UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 1-10581
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BENTLEY PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA No. 59-1513162
- - ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4890 W. Kennedy Blvd., Suite 400, Tampa, FL 33609
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(Current Address of Principal Executive Offices)
4830 W. Kennedy Blvd., Suite 548, Tampa, FL 33609
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(Former Address of Principal Executive Offices)
Registrant's telephone number, including area code: (813) 281-0961
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares of the Registrant's common stock outstanding as of November
13, 1998 was 8,443,192.
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
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INDEX
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<TABLE>
<CAPTION>
<S> <C> <C>
Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations (unaudited) for the
three months ended September 30, 1998 and 1997, and the nine
months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Common Stockholders'
Equity (unaudited) for the nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. OTHER INFORMATION 18
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</TABLE>
2
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BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
(In thousands, except per share data) September 30, December 31,
1998 1997
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $8,430 $11,117
Receivables 2,894 2,428
Inventories 936 714
Prepaid expenses and other 1,472 750
------- ------
Total current assets 13,732 15,009
------- ------
Fixed assets, net 3.187 2,918
Drug licenses and related costs, net 1,298 691
Other non-current assets, net 1,763 2,425
-------- -------
$19,980 $21,043
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,853 $1,493
Accrued expenses 1,630 1,723
Short term borrowings 1,234 1,140
Current portion of long term debt 5 5
---------- ---------
Total current liabilities 4,722 4,361
---------- ---------
Long term debt, net 5,409 5,329
---------- ---------
Other non-current liabilities 289 110
---------- ---------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value,
authorized 2,000 shares:
Series A, issued and outstanding, 60 shares 2,440 2,338
-------- --------
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 8,428 and 8,426 shares 168 168
Stock purchase warrants 556 192
Paid-in capital in excess of par value 81,289 81,382
Accumulated deficit (73,342) (70,982)
Cumulative foreign currency translation adjustment (1,551) (1,855)
--------- --------
7,120 8,905
--------- --------
$19,980 $21,043
========= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
3
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BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $3,674 $3,141 $10,532 $11,528
Cost of sales 1,585 1,617 4,480 6,345
----- ----- ----- -----
Gross margin 2,089 1,524 6,052 5,183
----- ----- ----- -----
Operating expenses:
Selling, general and administrative 2,113 1,666 6,208 5,646
Research and development 30 130 95 306
Depreciation and amortization 75 60 201 232
Nonrecurring charge - - 1,176 -
------- ------- ----- ------
Total operating expenses 2,218 1,856 7,680 6,184
----- ----- ----- -----
Loss from operations (129) (332) (1,628) (1,001)
Other (income) expenses:
Interest expense 285 318 820 963
Interest income (126) (14) (408) (34)
Loss on disposition of subsidiary - - - 591
Other (income) expense, net - 23 - 52
----- ----- ----- -----
Loss before income taxes (288) (659) (2,040) (2,573)
Income tax (benefit) provision (132) - 320 -
----- ----- ----- -----
Net loss (156) (659) (2,360) (2,573)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses (328) 56 (304) 321
Comprehensive income (loss) $172 ($715) ($2,056) ($2,894)
====== ===== ======= =======
Basic net loss per common share ($0.02) ($0.20) ($0.29) ($0.79)
====== ===== ======= =======
Weighted average common shares outstanding 8,428 3,453 8,428 3,385
====== ===== ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
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BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
$.02 Par Value Additional Other
Common Stock Paid-In Accumulated Equity
Shares Amount Capital Deficit Transactions Total
------ ----- ---------- ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 8,426 $168 $81,382 ($70,982) ($1,663) $8,905
Exercise of stock options/warrants 2 - 8 - - 8
Issuance of stock options/warrants - - - - 364 364
Accrual of dividends-preferred stock - - (101) - - (101)
Foreign currency translation - - - - 304 304
adjustment
Net loss (2,360) (2,360)
------------ ------------ ------------- ------------ ------------- -------------
- - - -
Balance at September 30, 1998 8,428 $168 $81,289 ($73,342) ($995) $7,120
============ ============ ============= ============ ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
5
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
-----------------
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,360) ($2,573)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 201 232
Nonrecurring charges 158 -
Loss on disposition of subsidiary - 591
Other non-cash items 375 305
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (316) 803
Inventories (160) 143
Prepaid expenses and other current assets (609) (230)
Other assets 78 (136)
Accounts payable and accrued expenses 64 (1,203)
Other liabilities 60 (45)
Capitalized acquisition costs 448 -
----------- ------------
Net cash used in operating activities 2,061 (2,113)
----------- ------------
Cash flows from investing activities:
Acquisition of Spanish drug licenses (447) (40)
Additions to fixed assets, net (178) (2)
Proceeds from sale of investments - 166
Receivable related to disposition of subsidiary - (501)
---------- ------------
Net cash used in investing activities (625) (377)
---------- ------------
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
6
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in short term borrowings 12 $255
Proceeds from exercise of stock options/warrants, net 8 266
Payments on capital leases (5) (4)
------ ------
Net cash provided by financing activities 15 517
------ ------
Effect of exchange rate changes on cash (16) (477)
------ ------
Net decrease in cash and cash equivalents (2,687) (2,450)
Cash and cash equivalents at beginning of period 11,117 4,425
------ ------
Cash and cash equivalents at end of period $8,430 $1,975
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (in thousands):
Interest $669 $717
==== ====
Taxes $716 $12
==== ====
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Registrant has issued Common Stock in exchange for services as follows (in
thousands):
Shares issued - 1
==== ====
Amount - $ 2
==== ====
</TABLE>
The Registrant issued Warrants during the nine months ended September 30, 1998
to purchase 425,000 shares of Common Stock in exchange for services.
The accompanying Notes to Consolidated Financial Statements
are an integral partof these financial statements.
7
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of Bentley Pharmaceuticals, Inc. (the
"Registrant"), at September 30, 1998 and 1997 included herein, have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with Generally Accepted Accounting Principles have been condensed or omitted. It
is suggested that these consolidated financial statements be read in conjunction
with the summary of significant accounting policies and the audited consolidated
financial statements and notes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
The consolidated financial statements include the accounts of the Registrant and
its wholly owned subsidiaries: Bentley Healthcare Corporation (f/k/a Belmac
Healthcare Corporation) and its wholly owned subsidiary - Belmac Hygiene, Inc.,
Belmac Health Corp., B.O.G. International Finance, Inc., Belmac Jamaica, Ltd.,
Bentley Pharma, Inc., Pharma de Espana, Inc., Laboratorios Belmac, S.A.,
Chimos/LBF S.A. until its divestiture in June 1997, and Belmac Holdings, Inc.
and its wholly owned subsidiary - Belmac A.I., Inc. All significant intercompany
balances have been eliminated in consolidation. The financial position and
results of operations of the Registrant'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 Common Stockholders' Equity. Foreign
currency translation gains and losses arising from cash transactions are
credited to or charged against current earnings.
The Registrant divested its French subsidiary, Chimos/LBF, S.A. (referred to
herein as Chimos/LBF), in June 1997 for approximately $3,650,000. An escrow fund
in the amount of approximately $350,000, representing the balance due the
Registrant, has been established for certain contingent obligations or
liabilities. In the opinion of management, the resolution of these contingencies
will not have a material effect on the Registrant's financial position or
results of operations. The Registrant's operations in France consisted of the
low margin brokerage of fine chemicals, sourcing of raw materials and
pharmaceutical intermediaries and the distribution of biotechnology or orphan
drugs.
The Registrant's previously announced negotiations whereby the Registrant was
considering the purchase of domestic and international rights to a portfolio of
branded drugs and a manufacturing facility located in Mequon, Wisconsin from
Schwarz Pharma and whereby Schwarz Pharma was to acquire control of Bentley's
Spanish subsidiary, Laboratorios Belmac came to an end in May 1998 without
consummation of an agreement. Consequently, the Registrant recorded a charge
during the quarter ended June 30, 1998 for all previously
8
<PAGE>
capitalized costs specific to this and other related potential acquisitions
totaling approximately $1,176,000, including $158,000 of non-cash items.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended September 30, 1998 and 1997 are presented on a
basis consistent with the audited consolidated financial statements for the year
ended December 31, 1997 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of September 30, 1998 and the results of its operations and its cash
flows for the nine months ended September 30, 1998 and 1997. The results of
operations for the nine months ended September 30, 1998 should not be considered
indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
The Registrant 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.
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being determined on
the first in, first out ("FIFO") method and are comprised of the following (in
thousands):
September 30, 1998 December 31, 1997
------------------ -----------------
Raw Materials $575 $338
Finished goods 470 501
---- ---
1,045 839
Less: Allowance for slow moving or (109) (125)
obsolete inventory ----- -----
$936 $714
==== ====
PROVISION FOR INCOME TAXES:
The Registrant has utilized all of its Spanish tax net operating loss
carryforwards. As a result, the Registrant recorded a provision for income taxes
totaling $320,000 for the nine months ended September 30, 1998 as a result of
its taxable income in Spain. This amount differs from the amount computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result of
certain nondeductible expenses in Spain. The Registrant paid $436,000 in income
taxes during the nine months ended September 30, 1998 related to taxable income
in Spain and $280,000 in U.S. income taxes related to amounts accrued at
December 31, 1997. Upon completion of the Registrant's U.S. federal income tax
return in September 1998, it was determined that the Registrant was due a refund
of this $280,000 as a result of application of foreign tax credits. The refund
was received subsequent to September 30, 1998 and has been reflected as a tax
benefit in the quarter ended September 30, 1998.
9
<PAGE>
BASIC NET LOSS PER COMMON SHARE:
Basic net loss per common share is presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128
provides for new accounting principles for use in the calculation of earnings
per share and is effective for financial statements for both interim and annual
periods ended after December 15, 1997. The Registrant has recalculated the basic
net loss per common share for all periods presented to give effect to FAS 128.
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during each period adjusted for actual shares
issued during the period. Diluted loss per common share is not presented, as it
is antidilutive. The effect of the Registrant's outstanding stock options, stock
warrants and convertible debentures were considered in the diluted loss per
share calculation.
SUBSEQUENT EVENTS:
Subsequent to September 30, 1998, the holders of the Registrant's Series A
Preferred Stock converted all such holdings into shares of the Registrant's
Common Stock. As a result, the number of shares of Common Stock increased by
15,498 and Common Stockholders' Equity increased by approximately $2.4 million
in October 1998.
The Registrant purchased the product Senioral from Sanofi-Winthrop subsequent to
September 30, 1998 for approximately $1.4 million. Senioral is a combination
product useful in the treatment of congestive symptoms of the upper respiratory
tract. The Registrant's Spanish subsidiary, Laboratorios Belmac S. A. started
marketing Senioral in October 1998 and expects sales of approximately $1 million
in the first twelve months.
10
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
- - ---------------------
Three Months Ended September 30, 1998 versus Three Months Ended September 30,
- - --------------------------------------------------------------------------------
1997
- - ----
The Registrant reported revenues of $3,674,000 and a net loss of $156,000 or
$.02 per common share for the three months ended September 30, 1998 compared to
revenues of $3,141,000 and a net loss of $659,000 or $.20 per common share for
the same period in the prior year.
The 17% increase in revenues is primarily attributable to the Registrant's
Spanish subsidiary, Laboratorios Belmac S.A., which reported an increase in
revenues of 22% in local currency; however, fluctuations in foreign currency
exchange rates resulted in a 24% increase to $3,647,000 in U.S. dollars in the
quarter ended September 30, 1998 compared to the same period in the prior year.
Gross margins for the quarter ended September 30, 1998 improved to 57% compared
to 49% in the comparable period of the prior year, primarily as a result of
increased volume and the utilization of capacity.
Selling, general and administrative expenses increased $447,000, or 27% to
$2,113,000 for the three months ended September 30, 1998 compared to $1,666,000
for the same period in the prior year. A significant portion of these expenses
are marketing and selling costs, which are necessary for the Registrant's plans
to increase sales and market share in Spain. To the extent practical, however,
the Registrant 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 $30,000 for the quarter ended September
30, 1998 compared to $130,000 for the same period of the prior year. The minimal
expenditures in research and development reflects the Registrant's continued
de-emphasis of basic research and redirection of its resources to developmental
expenses necessary for expansion of its portfolio of marketed products. The
Registrant intends to continue to carefully manage its research and development
expenditures in the future.
Interest expense totaled $285,000 for the three months ended September 30, 1998
compared to $318,000 for the same period of the prior year. Interest income was
$126,000 for the three months ended September 30, 1998, compared to $14,000 for
the same period of the prior year. The increase was with respect to interest
earned on higher short-term interest bearing investment balances during the
third quarter of 1998, which resulted from the proceeds of the exercise of
approximately 4,900,000 Class A Warrants during the fourth quarter of 1997. The
Registrant recorded a provision for income taxes totaling $148,000 for the three
months ended September 30, 1998 as a result of taxable income earned in Spain,
which was offset by a refund of U.S. income
11
<PAGE>
taxes in the amount of $280,000. The refund, which was applied for as a result
of filing the Registrant's U.S. income tax return in September 1998, was
received subsequent to September 30, 1998. Such refund, which resulted from
application of foreign tax credits, was recorded as a benefit in the quarter
ended September 30, 1998.
The Registrant reported a loss from operations of $129,000 for the quarter ended
September 30, 1998 compared to loss from operations of $332,000 in the same
period of the prior year. The effect of combining non-operating items, primarily
interest expense of $285,000, interest income of $126,000 and an income tax
benefit of $132,000 resulted in a net loss of $156,000, or $.02 per common share
for the quarter ended September 30, 1998, compared to the net loss in the
comparable period of the prior year, of $659,000, or $.20 per common share.
Nine Months Ended September 30, 1998 versus Nine Months Ended September 30, 1997
- - --------------------------------------------------------------------------------
The Registrant reported revenues of $10,532,000 and a net loss of $2,360,000 or
$.29 per common share for the nine months ended September 30, 1998 compared to
revenues of $11,528,000 and a net loss of $2,573,000 or $.79 per common share
for the same period in the prior year. Excluding the effect of the nonrecurring
charge of $1,176,000, representing the write-off of previously capitalized
acquisition costs, the Registrant's net loss would have been $1,184,000 or $.15
per common share for the nine months ended September 30, 1998.
The 9% decrease in revenues is primarily attributable to the June 1997
divestiture of the Registrant's French subsidiary, Chimos/LBF, which generated
approximately $2,029,000 during the nine months ended September 30, 1997.
However, the Registrant's Spanish subsidiary, Laboratorios Belmac S.A., reported
an increase in revenues of 17% in local currency in the nine months ended
September 30, 1998 compared to the same period in the prior year; however,
fluctuations in foreign currency exchange rates reduced the increase to 13% or
$10,437,000 when expressed in U.S. dollars.
Gross margins for the nine months ended September 30, 1998 improved to 57%
compared to gross margins of 45% in the comparable period of the prior year,
primarily as a result of: (i) improvement in Laboratorios Belmac's average gross
margin from 49% to 58% and (ii) the low gross margins associated with
Chimos/LBF, which was divested in June 1997.
Selling, general and administrative expenses increased by $562,000 or 10% to
$6,208,000 for the nine months ended September 30, 1998 compared to $5,646,000
for the same period in the prior year. A significant portion of these expenses
are marketing and selling costs, which are necessary for the Registrant's plans
to increase sales and market share in Spain. To the extent practical, however,
the Registrant 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 $95,000 for the nine months ended
September 30, 1998 compared to $306,000 for the same period of the prior year.
The minimal expenditures in research and development reflect the Registrant's
continued de-emphasis of basic research and redirection of
12
<PAGE>
its resources to developmental expenses necessary for expansion of its portfolio
of marketed products. The Registrant intends to continue to carefully manage its
research and development expenditures.
Included in operating expenses for the nine months ended September 30, 1998 is a
nonrecurring charge of $1,176,000, which represents the previously capitalized
costs specific to the abandoned Schwarz Pharma and other related acquisitions.
These costs were written off during the second quarter of 1998 after
negotiations ended during May of 1998.
Interest expense totaled $820,000 for the nine months ended September 30, 1998
compared to $963,000 for the same period of the prior year. Interest income was
$408,000 for the nine months ended September 30, 1998 compared to $34,000 for
the same period of the prior year. The increase was with respect to interest
earned on higher short-term interest bearing investment balances during the nine
months ended September 30, 1998, which resulted from the proceeds of the
exercise of approximately 4,900,000 Class A Warrants during the fourth quarter
of 1997. As a result of the June 1997 sale of Chimos/LBF, the Registrant
recorded a provision for loss on disposition of subsidiary, which totaled
$591,000, including realized exchange loss of $386,000, and a loss of $205,000
during the six months ended June 30, 1997. The Registrant recorded a provision
for income taxes totaling $320,000 for the nine months ended September 30, 1998
as a result of taxable income earned in Spain, which was partially offset by a
U.S. income tax refund of $280,000, which resulted from use of foreign tax
credits.
The Registrant reported a loss from operations of $1,628,000 for the nine months
ended September 30, 1998 compared to $1,001,000 in the same period of the prior
year, primarily due to the 1998 nonrecurring charge of $1,176,000 representing
the write-off of previously capitalized costs specific to the Schwarz Pharma and
other related acquisitions. Excluding the effect of the nonrecurring charge, the
Registrant's loss from operations for the nine months ending September 30, 1998
would have been $452,000. The effect of combining non-operating items, primarily
interest expense of $820,000, interest income of $408,000 and provision for
income taxes of $320,000 resulted in a net loss of $2,360,000, or $.29 per
common share for the nine months ended September 30, 1998, compared to the net
loss in the comparable period of the prior year, of $2,573,000, or $.79 per
common share. Excluding the nonrecurring charge, the net loss would have been
$1,184,000 or $.15 per common share for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES:
- - -------------------------------
Total assets decreased from $21,043,000 at December 31, 1997 to $19,980,000 at
September 30, 1998, while Common Stockholders' Equity decreased from $8,905,000
at December 31, 1997 to $7,120,000 at September 30, 1998. The decrease in Common
Stockholders' Equity reflects primarily the loss incurred by the Registrant for
the nine months ended September 30, 1998 offset by issuance of stock purchase
warrants and by the positive impact of the Spanish peseta exchange rate on the
foreign currency translation adjustment.
13
<PAGE>
The Registrant's working capital decreased from $10,648,000 at December 31, 1997
to $9,010,000 at September 30, 1998, primarily as a result of the loss from
operations incurred by the Registrant during the period.
Cash and cash equivalents decreased from $11,117,000 at December 31, 1997 to
$8,430,000 at September 30, 1998, primarily as a result of using cash for
operating activities (including costs associated with the abandoned Schwarz
acquisition) and the acquisition of drug licenses in Spain. Included in cash and
cash equivalents at September 30, 1998 are approximately $8,159,000 of
short-term investments considered to be cash equivalents.
Accounts receivable increased from $2,428,000 at December 31, 1997 to $2,894,000
at September 30, 1998 as a result of the increase in sales volume and
fluctuation in foreign currency exchange rates. The Registrant has not
experienced any material delinquent accounts. Inventories increased to $936,000
at September 30, 1998 compared to $714,000 at December 31, 1997. Prepaid
expenses and other current assets increased from $750,000 at December 31, 1997
to $1,472,000 at September 30, 1998, primarily as the result of issuance of
stock purchase warrants for services rendered to the Registrant and prepayment
of marketing costs in Spain. The value of the warrants are being amortized over
the life of the underlying contract for services.
The combined total of accounts payable and accrued expenses increased from
$3,216,000 at December 31, 1997 to $3,483,000 at September 30, 1998, primarily
as a result of increased sales volume and fluctuation in foreign currency
exchange rates. Short-term borrowings increased from $1,140,000 at December 31,
1997 to $1,234,000 at September 30, 1998, as a result of higher outstanding
balances on lines of credit used for operating purposes in Spain.
Fixed assets, net increased from $2,918,000 at December 31, 1997 to $3,187,000
at September 30, 1998, due primarily to fluctuations in foreign currency
exchange rates and renovations at the Spanish manufacturing facility offset by
recurring depreciation charges.
Drug licenses and related costs, net increased from $691,000 at December 31,
1997 to $1,298,000 at September 30, 1998, primarily due to the purchase of drug
licenses in Spain and fluctuations in foreign currency exchange rates, offset by
recurring amortization charges.
Other non-current assets decreased from $2,425,000 at December 31, 1997 to
$1,763,000 at September 30, 1998, primarily due to the write-off of previously
capitalized acquisition costs specific to the abandoned Schwarz Pharma and other
related acquisitions and recurring amortization charges.
Long term debt increased from $5,329,000 at December 31, 1997 to $5,409,000 at
September 30, 1998, due primarily to accretion recorded on the Debentures issued
in the Registrant's February 1996 public offering. Other non-current liabilities
increased from $110,000 at December 31, 1997 to $289,000 at September 30, 1998,
primarily as a result of recording an obligation to issue 62,000 shares of
Common Stock to a consulting firm for services rendered.
14
<PAGE>
Subsequent to September 30, 1998, the holders of the Registrant's Series A
Preferred Stock converted all such holdings into shares of the Registrant's
Common Stock. As a result, the number of shares of Common Stock increased by
15,498 and Common Stockholders Equity increased by approximately $2.4 million in
October 1998.
Investing activities, primarily the purchase of drug licenses in Spain and
capital improvements to the manufacturing facility in Spain, used net cash of
$625,000 during the nine months ended September 30, 1998. Financing activities,
for the nine months ended September 30, 1998, provided net cash of $15,000 and
operating activities, including the write off of pre-acquisition costs, for the
nine months ended September 30, 1998 used net cash of $2,061,000.
A substantial amount of the Registrant's business is conducted in Europe and is
therefore affected by the extent to which there are fluctuations in the dollar's
value against other currencies. The effect of foreign currency fluctuations on
long lived assets for the nine months ended September 30, 1998 was an increase
of $304,000 and the cumulative historical effect was a decrease of $1,551,000,
as reflected in the Registrant's Consolidated Balance Sheets in the "Liabilities
and Stockholders' Equity" section. Although exchange rates fluctuated
significantly in recent years, the Registrant does not believe that the effect
of foreign currency fluctuation is material to the Registrant's results of
operations as the expenses related to much of the Registrant's foreign currency
revenues are in the same currency as such revenues. However, the carrying value
of assets and reported values can be materially impacted by foreign currency
translation. In the event that the Registrant is required to fund United States
operations or cash needs with funds generated in Spain, currency rate
fluctuations in the future could have a significant impact on the Registrant.
However, at the present time, the Registrant does not anticipate altering its
business plans and practices to compensate for future currency fluctuations.
Given the Registrant's current liquidity and significant cash balances and
considering its future strategic plans, the Registrant should have sufficient
liquidity to fund operations and further its immediate strategic objectives. The
Registrant, however, continues to explore alternative sources for financing its
business. In appropriate situations, that will be strategically determined, the
Registrant 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue has arisen because many existing computer programs use only
the last two digits of any particular year, rather than all four digits, to
identify that year. These computer programs can not properly distinguish between
the years 1900 and 2000 or 1901 and 2001, for example. If not corrected, many
computer applications could fail or create erroneous results. The extent of the
potential impact of the Year 2000 Issue is not yet known, and if not timely
corrected, could affect the global economy.
15
<PAGE>
The Registrant has recognized the need to ensure that its business operations
will not be adversely impacted by the Year 2000 Issue and is aware of the time
sensitive nature of the problem. As a result, the Registrant has assessed how it
may be impacted by the Year 2000 Issue. Consequently, the Registrant is in the
process of modifying, where needed, its computer applications to ensure that
they will function properly beyond 1999.
The Registrant has replaced certain systems and applications and is in the
process of replacing other systems and/or applications with the assistance of
external consultants. The Registrant believes that with modifications to
existing software and conversions to new software applications, which are Year
2000 Compliant, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material adverse impact on the operations of the
Registrant.
The Registrant is in the process of polling its significant suppliers and
service providers to determine the extent to which it is vulnerable to a failure
of any such third party to adequately address its own Year 2000 Issue. The
Registrant's total Year 2000 project cost and estimates to complete include the
estimated costs and time associated with the impact of a third party's Year 2000
Issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Registrant's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Registrant's systems,
would not have a material adverse effect on the Registrant. The Registrant has
determined it has no exposure to contingencies related to the Year 2000 Issue
for the products it has sold.
The Registrant plans to complete the Year 2000 project by June 30, 1999. The
total remaining cost of the Year 2000 project is estimated at $40,000. Of the
total project cost, approximately $15,000 is attributable to the purchase of new
software, which will be capitalized. The remaining $25,000 which will be
expensed as incurred over the next six months, is not expected to have a
material effect on the results of operations. To date, the Registrant has
incurred and expensed approximately $20,000 related to the assessment of, and
preliminary efforts in connection with, its Year 2000 project and the
development of a remediation plan.
The costs of the Year 2000 project and the date on which the Registrant plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Because of the importance of addressing the Year 2000 Issue, the Registrant
expects to develop by January 1999, contingency plans to address any issues that
may not be corrected by implementation of the Registrant's Year 2000 project in
a timely manner.
16
<PAGE>
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
- - --------------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- - ------------------------------------------------
The statements contained in this Quarterly Report on Form 10-Q which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of the Registrant, the occurrence of which
involve certain risks and uncertainties that could cause the Registrant's actual
results to differ materially from those expected by the Registrant, including
the history of operating losses; uncertainty of future financial results;
possible negative cash flow from operating activities; additional financing
requirements; no assurance of successful and timely development of new products;
risks inherent in pharmaceutical development; dependence on regulatory
approvals; uncertainty of pharmaceutical pricing or profitability;
unpredictability of patent protection; rapid technological change; competition;
and other uncertainties detailed in the Registrant's Registration Statement on
Form S-3 (SEC Commission file No. 333-28593) declared effective by the
Securities and Exchange Commission on June 10, 1997 and any amendments thereto.
17
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
On August 24, 1998, as the result of a jury trial conducted in the Circuit Court
of Hillsborough County Florida, the Registrant was awarded a judgment in the
amount of $2.1 million relating to the Registrant's claims of civil theft and
breach of employment agreement filed against its former President and Chief
Executive Officer, Michael M. Harshbarger. The judgment included treble damages
totaling $418,000 related to its civil theft claim and $1,712,000 related to its
breach of employment agreement claim. The Registrant will exercise all
reasonable efforts to collect the judgment, but is cautious and conservative
with expectations of collection. In addition to establishing a receivable on its
books, the Registrant has established a reserve equal to the receivable until it
ultimately proves collectible, if at all.
In September 1998, the United States Court of Appeals for the Second Circuit in
New York affirmed the District Court's January 1998 grant of judgment in favor
of the Registrant in the amount of $7.68 million against defendants Medstar,
Inc., Maximed, Inc., and Robert S. Cohen. The Registrant has previously
announced that it will pursue all legal means to collect the judgment; however,
it remains uncertain as to what portion of the judgment, if any, will ultimately
prove collectible. In addition to establishing a receivable on its books, the
Registrant has established a reserve equal to the receivable until it ultimately
proves collectible, if at all.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Reference is made to the Registrant's Form 10-Q for the quarter ended June 30,
1998 regarding the Registrant's Annual Meeting of Stockholders held on July 29,
1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a)Exhibits:
27.1 Financial Data Schedule
(b)Reports on Form 8-K filed during the quarter ended September 30,
1998:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
September 30, 1998.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1998.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
-------------------------------
Registrant
November 13, 1998 By: /s/ James R. Murphy
-------------------------------------
James R. Murphy
Chairman, President and Chief
Executive Officer
(principal executive officer)
November 13, 1998 By: /s/ Michael D. Price
-------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal
financial and accounting officer)
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