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, 1999
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
BENTLEY PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE No. 59-1513162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (603) 964-8006
----------------------------
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
2, 1999 was 10,122,824.
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
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<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations and of Comprehensive
Income (Loss) (unaudited) for the three months ended
September 30, 1999 and 1998, and the nine months ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in Common Stockholders'
Equity (unaudited) for the nine months ended September 30,
1999 5
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
-----------------
Item 2. Changes in the Rights of the Registrant's Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
unaudited)
September 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,653 $ 6,703
Short term investments 1,271 -
Receivables 3,695 3,730
Inventories 1,279 1,208
Prepaid expenses and other 847 820
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Total current assets 11,745 12,461
------ ------
Fixed assets, net 3,892 3,551
Drug licenses and related costs, net 4,751 2,433
Other non-current assets, net 1,630 1,873
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$22,018 $20,318
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,357 $ 2,835
Accrued expenses 1,788 1,563
Short term borrowings 954 1,223
Current portion of long term debt 5 5
------ ------
Total current liabilities 5,104 5,626
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Long term debt, net 5,448 5,410
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Other non-current liabilities 98 290
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Commitments and contingencies
Common Stockholders' Equity:
Common tock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 10,123 and 8,443 shares 202 168
Stock purchase warrants (to purchase 4,896 and 5,928
shares of common stock) 808 556
Additional paid-in capital 87,560 83,728
Accumulated deficit (75,045) (73,858)
Accumulated other comprehensive loss (2,157) (1,602)
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11,368 8,992
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$22,018 $20,318
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</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
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<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------------- ------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Sales $5,187 $3,674 $14,295 $10,532
Cost of sales 2,062 1,585 6,070 4,480
----- ----- ----- -----
Gross margin 3,125 2,089 8,225 6,052
----- ----- ----- -----
Operating expenses:
Selling, general and administrative 2,438 2,113 7,349 6,208
Research and development 226 30 527 95
Depreciation and amortization 136 75 321 201
Nonrecurring charge - - - 1,176
----- ----- ------ ------
Total operating expenses 2,800 2,218 8,197 7,680
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Income (loss) from operations 325 (129) 28 (1,628)
Other (income) expenses:
Interest expense 291 285 860 820
Interest income (58) (126) (180) (408)
----- ----- ----- -----
Income (loss) before income taxes 92 (288) (652) (2,040)
Provision (benefit) for income taxes 280 (132) 535 320
----- ----- ----- -----
Net loss (188) (156) (1,187) (2,360)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses (196) (328) 555 (304)
----- ----- ----- -----
Comprehensive income (loss) $8 $172 ($1,742) ($2,056)
===== ===== ====== =====
Basic and diluted net loss per common share ($0.02) ($0.02) ($0.14) ($0.29)
===== ===== ===== =====
Weighted average common shares outstanding 9,522 8,428 8,808 8,428
===== ===== ===== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$.02 Par Value Additional Accumu- Accumulated Other
Common Stock Paid-In lated Other Compre- Equity
Shares Amount Capital Deficit hensive Loss Transactions Total
------ ------ ------- ------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,443 $168 $83,728 ($73,858) ($1,602) $556 $8,992
Issuance of stock options/warrants - - - - - 319 319
Common Stock issued to acquire technology 585 12 838 - - - 850
Common Stock issued as compensation 216 4 334 - - - 338
Exercise of Class A redeemable warrants 859 18 2,626 - - (67) 2,577
Conversion of debentures 20 - 34 - - - 34
Foreign currency translation adjustment - - - - (555) - (555)
Net loss - - - (1,187) - - (1,187)
------ ---- ------- --------- -------- ---- -------
Balance at September 30, 1999 10,123 $202 $87,560 ($75,045) ($2,157) $808 $11,368
====== ==== ======= ========= ======== ==== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE>
*********
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
` For the Nine
Months Ended
September 30,
------------------
(IN THOUSANDS) 1999 1998
---- ----
Cash flows from operating activities:
Net loss ($1,187) ($2,360)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 321 201
Nonrecurring charges - 158
Other non-cash items 552 375
(Increase) decrease in assets and increase
(decrease) in liabilities:
Receivables (335) (316)
Inventories (199) (160)
Prepaid expenses and other current assets (352) (609)
Other assets 102 78
Accounts payable and accrued expenses 88 64
Other liabilities (2) 60
Capitalized acquisition costs - 448
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Net cash used in operating activities (1,012) (2,061)
----- -----
Cash flows from investing activities:
Acquisition of drug delivery technology/drug licenses (1,518) (447)
Purchase of short term investments (1,271) -
Additions to fixed assets, net (785) (178)
----- -----
Net cash used in investing activities (3,574) (625)
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The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
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<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(UNAUDITED)
(IN THOUSANDS)
For the Nine
Months Ended
September 30,
----------------
1999 1998
---- ----
Cash flows from financing activities:
Proceeds from exercise of stock options/warrants, net $2,577 $ 8
Net (decrease) increase in short term borrowings (174) 12
Payments on capital leases (4) (5)
----- ----
Net cash provided by financing activities 2,399 15
----- ----
Effect of exchange rate changes on cash 137 (16)
----- ----
Net decrease in cash and cash equivalents (2,050) (2,687)
Cash and cash equivalents at beginning of period 6,703 11,117
------ ------
Cash and cash equivalents at end of period $4,653 $ 8,430
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for
(IN THOUSANDS):
Interest $699 $669
====== ======
Taxes $265 $716
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SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Registrant has issued Common Stock in exchange
for services and purchase of drug delivery
technology as follows (IN THOUSANDS):
Shares 801 -
===== ======
Amount $1,188 -
===== ======
During the nine months ended September 30, 1999, the Registrant issued Warrants
to purchase 450,000 shares of Common Stock as partial consideration for the
purchase of drug delivery technology. Fifty of the Registrant's 12% Convertible
Debentures were converted into 20,000 shares of Common Stock during the nine
months ended September 30, 1999.
During the nine months ended September 30, 1998, the Registrant issued Warrants
to purchase 425,000 shares of Common Stock in exchange for services.
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
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<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Registrant") is an
international pharmaceutical and drug delivery company engaged primarily in the
manufacturing, marketing and distribution of pharmaceutical products in Spain
and exportation of pharmaceutical products to other countries. The Registrant
develops and registers late stage products, and manufactures, packages and
distributes both its own and other companies' pharmaceutical products.
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant 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 in the near future or
currently marketed products. As a result of this transition, the Registrant has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Registrant's
operations. However, with the February 1999 acquisition of permeation
enhancement technology, limited development expenditures will be required prior
to entering into formal collaboration with other companies.
In February 1999, the Registrant acquired rights to certain U.S. and
international patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological tissues. The acquisition
price included a cash payment of approximately $1.1 million, an obligation to
issue 225,807 shares of Common Stock and ten-year warrants to purchase 450,000
shares of common stock. In addition, the Registrant agreed to issue 359,282
shares of Common Stock to Conrex Pharmaceutical Corporation. The total value of
all consideration paid for the Assets was approximately $2.5 million.
Furthermore, terms of this transaction provide for certain royalty payments upon
commercialization of products using the technologies purchased.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at September 30, 1999
and 1998 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, 1998.
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<PAGE>
The consolidated financial statements include the accounts of the Registrant and
its wholly-owned subsidiaries: Laboratorios Belmac S.A.; Bentley Healthcare
Corporation and its wholly-owned subsidiary, Belmac Hygiene, Inc.; Belmac Health
Corporation; Belmac Holdings, Inc. and its wholly-owned subsidiary, Belmac A.I.,
Inc.; B.O.G. International Finance, Inc.; Bentley Pharma, Inc; Pharma de Espana,
Inc.; and Belmac Jamaica, Ltd. 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 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 Accumulated other comprehensive gain (loss) in the Common Stockholders'
Equity section of the Consolidated Balance Sheets. Foreign currency translation
gains and losses arising from cash transactions are credited to or charged
against current earnings.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended September 30, 1999 and 1998 are presented on a
basis consistent with the audited consolidated financial statements for the year
ended December 31, 1998 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of September 30, 1999 and the results of its operations and its cash
flows for the nine months ended September 30, 1999 and 1998. The results of
operations for the nine months ended September 30, 1999 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.
Investments in securities that do not meet the definition of cash equivalents
are classified as investments available for sale in the Consolidated Balance
Sheets.
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, 1999 December 31, 1998
------------------ -----------------
Raw Materials $491 $ 505
Finished goods 788 703
----- -----
$1,279 $1,208
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<PAGE>
DRUG LICENSES AND RELATED COSTS:
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Registrant's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Carrying values of such assets are reviewed annually by the
Registrant and are adjusted for any diminution in value.
As discussed above, the Registrant acquired rights to certain U.S. and
international patents and related technology in February 1999. The purchase
price, which included cash, shares of Common Stock and warrants to purchase
Common Stock, of approximately $2.5 million has been capitalized as drug
licenses and related costs, net on the Consolidated Balance Sheets.
COMMON STOCKHOLDERS' EQUITY:
During the nine months ended September 30, 1999, holders of the Registrant's
Class A Redeemable Warrants exercised approximately 859,000 of such warrants,
resulting in the issuance of approximately 859,000 shares of Common Stock and
approximately 859,000 Class B Warrants. The remaining 1,252,000 Class A
Warrants, which were not exercised, expired on August 16, 1999. The Registrant
received net proceeds of approximately $2,577,000.
During the nine months ended September 30, 1999, holders of the Registrant's 12%
Debentures converted 50 of such Debentures, with a net carrying value of
approximately $34,000, into 20,000 shares of Common Stock.
PROVISION FOR INCOME TAXES:
The Registrant recorded a provision for income taxes totaling $535,000 for the
nine months ended September 30, 1999 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 loss primarily as a result of the increase in the
valuation allowance to offset domestic deferred tax assets and certain
nondeductible expenses in Spain.
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" (SFAS 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.
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<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1999 versus Three Months Ended September 30,
- --------------------------------------------------------------------------------
1998
- ----
The Registrant reported revenues of $5,187,000 and a net loss of $188,000 or
$.02 per basic and diluted common share for the three months ended September 30,
1999 compared to revenues of $3,674,000 and a net loss of $156,000 or $.02 per
basic and diluted common share for the same period in the prior year.
The 41% increase in revenues is primarily attributable to increased sales by the
Registrant's Spanish subsidiary, Laboratorios Belmac S.A., which reported an
increase in revenues of 52% in local currency; however, fluctuations in foreign
currency exchange rates resulted in revenues for the quarter ended September 30,
1999 of $5,187,000 when translated into U.S. dollars.
Gross margins for the quarter ended September 30, 1999 improved to 60%, compared
to 57% in the comparable period of the prior year, primarily as a result of a
change in the mix of products sold during the quarter ended September 30, 1999
compared to the quarter ended September 30, 1998, as well as from higher sales
volume in the quarter ended September 30, 1999, which resulted in lower
manufacturing costs per unit.
Selling, general and administrative expenses increased 15% or $325,000, to
$2,438,000 for the three months ended September 30, 1999 compared to $2,113,000
for the same period in the prior year, primarily as a result of increases in
selling and marketing expenses. Selling, general and administrative expenses as
a percentage of revenues, however, have improved, decreasing to 47% for the
quarter ended September 30, 1999 from 58% in the comparable period of the prior
year. A significant portion of these expenses are marketing and selling costs,
which are necessary for the Registrant's growth in sales and market share in
Spain. To the extent practical, however, the Registrant intends to continue its
efforts to control general and administrative expenses in its effort to reach
and maintain profitability.
Research and development expenses totaled $226,000 for the quarter ended
September 30, 1999 compared to $30,000 for the same period of the prior year.
The increase in research and development expenses is primarily the result of
establishing a laboratory in the Registrant's new U.S. headquarters, located in
New Hampshire, which is being used by the Registrant to develop its recently
acquired permeation enhancement technology. The minimal expenditures in research
and development reflect 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; however,
future expenditures will be greater than in recent periods due to planned
limited development expenditures related to its recently acquired permeation
enhancement technology.
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<PAGE>
Depreciation and amortization expenses increased 81% to $136,000 for the three
months ended September 30, 1999, compared to $75,000 for the same period of the
prior year. The increase was primarily due to higher depreciation charges with
respect to renovations and improvements at the Registrant's manufacturing
facility, renovations and the purchase of equipment to establish it U.S.
laboratory and higher amortization charges with respect to recently acquired
drug licenses and technologies.
Interest expense totaled $291,000 for the three months ended September 30, 1999
compared to $285,000 for the same period of the prior year. Interest income
totaled $58,000 for the three months ended September 30, 1999, compared to
$126,000 for the same period of the prior year. The decrease was due to lower
short term interest bearing investment balances during the third quarter of
1999.
The Registrant recorded a provision for income taxes totaling $280,000 for the
three months ended September 30, 1999 as a result of higher taxable income
earned in Spain. The comparable period of the prior year included a provision
for income taxes on taxable income in Spain of $148,000, offset by a refund of
U.S. income taxes in the amount of $280,000, resulting in a net benefit of
$132,000.
The Registrant reported income from operations of $325,000 for the quarter ended
September 30, 1999 compared to a loss from operations of $129,000 in the same
period of the prior year. The effect of combining non-operating items, primarily
interest expense of $291,000, interest income of $58,000 and an income tax
provision of $280,000 resulted in a net loss of $188,000, or $.02 per basic and
diluted common share for the quarter ended September 30, 1999, compared to the
net loss in the comparable period of the prior year, of $156,000, or $.02 per
basic and diluted common share. The Registrant's net loss of $156,000 in the
third quarter of the prior year would have been $280,000 higher, or $436,000
($.05 per basic and diluted common share), if not for the nonrecurring income
tax refund of $280,000.
Nine Months Ended September 30, 1999 versus Nine Months Ended September 30, 1998
- --------------------------------------------------------------------------------
The Registrant reported revenues of $14,295,000 and a net loss of $1,187,000 or
$.14 per basic and diluted common share for the nine months ended September 30,
1999 compared to revenues of $10,532,000 and a net loss of $2,360,000 or $.29
per basic and diluted common share for the same period in the prior year.
Excluding the effect of the 1998 nonrecurring charge of $1,176,000, representing
the write-off of previously capitalized acquisition costs, the Registrant's net
loss for the nine months ended September 30, 1998 would have been $1,184,000 or
$.15 per basic and diluted common share.
The 36% increase in revenues is primarily attributable to increased sales by the
Registrant's Spanish subsidiary, Laboratorios Belmac S.A., which reported an
increase in revenues of 41% in local currency for the nine months ended
September 30, 1999 compared to the same period in the prior year; however,
fluctuations in foreign currency exchange rates resulted in revenues of
$10,532,000 when expressed in U.S. dollars.
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<PAGE>
Gross margins for the nine months ended September 30, 1999 increased slightly to
58% compared to gross margins of 57% in the comparable period of the prior year,
primarily as a result of a more favorable mix of products sold during the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998.
Selling, general and administrative expenses increased by $1,141,000 to
$7,349,000 (51% of revenues) for the nine months ended September 30, 1999
compared to $6,208,000 (59% of revenues) 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 growth in sales and market share in Spain. In
addition, certain nonrecurring compensation charges were recorded during the
nine months ended September 30, 1999, which represent bonuses in the form of
Common Stock, in lieu of cash, issued to executive officers of the Registrant.
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 $527,000 for the nine months ended
September 30, 1999 compared to $95,000 for the same period of the prior year.
The increase in research and development expenses is primarily the result of
establishing a laboratory in the Registrant's new U.S. headquarters, located in
New Hampshire. This laboratory is being used by the Registrant to develop its
recently acquired permeation enhancement technology. The minimal expenditures in
research and development reflect 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.
Depreciation and amortization expenses totaled $321,000 for the nine months
ended September 30, 1999, compared to $201,000 for the same period of the prior
year. The increase was primarily due to higher depreciation charges with respect
to renovations and improvements at the Registrant's manufacturing facility,
renovations and purchase of equipment to establish its U.S. laboratory and
higher amortization charges with respect to recently acquired drug licenses and
technologies.
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 1998.
Interest expense totaled $860,000 for the nine months ended September 30, 1999
compared to $820,000 for the same period of the prior year. Interest income was
$180,000 for the nine months ended September 30, 1999 compared to $408,000 for
the same period of the prior year. The decrease was due to lower short-term
interest bearing investment balances during the nine months ended September 30,
1999.
The Registrant recorded a provision for income taxes totaling $535,000 for the
nine months ended September 30, 1999 as a result of taxable income earned in
Spain compared to $320,000 in the
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<PAGE>
same period of the prior year, which includes a refund of U.S. income taxes in
the amount of $280,000. The prior year provision for income taxes would have
totaled $600,000, if not for the U.S. income tax refund.
The Registrant reported income from operations of $28,000 for the nine months
ended September 30, 1999 compared to a loss of $1,628,000 in the same period of
the prior year. Excluding the effect of the nonrecurring charge, the
Registrant's loss from operations for the nine months ended September 30, 1998
would have been $452,000. The effect of combining non-operating items, primarily
interest expense of $860,000, interest income of $180,000 and provision for
income taxes of $535,000 resulted in a net loss of $1,187,000, or $.14 per basic
and diluted common share for the nine months ended September 30, 1999, compared
to the net loss in the comparable period of the prior year, of $2,360,000, or
$.29 per basic and diluted common share. Excluding the 1998 nonrecurring charge,
the prior year net loss for the nine months ended September 30, 1998 would have
been $1,184,000 or $.15 per basic and diluted common share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total assets increased from $20,318,000 at December 31, 1998 to $22,018,000 at
September 30, 1999, while Common Stockholders' Equity increased from $8,992,000
at December 31, 1998 to $11,368,000 at September 30, 1999. The increase in
Common Stockholders' Equity reflects primarily the Registrant's issuance of
approximately 585,000 shares of Common Stock and 450,000 stock purchase warrants
as a result of the February 1999 acquisition of permeation enhancement
technology, issuance of 150,000 shares of Common Stock to executive officers of
the Registrant, which shares represent bonuses in lieu of cash, and the exercise
of approximately 859,000 Class A Warrants during the third quarter of 1999,
offset by the loss incurred by the Registrant for the nine months ended
September 30, 1999 and the negative impact of the fluctuation of the Spanish
peseta (and related euro) exchange rate on the foreign currency translation.
The Registrant's working capital decreased from $6,835,000 at December 31, 1998
to $6,641,000 at September 30, 1999, primarily as a result of the loss from
operations incurred by the Registrant during the period and use of cash for the
acquisition of permeation enhancement technology in the U.S. and for
manufacturing facility renovations in Spain, partially offset by cash received
from the exercise of approximately 859,000 Class A Warrants during the third
quarter of 1999.
Cash and cash equivalents decreased from $6,703,000 at December 31, 1998 to
$4,653,000 at September 30, 1999, primarily as a result of using cash for
operating activities, purchase of permeation enhancement technology, renovation
of the manufacturing facility in Spain and establishing a laboratory in the
U.S., which was partially offset by cash received from the exercise of
approximately 859,000 Class A Warrants, a portion of which was used to purchase
short term investments. Included in cash and cash equivalents at September 30,
1999 are approximately $4,179,000 of short term investments considered to be
cash equivalents. There are also approximately $1,271,000 of short term
investments at September 30, 1999, which were purchased with a portion of the
cash received from the exercise of approximately 859,000 Class A Warrants during
the quarter ended September 30, 1999.
-14-
<PAGE>
Accounts receivable decreased slightly from $3,730,000 at December 31, 1998 to
$3,695,000 at September 30, 1999. Although sales have increased during the nine
months ended September 30, 1999, this was offset by increased cash collections
during this period and the effect of the fluctuation in foreign currency
exchange rates. The Registrant has not experienced any material delinquent
accounts. Inventories increased to $1,279,000 at September 30, 1999 compared to
$1,208,000 at December 31, 1998. Prepaid expenses and other current assets
increased from $820,000 at December 31, 1998 to $847,000 at September 30, 1999.
The combined total of accounts payable and accrued expenses decreased from
$4,398,000 at December 31, 1998 to $4,145,000 at September 30, 1999, primarily
as a result of payment of liabilities, offset by an increase in the accrual for
income taxes payable and fluctuations in foreign currency exchange rates. Short
term borrowings decreased from $1,223,000 at December 31, 1998 to $954,000 at
September 30, 1999, as a result of lower outstanding balances on lines of credit
used for operating purposes in Spain and the effect of fluctuation in foreign
currency exchange rates.
Fixed assets, net increased from $3,551,000 at December 31, 1998 to $3,892,000
at September 30, 1999, due primarily to renovations at the Spanish manufacturing
facility and establishing a laboratory in the U.S., partially offset by
recurring depreciation charges and the effect of fluctuations in foreign
currency exchange rates.
Drug licenses and related costs, net increased from $2,433,000 at December 31,
1998 to $4,751,000 at September 30, 1999, primarily due to the February 1999
acquisition of permeation enhancement technology, which was purchased for a
combination of cash, shares of the Registrant's Common Stock and issuance of
stock purchase warrants and other drug licenses, partially offset by the effect
of fluctuations in foreign currency exchange rates and recurring amortization
charges.
Other non-current assets decreased from $1,873,000 at December 31, 1998 to
$1,630,000 at September 30, 1999, primarily due to the effect of fluctuations in
foreign currency exchange rates and recurring amortization charges.
Long term debt increased from $5,410,000 at December 31, 1998 to $5,448,000 at
September 30, 1999, due primarily to accretion recorded on the Debentures issued
in the Registrant's February 1996 public offering. Other non-current liabilities
decreased from $290,000 at December 31, 1998 to $98,000 at September 30, 1999,
primarily as a result of the issuance of approximately 66,000 shares of Common
Stock as compensation to a consultant.
Investing activities, primarily the acquisition of drug delivery technology,
capital improvements to the manufacturing facility in Spain, establishing a
laboratory in the U.S. and the purchase of short term investments used net cash
of $3,574,000 during the nine months ended September 30, 1999. Financing
activities, primarily the exercise of approximately 859,000 Class A Redeemable
Warrants, partially offset by repayment of short term borrowings for the nine
months ended September 30, 1999, provided net cash of $2,399,000 and operating
activities for the nine months ended September 30, 1999 used net cash of
$1,012,000.
-15-
<PAGE>
Given the Registrant's current liquidity and cash balances and considering its
future strategic plans, the Registrant should have sufficient liquidity to fund
operations into the year 2001, which should be a sufficient time frame for the
Registrant to advance its strategic objectives and generate revenues and cash
flow to support the Registrant's cash requirements. However, there can be no
assurance that these objectives or revenues will be attained. The Registrant
continues to explore alternative sources for financing its business activities.
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 under
development and the sale of certain of the assets of, or its subsidiaries.
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 cannot 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 Year 2000
Issue can affect information technology ("IT") as well as non-IT systems. In
fact, many non-IT systems typically include imbedded technology such as
microcontrollers. These types of systems are more difficult to assess and repair
than IT systems. It may even be necessary to replace non-IT systems if they
cannot be modified. 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.
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 completed an
assessment of how it may be impacted by the Year 2000 Issue. The Registrant
engaged information system consultants to evaluate its systems and technology.
The Registrant's assessment process included a review of its IT as well as
non-IT systems. The Registrant has also considered the potential impact on its
operations and business model in the event that third parties with whom it has
material relationships fail to resolve their own Year 2000 issues.
The Registrant completed its assessment phase of the Year 2000 Issue. As a
result, it was determined that certain IT systems (hardware and software) needed
upgrading or replacing. The Registrant has completed the remediation project of
upgrading and/or replacing its IT systems where appropriate. In addition, the
Registrant is in the process of installing a new IT system at its operating
subsidiary in Spain, at a total approximate cost of $70,000, all of which has
been incurred and capitalized to date. This project was not accelerated nor
precipitated by the Year 2000 Issue; however, it is anticipated that all aspects
of the new system are Year 2000 compliant. Such expenditures have been budgeted
and are being funded from operations. The new system has been installed and
tested and began operating on November 1, 1999. Management of the Registrant has
also conducted a review of its non-IT systems and has concluded that it is not
materially exposed to non-IT system risks.
-16-
<PAGE>
The Registrant has polled its significant suppliers, service providers and other
third parties with whom it has material relationships 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 has received responses from
substantially all of such parties. No additional risks have been identified as a
result of the responses received. External consultants have tested the
Registrant's systems and have determined that its existing upgraded/replaced IT
systems are now Year 2000 compliant.
In the view of management of the Registrant, not only is it possible that
management may not have access to vital information which is used to make
management decisions, but the manufacturing process could even be interrupted
due to unavailability of raw materials or inoperable equipment and/or systems if
the Registrant's assessment and remediation program was not successful.
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 or anticipates selling in the
future.
Although the Registrant cannot determine the severity with which the Year 2000
issue will affect, either directly or indirectly, the Registrant's operations
and financial condition, the Registrant believes the most reasonably likely
worst case scenario in the event the Registrant or its significant customers,
vendors, or service providers fail to resolve the Year 2000 issue would be
inability on the part of the Registrant to manufacture, market, and distribute
its products and receive revenues from the sale of such products for a
substantial period of time following the commencement of the Year 2000. Factors
that could cause material differences in results, many of which are outside the
control of the Registrant, include, but are not limited to, the Registrant's
ability to identify and correct all relevant computer software, the accuracy of
representations by manufacturers of the Registrant's systems that their products
are Year 2000 compliant, the ability of the Registrant's customers, vendors and
service providers to identify and resolve their own Year 2000 issues and the
Registrant's ability to respond to and dedicate adequate resources to resolve
unforeseen complications arising as a result of the Year 2000 issue.
Although the Registrant continues to focus on the Year 2000 issue and believes
that it is now Year 2000 compliant, the Registrant is in the process of
finalizing a contingency plan intended to mitigate the possible disruption in
business operations that may result from the Year 2000 issue. Contingency plans
to address the most reasonably likely worst case scenario described above may
include the purchase of alternative hardware and software and other appropriate
measures. Such plans will not, however, guarantee that no material adverse
effects will occur.
The Registrant completed its Year 2000 project in October 1999 at a total cost
of approximately $85,000 excluding the new IT system in Spain. Of the total
project cost, approximately $35,000 was attributable to the purchase of new
hardware and software, which has been capitalized. The Registrant incurred and
expensed approximately $50,000 related to the assessment of, remediation and
testing for compliance with its Year 2000 project.
-17-
<PAGE>
Because of the importance of the potential impact of the Year 2000 Issue, the
Registrant is finalizing contingency plans to address any issues that may not
have been corrected by implementation of the Registrant's Year 2000 project in a
timely manner. Such contingency plans may include considerations such as
increasing inventories of raw materials, production of greater than normal
quantities of finished goods, and implementation of manual back-up systems where
appropriate.
DERIVATIVE INSTRUMENTS AND HEDGING
- ----------------------------------
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The FASB has delayed the date for mandatory
adoption and implementation of SFAS 133. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and is not intended to
be applied retroactively. Management does not believe that the adoption of SFAS
133 will have a significant impact on the Registrant's consolidated financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Foreign Currency
- ----------------
A substantial amount of the Registrant's business is conducted in Europe and is
therefore influenced by the extent to which there are fluctuations in the
dollar's value against other currencies, specifically the euro and the peseta.
On January 1, 1999, the euro became the official currency of 11 European Union
(EU) member states with a fixed conversion rate against their national
currencies. The value of the euro against the dollar and all other currencies,
including those of the four EU member states that are not participating in the
eurozone, will fluctuate according to market conditions. Although euro notes and
coins will not appear until January 1, 2002, the new currency can be used by
consumers, retailers, companies and public administrations from January 1, 1999,
in the form of "written money," i.e. by means of checks, traveler's checks, bank
transfers, credit card transactions, etc. The permanent value of one euro is
fixed at 166.39 pesetas. The exchange rate at September 30, 1999 and December
31, 1998 was 156.17 and 141.97 pesetas per U.S. dollar, respectively. The
weighted average exchange rate for the nine months ended September 30, 1999 and
1998 was 154.78 and 154.27 pesetas per U.S. dollar, respectively.
The effect of foreign currency fluctuations on assets and liabilities for the
nine months ended September 30, 1999 was a decrease of $555,000 and the
cumulative historical effect was a decrease of $2,157,000, as reflected in the
Registrant's Consolidated Balance Sheets in the "Liabilities and Stockholders'
Equity" section titled Accumulated other comprehensive loss. Although exchange
rates recently fluctuated significantly, the Registrant does not believe that
the effect of foreign currency
-18-
<PAGE>
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.
Nonetheless, the Registrant does not plan to modify its business practices. The
Registrant has relied primarily upon financing activities to fund the operations
of the Registrant in the United States. 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.
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
that it could be required to cut back or stop operations if it is unable to
raise or obtain needed funding; a history of losses; that successful development
of current and future products is uncertain; that clinical trial results may
result in failure to obtain regulatory approval and inability to sell products;
that its patent position is uncertain and its success depends on its proprietary
rights; that it may have to lower prices or spend more money to effectively
compete against companies with greater resources, which could result in lower
revenues and/or profits; that rapid technological change may result in product
obsolescence before a significant portion of the related costs are recouped;
product liability; doing business outside of the United States; that its
computer system may not recognize the Year 2000, which may affect computer
systems and disrupt its business; and other uncertainties detailed in the
Registrant's Registration Statement on Form S-3 (SEC Commission file No.
333-80729) declared effective by the Securities and Exchange Commission on July
22, 1999 and any amendments thereto.
-19-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
On June 30, 1999, the shareholders of the Registrant approved a
proposal that authorized the change of the Registrant's state of incorporation
from Florida to Delaware and adoption of a certificate of incorporation and
by-laws, which conform to Delaware law as well as adoption of various
anti-takeover provisions. Effective October 29, 1999, such reincorporation was
completed by merging the Registrant with and into Bentley Pharma, Inc., a
Delaware corporation, which was a wholly-owned subsidiary of the Registrant
("Bentley-Delaware"), with Bentley-Delaware being the surviving entity.
This reincorporation/merger, in effect, caused the Registrant to be
reincorporated in Delaware. On the effective date of the reincorporation/merger,
each issued and outstanding share of Common Stock was converted into one (1)
share of Common Stock, $.02 par value per share of Bentley-Delaware. On the
effective date of the reincorporation/merger, Bentley-Delaware succeeded to all
of the assets, liabilities and business of the Registrant and possesses all of
the rights and powers of the Registrant. The business of the Registrant will
continue to operate under the name, "Bentley Pharmaceuticals, Inc." The officers
and directors of Bentley-Delaware are the same as the officers and directors of
the Registrant. Stockholders of Bentley-Delaware, as stockholders of a Delaware
corporation, will, in general, have the same rights that they possessed as
stockholders of the Registrant, a Florida corporation, although certain changes
are inherent in being incorporated in Delaware rather than in Florida. The
Registrant has filed Amendment No. 1 on Form 8-A/A on October 29, 1999, which
sets forth a description of the Common Stock of Bentley-Delaware, which is
hereby incorporated by reference. The reincorporation/merger had no effect on
the rights of holders of its 12% Debentures or Class B Warrants, other than that
holders thereof will receive shares of Common Stock of Bentley-Delaware, a
Delaware corporation, rather than of Bentley Pharmaceuticals, Inc., a Florida
corporation, upon conversion or exercise, respectively.
In connection with the reincorporation/merger, Bentley-Delaware adopted
a Restated Certificate of Incorporation and Amended Restated By-Laws. On the
effective date of the reincorporation/merger, each issued and outstanding share
of Common Stock was automatically converted into one (1) share of
Bentley-Delaware Common Stock. Stockholders may, but are not required to,
surrender their present Common Stock certificates to the Registrant's Transfer
Agent, American Stock Transfer and Trust Company, Inc., 40 Wall Street, New
York, NY 10005, so that replacement certificates representing shares of
Bentley-Delaware Common Stock may be issued in exchange therefor. Certificates
representing Common Stock should not be destroyed or returned to the Registrant.
-20-
<PAGE>
ITEM 5. OTHER INFORMATION
-----------------
The Registrant relocated its corporate headquarters to New Hampshire in
June 1999. All future correspondence should be addressed to:
Bentley Pharmaceuticals, Inc.
65 Lafayette Road, 3rd Floor
North Hampton, NH 03862
Telephone: 603.964.8006
Facsimile: 603.964.6889
www.bentleypharm.com
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
3.1 Copy of Registrant's Restated Certificate of Incorporation
(Incorporated by reference to Appendix B to the Registrant's
Definitive Proxy Statement for Annual Meeting of
Stockholders filed with the Securities and Exchange
Commission on May 18, 1999.)
3.2 Copy of Registrant's Amended and Restated By-Laws
(Incorporated by reference to Appendix C to the Registrant's
Proxy Statement for Annual Meeting of Stockholders filed
with the Securities and Exchange Commission on May 18,
1999.)
27.1 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K filed during the quarter ended September 30,
1999:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
September 30, 1999.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1999.
-21-
<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 2, 1999 By: /s/ James R. Murphy
---------------------------------------
James R. Murphy
Chairman, President and Chief Executive
Officer
(principal executive officer)
November 2, 1999 By: /s/ Michael D. Price
---------------------------------------
Michael D. Price
Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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