stock on the American
Stock Exchange for each of the 20 consecutive
trading days immediately preceding the record date
for redemption equals or exceeds $7.00 per share.
The redemption price will be 105% plus accrued
interest through the date of redemption. If the
redemption date is prior to the Anniversary Date,
the conversion price per share during the period
following the notice of redemption will be the
lesser of $2.50 or 80% of the average closing price
of the Common Stock on the American Stock Exchange
for the 20 consecutive trading days immediately
preceding the record date for redemption.
Debenture Subordination; No Sinking
Fund, Other Security or Guarantees.... Subordinated to all Senior Debt, as defined in the
Indenture, which as of September 30, 1995
aggregated $1,220,000. Senior or pari passu with
all other series of debentures. Debenture holders
may recover less ratably than holders of Senior
Debt. The Debentures will not be secured by a
sinking fund or otherwise and will not be
guaranteed. The Indenture does not limit the amount
the Company may borrow. The Indenture prohibits
subsidiaries of the Company from placing any
limitations on paying their profits or making loans
to the Company.
Debenture Original Issue Discount..... Interest on Debentures is taxable as ordinary
income when received or accrued. A portion of
original issue discount must be included in income
each year regardless of the cash payment of such
interest at an effective interest rate of 13.3%.
See "Certain Federal Income Tax Considerations--The
Debentures."
Redeemable Warrant Exercise Rights.... For Class A Redeemable Warrants, for three years
from the date hereof but not prior to the
Separation Date at $3.00 per share, subject to
change under certain conditions. For Class B
Redeemable Warrants, for five years from the date
hereof at $5.00 per share, subject to change under
certain conditions. See "Risk Factors--
Determination of Warrant Exercise Price."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Redeemable Warrant Redemption......... On or after the Separation Date, the Company may,
on 30 days prior written notice redeem all of the
Class A or Class B Redeemable Warrants for $.05 per
Warrant if the per share closing price of the
underlying Common Stock on the American Stock
Exchange for each of the 20 consecutive trading
days immediately preceding the record date for
redemption equals or exceeds 150% or 130%,
respectively, of the then respective exercise
prices.
Estimated Net Proceeds to the Company
(1)................................... $4,970,000
Percentage of Proceeds to be Used to
Repay Indebtedness.................... 35.6%
Percentage of Proceeds to be Used to
Repay Related Party Debt.............. None
Affiliate Participation............... The aggregate of all purchases by the Company's
officers, directors or affiliates in this Offering
shall not exceed 5% of the Offering.
Common Stock Outstanding Prior to the
Offering.............................. 3,330,472
Common Stock Outstanding After the
Offering(2)........................... 3,330,472
Trading Symbol
for Common Stock.................... BNT
for Units........................... BNTU
for Debentures...................... BNTD
for Class A Redeemable Warrants..... BNTA
for Class B Redeemable
Warrants(3)........................... BNTB
</TABLE>
- ------------
(1) After deducting $1,030,000 for underwriting discounts and the other expenses
of this Offering payable by the Company, including the non-accountable
expense allowance payable to the Underwriter. See "Use of Proceeds" and
"Underwriting."
(2) Excludes (i) an aggregate of 14,210,000 shares of Common Stock reserved for
issuance upon conversion or exercise of the securities issuable in the
Offering (including the Underwriter's overallotment option), consisting of
2,760,000 shares issuable upon conversion of the Debentures (which would be
increased to 3,860,140 shares, if the average closing price of the Common
Stock during the twenty trading days prior to the Anniversary Date was equal
to $2.23, the average closing price of the Common Stock during the twenty
trading days ended February 12, 1996), 10,350,000 shares of Common Stock
issuable upon exercise of the Redeemable Warrants and 1,083,000 shares of
Common Stock issuable upon exercise of the securities underlying the
warrants granted by the Company to the Underwriter (the "Underwriter
Warrants") to purchase 570 Units (or such number of shares of Common Stock
into which such Units are convertible) at a price of $.001 per Underwriter
Warrant; (ii) 576,841 shares of Common Stock reserved for issuance upon
exercise of outstanding stock purchase warrants; (iii) 260,542 shares of
Common Stock reserved for issuance upon exercise of stock options; (iv)
150,000 shares of Common Stock reserved for issuance upon conversion of
certain notes payable issued in a private placement in October 1995 (see
"Concurrent Offering"); (v) 14,960 shares of Common Stock reserved for
issuance upon conversion of the Series A Preferred Stock or upon conversion
of 9% Convertible Debentures due 2016 into which the Series A Preferred
Stock is exchangeable; (vi) 3,183 shares of Common Stock reserved for
issuance to current or former members of the Board of Directors of the
Company and others as compensation; and (vii) 349,500 shares of Common Stock
issued subsequent to September 30, 1995. See Note 12 of Notes to
Consolidated Financial Statements, "Management--Executive Compensation,"
"Principal Stockholders," "Description of Debentures--Conversion" and
"Description of Securities--Redeemable Warrants."
(3) The Class B Redeemable Warrants will not be listed on the American Stock
Exchange or the Pacific Stock Exchange until a sufficient number of Class A
Redeemable Warrants have been exercised.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial information for the fiscal year ended
June 30, 1992, the six month period ended December 31, 1992, the fiscal years
ended December 31, 1993 and 1994 and the nine month period ended September 30,
1995 set forth below is derived from and should be read in conjunction with the
Company's consolidated financial statements and accompanying notes appearing
elsewhere in this Prospectus. The data for the nine month period ended September
30, 1994 are derived from and qualified by reference to the Company's
consolidated financial statements appearing elsewhere herein and, in the opinion
of management of the Company, includes all adjustments that are of a normal
recurring nature and necessary for a fair presentation. The statement of
operations data for the nine month periods ended September 30, 1994 and 1995 are
not necessarily indicative of results for a full year.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FOR THE
FOR THE YEAR MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
ENDED JUNE 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
1992 1992 1993 1994 1994 1995
-------------- ------------ -------- ------- ------- -------
Net Sales...................... $ 13,138 $ 9,708 $ 19,849 $26,284 $19,676 $23,583
Cost of Sales.................. 8,871 5,899 15,100 21,464 15,940 19,523
Operating Expenses............. 14,758 23,493(1) 14,722(2) 9,050 7,413 6,265
Operating Income (Loss)........ (10,491) (19,684) (9,973) (4,230) (3,677) (2,205)
Other (Income) Expense, Net.... 320 (153) 263 (652)(3) (26) (686)(3)
Net Income (Loss).............. (10,811) (19,531) (10,236) (3,578) (3,651) (1,519)
Net Income (Loss) Per Common
Share.......................... (11.12) (16.60) (6.32) (1.56) (1.67) (.55)
Weighted Average Shares of
Common Stock Outstanding....... 997 1,203 1,655 2,395 2,257 2,978
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1995
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<S> <C> <C> <C> <C>
1993 1994 ACTUAL AS ADJUSTED(4)
------- ------- ------- --------------
Working Capital.................................... $ 2,043 $ 1,928 $ 1,779 $ 8,277
Non-Current Assets................................. 5,937 5,644 5,960 7,275
Total Assets....................................... 16,160 16,332 16,170 21,983
Non-Current Liabilities less Current Portion....... 2,821 336 500 4,832
Redeemable Preferred Stock......................... 2,218 2,256 2,374 2,374
Common Stockholders' Equity........................ 2,941 4,980 4,865 6,346
</TABLE>
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<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
Earnings are inadequate to cover fixed charges. The resultant deficiency was
$2,493,000, $2,476,000, $10,468,000, $19,531,000, $10,236,000, $3,578,000, and
$1,519,000 for the years ended June 30, 1990, 1991, and 1992, for the six month
period ended December 31, 1992, for the years ended December 31, 1993 and 1994,
and for the nine month period ended September 30, 1995, respectively.
If the Debentures included in this Offering had been outstanding since
January 1, 1994, the result would have been an increase in the Company's net
loss of approximately $887,000 and $665,000 for the year ended December 31, 1994
and for the nine month period ended September 30, 1995, respectively.
Consequently, on a pro forma basis, the resultant deficiency, for the year ended
December 31, 1994 and for the nine month period ended September 30, 1995, would
have been $4,465,000 and $2,184,000, respectively. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
- ------------
(1) The Company changed its fiscal year end to December 31 effective December
31, 1992 and sold its French marketing rights to Amodex(R) on January 20,
1993. The six months ended December 31, 1992 include other non-recurring
charges totaling $9,321,000. See Note 4 of Notes to Consolidated Financial
Statements.
(2) Includes $2,241,000 related to the write-off of capitalized costs with
respect to the sachet formulation of Biolid(R) and related costs and
$1,000,000 related to settlement of litigation. See Notes 8 and 12 of Notes
to Consolidated Financial Statements.
(3) The Company sold its Spanish marketing rights to its ciprofloxacin
antibiotic, Belmacina(R), in 1994 and included the gain thereon
(approximately $884,000) in Other (Income) Expense, Net in the year ended
December 31, 1994 and recorded the anticipated gain on sale of the related
trademark of $380,000 as deferred revenue as of December 31, 1994. Such
deferred revenue was recognized as income in the nine month period ended
September 30, 1995. See Note 8 of Notes to Consolidated Financial
Statements.
(4) Adjusted to give effect to the receipt of proceeds from private placements
in October 1995 and the sale of the 6,000 Units offered hereby and the use
of the estimated net proceeds thereof. See "Use of Proceeds."
8
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a substantial
degree of risk. Prior to making an investment decision, prospective investors
should give careful consideration to, among other items, the following factors:
FINANCIAL RISKS
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
FINANCIAL RESULTS. As of September 30, 1995, the Company had a cumulative
deficit of approximately $63,441,000. The Company has realized significant
losses in the past and could have quarterly and annual losses in the future. The
Company has not generated any profits from operations. The Company has realized
quarter to quarter fluctuations in its results in the past and, although such
fluctuations have been minimal in recent quarters, they may be significant in
the future. Consequently, the Company may continue to operate at a loss for the
foreseeable future and there can be no assurance that the Company's business
will operate on a profitable basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEGATIVE CASH FLOW FROM OPERATING ACTIVITIES. The Company is experiencing
negative cash flow from operations resulting in the need to fund ongoing
operations from financing activities. In October 1995 the Company completed two
private placements resulting in net proceeds to the Company of approximately
$1,590,000, all of which is being used for working capital purposes. A
substantial portion of the proceeds of this Offering will be used to repay the
debt incurred in the private placements to the extent such debt has not been
converted to equity by the holders thereof. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Private Placements" and "Concurrent
Offering." The future existence and profitability of the Company is dependent
upon its ability to obtain additional funds such as the net proceeds of this
Offering to finance operations and expand operations in an effort to achieve
profitability from operations. No assurance can be given that the Company's
business will ultimately generate sufficient revenue to fund the Company's
operations on a continuing basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LIMITED REVENUES. Although the Company was founded in 1974, it has only
generated revenue from product-related sales since August 1991. The Company has
used cash from financing activities to fund its operations. The Company has made
progress toward commercialization of specific products and has commenced
commercialization of others. The Company is now generating revenues from sales
of products of its subsidiaries Chimos/LBF, S.A., a company based in France
which distributes specialty pharmaceutical products and chemicals in France
("Chimos"), and Laboratorios Belmac, S.A., a pharmaceutical manufacturer located
in Spain ("Laboratorios Belmac"). Chimos and Laboratorios Belmac were acquired
by the Company in August 1991 and February 1992, respectively. Substantial
amounts of time and financial and other resources will be required to complete
the development and clinical testing of the Company's products currently under
development. Although over the last several months the Company has continued its
existing limited research and development program, due to its limited cash
resources, it has suspended additional research and development activities
during such period pending the selection of strategic partners for development
and marketing. There is no assurance that the Company will receive additional
funding necessary to continue research and development activities or that it
will otherwise succeed in developing any additional products with commercially
valuable applications.
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ADDITIONAL FINANCING REQUIREMENTS. The Company believes that its emphasis on
product distribution in France and Spain, strategic alliances and product
acquisitions together with careful management of its research and development
activities and the net proceeds from this Offering, should provide sufficient
liquidity to enable it to conduct its existing operations through the end of
1996, of which there can be no assurance. However, the Company's pharmaceutical
products being developed and which may be developed will require the investment
of substantial additional time as well as financial and other resources in order
to become commercially successful. Following the development period, the
Company's products will generally be required to go through lengthy governmental
approval processes, including extensive clinical testing, followed by market
development. The Company's operating revenues and cash resources may not be
sufficient over the next several years for the commercialization by itself of
any of the products currently in development. Consequently, the Company may
require additional licensees or partners and/or additional financing. There can
be no assurance, however, that the Company can conclude such commercial
arrangements or obtain additional capital when needed on acceptable terms, if at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
INDEPENDENT AUDITORS' REPORT. The report of the Company's independent
auditors with respect to the audited consolidated financial statements of the
Company included elsewhere herein expresses an unqualified opinion that includes
an explanatory paragraph referring to the Company's recurring losses from
operations as well as negative operating cash flows, which raise substantial
doubt about the Company's ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
notes thereto and the Report of Independent Auditors included herein.
POSSIBLE RESTRICTION ON ABILITY TO UTILIZE NET OPERATING LOSS CARRY FORWARDS
RESULTING FROM CHANGE IN EQUITY OWNERSHIP. At December 31, 1994 and September
30, 1995, the Company had net operating loss ("NOL") carry forwards of
approximately $34,000,000 and $35,000,000, respectively, available to offset
United States taxable income. The NOL carry forwards will expire in tax years
1996 through 2010. The amount of these loss carry forwards which can be used to
reduce future taxable income, if any, may be reduced by, among other things,
future changes in the ownership of the Company's Common Stock. Internal Revenue
Code Section 382 would limit the amount of future taxable income, if any, that
could be offset by the NOL carry forwards if, at any time, the percentage of the
stock of the Company owned by one or more 5% shareholders increases by more than
50% over the lowest percent of the Company's stock owned by such shareholders
during the preceding three year period. The Company's subsidiaries in France and
Spain have NOL carry forwards of approximately $14,000,000 and $3,000,000,
respectively. These will expire in various years ending in 1999. See Note 13 of
Notes to Consolidated Financial Statements.
BUSINESS RISKS
NO ASSURANCE OF SUCCESSFUL AND TIMELY DEVELOPMENT OF NEW PRODUCTS. Although
the Company has a limited number of products in various stages of development,
including pre-clinical testing and clinical trials, the Company has not yet
substantially marketed any of these products other than Biolid(R) (the Company's
macrolide antibiotic) in France, the marketing of which has since been
suspended. During a periodic review of the dossier of Biolid by France's
Ministry of Health in 1993 which was completed shortly after the Company had
negotiated the sale of its rights to the sachet formulation of Biolid in France,
the Ministry required the suspension of marketing of Biolid pending provision by
the Company of additional clinical data regarding the mechanisms for the
comparatively enhanced absorption of the Biolid sachet. The suspension was
unrelated to safety or efficacy issues, but has not been lifted since the
Company has not had sufficient resources to conduct the study required. See
"Risks
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Inherent in Pharmaceutical Development; Dependency on Regulatory Approvals"
below, "Business-- Products under Development--Biolid(R)" and Notes 4 and 8 of
the Notes to Consolidated Financial Statements. There can be no assurance that
the Company will be able to develop large scale production of any particular
product for clinical trials or eventual commercial production. The marketing of
certain of the Company's products could be adversely affected by delays in
developing large-scale production processes, developing or acquiring production
facilities or obtaining regulatory approval for such processes or facilities.
RISKS INHERENT IN PHARMACEUTICAL DEVELOPMENT; DEPENDENCE ON REGULATORY
APPROVALS. The process of creating, scaling-up, manufacturing and marketing any
new human pharmaceutical product is inherently risky. There can be no assurance
that any drug under development will be safe and effective. Moreover,
pharmaceutical products are subject to significant regulation. Any human
pharmaceutical product developed by the Company would require clearance by
Spain's Ministry of Health for sales in Spain, France's Ministry of Health for
sales in France, the U.S. Food and Drug Administration ("FDA") for sales in the
United States and similar agencies in other countries. The process of obtaining
these approvals is costly and time-consuming, and there can be no assurance that
such approvals will be granted. In general, only a small percentage of new
pharmaceutical products achieve commercial success. Such governmental regulation
may prevent or substantially delay the marketing of the Company's products and
may cause the Company to undertake costly procedures with respect to its
research and development and clinical testing operations which may furnish a
competitive advantage to more substantially capitalized companies which compete
with the Company. In addition, the Company is required, in connection with its
activities, to comply with good manufacturing practices (GMPs) and local, state
and federal regulations. Non-compliance with these regulations could have a
material adverse effect on the Company and/or prevent the commercialization of
the Company's products. See "Business--Regulation."
DEPENDENCY ON OTHERS; POSSIBLE DISCONTINUATION OF CERTAIN MARKETING
ACTIVITIES. The Company relies on outside contractors for manufacturing of the
products it distributes in France, including Ceredase, a drug used in the
treatment of Gaucher's Disease, which currently represents approximately 60% of
the Company's revenues. The Company also relies on sales of Ceredase and other
products by Chimos to Pharmacie Centrale des Hopitaux. Sales to Pharmacie
Centrale des Hopitaux accounted for approximately 30% and 26% of the Company's
sales for the year ended December 31, 1994 and for the nine months ended
September 30, 1995, respectively. Chimos, a distributor authorized by France's
Ministry of Health, distributes Ceredase pursuant to an agreement of limited
duration with Genzyme Corporation, the manufacturer of Ceredase. The most recent
extension of this agreement terminates on March 31, 1996. There can be no
assurance that the relationship between Genzyme and Chimos will continue. The
Company continues to assess the importance of Ceredase to its operation since,
notwithstanding the relative significance of its sales volume, its gross margins
as a percentage of sales are minimal. A termination of the Company's marketing
of Ceredase would likely reduce the Company's net income by approximately
$300,000 annually; however, due to the extended payment terms granted to
customers for this product, termination would have little short-term effect on
cash receipts from the sale of Ceredase as receivables from prior sales to such
customers would continue to be collected. Accordingly, management of the Company
expects that such a termination would have a positive short-term effect on the
Company's cash flow resulting from the elimination of costs of purchasing
Ceredase from Genzyme for distribution (approximately $4.0 million over the
first four to six months following termination) while receivables from prior
sales continue to be collected. See "Business--Product Lines--Pharmaceutical
Marketing and Sales in France."
UNCERTAINTY OF PHARMACEUTICAL PRICING, PROFITABILITY AND RELATED
MATTERS. The levels of revenues and profitability of pharmaceutical companies
may be affected by the continuing efforts of governmental and third party payers
to contain or reduce the costs of health care through various means. For
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example, in certain foreign markets, including Spain and France, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on the Company's business,
financial condition and profitability. In addition, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third party payers, such as government and private insurance
plans. Third party payers are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive basis. See "Business--Sales and Marketing."
UNPREDICTABILITY OF PATENT PROTECTION; PROPRIETARY TECHNOLOGY. The Company
has filed numerous patent applications and has been granted a number of patents.
However, there can be no assurance that its pending applications will be issued
as patents or that any of its issued patents will afford adequate protection to
the Company or its licensees. Other private and public entities have also filed
applications for, or have been issued, patents and are expected to obtain
patents and other proprietary rights to technology which may be harmful to the
commercialization of the Company's products. The ultimate scope and validity of
patents which are now owned by or may be granted to third parties in the future,
the extent to which the Company may wish or be required to acquire rights under
such patents, and the cost or availability of such rights cannot be determined
by the Company at this time. In addition, the Company also relies on unpatented
proprietary technology in the development and commercialization of its products.
There is no assurance that others may not independently develop the same or
similar technology or obtain access to the Company's proprietary technology.
The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovations to develop its competitive position.
All of the Company's employees with access to the Company's proprietary
information have entered into confidentiality agreements and have agreed to
assign to the Company any inventions relating to the Company's business made by
them while in the Company's employ. However, there can be no assurance that
others may not acquire or independently develop similar technology or, if
patents in all major countries are not issued with respect to the Company's
products, that the Company will be able to maintain information pertinent to
such research as proprietary technology or trade secrets.
RAPID TECHNOLOGICAL CHANGE. The pharmaceutical industry has undergone rapid
and significant technological change. The Company expects the technology to
continue to develop rapidly, and the Company's success will depend significantly
on its ability to maintain a competitive position. The Company has recently
shifted its strategic focus so that it does not rely on research and development
of pharmaceuticals from concept through marketing. Instead, it seeks to acquire
late-stage development compounds that can be marketed within one or two years
and currently-marketed products. Rapid technological development may result in
actual and proposed products or processes becoming obsolete before the Company
recoups a significant portion of related research and development, acquisition
and commercialization costs. See "Business--Products Under Development."
COMPETITION. The Company is in competition with other pharmaceutical
companies, biotechnology firms and chemical companies, many of which have
substantially greater financial, marketing and human resources than those of the
Company (including, in some cases, substantially greater experience in clinical
testing, production and marketing of pharmaceutical products). The Company also
experiences competition in the development of its products and processes from
individual scientists, hospitals,
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<PAGE>
universities and other research institutions and, in some instances, competes
with others in acquiring technology from these sources. See
"Business--Competition."
UNCERTAINTY OF ORPHAN DRUG DESIGNATION. An Orphan Drug is a product or
products used to treat a rare disease or condition, which, as defined under
United States law, is a disease or condition that affects populations of less
than 200,000 individuals or, if victims of a disease number more than 200,000,
the sponsor establishes that it does not realistically anticipate its product
sales will be sufficient to recover its costs. If a product is designated an
Orphan Drug, then the sponsor is entitled to receive certain incentives to
undertake the development and marketing of the product. In Spain, Orphan Drugs
are given a preference in the pharmaceutical review process by Spain's Ministry
of Health if it can be shown that the product is an important therapeutic agent
and there is unequivocal data supporting its efficacy. The Ministry of Health
has the authority to require pharmaceutical manufacturers to continue to produce
products which are Orphan Drugs regardless of their commercial potential. As
required by the Ministry of Health, Laboratorios Belmac currently manufactures
and distributes one Orphan Drug, Anacalcit, which is used in the treatment of
nephrolithiasis. In France, Orphan Drug status is granted by France's Ministry
of Health. Chimos does not currently own in its portfolio any Orphan Drugs, but
does act as a distributor for other companies who have Orphan Drug status in
France, such as Ceredase, an Orphan Drug produced by Genzyme Corporation. The
Company does not currently market any Orphan Drugs in the United States. See
"Business--Regulation."
ATTRACTION AND RETENTION OF KEY PERSONNEL. The Company believes that it has
been able to attract skilled and experienced management and scientific
personnel. There can be no assurance, however, that the Company will continue to
attract and retain personnel of high caliber. Since 1992, five individuals have
served as the Company's chief executive officer. This instability in the
Company's management in the recent past has hampered the Company's growth. While
the Company believes that it has assembled an effective management team, the
loss of several individuals who are considered key management or scientific
personnel of the Company could have an adverse impact on the Company. Although
all discoveries and research of each employee made during employment remain the
property of the Company, the Company has not entered into noncompetition
agreements with its key employees and such employees would therefore be able to
leave and compete with the Company.
RISK OF PRODUCT LIABILITY. The Company faces an inherent business risk of
exposure to product liability claims in the event that the use of its technology
or prospective products is alleged to have resulted in adverse effects. While
the Company has taken, and will continue to take, what it believes are
appropriate precautions, there can be no assurance that it will avoid
significant liability exposure. The Company maintains product liability
insurance in the amount of $5 million. However, there is no assurance that this
coverage will be adequate in terms and scope to protect the Company in the event
of a product liability claim. In connection with the Company's clinical testing
activities, the Company may, in the ordinary course of business, be subject to
substantial claims by, and liability to, subjects who participate in its
studies.
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $1,700,000
(34.2%) of the estimated net proceeds from this Offering has been allocated to
working capital. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds.
RISK OF DOING BUSINESS OUTSIDE THE UNITED STATES. Nearly all of the
Company's revenues during 1994 and the first nine months of 1995 have been
generated outside the United States, from the Company's subsidiaries in France
and Spain. There are risks in operation outside the United States, including,
among others, the difficulty of administering businesses abroad, exposure to
foreign currency fluctuations and devaluations or restrictions on money
supplies, foreign and domestic export law and regulations, taxation, tariffs,
import quotas and restrictions and other political and economic events
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beyond the Company's control. The Company has not experienced any material
effects of these risks as of yet, however there can be no assurance that they
will not have such an effect in the future.
CERTAIN FLORIDA LEGISLATION. The State of Florida has enacted legislation
that may deter or frustrate takeovers of Florida corporations. The Florida
Control Share Act generally provides that shares acquired in excess of certain
specified thresholds will not possess any voting rights unless such voting
rights are approved by a majority vote of a corporation's disinterested
shareholders. The Florida Affiliated Transactions Act generally requires
supermajority approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates). Florida law
also authorizes the Company to indemnify the Company's directors, officers,
employees and agents. The Company has adopted a by-law with such an indemnity.
MARKET RISKS
RISK OF LOSS OF ENTIRE INVESTMENT. Because of the Company's history of
losses and negative cash flow from operations as well as the other risk factors
referred to in this section and elsewhere in this Prospectus, a prospective
investor should not purchase Units unless he is prepared to risk the loss of his
entire investment.
NO ASSURANCE OF PUBLIC MARKET. Prior to this Offering, there has been no
public trading market for the Units, the Debentures or the Redeemable Warrants.
Although the Units, Debentures and Class A Redeemable Warrants have been
approved for listing on the American Stock Exchange and the Pacific Stock
Exchange, there is no assurance that a regular trading market will develop after
this Offering or that, if developed, it will be sustained. Since the Class B
Redeemable Warrants will not be outstanding until the Class A Redeemable
Warrants are exercised, they will not be publicly traded until a sufficient
number are outstanding, thereby limiting the ability of a holder to sell them.
Since the Company will not issue fractional shares, holders will only be
permitted to trade the Class B Redeemable Warrants in multiples of two.
If the Units, Debentures or Redeemable Warrants do not remain listed due to
the Company's inability to meet the continued listing requirements, they may be
traded from time to time on the over-the-counter market. As trading volume in
such market is not expected to be high, there can be no assurance that in such
event investors will be able to readily sell such securities.
VOLATILITY OF SHARE PRICE. The market price of the Company's shares since
its initial public offering in February 1988 has been volatile. In July 1995 the
Company effected a one-for-ten reverse stock split. As recently as the first
quarter of 1993, the market price of the Company's Common Stock was $63.75
(giving retroactive effect to the reverse stock split). Factors such as
announcements of technological innovations or new commercial products by the
Company or its competitors, the results of clinical testing, patent or
proprietary rights, developments or other matters may have a significant impact
on the market price of the Common Stock. See "Price Range of Common Stock and
Dividend Policy."
POSSIBLE DELISTING OF COMMON STOCK FROM AMERICAN STOCK EXCHANGE. The Company
currently does not satisfy some of the American Stock Exchange's financial
guidelines for continued listing of its Common Stock. While there can be no
assurance that listing on the American Stock Exchange will be continued,
management of the Company believes that the Company's business prospects are
improving and that the Company will be able to maintain continued listing. See
"Description of Securities-- Listing on AMEX." If the Common Stock were
delisted, an investor could find it more difficult to dispose of or to obtain
accurate quotations as to the price of the Common Stock, the Units, the
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Debentures, and the Redeemable Warrants. If the Common Stock is listed on the
Pacific Stock Exchange and then delisted on the American Stock Exchange, it is
likely to be delisted by the Pacific Stock Exchange.
AUTHORIZATION OF PREFERRED STOCK. The Company's Articles of Incorporation
authorize the issuance of 2,000,000 shares of "blank check" preferred stock (the
"Preferred Stock") with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change of control of the Company. There are currently 60,000 shares of Series A
Convertible Exchangeable Preferred Stock outstanding. The Company has no current
plans to issue any additional shares of Preferred Stock; however, there can be
no assurance that the Company's Board of Directors will not do so at some time
in the future. See "Description of Securities--Preferred Stock."
UNDERWRITER WARRANTS AND OUTSTANDING CONVERTIBLE SECURITIES. The Company
will sell to the Underwriter, for nominal consideration, warrants to purchase up
to 570 Units exercisable for a period of four years, commencing one year from
the date hereof, at an exercise price of $1,200 per Unit. The Company currently
has outstanding 837,383 options and warrants to purchase Common Stock at
exercise prices ranging from $2.50 to $177.50. The holders of the Underwriter
Warrants and of the warrants and options are likely to exercise or convert them
at a time when the Company would be able to obtain additional equity capital on
terms more favorable than those provided by such warrants, options and
Underwriter Warrants. The Underwriter Warrants and certain other warrants and
options also grant to the holders certain demand registration rights and "piggy
back" registration rights. These obligations may hinder the Company's ability to
obtain future financing. See "Underwriting."
DISCOUNT ON CONVERSION OF DEBENTURES. The Debentures are convertible into
Common Stock at a conversion price per share equal to the lesser of $2.50 or 80%
of the market price of the Common Stock during the twenty-day period ending one
year from the date of this Prospectus (or the date of redemption, if earlier).
This feature has a built in premium for the Debenture holders upon conversion of
the Debentures which remains constant regardless of the market price of the
Company's securities. A conversion of the Debentures would dilute the interests
of holders of Common Stock and may adversely affect the market price for the
Common Stock and any other traded securities of the Company.
SUBORDINATION OF DEBENTURES. The Debentures are subordinated to all existing
and future Senior Debt (as defined in the Indenture) of the Company and will be
effectively subordinated to all indebtedness and other liabilities of any
subsidiaries of the Company that may subsequently be formed. Moreover, the
Indenture governing the Debentures does not restrict the ability to incur Senior
Debt or other indebtedness by the Company. As a result of such subordination,
Debenture holders will be dependent upon the Company's ability to generate
sufficient revenue from operations to satisfy all of its obligations, including
the Senior Debt and the payments related to the Debentures. Most of the
Company's revenues are derived from its foreign subsidiaries. Any restrictions
on the subsidiaries to make payments to the Company would affect its ability to
pay interest. Moreover, in the event of insolvency of the Company, holders of
Senior Debt will be entitled to be paid in full prior to any payment to the
holders of the Debentures, and other creditors of the Company, including trade
creditors of the Company's subsidiaries, also may recover more, ratably, than
the holders of the Debentures. In addition, an event of default under the
Indenture governing the Debentures may trigger defaults under Senior Debt of the
Company, in which case the holders of such Senior Debt will have the power to
demand payment in full and to be paid prior to any payment to the holders of the
Debentures. In addition, the absence of limitations in the Indenture on the
issuance of Senior Debt could increase the
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risk that sufficient funds will not be available to pay holders of the
Debentures after payment of amounts due to the holders of Senior Debt. There can
be no assurance that the Company will be able to service the Debentures in
accordance with their terms. In addition, if a default were to occur, there is
no assurance that Debenture holders would be able to obtain repayment of the
sums then due under their Debentures. See "Description of
Debentures--Subordination of Debentures."
CURRENT PROSPECTUS AND STATE SECURITIES LAW QUALIFICATION REQUIRED TO
EXERCISE THE REDEEMABLE WARRANTS. A purchaser of Units will have the right to
exercise the Redeemable Warrants included therein only if a current prospectus
relating to the underlying shares is then in effect and such shares are
qualified for sale or exempt from such qualification under the securities laws
of the state in which he resides. The Company has registered these shares
together with the Units offered hereby, and has qualified them in the states
where it plans to sell the Units unless such qualification has not been
required. It has also filed an undertaking with the Commission to maintain a
current prospectus relating to such shares until the expiration of the Warrants.
However, there is no assurance that it will be able to satisfy this undertaking.
Accordingly, the Warrants may be deprived of any value if a current prospectus
is not kept effective or if such shares are not qualified or exempt in the
states in which exercising Warrant holders reside. See "Description of
Securities--Redeemable Warrants."
POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION. The Company may, on 30 days
prior written notice, redeem all of the Class A or Class B Redeemable Warrants
for $.05 per Warrant if the per share closing price of the underlying Common
Stock for each of the 20 consecutive trading days immediately preceding the
record date for redemption equals or exceeds 150% or 130%, respectively, of the
then exercise price. If the Company calls for such redemption, then all of such
class of Redeemable Warrants remaining unexercised at the end of the redemption
period must be redeemed. Accordingly, to the extent that such class of
Redeemable Warrants are redeemed, the Warrant holders will lose their rights to
purchase Common Stock pursuant to such Warrants. Furthermore, the threat of
redemption could force the Warrant holders to exercise the Warrants at a time
when it may be disadvantageous for them to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold them, or to
accept the redemption price which will be substantially less than the market
value of the Warrants at the time of redemption. See "Description of
Securities--Redeemable Warrants."
DETERMINATION OF WARRANT EXERCISE PRICE AND ALLOCATION OF CONSIDERATION. Of
the Unit purchase price of $1,000, for financial reporting purposes the
consideration allocated to the Debenture is $722, to the conversion discount
feature of the Debenture is $224 and to the 1,000 Class A Warrants is $54, and
for federal income tax purposes (including original issue discount) the
consideration allocated to the Debenture is $931 and to the Class A Warrants is
$69. No consideration is allocated to the Class B Warrants. The exercise price
of each class of Redeemable Warrants was determined by negotiation between the
Company and the Underwriter and bears no relationship to the Company's net
worth, book value, results of operations or any other recognized criteria of
value. Accordingly, there is no assurance that the Warrants will have any value.
LACK OF DIVIDENDS; INABILITY TO FUND DIVIDEND PAYMENTS. The Company has not
paid dividends on its Common Stock since its inception and does not intend to
pay any dividends on its Common Stock in the foreseeable future. The holders of
the Company's outstanding Series A Preferred Stock have been entitled to receive
cumulative dividends, payable annually on October 15, since 1992, out of funds
legally available therefor at the rate of $2.25 per year on each share of Series
A Preferred Stock. The Company exercised its right to adjust the conversion
ratio of the Series A Preferred Stock rather than pay the dividend payments due
on October 15, 1992 and 1993 and has not paid dividends of an aggregate of
approximately $270,000 to holders of Series A Preferred Stock which were due on
October 15, 1994 and 1995. These arrearages currently have the effect of
limiting the payment of cash dividends to holders of Common Stock and giving the
Preferred Stockholders, as a class, the right to designate two directors. There
can be no assurance that cash flow from the future operations of the Company
will be sufficient to meet these obligations. Under the terms of the Indenture,
the Company is restricted from paying cash dividends on its capital stock. See
"Price Range of Common Stock and Dividend Policy" and "Description of
Securities--Preferred Stock."
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USE OF PROCEEDS
The estimated net proceeds to the Company, after deducting underwriting
commissions and the other expenses of this Offering, will be approximately
$4,970,000 (or $5,960,000 if the Underwriter's over-allotment option is
exercised in full). The Company expects to apply these proceeds approximately as
follows:
APPLICATION AMOUNT PERCENTAGE
- ---------------------------------------------------- ---------- ----------
Repayment of working capital indebtedness (1)....... $1,770,000 35.6%
Acquisition of complementary products, technologies
and/or businesses (2)............................... 1,000,000 20.1
Research and development (3)........................ 500,000 10.1
Working capital..................................... 1,700,000 34.2
---------- -----
$4,970,000 100.0%
---------- -----
---------- -----
(1) The indebtedness was incurred in October 1995 and bears interest at
the rate of 12% per annum. Of this amount, $720,000 is due on July 31 and
$1,050,000 is due on September 30, 1996, or upon consummation of a public
offering such as the Offering. The debt was incurred for general working
capital purposes and was incurred in private placements placed by the
Underwriter. Purchasers of this debt may use their debt to purchase the
Units offered hereby, causing a reduction in the cash net proceeds to the
Company and an equivalent reduction in the amount to be repaid to them. To
the extent any holders of the debt convert their debt to equity prior to the
date hereof, the proceeds will be reallocated to acquisitions. Concurrent
with this payment, the Company will pay holders all accrued and unpaid
interest, which amount is not expected to be material. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Private Placements," "Underwriting--Private
Placements" and "Concurrent Offering."
(2) The Company intends to seek to acquire products, technologies and/or
businesses which complement the Company's current activities, are consistent
with the Company's strategic focus and contribute toward making the Company
profitable.
(3) Includes additional work to complete the clinical trials of the
tablet formulation of Biolid. See "Business --Products under
Development--Biolid."
The foregoing represents the Company's best estimate of its allocation of
the proceeds of this Offering based upon its current plans and certain
assumptions regarding general economic and industry conditions, market factors
and the Company's future revenues and expenditures. If any of these factors
change, the Company may find it necessary or advisable to reallocate some of the
proceeds within the above-described categories or to use portions thereof for
other purposes. Management believes that the net proceeds of this Offering,
together with any internally generated funds, should be sufficient to finance
the Company's intended level of operations as set forth herein through the end
of 1996. There can be no assurance that additional funds will not be required
earlier than anticipated or that the Company will be able to obtain such funds,
if at all, on a basis deemed acceptable to it. The Company currently has no
commitments to obtain any such financing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The proceeds, if any, from the exercise of the Underwriter's over-allotment
option and the Redeemable Warrants will be used for the acquisition of
complementary products, technologies and/or businesses, and/or general working
capital purposes.
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
On July 31, 1990, the Company's Common Stock began trading on the American
Stock Exchange. It is traded under the symbol BNT. The following table sets
forth the high and low sales prices for the Common Stock as reported on the
American Stock Exchange for the Company's last two fiscal years ended December
31, 1993 and December 31, 1994, respectively, and for the interim period
indicated. All prices for the period prior to July 25, 1995 have been restated
to reflect the one-for-ten reverse stock split.
HIGH SALES PRICE LOW SALES PRICE
---------------- ---------------
1994
First Quarter............................... $28.75 $ 16.25
Second Quarter.............................. 18.75 9.38
Third Quarter............................... 11.88 10.63
Fourth Quarter.............................. 9.38 5.00
1995
First Quarter............................... 7.50 3.13
Second Quarter.............................. 9.38 3.75
Third Quarter............................... 8.63 4.13
Fourth Quarter.............................. 4.63 2.06
1996
First Quarter (through February 12, 1996)... 2.88 2.06
As of February 12, 1996 there were 2,232 holders of record of the Common
Stock. The closing price of the Company's Common Stock on February 12, 1996 was
$2.125 per share.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock. The current
policy of the Board of Directors is to retain earnings to finance the operation
of the Company's business. Accordingly, it is anticipated that no cash dividends
will be paid to the holders of the Common Stock in the foreseeable future. Under
the terms of the Series A Preferred Stock, the Company is restricted from paying
dividends on its Common Stock so long as there are arrearages on dividend
payments on the Series A Preferred Stock. There currently are such arrearages.
Under the terms of the Debentures, the Company is subject to certain
restrictions which prohibit the payment of cash dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1995 and as adjusted to give effect to the sale of the Units
offered hereby and the application of the estimated net proceeds (in thousands
except share data):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
---------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
Accounts payable and accrued expenses.............................. $ 7,211 $ 7,211
Short-term borrowings.............................................. 1,216 1,216
Current portion of long-term debt.................................. 4 4
Non-current liabilities, less current portion...................... 500 500
12% Convertible Debentures......................................... -- 4,332(2)
------- --------------
Total non-current liabilities.................................... 500 4,832
Redeemable preferred stock, $1.00 par value; authorized 2,000,000
shares; Series A issued and outstanding 70,000 shares.............. 2,374 2,374
Common Stockholders' Equity:
Common Stock, $.02 par value; authorized 5,000,000 shares(3);
issued and outstanding 2,978,000 shares(4)......................... 60 65
Stock Purchase Warrants.......................................... -- 324
Paid in capital in excess of par value........................... 69,009 70,737
Stock subscriptions receivable................................... (105) (105)
Retained earnings (deficit)...................................... (63,441) (64,017)
Cumulative foreign currency translation adjustment............... (658) (658)
------- --------------
Total Common Stockholder's Equity.............................. 4,865 6,346
------- --------------
Total Liabilities and Capitalization........................... $16,170 $ 21,983
------- --------------
------- --------------
</TABLE>
- ------------
(1) Adjustments include the effect of accounting for receipt of proceeds from
private placements in October 1995 and the application of the proceeds from
this Offering to pay the debt incurred in such private placements.
(2) An allocation of the proceeds between the Debentures, the conversion
discount feature and the Redeemable Warrants has been made on the basis of
their estimated respective market values. The Debentures are reflected net
of a discount of $1,668,000. The face value of each Debenture is $1,000 and
the effective interest rate is estimated to be 18.1%. Should the Debenture
Holders elect to convert their Debentures into shares of Common Stock, they
may do so at a discount to the market price. Such discount, estimated to be
$1,344,000, will be recognized over the life of the Debentures as a
component of financing cost and has been considered in the determination of
the effective interest rate. Such allocations will be reviewed and adjusted
as necessary to reflect market values on the date of issuance.
(3) Effective January 1, 1996, the Company increased its authorized shares of
Common Stock from 5,000,000 to 20,000,000.
(4) Excludes (i) an aggregate of 14,210,000 shares of Common Stock reserved for
issuance upon conversion or exercise of the securities issuable in the
Offering (including the Underwriter's overallotment option), consisting of
2,760,000 shares issuable upon conversion of the Debentures (which would be
increased to 3,860,140 shares, if the average closing price of the Common
Stock during the twenty trading days prior to the Anniversary Date was equal
to $2.23, the average closing price of the Common Stock during the twenty
trading days ended February 12, 1996), 10,350,000 shares of Common Stock
issuable upon exercise of the Redeemable Warrants and 1,083,000 shares of
Common Stock issuable upon exercise of the securities underlying the
Underwriter Warrants; (ii) 576,841 shares of Common Stock reserved for
issuance upon exercise of outstanding stock purchase warrants; (iii) 260,542
shares of Common Stock reserved for issuance upon exercise of stock options;
(iv) 150,000 shares of Common Stock reserved for issuance upon conversion of
certain notes payable issued in a private placement in October 1995 (see
"Concurrent Offering"); (v) 14,960 shares of Common Stock reserved for
issuance upon conversion of the Series A Preferred Stock or upon conversion
of 9% Convertible Debentures due 2016 into which the Series A Preferred
Stock is exchangeable; (vi) 3,183 shares of Common Stock reserved for
issuance to current or former members of the Board of Directors of the
Company and others as compensation; and (vii) 349,500 shares of Common Stock
issued subsequent to September 30, 1995. See Note 12 of Notes to
Consolidated Financial Statements, "Management--Executive Compensation,"
"Principal Stockholders," "Description of Debentures--Conversion" and
"Description of Securities-- Redeemable Warrants."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial information for the fiscal years ended
June 30, 1990, 1991 and 1992, the six month period ended December 31, 1992, the
fiscal years ended December 31, 1993 and 1994 and the nine month period ended
September 30, 1995 set forth below is derived from and should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes appearing elsewhere in this Prospectus. The data for the nine
month period ended September 30, 1994 are derived from and qualified by
reference to the Company's consolidated financial statements appearing elsewhere
herein and, in the opinion of management of the Company includes all adjustments
that are of a normal recurring nature and necessary for a fair presentation. The
statement of operations data for the nine month period ended September 30, 1994
and 1995 are not necessarily indicative of results for a full year.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FOR THE FISCAL YEAR SIX MONTHS FISCAL YEAR NINE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30 DECEMBER 31 DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------- ------------------ -----------------
1990 1991 1992(1) 1992(2) 1993(3) 1994(4) 1994 1995(4)
------- ------- -------- ----------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................ $ 21 $ -- $ 13,138 $ 9,708 $ 19,849 $26,284 $19,676 $23,583
Cost of sales............................ 7 -- 8,871 5,899 15,100 21,464 15,940 19,523
------- ------- -------- ----------- -------- ------- ------- -------
Gross margin............................. 14 -- 4,267 3,809 4,749 4,820 3,736 4,060
Operating expenses....................... 2,529 2,506 14,758 23,493 14,722 9,050 7,413 6,265
------- ------- -------- ----------- -------- ------- ------- -------
Operating income (loss).................. (2,515) (2,506) (10,491) (19,684) (9,973) (4,230) (3,677) (2,205)
Other (income) expense................... (22) (30) 320 (153) 263 (652) (26) (686)
------- ------- -------- ----------- -------- ------- ------- -------
Net income (loss)........................ $(2,493) $(2,476) $(10,811) $ (19,531) $(10,236) $(3,578) $(3,651) $(1,519)
------- ------- -------- ----------- -------- ------- ------- -------
------- ------- -------- ----------- -------- ------- ------- -------
Net income (loss) per Common Share....... $ (5.07) $ (3.56) $ (11.12) $ (16.60) $ (6.32) $ (1.56) $ (1.67) $ (.55)
------- ------- -------- ----------- -------- ------- ------- -------
------- ------- -------- ----------- -------- ------- ------- -------
Weighted average number of Common Shares
outstanding.............................. 492 695 997 1,203 1,655 2,395 2,257 2,978
------- ------- -------- ----------- -------- ------- ------- -------
------- ------- -------- ----------- -------- ------- ------- -------
</TABLE>
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
--------------------------- ----------------------------- AT SEPTEMBER
1990 1991 1992(1) 1992(2) 1993(3) 1994(4) 30, 1995
------ ------ ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency)............. $1,202 $ (631) $ 8,449 $(3,842) $ 2,043 $ 1,928 $ 1,779
Non-current assets....................... 596 2,955 18,643 13,497 5,937 5,644 5,960
Total assets............................. 2,216 3,244 38,753 21,953 16,160 16,332 16,170
Long term obligations.................... 25 93 2,626 2,349 2,821 336 500
Redeemable Preferred Stock............... -- -- 7,164 7,401 2,218 2,256 2,374
Common Stockholders' equity (deficit).... 1,773 2,231 17,352 (95) 2,941 4,980 4,865
</TABLE>
- ------------
(1) The Company acquired 100% of the shares of Chimos in August 1991 and,
accordingly, for accounting purposes, was no longer considered in the
development stage of operations. The Company also acquired 100% of the
shares of Laboratorios Belmac in February 1992, as well as Amodex(R)
trademark and licensing rights in France in December 1991. See Notes 3 and 8
of Notes to Consolidated Financial Statements.
(2) The Company changed its fiscal year end to December 31 effective December
31, 1992 and sold its marketing rights in France to Amodex(R) on January 20,
1993. The six months ended December 31, 1992 include other non-recurring
charges totaling $9,321,000. See Note 4 of Notes to Consolidated Financial
Statements.
(3) The year ended December 31, 1993 includes the effects of writing off
capitalized costs with respect to the sachet formulation of Biolid, its
noncrystalline form of erythromycin and a charge to earnings for the
settlement of class action litigation. See Notes 8 and 12 of Notes to
Consolidated Financial Statements.
(4) The Company sold its Spanish marketing rights to its ciprofloxacin
antibiotic, Belmacina(R), in 1994 and included the gain thereon
(approximately $884,000) in Other (Income) Expense in the year ended
December 31, 1994 and recorded the anticipated gain on sale of the related
trademark of $380,000 as deferred revenue as of December 31, 1994 which was
recognized in the nine months ended September 30, 1995. Other (Income)
Expense for the nine months ended September 30, 1995 also includes the
recognition of income of $360,000 from the commercialization of a certain
drug provided by the Company's former Chairman and Chief Executive Officer,
$533,000 of expense related to the settlement of litigation with the
Company's former Chief Financial Officer and income of $368,000 due to the
reversal of an overaccrual for a liability. See Notes 8, 12, 15 and 17 of
Notes to Consolidated Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is an international pharmaceutical and health care company with
its primary focus on the development and marketing of pharmaceutical and health
care products. Substantially all of its revenues have come from its operations
in France and Spain; however, the Company began limited marketing of health care
products in the United States in 1994.
Effective December 31, 1992, the Company changed its fiscal year end from
June 30 to December 31. The Company incurred a net loss of $3,578,000 and
$1,519,000 for the year ended December 31, 1994 and the nine months ended
September 30, 1995, respectively. The Company intends to continue to focus its
efforts on business activities which management believes should result in
operating profits in the future, of which there can be no assurance. To improve
its results, the Company's management will focus on increasing higher margin
pharmaceutical and health care product sales, controlling expenses through its
austerity program, careful prioritization of research and development projects
resulting in continued low overall research and development expenditures, and
potentially acquiring marketable products or profitable companies in the United
States or Europe that are compatible with the Company's strategy for growth. See
"--Liquidity and Capital Resources." Currently, the profit margins for the
products sold by the Company's subsidiary in Spain are significantly higher than
those generated by the Company's subsidiary in France. For business segment
information on the Company's operations outside the United States, see Note 14
of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1994
The Company reported revenues of $23,583,000 and a net loss of $1,519,000 or
$.55 per share for the nine months ended September 30, 1995 compared to revenues
of $19,676,000 and a net loss of $3,651,000 or $1.67 per share for the same
period in the prior year.
Sales and Cost of Sales. The 20% increase in revenues is primarily
attributable to an increase in sales by the Company's subsidiary in France,
Chimos/LBF S.A., which distributes specialty pharmaceutical products and fine
chemicals in France. Consolidated gross margins for the nine months ended
September 30, 1995 remained consistent at 19% when compared to the comparable
period of the prior year, excluding the effect of the $423,000 charge to cost of
sales in the third quarter of 1995, representing an increase in the Company's
reserves for slow moving or obsolete inventory in Spain. The Company's
distribution operations in France (Chimos/LBF S.A.) generate relatively low
gross margins as opposed to the Company's Spanish subsidiary, Laboratorios
Belmac S.A., which is experiencing substantially higher margins.
Operating Expenses. Selling, general and administrative expenses were
$5,516,000 for the nine months ended September 30, 1995 compared to $6,428,000
for the same period in the prior year. The 14% decrease is primarily
attributable to cost control measures implemented by the Company. The Company
intends to continue its efforts to control general and administrative expenses
as part of its austerity program in its effort to reach and maintain
profitability.
Research and development expenses were $341,000 for the nine months ended
September 30, 1995 compared to $608,000 for the same period of the prior year.
The 44% decrease reflects the results of a thorough review of all research and
development activities and the establishment of priorities based upon both
technical and commercial criteria. During this period, the Company did not
commence any new research and development programs. The Company intends to
continue to carefully manage its research and development expenditures in the
future in view of its limited resources.
21
<PAGE>
Other Income/Expense. Interest expense was $215,000 for the nine months
ended September 30, 1995 compared to $140,000 for the same period in the prior
year. The 54% increase reflects interest cost on higher average outstanding
balances on revolving lines of credit, which are used to finance working capital
needs. Other income/expense of $686,000 for the nine months ended September 30,
1995 is primarily comprised of $360,000 related to a settlement of litigation
(see Notes 15 and 17 of Notes to Consolidated Financial Statements) and the
$380,000 gain recognized upon the sale of the Company's Belmacina trademark in
Spain, which was previously reflected in the Company's consolidated financial
statements as deferred revenue as of December 31, 1994. The Company has since
transferred the trademark to the purchaser and collected the balance of the
related receivable in the fourth quarter of 1995. Other income/expense also
includes the effect of a reversal of an overaccrual of a liability related to
the proposed sale of Biolid, which did not occur, in the amount of $368,000.
Also included, is income from the Company's contract manufacturing arrangements
with several pharmaceutical concerns, offset by a charge for cancellation of the
stock subscription receivable and related interest from a former officer of the
Company. One-half of the loss (approximately $37,000) incurred by Maximed
Pharmaceuticals, the Company's partnership with Maximed Corporation, is also
included in other income/expense in the nine months ended September 30, 1995.
Although the Company is in a dispute with, and has filed an action against, its
partner, and has ceased funding the partnership's activities until such dispute
is resolved, appropriate operating costs have been accrued and charged to
operations during the nine months ended September 30, 1995. See "Legal
Proceedings".
FISCAL YEAR ENDED DECEMBER 31, 1994 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1993
The Company reported sales of $26,284,000 and a net loss of $3,578,000 or
$1.56 per share for the fiscal year ended December 31, 1994, compared to sales
of $19,849,000 and a net loss of $10,236,000 or $6.32 per share for the prior
year.
Sales and Cost of Sales. The 32% increase in sales is primarily a result of
increased sales by the Company's subsidiary in France, Chimos/LBF. Gross margins
for the year ended December 31, 1994 averaged 18% compared with 24% in the prior
year. The lower margins are primarily a result of the lower gross margins
experienced by Chimos/LBF's distribution operations, whose sales accounted for
approximately 77% of revenues, compared with 68% in the prior year. The lower
gross margins experienced by the Company in France were only partially offset in
Spain, where Laboratorios Belmac is experiencing margins substantially higher
than those in France.
Operating Expenses. Selling, general and administrative expenses were
$7,716,000, or 29% of sales, for the year ended December 31, 1994 compared with
$9,170,000, or 46% of sales, for the prior year. The decrease from 46% to 29% of
sales is primarily attributable to adjustments to accruals for tax
contingencies, related primarily to product registration taxes, totalling
$1,645,000, which are no longer considered probable and to cost control measures
implemented by the Company and reduced marketing costs in France due to the
suspension of marketing of Biolid during the fourth quarter of 1993.
Notwithstanding these efforts, selling and marketing costs continue to be
significant and necessary expenses in connection with the Company's plans to
increase market share in Spain. To the extent practical, however, the Company
intends to continue its efforts to control general and administration expenses
as part of its austerity program.
Research and development expenses were $759,000 for the year ended December
31, 1994 compared to $1,555,000 in the prior year. The 51% decrease reflects the
results of a thorough review of all research and development activities and the
establishment of priorities based upon both technical and commercial criteria.
During 1994, the Company did not commence any new research and development
programs. It did, however, continue certain programs already in progress,
including a Biolid pharmacokinetics trial. The Company intends to continue to
carefully manage its research and development expenditures in the future in view
of its limited resources.
22
<PAGE>
Depreciation and amortization expenses were $575,000 for the year ended
December 31, 1994 compared to $756,000 for the prior year. The 24% decrease is
primarily attributable to the write-off of Drug Licenses and Product Rights as
of December 31, 1993, and the 1994 sale of its Spanish ciprofloxacin antibiotic,
Belmacina(R), resulting in reduced amortization charges.
Other Income/Expense. Other income/expense for the year ended December 31,
1994 included the gain recognized upon the 1994 sale of the Company's Spanish
rights to its ciprofloxacin antibiotic, Belmacina(R), of approximately $884,000.
FISCAL YEAR ENDED DECEMBER 31, 1993 VERSUS TWELVE MONTHS ENDED DECEMBER 31, 1992
The Company reported revenues of $19,849,000 and a net loss of $10,236,000
or $6.32 per share for the year ended December 31, 1993, compared to revenues of
$19,217,000 and a net loss of $27,023,000 or $23.70 per share for the same
period in the prior year.
Sales and Cost of Sales. While 1993 revenues increased slightly, their
composition changed significantly. Sharply reduced sales at Laboratoires Belmac
due to its divestiture of Amodex(R) and decreased promotion and the resulting
reduction in sales of its sachet formulation of Biolid were more than offset by
increases in sales generated by Chimos. Gross margins for the year ended
December 31, 1993 averaged 24% compared to 37% in the comparable period of the
prior year. The lower margins were primarily a result of the lower gross margins
experienced by Chimos' distribution operations, whose sales accounted for
approximately 68% of revenues, as compared to 52% in the comparable period of
the prior year and to low gross margin contributions from Laboratoires Belmac's
sales due to the fact that Amodex(R) and Biolid inventories were adjusted
downward to net realizable value as of December 31, 1992. The lower gross
margins experienced by the Company in France were only partially offset in
Spain, where Laboratorios Belmac experienced margins substantially higher than
those in France.
Operating Expenses. Selling, general and administrative expenses were
$9,170,000 for the year ended December 31, 1993 compared to $15,724,000 for the
same period in the prior year. The decrease was primarily attributable to cost
control measures implemented by the Company and reduced marketing costs in
France due to the divestiture of Amodex(R) and the decreased promotion of its
sachet formulation of Biolid.
Research and development expenses were $1,555,000 for the year ended
December 31, 1993 compared to $7,339,000 in the comparable period of the prior
year. The decrease reflected the results of a thorough review of all research
and development activities, and the establishment of priorities based upon both
technical and commercial criteria. Biolid (tablet formulation) was the primary
focus in research and development.
Depreciation and amortization expenses were $756,000 for the year ended
December 31, 1993 compared to $1,497,000 for the same period in the prior year.
The decrease was primarily attributable to the write-down of drug licenses and
product rights and to the divestiture of Amodex(R).
As a result of the decision to withdraw the sachet formulation of Biolid
from the French market, the Company recorded an expense of $2,241,000 in the
fourth quarter of 1993, reflecting the write-off of the capitalized costs with
respect to the sachet formulation of Biolid, Biolid sachet inventories, and
costs associated with refunding certain costs to the potential buyer of these
rights. See "Business--Products--Biolid(R)."
The Company agreed in 1993 to issue to plaintiffs in class action
litigation, shares of its Common Stock with a market value of $1,000,000. The
Company accrued this amount as a non-current liability as of December 31, 1993.
23
<PAGE>
Other Income/Expense. The provision for income taxes of $343,000 for the
twelve months ended December 31, 1992 was a result of foreign taxes on profits
generated by Chimos in 1992. Chimos was not eligible to file a consolidated
income tax return with Laboratoires Belmac in France until 1993; therefore, the
Laboratoires Belmac losses were not available to offset Chimos' taxable profits
in 1992. No such provision was required for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Total assets decreased from $16,332,000 at December 31, 1994 to $16,170,000
at September 30, 1995, while Common Stockholders' Equity decreased from
$4,980,000 at December 31, 1994 to $4,865,000 at September 30, 1995. The
decrease in Common Stockholders' Equity reflects primarily the loss incurred by
the Company for the period which was partially offset by $562,000 received from
a stock subscription receivable and fluctuation in the exchange rates of
European currencies compared to the U.S. Dollar.
The Company's working capital decreased from $1,928,000 at December 31, 1994
to $1,779,000 at September 30, 1995. Receivables increased from $7,609,000 at
December 31, 1994 to $8,268,000 at September 30, 1995 due primarily to the
continued growth in sales volume at the Company's subsidiary in France,
Chimos/LBF. A significant portion of the Company's trade receivables arise from
sales of pharmaceutical and healthcare products to the French government.
Payment terms for such sales are typically 90 to 100 days. The Company has not
experienced any material delinquent accounts. During the period, the Company
collected approximately $922,000 of the $1,140,000 receivable due at December
31, 1994 from the sale of its ciprofloxacin antibiotic, Belmacina, in Spain.
Inventories decreased from $1,247,000 at December 31, 1994 to $1,000,000 at
September 30, 1995 primarily due to an increase in the Company's reserves for
slow-moving or obsolete inventory in Spain of $423,000. The combined total of
accounts payable and accrued expenses also remained relatively unchanged at
September 30, 1995 as compared to December 31, 1994, decreasing $445,000 or less
than 6%. Short term borrowings increased from $663,000 at December 31, 1994 to
$1,216,000 at September 30, 1995 due to higher balances used for working capital
purposes (primarily the purchase of inventories in France and Spain, and
short-term borrowings used to finance factory renovations in Spain).
Investing activities, including the collection of approximately $922,000
from the 1994 sale of Belmacina, proceeds from the sale of investments available
for sale of $214,000, an investment in the Company's Spanish manufacturing
facilities of approximately $507,000 and in the Belmac/Maximed Partnership (see
"Legal Proceedings") of $13,000, provided net cash of $616,000 during the nine
months ended September 30, 1995. Financing activities (primarily collection of a
stock subscription receivable and proceeds from short term borrowings) provided
net proceeds of $925,000 for the nine months ended September 30, 1995. Operating
activities for the nine months ended September 30, 1995 required net cash of
$2,422,000.
Total assets increased from $16,160,000 at December 31, 1993 to $16,332,000
at December 31, 1994, while Common Stockholders' Equity increased from
$2,941,000 at December 31, 1993 to $4,980,000 at December 31, 1994. The increase
in Common Stockholders' Equity is primarily a result of net proceeds of
approximately $3,384,000 received from private placements of Common Stock and
warrants and approximately $693,000 received from stock subscriptions
receivable, offset by losses incurred by the Company for the period. Common
Stockholders' Equity also increased by $1,000,000 as a result of the issuance of
the Common Stock to settle a class action litigation.
The Company's working capital was $1,928,000 at December 31, 1994 compared
to $2,043,000 at December 31, 1993. Marketable securities were liquidated during
1994 to satisfy liabilities of the Company. Receivables increased as a result of
the growth in the Company's business as well as including the $1,140,000
receivable from the sale in Spain of its ciprofloxacin antibiotic, Belmacina(R),
which has been received subsequent to year end. Accounts payable increased in
part due to the
24
<PAGE>
increased level of business and in part due to the Company's careful management
of its limited liquid resources.
Investing activities provided net cash of $134,000 for the year ended
December 31, 1994, including proceeds from the sale of the Company's
ciprofloxacin antibiotic, Belmacina(R) in Spain, which was sold for $1,556,000
and generated a gain of $884,000. See Note 8 of Notes to Consolidated Financial
Statements. The Company also sold certain investments during 1994 generating
proceeds of $1,040,000. The Company invested $648,000 in its partnership with
Maximed Corporation (named Maximed Pharmaceuticals) for development of hydrogel
based feminine health care products. Management believes that it is possible to
introduce its first product to the market in 1996 if a dispute with its partner
can be resolved and product development progresses as planned. Investing
activities also included a repayment to Evans Medical S.A. of $793,000 for
amounts due relating to the cancellation of the proposed sale of the marketing
rights to the sachet formulation of Biolid in France in 1993.
Financing activities (primarily receipt of proceeds from private placements
and from stock subscriptions receivable) provided net proceeds of $3,439,000 for
the year ended December 31, 1994, while operating activities for the year ended
December 31, 1994 required net cash of $3,415,000.
The Company continues to experience negative cash flows from operating
activities, and completed private placements of its securities totaling
$1,770,000 during October 1995 in order to fund its operations and is pursuing
this Offering to provide further liquidity. See "--Private Placements" below and
Note 17 of Notes to Consolidated Financial Statements. The Company may seek to
enter into a partnership or other collaborative funding arrangement with respect
to future clinical trials of its products under development. The Company,
however, continues to explore alternative sources for financing its business. In
appropriate situations, that will be strategically determined, the Company may
seek financial assistance from other sources, including contribution by others
to joint ventures and other collaborative or licensing arrangements for the
development, testing, manufacturing and marketing of products and the sale of a
minority interest in, or certain of the assets of, one or more of its
subsidiaries. Management expects that by carefully prioritizing research and
development activities and continuing its austerity program, upon consummation
of this Offering, the Company should have sufficient liquidity to fund
operations through the end of 1996.
Seasonality. In the past, the Company has experienced lower sales in the
fourth calendar quarter of each year. Should the Company begin large sales of a
pharmaceutical product whose sales are seasonal, seasonality of its sales may
become more significant.
Currency. A substantial amount of the Company's business is conducted in
France and Spain and is therefore influenced by the extent to which there are
fluctuations in the dollar's value against such countries' currencies. The
effect of foreign currency fluctuations on long lived assets for the nine months
ended September 30, 1995 and for the year ended December 31, 1994 was an
increase of $443,000 and $289,000, respectively, and the cumulative historical
effect at September 30, 1995 and December 31, 1994 was a decrease of $658,000
and $1,101,000, respectively, as reflected in the Company's Consolidated Balance
Sheets in the "Liabilities and Stockholders' Equity" section. Although exchange
rates fluctuated significantly in recent months, the Company does not believe
that the effect of foreign currency fluctuation is material to the Company's
results of operations as the expenses related to much of the Company's foreign
currency revenues are in the same currency as such revenues. The Company relies
primarily upon financing activities to fund the operations of the Company in the
United States and has not transferred significant amounts into or out of the
United States in the recent past. In the event that the Company is required to
fund United States operations with funds generated in France or Spain, currency
rate fluctuations in the future could have a significant impact on the Company.
However, at the present time, the Company does not anticipate altering its
business plans and practices to compensate for future currency fluctuations.
25
<PAGE>
Private Placements. To finance its operations, in October 1995 the Company
conducted two private placements of its securities. In the first placement, the
Company sold to certain purchasers for an aggregate purchase price of $720,000,
120,000 shares of the Company's Common Stock and 12% promissory notes in the
aggregate principal amount of $720,000 (the "Notes") which become payable in
full upon the earlier of July 31, 1996 or the closing of a public offering of
the Company's securities (a "Public Offering"). The Notes are convertible into
shares of Common Stock, at the option of the holders thereof, at a conversion
price of $3.00 per share, for an aggregate of 240,000 shares of Common Stock,
subject to anti-dilution provisions. The Notes are subject to mandatory
conversion at a conversion price of $3.00 per share if no Public Offering is
completed by July 31, 1996.
In the second placement, the Company sold to certain purchasers for an
aggregate purchase price of $1,050,000, 131,250 shares of Common Stock and 12%
promissory notes in the aggregate principal amount of $1,050,000 (the "A Notes")
which become payable in full upon the earlier of September 30, 1996 or the
completion of a Public Offering. The A Notes are subject to mandatory
conversion, at a conversion price equal to the average closing price for the
Common Stock quoted on the American Stock Exchange for the five trading days
immediately preceding September 30, 1996, if no Public Offering is completed by
September 30, 1996.
As required by the terms of the placements, the Company will utilize a
portion of the proceeds of this Offering to repay the Notes and the A Notes. See
"Use of Proceeds." The Underwriter served as placement agent for the placements.
See "Underwriting--Private Placements." The shares of Common Stock sold in the
placements and the shares of Common Stock issuable upon conversion of the Notes
which have been converted prior to the date hereof and, consequently, will not
be repaid, have been registered for resale. See "Concurrent Offering."
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BUSINESS
GENERAL
The Company is an international pharmaceutical and health care company
engaged primarily in the manufacturing, marketing and distribution of
pharmaceutical products in France and Spain, with limited distribution of health
care products and research and development activities in the United States. The
Company's operations in France consist of the brokerage of fine chemicals and
the marketing of the drug Ceredase, manufactured by Genzyme Corporation and used
in the treatment of Gaucher's Disease. In Spain, the Company manufactures,
packages and distributes both its own and other companies' pharmaceutical
products and has recently begun to emphasize the manufacture of pharmaceuticals
under contract. In the United States, the Company markets disposable linens to
emergency health services which are manufactured under contract. The percentage
of the Company's total revenues for the nine months ended September 30, 1995
which are attributable to its operations in France, Spain and the United States
are approximately 82%, 17% and 1%, respectively. Limited research and
development activities are conducted both in the United States and Europe and
the Company has several products under development. The Company's chemical and
pharmaceutical operations in France and Spain are a result of its 1991
acquisition of Chimos S.A. and the establishment of a pharmaceutical subsidiary
in France, Laboratoires Belmac S.A. (these two entities in France have since
been merged into one entity named and referred to herein as Chimos/LBF S.A.) and
the 1992 acquisition of Rimafar S.A. (subsequently renamed and referred to
herein as Laboratorios Belmac S.A.), respectively.
The strategic focus of the Company has shifted in response to the evolution
of the global health care environment. The Company has moved from a research and
development-oriented pharmaceutical company, developing products from the
chemistry laboratory through marketing to a company seeking to acquire
late-stage development compounds that can be marketed within one or two years,
and currently marketed products. As a result of this transition, the Company has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Company's
operations. The Company emphasizes product distribution in France and Spain,
strategic alliances and product acquisitions, which management of the Company
expects will move the Company closer to profitability in the near future.
The Company's sales by its primary product lines are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31,
------------------ ------------------
1993 1994 1994 1995
------- ------- ------- -------
<CAPTION>
<S> <C> <C> <C> <C>
Pharmaceutical and consumer health care products...... $19,483 $26,100 $19,560 $23,429
Disposable linen products............................. 56 184 116 154
Other................................................. 310 -- -- --
------- ------- ------- -------
Total........................................... $19,849 $26,284 $19,676 $23,583
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
PRODUCT LINES
The Company currently manufactures, markets and sells pharmaceutical
products in Spain, distributes pharmaceutical and biotechnology products and
brokers fine chemicals in France, and markets and sells disposable linens in the
United States.
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PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN
Laboratorios Belmac S.A., the Company's subsidiary in Spain ("Laboratorios
Belmac"), manufactures, markets and sells pharmaceutical products whose four
primary categories are cardiovascular, neurological, gastrointestinal and
antibiotic. The Company manufactures over 30 types of pharmaceuticals in its
facility in Zaragoza, Spain both for its own sales and, on occasion, under
contract for others. The manufacturing facility was recently renovated and
brought into full compliance with European Union Good Manufacturing Practices
(GMPs). Among the products Laboratorios Belmac manufactures, each of which is
registered with Spain's Ministry of Health, are:
Controlvas(R). Controlvas, whose generic name is enalapril, is an
angiotensin converting enzyme inhibitor useful in the treatment of
hypertension and congestive heart failure. Enalapril is marketed in the
United States by Merck & Company.
Belmazol(R). Belmazol, whose generic name is omeprazole, is used
primarily for hyperacidity problems related to ulcers and, secondarily, for
the treatment of gastroesophageal reflux disease. Omeprozole is a proton
pump inhibitor which inhibits the hydrogen/potassium ATPase enzyme system at
the secretory surface of the gastric parietal cell. Because this enzyme
system is regarded as an acid pump within the gastric mucosa, it has been
characterized as a gastric acid pump inhibitor in that it blocks the final
step of acid production. This compound has been used in combination with
antibiotics for the treatment of ulcers when it is suspected that
Helicobacter pylori, a bacteria, is the etiologic agent.
Lopermida(R). Lopermida, whose generic name is loperamide hydrochloride,
a product launched by the Company in Spain in March 1995, is a compound that
inhibits gastrointestinal motility and is useful in the treatment of
diarrheal conditions and colitis. Loperamide hydrochloride is marketed in
the United States by several drug companies, including McNeil, Proctor &
Gamble, Novo Pharm and Geneva.
Ergodavur(R), Neurodavur(R) and Neurodavur Plus(R). Ergodavur,
Neurodavur and Neurodavur Plus are compounds used for the enhancement of
activity in the central and peripheral nervous systems.
Diflamil(R). Diflamil is an anti-inflammatory analgesic used in the
treatment of arthritis.
Resorborina(R). Resorborina is a compound that has local anesthetic and
anti-inflammatory properties for the treatment of pharyngitis and mouth
infections.
Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are compounds
used to treat local fungal infections, especially around the nails.
Otogen(R). Otogen is a product used for the treatment of ear infections
and ear pain.
Spirometon(R). Spirometon is a combination of spironolactone and
bendroflumethazide useful in the treatment of congestive heart failure,
hypertension and edema. (Spirometon is a diuretic that preserves the body's
supply of potassium).
Anacalcit(R). Anacalcit is a calcium binding product used for the
treatment of kidney stones. The Spanish government has specifically
requested that Laboratorios Belmac continue to manufacture this product, as
Laboratorios Belmac is the only supplier of this type of product in Spain.
Biolid(R). Biolid is a non-crystalline form of erythromycin with a
potential for enhanced bioavailability. Plans are underway for developing
manufacturing capabilities for Biolid in Spain. Laboratorios Belmac will
perform an additional clinical study in Spain once the production of the
sachet formulation has been completed and prior to the commencement of
marketing. See "--Products under Development--Biolid--Spain."
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Belmacina(R). Belmacina is a ciprofloxacin antibiotic. The Company sold
its Spanish marketing rights to Belmacina to CEPA, a Spanish company, in
1994 for 200 million Spanish Pesetas (approximately $1,556,000) and the
related trademark to CEPA for 50 million Spanish Pesetas (approximately
$380,000) in 1995. The Company maintains the right to manufacture and export
this product. Belmacina was acquired by the Company in September 1992 for
approximately $577,000. The gain on sale of the marketing rights
(approximately $884,000) was included in the Company's income for the year
ended December 31, 1994. The Company recorded the gain on the sale of the
related trademark (approximately $380,000) as deferred revenue in its
consolidated financial statements for the year ended December 31, 1994, and
recognized such revenue in 1995. See Note 8 of Notes to Consolidated
Financial Statements.
Rimafungol(R). Rimafungol is the Company's form of cyclopiroxolamine, a
broad-spectrum antifungal product for treating fungal infections of the skin
and vagina.
Rofanten(R). Rofanten is the Company's formulation of naproxen sodium,
an anti-inflammatory/analgesic.
Generic Antibiotics. Laboratorios Belmac produces directly or by
contract to others, various other types of generic antibiotics for which
patent protection no longer exists, such as amoxicillin, ampicillin
(Bactosone Retard(R)) and injectable forms of penicillin.
Controlvas and Belmazol, together, represent approximately 70% of the sales
of Laboratorios Belmac.
As the Spanish government did not provide any patent protection for
pharmaceutical products until 1992, the Company, while owning the right to
manufacture the drugs described above as well as other pharmaceuticals, will
often be one of several companies which has the right to manufacture and sell
substantially similar products. The Spanish regulatory authorities specify the
amounts each company can charge for its products. Therefore, the Company's
competitors may sell similar products at the same, higher or lower prices. Many
of these competitors are larger, better capitalized and have more developed
sales networks than the Company.
The Company maintains an internal marketing and sales staff of approximately
54, including 32 employees and 22 independent sales representatives working on
commission in Spain to market the pharmaceuticals it produces. The Company's
sales force competes by emphasizing highly individualized customer service.
In 1995, the Company commenced the export of pharmaceuticals manufactured by
Laboratorios Belmac outside Spain through local distributors, particularly in
Eastern Europe and South America.
CONTRACT MANUFACTURING. Since Laboratorios Belmac currently utilizes less
than 100% of its plant capacity to manufacture its own products, Laboratorios
Belmac has begun to act as a contract manufacturer of pharmaceuticals owned by
other companies such as Rhone-Poulenc's subsidiary Natterman S.A., Ciba Geigy's
subsidiary Zyma, Fournier, Italpharmaco, Beijing Pharmaceutical, Instituto
Llorente and Laboratorios Juventus, S.A. Other contracts are contemplated in the
near future. The Company manufactures these pharmaceuticals to its customers'
specifications, packaging them with the customers labels. Occasionally, to
assure product uniformity and quality, employees of these customers will work at
the Company's manufacturing facility.
As a result of Spain's entry into the European Union, Spain implemented new
pharmaceutical manufacturing standards and the Company was required to modify
its facility to comply with these regulations. Such renovations were
accomplished by Laboratorios Belmac without interruption of sales or
distribution. After an inspection, in July 1995 the operating parts of the
facility were determined to be in compliance with European Good Manufacturing
Practices ("GMPs") by Spain's Ministry of Health.
29
<PAGE>
PHARMACEUTICAL MARKETING AND SALES IN FRANCE
Chimos/LBF S.A., the Company's subsidiary in France ("Chimos"), is engaged
in the import and distribution of specialty pharmaceutical products to hospitals
and others in France. Chimos concentrates on the sale of "orphan drugs" (drugs
used for the treatment of rare diseases). The Company markets, throughout
France, over 26 pharmaceutical products from Europe and the United States.
Among the products Chimos currently markets is Ceredase, a drug used in the
treatment of Gaucher's Disease. Chimos has been marketing Ceredase in France
since the drug became available, approximately five years ago. Chimos is able to
market these drugs because it has been authorized as a distributor by France's
Ministry of Health. The primary customer of Chimos is Pharmacie Centrale des
Hopitaux, which purchases Ceredase from Chimos. Since Ceredase treats a rare
disease, this hospital buys and controls distribution of this product to other
hospitals in France. Ceredase is manufactured by Genzyme Corporation of Boston,
Massachusetts, which contracts with Chimos to distribute it in France. The
contracts with Genzyme have recently had limited terms; the most recent
three-month extension terminates on March 31, 1996. There can be no assurance
that Chimos will continue to market Ceredase or that the relationship between
Chimos and Genzyme will continue. The Company continues to assess the importance
of Ceredase to its operation because, notwithstanding the relative significance
of its sales volume, its gross margins as a percentage of sales are minimal.
Chimos, as one of the authorized distributors of Orphan Drugs in France, is
occasionally contacted by manufacturers of such products outside of France to
act as their distributor. In addition, the Company from time to time supplies
Chimos with a list of Orphan Drugs approved by the FDA in the United States and
Chimos contacts their manufacturers to seek becoming their distributor in
France.
CHEMICAL BROKERAGE. Chimos is engaged in the import and supply in France of
approximately 39 fine chemicals, such as furosemide, phenobarbital and
trihexyphenidyl HCl, used in the manufacture of pharmaceuticals, from countries
such as Japan, Taiwan, China, Pakistan and several European countries. The
brokerage of fine chemicals by Chimos provides a necessary link between the
manufacturer and end-user. The manufacturer produces the chemicals to meet
product specifications and provides a certificate of analysis as to the purity
of the chemicals. The products are provided to the end-user, which generally
verifies the analysis with its own quality control procedures. Chimos generally
acts as agent for the manufacturer, arranging for shipping, import and customs
documentation, invoicing and collection of payments. Chimos also acts on
occasion on behalf of the end-user, which requests that Chimos source a
particular product from one of its sources or conduct a world-wide search for
the product.
MARKETING AND DISTRIBUTION OF DISPOSABLE LINENS IN THE UNITED STATES
The Company markets and distributes disposable linen products to the
emergency health care industry in the United States through Belmac Healthcare
Corporation, one of the Company's U.S. subsidiaries ("Healthcare"). These
disposable linens include products such as blankets, sheets and pillowcases.
Customers for these products include distributors to entities which are engaged
in the provision of emergency health care services, such as emergency rooms and
ambulance services, located primarily in the southwestern and northeastern
regions of the United States.
Healthcare receives orders for these products at the Company's headquarters
in Tampa, Florida. Healthcare subcontracts the manufacturing of the disposable
linens in accordance with Healthcare's specifications. The raw materials for
these products are provided by Healthcare and stored with one of the
manufacturers until needed. Once produced, the products are shipped directly to
the customer from the manufacturer or held in inventory in anticipation of
customer demand.
The supply of disposable linens to health care providers in the United
States is a highly competitive business. Large companies with significantly
greater resources than the Company, such as Kimberly-
30
<PAGE>
Clark Corporation, Minnesota Mining & Mfg. Co., Johnson & Johnson, Owens & Minor
Inc., General Medical Corp. and Baxter International Inc., dominate the market.
The Company concentrates its marketing on the emergency services segment of the
health care market, an area which demands greater individual attention.
Healthcare believes that it competes on the basis of customer service.
Healthcare advertises this service nationwide through several mediums, such
as print advertisements, trade shows and direct mail (sales brochures). Sales
from disposable linens increased from $56,000 in 1993 to $184,000 in 1994 and to
$154,000 during the first nine months of 1995. The manufacture and sale of
disposable linens is subject to regulation by the FDA. The FDA monitors the
composition and labeling of health care products, such as disposable linens.
PRODUCTS UNDER DEVELOPMENT
Although the Company significantly reduced its research and development
activities when it implemented its austerity program in 1993, the Company has
maintained its rights to a number of selected products. There can be no
assurance that the Company will have the resources to bring any of these
products to market or, if such resources are available, that the products can be
successfully developed, manufactured or marketed.
Due to the expense and time commitment required to bring a pharmaceutical
product to market, the Company is seeking co-marketing, licensing and
promotional arrangements and other collaborations with other international or
national pharmaceutical companies. Generally, management believes that the
Company can compete more effectively in certain markets through collaborative
arrangements with companies that have an established presence in a particular
geographic area and greater resources than those of the Company. The Company is
currently seeking partners to assist in the further development and marketing of
Biolid and Alphanon(R).
BIOLID(R)
Biolid is a non-crystalline form of erythromycin with a potential for
enhanced bioavailability (quantity absorbed in blood over time compared to dose
received). Initially, Biolid was produced in Europe in a sachet formulation,
which is a powder formulation contained in a packet, which is mixed with water
prior to oral administration. This formulation for drugs is more popular in
Europe than in the United States, necessitating the Company's development of a
tablet formulation for marketing in the United States. The Company was granted a
United States patent for Biolid in June 1992. An international patent
application covering ten additional countries was granted in January 1994.
Regulatory approval is pending in Mexico. Regulatory approval was recently
received in Spain and an Investigational New Drug Application ("IND") is on file
with the FDA.
Initial Sachet Formulation Studies. Five double blind clinical studies of
Biolid, using its sachet formulation, were completed in 1992 in a total of 612
patients in France, Germany, Belgium and Holland. Four studies used
roxithromycin (Rulid, Hoescht-Roussel) as a reference drug, and Biolid showed
equal efficacy and tolerance in both lower and upper respiratory tract
infections in three of the four studies. In the fifth study, Biolid was compared
to a third generation oral cephalosporin, cefpodoxime (Cefodox,
Hoescht-Roussel), in upper respiratory tract infections, and again, equal
efficacy and tolerance were observed.
France. The Company began marketing the sachet formulation of Biolid in
France in 1992 after its approval by France's Ministry of Health. During a
periodic review of the dossier of Biolid by the Ministry in 1993 which was
completed shortly after the Company had negotiated the sale of the Company's
rights to the sachet formulation in France, the Ministry required the suspension
of marketing of Biolid pending the provision by the Company of additional
clinical data regarding the mechanisms for the comparatively enhanced absorption
of the Biolid sachet. This suspension was
31
<PAGE>
unrelated to its safety or efficacy issues. The sale of the rights to Biolid did
not occur. The Company believes that once the additional technical information
requested has been provided to the French regulators, the regulators should
agree to the continued marketing of the sachet formulation. However, due to the
cost of such a study, at this time the Company will not fund additional clinical
studies of the sachet formulation in France without a collaborative partner. The
Company believes that the likelihood of obtaining a partner in France is
currently remote. See Notes 4 and 8 of Notes to Consolidated Financial
Statements.
Spain. The Company received approval by Spain's Ministry of Health in 1994
for marketing the sachet formulation of Biolid in Spain at a price lower than
that requested by the Company. In 1995, the Ministry approved a higher price
level, pending delivery of the results of a further clinical study demonstrating
enhanced bioavailability of Biolid. In addition, once the initial production of
a quantity of Biolid has been produced by Laboratorios Belmac in Spain, which
will be done using raw materials supplied to Laboratorios Belmac from Chimos,
Laboratorios Belmac will use the same clinical study to demonstrate that the
manufacturing process used in Spain is substantially similar to that which was
successfully used in France and that the formulation produced in Spain yields a
final product which meets all regulatory standards. The Company currently
expects that the clinical study will be performed in two phases. First, a pilot
study of six persons will be performed and then, if the results of the pilot
study are positive, a larger population will be tested in compliance with the
requirements of the Ministry. There can be no assurance that either the pilot
study or, if the pilot study is successful, the full study will demonstrate
either enhanced bioavailability or substantial similarity. Management of the
Company does not have sufficient data to be able to accurately predict the
outcome of these studies at this time. These studies would be funded by the
operations of Laboratorios Belmac and a portion of the proceeds of this
Offering.
United States. The Company has determined to direct its marketing efforts
for Biolid in the United States to the twice-a-day tablet formulation rather
than the sachet formulation. The Company has performed several pilot studies
between 1992 and 1994, the most recent of which indicated that the tablet, given
with a high fat meal, had bioavailability which was approximately 25% better
when compared on a milligram for milligram basis with a competitive U.S. tablet
of erythromycin. These results did not achieve the same level of bioavailability
as the initial studies of the sachet formulation. Because of wide variations in
the data, an additional study with a larger number of subjects will be required
to definitively determine the relative bioavailability of the tablet formulation
as compared to standard erythromycin. A study plan was reviewed by the FDA.
There can be no assurance that this study will demonstrate enhanced
bioavailability. Management of the Company does not have sufficient data to be
able to accurately predict the outcome of the studies at this time. A portion of
the proceeds of this Offering may be used to fund this study. Should this study
be successful, the Company intends to seek collaborative partners to assist in
further development and marketing of this product.
ALPHANON(R)
Alphanon, the Company's original product, was designed for the systemic
treatment of hemorrhoids. The drug was originally developed as a liquid
formulation for intra-navel transdermal application. A double blind placebo
controlled study conducted in France in the late 1980's in 220 patients
demonstrated that Alphanon was effective in the treatment of hemorrhoids and
hemorrhoidal bleeding. This study was not conducted in complete compliance with
Good Clinical Practices.
A transdermal patch, a more convenient formulation, has been developed with
ALZA Corporation, and an IND is on file with the FDA. The Company satisfactorily
completed a Phase I clinical study in December 1992 and is evaluating its
alternatives which include continuing development, co-development or
divestiture. The Company has discontinued all sales and marketing efforts as
well as further research and development related to Alphanon pending a decision
regarding such alternatives.
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OTHER PRODUCTS
Azaquinone Analogues. The development of the original azaquinone compound
was discontinued by the Company in 1994, however, numerous analogues were
synthesized by the Company as part of the development process. Initial in vitro
screening showed promising activity against Mycobacterium avium complex (MAC).
The Company plans to continue limited additional research on these analogues.
The Kuzell Institute in San Francisco, California, under a grant from the
National Institutes of Health, is currently conducting research into the
efficacy of azaquinone. Should the results of this testing show that an
azaquinone analogue has enough unique qualities to distinguish it from other
similar products, the Company plans to apply for a patent, and ultimately sell
the rights to this compound.
Phenantramine Analogue. Phenantramine analogue is a pre-clinical stage
antimalarial which has shown effectiveness against sensitive and resistant
strains of Plasmodium falciparum. It is currently being reviewed for possible
co-development by an unrelated third party. The Company is planning no
additional in-house research and development activity at this time with respect
to this compound.
PARTNERSHIP VENTURE
In March 1994 the Company formed a partnership, through Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation, which is headquartered in New York City, and planned to
market, through this partnership, a range of hydrogel based feminine health care
products, including a contraceptive, an antiseptic, an antifungal and an
antibacterial. In December 1994, the Company commenced litigation against its
partner claiming interference in the management of the partnership and
misrepresentation under the Partnership Agreement. On January 12, 1996 the Court
ruled that the Company's reliance on its partner's misrepresentation was not
justified and that the Company had performed its obligations under the agreement
with its partner. Accordingly, the Company's claims as well as the counterclaims
of its partner were dismissed. Pending resolution of this dispute, the
partnership is not actively engaged in the development of any products. The
Company believes that while introduction of the first product, a contraceptive,
is possible in 1996, such introduction is dependent upon a prompt and favorable
resolution of the Company's dispute with its partner which would include the
receipt by the Company of the rights to such products. See "Legal Proceedings."
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company purchases, in the ordinary course of business, necessary raw
materials and supplies essential to the Company's operations from numerous
suppliers. There have been no availability problems or supply shortages nor are
any anticipated.
PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS
Although few of the products currently being sold by the Company are
protected by patents owned by the Company, the Company believes that patent and
trademark protection of the results of the Company's research and development
efforts will be an essential component to the future success of the Company.
Accordingly, where possible, patents and trademarks will be sought and obtained
in the United States and in all countries of principal market interest to the
Company.
Patents for Biolid were granted in the U.S. in June 1992 and in the
following European countries in January 1994: Austria, Belgium, Italy,
Liechtenstein, Netherlands, Sweden, Switzerland, U.K., Germany and France. A
patent for Biolid in Venezuela was granted in September 1995. A U.S. patent for
Phenantramine was granted in October 1993. Trademarks for Biolid are currently
registered in France, Ireland, Portugal, Sweden and the U.K. Alphanon trademarks
are currently registered in the U.S. and Australia.
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<PAGE>
In addition, Laboratorios Belmac owns 50 trademarks for pharmaceutical
products and one patent for enalapril (which expires in 2005) which were granted
by Spain's Bureau of Patents and Trademarks. In Spain, patents expire after 20
years and trademarks expire after 10 years, but can be renewed. All prescription
pharmaceutical products marketed by Laboratorios Belmac in Spain have been
registered with and approved by Spain's Ministry of Health. To register a
pharmaceutical with the Ministry requires the submission of a registration
dossier which includes all pre-clinical, clinical and manufacturing information.
The registration process generally takes approximately two years. There can be
no assurance that a competitor has not or will not submit additional
registrations for products substantially similar to those marketed by
Laboratorios Belmac.
COMPETITION
All of the Company's current and future products face competition both from
existing drugs and products and from new drugs and products being developed by
others. This competition potentially includes national and multi-national
pharmaceutical and health care companies of all sizes. Many of these other
pharmaceutical and health care concerns have greater financial resources,
technical staffs and manufacturing and marketing capabilities than the Company.
Acceptance by hospitals, physicians and patients is crucial to the success of a
pharmaceutical or health care product.
The Company competes primarily in France and Spain, which are large,
developed population centers in Europe with populations of approximately
58,000,000 and 39,000,000 people, respectively. In addition, since both
countries are members of the European Union, the Company expects to be able to
target the European Union's larger population of approximately 442,000,000 as
integration eliminates the barriers between countries.
Laboratorios Belmac competes with both large multinational companies and
local companies which produce most of the products Laboratorios Belmac
manufactures on the basis of service and its concentration on select product
lines. For example, there are currently 23 companies which market and sell
omeprazole, such as Schering-Plough, S.A. Similarly, 20 companies currently sell
enalapril, with Merck, Sharp & Dome de Espana, S.A. being the product leader.
Others of the products sold by Laboratorios Belmac, such as Onico-Fitex, are
more unusual and have fewer competitors. The contract manufacturing performed by
Laboratorios Belmac has a number of competitors, including Tadec Meiji Farma,
Bama Geve, ReigJofre, Aristegui, and Fournier, S.A.
Chimos, as a distributor and broker of fine chemicals, pharmaceutical
intermediates and biotechnology products, competes with numerous multinational
companies as well as companies in France, resulting in low product margins
despite high volume. Competition in the supply and distribution of
pharmaceutical intermediates is particularly strong from a large number of small
companies located in Italy, India, Pakistan and China. Certain large
multinational companies also compete in the distribution of fine chemicals
including Abbott Laboratories--Chemicals Division, The UpJohn Co. and Bayer A.G.
The biotechnology industry is currently less competitive as many of such
products are Orphan Drugs with low volumes.
CUSTOMERS
The incidence of certain infectious diseases which occur at various times in
different areas of the world affects the demand for the Company's antibiotic
products when they are marketed in each area. Orders for the Company's products
are generally filled on a current basis, and no order backlog existed at
September 30, 1995 or December 31, 1994. Sales of approximately $6,024,000 and
$8,000,000 to Pharmacie Centrale des Hopitaux accounted for approximately 26%
and 30%, of the Company's sales for the nine months ended September 30, 1995 and
for the year ended December 31, 1994, respectively. The Company expects that the
loss of this customer would have a material short-term adverse effect on the
Company's business. No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts at the election of any
governmental authority.
34
<PAGE>
RESEARCH AND DEVELOPMENT
In addition to various executive and administrative functions, the Tampa,
Florida headquarters of the Company serves as a site for limited research and
development activities. Research and development activities have also been
performed, under contract, by various universities and consulting research
laboratories. The Company has a research and development portfolio of four
pharmaceutical products, with a primary focus on anti-infectives. See
"--Products under Development." These products are protected by two patents and
one patent application in the United States. Patent and patent applications have
also been filed in other countries of marketing interest to the Company. INDs
are on file with the FDA for the macrolide antibiotic, Biolid, and the
transdermal anti-hemorrhoidal patch, Alphanon.
The Company spent $341,000 in the nine months ended September 30, 1995,
$759,000 in the year ended December 31, 1994, $1,555,000 in the year ended
December 31, 1993, $3,599,000 in the six months ended December 31, 1992, and
$5,168,000 in the year ended June 30, 1992 on research and development to
discover and develop new products and processes and to improve existing products
and processes. Expenditures were concentrated in the development of products for
the treatment of infectious diseases. These decreases are a result of a thorough
review of research and development activities with the establishment of
priorities based on both technical and commercial criteria. The Company intends
to continue to carefully manage such expenditures in view of its limited
resources. A portion of the proceeds of this Offering is intended to be used for
further research and development activities. See "Use of Proceeds."
Laboratorios Belmac is engaged in limited research of drug delivery systems
("DDS"), such as sustained release and time release formulations, through a
collaborative venture with a customer. Laboratorios Belmac plans to commence
clinical studies of the drug Cisapride, a motility product used for the
treatment of gastrointestinal disorders, in collaboration with another entity
and a study of the sachet formulation of Biolid in the next year.
REGULATION
The development, manufacture, sale, and distribution of the Company's
products are subject to comprehensive government regulation, and the general
trend is toward more stringent regulation. Government regulation, which includes
detailed inspection of and controls over research laboratory procedures,
clinical investigations, and manufacturing, marketing, and distribution
practices by various federal, state, and local agencies, substantially increases
the time, difficulty and cost incurred in obtaining and maintaining the approval
to market newly developed and existing products.
United States. The steps required before a pharmaceutical agent may be
marketed in the United States include (i) preclinical laboratory and animal
tests, (ii) the submission to the FDA of an IND, which must become effective
before human clinical trials may commence, (iii) adequate and well-controlled
human clinical trials to establish the safety and efficacy of the drug, (iv) the
submission of New Drug Application ("NDA") to the FDA, and (v) the FDA approval
of the NDA prior to any commercial sale or shipment of the drug. In addition to
obtaining FDA approval for each product, each domestic drug manufacturing
establishment must be registered with the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with current GMPs for drugs. To supply products for use in the United States,
foreign manufacturing establishments must comply with GMPs and are subject to
periodic inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Clinical trials are typically conducted in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into healthy
human volunteers, the emphasis is on testing for safety (adverse effects),
dosage tolerance, metabolism, excretion and clinical pharmacology. Phase II
involves studies in a limited patient population to determine the efficacy of
the pharmaceutical for specific targeted indications, to determine dosage
tolerance and optimal dosage and to identify possible adverse side effects and
safety risks. Once a compound is found to be effective and to have an acceptable
35
<PAGE>
safety profile in Phase II evaluations, Phase III trials are undertaken to
evaluate clinical efficacy further and to further test for safety within an
expanded patient population at multiple clinical study sites. The FDA reviews
both the clinical plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.
The results of the preclinical and clinical trials are submitted to the FDA
in the form of a NDA for marketing approval. The approval process is affected by
a number of factors, including the severity of the disease, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review process and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials would be necessary to gain approval
for the use of the product for any additional indications. The FDA may also
require post-marketing testing to monitor for adverse effects, which can involve
significant expense.
Under the Orphan Drug Act, the FDA may designate a product or products as
having Orphan Drug status to treat a "rare disease or condition," which is a
disease or condition that affects populations of less than 200,000 individuals
in the United States or, if victims of a disease number more than 200,000, the
sponsor establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs. If a product is designated an Orphan
Drug, then the sponsor is entitled to recover its costs and the sponsor is
entitled to receive certain incentives to undertake the development and
marketing of the product, including limited tax credits and high-priority FDA
review of an NDA. In addition, the sponsor that obtains the first marketing
approval for a designated Orphan Drug for a given indication is eligible to
receive marketing exclusivity for a period of seven years.
Spain. As a manufacturer in Spain, which is a member of the European Union,
Laboratorios Belmac is subject to the regulations enacted by the European Union.
Prior to Spain's entry into the European Union in 1993, the pharmaceutical
regulations in Spain were less stringent and Laboratorios Belmac, along with all
Spanish companies, have had to modify their procedures to adapt to the new
regulations, which are nearly identical to the regulations promulgated by the
United States Food & Drug Administration discussed above. In general, these
regulations are consistent with the FDA and require a manufacturer of a proposed
pharmaceutical to show efficacy and safety. The development process in Spain
goes through the same phases (e.g. I, II, III) as in the United States to assure
their safety and efficacy. A dossier on each pharmaceutical is prepared which
takes approximately two years for review by the Ministry of Health. They then
can only be sold to the public with a prescription from a medical doctor.
As most of the pharmaceuticals Laboratorios Belmac produces are subject to
this regulatory process, its business can be materially affected by any change
in existing regulations. Currently, Laboratorios Belmac has submitted two
products for regulatory review by the Spanish Ministry of Health, cisapride and
diclofenac, which will be marketed once approved. In addition, Laboratorios
Belmac markets 14 products and has two products which have been approved and are
in pre-marketing stages.
France. Most of the activities of Chimos are not regulated by France's
Ministry of Health, since pharmaceuticals in France are regulated at the level
of the manufacturer, as they produce the products, and pharmacists, as they
distribute the products to the public. Chimos' distribution activities are not
regulated. Chimos has had one regulatory submission at the Ministry of Health
for Biolid. See "--Products under Development--Biolid."
General. Continuing studies of the utilization, safety, and efficacy of
health care products and their components are being conducted by industry,
government agencies, and others. Such studies, which employ increasingly
sophisticated methods and techniques, can call into question the utilization,
safety, and efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of such products
and give rise to claims for damages from persons
36
<PAGE>
who believe they have been injured as a result of their use. The Company has
product liability insurance for such potential claims, however, no such claims
have ever been asserted against the Company.
The cost of human health care continues to be a subject of investigation and
action by governmental agencies, legislative bodies, and private organizations.
In the United States, most states have enacted generic substitution legislation
requiring or permitting a dispensing pharmacist to substitute a different
manufacturer's version of a drug for the one prescribed. Federal and state
governments continue their efforts to reduce costs of subsidized heath care
programs, including restrictions on amounts agencies will reimburse for the use
of products. Efforts to reduce health care costs are also being made in the
private sector. Health care providers have responded by instituting various cost
reduction and containment measures of their own. It is not possible to predict
the extent to which the Company or the health care industry in general might be
affected by the matters discussed above.
Many countries, directly or indirectly through reimbursement limitations,
control the selling price of certain health care products. Furthermore, many
developing countries limit the importation of raw materials and finished
products. In western Europe, efforts are under way by the European Union to
harmonize technical standards for many products, including drugs and medical
devices, and to make more uniform the requirements for marketing approval from
the various ministries of health.
Although the Company recently began marketing disposable linen products in
the United States, the majority of the Company's sales are in France and Spain.
International operations are subject to certain additional risks inherent in
conducting business outside the United States, including price and currency
exchange controls, changes in currency exchange rates, limitations on foreign
participation in local enterprise, expropriation, nationalization, and other
governmental action.
To the best of its knowledge, the Company is presently in substantial
compliance with all existing applicable environmental laws and does not
anticipate that such compliance will have a material effect on its future
capital expenditures, earnings or competitive position with respect to any of
its operations.
EMPLOYEES
The Company and its subsidiaries employ approximately 83 people, 9 of whom
are employed in the United States, 5 in France and 69 in Spain as of February
12, 1996. Of such employees, approximately 29 are principally engaged in
manufacturing activities, 34 in sales and marketing, 2 in research and
development and 18 in management and administration. In general, the Company
considers its relations with its employees to be good.
FACILITIES
UNITED STATES
The Company's corporate headquarters are located in Tampa, Florida where the
Company leases approximately 14,000 square feet of office space, which leases
expire in 1998.
SPAIN
Manufacturing is performed at the Company's facilities in Zaragoza, Spain.
These facilities have been renovated recently to comply with the requirements
for good manufacturing practices (GMPs). The facilities, which are owned by the
Company, consist of approximately 45,000 square feet located in a prime
industrial park and seated on sufficient acreage that would allow for future
expansion. The manufacturing facility is capable of producing tablets, capsules,
suppositories, creams, ointments, lotions, liquids and sachets, as well as
microgranulated and microencapsulated products. The facility also includes
analytical chemistry, quality control and quality assurance laboratories. The
GMPs certification allows the Company to undertake contract manufacturing for a
number of international pharmaceutical companies either engaged in or
contemplating emergence into the Spanish market. The
37
<PAGE>
Company's administrative offices in Spain are located in Madrid in approximately
3,000 square feet of newly renovated, leased offices which leases expire in
1998.
FRANCE
Chimos is located in Paris, France in leased office space of approximately
2,000 square feet which leases expire in 1998. Manufacturing is contracted out
to SPNE, a semiprivate/government organization, outside of Paris.
LEGAL PROCEEDINGS
Belmac Hygiene, Inc. ("Hygiene"), a subsidiary of the Company, filed an
action on December 9, 1994 in the United States District Court for the Southern
District of New York against Medstar, Inc. ("Medstar"), Maximed, Inc.
("Maximed") and Robert S. Cohen. The defendants are Hygiene's partners (or such
partner's control persons) in the Company's partnership with Maximed (the
"Partnership"), which was formed for the development and ultimate sale of
Maximed's intra-vaginal controlled release products. The action sought (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's representatives, and (ii) to recover damages as a result of
defendants' misrepresentations and breach of warranty in the Partnership
agreement. The defendants filed a counterclaim against Hygiene. Medstar also
filed a separate action on May 4, 1995 in the United States District Court for
the Southern District of New York against the Company alleging that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Company pursuant
to its guaranty of Hygiene's obligations. The issues were tried, without a jury,
on August 21 through 23, 1995. Thereafter, post-trial briefs and proposed
findings of fact and conclusions of law were submitted, and argument was heard
on October 25, 1995. On January 12, 1996, the Court ruled that the Company's
reliance on defendants' misrepresentation was not justified and that the Company
had performed its obligations under the Partnership agreement. Accordingly, the
Court rendered its decision dismissing all claims and counter-claims asserted by
the parties. The Company is assessing its options as to a possible appeal to the
decision.
Michael M. Harshbarger, a former member of the Company's Board of Directors
and its former President and Chief Executive Officer, filed a suit against the
Company in November 1993 in the Circuit Court of the Thirteenth Judicial
Circuit, State of Florida, Hillsborough County Civil Division alleging wrongful
termination. The plaintiff is seeking monetary damages in excess of $1,400,000.
The Company views his claim as meritless and intends to vigorously oppose it.
The Company has filed a counterclaim against Harshbarger for wrongful conversion
and civil theft, fraud and deceit, and breach of contract, seeking the return of
corporate assets removed by Harshbarger and for restitution related to expenses
of a personal nature that he charged to the Company's accounts. The Company is
currently amending its counterclaim to include breach of fiduciary duty. The
Company is seeking damages from Harshbarger relating to its counterclaim in
excess of $1,000,000.
38
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY MANAGERS
The directors, executive officers and key managers of the Company are as
follows:
<TABLE>
<CAPTION>
CLASS
POSITIONS WITH OF
NAME AGE THE COMPANY DIRECTOR*
--- --- -------------- ---------
<S> <C> <C> <C>
James R. Murphy....................... 45 Chairman, President, Chief Executive
Officer and Director III
Robert M. Stote, M.D.................. 56 Senior Vice President, Chief Science
Officer and Director III
Michael D. Price...................... 38 Vice President, Chief Financial
Officer, Treasurer, Secretary and
Director II
Randolph W. Arnegger.................. 51 Director II
Charles L. Bolling.................... 72 Director II
Doris E. Wardell...................... 56 Director I
Denis Nicolas......................... 75 President of Chimos
Clemente Gonzalez Azpeitia, M.D....... 55 General Manager of Laboratorios Belmac
Jose M. Esteve Serrano................ 59 Controller of Laboratorios Belmac
</TABLE>
Set forth below is a biographical description of each executive officer,
director and key employee of the Company:
JAMES R. MURPHY became President and Chief Operating Officer of the Company
on September 7, 1994 and was named Chief Executive Officer effective January 1,
1995 and became Chairman of the Board on June 9, 1995. Prior to rejoining the
Company, Mr. Murphy served as Vice President of Business Development at
MacroChem Corporation, a publicly owned pharmaceutical company, from March 1993
through September 1994. From September 1992 until March 1993, Mr. Murphy served
as a Consultant to the pharmaceutical industry with his primary efforts directed
toward product licensing. Prior thereto, Mr. Murphy served as Director-Worldwide
Business Development and Strategic Planning of the Company from December 1991 to
September 1992. Mr. Murphy previously spent 14 years in basic pharmaceutical
research and product development with SmithKline Corporation and in business
development with contract research laboratories. Mr. Murphy received a B.A. in
Biology from Millersville University. He has been a Director of the Company
since 1993.
ROBERT M. STOTE, M.D. became Senior Vice President and Chief Science Officer
of the Company in March 1992. Prior to joining Bentley Pharmaceuticals, Inc.,
Dr. Stote was employed for 20 years by SmithKline Beecham Corporation serving as
Senior Vice President and Medical Director, Worldwide Medical Affairs from 1989
to 1992, and Vice President-Clinical Pharmacology-Worldwide from 1987 to 1989.
From 1984 to 1987 Dr. Stote was Vice President-Phase I Clinical Research, North
America. Dr. Stote was Chief of Nephrology at Presbyterian Medical Center of
Philadelphia from 1972 to 1989 and was Clinical Professor of Medicine at the
University of Pennsylvania. Dr. Stote received a B.S. in Pharmacy from the
Albany College of Pharmacy, an M.D. from Albany Medical College and is Board
Certified in Internal Medicine and Nephrology. He was a Fellow in Nephrology and
Internal Medicine at the Mayo Clinic and is currently a Fellow of the American
College of Physicians. He has been a Director of the Company since 1993.
MICHAEL D. PRICE became Chief Financial Officer, Vice President/Treasurer
and Secretary of the Company in October 1993, April 1993 and November 1992,
respectively. He has served the Company
- ------------
* The Company's Amended and Restated Articles of Incorporation and By-laws
provide for a classified Board of Directors. The Board is divided into three
classes designated Class I, Class II and Class III, with terms expiring at the
1997, 1998 and 1996 annual meeting of stockholders, respectively.
39
<PAGE>
in other capacities since March 1992. Prior to joining the Company, Mr. Price
was employed as a financial and management consultant with Carr Financial Group
in Tampa, Florida from March 1990 to March 1992. Prior thereto, he was employed
as Vice President of Finance with Premiere Group, Inc., a real estate developer
in Tampa, Florida from June 1988 to February 1990. Prior thereto, Mr. Price was
employed by Price Waterhouse in Tampa, Florida from January 1982 to June 1988
where his last position with that firm was as an Audit Manager. Mr. Price
received a B.S. in Business Administration with a concentration in Accounting
from Auburn University and an M.B.A. from Florida State University. Mr. Price is
a Certified Public Accountant in the State of Florida. He has been a Director of
the Company since January 1995.
RANDOLPH W. ARNEGGER is the President of Vantage Point Marketing, a
developer and producer of continuing medical education programs, medically
oriented direct mail programs, and medical convention programs, a position he
has held since 1986. Prior thereto, Mr. Arnegger served as Vice President of
Account Services for Curtin & Pease/Peneco, a national direct mail firm, and
Vice President for Pro Clinica, a medical advertising agency in New York. He has
been a Director of the Company since 1994.
CHARLES L. BOLLING served from 1968 to 1973 as Vice President of Product
Management and Promotion (U.S.), from 1973 to 1977 as Vice President of
Commercial Development and from 1977 to 1986 as Director of Business Development
(International) at Smith Kline & French Laboratories. Mr. Bolling has been
retired since 1986. He has been a Director of the Company since 1991.
DORIS E. WARDELL has been Assistant Professor/Clinical Services Coordinator
at the University of Utah College of Nursing since April 1994, and was
previously involved in Integrated Care special projects at Allegheny General
Hospital, serving as Acting Vice President of Nursing at Allegheny General
Hospital from September 1992 to June 1994 and Assistant Vice President of
Nursing from December 1989 to September 1992. Prior thereto, Mrs. Wardell served
as Vice President of Administration at Beaver Medical Center from April 1987 to
November 1989. From March 1980 to April 1987, she was employed by Chestnut Hill
Hospital as Vice President of Nursing and Director of Nursing Services from
August 1978 to March 1980. She has been a Director of the Company since 1994.
DENIS NICOLAS has been the President of Chimos since he was one of its
founders in 1964. Mr. Nicolas' expertise is in the sourcing of fine chemicals
and pharmaceutical raw materials from manufacturers around the world.
CLEMENTE GONZALEZ AZPEITIA has been the General Manager of Laboratorios
Belmac since 1993. From 1987 through 1992, Mr. Gonzalez was a business director
and then a sales director of CEPA, a pharmaceutical company in Spain. From 1969
to 1987, he was employed by the Berenguer-Beneyto Laboratory, first as head of
the research department and later as director of medicine and director of
marketing. Mr. Gonzalez received a medical degree from the University of Madrid.
JOSE M. ESTEVE SERRANO has been the Controller of Laboratorios Belmac since
April 1995. From 1986 through that time he was the financial director of Auto
Suture Espana S.A., the subsidiary in Spain of U.S. Surgical Corporation. From
1983 through 1986, Mr. Esteve was the Controller of Det Norske Veritas Spain, a
shipping services group in Madrid with headquarters in Norway. Prior thereto he
held a number of financial positions in businesses and banks in New York and
Madrid. Mr. Esteve has M.A. degrees in Law and in Economics from the University
of Madrid and an M.B.A. from New York University.
The Company is currently in arrears on two annual dividend payments on its
Series A Preferred Stock and therefore, the holders of the Series A Preferred
Stock have the right, as a class, to elect two additional members of the
Company's Board of Directors. As of the date hereof, the holders have not
exercised such right.
40
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee recommends to the Board of Directors the appointment of
independent accountants to audit the Company's consolidated financial
statements, reviews the Company's internal control procedures and advises the
Company on tax and other matters connected with the growth of the Company. The
Audit Committee also reviews with management the annual audit and other work
performed by the independent accountants. The Company's Compensation Committee
administers the Company's 1991 Stock Option Plan and reviews and recommends to
the Board of Directors the nature and amount of compensation to be paid to the
Company's executive officers. The Audit Committee consists of Messrs. Arnegger,
Bolling and Price. The Compensation Committee consists of Mrs. Wardell and
Messrs. Arnegger and Bolling.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued by the
Company to or for the account of the current Chief Executive Officer and each
person who served as Chief Executive Officer during 1994, and the executive
officers at December 31, 1994 whose total cash compensation for the year ended
December 31, 1994 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS
---------------------- PAYOUTS
SECURITIES -------
ANNUAL COMPENSATION OTHER RESTRICTED UNDERLYING LTIP ALL
-------------------------------- ANNUAL STOCK OPTIONS/ PAYOUTS OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) COMP($) AWARDS($) SARS(#) ($) COMP(2)
- -------------------------------------------- ----------- --------- -------- -------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Murphy(3).......................... Y/E12/31/94 $55,903 $-- $-- $685 -- $-- $12,000
Chairman, President and Chief Executive
Officer
Robert M. Stote, M.D. (4)................... Y/E12/31/94 200,000 -- 27,000 -- -- -- --
Senior Vice President and Chief Science Y/E12/31/93 211,538 -- -- 2,375 20,000 --
Officer Six months --
ended -- -- -- --
12/31/92 100,000 -- -- 15,000 --
Y/E 6/30/92 66,667
Michael D. Price(5)......................... Y/E12/31/94 100,000 -- -- -- -- -- --
Vice President, Chief Financial Officer, Y/E12/31/93 90,525 -- -- 2,375 9,000 -- --
Treasurer and Secretary
Ranald Stewart, Jr.(6)...................... Y/E12/31/94 -- -- 162,000 157,500 20,000 -- --
Former Chairman of the Board, Former Chief Y/E12/31/93 -- -- 106,200 4,500 20,000 -- --
Executive Officer and Director
Donald E. Boultbee(7)....................... Y/E12/31/94 166,667 -- -- 333 -- -- --
Former President and Former Chief Executive Y/E12/31/93 83,333 -- -- -- 10,000 -- --
Officer
</TABLE>
- ------------
(1) The Company changed its fiscal year from June 30 to December 31 commencing
with the six month transition period ended December 31, 1992.
(2) The value of perquisites provided to the named executive officers did not
exceed 10% of total compensation in any case.
(3) Mr. Murphy, Chairman, President and Chief Executive Officer, has been
employed by the Company since September 1994. Mr. Murphy's annual salary is
currently $225,000. During the year ended December 31, 1994, Mr. Murphy was
reimbursed $12,000 for costs related to his relocation upon accepting
employment with the Company. During the nine months ended September 30,
1995, Mr. Murphy was awarded stock options to purchase 50,000 shares of
Common Stock at $3.75 per share, 50% of which vest on June 12, 1996 and the
balance of which vest on June 12, 1997. During the year ended December 31,
1994, Mr. Murphy was awarded stock options to purchase 2,000 shares of
Common Stock at $11.25 per share upon his election to the Board of Directors
on June 9, 1994. Of these options, 1,000 options vested on June 9, 1995 and
the remaining
(Footnotes continued on following page)
41
<PAGE>
(Footnotes continued from preceding page)
1,000 options are scheduled to vest on June 9, 1996. Compensation for
services rendered in other capacities prior to becoming an executive officer
of the Company is excluded. Prior to becoming an executive officer, in his
capacity as an outside Director, Mr. Murphy was awarded 137 shares of Common
Stock for services rendered in 1994 as a Committee Member of the Board of
Directors.
(4) Dr. Stote, Senior Vice President and Chief Science Officer, has been
employed by the Company since March 1992. Dr. Stote's annual salary is
currently $215,000. During the nine months ended September 30, 1995, Dr.
Stote was awarded stock options to purchase 37,500 shares of Common Stock at
$3.75 per share, 50% of which vest on June 12, 1996 and the balance of which
vest on June 12, 1997. During the year ended December 31, 1993, Dr. Stote
was awarded stock options to purchase 20,000 shares of Common Stock at
$20.00 per share, all of which are fully vested. Also during the year ended
December 31, 1993, Dr. Stote was awarded 100 shares of the Company's
restricted Common Stock. During the year ended June 30, 1992, Dr. Stote was
awarded stock options to purchase 15,000 shares of Common Stock at $142.50
per share, as to which 11,250 have vested and 3,750 are scheduled to vest on
March 2, 1996. Dr. Stote was reimbursed $22,340 during the six months ended
December 31, 1992 and $14,854 during the year ended December 31, 1993 for
costs related to his relocation upon accepting employment with the Company.
(5) Mr. Price, Vice President, Chief Financial Officer, Treasurer, and Secretary
has been employed by the Company since March 1992. Mr. Price's annual salary
is currently $115,000. During the nine months ended September 30, 1995, Mr.
Price was awarded stock options to purchase 22,500 shares of Common Stock at
$3.75 per share, 50% of which vest on June 12, 1996 and the balance of which
vest on June 12, 1997. During the year ended December 31, 1993, Mr. Price
was awarded stock options to purchase 9,000 shares of Common Stock at $20.00
per share, all of which are fully vested. Also during the year ended
December 31, 1993, Mr. Price was awarded 100 shares of the Company's
restricted Common Stock. During the year ended June 30, 1992, Mr. Price was
awarded stock options to purchase 1,000 shares of Common Stock at $145.00
per share, all of which are fully vested. Compensation for services rendered
in other capacities prior to becoming an executive officer of the Company is
excluded.
(6) Mr. Stewart was a Director of the Company from 1986 to June 1995 and served
as Chairman of the Board from February 26, 1993 until December 31, 1994. He
served in the capacity of interim Chief Executive Officer during the period
July 15, 1993 through September 1, 1993 (the date Mr. Boultbee was engaged
as President and Chief Executive Officer) and from September 1, 1994 (the
date of Mr. Boultbee's resignation) through December 31, 1994 (the date that
Mr. Murphy was named Chief Executive Officer). Mr. Stewart received a
Chairman's fee of $162,000 in 1994 and also received 6,000 shares of Common
Stock as compensation for services rendered in 1993. Mr. Stewart was also
awarded an additional 6,000 shares of Common Stock in December 1995 as
compensation for serving as Chairman in 1994. Mr. Stewart was also granted
stock options in 1994 to purchase 20,000 shares of Common Stock at $5.63 per
share. Mr. Stewart received a Chairman's fee of $106,200 in 1993. During the
year ended December 31, 1993, Mr. Stewart was granted stock options to
purchase 20,000 shares of Common Stock at $20.00 per share. In 1994, Mr.
Stewart also received a grant of 200 shares of Common Stock, as compensation
for serving on a Committee of the Company's Board of Directors. Outside
Director's fees prior to becoming an executive officer of the Company are
excluded.
(7) Mr. Boultbee served as President and Chief Executive Officer of the Company
from September 1, 1993 through August 31, 1994 at an annual salary of
$250,000 and as a Director from April 1994 through December 31, 1994. Mr.
Boultbee was granted stock options in 1993 to purchase 10,000 shares of
Common Stock at $19.38 per share which options expired unexercised. Mr.
Boultbee was awarded 67 shares of Common Stock for services rendered in 1994
as a Committee Member of the Board of Directors.
42
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the details of options granted to the
individuals listed in the Summary Compensation table during the year ended
December 31, 1994. No stock appreciation rights have been granted to date.
OPTION/SAR GRANTS IN THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES
INDIVIDUAL GRANTS OF STOCK
----------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS/SARS EXERCISE FOR OPTION
UNDERLYING GRANTED TO OR BASE TERMS
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ------------------------------------------- ---------- ------------ --------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James R. Murphy(1)......................... 2,000 6.0% $ 11.25 06/09/04 -- $2,258
Robert M. Stote, M.D....................... -- -- -- -- -- --
Michael D. Price........................... -- -- -- -- -- --
Ranald Stewart, Jr.(2)..................... 20,000 59.5% 5.63 12/31/94 -- --
3,000 9.0% 11.25 06/09/04 -- 3,387
Donald E. Boultbee......................... -- -- -- -- -- --
</TABLE>
- ------------
(1) Mr. Murphy was granted ten-year options in 1994 to purchase 2,000 shares of
Common Stock at $11.25 per share under the 1991 Stock Option Plan (see Stock
Option Plans ), upon his election as an outside Director in June 1994 (prior
to becoming an executive officer). The options were granted at their fair
market value ($11.25) on the date of grant. Of these options, 1,000 options
vested on June 9, 1995 and the remaining 1,000 options are scheduled to vest
on June 9, 1996.
(2) Mr. Stewart was granted ten-year options in 1994 to purchase 20,000 shares
of Common Stock at $5.63 per share under the 1991 Stock Option Plan (see
"Stock Option Plans"). The options were granted at their fair market value
($5.63) on the date of grant. Mr. Stewart was also granted ten-year options
to purchase 3,000 shares of Common Stock at $11.25 per share under the 1991
Stock Option Plan upon his election as an outside Director in June 1994
(prior to becoming an executive officer). The options were granted at their
fair market value ($11.25) on the date of grant and expired unexercised.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information concerning the number of
shares of Common Stock acquired upon the exercise of stock options during the
year ended December 31, 1994 by, and the number and value at December 31, 1994
of shares of Common Stock subject to unexercised options held by, the
individuals listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (# SHARES) FY-END ($)
SHARES ----------------- -----------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
- ----------------------------------- --------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
James R. Murphy.................... -- -- 1,000 / 2,000 -0- / -0-
Robert M. Stote, M.D............... -- -- 21,250 / 13,750 -0- / -0-
Michael D. Price................... -- -- 5,500 / 4,500 -0- / -0-
Ranald Stewart, Jr................. -- -- 5,200 / 2,000 -0- / -0-
Donald E. Boultbee................. -- -- -0- / -0- -0- / -0-
</TABLE>
- ------------
(1) Represents the closing price of the Company's Common Stock on the American
Stock Exchange on December 30, 1994 minus the respective exercise prices.
43
<PAGE>
REMUNERATION OF CHAIRMAN OF THE BOARD AND NON-EMPLOYEE DIRECTORS
The Company pays non-employee Director fees equal to $12,000 per year for
attendance at meetings and reimburses expenses incurred in attending meetings.
Total non-employee Director fee payments during the year ended December 31, 1994
were $44,000 and expenses incurred by non-employee Directors in attending
meetings which were reimbursed by the Company totaled $5,060. Total Chairman's
fee paid to or accrued for the benefit of Ranald Stewart, Jr., former Chairman
of the Board and Chief Executive Officer of the Company during the year ended
December 31, 1994 was $162,000. Mr. Stewart, in his capacity as Chairman, was
also issued 6,000 shares of Common Stock in 1994, with a fair market value of
$127,500 for services provided in 1993 and has been awarded an additional 6,000
shares of Common Stock in 1995 with a fair market value of $33,750 for services
provided in 1994. During 1994, Mr. Stewart also received options to purchase
20,000 shares of Common Stock. In addition, options to purchase 1,000 shares of
Common Stock are automatically granted to each non-employee Director upon his or
her election or reelection to the Board for each year of the term for which he
or she is elected. The options vest as to 1,000 shares at the end of each year
of such term. During the year ended December 31, 1994, the Company granted to
the individuals who served as non-employee Directors during such fiscal year,
options to purchase an aggregate of 8,800 shares of Common Stock in recognition
of such services. The options which were granted pursuant to the 1991 Stock
Option Plan, are exercisable for ten years (commencing one year from the date of
the grant) at exercise prices ranging from $6.88 to $11.25 per share
(representing the fair market value of the Common Stock on the date of grant).
Non-employee Directors who serve on committees of the Company's Board of
Directors are awarded 200 shares of Common Stock annually. During the fiscal
year ended December 31, 1994, no such shares of Common Stock were granted to
non-employee Directors; however, 817 shares were granted in 1995 to such
individuals for services rendered during 1994.
EMPLOYMENT AGREEMENTS
Mr. James R. Murphy, Chairman of the Board, President and Chief Executive
Officer, entered into an employment agreement with the Company dated as of June
12, 1995 providing for an initial term which expires on June 12, 1998. Under the
terms of this agreement, Mr. Murphy's annual base salary is $225,000. The
agreement with Mr. Murphy also provides for bonuses at the recommendation and
discretion of the Compensation Committee of the Company's Board of Directors and
a severance payment equal to two years salary and immediate vesting of all
outstanding stock options upon termination following a change in control of the
Company. Pursuant to the agreement, if terminated without cause, Mr. Murphy will
be entitled to a severance payment equal to one year salary and immediate
vesting of all outstanding stock options.
Dr. Robert M. Stote, Senior Vice President and Chief Science Officer,
entered into an employment agreement with the Company dated as of June 12, 1995
providing for an initial term which expires on June 12, 1998. Under the terms of
this agreement, Dr. Stote's annual base salary is $215,000. The agreement with
Dr. Stote also provides for bonuses at the recommendation and discretion of the
Compensation Committee of the Company's Board of Directors and a severance
payment equal to two years salary and immediate vesting of all outstanding stock
options upon termination following a change in control of the Company. Pursuant
to the agreement, if terminated without cause, Dr. Stote will be entitled to a
severance payment equal to one year salary and immediate vesting of all
outstanding stock options.
44
<PAGE>
Mr. Michael D. Price, Vice President, Chief Financial Officer, Treasurer and
Secretary, entered into an employment agreement with the Company dated as of
June 12, 1995 providing for an initial term which expires on June 12, 1998.
Under the terms of this agreement, Mr. Price's annual base salary is $115,000.
The agreement with Mr. Price also provides for bonuses at the recommendation and
discretion of the Compensation Committee of the Company's Board of Directors and
a severance payment equal to two years salary and immediate vesting of all
outstanding stock options upon termination following a change in control of the
Company. Pursuant to the agreement, if terminated without cause, Mr. Price will
be entitled to a severance payment equal to one year salary and immediate
vesting of all outstanding stock options.
STOCK OPTION PLANS
The Company's Incentive Stock Option Plan and Non-Qualified Stock Option
Plan (the "Plans") were terminated by the Board of Directors pursuant to their
provisions on September 30, 1991. Although outstanding options were not affected
by such termination, options may no longer be granted thereunder. Options
granted under the Incentive Stock Option Plan to purchase shares of Common Stock
are intended to qualify as "incentive stock options" under Section 422A (now
Section 422) of the Internal Revenue Code of 1986, as amended (the "Code").
Participation in the Plans was limited to employees and Directors of the Company
selected by the Compensation Committee, which determined the number of shares
subject to any option, the option exercise price per share which could not be
less than 98% (in the case of the Non-Qualified Stock Option Plan) or 100% (in
the case of the Incentive Stock Option Plan) of the fair market value of the
Common Stock on the date of grant and the time period (which could not exceed
ten years from the date of grant) within which, and the conditions under which,
all or portions of each option could be exercised.
1991 STOCK OPTION PLAN
The Company's 1991 Stock Option Plan (the "1991 Plan") permits the grant of
up to an aggregate of 240,000 shares of Common Stock to promote the interests of
the Company in attracting and retaining employees (including officers) and
experienced and knowledgeable non-employee Directors for the Company and its
subsidiaries, by enabling them to acquire or increase a proprietary interest in
the Company, to benefit from appreciation in the value of the Company's Common
Stock and, thus, participate in the long-term growth of the Company. The 1991
Plan replaced the Plans (see "--Stock Option Plans") which terminated as to
future grants on September 30, 1991.
The 1991 Plan is administered by a committee of the Board of Directors of
not less than two Directors, each of whom must be "disinterested persons" within
the meaning of regulations promulgated by the Commission. The Board of Directors
has designated the Compensation Committee of the Board consisting of Mrs.
Wardell and Messrs. Arnegger and Bolling to administer the 1991 Plan. The
Compensation Committee has the authority under the 1991 Plan to determine the
terms of options granted under the 1991 Plan, including, among other things, the
individuals who shall receive options, the times when they shall receive them,
whether an incentive stock option and/or non-qualified option shall be granted,
the number of shares to be subject to each option, and the date or dates each
option shall become exercisable.
No options may be granted under the 1991 Plan after September 30, 2001. The
Board may amend, suspend or terminate the 1991 Plan or any portion thereof at
any time and from time to time in such respects as it deems necessary or
advisable (including without limitation to conform with applicable law or the
regulations or rulings thereunder), but may not without the approval of the
Company's shareholders make any alteration or amendment thereof which would (i)
change the class of those eligible to receive options, (ii) increase the maximum
number of shares for which options may be granted (except for anti-dilution
adjustments) or (iii) materially increase the benefits to participants under the
1991 Plan.
45
<PAGE>
During the fiscal year ended December 31, 1994, options to purchase 2,000,
23,000, and 28,600 shares of Common Stock, were granted to Mr. Murphy, Mr.
Stewart and all Executive Officers as a group, respectively. The options were
granted at prices ranging from $5.63 to $11.25, representing the fair market
value of the Common Stock on the dates of grant. The average exercise prices of
the options granted to Mr. Murphy, Mr. Stewart and all Executive Officers as a
group were $11.25, $6.38, and $7.20, respectively. Expiration dates of these
options range from June 9, 2004 to October 31, 2005.
Also during the fiscal year ended December 31, 1994, options to purchase
3,600 and 5,000 shares of Common Stock were granted to non-employee Directors of
the Company and to employees of the Company who are not executive officers,
respectively. Options granted to non-employee Directors were granted at prices
ranging from $6.88 to $11.25 per share, representing the fair market value on
the date of grant and expiration dates ranging from June 9, 2004 to October 31,
2005. Options granted to employees of the Company who are not Executive Officers
were granted at $5.00 per share, representing the fair market value of the
Common Stock on the date of grant. The expiration date of these options is
December 12, 2004.
As of December 1, 1995, although no options had been exercised, options to
purchase 194,100 shares held by 11 optionees were outstanding at a weighted
average per share exercise price of $28.39 and 45,900 shares are available for
future grants under the 1991 Plan.
401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under
which eligible employees may contribute, on a pre-tax basis, between 1% to 15%
of their respective total annual income from the Company, subject to maximum
aggregate annual contribution imposed by the Internal Revenue Code of 1986, as
amended. All full-time employees who have worked for the Company for at least
six months are eligible to participate in the 401(k) Plan. All employee
contributions are allocated to the employee's individual account and are
invested in various investment options as directed by the employee. Cash
contributions are fully vested and nonforfeitable. The Company has elected to
make its first matching contributions to the 401(k) Plan for the 1995 fiscal
year in the amount of $19,000.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 31, 1995 as to (i)
each person (including any "group" as that term is used in Section 13(d)(3) of
the 1934 Act) who is known to the Company to be the beneficial owner of more
than five percent of the Company's Common Stock, its only class of voting
securities; (ii) each director; (iii) each executive officer named in the
Summary Compensation Table and (iv) the shares of the Company's Common Stock
beneficially owned by all current executive officers and directors of the
Company as a group.
<TABLE> NUMBER OF SHARES
NAME AND ADDRESS SHARES OWNED
(WHERE APPLICABLE) BEFORE PERCENTAGE
OF BENEFICIAL OWNER OFFERING(1) OF CLASS
- ---------------------------------------------- ---------------- ----------
<S> <C> <C>
Shulmit Pritziker............................. 453,020(2) 13.01%
50 Broad Street
New York, New York 10004
Ilya Margulis................................. 427,300(3) 12.53%
50 Broad Street
New York, New York 10004
Light Associates.............................. 200,594(4) 6.02%
1031 Rosewood Way
Alameda, California 94501
Susquehanna Capital Group..................... 177,843(5) 5.12%
42 Read's Way
New Castle, Delaware 19720
James R. Murphy............................... 2,587(6) *
Chairman of the Board,
President, Chief Executive
Officer and Director
Robert M. Stote, M.D.......................... 35,300(7) 1.05%
Senior Vice President, Chief
Science Officer and Director
Michael D. Price.............................. 10,403(8) *
Vice President, Chief
Financial Officer, Treasurer,
Secretary and Director
Randolph W. Arnegger.......................... 1,013(9) *
Director
Charles L. Bolling............................ 4,800(10) *
Director
Doris E. Wardell.............................. 1,112(11) *
Director
Ranald Stewart, Jr............................ 59,175(12) 1.75%
Former Chairman of the Board, Former
Chief Executive Officer, and Former Director
Donald E. Boultbee............................ 66 *
Former President, Former Chief
Executive Officer and Former Director
All current executive officers and directors
as a group (6 persons)........................ 51,615(13) 1.53%
</TABLE>
- ------------
* Less than one percent.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options, warrants and convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held
(Footnotes continued on following page)
47
<PAGE>
(Footnotes continued from preceding page)
by any other person) and which are exercisable within 60 days of this
Prospectus have been exercised. Except as otherwise indicated, all shares
are beneficially owned, and sole investment and voting power is held, by
the persons named.
(2) Includes 150,904 shares of Common Stock which Shulmit Pritziker has the
right to acquire pursuant to presently exercisable stock purchase warrants.
(3) Includes 79,100 shares which Ilya Margulis has the right to acquire
pursuant to presently exercisable stock purchase warrants.
(4) As reported in the Light Associates Schedule 13-D (Amendment No. 5) dated
December 15, 1995.
(5) Includes 143,343 shares which Susquehanna Capital Group has the right to
acquire pursuant to presently exercisable stock purchase warrants and
34,500 shares of Common Stock which the Company believes continue to be
beneficially owned by Susquehanna Capital Group.
(6) Includes 2,000 shares of Common Stock which Mr. Murphy has the right to
acquire pursuant to presently exercisable stock options.
(7) Includes 35,000 shares of Common Stock which Dr. Stote has the right to
acquire pursuant to presently exercisable stock options.
(8) Includes 101 shares of Common Stock owned by Mr. Price's sons as to which
Mr. Price disclaims beneficial ownership. Also includes 10,000 shares of
Common Stock which Mr. Price has the right to acquire pursuant to presently
exercisable stock options.
(9) Includes 600 shares of Common Stock which Mr. Arnegger has the right to
acquire pursuant to presently exercisable stock options.
(10) Includes 100 shares of Common Stock owned by Mr. Bolling's wife as to which
Mr. Bolling disclaims beneficial ownership. Includes 4,000 shares of Common
Stock which Mr. Bolling has the right to acquire pursuant to presently
exercisable stock options.
(11) Includes 1,000 shares of Common Stock which Mrs. Wardell has the right to
acquire pursuant to presently exercisable stock options.
(12) Includes 4,775 shares of Common Stock owned by Mr. Stewart's wife, as to
which Mr. Stewart disclaims beneficial ownership. Also includes 42,200
shares of Common Stock which Mr. Stewart has the right to acquire pursuant
to presently exercisable stock options.
(13) Includes 50,600 shares of Common Stock which certain of such Executive
Officers and Directors have the right to acquire pursuant to presently
exercisable stock options.
48
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.02 per share. The holders of Common Stock are entitled to cast one vote
for each share held at all stockholder meetings for all purposes, including the
election of directors, and to share equally on a per share basis in such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation or dissolution, each outstanding share of
Common Stock will be entitled to share equally in the assets of the Company
legally available for distribution to stockholders, after the payment of all
debts and other liabilities and any payments due to holders of shares of
Preferred Stock.
No holder of Common Stock has a preemptive or preferential right to purchase
or subscribe for any unissued or additional authorized stock or any securities
of the Company convertible into shares of its Common Stock.
The Common Stock does not have cumulative voting rights which means that the
holders of more than 50% of the Common Stock voting for the election of
directors can elect 100% of the directors of the Company if they choose to do
so. The By-Laws of the Company require that a majority of the issued and
outstanding shares of the Company be represented to constitute a quorum and
transact business at a stockholders' meeting.
In accordance with the Amended and Restated Articles of Incorporation of the
Company, as amended, the Board of Directors of the Company is divided into three
classes, with the classes as nearly equal in number as possible. The term of
each class of directors is three years, with the term of one class expiring each
year in rotation. The consent of the holders of 66 2/3% of all outstanding
shares is required to fill a vacancy on the Board of Directors created by death
or resignation or to remove a director, and then only for cause. These
provisions are designed to provide continuity of directors. In addition, a vote
of 66 2/3% of all outstanding shares is required to approve a merger, a sale of
substantially all of the Company's assets and similar transactions, or to amend
any provision of the Amended and Restated Articles of Incorporation relating to
officers and directors.
The Company effected a one-for-ten reverse stock split on July 25, 1995
which decreased the number of authorized shares of Common Stock from 50,000,000
to 5,000,000 without any change in the par value.
The stockholders of the Company approved a proposal to amend the Company's
Articles of Incorporation to increase the number of authorized shares of Common
Stock from 5,000,000 to 20,000,000 at a Special Meeting of Stockholders held on
December 8, 1995. An amendment to the Company's Articles of Incorporation
increasing its authorized shares was filed with the Department of State of the
State of Florida and became effective on January 1, 1996. The additional
15,000,000 shares are part of the existing class of Common Stock and have the
same rights and privileges as the shares of Common Stock presently issued and
outstanding.
UNITS
The Debentures and the Redeemable Warrants offered hereby are offered in
Units. Each Unit consists of a One Thousand Dollar ($1,000) principal amount 12%
Convertible Senior Subordinated Debenture Due February 13, 2006 and 1,000 Class
A Redeemable Warrants, each to purchase one share of Common Stock and one Class
B Redeemable Warrant. Of the Unit purchase price of $1,000, for financial
reporting purposes the consideration allocated to the Debenture is $722, to the
conversion discount feature of the Debenture is $224 and to the 1,000 Class A
Warrants is $54, and for federal income tax purposes (including original issue
discount) the consideration allocated to the Debenture is $931 and to the 1,000
Class A Warrants is $69. No consideration has been allocated to the Class B
Warrants. The Debentures and Class A Redeemable Warrants may not be detached for
six months after
49
<PAGE>
the date hereof without the prior written consent of the Underwriter, after
which all of the Debentures and the Class A Redeemable Warrants will be
separately transferable (the "Separation Date"). See "Description of
Debentures."
REDEEMABLE WARRANTS
The Redeemable Warrants will be issued in registered form under, governed
by, and subject to the terms of a warrant agreement (the "Warrant Agreement")
between the Company and American Stock Transfer and Trust Company of New York,
as warrant agent (the "Warrant Agent"). The following statements are brief
summaries of what management believes are all of the material provisions of the
Warrant Agreement and are subject to the detailed provisions thereof, to which
reference is made for a complete statement of such provisions. Copies of the
Warrant Agreement may be obtained from the Company or the Warrant Agent and have
been filed with the Commission as an exhibit to the Registration Statement of
which this Prospectus forms a part. See "Available Information."
Class A Redeemable Warrants. The Company has authorized the issuance of
7,500,000 Class A Redeemable Warrants to purchase an aggregate of 6,900,000
shares of Common Stock and 6,900,000 Class B Redeemable Warrants (including
900,000 shares of Common Stock and 900,000 Class B Redeemable Warrants
underlying the Class A Redeemable Warrants comprising part of the Units issuable
pursuant to the Underwriter's over-allotment option) and 570,000 shares of
Common Stock and 570,000 Class B Redeemable Warrants underlying the Class A
Redeemable Warrants comprising part of the Units issuable pursuant to the
Underwriter Warrants and has reserved an equivalent number of shares of Common
Stock for issuance upon exercise of such Warrants. Each Class A Redeemable
Warrant entitles the registered holder thereof to purchase, at any time for a
period of three years from the date of this Prospectus but not prior to the
Separation Date, one share of Common Stock and one Class B Redeemable Warrant at
a price of $3.00 per share. The Warrant exercise price and the number of shares
issuable upon exercise of the Class A Redeemable Warrants are subject to
adjustment as described below.
The Class A Redeemable Warrants are subject to redemption by the Company, on
or after the Separation Date, upon not less than 30 days prior written notice at
$.05 per Redeemable Warrant if the closing price of the underlying Common Stock
on the American Stock Exchange for each of the 20 consecutive trading days
within 10 days immediately preceding the record date for redemption equals or
exceeds 150% of the then exercise price. Warrant holders will have the right to
exercise their Warrants until the close of business on the date fixed for
redemption. If any of the Redeemable Warrants are redeemed, then all of such
Warrants remaining unexercised at the end of the redemption period must be
redeemed.
Class B Redeemable Warrants. The Company has authorized the issuance of
7,500,000 Class B Warrants to purchase an aggregate of 3,750,000 shares of
Common Stock (including 450,000 shares of Common Stock underlying the Class B
Redeemable Warrants comprising part of the Units issuable pursuant to the
Underwriter's over-allotment option) and 285,000 shares of Common Stock
underlying the Class B Redeemable Warrants comprising part of the Units issuable
pursuant to the Underwriter Warrants and has reserved an equivalent number of
shares of Common Stock for issuance upon exercise of such Warrants. Two Class B
Redeemable Warrants entitle the registered holder thereof for a period of five
years from the date hereof to purchase one share of Common Stock at an exercise
price of $5.00 per share. The Warrant exercise price and the number of shares
issuable upon exercise of the Class B Redeemable Warrants are subject to
adjustments as described below. Holders will only be permitted to exercise or
trade Class B Warrants in multiples of two.
The Class B Redeemable Warrants are subject to redemption by the Company, on
or after the Separation Date, upon not less than 30 days prior written notice at
$.05 per Redeemable Warrant if the closing price of the underlying Common Stock
on the American Stock Exchange for each of the 20
50
<PAGE>
consecutive trading days within 10 days immediately preceding the record date
for redemption equals or exceeds 130% of the then exercise price. Warrant
holders will have the right to exercise their Warrants until the close of
business on the date fixed for redemption. If any of the Redeemable Warrants are
redeemed, then all of such Warrants remaining unexercised at the end of the
redemption period must be redeemed.
Class A and Class B Redeemable Warrants. The Redeemable Warrants contain
provisions that protect the holders thereof against dilution by adjustment of
the exercise price and the number of shares issuable upon exercise in certain
events including, but not limited to, stock dividends, stock splits,
reclassifications, mergers, or a sale of substantially all of the Company's
assets. The Company does not intend to issue fractional shares of Common Stock.
Therefore, holders must exercise two Class B Redeemable Warrants simultaneously.
A Warrant holder will not possess any rights as a stockholder of the Company.
The shares of Common Stock, when issued upon the exercise of the Redeemable
Warrants in accordance with the terms thereof, will be fully paid and
non-assessable.
The Redeemable Warrants will be exchangeable and transferable on the books
of the Company at the principal office of the Warrant Agent. Each Class A
Redeemable Warrant or two Class B Redeemable Warrants may be exercised upon
surrender of a Warrant certificate after the Separation Date and on or prior to
the close of business on February 14, 1999 or February 14, 2001, respectively
(or earlier redemption date thereof), after which the Redeemable Warrants become
wholly void and of no value, at the offices of the Warrant Agent with the form
of "Election to Purchase" on the reverse side of the Warrant certificate
completed and executed as indicated, accompanied by payment of the full exercise
price (by cash, or by bank check, certified check or money order payable to the
order of the Warrant Agent) for the number of Redeemable Warrants being
exercised.
Upon receipt of duly exercised Redeemable Warrants and payment of the
exercise price, the Company shall issue and cause to be delivered to, or upon
the written order of, the exercising Warrant holder, certificates representing
the number of shares of Common Stock so purchased. If less than all of the
Redeemable Warrants evidenced by a Warrant certificate are exercised, a new
Warrant certificate representing the remaining number of Redeemable Warrants
will be issued to the Warrant holder by the Warrant Agent. No amendment
adversely affecting the rights of the holders of the Redeemable Warrants may be
made without the approval of the holders of a majority of the then outstanding
Redeemable Warrants.
PREFERRED STOCK
The Company is authorized to issue an aggregate of 2,000,000 shares of
Preferred Stock, $1.00 par value. The Preferred Stock may be issued in series
from time to time with such designations, rights, preferences and limitations,
including but not limited to dividend rates and conversion features, as the
Board of Directors may determine. Accordingly, Preferred Stock may be issued
having dividend and liquidation preferences over the Common Stock without the
consent of the Common Stockholders. In addition, the ability of the Board to
issue Preferred Stock could also be used by the Company as a means of resisting
a change of control of the Company and, therefore, could be considered an
"anti-takeover" device.
During the year ended June 30, 1992, the Company issued 290,000 shares of $1
par value Series A Convertible Exchangeable Preferred Stock (the "Series A
Preferred Stock") and 340,000 shares of $1 par value Series B Convertible
Exchangeable Preferred Stock (the "Series B Preferred Stock") at $25 per share.
The issuance of these shares provided aggregate proceeds to the Company of
$15,750,000. All shares of the Series B Preferred Stock have been converted.
Since the Series A Preferred Stock meets the definition of Mandatorily
Redeemable Preferred Stock, it has been excluded from the Common Stockholders'
Equity section of the Consolidated Balance Sheets. As of September 30, 1995 and
51
<PAGE>
December 31, 1994, 220,000 shares of the Series A Preferred Stock had been
converted into 48,100 shares of Common Stock.
The shares of Series A Preferred Stock are convertible at the option of the
holders into Common Stock at any time prior to the close of business on the date
fixed for redemption or exchange, at an initial conversion price of $115.00 per
share (at an initial conversion rate of approximately .21739 shares of Common
Stock). The conversion rates were adjusted by the Company, in lieu of paying
cumulative dividends of 9% per annum due in 1992 and 1993 to .25808. The Company
has not paid the holders the dividends due in 1994 or 1995. The dividend payment
date for Series A Preferred Stock is October 15. See Note 11 of Notes to
Consolidated Financial Statements.
The Series A Preferred Stock has a liquidation preference equal to $25.00
per share, plus accrued and unpaid dividends up to the liquidation date. The
Series A Preferred Stock are redeemable for cash at the option of the Company.
The Preferred Stock is also redeemable for cash at the option of the holder upon
certain major stock acquisitions or business combinations at $25.00 per share,
plus accrued and unpaid dividends through the redemption dates. The holders of
Preferred Stock have no voting rights except as required by applicable law and
except that if the equivalent of two full annual cash dividends shall be accrued
and unpaid, the holders of the Series A Preferred Stock have the right, as a
class, to elect two additional members of the Company's Board of Directors. As
of the date hereof, the holders of the Series A Preferred Stock are owed two
years arrears of dividends, aggregating approximately $270,000, but have not
exercised their right to appoint such directors.
The Series A Preferred Stock is exchangeable in whole, but not in part, at
the option of the Company on any dividend payment date beginning October 15,
1993, for 9% Convertible Subordinated Debentures of the Company due 2016.
Holders of Series A Preferred Stock will be entitled to $25 principal amount of
Debentures for each share of Series A Preferred Stock. The Series A Preferred
Stock is recorded at redemption value, which is $25.00 per share plus cumulative
dividends of 9% per annum. The following table summarizes activity of the Series
A Preferred Stock:
SERIES A
-----------------
SHARES AMOUNTS
------ -------
(IN THOUSANDS)
Balance at June 30, 1992.................................... 74 $1,882
Converted to Common Stock................................. -- --
Accretion of discount and accrual of 9% dividends......... -- 116
------ -------
Balance at December 31, 1992................................ 74 1,998
Converted to Common Stock................................. -- --
Accretion of discount and accrual of 9% dividends......... -- 220
------ -------
Balance at December 31, 1993................................ 74 2,218
Converted to Common Stock................................. (4) (128)
Accrual of 9% dividends................................... -- 166
------ -------
Balance at December 31, 1994................................ 70 2,256
Accrual of 9% dividends................................... -- 118
------ -------
Balance at September 30, 1995............................... 70 $2,374
------ -------
------ -------
CERTAIN FLORIDA LEGISLATION
The State of Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations. The Florida Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will not
possess any voting rights unless such voting rights are approved by a majority
vote of a corporation's disinterested shareholders. The Florida Affiliated
Transactions Act generally requires supermajority approval by disinterested
shareholders of certain specified transactions
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between a public corporation and holders of more than 10% of the outstanding
voting shares of the corporation (or their affiliates). Florida law also
authorizes the Company to indemnify the Company's directors, officers, employees
and agents.
LISTING ON THE AMERICAN STOCK EXCHANGE
The Company currently does not satisfy some of the American Stock Exchange's
financial guidelines for continued listing of its Common Stock. While there can
be no assurance that listing on the American Stock Exchange will be continued,
management of the Company believes that its business prospects are improving and
that it will be able to maintain continued listing. If the Common Stock were
delisted, an investor could find it more difficult to dispose of or to obtain
accurate quotations as to the price of the Common Stock. If the Common Stock is
listed on the Pacific Stock Exchange and then delisted on the American Stock
Exchange, it is likely to be delisted by the Pacific Stock Exchange.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants and the Transfer Agent and Registrar for the Units,
Redeemable Warrants and Debentures is American Stock Transfer & Trust Company,
40 Wall Street, New York, New York 10005.
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DESCRIPTION OF DEBENTURES
GENERAL
The Debentures will be issued under an indenture (the "Indenture") to be
dated as of February 14, 1996, between the Company and American Stock Transfer &
Trust Company (the "Trustee"). A copy of the Indenture is filed as an exhibit to
the Registration Statement of which this Prospectus is a part. See "Available
Information." Neither the Indenture, the Trustee nor the Debentures will be
subject to the provisions of the Trust Indenture Act of 1939. Accordingly,
Debenture holders will not have the protections of that Act available to them.
The following summaries of what management believes are all of the material
provisions of the Indenture do not purport to be complete and are subject to and
qualified in their entirety by reference to all of the provisions of the
Indenture, including the definitions therein of certain terms. Whenever
particular provisions or defined terms of the Indenture are referred to, such
provisions or defined terms are incorporated herein by reference. Parenthetical
references set forth in this section are to sections in the Indenture or to
paragraphs in the form of Debenture which is appended to the Indenture as
Exhibit A.
The Debentures will (i) be limited to $7,500,000 aggregate principal amount
(including the $900,000 over-allotment option granted to the Underwriter and
$570,000 of Units issuable upon exercise of the Underwriter Warrants) (Debenture
paragraph 4); (ii) be unsecured obligations of the Company (Debenture paragraph
4); (iii) mature on February 13, 2006 (Face of Debenture); and (iv) bear
interest from the date of delivery at the rate per annum set forth on the cover
page of this Prospectus, payable quarterly on January 1, April 1, July 1 and
October 1 each year, commencing April 1, 1996, to the holders of record, with
certain exceptions, at the close of business on the 15th day of the month
preceding the payment date (Debenture paragraphs 1 and 2). Principal (and
premium, if any) and interest are to be payable and the Debentures will be
exchangeable and convertible and transfers thereof will be registrable at the
offices or agencies of the Company maintained for such purposes in the Borough
of Manhattan, City and State of New York, initially to the Trustee/American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005,
provided that payment of interest may be made at the option of the Company by
check mailed to the address of the person entitled thereto as it appears in the
Debenture register (Debenture paragraphs 2 and 3).
The Debentures will be issued only in fully registered form in denominations
of $1,000 or an integral multiple thereof. The Debentures are exchangeable and
transfers thereof will be registrable without charge therefor, but the Company
may require payment of a sum sufficient to cover tax or other governmental
charge payable in connection therewith (Debenture paragraph 9).
CONVERSION
The holders of the Debentures will be entitled at any time commencing at the
earlier of (i) twelve months after the date hereof or (ii) upon the Company
sending a notice of redemption, or (iii) such earlier date as may be designated
by the Company and the Underwriter, and from time to time up to the close of
business on February 13, 2006, subject to prior redemption, to convert the
Debentures or portions thereof (which are $1,000 or integral multiples thereof)
into shares of the Company's Common Stock at an initial conversion price, which
is subject to adjustment in certain circumstances as set forth below, of the
lesser of $2.50 per share or 80% of the average closing price on the American
Stock Exchange for the 20 consecutive trading days immediately preceding the
first anniversary of the issuance of the Debentures or the giving of the notice
of redemption, as applicable. (Debenture paragraph 7). No adjustment will be
made on conversion of any Debenture for interest accrued thereon or for
dividends on any Common Stock issued other than dividends payable in Common
Stock or Convertible Securities (as defined in the Indenture) (Article X:
Section 10.02). The Company is not required to issue fractional interests in the
Common Stock upon conversion of the Debentures and, in lieu thereof, will round
any fractional share up to the next highest share (Article X: Section 10.03). In
the case of Debentures called for redemption, conversion rights will expire at
the close of business on the business day prior to the redemption date (Article
X: Section 10.02).
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The conversion price is subject to downward adjustment in the event that the
Company issues shares of Common Stock (including shares issuable pursuant to a
stock dividend) and the per share consideration received by the Company upon
issuance of the Common Stock is less than the current conversion price (Article
X: Section 10.06). In case of a stock split or reverse stock split, a stock
dividend, a reclassification, the current conversion price shall be
proportionately decreased or increased (Article X: Section 10.05). No adjustment
in the current conversion price will be required unless such adjustment would
require a change of at least $.05; provided, however, that any adjustment that
would otherwise be required to be paid shall be carried forward and taken into
account in any subsequent adjustment (Article X: Section 10.8).
The Company may reduce the conversion price by any amount, without
limitation, for any period of time if the period is at least 20 consecutive
trading days. Upon such reduction, the Company shall mail a notice thereof to
Debenture holders and publish an announcement of the notice (Article X: Section
10.13). The Company may consider reducing the conversion price if it was
experiencing difficulty servicing the debt represented by the Debentures and the
price of its Common Stock had declined subsequent to the Offering. Under such
circumstances, a reduction in the conversion price would be intended to provide
the holders with additional incentive to convert their Debentures thereby
reducing the Company's debt obligations.
In the event of a merger or consolidation of the Company with another
corporation, a capital reorganization or reclassification of the Company's
capital stock, or sale of all or substantially all of the Company's assets that
is effected in such a way that holders of the Common Stock are entitled to
receive stock, securities or assets (including, without limitation, cash) with
respect to or in exchange for Common Stock, then the holders of the outstanding
Debentures shall from such point onward have the right thereafter to convert
each such Debenture into the kind and amount of stock, securities or assets
received by a holder of the number of shares of Common Stock into which such
Debentures might have been converted immediately prior to such transaction
(Article X: Section 10.15).
It should be noted that, in the event of such a transaction, no subsequent
adjustment of the current conversion price is required. Thus, for example, if
the Company were to engage in a merger in which Common Stockholders received
cash in an amount less than the then current conversion price, exercise of the
conversion right would result in the Debenture holder receiving less than the
principal amount of such Debenture.
The shares of Common Stock, when issued upon the conversion of the
Debentures in accordance with the terms thereof, will be fully paid and
non-assessable.
DISCOUNT ON CONVERSION OF DEBENTURES
The Debentures are convertible into Common Stock at a conversion price per
share equal to the lesser of $2.50 or 80% of the market price of the Common
Stock during the twenty-day period ending one year (or upon redemption, if
earlier) from the date of this Prospectus. Due to the Company's history of
operating losses, the uncertainties regarding its future financial results and
the other risks associated with holding long term debt of the Company,
management determined that additional incentives were necessary in order to
assure marketability of the Offering. Accordingly, the conversion price was
established in a manner that provides a built-in premium for Debenture holders
upon conversion of the Debentures which remains constant regardless of the
market price of the Common Stock.
SUBORDINATION OF DEBENTURES
The payment of the principal of (and premiums, if any) and interest on the
Debentures will be subordinated in right of payment to the extent set forth in
the Indenture to the prior payment in full of the principal of (and premiums, if
any) and interest on all Senior Debt of the Company (Article XI: Section 11.01).
Senior Debt is defined to include indebtedness for money borrowed outstanding on
the day of execution of the Indenture or thereafter, created for money borrowed
from banks, or other traditional long-term institutional lenders such as
insurance companies and pension funds, unless in the instrument creating or
evidencing such indebtedness it is provided that such Debt is not senior in
right
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of payment to the Debentures (Article XI: Section 11.02(c)). At September 30,
1995, Senior Debt aggregated $1,220,000. The Company expects from time to time
to make additional borrowings which will constitute Senior Debt.
The Company is not limited in the amount of additional indebtedness,
including Senior Debt, which it can create, incur, assume or guarantee.
Accordingly, the Debenture holders are not protected against highly leveraged or
other transactions involving the Company that may adversely affect them.
However, any additional indebtedness, other than Senior Debt, may not be senior
to the priority of the Debentures (Article XI: Section 11.13).
Upon any payment or distribution of the Company's assets to creditors on any
dissolution, winding up, total or partial liquidation, reorganization or
readjustment of the Company, whether voluntary or involuntary, or bankruptcy,
insolvency, receivership or other proceedings all principal of (and premiums, if
any) and interest due upon all Senior Debt must be paid in full before the
Debenture holders or the Trustee are entitled to receive or retain any assets so
paid or distributed in respect of the Debentures (Article XI: Section 11.03).
COVENANTS
The Company may not declare or pay any cash dividends or make any
distributions to holders of the capital stock, other than dividends or
distributions payable in such capital stock. The Company may not purchase,
redeem or otherwise acquire or retire for value any shares of its capital stock
or warrants or rights to acquire such stock if, at the time of such declaration,
payment, distribution, purchase, redemption, other acquisition or retirement, an
Event of Default shall have occurred and be continuing (Article IV: Section
4.04).
The Company may not (i) sell or lease any property or render any service to,
make any investment in, purchase any property or borrow any money from, or make
any payment for any service rendered by an Affiliate unless the Board of
Directors determines in good faith that the terms of such transaction are at
least as favorable to the Company as those which could be obtained in a similar
transaction with an independent third party; (ii) make any payment to any of its
officers, directors or employees, or agreement to do so, unless the Board of
Directors determines in good faith that the amount to be paid, or to be agreed
to be paid, for such service bears a reasonable relationship to the value of
such services to the Company; or (iii) make any sale to an Affiliate of any
capital stock or other securities or obligations of an Affiliate at a cash sale
price less than the original cost thereof to the Company or such Affiliate, as
the same may have been reduced from time to time by cash dividends or interest
payments thereon or payments of principal thereof received by the Company or
such Affiliate plus interest on such investment, as the same may have been
reduced from time to time at a rate not less than the rate borne by the
Debentures, but in no event less than current fair market value. (Article IV:
Section 4.05).
The Indenture provides that the Company will not, and will not permit any of
its subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any encumbrance or restriction on the ability of
any such subsidiary to (i) pay dividends or make any other distributions on its
capital stock or any other interest or participation in, or measured by, its
profits owned by, or pay any indebtedness owed to, the Company or a subsidiary
of the Company, or (ii) make loans or advances to the Company or a subsidiary of
the Company, or (iii) transfer any of its properties or assets to the Company
(Article IV: Section 4.04).
The Company is required to file with the Trustee copies of the reports it
files with the Commission and to provide to holders copies of all documents
furnished to stockholders of the Company (Article IV: Section 4.02). It is also
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, an Officers' Certificate stating whether or not the signers know of any
Default that occurred during the fiscal year. If they do, the Certificate shall
describe the Default and its status (Article IV: Section 4.03).
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REDEMPTION
Commencing six months after the date hereof, the Company may, on at least 30
days prior written notice redeem the Debentures, in whole or in part, if the
closing price of the Common Stock on the American Stock Exchange (or other
principal trading market) for each of the 20 consecutive trading days
immediately preceding the record date for redemption equals or exceeds $7.00 per
share, as initially constituted. The redemption price will be 105% of the
principal amount of the Debentures plus accrued interest through the date of
redemption (Article III).
MODIFICATION OF THE INDENTURE
With the consent of the holders of not less than 60% in principal amount of
outstanding Debentures, the Company and the Trustee may enter into an indenture
or indentures supplemental to the Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any provisions of the
Indenture or modifying in any manner the rights of the Debenture holders under
the Indenture, provided that no such supplemental indenture shall, without the
consent of the Debenture holders affected (a) reduce the rate of, or change the
time of payment of, interest on any Debenture; (b) reduce the principal (or
premium on), or change the fixed maturity of any Debenture; (c) impair the right
to institute suit for the enforcement of any such payment when due; (d) reduce
the above stated percentage of outstanding Debentures; (e) alter the provisions
of the Indenture so as to adversely affect the terms of conversion of the
Debentures into Common Stock; or (f) make any change in the subordination of the
Debentures in a manner that is materially adverse to the Holders (Article IX:
Section 9.02).
EVENTS OF DEFAULT, NOTICE AND WAIVER
Events of Default are defined in the Indenture as being (a) a default for 20
days in payment of any interest installment when due, and default in payment of
principal (or premium, if any) when due; (b) a default for 60 days after written
notice to the Company by the Trustee or by the holders of 25% in principal
amount of the outstanding Debentures in the performance of any other covenant of
the Company in the Indenture; (c) a default by the Company or any Subsidiary on
indebtedness in an aggregate principal amount of at least $500,000; (d) the
entering of a final judgment or judgments for the payment of at least $500,000
against the Company or any Subsidiary which remains unpaid and unstayed for a
period of 30 days after the date on which the right to appeal has expired; and
(e) certain events of bankruptcy, insolvency and reorganization of the Company
(Article VI: Section 6.01). If an Event of Default shall occur and be
continuing, either the Trustee or the holders of 25% in principal amount of the
outstanding Debentures may declare the principal of all of the Debentures to be
due and payable (Article VI: Section 6.02).
The holders of a majority in principal amount of the outstanding Debentures
may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any power of trust conferred on
the Trustee (Article VI: Section 6.05). The right of a Debenture holder to
institute a proceeding with respect to the Indenture is subject to certain
conditions precedent, including the provision of notice and indemnification for
the Trustee (Article VI; Section 6.06). The holders of a majority in principal
amount of the outstanding Debentures may, on behalf of the Debenture holders,
waive any past default and its consequences under the Indenture, except a
default in the payment of the principal of (or premium, if any) or interest on
any Debenture or a default in respect of the conversion right of Debenture
holders (Article VI: Section 6.04).
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Company may terminate its obligations under the Indenture at any time by
delivering all outstanding Debentures to the Trustee for cancellation. After all
the Debentures have been called for redemption or mature in one year, the
Company may terminate all of its obligations under the Indenture, other than its
obligations to pay the principal of and interest on the Debentures and certain
other obligations, at any time, by depositing with the Trustee money or
non-callable U.S. Government obligations sufficient to pay all remaining
indebtedness on the Debentures (Article VIII).
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TRANSFER AND EXCHANGE
A holder may transfer or exchange Debentures in accordance with the
Indenture. The Registrar may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any Debenture selected for redemption. Also, the Registrar
is not required to transfer or exchange any Debenture for a period of 15 days
before a selection of Debentures to be redeemed. The registered holder of a
Debenture may be treated as the owner of it for all purposes.
COMMUNICATIONS AMONG HOLDERS
Three or more Debenture holders who have owned their Debentures for at least
six months may request the Trustee to send copies of a proxy or other
communications to the other holders, upon payment by the requesting holders of
the reasonable expenses of such mailing and the Trustee determining that the
mailing would not be contrary to the best interests of all the holders nor in
violation of applicable law. (Article XII: Section 12.02).
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign.
The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee.
The Indenture provides that in case an Event of Default shall occur (which shall
not be cured), the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any of the
holders of the Debentures, unless they shall have offered to the Trustee
security and indemnity satisfactory to it.
CONSENT TO SERVICE
The Indenture provides that the Company will irrevocably designate the
Trustee as its authorized agent for service of process in any legal action or
proceeding arising out of or relating to the Indenture or the Debentures brought
in any Federal court or court of the State of New York and will irrevocably
submit to such jurisdiction.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Secretary of the Company, Bentley
Pharmaceuticals, Inc., 4830 West Kennedy Boulevard, One Urban Centre, Suite 550,
Tampa, Florida 33609.
GOVERNING LAW
The Indenture and Debentures will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such State's
conflicts of laws principles.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax consequences
to purchasers of the Units. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations promulgated or proposed thereunder, positions of the Internal
Revenue Service ("IRS") and existing judicial decisions as of the date hereof,
all of which are subject to change at any time. Moreover, the effect of any such
change may be retroactive as well as prospective. Further, there can be no
assurance that the IRS will not take a contrary view to that set forth herein
which may be upheld by a court. No ruling from the IRS or opinion of counsel has
been or will be sought as to any of the matters discussed below. This summary of
certain U.S. federal tax consequences is based upon the advice of Parker Chapin
Flattau & Klimpl, LLP, counsel to the Company.
This summary is for general information purposes only and applies only to
the initial purchasers who hold the Units (and each of its components and the
underlying Common Stock) as capital assets within the meaning of Section 1221 of
the Code. It does not purport to address all tax consequences that may be
relevant to particular investors (including, for example, foreign persons,
financial institutions, broker-dealers, insurance companies, tax-exempt
organizations and persons in special situations). In addition, the discussion
does not address any aspect of state, local or foreign taxation or other federal
taxes.
PROSPECTIVE PURCHASERS OF THE UNITS ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING OR
DISPOSING OF THE UNITS, THE DEBENTURES, THE WARRANTS AND THE UNDERLYING COMMON
STOCK, AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER
TAX LAWS.
THE UNITS
Each Unit is comprised of a $1,000 Principal Amount 12% Convertible Senior
Debenture due February 13, 2006 and 1,000 Class A Redeemable Warrants, each to
purchase one share of Common Stock and one Class B Redeemable Warrant. Two Class
B Warrants may be exercised to purchase one additional share of Common Stock.
The issue price of a Unit is equal to the initial offering price to the
public (excluding sales to bond houses, brokers and others acting in the
capacity as underwriters, placement agents or wholesalers) at which a
substantial amount of Units are sold. Such amount must then be allocated between
the Debenture and the Warrants in accordance with their relative fair market
values on the issue date. For federal income tax purposes (including original
issue discount), the Company intends to allocate the $1,000 purchase price for
each Unit $931 to the Debenture and $69 to the Class A Warrants, based on an
independent appraisal. Because of different rules and considerations, this is
different than the allocation required for financial accounting purposes which
is $722 to the Debenture, $224 to the conversion discount feature of the
Debenture and $54 to the 1,000 Class A Warrants. No assurance can be given,
however, that the IRS will not challenge the Company's determination.
The Company's allocation of the issue price of the Units is binding on a
holder, unless he discloses the use of a different allocation on the applicable
form attached to his federal income tax return for the year in which the
acquisition occurs. A holder who uses a different allocation than the Company
should consult with his tax advisors as to the consequences of such allocation,
including the effect of having acquired the Debenture for more or less than its
issue price.
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THE DEBENTURES
The stated interest on the Debenture will be taxable as ordinary income when
received or accrued by the holder in accordance with his method of accounting.
In addition, a portion of the $69 of original issue discount ("OID") with
respect to the Debenture must be included in gross income each year based on an
economic accrual of interest, even if the holder has not received a cash payment
in respect of such OID. The amount of OID required to be included in gross
income increases the holder's basis in the Debenture. Proposed legislation,
however, would defer the Company's ability to deduct the OID until it is paid.
The OID with respect to a Debenture is equal to the excess, if any, of its
stated redemption price at maturity ($1,000) over the issue price of the
Debenture ($931), since it will exceed the de minimis exception allowed where
the OID would otherwise be less than 1/4% of the stated redemption price at
maturity multiplied by the number of full years to maturity of the Debentures.
Such amount could be increased if the IRS successfully challenges the allocation
of the Unit issue price.
Upon the sale, exchange or redemption of a Debenture, the holder will
recognize gain or loss equal to the difference between the amount realized on
such sale, exchange or redemption and his tax basis in the Debenture. Such gain
or loss will be long-term capital gain or loss if the Debenture was held for
more than one year. Net capital gains of individuals are generally taxed at
lower rates than ordinary income. Proposed legislation would make such rates
even more favorable for both individuals and corporations. On the other hand,
there are limitations on the deductibility of capital losses.
Conversion of a Debenture (other than with respect to any accrued but unpaid
interest) into Common Stock pursuant to its terms is not taxable. The holder's
basis and holding period for the Common Stock will include his basis and holding
period in the Debenture.
THE WARRANTS
Upon a sale or exchange of a Warrant (including the receipt of cash in lieu
of a fractional share of Common Stock upon exercise of a Warrant), a holder will
recognize capital gain or loss equal to the difference between the amount
realized upon the sale or exchange and the holder's basis in the Warrant (as
determined above). Such gain or loss will be long-term if, at the time of the
sale or exchange, the Warrant was held for more than one year. Adjustments to
the exercise price or conversion ratio, or the failure to make adjustments, may
result in the receipt of a constructive dividend by the holder.
Upon the exercise of a Warrant, a holder's tax basis in the interest
acquired upon such exercise will be equal to his tax basis in the Warrant plus
the exercise price of the Warrant. In the case of the exercise of a Class A
Warrant, such basis must be allocated between the Common Stock and the Class B
Warrant received in proportion to their relative fair market values. His holding
period with respect to such interest will commence on the date of exercise. If a
Warrant expires without being exercised, the holder will have a capital loss
equal to his tax basis in the Warrant as if the Warrant had been sold on such
date for no consideration.
COMMON STOCK
Distributions paid with respect to shares of Common Stock will be includible
in the gross income of the holder as ordinary income to the extent such
distributions are paid out of the Company's current or accumulated earnings and
profits (as computed for detail income tax purposes). To the extent that a
distribution exceeds such earnings and profits, it will be treated as a
non-taxable return of capital in an amount up to the holder's tax basis in such
Common Stock (which reduces such basis), and a distribution in excess of such
tax basis is taxed as a capital gain from the sale of the Common Stock.
Dividends received by a corporate holder are generally eligible for the
dividends received deduction, subject to the limitations under Section 1059 of
the Code relating to extraordinary dividends. Proposed
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legislation would reduce the amount of the available dividends received
deduction and place additional limitations on it.
Upon the sale or exchange of the Common Stock, a holder will recognize
capital gain or loss equal to the difference between the amount realized on such
sale or exchange and the holder's tax basis in the Common Stock. Such gain or
loss will be long-term if the Common Stock was held for more than one year. An
even more favorable tax rate may be available if the Common Stock sold qualifies
as "qualified small business stock" under Section 1202 of the Code.
BACKUP WITHHOLDING
A holder may be subject to backup withholding at the rate of 31% of the
interest paid on a Debenture, the dividends on the Common Stock and the proceeds
from the sale, exchange or redemption of a Unit, Debenture, Warrant or Common
Stock, unless (a) the holder is a corporation or other exempt recipient and,
when required, demonstrates such fact or (b) provides, when required, his
taxpayer identification number to the payor, certifies that he is not subject to
backup withholding and otherwise complies with the backup withholding rules.
Backup withholding is not an additional tax; any amount so withheld is
creditable against the holder's federal income tax liability. Failure to furnish
the holder's taxpayer identification number may also subject the holder to a
penalty.
REQUIREMENT FOR CURRENT REGISTRATION
The Company is required to have a current registration statement on file
with the Commission and to effect appropriate qualifications, except where
exemptions therefrom are available, under the laws and regulations of the states
in which the holders of the Redeemable Warrants reside in order to comply with
applicable laws in connection with the exercise of the Redeemable Warrants and
the resale of the Common Stock issued upon such exercise. The Company,
therefore, will be required to file post effective amendments to its
Registration Statement when subsequent events require such amendments in order
to continue the registration of the Common Stock underlying the Redeemable
Warrants and to take appropriate action under state securities laws. There can
be no assurance that the Company will be able to keep its Registration Statement
current or to effect appropriate action under applicable state securities laws,
the failure of which may cause the exercise of the Redeemable Warrants and
resale or other disposition of the underlying Common Stock to be effected under
circumstances which do not comply with applicable securities laws. See "Risk
Factors--Current Prospectus and State Securities Law Qualification Required to
Exercise the Redeemable Warrants."
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company and the Underwriter (the "Underwriting Agreement"), Coleman
and Company Securities, Inc. (the "Underwriter"), has agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriter, 6,000 Units,
at the initial offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Units are subject to certain conditions
precedent, and that the Underwriter will purchase all of the Units if any of
such Units are purchased.
The Underwriter has advised the Company that it proposes initially to offer
the Units directly to the public at the initial public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $50.00 per Unit. The Underwriter may allow, and such
dealers may reallow, a concession not in excess of $20.00 per Unit to certain
other dealers. After the initial public offering, the public offering price,
concession and re-allowance may be changed.
The Company has granted to the Underwriter an option exercisable during the
30-day period after the date of this Prospectus, to purchase up to an aggregate
of 900 additional Units at the initial public offering price set forth on the
cover page of the Prospectus, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriter may exercise
this option only to cover over-allotments, if any, made in connection with the
sale of the Units offered hereby.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of this Offering, $50,000 of which
has already been paid to cover some of the underwriting costs and due diligence
expenses related to this Offering.
The Company has agreed to permit the Underwriter to have an observer attend
the meetings of the Company's Board of Directors for a period of three years
from the date hereof.
The Company and the Underwriter have agreed to indemnify each other against,
or to contribute to losses arising out of, certain civil liabilities in
connection with this Offering, including liabilities under the Securities Act.
Prior to this Offering there has been no public trading market for the
Company's Units, Debentures or Warrants. The initial public offering price of
the Units, and the terms of the Debentures and Warrants have been determined by
negotiation between the Company and the Underwriter. The factors considered in
determining the initial public offering price and such terms, in addition to
prevailing market conditions, were the history of and prospects for the industry
in which the Company competes, the market for the Company's Common Stock, an
assessment of the Company's management, the prospects of the Company, and the
demand for similar securities of comparable companies.
At the request of the Company, the Underwriter has reserved during the
period of the Offering up to 5% of the Units offered hereby for sale at the
public offering price to certain officers and other employees of the Company and
to certain other persons designated by the Company who are directly related to
the conduct of the Company's business. All persons who purchase any of the
reserved Units upon the Offering must represent that their purchases are for
investment purposes only, and with no present intention to resell the Units. The
number of Units available for sale to the general public will be reduced to the
extent these persons purchase reserved Units. Any reserved Units not so
purchased will be offered by the Underwriter to the general public on the same
terms as the other Units offered by this Prospectus.
62
<PAGE>
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.
UNDERWRITER WARRANTS
The Company has agreed to sell to the Underwriter or its designees, for a
nominal consideration, the Underwriter Warrants to purchase an aggregate of 570
Units. The Units subject to the Underwriter Warrants will be in all respects
identical to Units offered to the public hereby except that the Underwriter
Warrants will be exercisable for a four-year period commencing one year after
their issuance at an exercise price equal to $1,200 per Unit. Pursuant to the
terms of the Underwriting Agreement, the Company is registering the shares of
Common Stock issuable upon conversion of the Debentures and upon exercise of the
Redeemable Warrants each as included in the Units issuable upon conversion of
the Underwriter Warrants in the Registration Statement of which this Prospectus
is a part. For the life of the Underwriter Warrants the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock, which may result in a dilution of the interests of other stockholders.
PRIVATE PLACEMENTS
In October 1995 the Underwriter served as placement agent for the issuance
and sale by the Company to certain purchasers in two private placements for an
aggregate purchase price of $1,770,000. The Underwriter received placement fees
of $177,000. Mr. Barry Blank, a representative of the Underwriter, participated
in placing the private placements and purchased Common Stock and Notes
aggregating $240,000 in the placements. The shares of Common Stock purchased by
Mr. Blank and Violet M. Blank, his mother, in the placements are subject to a
lock-up for a period of one year from the date hereof.
In the first placement, the Company sold to certain purchasers for an
aggregate purchase price of $720,000, 120,000 shares of the Company's Common
Stock and 12% promissory notes in the aggregate principal amount of $720,000
(the "Notes") which become payable in full upon the earlier of July 31, 1996 or
the closing of a public offering of the Company's securities (a "Public
Offering"). The Notes are convertible into shares of Common Stock, at the option
of the holders thereof, at a conversion price of $3.00 per share for an
aggregate of 240,000 shares of Common Stock, subject to anti-dilution
provisions. The Notes are subject to mandatory conversion at a conversion price
of $3.00 per share if no Public Offering is completed by July 31, 1996.
In the second placement, the Company sold to certain purchasers for an
aggregate purchase price of $1,050,000, 131,250 shares of Common Stock and 12%
promissory notes in the aggregate principal amount of $1,050,000 (the "A Notes")
which become payable in full upon the earlier of September 30, 1996 or the
completion of a Public Offering. The A Notes are subject to mandatory
conversion, at a conversion price equal to the average closing price for the
Common Stock quoted on the American Stock Exchange for the five trading days
immediately preceding September 30, 1996, if no Public Offering is completed by
September 30, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Private
Placements."
Purchasers of notes in the private placements who have not converted prior
to the date hereof may use their notes to purchase the Units offered hereby, so
long as they notify the Company of such intent in accordance with the notice
provisions set forth in their notes. Such exchange will be made based on
converting the outstanding principal balance of the notes for an equivalent
principal amount of Debentures, based on the price to public set forth on the
cover page of this Prospectus. Holders of the notes must deliver such notes to
the Underwriter for cancellation by the Company prior to the issuance
63
<PAGE>
of Debentures. The Underwriter will receive commissions from such purchasers
both for the private placement, as stated in the immediately preceding
paragraphs, and from the purchase of the Units, in the amount stated on the
cover page of this Prospectus.
CONCURRENT OFFERING
Concurrently with this Offering, the Company is registering 458,500 shares
of Common Stock for concurrent or future sales by certain selling shareholders.
Of such shares of Common Stock, 356,250 were issued either in connection with
private placements conducted by the Company in October 1995 or are issuable upon
conversion of notes sold in one of such placements (to the extent such notes are
converted to Common Stock prior to the application of a portion of the proceeds
of this Offering to repay such notes). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Private Placements" and "Underwriting--Private Placements." Of such
shares of Common Stock, 102,250 have been registered upon exercise of various
"piggy back" registration rights granted to Baytree Associates, Inc. and Martin
E. Janis & Co., Inc. in connection with their subscriptions of such shares.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New
York, New York 10036. Reid & Priest LLP, 40 West 57th Street, New York, New York
10019 has acted as counsel for the Underwriter in connection with this Offering.
Parker Chapin Flattau & Klimpl, LLP has represented the Underwriter in
connection with other transactions.
EXPERTS
On June 6, 1994, Price Waterhouse declined to stand for re-election as the
Company's independent public accountant. There was no adverse opinion or
disclaimer of opinion, or modification as to uncertainty, audit scope or
accounting principles contained in the reports of Price Waterhouse for the
fiscal years ended June 30, 1992 and December 31, 1993 or the six month
transition period ended December 31, 1992, other than the inclusion in Price
Waterhouse's reports relating to the periods ended December 31, 1992 and 1993 of
a statement as to an uncertainty regarding the ability of the Company to
continue as a going concern.
During the Company's fiscal periods covered by Price Waterhouse's reports
and the subsequent interim period preceding Price Waterhouse's decision not to
stand for re-election on June 6, 1994, there were no disagreements with Price
Waterhouse on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Price Waterhouse, would have caused Price
Waterhouse to make reference in connection with its report concerning the
Company's financial statements to the subject matter of the disagreements other
than as set forth below.
For the fiscal year ended June 30, 1992, Price Waterhouse reported material
weaknesses indicating that during much of fiscal 1992, European financial
management personnel were not in place, uniform accounting policies and
reporting procedures were not clearly established and certain corporate
documents, such as Board of Directors meeting minutes, contractual agreements
and documents filed with the Securities and Exchange Commission, were not
contemporaneously available from management and signed copies of such documents
were not readily available. These items were discussed with the Audit Committee
of the Company's Board of Directors and, during the year ended December 31,
1993, were resolved to the satisfaction of Price Waterhouse. The Price
Waterhouse report to the Audit
64
<PAGE>
Committee for the year ended December 31, 1993 did not contain any material
weaknesses. The Company authorized Price Waterhouse to respond fully to the
inquiries of a successor accountant concerning all subject matters.
The Audit Committee of the Board of Directors of the Company selected
Deloitte & Touche LLP to serve as the Company's independent auditors for the
year ended December 31, 1994 and for the year ending December 31, 1995.
The consolidated financial statements as of December 31, 1994 and for the
year then ended, and as of September 30, 1995 and for the nine months then
ended, included in this Prospectus and the related financial statement schedule
as of December 31, 1994 and for the year then ended, and as of September 30,
1995 and for the nine months then ended included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement (which reports express an unqualified opinion and include an
explanatory paragraph referring to the Company's recurring losses from
operations as well as negative operating cash flows which raise substantial
doubt about its ability to continue as a going concern), and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements with respect to the year ended June
30, 1992, the six months ended December 31, 1992 and the year ended December 31,
1993 included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been so included in
reliance on the report (which includes an explanatory paragraph relating to the
Company's ability to continue as a going concern as described in Note 1 of Notes
to Consolidated Financial Statements) of Price Waterhouse LLP, independent
accountants, given on authority of said firm as experts in auditing and
accounting.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE HEREIN
-----------
<S> <C>
Independent Auditors' Reports.................................................. F-2 to F-3
Consolidated Balance Sheets as of December 31, 1993 and 1994, and September 30,
1995........................................................................... F-4
Consolidated Statements of Operations for the year ended June 30, 1992, for the
six months ended December 31, 1992, for the years ended December 31, 1993 and
1994, and for the nine months ended September 30, 1994 (unaudited) and 1995.... F-5
Consolidated Statements of Changes in Common Stockholders' Equity for the year
ended June 30, 1992, for the six months ended December 31, 1992, for the
years ended December 31, 1993 and 1994, and for the nine months ended
September 30, 1995........................................................... F-6 to F-7
Consolidated Statements of Cash Flows for the year ended June 30, 1992, for the
six months ended December 31, 1992, for the years ended December 31, 1993 and
1994, and for the nine months ended September 30, 1994 (unaudited) and 1995.... F-8 to F-9
Notes to Consolidated Financial Statements..................................... F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Bentley Pharmaceuticals, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. (formerly Belmac Corporation) and subsidiaries (the
"Company") as of December 31, 1994 and September 30, 1995, and the related
consolidated statements of operations, changes in common stockholders' equity,
and cash flows for the year ended December 31, 1994 and for the nine months
ended September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1994
and September 30, 1995, and the results of its operations and its cash flows for
the periods then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has been experiencing recurring
losses from operations as well as negative operating cash flows. These matters
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Tampa, Florida
December 8, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Bentley Pharmaceuticals, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in common stockholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Bentley Pharmaceuticals, Inc. (formerly Belmac
Corporation), and its subsidiaries at December 31, 1993, and the results of
their operations and their cash flows for the year ended June 30, 1992, the six
months ended December 31, 1992, and the year ended December 31, 1993 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Bentley
Pharmaceuticals, Inc. (formerly Belmac Corporation), for any period subsequent
to December 31, 1993.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICE WATERHOUSE LLP
Tampa, Florida
March 30, 1994
F-3
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,552 $ 1,321 $ 580
Investments available for sale....................... 1,118 215 1
Receivables.......................................... 5,953 7,609 8,268
Inventories.......................................... 1,298 1,247 1,000
Prepaid expenses and other........................... 302 296 361
-------- -------- -------------
Total current assets................................ 10,223 10,688 10,210
-------- -------- -------------
Fixed assets, net..................................... 3,704 3,618 4,012
Drug licenses and related costs, net.................. 1,474 968 965
Other non-current assets, net......................... 759 1,058 983
-------- -------- -------------
$ 16,160 $ 16,332 $ 16,170
-------- -------- -------------
-------- -------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 4,466 $ 5,374 $ 5,067
Accrued expenses...................................... 2,445 2,282 2,144
Short term borrowings................................. 1,040 663 1,216
Current portion of long term debt..................... 229 61 4
Deferred revenue...................................... -- 380 --
-------- -------- -------------
Total current liabilities........................... 8,180 8,760 8,431
-------- -------- -------------
Long term debt........................................ 35 -- --
-------- -------- -------------
Other non-current liabilities......................... 2,786 336 500
-------- -------- -------------
Commitments and Contingencies (Notes 11, 15 and 16)
Redeemable preferred stock, $1.00 par value,
authorized 2,000 shares
Series A, issued and outstanding, 74 shares at
December 31, 1993, and 70 shares at December 31,
1994 and September 30, 1995............................. 2,218 2,256 2,374
-------- -------- -------------
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 5,000 shares,
issued and outstanding, 2,070, 2,977 and 2,978 shares... 41 60 60
Stock purchase warrants (to purchase 156, 477 and 574
shares of common stock).................................
Paid-in capital in excess of par value................ 63,902 69,493 69,009
Stock subscriptions receivable........................ (1,268) (1,550) (105)
Accumulated deficit................................... (58,344) (61,922) (63,441)
Cumulative foreign currency translation adjustment.... (1,390) (1,101) (658)
-------- -------- -------------
2,941 4,980 4,865
-------- -------- -------------
$ 16,160 $ 16,332 $ 16,170
-------- -------- -------------
-------- -------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX FOR THE YEAR FOR THE NINE
YEAR MONTHS ENDED MONTHS ENDED
ENDED ENDED DECEMBER 31, SEPTEMBER 30,
JUNE 30, DECEMBER 31, ------------------ ---------------------
1992 1992 1993 1994 1994 1995
-------- ------------ -------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales................................. $ 13,138 $ 9,708 $ 19,849 $26,284 $19,676 $23,583
Cost of sales......................... 8,871 5,899 15,100 21,464 15,940 19,523
-------- ------------ -------- ------- ----------- -------
Gross margin.......................... 4,267 3,809 4,749 4,820 3,736 4,060
-------- ------------ -------- ------- ----------- -------
Operating expenses:
Selling, general and
administrative........................ 8,665 9,830 9,170 7,716 6,428 5,516
Research and development............ 5,168 3,599 1,555 759 608 341
Depreciation and amortization....... 925 743 756 575 377 408
Write-off of Biolid and related
costs................................. -- -- 2,241 -- -- --
Settlement of class action
litigation............................ -- -- 1,000 -- -- --
Other non-recurring charges......... -- 9,321 -- -- -- --
-------- ------------ -------- ------- ----------- -------
Total operating expenses............ 14,758 23,493 14,722 9,050 7,413 6,265
-------- ------------ -------- ------- ----------- -------
Loss from operations.................. (10,491) (19,684) (9,973) (4,230) (3,677) (2,205)
Other (income) expenses:
Interest expense.................... 427 205 271 423 140 215
Interest income..................... (448) (256) (91) (123) (44) (1)
Other (income) expense.............. (2) (102) 83 (952) (122) (900)
-------- ------------ -------- ------- ----------- -------
Loss before income taxes.............. (10,468) (19,531) (10,236) (3,578) (3,651) (1,519)
Provision for income taxes............ 343 -- -- -- -- --
-------- ------------ -------- ------- ----------- -------
Net loss.............................. $(10,811) $(19,531) $(10,236) $(3,578) $(3,651) $(1,519)
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
Net loss per common share............. $(11.12) $(16.60) $(6.32) $(1.56) $(1.67) $(.55)
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
Weighted average common shares
outstanding........................... 997 1,203 1,655 2,395 2,257 2,978
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
$.02 PAR VALUE
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT TRANSACTIONS TOTAL
------ ------ ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1991................. 751 $ 15 $ 19,252 $ (17,766) $ 730 $ 2,231
Private placement of common stock...... 94 2 8,445 -- -- 8,447
Stock subscriptions receivable......... -- -- -- -- (199) (199)
Conversion of redeemable preferred
stock.................................... 66 1 8,399 -- -- 8,400
Exercise of stock options.............. 42 1 2,056 -- -- 2,057
Conversion of stock purchase
warrants................................. 203 4 8,109 -- (1,392) 6,721
Issuance of shares relating to Chimos
acquisition.............................. 10 -- 612 -- -- 612
Repurchase of common stock............. (5) -- (495) -- -- (495)
Accretion/accrual of
dividends--preferred stock........... -- -- (277) -- -- (277)
Foreign currency translation
adjustment............................... -- -- -- -- 666 666
Net loss............................... -- -- -- (10,811) -- (10,811)
------ ------ ---------- ----------- ------------ --------
Balance at June 30, 1992................. 1,161 23 46,101 (28,577) (195) 17,352
Private placement of common stock...... 81 2 3,862 -- -- 3,864
Stock subscriptions receivable......... -- -- -- -- (1,700) (1,700)
Cancellation of stock subscriptions
receivable............................... -- -- -- -- 426 426
Conversion of redeemable preferred
stock.................................... 1 -- 201 -- -- 201
Exercise of stock options.............. 1 -- 60 -- -- 60
Issuance of common stock as
compensation............................. 17 -- 960 -- -- 960
Other equity transactions.............. -- -- 135 -- -- 135
Accretion/accrual of
dividends--preferred stock........... -- -- (439) -- -- (439)
Foreign currency translation
adjustment............................... -- -- -- -- (1,423) (1,423)
Net loss............................... -- -- -- (19,531) -- (19,531)
------ ------ ---------- ----------- ------------ --------
Balance at December 31, 1992............. 1,261 25 50,880 (48,108) (2,892) (95)
------ ------ ---------- ----------- ------------ --------
</TABLE>
(Continued)
F-6
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON STOCKHOLDERS' EQUITY (CONCLUDED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
$.02 PAR VALUE
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT TRANSACTIONS TOTAL
------ ------ ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992............. 1,261 $ 25 $ 50,880 $ (48,108) $ (2,892) $ (95)
Private placement of common stock...... 733 15 7,370 -- -- 7,385
Stock subscription receivable.......... -- -- -- -- (856) (856)
Stock subscription received............ -- -- -- -- 1,700 1,700
Conversion of redeemable preferred
stock.................................... 36 1 5,401 -- -- 5,402
Conversion of stock purchase
warrants................................. 9 -- 97 -- -- 97
Conversion of minority interest--
Pharmacin Corp........................... 10 -- -- -- -- --
Stock issued for termination
compensation............................. 15 -- 330 -- -- 330
Miscellaneous.......................... 6 -- 44 -- -- 44
Accretion/accrual of
dividends--preferred stock........... -- -- (220) -- -- (220)
Foreign currency translation
adjustment............................... -- -- -- -- (610) (610)
Net loss............................... -- -- -- (10,236) -- (10,236)
------ ------ ---------- ----------- ------------ --------
Balance at December 31, 1993............. 2,070 41 63,902 (58,344) (2,658) 2,941
Conversion of stock purchase
warrants................................. 2 -- 34 -- -- 34
Private placement of common stock,
net...................................... 826 17 4,776 -- -- 4,793
Stock subscriptions receivable......... -- -- -- -- (1,596) (1,596)
Stock subscriptions received........... -- -- -- -- 693 693
Conversion of redeemable preferred
stock.................................... 1 -- 129 -- -- 129
Repurchase of common stock............. (41) (1) (620) -- 621 --
Sale of treasury stock................. 42 1 294 -- -- 295
Issuance of common stock as
compensation............................. 7 -- 146 -- -- 146
Issuance of common stock to settle
litigation............................... 70 2 998 -- -- 1,000
Accrual of dividends--preferred
stock.................................... -- -- (166) -- -- (166)
Foreign currency translation
adjustment............................... -- -- -- -- 289 289
Net loss............................... -- -- -- (3,578) -- (3,578)
------ ------ ---------- ----------- ------------ --------
Balance at December 31, 1994............. 2,977 60 69,493 (61,922) (2,651) 4,980
Stock subscription received............ -- -- -- -- 562 562
Stock subscription
revaluation/cancellation................. -- -- (351) -- 883 532
Common stock issued as compensation.... 1 -- 3 -- -- 3
Accrual of dividends--preferred
stock.................................... -- -- (118) -- -- (118)
Miscellaneous.......................... -- -- (18) -- -- (18)
Foreign currency translation
adjustment............................... -- -- -- -- 443 443
Net loss............................... -- -- -- (1,519) -- (1,519)
------ ------ ---------- ----------- ------------ --------
Balance at September 30, 1995............ 2,978 $ 60 $ 69,009 $ (63,441) $ (763) $ 4,865
------ ------ ---------- ----------- ------------ --------
------ ------ ---------- ----------- ------------ --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-7
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR SIX MONTHS FOR THE FOR THE NINE
ENDED ENDED YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------- ------------ ------------------ ---------------------
1992 1992 1993 1994 1994 1995
-------- ------------ -------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(10,811) $(19,531) $(10,236) $(3,578) $(3,651) $(1,519)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 925 743 756 575 377 408
Gain on sale of Belmacina(R)....... -- -- -- (884) -- (380)
Other non-cash items............... (72) (50) (10) 108 120 117
Write-off of Biolid(R) and related
costs.................................. -- -- -- -- -- --
Settlement of class action
litigation............................. -- -- 1,000 -- -- --
Stock issued as compensation....... -- -- 375 146 -- --
Other non-recurring charges........ -- 9,321 -- -- -- --
Cancellation of Stock subscription
receivable............................. -- -- -- -- -- 533
Research and development charges... -- 250 -- -- -- --
(Increase) decrease in assets and
increase (decrease) in
liabilities net of effects of
acquisitions:
Receivables........................ (5,561) 2,886 (2,160) 124 1,361 (1,007)
Inventories........................ (2,815) 930 1,066 154 (698) 199
Prepaid expenses and other current
assets................................. (444) 279 (10) 20 (114) (44)
Other assets....................... (811) (165) 286 349 210 66
Accounts payable and accrued
expenses............................... 5,086 743 (2,936) 228 386 (795)
Other liabilities.................. -- -- -- (657) -- --
-------- ------------ -------- ------- ----------- -------
Net cash (used in) operating
activities............................. (14,503) (4,594) (9,628) (3,415) (2,009) (2,422)
-------- ------------ -------- ------- ----------- -------
Cash flows from investing activities:
Proceeds from sale of Belmacina(R)... -- -- -- 651 778 922
Proceeds from sale of investments.... 1,924 4,533 555 1,040 720 214
Purchase of investments.............. (5,479) (1,510) (1,118) (116) (116) --
Net change in fixed assets........... (795) (296) (133) -- -- (507)
Investment in partnership............ -- -- -- (648) (605) (13)
(Repayment to) received from Evans... -- -- 532 (793) (793) --
Proceeds from sale of Amodex(R)
rights................................. -- -- 3,260 -- -- --
Pharmaceutical license
acquisitions........................... (5,500) (459) -- -- -- --
Chimos acquisition, net of cash
acquired............................... (312) -- -- -- -- --
Other investments.................... -- (30) (20) -- -- --
Laboratorios Belmac acquisition, net
of cash acquired................... (2,759) -- -- -- -- --
-------- ------------ -------- ------- ----------- -------
Net cash provided by (used in)
investing activities................... (12,921) (2,238) 3,076 134 (16) 616
-------- ------------ -------- ------- ----------- -------
</TABLE>
(Continued)
F-8
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR SIX MONTHS FOR THE FOR THE NINE
ENDED ENDED YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------- ------------ ------------------ ---------------------
1992 1992 1993 1994 1994 1995
-------- ------------ -------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings............................. $ 242 $ (858) $ 391 $ (397) $ (242) $ 501
Proceeds from private placement:
Preferred stock.................... 15,750 -- -- -- -- --
Common stock....................... 10,120 2,386 8,711 3,761 2,903
Offering costs of private
placement.............................. (2,136) (217) (2,096) (377) (287) (56)
Collection of stock subscription
receivable............................. -- -- 1,700 693 457 562
Proceeds from exercise of stock
options................................ 2,057 60 -- -- -- --
Proceeds from exercise of stock
warrants............................... 6,522 -- 97 34 34 --
Other equity transactions............ -- 135 -- -- -- --
Repayments of long term debt......... (1,228) (1,632) (221) (203) (153) (57)
Payments on capital leases........... (36) (45) (81) (72) (55) (25)
-------- ------------ -------- ------- ----------- -------
Net cash provided by (used in)
financing activities................... 31,291 (171) 8,501 3,439 2,657 925
-------- ------------ -------- ------- ----------- -------
Effect of exchange rate changes on
cash................................... (425) (536) (997) (389) (9) 140
-------- ------------ -------- ------- ----------- -------
Net increase (decrease) in cash and
cash equivalents..................... 3,442 (3,063) 952 (231) 623 (741)
Cash and cash equivalents at beginning
of period............................ 221 3,663 600 1,552 1,552 1,321
-------- ------------ -------- ------- ----------- -------
Cash and cash equivalents at end of
period................................. $ 3,663 $ 600 $ 1,552 $ 1,321 $ 2,175 $ 580
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Registrant paid cash during the period for (in thousands):
<S> <C> <C> <C> <C> <C> <C>
Interest................... $ 267 $ 186 $ 309 $ 263 $ 172 $ 220
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
Taxes...................... $ 285 $ 428 $ 0 $ 6 $ 6 --
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
The Registrant has issued Common Stock in exchange for services, rights or in
settlement of litigation as follows (in thousands):
<S> <C> <C> <C> <C> <C> <C>
Shares Issued.............. -- 17 38 99 7 1
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
Amount..................... -- $ 960 $ 820 $ 1,290 $ 146 $ 3
-------- ------------ -------- ------- ----------- -------
-------- ------------ -------- ------- ----------- -------
</TABLE>
The accompanying Notes to Consolidated Statements
are an integral part of these financial statements.
F-9
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY AND OPERATIONS
Bentley Pharmaceuticals, Inc. (formerly Belmac Corporation) (the "Company")
is an international pharmaceutical and health care company engaged primarily in
the manufacturing, marketing and distribution of pharmaceutical products in
France and Spain, with limited distribution of health care products and research
and development activities in the United States. The Company's operations in
France consist of the import and distribution of fine chemicals and the
marketing of specialty pharmaceutical products. In Spain, the Company
manufactures, packages and distributes both its own and other companies'
pharmaceutical products. In the United States, the Company markets disposable
linens to emergency health services which are manufactured under contract.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company has incurred significant net
losses as well as negative operating cash flows for all periods presented. These
losses, although decreasing, and other factors may indicate that the Company may
be unable to continue as a going concern.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing as may
be required, and ultimately to attain profitable operations and positive cash
flows. Management has developed a comprehensive strategic plan which focuses on
short-term profitability and goals and includes plans to achieve continued
profitability on an ongoing basis. Additionally, management is exploring various
financing alternatives, including a public offering of its debt and/or equity
securities. Management plans include careful prioritization of research and
development activities and continuation of an austerity program that it
implemented in early 1993. Additionally, management is considering possible
joint ventures or other third party relationships for the continuing
development, licensing and marketing of certain drugs currently under
development.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN YEAR END
Effective December 31, 1992 the Company changed its fiscal year end from
June 30 to December 31.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: B.O.G. International Finance, Inc., Belmac
Jamaica, Ltd., Belmac Healthcare Corporation and its wholly owned subsidiary
Belmac Hygiene, Inc., Chimos/LBF S.A. (formerly known as the separate entities
of Laboratoires Belmac S.A. and Chimos S.A.) and its wholly owned subsidiary
Laboratorios Belmac S.A., and Belmac Holdings, Inc. (formerly known as Pharmacin
Holdings, Inc.), and its wholly owned subsidiary, Belmac A. I., Inc. (formerly
known as Pharmacin Corp.). Belmac Hygiene, Inc. entered into a 50/50 partnership
with Maximed Corporation of New York in March 1994. Belmac Hygiene's
participation in the partnership is accounted for using the equity method. All
significant intercompany balances have been eliminated in consolidation. The
financial position and
F-10
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
results of operations of the Company's foreign subsidiaries are measured using
local currency as the functional currency. Assets and liabilities of foreign
subsidiaries are translated at the rate of exchange in effect at the end of the
period. Revenues and expenses are translated at the average exchange rate for
the period. Foreign currency translation gains and losses not impacting cash
flows are credited to or charged against Stockholders' Equity. Foreign currency
translation gains and losses arising from cash transactions are credited to or
charged against current earnings.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents for purposes of
the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
Investments in securities which do not meet the definition of cash equivalents
are classified as investments available for sale in the Consolidated Balance
Sheets. A bank overdraft of approximately $30,000 at December 31, 1993 is
included in accounts payable as of that date and restricted cash of
approximately $300,000 at December 31, 1993 is included in investments available
for sale as of that date as well.
INVESTMENTS AVAILABLE FOR SALE
Investments available for sale are reported at approximate market value.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out ("FIFO") method.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the following estimated economic lives of the assets:
YEARS
-----
Buildings............................................... 30
Equipment............................................... 5-7
Furniture and fixtures.................................. 5-7
Other................................................... 5
Leasehold improvements are depreciated over the life of the respective
lease.
Expenditures for replacements and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized, while
expenditures for maintenance and repairs are charged against operations as
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
recognized currently.
DRUG LICENSES AND RELATED COSTS
Drug licenses and related costs incurred in connection with obtaining or
acquiring licenses, patents, and other proprietary rights related to the
Company's commercially developed products are capitalized. Capitalized drug
licenses and related costs are being amortized on a straight-line basis over
fifteen years
F-11
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
from the dates of acquisition. Costs of acquiring pharmaceuticals requiring
further development are expensed as purchased research and development. Carrying
values of such assets are reviewed annually by the Company and are adjusted for
any diminution in value.
INVESTMENT IN PARTNERSHIP
Belmac Hygiene, Inc., a wholly-owned subsidiary of the Company entered into
a 50/50 partnership in March 1994 with Maximed Corporation ("Maximed") to
develop and market feminine healthcare products. Maximed contributed the
hydrogel-based technology and the Company, through its subsidiary, is
responsible for providing financing and funding of the partnership's activities.
The investment in the partnership is accounted for using the equity method.
Belmac Hygiene, Inc. has become involved in a dispute with Maximed and filed
suit in December 1994 against Maximed (See Note 15). In the opinion of
management, the carrying value of its investment in the partnership, accounted
for using the equity method, of $501,000 and $513,000 as of December 31, 1994
and September 30, 1995, respectively, is not impaired and no reserve is
considered necessary.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
AMORTIZATION OF GOODWILL
Costs of investments in purchased companies in excess of the underlying fair
value of net identifiable assets at date of acquisition are recorded as goodwill
and included in other non-current assets which is amortized over fifteen years
on a straight line basis. Carrying values of such assets are reviewed annually
by the Company and are adjusted for any diminution in value.
REVENUE RECOGNITION
Sales of products are recognized by the Company when the products are
shipped to customers. The Company allows sales returns in certain situations,
but does not reserve for returns and allowances based upon the Company's
favorable historical experience.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
109). SFAS 109 mandates the liability method in accounting for the effects of
income taxes for financial reporting purposes. The Company adopted SFAS 109
effective January 1, 1993. This statement did not have a material impact on the
Company's consolidated financial statements as a result of establishing a
valuation allowance equal to the deferred tax asset arising primarily from its
net operating loss carryforwards.
NET LOSS PER COMMON SHARE
Primary loss per common share is computed by dividing the net loss (less
accretion of discount and accrued dividends on mandatorily redeemable preferred
stock) by the weighted average number of shares of Common Stock outstanding
during each period. Common Stock equivalents were not included in the
calculation of primary loss per share as they were determined to be
antidilutive.
F-12
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company effected a one-for-ten reverse split of its Common Stock on July
25, 1995 as a result of an amendment to its Articles of Incorporation which was
approved by the stockholders at the Company's Annual Stockholders Meeting held
on June 9, 1995. All information with respect to per share data and number of
common shares has been retroactively adjusted to give effect to the reverse
stock split.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("FAS 121") effective for fiscal years beginning after December 15, 1995. FAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management believes that the adoption of FAS 121 will not have a
material impact on the financial condition or the results of operations of the
Company.
In October 1995, FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") effective for
transactions entered into after December 15, 1995. FAS 123 provides alternatives
for the methods used by entities to record compensation expense associated with
its stock-based compensation plans. Additionally, FAS 123 provides further
guidance on the disclosure requirements relating to stock-based compensation
plans. Management believes that the adoption of FAS 123 will not have a material
impact on the financial condition or the results of operations of the Company.
UNAUDITED PERIOD
Amounts reported for the nine-month period ended September 30, 1994 are
unaudited and in the opinion of management of the Company include all
adjustments that are of a normal recurring nature and necessary for a fair
presentation.
NOTE 3--ACQUISITIONS
CHIMOS S.A.
In August 1991, the Company, through its 100% owned subsidiary, Laboratoires
Belmac S.A., purchased all of the outstanding shares of Chimos S.A., ("Chimos"),
a company with executive offices in Paris, France. The acquisition price
consisted of 3,000,000 French Francs (approximately $500,000) plus 10,000 shares
of the Company's Common Stock (approximate value of $613,000). This acquisition
has been accounted for by the purchase method and the excess of purchase price
over the fair market value of net assets acquired has been recorded as goodwill
(approximately $548,000) and included in other non-current assets. These two
entities were merged in 1994 into one surviving entity known as Chimos/LBF S.A.
Chimos/LBF S.A. is engaged in the distribution of specialty pharmaceutical
products and fine chemicals to pharmacies and hospitals in France.
RIMAFAR S.A.
In February 1992, the Company, through its wholly-owned subsidiary,
Laboratoires Belmac S.A., consummated the acquisition of all of the outstanding
shares of Rimafar S.A. (currently known as
F-13
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ACQUISITIONS--(CONTINUED)
Laboratorios Belmac S.A.), a Spanish corporation. The Company paid a cash
purchase price of approximately $3,100,000 (including costs associated with the
acquisition) for 100% of the shares.
This acquisition was accounted for by the purchase method and the excess of
purchase price over the tangible net assets acquired was assigned to nine
different Spanish drug licenses held by the Company (See Note 8).
PRO FORMA FINANCIAL INFORMATION
The following pro forma Statement of Operations reflects the effect on the
Company's 1992 operations, as if the above described acquisitions had occurred
at the beginning of the Company's fiscal year ended June 30, 1992:
PRO FORMA COMBINED (UNAUDITED)
------------------------------
Net sales............................... $ 17,249,000
Net loss................................ $(11,145,000)
Loss per Common Share................... $ (11.40)
The above pro forma financial information relating to Chimos and
Laboratorios Belmac is presented in accordance with accounting rules relating to
business acquisitions and is not necessarily indicative either of the results of
operations that would have occurred had the acquisitions been effective at the
beginning of the fiscal year indicated or of future results of operations of the
combined companies.
NOTE 4--OTHER NON-RECURRING CHARGES
The aggregate amount of other non-recurring charges for the period ended
December 31, 1992 of $9,321,000 relates primarily to a 1992 realignment of the
Company and its products in the United States and in Europe by its management as
outlined below.
MANAGEMENT
On February 26, 1993, Jean-Francois Rossignol resigned as Chairman and Chief
Executive Officer of the Company. The Company agreed to forgive $271,000 of a
note receivable from Dr. Rossignol at the time of his resignation, the cost of
which has been included in the period ended December 31, 1992.
The Company decided in December 1992 to realign its pharmaceutical
operations in France by implementing a more cost effective marketing strategy
utilizing an outside marketing firm during certain times of the year in place of
its internal French management and sales force. Severance costs associated with
the displacement of the French employees totaling approximately $1,054,000 were
included in the period ended December 31, 1992.
As part of the realignment of French operations, the Company decided to
relocate its French offices from Sophia Antipolis to Paris. In conjunction with
this decision the Company wrote-off certain leasehold improvements and other
assets and expensed certain lease and other commitments aggregating $2,108,000
which was included in the period ended December 31, 1992.
On November 23, 1992 Michael M. Harshbarger was appointed President and
Chief Operating Officer of the Company. Under the terms of Harshbarger's
employment agreement 10,000 shares of the Company's Common Stock were granted to
him on December 16, 1992. The market value of the shares on the date of grant of
$575,000 was included in the period ended December 31, 1992.
F-14
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--OTHER NON-RECURRING CHARGES--(CONTINUED)
As an incentive to its employees in Spain, the Company's Board of Directors
on December 29, 1992 approved the issuance of 7,000 shares of Common Stock to
the employees of Laboratorios Belmac, resulting in a charge of $385,000 based on
the market price of the Company's Common Stock on the date of grant. These costs
were also included in the period ended December 31, 1992.
PRODUCTS
In January 1993, the Company sold its product rights and inventory of
Amodex(R) to a third party. Charges of $3,574,000 and $212,000 representing the
write-down of drug licenses and inventory, respectively, to net-realizable value
were included in the period ended December 31, 1992.
The Company decided to discontinue marketing its Biolid(R) infant and
pediatric formulations in France due to lower than expected sales volume and low
gross margins. Additionally, it was determined that excessive quantities of the
adult formulation of Biolid(R) existed, recognizing the Company's restructured
marketing efforts. Accordingly, inventory write-offs relating to Biolid(R)
totaling approximately $630,000 were reflected in the period ended December 31,
1992. The Company wrote-off certain capitalized costs related to the sachet
formulation of Biolid(R) as of December 31, 1993 (See Note 8).
The Company has decided to focus its product development efforts for
Alphanon(R) on a transdermal patch delivery system and accordingly $243,000 of
deferred product costs relating to the intra-navel transdermal technology were
written off in 1992. The inability to collect receivables for Alphanon(R) sales
amounting to $162,000 from a major customer outside the United States was
indicative of the limited market opportunity for the product in its
navel-transdermal delivery form. Accordingly, the Company also wrote-off
approximately $107,000 of inventory relating to Alphanon(R).
NOTE 5--RECEIVABLES
Receivables consist of the following (in Thousands):
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
Trade receivables............................ $5,163 $6,360 $ 7,479
Sale of Belmacina(R) (Note 8)................ -- 1,140 243
Other (Notes 8 and 15)....................... 840 233 645
------ ------ -------------
6,003 7,733 8,367
Less--allowance for doubtful accounts........ (50) (124) (99)
------ ------ -------------
$5,953 $7,609 $ 8,268
------ ------ -------------
------ ------ -------------
NOTE 6--INVENTORIES
Inventories consist of the following (in Thousands):
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
Raw materials................................. $ 553 $ 149 $ 217
Work in progress.............................. 3 3 1
Finished goods................................ 742 1,343 1,453
------ ------ -------------
1,298 1,495 1,671
Less--allowance for slow-moving or obsolete
inventory.................................. -- (248) (671)
------ ------ -------------
$1,298 $1,247 $ 1,000
------ ------ -------------
------ ------ -------------
F-15
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--FIXED ASSETS
Fixed assets consist of the following (in Thousands):
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
Land..................................... $1,033 $1,121 $ 1,195
Buildings................................ 1,667 1,810 2,477
Equipment................................ 845 916 964
Furniture and fixtures................... 603 675 653
Leasehold improvements................... 302 340 335
Equipment under capital lease............ 181 221 138
------ ------ -------------
4,631 5,083 5,762
Less-accumulated depreciation............ (927) (1,465) (1,750)
------ ------ -------------
$3,704 $3,618 $ 4,012
------ ------ -------------
------ ------ -------------
Depreciation expense was $287,000, $173,000, $489,000, $434,000, $258,000
(unaudited) and $290,000 for the year ended June 30, 1992, for the six months
ended December 31, 1992, for the years ended December 31, 1993 and 1994, and for
the nine months ended September 30, 1994 and 1995, respectively.
NOTE 8--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (in Thousands):
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
Laboratorios Belmac's portfolio (Note 3)...... $1,721 $1,259 $ 1,342
Less--accumulated amortization................ (247) (291) (377)
------ ------ -------------
$1,474 $ 968 $ 965
------ ------ -------------
------ ------ -------------
In September 1992, the Company, through its Spanish subsidiary Laboratorios
Belmac, acquired the Spanish license and product rights to Belmacina(R), a
ciprofloxacin antibiotic, for approximately $577,000. The Company sold its
Spanish license and product rights to Ciprofloxacin in 1994 for approximately
$1,556,000 and sold the related trademark for approximately $380,000 in 1995.
The Company received approximately $651,000 in cash, net of transaction costs
and a receivable of approximately $1,140,000, which includes amounts related to
the sale of the trademark. The gain on sale of the license and product rights of
approximately $884,000 was included in Other Income for the year ended December
31, 1994 and the gain on the sale of the related trademark was recorded as a
receivable and as deferred revenue as of December 31, 1994. The Company
recognized the gain on the sale of the related trademark upon the transfer of
the trademark to the buyer in 1995.
In December 1991, the Company, through its wholly-owned French subsidiary
Laboratoires Belmac S.A., acquired certain inventory and all French product
rights of Amodex(R). Amodex(R) is an amoxicillin-based antibiotic that has been
registered with the Ministry of Health in France and has been granted regulatory
approval for marketing in France. Pursuant to this agreement, Laboratoires
Belmac S.A. agreed to pay approximately $6,800,000, of which $5,500,000 was paid
at consummation and approximately $1,300,000 was agreed to be payable in three
installments in December 1993, 1994
F-16
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--DRUG LICENSES AND RELATED COSTS, NET--(CONTINUED)
and 1995. Subsequent to June 30, 1992, Laboratoires Belmac S.A. renegotiated the
terms of the agreement whereby one payment of approximately $882,000 was made in
lieu of the three installment payments. The related intangible asset and debt
were adjusted at June 30, 1992 to reflect the revised agreement.
In January 1993 the Company sold all of its French product rights and
inventory of Amodex(R) to a third party. At December 31, 1992 the cost
associated with the Amodex(R) product rights was reduced to $3,260,000 to
reflect its net realizable value (See Note 4).
In September 1993 the Company entered into an agreement to sell its rights
to the Biolid(R) sachet formulation in France and related inventories to Evans
Medical S.A. for approximately $2,245,000. The Company received approximately
$950,000 cash upon execution of the agreement including approximately $350,000
for promotion and marketing of the product. The Company recorded a receivable of
approximately $1,550,000 as of September 30, 1993, representing the balance of
the purchase price which was due upon transfer of the French AMM (license to
market the product) to Evans. This transaction was subject to approval, by a
French regulatory authority, of the transfer of the French AMM to Evans. The
French regulatory authority subsequently requested additional information prior
to approving this transfer and requested marketing of Biolid(R) be suspended
pending the additional data. The Company discontinued marketing this product,
which is a sachet formulation.
As a result of the regulatory action, the Company entered into an agreement
with Evans in March 1994 which canceled the previous sales agreement and the
Company agreed to refund approximately $532,000 deposited by Evans and an
additional $175,000 of the promotional costs paid by Evans. Accordingly, the
Company reversed the sale of the rights to the sachet formulation of Biolid(R)
and removed the previously recorded gain and receivable from its books,
effective December 31, 1993. As a result of the decision to withdraw the sachet
formulation of Biolid(R) from the French market and the subsequent agreement
with Evans, the Company recorded an expense of $2,241,000 in the fourth quarter
of 1993 reflecting the write-off of the sachet formulation of Biolid(R)
intangible asset, the Biolid(R) inventories and the reimbursement of Evans'
promotional costs.
The Company owns all rights, title and interest to Alphanon(R), a camphor
based anti-hemorrhoidal drug. In connection with the acquisition of Alphanon(R),
the Company agreed to pay for the longer of fifteen years from the first
marketing of Alphanon(R) in each country or the life of an Alphanon(R) patent in
each country, a royalty fee of 5% of the gross profit from the manufacture and
sale of the product and 5% of the net royalty payments received from any
licensing agreements of the product. Costs capitalized related to this drug
license included $262,000 for the value of Common Stock issued. In December 1992
the Company wrote-off all remaining unamortized Alphanon(R) license and related
costs reflecting the decision to discontinue further sales and marketing efforts
related to Alphanon(R) pending further development of the transdermal patch
technology (See Note 4).
Amortization expense for drug licenses and related costs was approximately
$553,000, $328,000, $227,000, $102,000, $89,000 (unaudited) and $86,000 for the
year ended June 30, 1992, for the six months ended December 31, 1992, for the
years ended December 31, 1993 and 1994, and for the nine months ended September
30, 1994 and 1995, respectively.
F-17
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--ACCRUED EXPENSES
Accrued expenses consist of the following (in Thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
<S> <C> <C> <C>
Accrued expenses.............................................. $ 774 $1,914 $ 1,669
Accrued payroll and severance benefits (Note 4)............... 964 368 475
Amount due to Evans (Note 8).................................. 707 -- --
------ ------ -------------
$2,445 $2,282 $ 2,144
------ ------ -------------
------ ------ -------------
</TABLE>
NOTE 10--DEBT
Short term borrowings consist of the following (in Thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1993 1994 1995
------- ----- -------------
<S> <C> <C> <C>
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate on the
note is 13.9%................................................. $ 570 $ 463 $ 675
Short-term loan (with a French financial institution),
maturing in January 1994, average interest rate 4.5%........ 369 -- --
Short-term loan (with a French financial institution), matured
on February 2, 1994, interest rate 4.25%.................... 101 -- --
Short-term loan (with a French financial institution),
maturing in January 1995, average interest rate 7.3%........ -- 200 --
Short term loan (with a French financial institution) maturing
in December 1995, average interest rate 11.3%............... -- -- 304
Other......................................................... -- -- 237
------- ----- -------------
Total Short term borrowings................................. $ 1,040 $ 663 $ 1,216
------- ----- -------------
------- ----- -------------
</TABLE>
Long-term debt consists of the following (in Thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1993 1994 1995
------ ---- -------------
<S> <C> <C> <C>
First mortgage loan, principal and interest of $35 quarterly
through February 1995, collateralized by land and buildings in
Spain. Interest is based on the Madrid Interbank Offering Rate
(MIBOR*) plus 1.45%.............................................. $ 175 $37 $--
Capital lease obligations, relating to various equipment used by
the Company.................................................... 89 24 4
------ ---- ---
264 61 4
Less current portion............................................. (229) (61 ) (4)
------ ---- ---
Total long-term debt........................................... $ 35 $ 0 $ 0
------ ---- ---
------ ---- ---
</TABLE>
- ------------
* MIBOR at December 31, 1993 and 1994, and September 30, 1995 was 9.5%, 8.65%
and 9.35%, respectively.
The weighted average interest rate on borrowings outstanding at December 31,
1994 and September 30, 1995 was 8.57% and 10.5%, respectively.
F-18
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--REDEEMABLE PREFERRED STOCK
During the year ended June 30, 1992, the Company issued 290,000 shares of $1
par value Series A Convertible Exchangeable Preferred Stock (the "Series A
Preferred Stock") and 340,000 shares of $1 par value Series B Convertible
Exchangeable Preferred Stock ("the Series B Preferred Stock") at $25 per share.
The issuance of these shares provided aggregate proceeds to the Company of
$15,750,000. Since the Series A and B Preferred Stock meet the definition of
Mandatorily Redeemable Preferred Stock, it has been excluded from the Common
Stockholders' Equity section of the Consolidated Balance Sheets. As of December
31, 1994 and September 30, 1995, 220,000 shares of the Series A Preferred Stock
and all shares of the Series B Preferred Stock had been converted into 56,100
and 48,100 shares, respectively, of Common Stock.
The shares of Series A and B Preferred Stock were convertible at the option
of the holders into Common Stock at any time prior to the close of business on
the date fixed for redemption or exchange, at an initial conversion price for
the Series A Preferred Stock of $115.00 per share (at an initial conversion rate
of approximately .21739 shares of Common Stock for each share of Series A
Preferred Stock) and for the Series B Preferred Stock of $160.00 per share (at
an initial conversion rate of .15625 shares of Common Stock for each share of
Series B Preferred Stock). The conversion rates were adjusted by the Company, in
lieu of paying cumulative dividends of 9% per annum to .25828 and .1703 for the
Series A and B Preferred Stock, respectively. The dividend payment date for
Series A Preferred Stock is October 15. The dividend payment date for Series B
Preferred Stock was February 1, 1993.
The Series A Preferred Stock has a liquidation preference equal to $25.00
per share, plus accrued and unpaid dividends up to the liquidation date. The
Series A Preferred Stock is redeemable for cash at the option of the Company.
The Preferred Stock is also redeemable for cash at the option of the holder upon
certain major stock acquisitions or business combinations at $25.00 per share,
plus accrued and unpaid dividends through the redemption dates. The holders of
Preferred Stock have no voting rights except as required by applicable law and
except that if the equivalent of two full annual cash dividends shall be accrued
and unpaid, the holders of the Series A Preferred Stock shall have the right, as
a class, to elect two additional members of the Company's Board of Directors. As
of the date hereof, the holders of the Series A Preferred Stock have not
exercised their right to appoint such directors.
The Series A Preferred Stock is exchangeable in whole, but not in part, at
the option of the Company on any dividend payment date beginning October 15,
1993, for 9% Convertible Subordinated Debentures of the Company due 2016.
Holders of Series A Preferred Stock will be entitled to $25 principal amount of
Debentures for each share of Series A Preferred Stock.
The Series A Preferred Stock is recorded at redemption value, which is
$25.00 per share plus cumulative dividends of 9% per annum. The following table
summarizes activity of the Series A and B Preferred Stock:
F-19
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--REDEEMABLE PREFERRED STOCK--(CONTINUED)
(In Thousands)
<TABLE>
<CAPTION>
SERIES A SERIES B
----------------- -----------------
<S> <C> <C> <C> <C>
SHARES AMOUNTS SHARES AMOUNTS
------ ------- ------ -------
Balance at December 31, 1992............................... 74 $1,998 212 $ 5,403
Converted to Common Stock................................ -- -- (212) (5,403)
Accretion of discount and accrual of 9% dividends........ -- 220 -- --
------ ------- ------ -------
Balance at December 31, 1993............................... 74 2,218 -- --
Converted to Common Stock................................ (4) (128)
Accrual of 9% dividends.................................. -- 166 -- --
------ ------- ------ -------
Balance at December 31, 1994............................... 70 2,256 -- --
Accrual of 9% dividends.................................. -- 118 -- --
------ ------- ------ -------
Balance at September 30, 1995.............................. 70 $2,374 -- $ --
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
NOTE 12--COMMON STOCKHOLDERS' EQUITY
At December 31, 1994 and September 30, 1995 the Company had the following
Common Stock reserved for issuances under various plans and agreements:
DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ------------------
For conversion of Series A Preferred
Stock (Note 11)..................... 18,000 18,000
For stock purchase warrants........... 476,500 574,000
For stock options..................... 382,500 260,500
For other............................. 7,500 8,500
-------- --------
884,500 861,000
-------- --------
-------- --------
The Company has never paid any dividends on its Common Stock. The current
policy of the Board of Directors is to retain earnings to finance the operation
of the Company's business. Accordingly, it is anticipated that no cash dividends
will be paid to the holders of the Common Stock in the foreseeable future. Under
the terms of the Series A Preferred Stock, the Company is restricted from paying
dividends on its Common Stock so long as there are arrearages on dividend
payments on the Series A Preferred Stock. There currently are such arrearages.
STOCK PURCHASE WARRANTS
During the year ended June 30, 1992, stock purchase warrants were converted
into 203,300 shares of the Company's Common Stock at prices ranging from $31.00
to $105.00 per share. Such conversions yielded net proceeds of $6,721,000 to the
Company in the year ended June 30, 1992.
No warrants were converted into shares of the Company's Common Stock in the
six months ended December 31, 1992.
During the year ended December 31, 1993, stock purchase warrants were
converted into 8,700 shares of the Company's Common Stock at prices ranging from
$10.00 to $13.75 per share. Such conversions yielded net proceeds of $97,000 to
the Company in the year ended December 31, 1993.
F-20
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--COMMON STOCKHOLDERS' EQUITY--(CONTINUED)
During the year ended December 31, 1994, stock purchase warrants were
converted into 2,500 shares of the Company's Common Stock at $13.75 per share.
Such conversions yielded net proceeds of $34,000 to the Company in the year
ended December 31, 1994.
No warrants were converted into shares of the Company's Common Stock in the
nine months ended September 30, 1995.
At September 30, 1995, there were 574,000 warrants outstanding which were
exercisable at prices ranging from $2.50 to $120.00 per share, of which 241,000
warrants have an exercise price of $2.50 per share. The Warrants expire through
December 1998.
COMMON STOCK TRANSACTIONS
During the year ended June 30, 1992, the Company issued 94,100 shares of
Common Stock in two private placement transactions with total net proceeds of
$8,447,000 and purchased 5,400 shares of its outstanding Common Stock for
$495,000. Also during the year ended June 30, 1992, 336,000 shares of the
Company's Series A and B Preferred Stock were converted into 65,700 shares of
Common Stock at conversion prices ranging from $115.00 to $160.00 per share.
During the six months ended December 31, 1992, the Company issued 80,600
shares of Common Stock in a private placement transaction, with total net
proceeds of $3,864,000 ($1,700,000 of such proceeds were received subsequent to
December 31, 1992 and were recorded as stock subscriptions receivable in the
Common Stockholders' Equity section of the Consolidated Balance Sheets at
December 31, 1992). The Company also awarded 17,000 shares of Common Stock to
employees as incentive compensation in the six months ended December 31, 1992
and 8,000 shares of the Company's Series B Preferred Stock were converted into
1,300 shares of Common Stock at the conversion price of $160.00 per share during
this period.
During the year ended December 31, 1993, the Company issued 733,400 shares
of Common Stock in private placement transactions, with total net proceeds of
$7,385,000 ($770,000 of such proceeds were recorded as stock subscriptions
receivable in the Common Stockholders' Equity section of the Consolidated
Balance Sheets). Also, 212,000 shares of the Company's Series B Preferred Stock
were converted into 36,100 shares of Common Stock at the conversion price of
$160.00 per share. The Company also awarded 1,900 shares of Common Stock to
employees as incentive compensation and settled litigation with two former
officers of the Company by issuing to them an aggregate of 14,700 shares of
Common Stock in the year ended December 31, 1993.
During the year ended December 31, 1994, the Company issued 845,800 shares
of Common Stock in private placement transactions, with total net proceeds of
$4,944,000 ($1,596,000 of such proceeds were recorded as stock subscriptions
receivable in the Common Stockholders' Equity section of the Consolidated
Balance Sheets of which approximately $1,193,000 had been received as of
December 8, 1995). Also, 4,000 shares of the Company's Series A Preferred Stock
were converted into 1,100 shares of Common Stock at the conversion price of
$115.00 per share. The Company also awarded 7,000 shares of Common Stock to
Directors as compensation and settled litigation with shareholders of the
Company by issuing to them an aggregate of 70,200 shares of Common Stock in the
year ended December 31, 1994.
During the nine months ended September 30, 1995, the Company issued 817
shares of Common Stock to Directors as compensation.
F-21
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--COMMON STOCKHOLDERS' EQUITY--(CONTINUED)
STOCK SUBSCRIPTIONS RECEIVABLE
Stock subscriptions receivable at June 30, 1992 represent amounts owed to
the Company by two former officers of the Company (see explanation below).
Certain receivables from one of the former officers included in the June 30,
1992 balance were forgiven and are included in non-recurring charges for the six
months ended December 31, 1992. (See Notes 4, 15 and 16).
Stock subscriptions receivable at December 31, 1992 included $412,000 owed
to the Company by a former officer of the Company (see explanation below) and
$1,700,000 owed to the Company by a subscriber of 50,000 shares of Common Stock
which were issued in a private placement. The $1,700,000 was received in full in
February 1993.
Stock subscriptions receivable at December 31, 1993 included $498,000 owed
to the Company by a former officer of the Company (see explanation below).
Additionally, amounts owed to the Company by a subscriber of 50,000 shares of
Common Stock which were issued in a private placement total $770,000 and were
included in the December 31, 1993 balance. Of this amount $473,000 was received
in 1994.
Stock subscriptions receivable at December 31, 1994 include an amount owed
to the Company by a former officer and director of the Company for the exercise
of various warrants and options to purchase 6,570 shares of the Company's Common
Stock at prices ranging from $38.10 to $105.00 per share totaling $412,000. The
notes accrued interest at the rate of 8.5% per annum payable through the
issuance of additional promissory notes having the same terms as the
subscriptions receivable. Such accrued interest totaled $121,000 at December 31,
1994. The Company cancelled the promissory notes receivable together with
interest due on such notes aggregating approximately $533,000 in May 1995 as a
result of a jury verdict. See Note 15. Additionally, amounts owed to the Company
by subscribers of shares of Common Stock which were issued in private placements
total $1,017,000 and are included in the December 31, 1994 balance, however,
$561,000 of this balance was collected in the nine months ended September 30,
1995. The remaining subscriptions outstanding relate to a subscription agreement
whereby the subscriber has entered into a subscription agreement with the
Company and delivered promissory notes for the purchase of the shares. The
shares have been issued in the name of the individual but were pledged to the
Company to secure payment for such shares under the promissory notes. The shares
are released from the pledge as they are paid for. Under the terms of the
subscription agreement and the related promissory note, the purchase price for
the stock is set at the closing price for the Company's Common Stock on the date
that the subscriber makes the payment for shares to be delivered and payment is
made to the Company under the promissory notes. The stock subscription
receivable and additional paid in capital were reduced by $350,000 at September
30, 1995 to reflect the current trading price for the Company's Common Stock at
September 30, 1995.
STOCK OPTION PLANS
The Company has in effect Stock Option Plans (the "Plans"), pursuant to
which directors, officers, and employees of the Company who contribute
materially to the success and profitability of the Company are eligible to
receive grants of options for the Company's Common Stock. An aggregate of
380,500 shares of Common Stock have been reserved for issuance under the Plans,
of which 166,200 and 214,600 had been granted as of and December 31, 1994 and
September 30, 1995, respectively. Options may be granted for terms not exceeding
ten years from the date of grant except for stock options which are granted to
persons owning more than 10% of the total combined voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the
F-22
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--COMMON STOCKHOLDERS' EQUITY--(CONTINUED)
fair market value on the date the options are granted (110% in the case of
persons owning more than 10% of the total combined voting power of the Company).
During the year ended June 30, 1992, holders of stock options exercised
options acquiring 41,800 shares of the Company's Common Stock. Such exercises
provided proceeds to the Company of $2,057,000 in the year ended June 30, 1992.
Holders of stock options exercised no options during the year ended December
31, 1993 or 1994, or the nine months ended September 30, 1995; however, they
exercised options during the six months ended December 31, 1992, acquiring 1,100
shares of the Company's Common Stock at prices ranging from $50.00 to $66.88 per
share. Such exercises provided proceeds of $60,000 to the Company in the six
months ended December 31, 1992.
In addition, the Company has granted options and warrants outside of the
Plans in connection with private placements of its securities and as
consideration for various services. These options and warrants have been granted
for terms not exceeding six years from the date of grant. The table below
summarizes all activity for the year ended June 30, 1992, the six months ended
December 31, 1992, the years ended December 31, 1993 and 1994 and the nine
months ended September 30, 1995.
NUMBER OF PRICE
COMMON SHARES PER SHARE
------------- ---------
(IN
THOUSANDS)
Outstanding at June 30, 1991............ 278
Granted............................... 142 $100.00 to $177.50
Exercised............................. (245) $ 25.00 to $105.00
Canceled.............................. (4) $ 50.00 to $ 58.75
-----
Outstanding at June 30, 1992............ 171
Granted............................... 88 $ 42.00 to $300.00
Exercised............................. (1) $ 50.00 to $ 66.88
Canceled.............................. (14) $ 50.00 to $152.50
-----
Outstanding at December 31, 1992........ 244
Granted............................... 171 $ 10.00 to $ 45.00
Exercised............................. (9) $ 10.00 to $ 13.75
Canceled.............................. (110) $ 37.50 to $300.00
-----
Outstanding at December 31, 1993........ 296
Granted............................... 359 $ 2.50 to $ 20.00
Exercised............................. (2) $ 13.75
Canceled.............................. (10) $ 13.75 to $ 71.25
-----
Outstanding at December 31, 1994........ 643
Granted............................... 180 $ 2.50 to $ 7.50
Exercised............................. -- --
Canceled.............................. (34) $ 11.25 to $177.50
-----
Outstanding at September 30, 1995....... 789
-----
-----
Options and warrants outstanding include 574,000 warrants, all of which are
exercisable, and 215,000 options, of which 82,000 are vested and exercisable at
September 30, 1995.
F-23
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--PROVISION FOR INCOME TAXES
The Company adopted SFAS 109, "Accounting for Income Taxes" effective
January 1, 1993, and began recognizing income tax benefits for net operating
loss carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not previously been recorded. As a result of the
adoption of SFAS 109, the Company has recognized approximately $18,000,000 as a
deferred tax asset; however, the Company has established a valuation allowance
equal to the full amount of the deferred tax asset, as future operating profits
cannot be assured. The Company expects to recognize the benefit of the asset
when financial reporting and taxable income is generated.
At December 31, 1994 and September 30, 1995, the Company has net operating
loss (the "NOL") carryforwards of approximately $34,000,000 and $35,000,000,
respectively, available to offset future U.S. taxable income. The Company
calculates that its use of the NOL may be limited to approximately $3,000,000
each year as a result of stock option and warrant issuances during prior fiscal
years resulting in an ownership change of more that 50% of the Company's
outstanding equity. If not offset against future taxable income, the NOL
carryforwards will expire in tax years 1996 through 2010.
In addition, Chimos/LBF S.A. and Laboratorios Belmac S.A. have NOL
carryforwards of approximately $14,000,000 and $3,000,000 available to offset
future taxable income for income tax purposes in France and Spain, respectively.
If not offset against taxable income, the NOL carryforwards will expire in
various years ending 1999.
The provision for income taxes of $343,000 for the year ended June 30, 1992
is the result of current French taxes on profits generated by Chimos S.A. in the
year ended June 30, 1992. Chimos was not eligible to file a French consolidated
income tax return with Laboratoires Belmac S.A. until fiscal year 1993.
Therefore, the Laboratoires Belmac losses were not available to offset Chimos'
taxable profits for the year ended June 30, 1992. For the six months ended
December 31, 1992, the years ended December 31, 1993 and 1994 and for the nine
months ended September 30, 1994 and 1995, no income tax provision is recorded
due to domestic losses and the consolidation of Chimos S.A. with Laboratoires
Belmac S.A. and subsequent merger of the two entities for French tax purposes.
NOTE 14--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS
The following is a summary of the results of operations and identifiable
assets of the Company's wholly-owned foreign subsidiaries as of and for the year
ended June 30, 1992, as of and for the six months ended December 31, 1992, and
as of and for the years ended December 31, 1993 and 1994 and for the nine months
ended September 30, 1994 and 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED JUNE 30, 1992
--------------------------------------------
<S> <C> <C> <C> <C>
FRANCE SPAIN U.S. CONSOLIDATED
------- ------ ------- ------------
Revenue.............................................. $10,891 $2,247 $ -- $ 13,138
Net loss............................................. (5,168) (189) (5,454) (10,811)
Identifiable assets.................................. 26,452 7,781 4,520 38,753
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 1992
----------------------------------------------
<S> <C> <C> <C> <C>
FRANCE SPAIN U.S. CONSOLIDATED
-------- ------- ------- ------------
Revenue............................................ $ 7,738 $ 1,970 $ -- $ 9,708
Net loss........................................... (11,808) (1,228) (6,495) (19,531)
Identifiable assets................................ 10,793 7,373 3,787 21,953
</TABLE>
F-24
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------
<S> <C> <C> <C> <C>
FRANCE SPAIN U.S. CONSOLIDATED
------- ------- ------- ------------
Revenue............................................. $15,155 $ 4,328 $ 366 $ 19,849
Net loss............................................ (811) (1,655) (7,770) (10,236)
Identifiable assets................................. 7,023 6,873 2,264 16,160
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------
<S> <C> <C> <C> <C>
FRANCE SPAIN U.S. CONSOLIDATED
------- ------ -------- ------------
Revenue............................................. $20,257 $5,843 $ 184 $ 26,284
Net income (loss)................................... 595 (405) (3,768) (3,578)
Identifiable assets................................. 6,476 7,833 2,023 16,332
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
--------------------------------------------
FRANCE SPAIN U.S. CONSOLIDATED
------- ------ ------- ------------
<S> <C> <C> <C> <C>
Revenue.............................................. $15,499 $4,061 $ 116 $ 19,676
Net income (loss).................................... (65) (974) (2,612) (3,651)
Identifiable assets.................................. 7,316 7,404 2,180 16,900
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1995
--------------------------------------------
<S> <C> <C> <C> <C>
FRANCE SPAIN U.S. CONSOLIDATED
------- ------ ------- ------------
Revenue.............................................. $19,282 $4,147 $ 154 $ 23,583
Net income (loss).................................... 1,103 (352) (2,270) (1,519)
Identifiable assets.................................. 7,713 7,349 1,108 16,170
</TABLE>
Total liabilities attributable to foreign operations were $11,029,000,
$8,358,000, $8,428,000 and $6,649,000 at December 31, 1992, December 31, 1993,
December 31, 1994 and September 30, 1995, respectively. There were no dividends
from foreign subsidiaries, and net foreign currency gains (losses) reflected in
results of operations for the year ended June 30, 1992, the six months ended
December 31, 1992, the year ended December 31, 1993 and 1994 and the nine months
ended September 30, 1994 and 1995 were approximately $35,000, $40,000,
($133,000), $66,000, $30,000 (unaudited), and $2,000, respectively. Sales in
France for the years ended December 31, 1993 and 1994, and the nine months ended
September 30, 1994 and 1995 include approximately $4,500,000, $8,000,000,
$6,953,000 (unaudited) and $6,024,000, respectively, to Pharmacie Centrale des
Hopitaux. Sales in France for the six months ended December 31, 1992, include
approximately $1,900,000 to Pharmacie Centrale des Hopitaux and $2,500,000 to
Distraphar. Sales in France for the year ended June 30, 1992 include
approximately $3,000,000 and $1,400,000 to Pharmacie Centrale des Hopitaux and
Industrie Chemiche Farmaceutiche Italienne, respectively.
NOTE 15--COMMITMENTS AND CONTINGENCIES
On July 15, 1993, Michael M. Harshbarger was discharged for cause from the
Company as President and Chief Executive Officer. At the time of his discharge,
Harshbarger owed the Company approximately $121,000 as a result of expenses of a
personal nature which he charged to the Company's accounts and removal of
corporate assets for personal use. Harshbarger has sued the Company for
F-25
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
wrongful termination, seeking damages in excess of $1,400,000 and the Company
has countersued for wrongful conversion and civil theft, fraud and deceit, and
breach of contract, in an effort to recover the amounts owed by Harshbarger. The
Company is amending a counterclaim against Harshbarger for breach of fiduciary
duty and is seeking damages in excess of $1,000,000. In the opinion of current
management, the amounts are collectable and this litigation will have no
material effect on the financial position or results of operations of the
Company.
On November 30, 1992, Marc S. Ayers resigned as Chief Financial Officer of
the Company and effective December 17, 1992, resigned as a member of the Board
of Directors. At December 31, 1994 Ayers owed the Company $412,000 plus $121,000
accrued interest under two stock subscription notes receivable, both of which
had matured and remained unpaid. Ayers sued the Company alleging breach of
contract and the Company countersued Ayers. This matter was tried in 1994 and a
jury verdict rendered on August 18, 1994, found in favor of Ayers on one issue
and in favor of the Company on another issue. The judge ordered a new trial on
all issues and no judgement was entered in the case. After a jury trial in May
1995, the jury found no binding contract was made between the Company and Ayers
while awarding Ayers a recovery of approximately $27,000 for consulting services
rendered and cancellation of the promissory notes and interest thereon. The
cancellation of the promissory notes and related interest was charged to
expenses in the nine months ended September 30, 1995.
Belmac Hygiene, Inc. ("Hygiene"), a subsidiary of the Company, filed an
action on December 9, 1994 in the United States District Court for the Southern
District of New York against Medstar, Inc. ("Medstar"), Maximed, Inc.
("Maximed") and Robert S. Cohen. The defendants are Hygiene's partners (or such
partner's control persons) in the Company's partnership with Maximed (the
"Partnership"), which was formed for the development and ultimate sale of
Maximed's intravaginal controlled release products. The action seeks (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's representatives, and (ii) to recover damages as a result of
defendants' misrepresentations and breach of warranty in the Partnership
agreement. The defendants have filed a counterclaim against Hygiene. Medstar
also filed a separate action on May 4, 1995 in the Untied States District Court
for the Southern District of New York against the Company alleging that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Company pursuant
to its guaranty of Hygiene's obligations. Management of the Company views both
Medstar's claim and the counterclaim of Medstar, Maximed and Robert S. Cohen to
be frivolous and entirely without merit and is vigorously pursuing the Company's
claims and defending both Medstar's action and the counterclaim. The issues were
tried, without a jury, on August 21-23, 1995. Thereafter, post-trial briefs and
proposed findings of fact and conclusions of law were submitted, and argument
was heard on October 25, 1995. However, a decision has not yet been rendered as
of December 8, 1995.
The Company has determined that it is exposed to certain contingencies with
respect to its operations in Spain totaling approximately $640,000 and has
accrued $120,000 for such contingencies that are considered probable and
included such amount in other non-current liabilities as of September 30, 1995.
The Company is also obligated to pay royalties on sales of the drug
Alphanon(R) (Notes 4 and 8).
The Company is entitled to payments of $360,000 related to the
commercialization of a certain drug provided to Jean-Francois Rossignol, its
former Chairman and Chief Executive Officer. On April 8, 1995, Rossignol filed a
Demand for Arbitration seeking to recover unspecified damages for the alleged
breach of a written agreement between Rossignol and the Company dated August 13,
1993. In April 1995, the Company commenced an action against Rossignol, Marc S.
Ayers and Romarc
F-26
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Laboratories, L.C., in the Circuit Court of the Thirteenth Judicial Circuit,
State of Florida, Hillsborough County Civil Division seeking, inter alia, a stay
of the arbitration commenced by Rossignol and $360,000 representing the
principal amount of a promissory note issued in connection with the August 13,
1993 agreement and damages. Under the terms of a settlement agreement entered
into on December 6, 1995 (the "Settlement Agreement"), Rossignol agreed to pay
to the Company the full amount of the promissory note in three installments, the
first of which ($160,000) was paid upon execution of the Settlement Agreement
and the remaining two ($100,000 each) are due in January and March 1996,
respectively. Consequently, the Company has included such amounts in Other
(Income) Expense for the nine months ended September 30, 1995.
The Company leases certain of its assets under noncancellable operating
leases. Total charges to operations under operating leases were approximately
$105,000, $204,000, $598,000, $360,000, $347,000 (unaudited) and $318,000, for
the year ended June 30, 1992, for the six months ended December 31, 1992, for
the years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1994 and 1995, respectively. Future minimum lease payments under
operating leases are as follows:
(IN THOUSANDS)
PERIOD ENDING, DECEMBER 31
- -----------------------------------------------------------
1995............................................... $ 133
1996............................................... 419
1997............................................... 321
1998............................................... 246
1999, and thereafter............................... -0-
NOTE 16--RELATED PARTY TRANSACTIONS
See Note 12 for stock subscriptions receivable from former officers and Note
15 for additional disclosures related to former officers.
On May 30, 1991 Rossignol exercised options to purchase 11,120 shares of
Common Stock at an average exercise price of $38.30 per share and Ayers
exercised options to purchase 4,674 shares at an exercise price of $45.60 per
share. On September 6, 1991, Ayers exercised options to purchase 1,896 shares of
Common Stock at an exercise price of $105.00 per share. Rossignol and Ayers
exercised their options through the issuance of promissory notes (the "Notes")
in the principal amounts of $426,000 and $412,000, respectively, representing
the aggregate exercise prices for such options. Each of the Notes accrued
interest at the rate of 8.5% per annum which was payable through the issuance of
additional promissory notes having the same terms as the Notes. In November
1992, Rossignol prepaid his note down to $271,000 (including accrued interest)
through the offset of payments from the Company (see additional explanation
below). February 26, 1993, Rossignol resigned as Chief Executive Officer and
Chairman of the Board and the Company agreed to forgive $271,000 of his Note
balance (including accrued interest) due to the Company and to release his
Belmac Holdings, Inc. (formerly Pharmacin Holdings, Inc.) stock which was held
as collateral by the Company. This transaction has been included in other
non-recurring charges for the six months ended December 31, 1992. Ayers' notes
and accrued interest were cancelled in May 1995 as a result of litigation and
are included in Other (Income) Expense for the nine months ended September 30,
1995. See Note 15.
Healthcare Capital Investments ("Healthcare"), a registered broker-dealer
which is 80% owned by Harshbarger, a former Director and former President and
Chief Executive Officer of the Company and
F-27
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
his wife, has acted as placement agent for the Company on private placements of
the Company's securities. In a $14,250,000 private placement completed in
October 1991 which Healthcare co-managed with Societe Generale Securities
Corporation ("Societe Generale"), Healthcare received a fee of $426,000. In a
$10,620,000 private placement completed in April 1992 which Healthcare also co-
managed with Societe Generale, Healthcare received a fee of $318,600. In
connection with a private placement completed in October 1992, Healthcare
received a fee of $244,500 and four-year warrants to purchase 2,391 shares of
Common Stock at an exercise price of $120.00 per share. In addition, in July
1992 Healthcare was granted five-year options to purchase 15,000 shares of
Common Stock at an exercise price of $116.25 per share for its advisory
services. Healthcare and its affiliates received fees during the year ended
December 31, 1993 totaling $242,000 and four- and five-year warrants to purchase
an aggregate of 9,600 shares of Common Stock at an exercise price of $22.00 per
share. Fees paid in connection with the above private placements have been
charged to additional-paid-in-capital.
Receivables at December 31, 1994 and September 30, 1995 include
approximately $121,000 owed by Harshbarger. See Note 15.
NOTE 17--SUBSEQUENT EVENTS
Private Placements. To finance its operations, in October 1995 the Company
conducted two private placements of its securities. In the first placement the
Company sold to certain purchasers for an aggregate purchase price of $720,000,
120,000 shares of the Company's Common Stock and 12% promissory notes in the
aggregate principal amount of $720,000 (the "Notes") which become payable in
full upon the earlier of July 31, 1996 or the closing of a public offering of
the Company's securities (a "Public Offering"). The Notes are convertible into
shares of Common Stock, at the option of the holders thereof, at a conversion
price of $3.00 per share, for an aggregate of 240,000 shares of Common Stock,
subject to anti-dilution provisions. The Notes are subject to mandatory
conversion at a conversion price of $3.00 per share if no Public Offering is
completed by July 31, 1996. The effective interest rate on the notes is 83%.
In the second placement, the Company sold to certain purchasers for an
aggregate purchase price of $1,050,000, 131,250 shares of Common Stock and 12%
promissory notes in the aggregate principal amount of $1,050,000 (the "A Notes")
which become payable in full upon the earlier of September 30, 1996 or the
completion of a Public Offering. The A Notes are subject to mandatory
conversion, at a conversion price equal to the average closing price for the
Common Stock quoted on the American Stock Exchange for the five trading days
immediately preceding September 30, 1996, if no Public Offering is completed by
September 30, 1996. The effective interest rate on the notes is 75%.
Settlement of Litigation. In December 1995, the Company entered into a
Settlement Agreement with Jean Francois Rossignol, Marc S. Ayers and Romark
Laboratories, L.C., whereby all parties agreed to settle all claims relative to
this matter and Rossignol agreed to pay to the Company the full amount of the
$360,000 promissory note dated August 13, 1993 due to the Company in three
installments. The first installment of $160,000 was paid upon execution of the
Settlement Agreement and the remaining two installments of $100,000 each are due
in January and March 1996, respectively. Consequently, the Company has included
such amounts in Other (Income) Expense for the nine months ended September 30,
1995. See Note 15.
Shareholders Meeting. At a Special Meeting of Shareholders held on December
8, 1995, the shareholders of the Company approved proposals to increase the
number of authorized shares of Common Stock from 5,000,000 to 20,000,000 and to
change the name of the Company to Bentley Pharmaceuticals, Inc.
F-28
<PAGE>
- ------------------------------------------- ----------------------------------
- ------------------------------------------- ----------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS 6,000 UNITS
IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THESE SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. BENTLEY
EXCEPT WHERE OTHERWISE INDICATED, THIS
PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE PHARMACEUTICALS, INC.
OF THE REGISTRATION STATEMENT. NEITHER THE [LOGO]
DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER Each Consisting of One Thousand
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION Dollars ($1,000) Principal Amount
THAT THERE HAS BEEN NO CHANGE IN THE Convertible Senior Subordinated
AFFAIRS OF THE 12% COMPANY SINCE THE Debenture
DATE HEREOF.
- ------------------- Due February 13, 2006
and
1,000 Class A Redeemable Warrants
TABLE OF CONTENTS Each to Purchase One Share
of Common Stock and
PAGE One Class B Redeemable
---- Warrant
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 9 Offering Price $1,000 per Unit
Use of Proceeds..................... 17
Price Range of Common Stock and
Dividend Policy..................... 18
Capitalization...................... 19
Selected Financial Data............. 20
Management's Discussion and Analysis ---------------
of Financial Condition and Results
of Operations..................... 21 PROSPECTUS
Business............................ 27
Legal Proceedings................... 38 ---------------
Management.......................... 39
Principal Stockholders.............. 47
Description of Securities........... 49
Description of Debentures........... 54
Certain Federal Income Tax
Considerations...................... 59
Requirement For Current
Registration........................ 61 COLEMAN AND COMPANY
Underwriting........................ 62
SECURITIES, INC.
Concurrent Offering................. 64
Legal Matters....................... 64
Experts............................. 64
Index to Financial Statements....... F-1
February 14, 1996
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