UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 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
BENTLEY PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Florida No. 59-1513162
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(State or other jurisdiction of
incorporation or organization) (I.R.S. employer identification no.)
4890 W. Kennedy Blvd., Suite 400, Tampa, FL 33609
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 281-0961
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Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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<S> <C>
Common Stock, $.02 par value American Stock Exchange and Pacific Exchange, Inc.
12% Convertible Senior Subordinated Debentures American Stock Exchange and Pacific Exchange, Inc.
Class A Redeemable Warrants American Stock Exchange and Pacific Exchange, Inc.
Class B Redeemable Warrants American Stock Exchange
</TABLE>
Securities registered pursuant to section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
Title of Class Aggregate Market Value As of Close of Business on
- - ---------------------------- ---------------------- --------------------------
Common Stock, $.02 par value $10,618,140 March 26, 1999
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title of Class Shares Outstanding As of Close of Business on
- - ---------------------------- ------------------ --------------------------
Common Stock, $.02 par value 8,443,192 March 26, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting of Stockholders - Incorporated by
Reference into Part III of this Form 10-K
<PAGE>
Part I
Item 1. Business
General
Bentley Pharmaceuticals, Inc. (the "Registrant") is an international
pharmaceutical company engaged in the manufacturing, marketing and
distribution of pharmaceutical products in Spain and export of its
products from Spain to countries such as Russia, Holland, Poland,
England and others. The Registrant recently acquired rights to certain
U.S. and international patents and related technology covering methods
to enhance the absorption of drugs delivered to biological tissues. The
Registrant plans to develop this technology and target U.S., European
and other international markets with the new product applications. The
Registrant was organized under the laws of the State of Florida in
February 1974.
In Spain, the Registrant acquires, licenses or develops and registers
late stage products, and manufactures, packages and distributes its own
products and products under contract for other pharmaceutical
companies. The Registrant sold its French subsidiary, Chimos/LBF S.A.
(referred to herein as Chimos/LBF) in June 1997 which, until such time,
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 marketed disposable
linens and other related products in the United States until December
1998, when it discontinued such activities in order to focus on the
acquisition and development of permeation enhancement technology and
potential product applications. The percentage of the Registrant's
total revenues for the year ended December 31, 1998 attributable to its
operations in Spain and the United States are approximately 99% and 1%,
respectively. The Registrant's pharmaceutical operations in Spain are a
result of its 1992 acquisition of Rimafar S.A. (subsequently renamed
and referred to herein as Laboratorios Belmac S.A.).
During 1998, the Registrant negotiated to acquire a manufacturing
facility in the United States and a portfolio of products from Schwarz
Pharma. The Registrant decided to abandon this effort in May 1998 and,
consequently, recorded a non-recurring charge of $1,176,000 in the
second quarter of 1998, representing previously capitalized costs
related to this and other abandoned acquisitions.
The strategic focus of the Registrant has shifted in response to the
evolution of the global health care environment. The Registrant
emphasizes product distribution in Spain, strategic alliances and
product acquisitions. Its overall strategy has been expanded due to the
February 1999 acquisition of permeation enhancement technology, which
will require limited development expenditures while providing a
multitude of opportunities for strategic partnerships and/or alliances,
which are anticipated to lead to milestone payments and royalty
arrangements with the strategic partners
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bearing the majority of development costs. This technology is based on
FDA GRAS (Generally Regarded As Safe) compounds, which should result in
significantly reduced pre-clinical studies.
The Registrant's sales by its primary product lines are as follows (In
Thousands):
For the Year Ended December 31,
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1998 1997 1996
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Pharmaceutical and Consumer
Health Care Products $15,148 $14,520 $22,924
Disposable Linen Products 95 382 209
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Total $15,243 $14,902 $23,133
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Product Lines
The Registrant currently manufactures, markets and sells pharmaceutical
products in Spain and exports certain of those products to various
countries. The Registrant discontinued its disposable linen product
line during 1998.
Pharmaceutical Manufacturing and Marketing in Spain
Laboratorios Belmac S.A., the Registrant's subsidiary in Spain
("Laboratorios Belmac"), manufactures and markets pharmaceutical
products within four primary therapeutic categories of cardiovascular,
gastrointestinal, neurological, and infectious diseases. The Registrant
manufactures or distributes approximately 80 dosage forms of various
pharmaceuticals in its manufacturing facility in Zaragoza, Spain both
for its own sales and under contract for others. The manufacturing
facility was renovated in 1995 and brought into full compliance with
European Union Good Manufacturing Practices (GMPs) for solid and liquid
dosage forms. Among the products Laboratorios Belmac manufactures
and/or distributes, each of which is registered with Spain's Ministry
of Health, are:
Belmazol(R). Belmazol, whose generic name is omeprazole, is
used primarily for hyperacidity problems related to ulcers and,
secondarily, for the treatment of gastroesophageal reflux disease.
Omeprazole is a proton pump inhibitor, which inhibits the
hydrogen/potassium ATPase enzyme system at the secretory surface of
gastric parietal cells. Because this enzyme system is regarded as an
acid pump within the gastric mucosa, it has been characterized as a
gastric acid pump inhibitor in that it blocks the final step of acid
production. This compound has been used in combination with antibiotics
for the treatment of ulcers when it is suspected that Helicobacter
pylori, a bacteria, is the etiologic agent. Omeprazole is marketed in
the United States by Astra-Merck.
Controlvas(R). Controlvas, whose generic name is enalapril, is
an angiotensin converting enzyme inhibitor useful in the treatment of
hypertension and congestive heart failure. Enalapril is marketed in the
United States by Merck & Company.
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Belmalax(R). Belmalax, whose generic name is lactulose, is
used primarily for treating constipation in the elderly and, secondly,
for the treatment of hepatic encephalopathy, a central nervous system
impairment. The degradation of lactulose in the intestine acidifies the
colon contents. Ammonia, which is a cause of encephalopathy, will
migrate into the colon, be transformed into the ammonium ion and
eliminated from the body.
Senioral(TM). Senioral is a combination product useful in the
treatment of congestive symptoms of the upper respiratory tract.
Arzimol(TM). Arzimol, Bristol Myers Squibb's Cefprozil, is
marketed in Spain by the Registrant under a distribution agreement with
Bristol Myers Squibb. Cefprozil is the largest selling oral antibiotic
in the cephalosporin class in the United States.
EZ Detect Home Test(TM). The EZ Detect Home Test detects
minute traces of blood in the stool. The presence of blood in the stool
may indicate bleeding problems such as cancer of the colon or rectum,
ulcers, hemorrhoids, polyps, colitis, diverticulitis and other
intestinal disorders. The test is more safe and sanitary and easier to
use than other test kits on the market. The test is manufactured by
Biomerica, Inc. in Newport Beach, California and distributed by
Laboratorios Belmac.
EZ-H.P.(TM). EZ-H.P. is a rapid version of the original H.
pylori Test GAP that was the first test of its kind to be
commercialized. The H. pylori Test GAP was developed to detect the
presence of Helicobacter pylori, the bacterium responsible for up to
90% of all ulcers. The EZ-H.P. can be used in doctors' offices and
requires very few steps to perform compared to other products. The test
is manufactured by Biomerica, Inc. in Newport Beach, California and
distributed by Laboratorios Belmac.
Finedal(R). Finedal is an anti-obesity agent of the
amphetamine class, chlorbenzorex, for the treatment of obesity in
conjunction with dietary control but with reduced adverse effects
common to that class of compounds.
Loperamida(R). Loperamida, whose generic name is loperamide
hydrochloride, a product launched by the Registrant in Spain in March
1995, is a compound that inhibits gastrointestinal motility and is
useful in the treatment of diarrheal conditions and colitis. Loperamide
hydrochloride is marketed in the United States by several drug
companies, including McNeil, Proctor & Gamble, Novo Pharm and Geneva.
Lactoliofil(R). Lactoliofil is an anti-diarrheal agent whose
mechanism of action is the restoration of gastrointestinal flora.
Ergodavur(R), Neurodavur(R) and Neurodavur Plus(R). Ergodavur,
Neurodavur and Neurodavur Plus are vitamin B compounds used for the
enhancement of activity in the central and peripheral nervous systems.
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Diflamil(R). Diflamil is an anti-inflammatory analgesic used
in the treatment of arthritis.
Resorborina(R). Resorborina is a compound that has local
anesthetic and anti-inflammatory properties for the treatment of
pharyngitis and mouth afflictions.
Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are
compounds used to treat local fungal infections, especially around the
nail beds.
Otogen(R). Otogen is a product used for the treatment of ear
infections and ear pain.
Spirometon(R). Spirometon is a combination of spironolactone
and bendroflumethazide useful in the treatment of congestive heart
failure, hypertension and edema. (Spirometon diuretics preserve the
body's supply of potassium).
Anacalcit(R). Anacalcit is a calcium-binding product used for
the treatment of kidney stones. The Spanish government has specifically
requested that Laboratorios Belmac continue to manufacture this product
as Laboratorios Belmac is the only supplier of this type of product in
Spain.
Rofanten(R). Rofanten is the Registrant's formulation of
naproxen sodium, an anti-inflammatory/analgesic.
Relaxibys(R). Relaxibys is a combination of an analgesic
(paracetamol) and a muscle relaxant (carisoprodol) purchased from
Econature.
Generic Antibiotics. Laboratorios Belmac sells various other
types of generic antibiotics for which patent protection no longer
exists, such as amoxicillin, ampicillin (Bactosone Retard(R)) and
injectable forms of penicillin.
Controlvas and Belmazol, together, represent approximately 54% of the
sales of Laboratorios Belmac.
As the Spanish government did not recognize international conventions
for patent protection for pharmaceutical products until 1992, the
Registrant, while owning the right to manufacture the drugs described
above as well as other pharmaceuticals, will often be one of several
companies which has the right to manufacture and sell products which
are patent protected in other parts of the world. The Spanish
regulatory authorities specify the amounts each company can charge for
its products. Therefore, the Registrant's competitors may sell similar
products at the same, higher or lower prices. Many of these competitors
are larger, better capitalized and have larger sales networks than the
Registrant.
The Registrant maintains an internal marketing and sales staff of
approximately 74, including 70 employees and 4 independent sales
representatives working on commission in Spain to market the
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pharmaceuticals it produces. The Registrant's sales force competes by
emphasizing highly individualized customer service in all major cities,
provinces and territorial islands of Spain.
In 1995, the Registrant commenced the export of pharmaceuticals
manufactured by Laboratorios Belmac outside Spain through local
distributors and brokers, particularly in Eastern Europe, Northern
Africa, China, the Middle East, Central and South America.
Contract Manufacturing. Since Laboratorios Belmac currently utilizes
less than 100% of its plant capacity to manufacture its own products,
Laboratorios Belmac has engaged in contract manufacturing of
pharmaceuticals owned by other companies such as Rhone-Poulenc's
subsidiary Natterman S.A., Italpharmaco, Ratiopharm, Juste,
Wasserman-Chiese, Vir, Laboratorios Juventus, S.A. and Ethypharm. Other
contracts are contemplated in the future. The Registrant manufactures
these pharmaceuticals to its customers' specifications, and packages
them with the customers' labels. Occasionally, to assure product
uniformity and quality, employees of these customers will work at the
Registrant's manufacturing facility. As a result of Spain's entry into
the European Union, Spain implemented new pharmaceutical manufacturing
standards and the Registrant was required to modify its facility to
comply with these regulations. Laboratorios Belmac accomplished such
renovations without interruption of sales or distribution. After an
inspection, in July 1995 the operating areas of the facility were
determined to be in compliance with European GMPs by Spain's Ministry
of Health. Additional renovations were undertaken in 1998 to further
upgrade the Registrant's manufacturing facility.
Laboratorios Belmac purchased dossiers and/or submitted new
registrations for 10 new products during 1998 including: Fluoxitine,
Diltiazem SR, Pentoxyfiline, SR and Acyclovir. The Spanish registration
process for these products could span one to two years before
authorization to market these products is received.
Laboratorios Belmac also formed a subsidiary in Chile during 1998 and
has also filed registrations to obtain market approval for certain
products which it intends to market in South America.
Products to which the Registrant Owns Rights
The Registrant acquired patents and related permeation enhancement
technology in February 1999 and plans to develop such technology into
product applications. (See "--Research and Development"). Due to the
expense and time commitment required to bring a pharmaceutical product
to market, the Registrant is seeking co-marketing, licensing and
promotional arrangements and other collaborations with other
international or national pharmaceutical companies. Generally,
management believes that the Registrant can compete more effectively in
certain markets through collaborative arrangements with companies that
have an established presence in a particular geographic area and
greater resources than those of the Registrant. There can be no
assurance that the Registrant will have the resources to bring any of
these products to market or, if such resources are available, that the
products can be successfully developed, manufactured or marketed.
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Partnership Venture
In March 1994 a wholly-owned subsidiary of the Registrant, Belmac
Healthcare Corporation, formed a partnership through its wholly-owned
subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation, which is headquartered in New York, and planned to
market, through this partnership, a range of hydrogel based feminine
health care products, including a contraceptive, an antiseptic, an
antifungal and an antibacterial. In December 1994, the Registrant
commenced litigation against its partner claiming interference in the
management of the partnership and misrepresentation under the
partnership agreement. The Registrant was awarded a judgment in the
amount of $7.68 million in 1998, which was affirmed by the U.S. Court
of Appeals. The Registrant is seeking an assignment of the patents and
related know-how from the partnership and its partner as partial
settlement of the judgment. The partnership is not actively engaged in
the development of any products. In addition to establishing a
receivable on its books, the Registrant has established a reserve equal
to the receivable.
Sources and Availability of Raw Materials
The Registrant purchases, in the ordinary course of business, necessary
raw materials and supplies essential to the Registrant's operations
from numerous suppliers. There have been no availability problems or
supply shortages nor are any anticipated.
Patents, Trademarks, Licenses and Registrations
Few of the products currently being sold by the Registrant are
protected by patents owned by the Registrant. However, where possible,
patents and trademarks will be sought and obtained in the United States
and in all countries of principal marketing interest to the Registrant.
The Registrant has filed or has rights to patent applications. However,
there can be no assurance that its rights will afford adequate
protection to the Registrant. In addition, the Registrant also relies
on unpatented proprietary technology in the development and
commercialization of its products. There is no assurance that others
may not independently develop the same or similar technology.
The Registrant also relies upon trade secrets, unpatented proprietary
know-how and continuing technological innovations to develop its
competitive position. However, there can be no assurance that others
may not acquire or independently develop similar technology or, if
patents in all major countries are not issued with respect to the
Registrant's products, that the Registrant will be able to maintain
information pertinent to such research as proprietary technology or
trade secrets.
The Registrant recently acquired patents and related permeation
enhancement technology and plans to develop alternative delivery
methods for currently marketed products, thereby extending their
marketing exclusivity. The patent coverage includes the United States,
Japan, Korea and most major European markets.
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Laboratorios Belmac owns approximately 50 trademarks for pharmaceutical
products and one patent, which were granted by Spain's Bureau of
Patents, and Trademarks. In Spain, patents expire after 20 years and
trademarks expire after 10 years, but can be renewed. All prescription
pharmaceutical products marketed by Laboratorios Belmac in Spain have
been registered with and approved by Spain's Ministry of Health. To
register a pharmaceutical with the Ministry requires the submission of
a registration dossier which includes all pre-clinical, clinical and
manufacturing information. The registration process generally takes
approximately two years or more. There can be no assurance that a
competitor has not or will not submit additional registrations for
products substantially similar to those marketed by Laboratorios
Belmac.
Competition
All of the Registrant's current and future products face competition
both from existing drugs and products and from new drugs and products
being developed by others. This competition potentially includes
national and multi-national pharmaceutical and health care companies of
all sizes. Many of these other pharmaceutical and health care concerns
have greater financial resources, technical staffs and manufacturing
and marketing capabilities than the Registrant. Acceptance by
hospitals, physicians and patients is crucial to the success of a
pharmaceutical or health care product.
The Registrant competes primarily in Spain, which is a large, developed
population center in Europe. Since Spain is a member of the European
Union, the Registrant expects to be able to target the European Union's
larger population as harmonization eliminates the barriers between
countries.
Laboratorios Belmac competes with both large multinational companies
and national Spanish companies, which produce most of the same products
Laboratorios Belmac manufactures. For example, there are currently many
companies, such as Schering-Plough, S.A., which market and sell
omeprazole. Similarly, many companies currently sell enalapril, with
Merck, Sharp & Dome de Espana, S.A. being the product leader. Others of
the products sold by Laboratorios Belmac, such as Onico-Fitex, are more
unusual and have fewer competitors. The contract manufacturing
performed by Laboratorios Belmac has a number of competitors, including
Tadec Meiji Farma, Bama Geve, ReigJofre, Aristegui, and Esteve, S.A.
Customers
The incidence of certain infectious diseases, which occur at various
times in different areas of the world, affects the demand for the
Registrant's antibiotic products when they are marketed in each area.
Orders for the Registrant's products are generally filled on a current
basis, and no order backlog existed at December 31, 1998. No material
portion of the Registrant's business is subject to renegotiation of
profits or termination of contracts at the election of any governmental
authority. There were no customers during the years ended December 31,
1998 or 1997, which accounted for at least 10% of the Registrant's
consolidated revenues. Sales of approximately $2,200,000 to Pharmacie
Centrale des Hopitaux by the Registrant's subsidiary in France, which
has since been sold, accounted for approximately 10% of the
Registrant's sales for the year ended December 31, 1996.
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Research and Development
The Registrant has decreased its research and development spending over
the past few years. Research and development activities have been
performed in the past, under contract, by various universities and
consulting research laboratories. However, the Registrant's strategy
has recently shifted due to the February 1999 acquisition of permeation
enhancement technology, which will require limited development
expenditures while providing a multitude of opportunities for strategic
partnerships and/or alliances; however, additional research will not be
required. The strategic alliances are anticipated to lead to milestone
payments and royalty arrangements with the strategic partners bearing
the majority of development costs. This technology is based on FDA GRAS
(Generally Regarded As Safe) compounds, which should result in
significantly reduced pre-clinical trials.
The Registrant spent $153,000, $324,000 and $29,000 in the years ended
December 31, 1998, 1997 and 1996, respectively, on research and
development to develop new products and processes and to improve
existing products and processes. Expenditures in 1998 were primarily
incurred in Spain and were concentrated in the development of late
stage products. The Registrant intends to continue to carefully manage
its research and development activities with the establishment of
priorities based on both technical and commercial criteria and to
carefully supervise such expenditures in view of its limited resources.
Research and development expenditures in 1999 will be greater than in
recent years, however, due to planned development of the recently
acquired permeation enhancement technology described above.
Laboratorios Belmac is engaged in limited research of drug delivery
systems ("DDS"), such as sustained release and time release
formulations, through a collaborative venture with a customer.
Regulation
The development, manufacture, sale, and distribution of the
Registrant's products are subject to comprehensive government
regulation, and the general trend is toward more stringent regulation.
Government regulation, which includes detailed inspection and control
over research laboratory procedures, clinical investigations,
manufacturing, marketing, and distribution practices by various
federal, state, and local agencies, substantially increases the time,
difficulty and cost incurred in obtaining and maintaining the approval
to market newly developed and existing products.
United States. The steps required before a pharmaceutical agent may be
marketed in the United States include (i) preclinical laboratory and
animal tests, (ii) the submission to the FDA of an Investigational New
Drug Application ("IND"), which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug, (iv)
the submission of a New Drug Application ("NDA") to the FDA, and (v)
the FDA approval of the NDA prior to any commercial sale or shipment of
the drug. In addition
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to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with current GMPs for drugs. To
supply products for use in the United States, foreign manufacturing
establishments must comply with GMPs and are subject to periodic
inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Clinical trials are typically conducted in three sequential phases that
may overlap. In Phase I, the initial introduction of the pharmaceutical
into healthy human volunteers, the emphasis is on testing for safety
(adverse effects), dosage tolerance, metabolism, excretion and clinical
pharmacology. Phase II involves studies in a limited patient population
to determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance and optimal dosage and to
identify possible adverse side effects and safety risks. Once a
compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to
evaluate clinical efficacy further and to further test for safety
within an expanded patient population at multiple clinical study sites.
The FDA reviews both the clinical plans and the results of the trials
and may discontinue the trials at any time if there are significant
safety issues.
The results of the preclinical and clinical trials are submitted to the
FDA in the form of a NDA for marketing approval. The approval process
is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review process and may
delay marketing approval. After FDA approval for the initial
indications, further clinical trials would be necessary to gain
approval for the use of the product for any additional indications. The
FDA may also require post-marketing testing to monitor for adverse
effects, which can involve significant expense.
Under the Orphan Drug Act, the FDA may designate a product or products
as having Orphan Drug status to treat a "rare disease or condition,"
which is a disease or condition that affects populations of less than
200,000 individuals in the United States or, if victims of a disease
number more than 200,000, the sponsor establishes that it does not
realistically anticipate its product sales will be sufficient to
recover its costs. If a product is designated an Orphan Drug, then the
sponsor is entitled to recover its costs and the sponsor is entitled to
receive certain incentives to undertake the development and marketing
of the product, including limited tax credits and high-priority FDA
review of a NDA. In addition, the sponsor that obtains the first
marketing approval for a designated Orphan Drug for a given indication
is eligible to receive marketing exclusivity for a period of seven
years.
Spain. As a manufacturer in Spain, which is a member of the European
Union, Laboratorios Belmac is subject to the regulations enacted by the
European Union. Prior to Spain's entry into the European Union in 1993,
the pharmaceutical regulations in Spain were less stringent and
Laboratorios Belmac, along with all Spanish companies, have had to
modify their procedures to adapt to the new
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regulations, which are similar to the regulations promulgated by the
United States Food & Drug Administration discussed above. In general,
these regulations are essentially consistent with the FDA and require a
manufacturer of a proposed pharmaceutical to show efficacy and safety.
The development process in Spain goes through the same phases (i.e. I,
II, III) as in the United States to assure their safety and efficacy. A
dossier on each pharmaceutical is prepared, which takes approximately
two years or more for review by the Ministry of Health. The
pharmaceutical can then only be sold to the public with a prescription
from a medical doctor.
General. Continuing reviews of the utilization, safety, and efficacy of
health care products and their components are being conducted by
industry, government agencies, and others. Such studies, which employ
increasingly sophisticated methods and techniques, can call into
question the utilization, safety, and efficacy of previously marketed
products and in some cases have resulted, and may in the future result,
in the discontinuance of such products and give rise to claims for
damages from persons who believe they have been injured as a result of
their use. The Registrant has product liability insurance for such
potential claims; however, no such claims have ever been asserted
against the Registrant.
The cost of human health care continues to be a subject of
investigation and action by governmental agencies, legislative bodies,
and private organizations. In the United States, most states have
enacted generic substitution legislation requiring or permitting a
dispensing pharmacist to substitute a different manufacturer's version
of a drug for the one prescribed. Federal and state governments
continue their efforts to reduce costs of subsidized heath care
programs, including restrictions on amounts agencies will reimburse for
the use of products. Efforts to reduce health care costs are also being
made in the private sector. Health care providers have responded by
instituting various cost reduction and containment measures of their
own. It is not possible to predict the extent to which the Registrant
or the health care industry in general might be affected by the matters
discussed above.
Many countries, directly or indirectly through reimbursement
limitations, control the selling price of certain health care products.
Furthermore, many developing countries limit the importation of raw
materials and finished products. In Western Europe, efforts are under
way by the European Union to harmonize technical standards for many
products, including drugs and medical devices, and to make more uniform
the requirements for marketing approval from the various regulatory
agencies. The Registrant is subject to reimbursement status of
prescription products in Spain and periodically products are identified
as non-reimbursable by the social security system. Although these
products can continue to be marketed, the non-reimbursable status could
reduce the market size of such products.
Although the Registrant marketed disposable linen products in the
United States until December 1998, the majority of the Registrant's
sales are in Spain. International operations are subject to certain
additional risks inherent in conducting business outside the United
States, including price and currency exchange controls, changes in
currency exchange rates, limitations on foreign participation in local
enterprise, expropriation, nationalization, and other governmental
action.
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To the best of its knowledge, the Registrant is presently in
substantial compliance with all existing applicable environmental laws
and does not anticipate that such compliance will have a material
effect on its future capital expenditures, earnings or competitive
position with respect to any of its operations.
Employees
The Registrant and its subsidiaries employ approximately 141 people, 6
of whom are employed in the United States and 135 in Spain as of March
26, 1999. Of such employees, approximately 48 are principally engaged
in manufacturing activities, 74 in sales and marketing, including 4
independent sales representatives, 3 in product development and 16 in
management and administration. In general, the Registrant considers its
relations with its employees to be good.
Financial Information Relating to Geographic Areas and Foreign
Operations
For information regarding the Registrant's foreign operations, see Note
12 of Notes to Consolidated Financial Statements.
Item 2. Properties
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United States
The Registrant's corporate headquarters are presently located at Two
Urban Centre, Suite 400, 4890 West Kennedy Boulevard, Tampa, Florida
33609 and include 2,500 square feet, which are occupied in accordance
with a lease agreement which expires in October 1999. The Registrant
has entered into a five year lease agreement, which expires in March
2004, whereby it has leased 3,200 square feet of office space and
laboratory space at 65 Lafayette Road, North Hampton, NH, where it
plans to relocate its corporate headquarters in the summer of 1999.
Spain
Manufacturing is performed at the Registrant's facilities in Zaragoza,
Spain. These facilities were renovated in 1995 to comply with the
requirements for European GMPs and further renovated during 1998. The
facilities, which are owned by the Registrant, consist of approximately
55,000 square feet located in a prime industrial park and seated on
sufficient acreage that would allow for future expansion. The
manufacturing facility is capable of producing tablets, capsules,
suppositories, creams, ointments, lotions, liquids and sachets, as well
as microgranulated and microencapsulated products. The facility also
includes analytical chemistry, quality control and quality assurance
laboratories. The GMPs certification allows the Registrant to undertake
contract manufacturing for a number of international pharmaceutical
companies either engaged in or contemplating emergence into the Spanish
market or for export. The Registrant's administrative offices in Spain
are located in Madrid in approximately 5,500 square feet of renovated,
leased offices, which leases expire in 2000.
12
<PAGE>
The Registrant's facilities are deemed suitable and provide adequate
productive capacity for the foreseeable future. In the event the
Registrant considers it necessary or appropriate, the Registrant is of
the opinion that comparable facilities can be located.
Item 3. Legal Proceedings
-----------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
13
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
--------------------------------------------------------------
Matters
-------
On July 31, 1990 and March 27, 1996, the Registrant's Common Stock
began trading on the American Stock Exchange and the Pacific Exchange,
Inc., respectively, under the symbol BNT. The following table sets
forth the high and low sales prices for the Common Stock as reported on
the American Stock Exchange for the periods indicated.
Quarter Ended High Sales Price Low Sales Price
------------- ---------------- ---------------
March 31, 1997 $4.25 $2.56
June 30, 1997 3.69 2.75
September 30, 1997 3.63 2.56
December 31, 1997 3.25 2.13
March 31, 1998 $3.38 $2.13
June 30, 1998 3.06 2.19
September 30, 1998 2.38 .81
December 31, 1998 1.69 .81
As of March 26, 1999 there were 1,970 holders of record of the
Registrant's Common Stock, excluding shares held in street name. No
dividends have ever been declared or paid on the Registrant's Common
Stock and the Registrant does not anticipate paying any dividends in
the foreseeable future.
Item 6. Selected Financial Data
-----------------------
The following selected consolidated financial data of the Registrant
and its subsidiaries has been derived from the Registrant's
consolidated financial statements. The selected financial data should
be read in conjunction with the Registrant's consolidated financial
statements and the notes thereto, which should be read in their
entirety and are included elsewhere in this Annual Report on Form 10-K.
All per share information prior to July 25, 1995 has been adjusted to
give retroactive effect to a one-for-ten reverse stock split of the
Registrant's Common Stock effected on that date. (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.)
14
<PAGE>
<TABLE>
<CAPTION>
Summary of Operations
Fiscal Year Ended
December 31,
-------------------------------------------------------------------
(In thousands, except per share 1998(1) 1997(2) 1996(3) 1995(3) 1994(4)
data) ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales $15,243 $14,902 $23,133 $31,437 $27,010
Cost of sales 6,601 8,010 15,638 25,586 21,931
--------- ----- ------ ------ --------
Gross margin 8,642 6,892 7,495 5,851 5,079
Operating expenses 10,710 8,438 8,794 8,198 9,050
--------- ----- ----- ----- --------
Other (income) expense 808 2,269 1,174 (21) (393)
--------- ----- ----- ------ -------
Loss before extraordinary item (2,876) (3,815) (2,473) (2,326) (3,578)
--------- ------- ------- ------- --------
Net loss $(2,876) $(3,815) $(2,919) $(2,326) $(3,578)
======== ======= ======== ======== ========
Loss per Common Share before
extraordinary item $(.35) $(.97) $(.79) $(.83) $(1.56)
========= ====== ====== ====== ========
Basic net loss per Common Share $(.35) $(.97) $(.92) $(.83) $(1.56)
========= ====== ====== ====== ========
Weighted average number of
Common Shares outstanding 8,431 4,072 3,334 2,999 2,395
========= ===== ===== ===== ========
Balance Sheet Information
At December 31,
---------------------------------------------------------------------
(In thousands) 1998(1) 1997(2) 1996(3) 1995(3) 1994(4)
------- ------- ------- ------- -------
Working capital $6,835 $10,758 $4,265 $3,113 $1,928
Non-current assets 7,857 6,034 6,746 6,523 5,644
Total assets 20,318 21,043 16,558 16,290 16,332
Non-current liabilities 5,700 5,549 5,513 2,252 336
Redeemable Preferred
Stock -0- 2,338 2,203 2,068 2,256
Common Stockholders'
Equity 8,992 8,905 3,295 5,316 4,980
</TABLE>
(1) Operating expenses in 1998 include non-recurring charges of
$1,176,000 related to the write-off of previously capitalized
acquisition costs, which resulted from abandoning the attempts
to acquire certain assets from Schwarz Pharma as well as
certain other acquisitions. All of the Registrants' outstanding
Redeemable Preferred Stock was converted into Common Stock in
October 1998.
15
<PAGE>
(2) Revenues declined during 1997 due to the Registrant's
divestiture of Chimos/LBF on June 26, 1997. Other (income)
expense for the year ended December 31, 1997 included interest
expense of $1,086,000 and a provision for loss on disposition
of subsidiary, which totaled $591,000, including realized
exchange loss of $386,000 due to fluctuations in the currency
exchange rates used to translate the foreign currency financial
statements and a loss of $205,000 recognized upon the sale of
Chimos/LBF. The Registrant also recorded a provision for income
taxes during 1997 totaling $621,000. During the fourth quarter
of 1997, the Registrant received proceeds of approximately
$9,800,000 from the exercise of approximately 4,900,000 Class A
Warrants.
(3) Revenues in France declined beginning in the second quarter of
1996, due to the March 31, 1996 expiration of the distribution
agreement for the product Ceredase, which accounted for
approximately 60% of the Registrant's revenues in 1995 and
approximately 54% of its revenues in the quarter ended March
31, 1996. Ceredase gross margins, as a percent of sales, were
approximately 5% during the quarter ended March 31, 1996. The
Registrant completed a public offering in February 1996,
whereby it issued $6,900,000 of 12% convertible subordinated
debentures and warrants. Consequently, the Registrant incurred
interest expense totaling $1,227,000 in 1996. The Registrant
incurred an extraordinary charge of $446,000, representing the
unamortized discount and issuance costs at the date of
repayment of Notes from its October 1995 private placements.
Operating expenses for the year ended December 31, 1996
included approximately $340,000, representing a provision for
goodwill impairment related to Chimos/LBF.
(4) The Registrant sold its Spanish marketing rights to its
ciprofloxacin antibiotic, Belmacina(R), in 1994 and included
the gain thereon (approximately $884,000) in Other (Income)
Expense in the year ended December 31, 1994 and recorded the
anticipated gain on sale of the related trademark of $380,000
as deferred revenue as of December 31, 1994, which was
recognized as revenue in the year ended December 31, 1995.
Other (Income) Expense for the year ended December 31, 1995
also included the recognition of income of $360,000 from the
commercialization of a certain drug provided by the
Registrant's former Chairman and Chief Executive Officer,
$533,000 of expense related to the settlement of litigation
with the Registrant's former Chief Financial Officer and income
of $375,000 due to the reversal of an over-accrual for a
liability.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
GENERAL
The Registrant is presently an international pharmaceutical company
with its primary focus on the
16
<PAGE>
manufacturing, marketing and distribution of pharmaceutical products in
Spain and the improvement of new drugs through new drug delivery
technologies, which it intends to commercialize in the United States
and other major markets. Historically most of its revenues have come
from its operations in Europe.
The Registrant incurred a net loss of $2,876,000 on revenues of
$15,243,000 for the year ended December 31, 1998. The Registrant
intends to continue to focus its efforts on business activities which
management believes should result in operating profits in the future,
of which there can be no assurance. To improve its results, the
Registrant's management will focus on increasing higher margin
pharmaceutical product sales, controlling expenses, carefully
allocating resources to limited product development projects and
potentially acquiring marketable products or profitable companies in
the United States or Europe that are compatible with the Registrant's
strategy for growth. (See "--Liquidity and Capital Resources"). For
business segment information on the Registrant's operations outside the
United States, see Note 12 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1998 versus Fiscal Year Ended December
-----------------------------------------------------------------------
31, 1997
--------
The Registrant reported revenues of $15,243,000 and a net loss of
$2,876,000 or $.35 per common share for the year ended December 31,
1998 compared to revenues of $14,902,000 and a net loss of $3,815,000
or $.97 per common share for 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 $1,700,000 or $.21 per common share for the year ended
December 31, 1998.
The 2% increase in revenues is primarily the result of the Registrant's
Spanish subsidiary, Laboratorios Belmac S.A., reporting an increase in
revenues of 23% in local currency in the year ended December 31, 1998
compared to the prior year; however, fluctuations in foreign currency
exchange rates reduced the increase to 21% or $2,657,000 when expressed
in U.S. dollars. This was partially offset by the effect of the June
1997 divestiture of the Registrant's French subsidiary, Chimos/LBF,
which generated approximately $2,029,000 during the year ended December
31, 1997, compared to no revenue in 1998.
Gross margins for the year ended December 31, 1998 improved to 57%
compared to gross margins of 46% in the prior year, primarily as a
result of: (i) improvement in Laboratorios Belmac's average gross
margin from 51% to 57% and (ii) the low gross margins associated with
Chimos/LBF, which was divested in June 1997.
Selling, general and administrative expenses increased by $1,259,000 or
16% to $9,078,000 for the year ended December 31, 1998 compared to
$7,819,000 for 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 in its effort to
reach and maintain
17
<PAGE>
profitability.
Research and development expenses were $153,000 for the year ended
December 31, 1998 compared to $324,000 for the prior year. The minimal
expenditures in research and development reflect the Registrant's
recent historical 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,
1999 expenditures will be greater than in 1998 due to planned limited
development expenditures related to recently acquired permeation
enhancement technology.
Included in operating expenses for the year ended December 31, 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 $1,076,000 for the year ended December 31,
1998 compared to $1,086,000 for the prior year. Interest income was
$499,000 for the year ended December 31, 1998 compared to $123,000 for
the prior year. The increase was with respect to interest earned on
higher short-term interest bearing investment balances during the year
ended December 31, 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 $236,000 for
the year ended December 31, 1998, including $516,000 of foreign taxes
as a result of taxable income earned in Spain, which was partially
offset by a U.S. income tax refund in 1998 of $280,000, which resulted
from use of foreign tax credits.
The Registrant reported a loss from operations of $2,068,000 for the
year ended December 31, 1998 compared to $1,546,000 in 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 abandoned Schwarz Pharma and other related acquisitions. Excluding
the effect of the nonrecurring charge, the Registrant's loss from
operations for the year ended December 31, 1998 would have been
$892,000. The effect of combining non-operating items, primarily
interest expense of $1,076,000, interest income of $499,000 and
provision for income taxes of $236,000 resulted in a net loss of
$2,876,000, or $.35 per common share for the year ended December 31,
1998, compared to the net loss in the comparable prior year, of
$3,815,000, or $.97 per common share. Excluding the nonrecurring
charge, the net loss would have been $1,700,000 or $.21 per common
share for the year ended December 31, 1998.
Fiscal Year Ended December 31, 1997 versus Fiscal Year Ended December
31, 1996
The Registrant reported revenues of $14,902,000 and a net loss of
$3,815,000 or $.97 per common
18
<PAGE>
share for the year ended December 31, 1997 compared to revenues of
$23,133,000 and a net loss of $2,919,000 or $.92 per common share for
the same period in the prior year.
Sales and Cost of Sales. The 36% decrease in revenues was primarily
attributable to an 83% decrease in sales by the Registrant's French
subsidiary, Chimos/LBF, to $2,029,000. The decrease in Chimos/LBF's
revenues was due to its divestiture on June 26, 1997, combined with a
decrease in its sales prior to the divestiture. This decrease was
partially offset by a 28% increase in sales (calculated in local
currency) by the Registrant's Spanish subsidiary, Laboratorios Belmac.
However, fluctuation in foreign currency exchange rates reduced the
increase in sales to 11%, when reported in U.S. dollars, to
$12,491,000. The Registrant's revenues began to decline beginning in
the second quarter of 1996, due to the March 31, 1996 expiration of its
distribution agreement for the product, Ceredase, which accounted for
approximately 60% of its revenues in the year ended December 31, 1995.
Ceredase gross margins, as a percent of sales, were approximately 5%.
Gross margins for the year ended December 31, 1997 improved to 46% when
compared to gross margins of 32% in the prior year, primarily as a
result of the higher proportion of sales from Laboratorios Belmac,
whose sales generated significantly higher gross margins than those of
Chimos/LBF, as well as the loss of low-margin Ceredase sales.
Chimos/LBF generated relatively low gross margins (approximately 21%
for the year ended December 31, 1997) compared to Laboratorios Belmac,
which experienced substantially higher margins (approximately 51% for
the year ended December 31, 1997).
Operating Expenses. Selling, general and administrative expenses were
$7,819,000 for the year ended December 31, 1997 compared to $7,923,000
for the same period in the prior year. Chimos/LBF's divestiture in June
1997 resulted in lower selling, general and administrative expenses in
France; however, this decrease was partially offset by increased
selling expenses incurred by the Spanish subsidiary to support the
increase in sales volume generated during the year ended December 31,
1997.
Research and development expenses were $324,000 for the year ended
December 31, 1997 compared to $29,000 for the prior year. The research
and development expenditures for the year ended December 31, 1997 were
primarily related to bio-equivalency studies, which were necessary in
order to obtain approval to export products from Spain to other
countries.
Depreciation and amortization expenses were $295,000 for the year ended
December 31, 1997, compared to $502,000 for the same period of the
prior year. The decrease was primarily due to (i) the divestiture of
Chimos/LBF; and (ii) the disposal of certain fixed assets during 1996
as a result of the Registrant's move to smaller, more cost effective
office space.
Other Income/Expense. Interest expense was $1,086,000 for the year
ended December 31, 1997 compared to $1,227,000 for the same period of
the prior year. The decrease reflected primarily the effect of retiring
high-yield promissory notes in February 1996, using proceeds from the
Public Offering, thereby lowering the effective interest rate on
outstanding debt, offset by higher outstanding balances on short term
borrowings, which were used to finance working capital needs. Interest
income was $123,000 for the year ended December 31, 1997 compared to
$103,000 for the same period of the prior year. The slight increase was
due to interest earned on higher short-term interest bearing investment
balances in the current year, which resulted from the proceeds of the
exercise of approximately 4,900,000 Class A Warrants during the fourth
quarter of 1997.
19
<PAGE>
Other (income) expenses for the year ended December 31, 1997 included a
provision for loss on disposition of subsidiary, which totaled
$591,000, including realized exchange loss of $386,000, due to
fluctuations in the currency exchange rates used to translate the
foreign currency financial statements and a loss of $205,000 recognized
upon the sale of Chimos/LBF. Other (income) expenses in 1996 were
primarily comprised of the loss of approximately $71,000 recognized
upon the disposition of certain unnecessary fixed assets and leasehold
improvements associated with the Registrant's relocation to smaller,
more cost effective, office space in April 1996.
The Registrant recorded a provision for income taxes totaling $621,000
for the year ended December 31, 1997. The income tax expense was
$280,000 (domestic) and $341,000 (foreign) and resulted from U.S.
alternative minimum taxes and certain nondeductible expenses in Spain.
The Registrant reported a loss from operations for the year ended
December 31, 1997 of $1,546,000 compared to a loss from operations of
$1,299,000 in the prior year, which was the combined result of lower
sales, partially offset by higher gross margins and lower operating
expenses. The effect of combining non-operating items, primarily (i)
interest expense of $1,086,000, and (ii) the loss of $591,000 upon the
disposition of the Registrant's French subsidiary, and (iii) income tax
expense of $621,000, resulted in a net loss of $3,815,000, or $.97 per
common share for the year ended December 31, 1997. Non-operating items
in the comparable period of the prior year included primarily (i)
interest expense of $1,227,000, and (ii) a loss recognized upon the
extinguishment of debt of approximately $446,000, which, when combined
with the loss from operations, resulted in a net loss of $2,919,000, or
$.92 per common share for the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Total assets decreased from $21,043,000 at December 31, 1997 to
$20,318,000 at December 31, 1998, while Common Stockholders' Equity
increased from $8,905,000 at December 31, 1997 to $8,992,000 at
December 31, 1998. The increase in Common Stockholders' Equity reflects
primarily the loss incurred by the Registrant for the year ended
December 31, 1998, offset by the effect of conversion of Series A
Preferred Stock into shares of Common Stock, issuance of stock purchase
warrants and by the positive impact of the Spanish peseta exchange rate
on the foreign currency translation adjustment.
The Registrant's working capital decreased from $10,758,000 at December
31, 1997 to $6,835,000 at December 31, 1998, primarily as a result of
the loss from operations incurred by the Registrant during the period,
including a non-recurring charge of $1,176,000 related to the write off
of previously capitalized acquisition costs and the use of cash for
acquisition of drug licenses in Spain and for manufacturing facility
renovations.
20
<PAGE>
Cash and cash equivalents decreased from $11,117,000 at December 31,
1997 to $6,703,000 at December 31, 1998, primarily as a result of using
cash for operating activities (including costs associated with the
abandoned Schwarz acquisition), the acquisition of drug licenses in
Spain and renovation of the manufacturing facility in Spain. Included
in cash and cash equivalents at December 31, 1998 are approximately
$6,242,000 of short-term investments considered to be cash equivalents.
Accounts receivable increased from $2,428,000 at December 31, 1997 to
$3,228,000 at December 31, 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. The
Registrant completed the sale of Chimos/LBF, for approximately
$3,650,000 on June 26, 1997. The Registrant has since received
approximately $3,300,000, including approximately $2,600,000 of cash
and cash equivalents which resided on Chimos/LBF's books prior to
disposition, of which approximately $500,000 was used to repay
indebtedness to the former subsidiary. 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.
The Registrant has established a reserve in the amount of $100,000,
which it has determined should be sufficient to address such
contingencies or liabilities. In the opinion of management, the
resolution of the remaining contingencies will have no material effect
on the Registrant's financial position or results of operations. The
Registrant recorded a loss of $591,000 related to this divestiture,
including realized exchange loss of $386,000 due to fluctuations in the
currency exchange rates used to translate the foreign currency
financial statements.
Inventories increased to $1,208,000 at December 31, 1998 compared to
$714,000 at December 31, 1997, primarily as a result of stocking the
product, Arzimol(TM) for distribution in 1999. Prepaid expenses and
other current assets increased from $750,000 at December 31, 1997, to
$1,322,000 at December 31, 1998, primarily as a result of issuance of
stock purchase warrants and prepayment of certain operating costs in
Spain during the year ended December 31, 1998.
The total of accounts payable and accrued expenses increased from
$3,106,000 at December 31, 1997 to $4,398,000 at December 31, 1998,
primarily as a result of increased sales volume, fluctuation in foreign
currency exchange rates and inventory purchases. Short-term borrowings
increased from $1,140,000 at December 31, 1997 to $1,223,000 at
December 31, 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
$3,551,000 at December 31, 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 $2,433,000 at December 31, 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 $1,873,000 at December 31, 1998, primarily due to the write-off of
previously capitalized acquisition costs
21
<PAGE>
and recurring amortization charges.
Long term debt increased from $5,329,000 at December 31, 1997 to
$5,410,000 at December 31, 1998, due primarily to accretion recorded on
the Debentures issued in the Registrant's February 1996 public
offering. Other non-current liabilities increased from $220,000 at
December 31, 1997 to $290,000 at December 31, 1998, primarily as a
result of recording an obligation to issue additional shares of Common
Stock to a consulting firm for services rendered during 1998.
The holders of the Registrant's Series A Preferred Stock converted all
such holdings into shares of the Registrant's Common Stock during the
year ended December 31, 1998. As a result, the number of shares of
Common Stock increased by approximately 15,000 and Common Stockholders
Equity increased by approximately $2,439,000 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 $2,118,000 during the year ended December 31, 1998.
Financing activities, for the year ended December 31, 1998, provided
net cash of $3,000 and operating activities, after adding back the
non-cash charges for abandoned acquisition, for the year ended December
31, 1998 used net cash of $2,116,000.
Seasonality. In the past, the Registrant has experienced a positive
fluctuation in the fourth quarter of 1998 due to seasonality. As the
Registrant markets more pharmaceutical products whose sales are
seasonal, seasonality of sales may become more significant.
Financings. An aggregate of 6,900 Units (the "Units") were sold in a
February 1996 Public Offering. Each Unit consisted of a One Thousand
Dollars ($1,000) Principal Amount 12% Convertible Senior Subordinated
Debenture due February 13, 2006 (the "Debentures") and 1,000 Class A
Redeemable Warrants, each to purchase one share of Common Stock and one
Class B Redeemable Warrant. Two Class B Redeemable Warrants entitle a
holder to purchase one share of Common Stock. The Debentures and Class
A Redeemable Warrants initially traded only as a Unit but began trading
separately on May 29, 1996. Interest on the Debentures is payable
quarterly. The Debentures are convertible prior to maturity, unless
previously redeemed, at any time commencing February 14, 1997 (the
"Anniversary Date") into shares of Common Stock at a conversion price
per share of $2.50. Gross and net proceeds (after deducting
underwriting commissions and the other expenses of the offering) were
approximately $6,900,000 and $5,700,000, respectively, a portion of
which were used to retire $1,770,000 principal balance of debt incurred
in previous private placements.
Of the Unit purchase price of $1,000, for financial reporting purposes,
the consideration allocated to the Debenture was $722, to the
conversion discount feature of the Debenture was $224 and to the 1,000
Class A Warrants was $54. None of the Unit purchase price was allocated
to the Class B Warrants. Such allocation was based upon the relative
fair values of each security on the date of issuance. Such allocation
resulted in recording a discount on the Debentures of approximately
$1,900,000. The effective interest rate on the Debentures is 18.1%.
22
<PAGE>
In order to generate working capital necessary to sustain the
Registrant's long range strategic objectives, the Registrant
temporarily lowered the exercise price on its Class A and Class B
redeemable warrants. Effective September 16, 1997, the exercise price
of the Class A warrants was lowered by $1.00, to $2.00 each. This
exercise period at the reduced price expired on December 5, 1997. After
this date, the Class A warrants reverted back to the original exercise
price of $3.00 per share until their expiration, which has been
extended by 183 days to August 16, 1999.
Holders of the Registrant's Class A warrants exercised approximately
70% of the outstanding Class A redeemable warrants (approximately
4,900,000 Class A warrants), which generated approximately $9,800,000
in proceeds to the Registrant. The exercise of the Class A warrants
resulted in issuance of approximately 4,900,000 shares of common stock
and approximately 4,900,000 Class B warrants.
The exercise price of the Registrant's Class B redeemable warrants was
also temporarily lowered by $2.00, to $3.00 as to each two Class B
warrants effective September 16, 1997 through January 13, 1998. After
January 13, 1998, the warrants reverted back to the original exercise
price of $5.00 per share until their expiration on February 14, 2001.
Holders of the Registrant's Class B warrants exercised 5,000 Class B
warrants in January 1998, generating proceeds to the Registrant of
$7,500, which resulted in the issuance of 2,500 shares of Common Stock.
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 2000, 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 flow needs. The Registrant, however, 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 subsidiary.
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 Year 2000 Issue can affect information
technoogy ("IT") as well as non-IT sytems. 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 assessed how it may be impacted by the Year 2000 Issue.
Consequently,
23
<PAGE>
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. For example, 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.
The Registrant has polled 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 or anticipates
selling in the future.
The Registrant plans to complete the Year 2000 project by September 30,
1999. The total remaining cost of the Year 2000 project is estimated at
$50,000. Of the total project cost, approximately $15,000 is
attributable to the purchase of new software, which is being
capitalized. The remaining $35,000, which will be expensed as incurred,
is not expected to have a material effect on the results of operations.
To date, the Registrant has incurred and expensed approximately $25,000
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 is developing contingency plans to
address any issues that may not be corrected by implementation of the
Registrant's Year 2000 project in a timely manner. Such contingency
plans may include considerations such as stock piling of raw matierals,
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" (FAS 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. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and is not intended to be applied
retroactively. Management does not believe that the adoption of FAS 133
will have a significant impact on the Registrant's consolidated
financial statements.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in or incorporated by reference into this
Annual Report on Form 10-K 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
24
<PAGE>
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 File No. 333-28593) declared
effective by the Securities and Exchange Commission on June 10, 1997
and any amendments thereto.
Item 7A. 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 December 31, 1998 and 1997 was
141.97 and 152.33 pesetas per U.S. dollar, respectively. The weighted
average exchange rate for the years ended December 31, 1998 and 1997
was 149.40 and 146.47 pesetas per U.S. dollar, respectively. The effect
of foreign currency fluctuations on long lived assets for the year
ended December 31, 1998 was an increase of $253,000 and the cumulative
historical effect was a decrease of $1,602,000, 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. 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.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
See Item 14 of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants
---------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
Not applicable.
26
<PAGE>
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons
------------------------------------------------------------
of the Registrant
-----------------
The following information is furnished with respect to each director
and executive officer of the Registrant.
Position of Year
the First
Registrant Class of Became
Name Age Presently Held Director Director
---- --- -------------- -------- --------
James R. Murphy 49 Chairman, President, III 1993
Chief Executive Officer
and Director
Robert M. Stote 59 Senior Vice President, III 1993
Chief Science Officer
and Director
Michael D. Price 41 Vice President, I 1995
Chief Financial Officer,
Treasurer, Secretary and
Director
Robert J. Gyurik 52 Vice President of II 1998
Pharmaceutical
Development and
Director
Charles L. Bolling 75 Director II 1991
Michael McGovern 55 Director I 1997
James R. Murphy became President and Chief Operating Officer of the
Registrant in September 1994, was named Chief Executive Officer
effective January 1995 and became Chairman of the Board in June 1995.
Prior to rejoining the Registrant, Mr. Murphy served as Vice President
of Business Development at MacroChem Corporation, a publicly owned
pharmaceutical company, from March 1993 through September 1994. From
September 1992 until March 1993, Mr. Murphy served as a consultant in
the pharmaceutical industry with his primary efforts directed toward
product licensing. Prior thereto, Mr. Murphy served as Director -
Worldwide Business Development and Strategic Planning of the Registrant
from December 1991 to September 1992. Mr. Murphy previously spent 14
years in basic pharmaceutical research and product development with
SmithKline Corporation and in international business development with
contract research laboratories. Mr. Murphy also serves on the Board of
Directors of Biopharmaceutics, Inc. Mr. Murphy received a B.A. in
Biology from Millersville University and attended the Massachusetts
School of Law in 1993 and 1994.
27
<PAGE>
Robert M. Stote, M.D. became Senior Vice President and Chief Science
Officer of the Registrant in March 1992. Prior to joining the
Registrant, Dr. Stote was employed for 20 years by SmithKline Beecham
Corporation serving as Senior Vice President and Medical Director,
Worldwide Medical Affairs from 1989 to 1992, and Vice
President-Clinical Pharmacology-Worldwide from 1987 to 1989. From 1984
to 1987, Dr. Stote was Vice President-Phase I Clinical Research, North
America. Dr. Stote was Chief of Nephrology at Presbyterian Medical
Center of Philadelphia from 1972 to 1989 and was Clinical Professor of
Medicine at the University of Pennsylvania. Dr. Stote serves as a
Director of Collaborative Clinical Research, Inc. Dr. Stote received a
B.S. in Pharmacy from the Albany College of Pharmacy, an M.D. from
Albany Medical College and is Board Certified in Internal Medicine and
Nephrology. He was a Fellow in Nephrology and Internal Medicine at the
Mayo Clinic and is currently a Fellow of the American College of
Physicians.
Michael D. Price became Chief Financial Officer, Vice
President/Treasurer and Secretary of the Registrant in October 1993,
April 1993 and November 1992, respectively. He has served the
Registrant in other capacities since March 1992. Prior to joining the
Registrant, he was employed as a financial and management consultant
with Carr Financial Group in Tampa, Florida from March 1990 to March
1992. Prior thereto, he was employed as Vice President of Finance with
Premiere Group, Inc., a real estate developer in Tampa, Florida from
June 1988 to February 1990. Prior thereto, Mr. Price was employed by
Price Waterhouse in Tampa, Florida from January 1982 to June 1988 where
his last position with that firm was as an Audit Manager. Mr. Price
received a B.S. in Business Administration with a concentration in
Accounting from Auburn University and an M.B.A. from Florida State
University. Mr. Price is a Certified Public Accountant in the State of
Florida.
Robert J. Gyurik became Vice President of Pharmaceutical Development of
the Registrant in March 1999. Mr. Gyurik was Manager of Development and
Quality Control at Macrochem Corporation, a position he held from 1993
to February 1999. From 1971 to 1993 Mr. Gyurik worked in various
postions at SmithKline Beecham ranging from Associate Senior
Investigator in the Nutrition/Production Enhancer Research Group and
Pharmaceutical Development Group to Senior Medical Chemist in the
Parasitology Resarch Group. Prior thereto, Mr. Gyurik worked at
Schering as a Medicinal Chemist. Mr. Gyurik attended Rutgers University
and received a B.A. in Biology and Chemistry from Immaculata College.
Mr. Gyurik is a member of the American Chemical Society, International
Society for Chronobiology and the New York Academy of Sciences.
Charles L. Bolling served from 1968 to 1973 as Vice President of
Product Management and Promotion (U.S.), from 1973 to 1977 as Vice
President of Commercial Development and from 1977 to 1986 as Director
of Business Development (International) at SmithKline & French
Laboratories. Mr. Bolling has been retired since 1986.
Michael McGovern serves as President of McGovern Enterprises, a
provider of corporate and financial consulting services, which he
founded in 1975. Mr. McGovern is Chairman of the Board of Specialty
Surgicenters, Inc., and is a Director on the corporate boards of North
Fulton Bancshares, Suburban Lodges of America Inc., Career Publishing
Network, L.L.C., Training Solutions Interactive Inc., and the Reynolds
Development Company. Mr. McGovern received a B.S. and M.S.
28
<PAGE>
in accounting and his Juris Doctor from the University of Illinois. Mr.
McGovern is a Certified Public Accountant and a member of the State Bar
of Georgia and the American Bar Association.
The Registrant's Articles of Incorporation and By-Laws provide for a
classified Board of Directors. The Board is divided into three classes,
designated Class I, Class II and Class III. The directors included in
Class III above will hold office until the 1999 Annual Meeting of
Stockholders. The director included in Class I above will hold office
until the 2000 Annual Meeting of Stockholders. The directors included
in Class II above will hold office until the 2001 Annual Meeting of
Stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Registrant's executive officers and directors, and any
persons who own more than 10% of any class of the Registrant's equity
securities, to file certain reports relating to their ownership of such
securities and changes in such ownership with the Securities and
Exchange Commission and the American Stock Exchange and to furnish the
Registrant with copies of such reports. To the Registrant's knowledge
during the year ended December 31, 1998, all Section 16(a) filing
requirements have been satisfied.
Item 11. Executive Compensation
----------------------
The information called for by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information called for by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information called for by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
29
<PAGE>
Part IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
----------------------------------------------------------------
Page Herein
<S> <C> <C>
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations and of Comprehensive Loss
for the years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Changes in Common Stockholders'
Equity for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-27
(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule F-28
Schedule II - Valuation and qualifying accounts and reserves F-29
All other schedules have been omitted because they are inapplicable or
are not required, or the information is included elsewhere in the
consolidated financial statements or notes thereto.
</TABLE>
30
<PAGE>
EXHIBIT INDEX
(3) Exhibits filed as part of this report:
Exhibit
Number Description
- - -------- --------------------------------------------------------------
3.1 Articles of Incorporation of the Registrant, as amended and
restated. (Reference is made to Exhibit 3.1 to the
Registrant's Amendment No. 1 on Form S-3 to its Registration
Statement on Form S-1, Commission File No. 33-65125, which
exhibit is incorporated herein by reference.)
3.2 Bylaws of the Registrant, as amended and restated. (Reference
is made to Exhibit 3.2 to the Registrant's Form 10-K dated
December 31, 1997, Commission File No. 1-10581, which exhibit
is incorporated herein by reference.)
4.1 Registrant's Amended and Restated 1991 Stock Option Plan.
(Reference is made to Exhibit 4.4 to the Registrant's Form
10-K dated December 31, 1997, Commission File No. 1-10581,
which exhibit is incorporated herein by reference.)
4.2 Form of Non-qualified Stock Option Agreement under the
Registrant's 1991 Stock Option Plan. (Reference is made to
Exhibit 4.25 to the Registrant's Form 10-K dated June 30,
1992, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
4.3 Form of Indenture relating to the Registrant's $1,000
Principal Amount 12% Senior Convertible Subordinated
Debentures due February 13, 2006 (with the Form of Debenture
attached thereto as Exhibit A.) (Reference is made to Exhibit
4.28 to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
4.4 Form of Warrant Agreement, including form of Class A and Class
B Warrant. (Reference is made to Exhibit 4.29 to the
Registrant's Registration Statement on Form S-1, Commission
File No. 33-65125, which exhibit is incorporated herein by
reference.)
4.5 Form of Underwriter Warrant. (Reference is made to Exhibit
4.30 to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
4.6 Form of Unit Certificate. (Reference is made to Exhibit 4.31
to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
31
<PAGE>
Exhibit
Number Description
- - -------- --------------------------------------------------------------
4.7 Agreement between the Registrant and Marsing & Co. Ltd., A.S.
dated June 26, 1997. (Reference is made to Exhibit 2.1 to the
Registrant's Form 8-K filed July 10, 1997, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)
4.8 Subscription Agreement between the Registrant and Hsu, dated
February 11, 1999. (Reference is made to Exhibit 7.2 to the
Registrant's Form 8-K filed February 26, 1999, Commission File
No. 1-10581, which exhibit is incorporated herein by
reference.)
4.9 Registration Rights Agreement between the Registrant and Hsu,
dated February 11, 1999. (Reference is made to exhibit 7.3 to
the Registrant's Form 8-K filed February 26, 1999, Commission
File No.
1-10581, which exhibit is incorporated herein by reference.)
4.10 Warrant issued by the Registrant for the benefit of Hsu, dated
February 11, 1999. (Reference is made to exhibit 7.4 to the
Registrant's Form 8-K filed February 26, 1999, Commission File
No. 1-10581, which exhibit is incorporated herein by
reference.)
4.11 Subscription Agreement between the Registrant and Conrex
Pharmaceutical Corporation ("Conrex"), dated February 11,
1999. (Reference is made to exhibit 7.5 to the Registrant's
Form 8-K filed February 26, 1999, Commission File No. 1-10581,
which exhibit is incorporated herein by reference.)
4.12 Registration Rights Agreement between the Registrant and
Conrex, dated February 11, 1999. (Reference is made to exhibit
7.6 to the Registrant's Form 8-K filed February 26, 1999,
Commission File No.
1-10581, which exhibit is incorporated herein by reference.)
10.1* Employment Agreement dated as of July 1, 1998 between the
Registrant and James R. Murphy.
- - ---------------
* Filed herewith
32
<PAGE>
Exhibit
Number Description
- - -------- --------------------------------------------------------------
10.2* Employment Agreement dated as of August 31, 1998 between the
Registrant and Robert M. Stote, M.D.
10.3* Employment Agreement dated as of July 1, 1998 between the
Registrant and Michael D. Price.
10.4 Partnership Agreement dated March 11, 1994 of Belmac/Maximed
Partnership. (Reference is made to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended March 31, 1994,
Commission File No.
1-10581, which is incorporated herein by reference.)
10.5 Agreement between the Registrant and Yungtai Hsu ("Hsu") dated
February 1, 1999, effective as of December 31, 1998.
(Reference is made to Exhibit 7.1 to the Registrant's Form 8-K
filed February 26, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
27.1* Financial Data Schedule.
- - ---------------
* Filed herewith.
b) Reports on Form 8-K filed during the fiscal quarter ended
December 31, 1998:
None.
Subsequent to December 31, 1998, the Registrant filed the
following Report on Form 8-K:
Form 8-K dated February 26, 1999 regarding the agreement
between the Registrant and Yungtai Hsu, whereby the Registrant
acquired rights to certain U.S. and international patents and
related technology. (Items 2 and 7).
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ James R. Murphy
----------------------------
James R. Murphy
Chairman, President and
Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ James R. Murphy Chairman, President, March 26, 1999
- - -------------------------- Chief Executive Officer
James R. Murphy and Director (principal
executive officer)
/s/ Robert M. Stote Senior Vice President, March 26, 1999
- - --------------------------- Chief Science Officer and
Robert M. Stote, M.D. Director
/s/ Michael D. Price Vice-President, March 26, 1999
- - --------------------------- Chief Financial Officer,
Michael D. Price Treasurer, Secretary and
Director (principal
financial and accounting officer)
/s/Robert J. Gyurik Vice President of March 26, 1999
- - --------------------------- Pharmaceutical Development
Robert J. Gyurik and Director
/s/Charles L. Bolling Director March 26, 1999
- - ---------------------------
Charles L. Bolling
/s/Michael McGovern Director March 26, 1999
- - ---------------------------
Michael McGovern
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations and of
comprehensive loss, changes in common stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- - -------------------------
DELOITTE & TOUCHE LLP
Tampa, FL
March 26, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $6,703 $11,117
Receivables 3,228 2,428
Inventories 1,208 714
Prepaid expenses and other 1,322 750
------ ------
Total current assets 12,461 15,009
------ ------
Fixed assets, net 3,551 2,918
Drug licenses and related costs, net 2,433 691
Other non-current assets, net 1,873 2,425
------- -------
$20,318 $21,043
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $2,835 $1,493
Accrued expenses 1,563 1,613
Short term borrowings 1,223 1,140
Current portion of long term debt 5 5
- -
------- -------
Total current liabilities 5,626 4,251
------- -------
Long term debt, net 5,410 5,329
------- -------
Other non-current liabilities 290 220
------- -------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value,
authorized 2,000 shares:
Series A, issued and outstanding, zero and 60 shares - 2,338
------- -------
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 8,443 and 8,426 shares 168 168
Stock purchase warrants (to purchase 5,928 and 5,697
shares of common stock) 556 192
Additional paid-in capital 83,728 81,382
Accumulated deficit (73,858) (70,982)
Cumulative foreign currency translation adjustment (1,602) (1,855)
-------- --------
8,992 8,905
-------- --------
$20,318 $21,043
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE LOSS
(In thousands, except per share data)
For the Year Ended
December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $15,243 $14,902 $23,133
Cost of sales 6,601 8,010 15,638
------- ------- -------
Gross margin 8,642 6,892 7,495
Operating expenses:
Selling, general and administrative 9,078 7,819 7,923
Research and development 153 324 29
Depreciation and amortization 303 295 502
Non-recurring charge - costs of abandoned acquisition 1,176 - -
Provision for goodwill impairment - - 340
------- ------- -------
Total operating expenses 10,710 8,438 8,794
------- ------- -------
Loss from operations (2,068) (1,546) (1,299)
Other (income) expenses:
Interest expense 1,076 1,086 1,227
Interest income (499) (123) (103)
Other (income) expense, net (5) 685 50
------- ------- -------
Loss before income taxes and extraordinary item (2,640) (3,194) (2,473)
Provision for income taxes 236 621 -
------- ------- ------
Loss before extraordinary item (2,876) (3,815) (2,473)
Extraordinary item-extinguishment of debt - - 446
------- ------- -------
Net loss (2,876) (3,815) (2,919)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses (253) 388 487
------- ------- -------
Comprehensive loss ($2,623) ($4,203) ($3,406)
======== ======== ========
Loss per common share before extraordinary
item ($0.35) ($0.97) ($0.79)
Extraordinary item - extinguishment of debt - - (0.13)
------- ------- -------
Basic net loss per common share ($.35) ($0.97) ($0.92)
======= ======= =======
Weighted average common shares outstanding 8,431 4,072 3,334
======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(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, 1995 3,330 $66 $70,047 ($64,248) ($549) $5,316
Public offering of units, net - - 1,184 - 285 1,469
Common stock issued as compensation 15 1 50 - - 51
Accrual of dividends-preferred stock - - (135) - - (135)
Foreign currency translation adjustment - - - - (487) (487)
Net loss - - - (2,919) - (2,919)
----- ------- ------ -------- ----- -------
Balance at December 31, 1996 3,345 67 71,146 (67,167) (751) 3,295
Exercise of Class A Redeemable Warrants 4,899 98 9,902 - (202) 9,798
Exercise of other stock options/warrants 172 3 570 - (150) 423
Exercise of underwriter warrants - - 30 - 7 37
Conversion of Debentures 9 - 23 - - 23
Issuance of stock options/warrants - - (51) - 102 51
Common stock issued as compensation 1 - 2 - - 2
Accrual of dividends-preferred stock - - (135) - - (135)
Stock subscription receivable cancellation - - (105) - 105 -
Foreign currency translation adjustment - - - - (774) (774)
Net loss - - - (3,815) - (3,815)
----- ------ ---- ------ ----- -------
Balance at December 31, 1997 8,426 168 81,382 (70,982) (1,663) 8,905
Exercise of Class B Redeemable Warrants 2 - 8 - - 8
Issuance of warrants - - - - 364 364
Conversion of redeemable preferred stock 15 - 2,439 - - 2,439
Accrual of dividends - preferred stock - - (101) - - (101)
Foreign currency translation adjustment - - - - 253 253
Net loss - - - (2,876) - (2,876)
------- ------- -------- ------- --------- ---------
Balance at December 31, 1998 8,443 $168 $83,728 ($73,858) ($1,046) $8,992
======= ======= ======== ======== ======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
(In thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Loss before extraordinary item ($2,876) ($3,815) ($2,473)
Adjustments to reconcile loss before extraordinary item to
net cash used in operating activities:
Depreciation and amortization 303 295 502
Non-cash costs of abandoned acquisitions 158 - -
Loss on disposition of subsidiary - 591 -
Extraordinary item-extinguishment of debt - (446)
-
Provision for goodwill impairment - 340
-
Loss on disposal of fixed assets - 79
-
Other non-cash items 501 267 468
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables (599) (137) 2,991
Inventories (412) (229) 43
Prepaid expenses and other current assets (544) (340) (272)
Other assets (72) (649) (93)
Accounts payable and accrued expenses 907 257 (716)
Other liabilities 70 (222) (496)
Capitalized acquisition costs 448 - -
------ ------- ------
Net cash used in operating activities (2,116) (3,982) (73)
------ ------- ------
Cash flows from investing activities:
Acquisition of Spanish drug licenses (1,559) (40) -
Additions to fixed assets (559) (108) (170)
Net proceeds from disposition of subsidiary - 378 -
Proceeds from sale of investments - 166 161
Purchase of investments - - (166)
--------- ------ -----
Net cash (used in) provided by investing activities (2,118) 396 (175)
--------- ------ -----
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
(In thousands) For the Year Ended
December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short term borrowings $ - $363 ($120)
Proceeds from exercise of Class A/B warrants, net 8 9,798 -
Proceeds from exercise of other options/warrants, net - -
555
Proceeds from public offering of units - - 6,900
Offering costs - (1,275)
Repayments of long term debt - (1,770)
Payments on capital leases (5) (5) (28)
---- ----- - ------
Net cash provided by financing activities 3 10,711 3,707
----- ------ ------
Effect of exchange rate changes on cash (183) (433) (154)
----- ----- -----
Net (decrease) increase in cash and cash equivalents (4,414) 6,692 3,305
Cash and cash equivalents at beginning of period 11,117 4,425 1,120
------ ----- -----
Cash and cash equivalents at end of period $6,703 $11,117 $4,425
====== ======= ======
Supplemental Disclosures of Cash Flow Information
The Company paid cash during the period for (in thousands):
Interest $972 $965 $907
====== ======= =====
Taxes $884 $12 -
====== ======= =====
Supplemental Disclosures of Non-Cash Financing Activities
The Company has issued Common Stock in exchange for services as
follows (in thousands):
Shares issued - 1 15
====== ======= ======
Amount - $2 $51
====== ======= ======
</TABLE>
The Company issued warrants during the year ended December 31, 1998 to purchase
425,000 shares of Common Stock in exchange for services. The Company also
is obligated to issue 66,000 shares of Common Stock to a Consultant for
services performed during 1997 and 1998. The holders of the Company's
Series A Preferred Stock converted the remaining 60,000 shares of
Redeemable Preferred Stock into approximately 15,000 shares of Common Stock
during the year ended December 31, 1998.
The Company acquired a drug license in Spain during the year ended December 31,
1996, assuming approximately $477,000 in liabilities therefore.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-6
<PAGE>
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY AND OPERATIONS
Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical
and health care company engaged primarily in the manufacturing, marketing and
distribution of pharmaceutical products in Spain. The Company develops and
registers late stage products, and manufactures, packages and distributes both
its own and other companies' pharmaceutical products.
The Company sold its French subsidiary, Chimos/LBF S.A. (referred to herein as
Chimos/LBF), in June 1997 for approximately $3,650,000. The Company'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. (See Note 13).
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, the Company has incurred net losses as well as negative
operating cash flows for all periods presented.
The Company's previously announced negotiations whereby the Company 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 Company recorded a charge during
the quarter ended June 30, 1998 for all previously capitalized costs specific to
this and other related abandoned acquisitions totaling approximately $1,176,000,
including $158,000 of non-cash items.
In order to fund operations, the Company primarily has issued Common Stock and
other securities. In February 1996, the Company completed a public offering of
its securities, which generated net proceeds of approximately $5,700,000, a
portion of which was used to retire $1,770,000 principal balance of debt
incurred in previous private placements (see Notes 8 and 15). The balance of the
net proceeds were used for working capital needs, limited research and
development activities, and search for possible acquisitions of complementary
products, technologies and/or businesses. During the year ended December 31,
1997, the Company temporarily lowered the exercise price on its Class A and
Class B redeemable warrants. Approximately 70% of the outstanding Class A
warrants (approximately 4,900,000 Class A warrants) were exercised during this
period, which generated approximately $9,800,000 in
F-7
<PAGE>
proceeds to the Company. The exercise of the Class A warrants resulted in
issuance of approximately 4,900,000 shares of common stock and 4,900,000 Class B
warrants. The exercise price of the Company's Class B warrants was also
temporarily lowered; however, no Class B warrants were exercised during 1997.
The proceeds from the Class A warrant exercises are being used for working
capital needs. Given the Company's current liquidity and significant cash
balances and considering its future strategic plans, management believes that it
now has sufficient resources to fund operations and further its strategic
objectives.
The strategic focus of the Company has shifted in response to the evolution of
the global health care environment. The Company has moved from a research and
development-oriented pharmaceutical company, which required developing products
from the chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one year or
currently marketed products. As a result of this transition, the Company has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Company's'
operations. 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 (see Note 16). The
Company emphasizes product distribution in Spain, strategic alliances and
product acquisitions, which management of the Company expects will move the
Company closer to profitability in the near future.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and foreign currency translation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Laboratorios Belmac S.A. and, until its
divestiture in June 1997, Chimos/LBF 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 each foreign subsidiary 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.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of
three months or
F-8
<PAGE>
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.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the following estimated economic lives of the assets:
Years
-----
Buildings 30
Equipment 5 - 7
Furniture and fixtures 5 - 7
Other 5
Leasehold improvements are depreciated over the life of the respective lease.
Expenditures for replacements and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized, while
expenditures for maintenance and repairs are charged against operations as
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
recognized currently.
Drug licenses and related costs
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Company's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Costs of acquiring pharmaceuticals requiring further development
are expensed as purchased research and development. Carrying values of such
assets are reviewed annually by the Company and are adjusted for any diminution
in value.
Investment in partnership
Belmac Hygiene, Inc., a wholly owned subsidiary of the Company, entered into a
50/50 partnership in March 1994 with Maximed Corporation ("Maximed") to develop
and market feminine health care products. Maximed contributed the hydrogel-based
technology and the Company, through its subsidiary, is responsible for providing
financing and funding of the partnership's activities. The investment in the
partnership is accounted for using the equity method. (See Note 13.)
Research and development
F-9
<PAGE>
Research and development costs are expensed when incurred.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimated.
Original issue discount/Debt issuance costs
Original issue discount related to the issuance of debt is amortized to interest
expense using the effective interest method over the lives of the related debt.
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of the
related debt.
Amortization of goodwill
Costs of investments in purchased companies in excess of the underlying fair
value of net identifiable assets at date of acquisition are recorded as goodwill
and included in other non-current assets which are amortized over fifteen years
on a straight-line basis. Carrying values of such assets are reviewed annually
by the Company and are adjusted for any diminution in value.
During the year ended December 31, 1996, as a result of estimating the expected
net proceeds from the then pending proposed sale of Chimos, the Company
reviewed, for impairment, the recoverable value of the carrying amount of
long-lived assets and intangibles. Based upon this review, the Company fully
reserved the remaining unamortized goodwill of approximately $340,000, at
December 31, 1996. Goodwill amortization expense, excluding the 1996 provision
for impairment, for the year ended December 31, 1996 was $38,000. There was no
goodwill amortization for the years ended December 31, 1998 or 1997 (see Note
13).
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FAS 107) requires disclosure of the estimated
fair values of certain financial instruments. The estimated fair value amounts
have been determined using available market information or other appropriate
valuation methodologies that require considerable judgment in interpreting
market data and developing estimates. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Long-term debt is estimated to have a fair
F-10
<PAGE>
value of approximately $7,406,000 as of December 31, 1998 (based upon market
price on December 31, 1998). The carrying amounts of other financial instruments
approximate their estimated fair values. The fair value information presented
herein is based on information available to management as of December 31, 1998.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore the current estimates of fair value may differ significantly from the
amounts presented herein.
Stock-based compensation plans
The Company applies APB 25 and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock-based compensation plans.
Revenue recognition
Sales of products are recognized by the Company when the products are shipped to
customers. The Company allows sales returns in certain situations, but does not
reserve for returns and allowances based upon the Company's favorable historical
experience.
Income taxes
The Company applies Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (FAS 109) which mandates the liability method in
accounting for the effects of income taxes for financial reporting purposes.
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 used in the calculation of earnings per
share and became effective for financial statements for both interim and annual
periods ended after December 15, 1997. The Company 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 the period. Diluted loss per common
share is not presented as it is antidilutive. Stock options, stock warrants and
convertible debentures are the only securities issued which would have been
included in the diluted loss per share calculation.
Comprehensive income
F-11
<PAGE>
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (FAS 130) requires businesses to disclose comprehensive income and its
components in their financial statements. FAS 130 became effective for fiscal
years beginning after December 15, 1997, and is applicable to interim periods.
The difference between net loss as reported and comprehensive loss is the effect
of foreign currency translation (gains) losses totaling ($253,000), $388,000
and $487,000 for years ended December 31,1998, 1997 and 1996, respectively.
Segments of an enterprise and related information
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information" (FAS 131) was issued in June 1997 and
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a Company's operating
segments. The Company operated in two business segments until the divestiture of
its French subsidiary in June 1997. The Company now operates in one business
segment. FAS 131 was adopted by the Company on January 1, 1998 (see Note 12).
Derivative instruments and hedging
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (FAS 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 a derivative and resulting
desigantion if used as a hedge. FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, and is not intended to be applied
retroactively. Management does not believe that the adoption of FAS 133 will
have a significant impact on the Company's consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation format. Such reclassifications are not material to the
consolidated financial statements.
NOTE 3--RECEIVABLES
Receivables consist of the following (In Thousands):
December 31,
1998 1997
---- ----
Trade receivables $2,972 $2,129
Other 273 358
--- ---
3,245 2,487
Less-allowance for doubtful account (17) (59)
------ ------
$3,228 $2,428
====== ======
F-12
<PAGE>
NOTE 4--INVENTORIES
Inventories consist of the following (In Thousands):
December 31,
1998 1997
----- ----
Raw materials $505 $338
Finished goods 703 376
---- ---
$1,208 $714
====== ====
NOTE 5--FIXED ASSETS
Fixed assets consist of the following (In Thousands):
December 31,
1998 1997
----- ----
Land $1,040 $967
Buildings 2,782 2,329
Equipment 754 430
Furniture and fixtures 539 435
Leasehold improvements - 92
Equipment under capital lease 27 27
-- --
5,142 4,280
Less-accumulated depreciation (1,591) (1,362)
------- -------
$3,551 $2,918
====== ======
Depreciation expense was $165,000, $185,000 and $345,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-13
<PAGE>
NOTE 6--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (In Thousands):
December 31,
1998 1997
---- ----
Drug licenses and related costs $3,144 $1,219
Less-accumulated amortization (711) (528)
------ -----
$2,433 $691
======= ======
The Company purchased the product Senioral from Sanofi-Winthrop during the year
ended December 31, 1998 for approximately $1,400,000. Senioral is a combination
product useful in the treatment of congestive symptoms of the upper respiratory
tract. The Company's Spanish subsidiary, Laboratorios Belmac S. A. started
marketing Senioral in October 1998.
Amortization expense for drug licenses and related costs was approximately
$138,000, $110,000 and $119,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following (In Thousands):
December 31,
1998 1997
---- ----
Accrued expenses $877 $814
Income taxes payable 242 608
Accrued payroll 444 191
--- ---
$1,563 $1,613
====== ======
F-14
<PAGE>
NOTE 8--DEBT
Short term borrowings consist of the following (In Thousands):
December 31,
1998 1997
---- ----
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate on the
note is 5.9% and 6.5%, respectively. $633 $1,036
Revolving lines of credit (with Spanish financial
institutions), average interest rate is 5.6% and 7.5%,
respectively.
590 104
--- ---
Total short term borrowings $1,223 $1,140
====== ======
The weighted average stated interest rate on short term borrowings outstanding
at December 31, 1998 and 1997 was 5.7% and 6.6%, respectively.
The Company has $3,839,000 of available revolving lines of credit with Spanish
financial institutions. At December 31, 1998, advances outstanding under the
lines of credit were approximately $590,000. The weighted average interest rate
at December 31, 1998 was 5.6% and interest is payable quarterly.
Long-term debt consists of the following (In Thousands):
December 31,
1998 1997
---- ---
Debentures, maturing February 13, 2006, stated rate of
interest 12% (net of $1,584 and $1,670 discount,
respectively)
$5,403 $5,317
Capitalized lease obligations, relating to various
equipment used by the Company 12 17
-- --
5,415 5,334
Less current portion (5) (5)
--- ---
Total long term debt $5,410 $5,329
====== ======
In February 1996, the Company completed a Public Offering of its securities,
whereby an aggregate of 6,900 Units were sold at a price of $1,000 per Unit.
Each Unit consisted of One
F-15
<PAGE>
Thousand Dollars ($1,000) Principal Amount 12% Convertible Senior Subordinated
Debenture due February 13, 2006 and 1,000 Class A Redeemable Warrants, each to
purchase one share of Common Stock and one Class B Redeemable Warrant. Two Class
B Redeemable Warrants entitle a holder to purchase one share of Common Stock.
Interest on the Debentures is payable quarterly. Gross and net proceeds (after
deducting underwriting commissions and the other expenses of the offering), were
approximately $6,900,000 and $5,700,000, respectively. Approximately $1,770,000
of the net proceeds were used to retire the principal balance of debt incurred
in 1995 private placements (See Note 14). The balance of the net proceeds,
approximately $4,000,000, was used for working capital needs, limited research
and development activities, and search for possible acquisitions of
complementary products, technologies and/or businesses.
On May 29, 1996, the Debentures and Class A Redeemable Warrants began trading
separately. The characteristics of the Debentures and Class A Redeemable
Warrants are consistent with their description as a component of the Units
except that the expiration date of the Class A Warrants has been extended to
August 16, 1999.
Of the Unit purchase price of $1,000, for financial reporting purposes, the
consideration allocated to the Debenture was $722, to the conversion discount
feature of the Debenture was $224 and to the 1,000 Class A Warrants was $54.
None of the Unit purchase price was allocated to the Class B Warrants. Such
allocation was based upon the relative fair values of each security on the date
of issuance. Such allocation resulted in recording a discount on the Debentures
of approximately $1,900,000. The original issue discount and the costs related
to the issuance of the Debentures are being amortized to interest expense using
the effective interest method over the lives of the related Debentures. The
effective interest rate on the Debentures is 18.1%.
The Debentures are convertible prior to maturity, unless previously redeemed, at
any time into shares of Common Stock at a conversion price per share of $2.50.
NOTE 9--REDEEMABLE PREFERRED STOCK
During 1991, the Company issued 290,000 shares of $1 par value Series A
Convertible Exchangeable Preferred Stock (the "Series A Preferred Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred Stock") at $25 per share. The issuance of these shares
provided aggregate proceeds to the Company of $15,750,000. Since the Preferred
Stock met the definition of Mandatorily Redeemable Preferred Stock, it was
excluded from the Common Stockholders' Equity section of the Consolidated
Balance Sheets. As of December 31, 1998 all 290,000 of the Series A Preferred
Stock had been converted into 66,700 shares of Common Stock and all 340,000
shares of the Series B Preferred Stock had been converted into 56,100 shares of
Common Stock.
F-16
<PAGE>
The Series A Preferred Stock was recorded at redemption value, which was $25.00
per share plus cumulative dividends of 9% per annum. The following table
summarizes activity of the Series A Preferred Stock (In Thousands):
Series A
--------
Shares Amount
------ ------
Balance at December 31, 1996 60 $2,203
Accrual of 9% dividends - 135
---- ------
Balance at December 31, 1997 60 2,338
Accrual of 9% dividends - 101
Conversion (60) (2,439)
---- -------
Balance at December 31, 1998 - $ -
==== =======
NOTE 10--COMMON STOCKHOLDERS' EQUITY
At December 31, 1998 the Company had the following Common Stock reserved for
issuances under various plans and agreements (In Thousands):
Common Shares
=============
For exercise of stock purchase warrants 7,213
For conversion of debentures 2,979
For exercise of stock options 2,091
For other 66
--------
12,349
========
The Company has never paid any dividends on its Common Stock. The current policy
of the Board of Directors is to retain earnings to finance the operation of the
Company's business. Accordingly, it is anticipated that no cash dividends will
be paid to the holders of the Common Stock in the foreseeable future.
Stock purchase warrants
At December 31, 1998, stock purchase warrants to purchase an aggregate of
5,928,000 shares of Common Stock were outstanding, which were exercisable at
prices ranging from $2.50 to $20.00 per share, of which 775,000 warrants have an
exercise price of $2.50 per share, 2,571,000 warrants have an exercise price of
$3.00 per share and warrants to purchase 2,447,000 shares
F-17
<PAGE>
have an exercise price of $5.00 per share. The warrants expire through December
2004.
During the year ended December 31, 1998, the Company issued stock purchase
warrants to purchase an aggregate of 425,000 shares of the Company's Common
Stock at $2.50 per share. During the year ended December 31, 1997, the Company
issued stock purchase warrants to purchase an aggregate of 2,574,000 shares of
the Company's Common Stock (including Class B warrants to purchase approximately
2,450,000 shares, which became outstanding upon exercise of the Class A
warrants), all of which were granted at exercise prices which were equal to or
greater than the market price of the Company's Common Stock on the dates of
grant. During the year ended December 31, 1997, the Company temporarily lowered
the exercise price on its Class A and Class B redeemable warrants. Approximately
70% of all outstanding Class A redeemable warrants (approximately 4,900,000
Class A warrants) were exercised during this period which generated
approximately $9,800,000 in proceeds to the Company. The exercise of the Class A
warrants resulted in issuance of approximately 4,900,000 shares of Common Stock.
The exercise price of the Registrant's Class B redeemable warrants was also
temporarily lowered and 5,000 Class B warrants were exercised in January 1998,
resulting in the issuance of 2,500 shares of Common Stock.
Additionally, 162,000 stock purchase warrants were converted into shares of the
Company's Common Stock, yielding net proceeds of $405,000 to the Company during
1997. Also during 1997, 110 underwriters' warrants were exercised, providing
proceeds of $132,000 to the Company, which resulted in the issuance of 110
$1,000 face value 12% Debentures due February 13, 2006 and 110,000 Class A
warrants. Such warrants were exercised during 1997 and are included in the
4,900,000 discussed above. The proceeds were allocated between the Debentures,
the Class A warrants and the conversion feature of the Debentures based upon the
relative fair values of each on the date of issuance. During the year ended
December 31, 1996, no stock purchase warrants were converted into shares of the
Company's Common Stock.
In addition, the Company has granted warrants outside of the Plans in connection
with private placements of its securities and as consideration for various
services. These warrants have been granted for terms not exceeding ten years
from the date of grant. The table below summarizes warrant activity for the
years ended December 31, 1996, 1997 and 1998.
F-18
<PAGE>
(In thousands except per share data)
Number of Price
Common Shares Per Share
Outstanding at December 31, 1995 547
Granted 7,845 $2.50-$3.00
Canceled (88) $5.00-$120.00
----
Outstanding at December 31, 1996 8,304
Granted 2,574 $2.50-$5.00
Exercised (5,061) $2.00-$2.50
Canceled (120) $2.50-$116.25
-----
Outstanding at December 31, 1997 5,697
Granted 425 $2.50
Exercised (2) $3.00
Canceled (192) $2.50-$24.60
-----
Outstanding at December 31, 1998 5,928
=====
Common stock transactions
During the year ended December 31, 1998, the Company issued approximately 15,500
shares of Common Stock as a result of the conversion of 60,000 shares of
Redeemable Preferred Stock and issued 2,500 shares of Common Stock as a result
of the exercise of 5,000 Class B warrants.
During the year ended December 31, 1997, the Company awarded 600 shares of
Common Stock to outside Directors as compensation. The Company also issued
approximately 4,900,000 shares
F-19
<PAGE>
of Common Stock as a result of the exercise of approximately 4,900,000 Class A
warrants. Also, 172,000 shares of Common Stock were issued in connection with
the exercise of other stock options/warrants and 9,000 shares of Common Stock
were issued as the result of conversion of 23 of the Company's $1,000 face value
12% Debentures due February 13, 2006.
During the year ended December 31, 1996, the Company issued 14,000 shares of
Common Stock as payment for consulting services and awarded 1,000 shares of
Common Stock to outside Directors as compensation.
Stock option plans
The Company has in effect Stock Option Plans (the "Plans"), pursuant to which
directors, officers, and employees of the Company who contribute materially to
the success of the Company are eligible to receive grants of options for the
Company's Common Stock. An aggregate of 2,091,000 shares of Common Stock have
been reserved for issuance under the Plans, of which 323,000 are outstanding
under the 1991 and 1994 Plans and 1,500,000 are outstanding under the Executive
Plan as of December 31, 1998. Options may be granted for terms not exceeding ten
years from the date of grant except for stock options which are granted to
persons owning more than 10% of the total combined voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the fair market value on the date the options
are granted (110% in the case of persons owning more than 10% of the total
combined voting power of the Company). During the year ended December 31, 1997,
9,000 stock options were converted into shares of the Company's Common Stock.
Holders of stock options exercised no options during the years ended December
31, 1996.
Had the compensation cost for the Company's Plans been determined based on the
fair value at the grant dates for awards under the Plans, consistent with the
method of FAS 123, the Company's net loss and basic net loss per common share on
a pro forma basis would have been (In Thousands, except per share data):
For the Year Ended
December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Net loss $(3,067) $(3,938) $(6,354)
Basic net loss per common share $(0.38) $(1.00) $(1.95)
The preceding pro forma results were calculated using the Black-Scholes
option-pricing model.
F-20
<PAGE>
The following assumptions were used for the years ended December 31, 1998, 1997
and 1996, respectively: (1) risk-free interest rates of 5.4%, 6.2% and 6.5%; (2)
dividend yields of 0.0%; (3) expected lives of 10, 9.7 and 10 years; and (4)
volatility of 85.3%, 73.1% and 88.1%. Results may vary depending on the
assumptions applied within the model. The effects of application of FAS 123 are
not likely to be representative of the effects on net income or loss for future
years because options vest over several years and generally additional awards
are made each year.
In addition, the Company has granted options outside of the Plans in connection
with private placements of its securities and as consideration for various
services. These options have been granted for terms not exceeding ten years from
the date of grant. The table below summarizes activity in the Company's Plans
for the years ended December 31, 1996, 1997 and 1998.
(In thousands except per share data)
Number of Weighted Average
Common Shares Exercise Price
------------- ----------------
Outstanding at December 31, 1995 213 $33.04
Granted 1,525 $3.74
Canceled (20) $83.71
----
Outstanding at December 31, 1996 1,718 $6.39
Granted 53 $2.93
Exercised (9) $2.31
Canceled (21) $47.68
----
Outstanding at December 31, 1997 1,741 $5.81
Granted 98 $2.25
Canceled (16) $3.20
----
Outstanding at December 31, 1998 1,823 $5.64
=====
F-21
<PAGE>
Options and warrants outstanding include 5,928,000 warrants, all of which are
exercisable, and 1,823,000 options, of which 720,000 are vested and exercisable
at December 31, 1998.
NOTE 11--PROVISION FOR INCOME TAXES
The Company has recognized a deferred tax asset of approximately $29,400,000 as
of December 31, 1998, primarily related to net operating loss and capital loss
carryforwards, and basis differences in the stock of its foreign subsidiary;
however, the Company has established a valuation allowance equal to the full
amount of the deferred tax asset, as future operating profits cannot be assured.
At December 31, 1998, the Company has net operating loss (the "NOL")
carryforwards of approximately $29,000,000 available to offset future U.S.
taxable income. The Company calculates that its use of the NOL generated through
December 31, 1997 may be limited to approximately $1,000,000 each year as a
result of stock, option and warrant issuances resulting in an ownership change
of more than 50% of the Company's outstanding equity. The NOL of approximately
$3,200,000 generated during the current tax year ended December 31, 1998 is
available to offset future taxable income without limitation. Additionally,
approximately $1,800,000 of the NOL generated in 1995 available to offset future
U.S. taxable income will be limited to approximately $300,000 per year over the
next six years due to the change in tax year end during 1995. The Company
utilized approximately $14,000,000 of NOLs to offset taxable income during 1997.
If not offset against future taxable income, the NOL carryforwards will expire
in tax years 2007 through 2013.
Total income tax expense (benefit) was ($280,000) (domestic) and $516,000
(foreign) for the year ended December 31, 1998. These amounts differ from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
loss as a result of the increase in the valuation allowance established to
offset domestic deferred tax assets and the Company's tax position in Spain. The
Company incurred income tax expense of $280,000 (domestic) and $341,000
(foreign) for the year ended December 31, 1997. These amounts differ from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
loss as a result of U.S. alternative minimum taxes and certain nondeductible
expenses in Spain. The Company incurred no income tax expense for the year ended
December 31, 1996.
NOTE 12-BUSINESS SEGMENT INFORMATION
The Company is an international pharmaceutical company engaged in the
development, manufacturing, marketing and distribution of pharmaceutical
products. The Company's Spanish subsidiary, Laboratorios Belmac S.A.,
manufactures, markets and distributes these pharmaceutical products from Spain.
During the year ended December 31, 1997, the Company divested its French
subsidiary, Chimos/LBF, which was primarily involved in the import and
distribution of specialty pharmaceutical products in France. In the U.S., the
Company's activities consist primarily of corporate management, administration
and limited product
F-22
<PAGE>
development. The Company manages its operating segments separately because they
either provide different products/services or require different strategies.
Laboratorios Belmac derives its revenues from the sales of its own products as
well as from products under contract for others, within four primary therapeutic
categories of cardiovascular, gastrointestinal, neurological and infectious
diseases. Until its divestiture in June 1997, the operations of Chimos/LBF
consisted of revenues from the import and distribution of specialty
pharmaceutical products to hospitals and others in France as well as sales of
"orphan drugs" (drugs used for the treatment of rare diseases). Until December
1998, the Company's operations in the United States included sales of disposable
linen products. The Company discontinued such activities in December 1998 in
order to focus on acquisition and development of permeation enhancement
technology and potential product applications, in addition to other corporate
office functions, including management, administration and raising of capital.
Set forth in the tables below is certain financial information with respect to
the Company's operating segments for the years ended December 31, 1998, 1997 and
1996. The operating segments use the same accounting policies as those described
in the summary of significant accounting policies in Note 2. Chimos/LBF was
divested by the Company in June 1997 and the following information for 1997
reflects its operating results through this date.
(In Thousands)
Year Ended December 31, 1998
-------------------------------------------
Corporate/
Consolidation/
Spain France Elimination Consolidated
Revenues $15,148 $- $95 $15,243
Interest income - - 499 499
Interest expense 105 - 971 1,076
Depreciation and amortization expense 250 - 53 303
Non-recurring charge - - 1,176 1,176
Net income (loss) before income taxes 1,410 - (4,050) (2,640)
Income tax expense (benefit) 516 - (280) 236
Net income (loss) 894 - (3,770) (2,876)
Fixed assets 3,515 - 36 3,551
Drug licenses 2,433 - - 2,433
Total assets 11,777 - 8,541 20,318
Total liabilities 7,809 - 3,517 11,326
Expenditures for drug licenses 141 - 1,418 1,559
Expenditures for fixed assets 548 - 11 559
F-23
<PAGE>
(In Thousands)
Year Ended December 31, 1997
-------------------------------------------
Corporate/
Consolidation/
Spain France Elimination Consolidated
------ ------ ----------- ------------
Revenues $12,491 $2,029 $382 $14,902
Interest income - - 123 123
Interest expense 131 13 942 1,086
Depreciation and amortization expense 215 28 52 295
Other expenses - - 685 685
Net income (loss) before income taxes 623 (20) (3,797) (3,194)
Income tax expense 341 - 280 621
Net income (loss) 282 (20) (4,077) (3,815)
Fixed assets 2,839 - 79 2,918
Drug licenses 691 - - 691
Total assets 6,949 - 14,094 21,043
Total liabilities 3,203 - 6,597 9,800
Expenditures for drug licenses 40 - - 40
Expenditures for fixed assets 91 - 17 108
(In Thousands)
Year Ended December 31, 1996
-------------------------------------------
Corporate/
Consolidation/
Spain France Elimination Consolidated
------ ------ ----------- ------------
Revenues $11,299 $11,625 209 23,133
Interest income - - 103 103
Interest expense 147 23 1,057 1,227
Depreciation and amortization
expense 329 101 72 502
Provision for goodwill impairment - 340 - 340
Net income (loss) before income taxes 722 178 (3,373) (2,473)
Extraordinary item - - 446 446
Net income (loss) 722 178 (3,819) (2,919)
Fixed assets 3,341 85 118 3,544
Drug licenses 1,475 - - 1,475
Total assets 7,887 5,322 3,349 16,588
Total liabilities 3,395 1,077 6,588 11,060
Expenditures for fixed assets - - 170 170
F-24
<PAGE>
Interest income and interest expense are based upon the actual results of each
operating segment's assets and borrowings. The consolidation/elimination column
includes the elimination of all inter-segment amounts as well as corporate
segment amounts. The principal component of the inter-segment amounts related to
inter-segment advances.
Revenues from a single customer did exceed 10% of consolidated revenues during
each of the years ended December 31, 1998 and 1996; however, revenues derived
from any one customer did not exceed 10% of consolidated revenues during 1997.
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company completed the sale of Chimos/LBF, for approximately $3,650,000 in
June 1997. The Company has since received approximately $3,300,000, including
approximately $2,600,000 of cash and cash equivalents on Chimos/LBF's books
prior to its disposition, of which approximately $500,000 was used to repay
indebtedness to the former subsidiary. An escrow fund in the amount of
approximately $350,000, representing the balance due the Company, has been
established for certain contingent obligations or liabilities. The Company has
established a reserve in the amount of $100,000, which it has determined should
be sufficient to address such contingencies and liabilities. In the opinion of
management, the resolution of the remaining contingencies will have no material
effect on the Company's financial position or results of operations.
In March 1994 a wholly-owned subsidiary of the Company, Belmac Healthcare
Corporation, formed a partnership through its wholly-owned subsidiary, Belmac
Hygiene, Inc., with a wholly-owned subsidiary of Maximed Corporation, which is
headquartered in New York, and planned to market, through this partnership, a
range of hydrogel based feminine health care products, including a
contraceptive, an antiseptic, an anti-fungal and an antibacterial. In December
1994, the Company commenced litigation against its partner claiming interference
in the management of the partnership and misrepresentation under the partnership
agreement. The Company was awarded a judgment in the amount of $7.68 million in
1998, which was affirmed by the U.S. Court of Appeals. In addition to
establishing a receivable on its books, the Company has established a reserve
equal to the receivable. The Company is seeking an assignment of the patents and
related know-how from the partnership and its partner as partial settlement of
the judgment.
F-25
<PAGE>
The partnership is not actively engaged in the development of any products. In
the opinion of management, the carrying value of its investment in the
partnership, accounted for using the equity method, of $553,000 as of December
31, 1998 and 1997, is not impaired and no reserve is considered necessary.
The Company was awarded a judgment in the amount of $2.1 million relating to the
Company's claims of civil theft and breach of employment agreement filed against
its former President and Chief Executive Officer, Michael M. Harshbarger. The
judgement included treble damages totaling $418,000 related to its civil theft
claim and $1,712,000 related to its breach of employment agreement claim. In
addition to establishing a receivable on its books, the Company has established
a reserve equal to the receivable.
The Company is obligated to pay certain royalty payments upon commercialization
of products using technologies acquired in a transaction, which it consummated
subsequent to December 31, 1998. (See Note 16).
The Company leases certain of its assets under noncancellable operating leases.
Total charges to operations under operating leases were approximately $487,000,
$350,000 and $448,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Future minimum lease payments under operating leases are as
follows:
(In Thousands)
Year Ending December 31,
-------------------------
1999 $519
2000 501
2001 522
2002 544
2003 and thereafter 567
NOTE 14--NON-RECURRING CHARGE
During 1998, the Company negotiated to acquire a manufacturing facility in the
United States and a portfolio of products from Schwarz Pharma. The Company
decided to abandon this effort in May 1998 and, consequently, recorded a
non-recurring charge of $1,176,000 (including $158,000 of non-cash items) in the
second quarter of 1998, representing previously capitalized costs related to
this and other proposed acquisitions. Of this amount, $448,000 was paid during
the year ended December 31, 1997.
NOTE 15--EXTRAORDINARY ITEM (FISCAL YEAR 1996)
The Company recorded an extraordinary charge, net of income tax effect of zero,
of $446,000, or $.13 per common share, in February 1996 upon the extinguishment
of debt that it had incurred
F-26
<PAGE>
in its October 1995 private placements, representing unamortized discount and
issuance costs at the date of repayment (see Note 8).
NOTE 16--SUBSEQUENT EVENTS
On February 11, 1999, the Company 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. Consideration
for the Assets was paid to Yungtai Hsu, an individual, in the form of a cash
payment of approximately $1.1 million, 225,800 shares of Common Stock and
ten-year warrants to purchase 450,000 shares of common stock. In addition,
359,282 shares of Common Stock were conveyed to Conrex Pharmaceutical
Corporation. The total of all consideration paid for the Assets was
approximately $2.25 million. Furthermore, terms of this transaction provide for
certain royalty payments upon commercialization of products using the
technologies.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida
We have audited the consolidated financial statements of Bentley
Pharmaceuticals, Inc., and subsidiaries (the "Company") as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
and have issued our report thereon dated March 26, 1999; such consolidated
financial statements and report are included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedule of the
Company listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Tampa, Florida
March 26, 1999
F-28
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC.
Schedule II
Valuation and qualifying accounts and reserves
Column A Column B Column C Column D Column E
-------- -------- --------- -------- ---------
Additions
---------
Balance at Charged to Charged to
beginning of costs and other accounts- Deductions- Balance at
Description period expenses describe (a) describe end of period
----------- ------------ ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Drug licenses and related costs:
For the year ended December 31, 1998 $528,000 $138,000 $45,000 $711,000
For the year ended December 31, 1997 497,000 110,000 (79,000) 528,000
For the year ended December 31, 1996 406,000 119,000 (28,000) 497,000
Goodwill:
For the year ended December 31, 1998 - -
For the year ended December 31, 1997 564,000
$564,000(b) -
For the year ended December 31, 1996 186,000 378,000(c) 564,000
Reserve for inventory obsolescence:
For the year ended December 31, 1998 125,000 7,000 24,000(d) 108,000
For the year ended December 31, 1997 827,000 (24,000) 678,000(e) 125,000
For the year ended December 31, 1996 819,000 136,000 128,000(f) 827,000
</TABLE>
- - ------------------------
(a)Effect of exchange rate fluctuations.
(b) Represents goodwill related to the Registrant's French subsidiary, which was
divested in June 1997.
(c) Includes approximately $340,000 of unamoritized goodwill related to the
Registrant's French subsidiary that management of the Registrant determined may
not be realizable via the sale of its French subsidiary (which sale occurred in
June 1997).
(d) Represents disposition of inventory which has been fully reserved.
(e) Includes a disposition of inventory of approximately $547,000, which has
been fully reserved and approximately $131,000 related to the Registrant's
French subsidiary, which was divested in June 1997.
(f) Represents disposition of inventory, which has been fully reserved.
F-29
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of July 1998 (the
"Effective Date") by and between Bentley Pharmaceuticals Inc., a Florida
corporation, (the "Employer") and James R. Murphy (the "Employee"), as the same
may be modified, supplemented, amended or restated from time to time in the
manner provided herein.
RECITALS
The Employer desires to employ the Employee, and the Employee desires to be
employed by the Employer, all upon the terms and provisions and subject to the
conditions set forth in this Agreement.
WITNESSETH
NOW THEREFORE, in consideration of the foregoing premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree to be legally bound as follows:
1. Employment. The Employer hereby employs the Employee, and the Employee hereby
accepts such employment as the President, Chairman of the Board and Chief
Executive Officer of the Employer upon the terms and subject to the conditions
set forth in this Agreement. The Employee shall, without any compensation in
addition to that which is specifically provided in this Agreement, serve in such
further offices or positions with Employer or any subsidiary of Employer or
(collectively, the "Employer Group") as shall from time to time be reasonably
requested by the Board of Directors of Employer. Each office and position within
the Employer Group in which Employee may serve or to which he may be appointed
shall be consistent in title and duties with Employee's positions as Chairman,
President and Chief Executive Officer of the Employer.
2. Term. Subject to the termination provisions hereinafter contained, the term
of employment under this Agreement shall be for an initial term of three and
one-half years, commencing on the Effective Date and terminating on December 31,
2001. This Agreement and the Employee's employment hereunder shall thereafter be
automatically renewed for successive one (1) year terms, unless terminated as
hereinafter provided. The term of employment hereunder, and any extension
thereof pursuant to this paragraph, are referred to as the ("Term").
3. Compensation, Reimbursement, etc
(a) Base Salary. Effective July 1, 1998, the Employer shall pay to the Employee
as compensation for all services rendered by the Employee a base salary of
$275,000 plus annual bonuses as determined by the Compensation Committee of the
Board of Directors,
<PAGE>
subject to Sections 3(d) and 3(e). Beginning Jan. 1, 1999 the base salary will
be adjusted to $290,000. Annual reviews of the Employee will be on a calendar
year basis thereafter.
(b) Expense Reimbursement. The Employer shall reimburse the Employee on a
semi-monthly basis for all reasonable expenses incurred by the Employee in the
performance of his duties under this Agreement; provided however, that the
Employee shall have previously furnished to the Employer an itemized account,
satisfactory to the Employer, in substantiation of such expenditures.
(c) Benefits. The Employee shall be entitled to health and other benefits on the
same terms and conditions as the Employer has made available to the Employee
during his initial employment contract dated 12 June 1995, i.e. participation in
the Employer's Health Plan supplemented by an executive policy from Boston
Mutual or a comparable carrier. The Employer shall obtain a term life insurance
and disability policy for the Employee with a value equal to at least one and
one half year's base salary payable to the estate of the Employee upon the
Employee's death or to the Employee in the event of disability as provided in
Section 7(b) hereof.
(d) Bonuses. The Employee shall be eligible for a bonus on or prior to December
31, 1998, payable in common stock of the Employer in an amount to be determined
by the Compensation Committee. Thereafter during the Term starting Jan 1, 1999,
the Employee shall be eligible for bonuses up to 50% of annual salary or any
other amount determined by the Compensation Committee, payable in cash and/or
common stock in accordance with this Section 3(d) (i), (ii), and (iii). Such
compensation will be awarded as soon as practicable after March 15th. It is
hereby understood between the Employer and the Employee that upon (i). the
attainment of the Employer's posting of it's second consecutive quarter of net
profit, or closing a year with a net profit, or announcement of a merger into
another company, or the sale or transfer of all or substantially all of the
pharmaceutical assets of the Company, the Employee will be entitled to a cash
bonus award 50% of annual base salary, OR (ii) upon a Change in Control (as
defined below), the Employee will be entitled to a cash bonus award 50% of
annual salary. OTHERWISE, (iii). Bonuses (payable in cash and/or common stock of
the Company) will be determined based upon, but not limited to, improvement in
the financial position of the Company without regard to budgeted research and
development expenditures. Other considerations will be given to the attainment
of strategic alliances, acquisition of new products, acquisition of
technologies, purchase of developmental products for future commercialization,
attainment of patents, product registrations submitted and/or approved, raising
of capital, as well as specific personal and corporate goals which will be
submitted to the Compensation Committee by the Employee within 30 days of the
organizational meeting which the Compensation Committee will review, approve or
modify and return said goals document ("Document") to the Employee for
submission to the Board of Directors for ratification. Each year the
Compensation Committee will give consideration and weight to each agreed upon
objective. The Employee will be evaluated by the Compensation Committee,
beginning in the fall of each year, based upon the
2
<PAGE>
mutually agreed Document. Any alteration in the Employee's compensation would be
effective at the beginning of the calendar year.
(e) Annual Review. The Employee shall be reviewed by the Board of Directors of
the Employer on an annual (calendar year) basis and be eligible to receive a
minimum of 7% increase in base salary and issuance of a minimum of 50,000 stock
options or a greater amount as determined by the Board's Compensation Committee.
(f) Stock Option Plan. Beginning in April 1999, the Employee will again be
eligible for periodic stock option grants under the 1991 Stock Option Plan (the
"Plan") or Non-Plan Options (defined below) as determined by the Board of
Director's Compensation Committee.
4. Duties. The Employee is engaged as the Chairman of the Board, President,
Chief Executive Officer of Bentley Pharmaceuticals, Inc. and in addition
President (Consejero Delegado) of Laboratorios Belmac, S.A., President of
Laboratorios Davur in Spain, President of Laboratorios Belmac-Davur in Chile and
President of Pharma de Espana, Inc. In addition, the Employee shall have such
other duties and hold such offices as may from time to time be reasonably
assigned to him by the Board of Directors of the Employer.
5. Extent of Services. During the Term of employment under this Agreement, the
Employee shall devote his full time, energy and attention to the benefit and
business of the Employer and its affiliates and shall not be employed by another
entity, except as a consultant to or as a director of a non-competitive company
or a company that could be of strategic interest to the Employer approved, by
the Employer's Board of Directors.
6. Vacation and Days Off. The Employee may take a maximum of four weeks of
vacation each calendar year, at times to be determined in a manner most
convenient to the business of the Employer. A maximum of one week unused
vacation may be carried over from one calendar year to the next or will be paid
to the Employee.
7. Termination Following Death or Incapacity.
(a) Death.
All rights of the Employee under this Agreement shall terminate upon death
(other than rights accrued prior thereto). All Plan Options (as defined below)
shall vest in accordance with the Plan and shall be exercisable for a period of
time as set forth in the Plan. All Non-Plan Options (as defined below) shall
immediately vest and transfer to the Employee's estate and be exercisable for a
period of 5 years from the date of his death or the period of time as set forth
in the Non-Plan Option Contract, whichever is greater. However, at the election
of the Employee's estate, all Plan Options may be terminated and may be replaced
with Non-Plan Options (the "Replacement Options"). The Replacement Options shall
have the same terms as set forth in the Plan, except that terms relating to
Non-Plan Options (as defined below), which are set forth in this Agreement
3
<PAGE>
and which vary the terms of the Plan shall govern. The Employer shall pay to the
estate of the Employee any unpaid salary and other benefits due as well as
reimbursable expenses accrued and owing to the Employee prior to his death. The
Employer agrees to maintain life insurance on the Employee equivalent to one and
one half year's base salary and will be payable to the Employee's estate upon
his death. The Employer shall have no additional financial obligation under this
Agreement to the Employee or his estate beyond the term-life insurance benefit
as discussed above.
(b) Disability.
(i) During any period of disability, illness or incapacity during the
term of this Agreement which renders the Employee at least temporarily unable to
perform the services required under this Agreement, the Employee shall receive
throughout which time, his salary payable under Section 3 of this Agreement,
less any benefits received by him under any insurance carried by or provided by
the Employer; provided however, all rights of the Employee under this Agreement
(other than rights already accrued) shall terminate as provided below upon the
Employee's permanent disability (as defined below).
(ii) The term "permanent disability" as used in this Agreement shall
mean the inability of the Employee, as determined by the Board of Directors of
the Employer, by reason of physical or mental disability to perform the duties
required of him under this Agreement after a period of: (a) 120 consecutive days
of such disability; or (b) disability for at least six months during any twelve
month period. Upon such determination, the Board of Directors may terminate the
Employee's employment under this Agreement upon ten (10) days prior written
notice. In the event of permanent disability all Plan Options (as defined below)
shall vest in accordance with the terms of the Plan and shall be exercisable for
a period of time as set forth in the Plan. All Non-Plan Options (as defined
below) shall immediately vest and will be exercisable for a period of five years
or the period of time indicated in the option contract, whichever is greater. At
the election of the Employee, Plan Options (as defined below) may be terminated
and may be replaced by Replacement Options.
(iii) If any determination of the Board of Directors with respect to
permanent disability is disputed by the Employee, the parties hereto agree to
abide by the decision of a panel of three physicians. The Employee and Employer
shall each appoint one member, and the third member of the panel shall be
appointed by the other two physicians. The Employee agrees to make himself
available for and to submit to reasonable examinations by such physicians as may
be directed by the Employer. Failure to submit to any such exam shall constitute
a material breach of this Agreement. In the event such a panel is convened, the
party whose position is not sustained will bear all the associated costs.
8. Other Terminations.
(a) Without Cause.
4
<PAGE>
(i) Either the Employee or the Employer may terminate this Agreement upon
written notice, sixty (60) days prior to the end of the initial term or any
one-year extension of this Agreement.
(ii) If the Employee gives notice pursuant to paragraph (i) above, the
Employer shall have the right to either (a) relieve the Employee, in whole or in
part, of his duties under this Agreement (without reduction in compensation) or
(b) to accelerate the date of termination to coincide with the date on which the
written notice is received (without reduction in compensation for the notice
period).
(iii) Not withstanding any provisions hereof to the contrary, the Employer
may terminate this Agreement without cause at any time. If the Employer
terminates this Agreement pursuant to the provisions of this paragraph 8(a)
(iii), it shall pay to the Employee as a severance benefit, in cash, an amount
equal to two (2) times the Employee's Base Salary plus bonus, all Plan Options
(defined below) shall vest in accordance with the terms of the Plan and shall be
exercisable for a period of time as set forth in the Plan and all Non-Plan
Options (defined below) shall immediately vest and be exercisable by the
Employee for a period of five years or the period of time indicated in the
Non-Plan Option contract whichever is greater. At the election of the Employee,
all Plan Options (as defined below) may be terminated and may be replaced by
Replacement Options.
(b) For Cause.
(i) The Employer may terminate this Agreement without notice (a) upon the
Employee's breach of any material provision of this Agreement, or (b) for other
"good cause" (as defined below).
(ii) The term "good cause" as used in this Agreement shall include, but
shall not be limited to: (a) conduct disloyal to the employer; (b) conviction of
any crime involving moral turpitude; and (c) substantial dependence, as
determined by the Board of Directors of the Employer, on any addictive
substance, including but not limited to alcohol, amphetamines, barbiturates,
methadone, cannabis, cocaine, PCP, THC, LSD, or narcotic drug. Should the
Employee dispute such a determination, the parties hereto agree to abide by the
decision of a panel of three physicians as described in section 7 (b) (iii).
(c.) Payment on Termination. If this Agreement is terminated pursuant to Section
8(b), the Employer shall pay to the Employee any unpaid salary and other
benefits and reimbursable expenses accrued and owing to the Employee. Such
payment shall be in full and complete discharge of any and all liabilities or
obligations of the Employer to the employee hereunder except as provided in
Section 9 hereof. The Employee shall be entitled to no further benefits under
this Agreement other than extension of health benefits as the Employee's expense
and Plan Options (defined below) shall vest in accordance with the terms of the
Plan and shall be exercisable for a period of time as set forth in the Plan and
all Non-Plan Options (defined below) awarded to the Employee shall immediately
vest and be exercisable for a period of 5 years or the period of time indicated
in the option contract, whichever is greater.
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8. Termination of Employment Upon Change in Control.
(a) For purposes hereof, a "Change in Control" shall be deemed to have occurred
if:
(i) there has occurred a "change in control" as such term is used in Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as in effect as the date hereof (hereinafter referred to as the
"Act");
(ii) if there has occurred a Change in Control as the term "Control" is
defined in Rule 12b-2 promulgated under the Act;
(iii) when any "person" (such term is defined in Section3 (a) (9) and 13
(d) (3) of the Act), during the Term of this Agreement, becomes a beneficial
owner, directly or indirectly, of securities of the Employer representing 20% or
more of the Employer's then outstanding securities having the right to vote on
the election of directors;
(iv) if the stockholders of the Employer approve a plan of complete
liquidation or dissolution of the Employer or a merger or consolidation in which
the Employer is not the surviving corporation;
(v) if there has occurred a change in ownership of effective control of the
Employer (within the meaning of Section 280G (b) (2) (A) of the Internal Revenue
Code of 1986, as amended (the "Code"); or
(vi) when the individuals who are members of the Board of Directors of the
Employer on the date hereof shall cease to constitute at least a majority of the
Board of Directors of the Employer, provided, however, that any new director
whose election to the Board of Directors or nomination for election to the Board
of Directors then still in office, shall not be deemed to have replaced his or
her predecessor.
(b) The Employee may terminate his employment at any time within 12 months
after a Change in Control and any of the following events has occurred:
(i) an assignment to the Employee of any duties inconsistent with the
status of the Employee's office and/or position with the Employer as constituted
immediately prior to the Change in Control or a significant adverse change in
the nature or scope of the Employee's authorities, powers, compensation,
functions or duties as constituted immediately prior to the Change in Control,
(ii) a failure by the Employer, after having received written notice from
the Employee specifying a material breach of its obligations pursuant to this
Agreement, to cure such breach within 30 days after receipt of such notice.
(iii) the Employee determines that the work environment is hostile or
uncomfortable.
An election by the Employee to terminate his employment following a Change in
Control shall not be deemed a voluntary termination of employment by the
Employee for the purpose of interpreting the provisions of this Agreement or any
of the Employer's Employee benefit plans and arrangements. The Employee's
continued employment with the Employer for any period of time during the Term of
this Agreement after a Change of Control shall not be considered a waiver of any
right he may have to terminate his employment to the extent permitted under this
Section 9 (b).
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If the Employer terminates the Employee without cause pursuant to Section 8 (a)
hereof within 12 months after a Change in Control has occurred, such termination
shall be deemed an election by the Employee to terminate his employment pursuant
to this Section 9. In addition, in the event of such termination, the Employee
shall continue to have the obligation provided for in Sections 11 and 12 hereof.
(c). If the Employee's employment with the Employer is terminated under Section
9 (b) hereof,
(i) the Employee shall be paid in a lump sum, within 30 days after
termination of employment, in cash, severance pay in an amount equal to 2.99
times his Base Salary plus bonuses, or that amount of salary and bonuses that
would have been due to the Employee through the expiration of the Term of this
Agreement, whichever is the greater; Notwithstanding the foregoing, if the
majority of the Board approves a transaction which results in a Change in
Control, (a) the Employee may not terminate his employment pursuant to Section 9
(b) (iii) hereof and the amount paid to the Employee shall be calculated using
the multiplier 2.0 rather than 2.99 as set forth in Section 9 (c).
(ii) the Employee shall be issued a number of stock options to purchase
shares of common stock (the "Common Stock") of the Employer equal to the number
of stock options (vested or non-vested) held by the Employee immediately prior
to the effective date of any Change in Control; to the extent that a sufficient
number of shares of Common Stock are available under the Plan, options to
purchase such shares shall be issued under the Plan ("the Plan Options"), and to
the extent that there are an insufficient number of shares available under the
Plan, such number of options to purchase shares shall be issued outside of the
Plan (the "Non-Plan Options"); the exercise price of the shares underlying the
Plan Options shall equal the fair market value of the Employer's Common Stock on
the date of the Employee's termination and the exercise price of the shares
underlying the Non-Plan Options shall equal the closing bid price of the
Employer's Common Stock on the Effective Date of this Agreement; and
(iii) all stock options held by the Employee immediately prior to the
effective date of the Change in Control and those Plan Options granted pursuant
to Section 9 (c) (ii) shall immediately vest and become fully exercisable for a
period of time indicated in the option contract, and all Non-Plan Options
granted pursuant to Section 9 (c)(ii) shall immediately vest and become fully
exercisable for a period of 5 years or the period of time indicated in the
option contract, whichever is greater; however, at the option of the Employee,
if the Employee is to receive options pursuant to this section, all Plan Options
may be terminated and may be replaced with Replacement and
(iv) benefits, as provided in Section 3 (c), shall continue until the end
of the Term as if the Employee continued to remain in employment through the end
of the Term of this Agreement or for a period of five years whichever is
greater.
The lump sum severance payment described in this Section 9 (c) (i)-(iv) is
hereinafter referred to as the "Termination Compensation". The amount of the
Termination Compensation shall be determined, at the expense of the Employer, by
its regular outside certified public accountant organization Upon payment of the
Termination Compensation and any other accrued compensation, this Agreement
shall terminate (except for the
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Employee's obligations pursuant to Sections 10, 11, 12,13 and 14 hereof) and be
of no further force or effect.
(d) After a Change in Control has occurred, the Employer shall honor the
Employee's exercise of the Employee's outstanding stock options and any other
stock related rights, in accordance with this Employment Agreement. After a
Change in Control has occurred and the Employee's employment is terminated as a
result thereof, the Employee (or his designated beneficiary or personal
representative(s) shall also receive, except to the extent already paid pursuant
to Section 9 (c) (i) hereof or otherwise, the sums the Employee would otherwise
have received (whether under this Agreement, by law or otherwise) by reason of
termination of employment as if a Change of Control had not occurred.
(e) Notwithstanding anything in this Agreement to the contrary, the Employee
shall have the right, prior to the receipt by him of any amounts due hereunder,
to treat some or all of such amounts as a loan from the Employer which the
Employee shall repay to the Employer, within 90 days from the date of receipt,
with interest at the rate provided in Section 7872 of the Code. The repayment of
the loan balance will be with the deferred severance which will then be supplied
by the Employer. Notice of any such waiver or treatment of amounts received as a
loan shall be given by the Employee to the Employer in writing and shall be
binding upon the Employer.
(f) The Employee shall not be required to mitigate the payment of the
Termination Compensation or other benefits or payments by seeking other
employment. To the extent that the Employee shall, after the Term of this
Agreement, receive compensation from any other employment, the payment of
Termination Compensation or other benefits or payments shall not be adjusted.
10. Disclosure, Proprietary Rights. The Employee agrees that during the Term of
his employment by the Employer, he will disclose only to the Employer all ideas,
methods, plans, formulas, processes, trade secrets, developments, or
improvements known by him which relate directly or indirectly to the business of
the Employer, including any lines of business, acquired by the Employee during
his employment by the Employer; provided, that nothing in this Section 10 shall
be construed as requiring any such communication where the idea, plan, method or
development is lawfully protected from disclosure, including but not limited to
trade secrets of third parties. For purposes of the Agreement, the term "the
business of the Employer" shall include, without limitation, the following: the
design, development, obtaining regulatory approval, production, manufacturing,
marketing, and licensing of prescription and non-prescription drugs, medical
devices, and methods for the diagnosis, evaluation, treatment or correction of
any disease, injury, illness or other medical or health condition and such other
lines of business as the Employer shall engage in during the Term hereof. The
parties further agree that any inventions, formulas, trade secrets, ideas, or
secret processes which shall arise form any disclosure made by the Employee
pursuant to this paragraph, whether or not patentable, shall be and remain the
sole property of the Employer.
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11. Confidentiality. The Employee agrees to keep in strict secrecy and
confidence any and all information the Employee assimilates or to which he has
access during his employment by the Employer and which has not been publicly
disclosed and is not a matter of common knowledge in the fields of work of the
Employer. The Employee agrees that both during and after the Term of his
employment by the Employer, he will not, without prior written consent of the
Employer, disclose any such confidential information to any third person,
partnership, joint venture, company, corporation, or other organization.
12. Non-Competition
The Employee covenants that he will not engage, directly or indirectly, alone or
in conjunction with others, as an agent, employee, investor, director,
shareholder or partner in any business which provides products, information
and/or services to the public which are competitive with those provided by the
Employer Group; provided, however, that the ownership by the Employee of 5% or
less of the issued and outstanding shares of any class of securities which is
traded on a national securities exchange or, in the over the counter market
shall not constitute a breach of the provisions of this section. This covenant
shall continue for the Term hereof and for a one year period subsequent to the
termination of this Agreement. Through the Term of this Agreement and for a
period of one year thereafter, if the Employee is terminated for good cause, the
Employee will not on his own behalf or on behalf of any other business
enterprise, directly or indirectly, solicit or induce any creditor, customer,
client, supplier, officer, employee or agent of the Employer Group to sever
his/her or its relationship with or leave the employ of the Employer Group.
13. Conflict of Interest
(a) Conflict of Interest. The Employee shall devote his full time, energy and
attention to the benefit and business of the employer and its affiliates and
shall not be employed by another entity, except as permitted in Section 5. (b)
Essential Element. It is understood by and between the parties hereto that the
foregoing restrictive covenants set forth in Sections 10, 11, 12, 13(a) and 14
are essential elements of this Agreement, and that but for the Agreement of the
Employee to comply with such covenants, the Employer would not have entered into
this Agreement. Notwithstanding anything to the contrary in this Agreement, the
terms and provisions of Sections 11, 12, 13(a) and 14 of this Agreement,
together with any definitions used in such terms and provisions, shall survive
the termination or expiration of this Agreement. The existence of any claim or
cause of action of the Employee against the Employer, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Employer of such covenants.
14. Specific Performance. The Employee agrees that damages at law will be
insufficient remedy to the Employer if the employee violates the terms of
Sections 10, 11, 12 or 13 of this Agreement and that the Employer shall be
entitled, upon application to a court of competent jurisdiction, to obtain
injunctive relief to enforce the provisions of such
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Sections, which injunctive or other equitable relief shall be in addition to any
other rights or remedies available to the Employer, and the Employee agrees that
he will not raise and hereby waives any objection or defense that there is an
adequate remedy at law.
15. Compliance with Other Agreements. The Employee represents and warrants that
the execution of this Agreement by him and his performance of his obligation
hereunder will not conflict with, result in the breach of any provision of,
terminate, or constitute a default under any agreement to which the Employee is
or may be bound.
16. Waiver of Breach. The waiver by the Employer of a breach of any of the
provisions of this Agreement by the Employee shall not be construed as a waiver
of any subsequent breach by the Employee.
17. D&O Insurance; Indemnification. The Employer hereby agrees to maintain in
full force and effect for the duration of this Agreement, Director's and
Officer's Liability Insurance of at least $2,000,000 and to indemnify and hold
harmless to the full extent permitted by law, the Employee for acts performed by
him in carrying out his duties and responsibilities in accordance with this
Agreement.
18. Binding Effect, Assignment. The rights and obligations of the Employer under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Employer. This Agreement is a personal employment
contract and the rights, obligations and interests of the Employee hereunder may
not be sold or assigned or hypothecated.
19. Successors and Assigns; Assignment. Whenever in this Agreement reference is
made to any party, such reference shall be deemed to include the successors,
assigns, heirs, and legal representatives of such party, and without limiting
the generality of the foregoing, all representations, warranties, covenants and
other agreements made by or on behalf of the Employee in this Agreement shall
inure to the benefit of the successors and assigns of the Employer; provided,
however, that nothing herein shall be deemed to authorize or permit the Employee
to assign any of his rights or obligations under this Agreement to any other
person (whether or not a family member or other affiliate or the Employee other
than stated in section 7 of this Agreement), and the Employee covenants and
agrees that he shall not make any such assignments.
20. Modification, Amendment, Etc. Each and every modification and amendment of
this Agreement shall be in writing and signed by all of the parties hereto, and
each and every waiver of, or consent to any departure from, any representation,
warranty, covenant or other term or provision of this Agreement shall be in
writing and signed by each affected party hereto.
21. Notice. Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by certified or registered mail,
first class, return receipt requested, to the parties at the following
addresses:
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Employer: Bentley Pharmaceuticals, Inc Employee: James R. Murphy
Two Urban Centre, Suite 400 4 John Stark Lane
4890 W, Kennedy Blvd. Hampton, NH
Tampa, FL 33609 03842
22. Severability. It is agreed by the Employer and Employee that if any portion
of the covenants set forth in this Agreement are held to be unreasonable,
arbitrary or against public policy, then that portion of such covenants shall be
considered divisible both as to time and geographical area. The employer and
Employee agree that if any court of competent jurisdiction determines the
specific time period or the specified geographical area applicable to this
Agreement to unreasonable , arbitrary or against public policy, then a lesser
time period or geographical are which is determined to be reasonable,
non-arbitrary and not against public policy may be enforced against the
Employee. The Employer and Employee agree that the foregoing covenants are
appropriate and reasonable when considered in light of the nature and extent of
the business conducted by the Employer.
23. Entire Agreement. This Agreement contains the entire agreement between the
Employer and the employee and superseded all prior agreement and understandings,
oral or written, with respect to the subject matter hereof. It is expressly
agreed that the terms of this Employment Agreement govern any prior stock option
grants to the Employee.
24. Headings. The headings contained in this agreement are for reference
purposes only and shall not affect the meaning or interpretation of the
Agreement.
25. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of Florida.
26. Counterparts. This Agreement may be executed in two counterparts copies of
the entire document or of signature pages to the document, each of which may be
executed by one or more of the parties hereto, but all of which when taken
together, shall constitute a single agreement binding upon all of the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first written.
Employer: Employee:
Bentley Pharmaceuticals, Inc. /s/ James R. Murphy
By: ________________________ -------------------------
James R. Murphy
Compensation Committee
Bentley Pharmaceuticals, Inc.
Board of Directors
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 31st day of August 1998 (the
"Effective Date"), by and between BENTLEY PHARMACEUTICALS, INC., a Florida
corporation (the "Employer") and Robert M. Stote (the "Employee"), as the same
may be modified, supplemented, amended or restated from time to time in the
manner provided herein.
RECITALS
The Employer desires to employ the Employee, and the Employee desires to be
employed by the Employer, all upon the terms and provisions and subject to the
conditions set forth in this Agreement.
WITNESSETH
NOW THEREFORE, in consideration of the foregoing premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree to be legally bound as follows:
1. Employment. The Employer hereby employs the Employee, and the
Employee hereby accepts such employment, upon the terms and subject to the
conditions set forth in this Agreement.
2. Term. Subject to the termination provisions hereinafter contained,
the term of employment under this Agreement shall be for an initial term
commencing on the Effective Date and terminating on August 31, 2001. This
Agreement and the Employee's employment hereunder shall thereafter be
automatically renewed for successive one year terms, unless terminated as
hereinafter provided. The term of employment hereunder, and any extension
thereof pursuant to this paragraph, are referred to as the "Term."
3. Compensation, Reimbursement, Etc.
(a) Salary. The Employer shall pay to the Employee as
compensation for all services rendered by the Employee a salary (the "Salary"),
which shall equal $75,000 per annum, payable in accordance with the Company's
regular salary practices.
(b) Expense Reimbursement. The Employer shall reimburse the
Employee on a semi-monthly basis for all reasonable expenses incurred by the
Employee in the performance of his duties under this Agreement; provided,
however, that the Employee shall have previously furnished to the Employer an
itemized account, satisfactory to the Employer, in substantiation of such
expenditures.
(c) Benefits. The Employer shall provide the Employee with a
health insurance allowance equivalent to that previously provided to the
Employee. The Employer shall continue carrying a term life insurance policy for
the Employee with a value equal to $225,000 and a disability
<PAGE>
policy for the Employee payable to the Employee's estate or directly to the
Employee in the event of the Employee's disability (as set forth in Section 6
(b)). All other benefits covered under the employment agreement between the
Employer and the Employee dated June 12, 1995 will be continued.
(d) Bonuses. The Employee shall be eligible for bonuses each
year, payable in cash and/or common stock of the Employer, as determined by the
Compensation Committee (the "Compensation Committee") of the Board of Directors
of the Employer (the "Board") in accordance with this Section 3(d)(i) and (ii).
Such compensation will be awarded as soon as practicable after the Employer's
annual organizational meeting (the "Annual Meeting") of the Board. It is hereby
understood between the Employer and the Employee that upon (i) the attainment of
the Employer's posting of its second consecutive quarter of pre-tax net profit
or announcement of a merger with another company, the Employee will be eligible
for a bonus award, or (ii) bonuses (payable in common stock of the Employer)
will be determined based upon, but not limited to, improvement in the financial
position of the Employer, strategic alliances, purchase of new products,
purchase of technologies, purchase of development products for future
commercialization, attainment of patents, product registrations submitted and/or
approved, as well as specific personal and corporate goals which the Employee
will submit to the Compensation Committee within 30 days of the Annual Meeting
of the Board which the Compensation Committee will review, approve or modify and
return the goals document (the "Document") to the Employee for submission to the
Board for ratification. Each year the Compensation Committee will consider and
weigh each agreed upon objective set forth in the Document, separating the U.S.
from international operations. The Employee will be evaluated by the Chief
Executive Officer and the recommendations of the Chief Executive Officer will be
considered by the Compensation Committee, prior to the Annual
Meeting/Stockholder's meeting, based upon the Document and presented to the
Employee at the time of the Annual Meeting.
(e) Annual Review. The Employee shall be reviewed by the Board
on each anniversary of the Effective Date of this Agreement.
(f) Stock Option Plan. The Employee shall be eligible for
periodic stock option grants under the 1991 Stock Option Plan (the "Plan"), or
any other plan, as determined by the Compensation Committee.
4. Duties. The Employee is engaged as the Chief Science Officer/
Medical Director. In addition, the Employee shall have such other duties and
hold such offices as may from time to time be reasonably assigned to him by the
Board.
5. Extent of Services. During the term of employment under this
Agreement, the Employee shall devote on average one and one-half days per week
(six days per month) to the benefit and business of the Employer and its
affiliates. The Employee shall work as many additional days per month as
required by the Employer and shall be compensated on a per diem basis
commensurate with his Salary. Employee may act as a consultant to or as a
director of any company that does not compete directly with Employer, approved,
in advance, by the Chief Executive Officer of the
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Employer, so long as Employee will not be placed in a position of conflict of
interest as set forth in Section 11 hereof.
6. Termination Following Death or Incapacity.
(a) Death. All rights of the Employee under this Agreement
shall terminate upon death (other than rights accrued prior thereto). All Plan
Options (as defined below) shall vest in accordance with the terms of the Plan
and shall be exercisable for a period of time as set forth in the Plan. All
Non-Plan Options (as defined below) shall immediately vest and transfer to the
Employee's estate and be exercisable for a period of 5 years or the period of
time indicated in the option contract, whichever is greater. However, at the
election of the Employee's estate, all Plan Options may be terminated and may be
replaced with Non-Plan Options (the "Replacement Options"). The Replacement
Options shall have the same terms as set forth in the Plan, except that terms
relating to Non-Plan Options (as defined below), which are set forth in this
Agreement and which vary the terms of the Plan shall govern. Additionally, the
Employer shall pay to the estate of the Employee any unpaid salary and other
benefits due as well as reimbursable expenses accrued and owing to the Employee
prior to his death. The Employer shall have no additional financial obligation
under this Agreement to the Employee or his estate.
(b) Disability.
(i) During any period of disability, illness or
incapacity during the term which renders the Employee at least temporarily
unable to perform the services required under this Agreement, the Employee shall
receive throughout which time, his Salary payable under Section 3 (a) of this
Agreement, less any benefits received by him under any insurance carried by or
provided by the Employer; provided however, all rights of the Employee under
this Agreement (other than rights already accrued) shall terminate as provided
below upon the Employee's permanent disability (as defined below).
(ii) The term "permanent disability" as used in this
Agreement shall mean the inability of the Employee, as determined by the Board,
by reason of physical or mental disability to perform the duties required of him
under this Agreement after a period of: (a) 120 consecutive days of such
disability; or (b) disability for at least six months during any 12 month
period. Upon such determination, the Board may terminate the Employee's
employment under this Agreement upon ten days prior written notice. In the event
of permanent disability, all Plan Options (as defined below) shall vest in
accordance with the terms of the Plan and shall be exercisable for a period of
time as set forth in the Plan and all Non-Plan Options (as defined below) shall
immediately vest and be exercisable for a period of 5 years or the period of
time indicated in the option contract, whichever is greater. However, at the
election of the Employee upon a termination under this Section 6 (b), all Plan
Options may be terminated and may be replaced with Replacement Options. The
Replacement Options shall have the same terms as set forth in the Plan, except
that terms relating to Non-Plan Options (as defined below), which are set forth
in this Agreement and which vary the terms of the Plan shall govern.
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(iii) If any determination of the Board with respect
to permanent disability is disputed by the Employee, the parties hereto agree to
abide by the decision of a panel of three physicians. The Employee and Employer
shall each appoint one member, and the third member of the panel shall be
appointed by the other two physicians. The Employee agrees to make himself
available for and to submit to reasonable examinations by such physicians as may
be directed by the Employer. Failure to submit to any such examination shall
constitute a material breach of this Agreement. In the event such a panel is
convened, the party whose position is not sustained by the panel shall bear all
associated costs.
7. Other Terminations.
(a) Without Cause.
(i) Either the Employee or the Employer may terminate
this Agreement upon written notice, 30 days prior to the end of the Term.
(ii) If the Employee gives notice pursuant to
paragraph (i) above, the Employer shall have the right to either (a) relieve the
Employee, in whole or in part, of his duties under this Agreement (without
reduction in compensation) or (b) to accelerate the date of termination to
coincide with the date on which the written notice is received (without
reduction in compensation for the notice period).
(iii) Notwithstanding any provision hereof to the
contrary, the Employer may terminate this Agreement without cause at any time.
If the Employer terminates this Agreement pursuant to the provisions of this
paragraph 7 (a) (iii), it shall pay to the Employee as a severance benefit, in
cash, an amount equal to 2.99 times the average of the Employee's salary plus
bonus for the five-year period preceding the year in which the date of
termination occurs, all Plan Options (as defined below) shall vest in accordance
with the terms of the Plan and shall be exercisable for a period of time as set
forth in the Plan and all Non-Plan Options (as defined below) shall immediately
vest and be exercisable by the Employee for a period of 5 years or the period of
time indicated in the option contract, whichever is greater. However, at the
election of the Employee upon a termination under this Section 7 (a), all Plan
Options may be terminated and may be replaced with Replacement Options. The
Replacement Options shall have the same terms as set forth in the Plan, except
that terms relating to Non-Plan Options (as defined below), which are set forth
in this Agreement and which vary the terms of the Plan shall govern.
(b) For Cause.
(i) The Employer may terminate this Agreement without
notice (a) upon the Employee's breach of any material provision of this
Agreement, or (b) for other "good cause" (as defined below).
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(ii) The term "good cause" as used in this Agreement
shall include, but shall not be limited to: (a) conduct disloyal to the
Employer; (b) conviction of any crime involving moral turpitude; and (c)
substantial dependence, as determined by the Board, on any addictive substance,
including but not limited to alcohol, amphetamines, barbiturates, methadone,
cannabis, cocaine, PCP, THC, LSD, or narcotic drug. Should the Employee dispute
such a determination, the parties hereto agree to abide by the decision of a
panel of three physicians selected in a manner provided in Section 6(b)(iii) of
this Agreement. In the event such a panel is convened, the party whose position
is not sustained by the panel shall pay all associated costs and expenses.
(iii) Payment on Termination. If this Agreement is
terminated pursuant to Section 7(b), the Employer shall pay to the Employee any
unpaid salary and other benefits and reimbursable expenses accrued and owing to
the Employee. Such payment shall be in full and complete discharge of any and
all liabilities or obligations of the Employer to the Employee hereunder except
as provided in Section 8 hereof. The Employee shall be entitled to no further
benefits under this Agreement other than extension of health benefits at the
Employee's expense and Plan Options (as defined below) shall vest in accordance
with the terms of the Plan and shall be exercisable for a period of time as set
forth in the Plan and all Non-Plan Options (as defined below) options awarded to
the Employee shall immediately vest and be exercisable for a period of 5 years
or the period of time indicated in the contract, whichever is greater.
8. Termination of Employment Upon Change in Control.
(a) For purposes hereof, a "Change in Control" shall be deemed
to have occurred (i) if there has occurred a "change in control" as such term is
used in Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as in effect at the date hereof (hereinafter
referred to as the "Act"); (ii) if there has occurred a change in control as the
term "control" is defined in Rule 12 b-2 promulgated under the Act; (iii) when
any "person" (as such term is defined in Sections 3 (a) (9) and 13 (d) (3) of
the Act), during the Term, becomes a beneficial owner, directly or indirectly,
of securities of the Employer representing 20% or more of the Employer's then
outstanding securities having the right to vote on the election of directors;
(iv) if the stockholders of the Employer approve a plan of complete liquidation
or dissolution of the Employer or a merger or consolidation in which the
Employer is not the surviving corporation; (v) if there has occurred a change in
ownership or effective control of the Employer or a change in the ownership of a
substantial portion of the assets of the Employer (within the meaning of Section
280G (b) (2) (A) of the Internal Revenue Code of 1986, as amended (the "Code");
or (vi) when the individuals who are members of the Board on the date hereof
shall cease to constitute at least a majority of the Board; provided, however,
that any new director whose election to the Board or nomination for election to
the Board by the Employer's stockholders was approved by a vote of the directors
then still in office, shall not be deemed to have replaced his or her
predecessor.
(b) The Employee may terminate his employment at any time
within 12 months after a Change in Control and in the event that any of the
following events has occurred: (i) an assignment to the Employee of any duties
inconsistent with the status of the Employee's office and/or
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position with the Employer as constituted immediately prior to the Change in
Control or a significant adverse change in the nature or scope of the Employee's
authorities, powers, functions or duties as constituted immediately prior to the
Change in Control, (ii) a failure by the Employer, after having received written
notice from the Employee specifying a material breach of its obligations
pursuant to this Agreement, to cure such breach within 30 days after receipt of
such notice or (iii) the headquarters of the Employer is moved to a new location
which is more than 100 miles from its location on the Effective Date.
An election by the Employee to terminate his employment
following a Change in Control shall not be deemed a voluntary termination of
employment by the Employee for the purpose of interpreting the provisions of
this Agreement or any of the Employer's employee benefit plans and arrangements.
The Employee's continued employment with the Employer for any period of time
during the Term after a Change in Control shall not be considered a waiver of
any right he may have to terminate his employment to the extent permitted under
this Section 8 (b).
If the Employer terminates the Employee without cause pursuant
to Section 7 (a) hereof within 12 months after a Change in Control has occurred,
such termination shall be deemed an election by the Employee to terminate his
employment pursuant to this Section 8.
In addition, in the event of such termination, the Employee
shall continue to have the obligations provided for in Sections 10 and 11 (b)
hereof.
(c) If the Employee's employment with the Employer is
terminated under Section 8 (b) hereof, (i) the Employee shall be paid in a lump
sum, within 30 days after termination of employment, in cash, severance pay in
an amount equal to 2.99 times the average of the Employee's salary plus bonus
for the five-year period preceding the year in which the Change in Control
occurs or that amount of salary that would have been due to the Employee through
the expiration of the term of this Agreement, whichever is greater; (ii) the
Employee shall be issued a number of stock options to purchase shares of common
stock (the "Common Stock") of the Employer equal to the number of stock options
(vested and non-vested) held by the Employee immediately prior to the effective
date of any Change of Control; to the extent that a sufficient number of shares
of Common Stock are available under the Plan, options to purchase such shares
shall be issued under the Plan (the "Plan Shares"), and to the extent that there
are an insufficient number of shares available under the Plan, such number of
options to purchase shares shall be issued outside of the Plan (the "Non-Plan
Shares"); the exercise price of the shares underlying the Plan Options shall
equal the fair market value of the Common Stock on the date of Employee's
termination and the exercise price of the shares underlying the Non-Plan Options
shall equal the closing bid price of the Common Stock on the Effective Date;
(iii) all stock options held by the Employee immediately prior to the effective
date of the Change of Control and those Plan Options granted pursuant to Section
8 (c)(ii) shall immediately vest and become fully exercisable for the period of
time indicated in the option contract, and all Non-Plan Options granted pursuant
to Section 8 (c)(ii) shall immediately vest and become fully exercisable for a
period of five years or the period of time indicated in the option contact,
whichever is greater; however, at the election of the Employee, if the Employee
is to receive options
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pursuant to this section, all Plan Options may be terminated and may be replaced
with Replacement Options; the Replacement Options shall have the same terms as
set forth in the Plan, except that terms relating to Non-Plan Options, which are
set forth in this Agreement and which vary the terms of the Plan, shall govern
and (iv) benefits, as provided in Section 3(c), shall continue until the end of
the Term, as if the Employee continued to remain as an employee of the Employer
through the end of the Term.
The lump sum severance payment described in this Section 8 (c)
(i)-(iv) is hereinafter referred to as the "Termination Compensation". The
amount of the Termination Compensation shall be determined, at the expense of
the Employer, by its regular certified public accountant immediately prior to
the Change in Control (the "Accountant"). Upon payment of the Termination
Compensation and any other accrued compensation, this Agreement shall terminate
(except for the employee's obligations pursuant to Sections 9, 10 and 11 (b)
hereof) and be of no further force or effect.
(d) Notwithstanding the foregoing, if the majority of the
Board approves a transaction which results in a Change in Control, (i) the
Employee may not terminate his employment pursuant to Section 8 (b) (iii) hereof
and (ii) the amount paid to the Employee in Section 8 (c) hereof, shall be
calculated using the multiplier 2.0 rather than 2.99 as set forth in Section 8
(c).
(e) After a Change in Control has occurred, the Employer shall
honor the Employee's exercise of the Employee's outstanding stock options and
any other stock related rights, in accordance with this Employment Agreement.
After a Change in Control has occurred and the Employee's employment is
terminated as a result thereof, the Employee (or his designated beneficiary or
personal representative) shall also receive, except to the extent duplicative
pursuant to Section 8 (c) (i) hereof or otherwise, the sums the Employee would
otherwise have received (whether under this Agreement, by law or otherwise) by
reason of termination of employment if a Change in Control had not occurred.
(f) Notwithstanding anything in this Agreement to the
contrary, the Employee shall have the right, prior to the receipt by him of any
amounts due hereunder, to waive the receipt thereof or, subsequent to the
receipt by him of any amounts due hereunder, to treat some or all of such
amounts as a loan from the Employer which the Employee shall repay to the
Employer, within 90 days from the date of receipt, with interest at the rate
provided in Section 7872 of the Code. The repayment of the loan balance will be
with the deferred severance funds which will then be supplied by the Employer.
Notice of any such waiver or treatment of amounts received as a loan shall be
given by the Employee to the Employer in writing and shall be binding upon the
Employer.
(g) The Employee shall not be required to mitigate the payment
of the Termination Compensation or other benefits or payments by seeking other
employment. To the extent that the Employee shall, after the Term, receive
compensation from any other employment, the payment of Termination Compensation
or other benefits or payments shall not be adjusted.
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9. Disclosure, Proprietary Rights. The Employee agrees that during the
Term of his employment by the Employer, he will disclose only to the Employer
all ideas, methods, plans, formulas, processes, trade secrets, developments, or
improvements known by him which relate directly to the business of the Employer,
including any lines of business, acquired by the Employee during his employment
by the Employer; provided, that nothing in this Section 9 shall be construed as
requiring any such communication where the idea, plan, method or development is
lawfully protected from disclosure, including but not limited to trade secrets
of third parties. For purposes of this Agreement, the term "the business of the
Employer" shall include, without limitation, the following: the design,
development, obtaining regulatory approval, production, manufacturing, marketing
and licensing of prescription and non-prescription drugs, medical devices,
medical instruments and methods for the diagnosis, evaluation, treatment or
correction of any disease, injury, illness or other medical or health condition
and such other lines of business as the Employer shall engage in during the Term
hereof. The parties further agree that any inventions, formulas, trade secrets,
ideas, or secret processes which shall arise from any disclosure made by the
Employee pursuant to this paragraph, whether or not patentable, shall be and
remain the sole property of the Employer. Exceptions to this paragraph will
exist when such inventions, formulas, trade secrets, ideas, or secret processes
are clearly the result of the Employee's consultation with or employment by
another company or entity.
10. Confidentiality. The Employee agrees to keep in strict secrecy and
confidence any and all information the Employee assimilates or to which he has
access during his employment by the Employer and which has not been publicly
disclosed and is not a matter of common knowledge in the fields of work of the
Employer. The Employee agrees that both during and after the Term of employment
by the Employer, he will not, without prior written consent of the Employer,
disclose any such confidential information to any third person, partnership,
joint venture, company, corporation, or other organization.
11. Conflict of Interest.
(a) Conflict of Interest. The Employee shall devote on average
one and one-half days per week (six days per month) to the benefit and business
of the Employer. Employee may act as a consultant to or as a director of any
company, that does not compete directly with Employer, approved, in advance, by
the Chief Executive Officer, so long as Employee will not be placed in a
position of conflict of interest. Employee shall be deemed to not be in a
position of a conflict of interest if Employee consults with a company and the
projects that Employee consults in connection with, and is involved with, do not
directly conflict with the business of the Employer.
(b) Covenant Not to Solicit. During employment with the
Employer, and for a period of two years thereafter, the Employee agrees he will
refrain from and will not, directly or indirectly, as independent contractor,
employee, consultant, agent, partner, joint venturer or otherwise, solicit or
encourage any of the employees of the Employer to terminate their employment.
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(c) Essential Element. It is understood by and between the
parties hereto that the foregoing restrictive covenants set forth in Sections
10, 11 (a), 11 (b) and 12 are essential elements of this Agreement, and that but
for the agreement of the Employee to comply with such covenants, the Employer
would not have agreed to enter into this Agreement. Notwithstanding anything to
the contrary in this Agreement, the terms and provisions of Sections 11 (a), 11
(b) and 12 of this Agreement, together with any definitions used in such terms
and provisions, shall survive the termination or expiration of this Agreement.
The existence of any claim or cause of action of the Employee against the
Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Employer of such covenants.
12. Specific Performance. The Employee agrees that damages at law will
be insufficient remedy to the Employer if the Employee violates the terms of
Sections 9, 10 or 11 of this Agreement and that the Employer shall be entitled,
upon application to a court of competent jurisdiction, to obtain injunctive or
other equitable relief to enforce the provisions of such Sections, which
injunctive or other equitable relief shall be in addition to any other rights or
remedies available to the Employer, and the Employee agrees that he will not
raise and hereby waives any objection or defense that there is an adequate
remedy available at law.
13. Compliance with Other Agreements. The Employee represents and
warrants that the execution of this Agreement by him and his performance of his
obligation hereunder will not conflict with, result in the breach of any
provision of, terminate, or constitute a default under any agreement to which
the Employee is or may be bound.
14. Waiver of Breach. The waiver by the Employer of a breach of any of
the provisions of this Agreement by the Employee shall not be construed as a
waiver of any subsequent breach by the Employee.
15. D&O Insurance; Indemnification. The Employer hereby agrees to
maintain in full force and effect for the duration of this Agreement, Director's
and Officer's Liability Insurance of at least $2,000,000 and to indemnify and
hold harmless to the full extent permitted by law, the Employee for acts
performed by him in carrying out his duties and responsibilities in accordance
with this Agreement.
16. Binding Effect, Assignment. The rights and obligations of the
Employer under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Employer. This Agreement is a personal
employment contract and the rights, obligations and interests of the Employee
hereunder may not be sold, assigned, transferred, pledged or hypothecated.
17. Successors and Assigns; Assignment. Whenever in this Agreement
reference is made to any party, such reference shall be deemed to include the
successors, assigns, heirs, and legal representatives of such party, and,
without limiting the generality of the foregoing, all representations,
warranties, covenants and other agreements made by or on behalf of the Employee
in this Agreement shall inure to the benefit of the successors and assigns of
the Employer; provided, however, that
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nothing herein shall be deemed to authorize or permit the Employee to assign any
of his rights or obligations under this Agreement to any other person (whether
or not a family member or other affiliate or the Employee other than stated in
Section 6 of this Agreement), and the Employee covenants and agrees that he
shall not make any such assignments.
18. Modification, Amendment, Etc. Each and every modification and
amendment of this Agreement shall be in writing and signed by all of the parties
hereto, and each and every waiver of, or consent to any departure from, any
representation, warranty, covenant or other term or provision of this Agreement
shall be in writing and signed by each affected party hereto.
19. Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by certified or
registered mail, first class, return receipt requested, to the parties at the
following addresses:
To the Employer: Bentley Pharmaceuticals, Inc.
One Urban Centre
Suite 548
4830 West Kennedy Boulevard
Tampa, FL 33609
To the Employee: Robert M. Stote
6210 Pasadena Point Boulevard
Gulfport, FL 33707
20. Severability. It is agreed by the Employer and Employee that if any
portion of the covenants set forth in this Agreement are held to be
unreasonable, arbitrary or against public policy, then that portion of such
covenants shall be considered divisible both as to time and geographical area.
The Employer and Employee agree that if any court of competent jurisdiction
determines the specified time period or the specified geographical area
applicable to this Agreement to be unreasonable, arbitrary or against public
policy, then a lesser time period or geographical area which is determined to be
reasonable, non-arbitrary and not against public policy may be enforced against
the Employee. The Employer and Employee agree that the foregoing covenants are
appropriate and reasonable when considered in light of the nature and extent of
the business conducted by the Employer.
21. Entire Agreement. This Agreement contains the entire agreement
between the Employer and the Employee and supersedes all prior agreements and
understandings, oral or written, with respect to the subject matter hereof. It
is expressly agreed that the terms of this Agreement govern any prior stock
option grants to the Employee.
22. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
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23. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Florida.
24. Counterparts. This Agreement may be executed in two counterpart
copies of the entire document or of signature pages to the document, each of
which may be executed by one or more of the parties hereto, but all of which,
when taken together, shall constitute a single agreement binding upon all of the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first written.
BENTLEY PHARMACEUTICALS, INC.
By: /s/ James R. Murphy
------------------------------------
James R. Murphy
Chairman, President and Chief
Executive Officer
EMPLOYEE
/s/ Robert M. Stote
------------------------------------
Robert M. Stote
11
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of July 1998 (the
"Effective Date") by and between Bentley Pharmaceuticals. Inc., a Florida
corporation, (the "Employer") and Michael D. Price (the "Employee"), as the same
may be modified, supplemented, amended or restated from time to time in the
manner provided herein.
RECITALS
The Employer desires to employ the Employee, and the Employee desires to be
employed by the Employer, all upon the terms and provisions and subject to the
conditions set forth in this Agreement.
WITNESSETH
NOW THEREFORE, in consideration of the foregoing premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree to be legally bound as follows:
1. Employment. The Employer hereby employs the Employee, and the Employee hereby
accepts such employment as the Vice President, Chief Financial Officer,
Secretary and Treasurer of the Employer upon the terms and subject to the
conditions set forth in this Agreement. The Employee shall, without any
compensation in addition to that which is specifically provided in this
Agreement, serve in such further offices or positions with Employer or any
subsidiary of Employer or (collectively, the "Employer Group") as shall from
time to time be reasonably requested by the Board of Directors of Employer. Each
office and position within the Employer Group in which Employee may serve or to
which he may be appointed shall be consistent in title and duties with
Employee's positions.
2. Term. Subject to the termination provisions hereinafter contained, the term
of employment under this Agreement shall be for an initial term of two and one
half years, commencing on the Effective Date and terminating on December 31,
2000. This Agreement and the Employee's employment hereunder shall thereafter be
automatically renewed for successive one (1) year terms, unless terminated as
hereinafter provided. The term of employment hereunder, and any extension
thereof pursuant to this paragraph, are referred to as the ("Term").
3. Compensation, Reimbursement, etc
(a) Base Salary. Effective July 1, 1998, the Employer shall pay to the Employee
as compensation for all services rendered by the Employee an annual base salary
of $160,000 plus annual bonuses as determined by the Compensation Committee of
the Board of Directors, subject to Sections 3(d) and 3(e). Beginning Jan. 1,
1999 the base salary will be adjusted to $168,000. Annual reviews of the
Employee will be on a calendar year basis thereafter.
<PAGE>
(b) Expense Reimbursement. The Employer shall reimburse the Employee on a
semi-monthly basis for all reasonable expenses incurred by the Employee in the
performance of his duties under this Agreement; provided however, that the
Employee shall have previously furnished to the Employer an itemized account,
satisfactory to the Employer, in substantiation of such expenditures.
(c) Benefits. The Employee shall be entitled to health and other benefits on the
same terms and conditions as the Employer has made available to the Employee
during his initial employment contract dated 12 June 1995, i.e. participation in
the Employer's Health Plan. The Employer shall obtain a term life insurance and
disability policy for the Employee with a value equal to at least one year's
base salary payable to the estate of the Employee upon the Employee's death or
to the Employee in the event of disability as provided in Section 7(a) hereof.
(d) Bonuses. The Employee shall be eligible for a bonus on or prior to December
31, 1998, payable in common stock of the Employer in an amount to be determined
by the Compensation Committee. Thereafter, during the Term starting Jan. 1,
1999, the Employee shall be eligible for bonuses of up to 50% of annual salary
each year, payable in cash and/or common stock as determined by the Board of
Director's Compensation Committee. Such compensation will be awarded as soon as
practicable after March 15th. It is hereby understood between the Employer and
the Employee that upon (i). the attainment of the Employer's posting of its
second consecutive posting of quarterly net profit, or closing a year with a net
profit, or announcement of a merger into another company, or the sale or
transfer of all or substainially all of the pharmaceutical assets of the
Company, the Employee will be eligible for a cash bonus award, OR (ii). Upon a
Change in Control (as defined below), the Employee will be entitled to the
maximum cash bonus award. OTHERWISE, (iii). bonuses (payable in cash and/or
common stock of the Company) will be determined based upon, but not limited to,
his contribution to improvement in financial position of the Company, without
regard to budgeted research and development expenditures. Other consideration
will be given to raising of capital, as well as specific personal and corporate
goals established by the CEO and Board of Directors.
(e) Annual Review. The Employee shall be reviewed by the CEO who will give
recommendations to the compensation committee of the Board of Directors of the
Employer on an annual (calendar year) basis. The Employee will be eligible to
receive a minimum of 5% increase in base salary and issuance of stock options as
determined by the Board's Compensation Committee.
(f) Stock Option Plan. Beginning in April 1999, the Employee will be eligible
for periodic stock option grants under the 1991 Stock Option Plan (the "Plan")
as determined by the Board of Director's Compensation Committee.
4. Duties. The Employee is engaged as the Vice President, Chief Financial
Officer, Secretary and Treasurer of the Employer. In addition, the Employee
shall have such other
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duties and hold such offices as may from time to time be reasonably assigned to
him by the Board of Directors of the Employer.
5. Extent of Services. During the Term of employment under this Agreement, the
Employee shall devote his full time, energy and attention to the benefit and
business of the Employer and its affiliates and shall not be employed by another
entity, except as a consultant to or as a director of a non-competitive company
or a company that could be of strategic interest to the Employer approved, by
the Employer's Board of Directors.
6. Vacation and Days Off. The Employee may take a maximum of four weeks of
vacation each calendar year, at times to be determined in a manner most
convenient to the business of the Employer. A maximum of one week unused
vacation may be carried over from one calendar year to the next or will be paid
to the Employee.
7. Termination Following Death or Incapacity.
(a) Death. All rights of the Employee under this Agreement shall terminate upon
death (other than rights accrued prior thereto). All Plan Options (as
defined below) shall vest in accordance with the Plan and be exercisable
for a period of time as set forth in the Plan. All Non-Plan Options (as
defined below) shall immediately vest and transfer to the Employee's estate
and be exercisable for a period of 5 years from the date of his death or
the period of time as set forth in the Non-Plan Option Contract, whichever
is greater. The Employer shall pay to the estate of the Employee any unpaid
salary and other benefits due as well as reimbursable expenses accrued and
owing to the Employee at the time of his death. The Employer agrees to
maintain life insurance on the Employee equivalent to one year's salary and
will be payable to the Employee's estate upon his death. The Employer shall
have no additional financial obligation under this Agreement to the
Employee or his estate beyond the term-life insurance benefit as discussed
above.
(b) Disability.
(i) During any period of disability, illness or incapacity during the term
of this Agreement which renders the Employee at least temporarily unable to
perform the services required under this Agreement, the Employee shall
receive throughout which time, his salary payable under Section 3 of this
Agreement, less any benefits received by him under any insurance carried by
or provided by the Employer; provided however, all rights of the Employee
under this Agreement (other than rights already accrued) shall terminate as
provided below upon the Employee's permanent disability (as defined below).
(ii) The term "permanent disability" as used in this Agreement shall mean
the inability of the Employee, as determined by the Board of Directors of
the Employer, by reason of physical or mental disability to perform the
duties required of him under this Agreement after a period of: (a) 120
consecutive days of such disability; or (b) disability for at least six
months during any twelve month period. Upon such determination, the Board
of Directors may terminate the Employee's employment under this Agreement
upon ten (10) days prior written notice. In the event of permanent
disability all Plan Options (as defined below) shall vest in accordance
with
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the terms of the Plan and will be exercisable for a period of time as set
forth in the Plan. All Non-Plan Options (as defined below) shall
immediately vest and will be exercisable for a period of five years or the
period of time indicated in the option contract, whichever is greater.
(iii) If any determination of the Board of Directors with respect to
permanent disability is disputed by the Employee, the parties hereto agree
to abide by the decision of a panel of three physicians. The Employee and
Employer shall each appoint one member, and the third member of the panel
shall be appointed by the other two physicians. The Employee agrees to make
himself available for and to submit to reasonable examinations by such
physicians as may be directed by the Employer. Failure to submit to any
such exam shall constitute a material breach of this Agreement. In the
event such a panel is convened, the party whose position is not sustained
will bear all the associated costs.
8. Other Terminations.
(a) Without Cause.
(i) Either the Employee or the Employer may terminate this Agreement upon
written notice, sixty (60) days prior to the end of the initial term or any
one-year extension of this Agreement. (ii) If the Employee gives notice
pursuant to paragraph (i) above, the Employer shall have the right to
either (a) relieve the Employee, in whole or in part, of his duties under
this Agreement (without reduction in compensation) or (b) to accelerate the
date of termination to coincide with the date on which the written notice
is received (without reduction in compensation for the notice period).
(iii) Not withstanding any provisions hereof to the contrary, the Employer
may terminate this Agreement without cause at any time. If the Employer
terminates this Agreement pursuant to the provisions of this paragraph 8(a)
(iii), it shall pay to the Employee as a severance benefit, in cash, an
amount equal to the Employee's Annual Base Salary plus bonus, all Plan
Options (defined below) shall vest in accordance with the terms of the Plan
and shall be exercisable for a period of time as set forth in the Plan and
all Non-Plan Options (defined below) shall immediately vest and be
exercisable by the Employee for a period of five years or the period of
time indicated in the Non-Plan Option contract whichever is greater.
(b) For Cause.
(i) The Employer may terminate this Agreement without notice (a) upon the
Employee's breach of any material provision of this Agreement, or (b) for
other "good cause" (as defined below). (ii) The term "good cause" as used
in this Agreement shall include, but shall not be limited to: (a) conduct
disloyal to the employer; (b) conviction of any crime involving moral
turpitude; and (c) substantial dependence, as determined by the Board of
Directors of the employee, on any addictive substance, including but not
limited to
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alcohol, amphetamines, barbiturates, methadone, cannabis, cocaine, PCP,
THC, LSD, or narcotic drug. Should the Employee dispute such a
determination, the parties hereto agree to abide by the decision of a panel
of three physicians as described in section 7 (b) (iii).
(c) Payment on Termination. If this Agreement is terminated pursuant to Section
8(b), the Employer shall pay to the Employee any unpaid salary and other
benefits and reimbursable expenses accrued and owing to the Employee. Such
payment shall be in full and complete discharge of any and all liabilities
or obligations of the Employer to the employee hereunder except as provided
in Section 9 hereof. The employee shall be entitled to no further benefits
under this Agreement other than extension of health benefits at the
Employee's expense and Plan Options (defined below) shall vest in
accordance with the terms of the Plan and shall be exercisable for a period
of time as set forth in the Plan and all Non-Plan Options (defined below)
awarded to the Employee shall immediately vest and be exercisable for a
period of 5 years or the period of time indicated in the option contract,
whichever is greater.
8. Termination of Employment Upon Change in Control.
(a) For purposes hereof, a "Change in Control" shall be deemed to have occurred
if: (i) there has occurred a "change in control" as such term is used in
Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as in effect as the date hereof
(hereinafter referred to as the "Act"); (ii) if there has occurred a Change
in Control as the term "Control" is defined in Rule 12b-2 promulgated under
the Act; (iii) when any "person" (such term is defined in Section3 (a) (9)
and 13 (d) (3) of the Act), during the term of this Agreement, becomes a
beneficial owner, directly or indirectly, of securities of the Employer
representing 20% or more of the Employer's then outstanding securities
having the right to vote on the election of directors; (iv) if the
stockholders of the Employer approve a plan of complete liquidation or
dissolution of the Employer or a merger or consolidation in which the
Employer is not the surviving corporation; (v) if there has occurred a
change in ownership of effective control of the Employer (within the
meaning of Section 280G (b) (2) (A) of the Internal Revenue Code of 1986,
as amended (the "Code"); or (vi) when the individuals who are members of
the Board of Directors of the Employer on the date hereof shall cease to
constitute at least a majority of the Board of Directors of the Employer,
provided, however, that any new director whose election to the Board of
Directors or nomination for election to the Board of Directors then still
in office, shall not be deemed to have replaced his or her predecessor.
(b) The Employee may terminate his employment at any time within 12 months
after a Change in Control and any of the following events has occurred: (i)
an assignment to the Employee of any duties inconsistent with the status of
the Employee's office and/or position with the Employer as constituted
immediately prior
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<PAGE>
to the Change in Control or a significant adverse change in the nature or
scope of the Employee's compensation or duties as constituted immediately
prior to the Change in Control, (ii) a failure by the Employer, after
having received written notice from the Employee specifying a material
breach of its obligations pursuant to this Agreement, to cure such breach
within 30 days after receipt of such notice.
An election by the Employee to terminate his employment following a Change in
Control shall not be deemed a voluntary termination of employment by the
Employee for the purpose of interpreting the provisions of this Agreement or any
of the Employer's Employee benefit plans and arrangements. The Employee's
continued employment with the Employer for any period of time during the Term of
this Agreement after a Change of Control shall not be considered a waiver of any
right he may have to terminate his employment to the extent permitted under this
Section 9 (b).
If the Employer terminates the Employee without cause pursuant to Section 8 (a)
hereof within 12 months after a Change in Control has occurred, such termination
shall be deemed an election by the Employee to terminate his employment pursuant
to this Section 9. In addition, in the event of such termination, the Employee
shall continue to have the obligation provided for in Sections 11 and 12 hereof.
(c). If the Employee's employment with the Employer is terminated under Section
9 (b) hereof,
(i) the Employee shall be paid in a lump sum, within 30 days after
termination of employment, in cash, severance pay in an amount equal to 2.9
times his Base Salary plus bonuses, or that amount of salary and bonuses
that would have been due to the Employee through the expiration of the Term
of this Agreement, whichever is the greater; Notwithstanding the foregoing,
if the majority of the Board of Directors approves a transaction which
results in a Change of Control, the amount paid to the Employee shall be
calculated using a multiplier of 2.0 rather than 2.9. (ii) the Employee
shall be issued a number of stock options to purchase shares of common
stock (the "Common Stock") of the Employer equal to the number of stock
options (vested or non-vested) held by the Employee immediately prior to
the effective date of any Change in Control; to the extent that a
sufficient number of shares of Common Stock are available under the Plan,
options to purchase such shares shall be issued under the Plan ("the Plan
Options"), and to the extent that there are an insufficient number of
shares available under the Plan, such number of options to purchase shares
shall be issued outside of the Plan (the "Non-Plan Options"); the exercise
price of the shares underlying the Plan Options shall equal the fair market
value of the Employer's Common Stock on the date of the Employee's
termination and the exercise price of the shares underlying the Non-Plan
Options shall equal the closing bid price of the Employer's Common Stock on
the Effective Date of this Agreement; and (iii) all stock options held by
the Employee immediately prior to the effective date of the Change in
Control and those Plan Options granted pursuant to Section 9 (c) (ii)
6
<PAGE>
shall immediately vest and become fully exercisable for a period of time
indicated in the option contract, and all Non-Plan Options granted pursuant
to Section 9 (c)(ii) shall immediately vest and become fully exercisable
for a period of 5 years or the period of time indicated in the option
contract, whichever is greater; however, at the option of the Employee, if
the Employee is to receive options pursuant to this section, all Plan
Options may be terminated and may be replaced with Non-Plan Options and
(iv) benefits, as provided in Section 3 (c), shall continue until the end
of the Term as if the Employee continued to remain in employment through
the end of the Term of this Agreement.
The lump sum severance payment described in this Section 9 (c) (i)-(iv) is
hereinafter referred to as the "Termination Compensation". The amount of the
Termination Compensation shall be determined, at the expense of the Employer, by
its regular outside certified public accountant organization. Upon payment of
the Termination Compensation and any other accrued compensation, this Agreement
shall terminate (except for the Employee's obligations pursuant to Sections 10,
11, 12, 13 and 14 hereof) and be of no further force or effect.
(d) After a Change in Control has occurred, the Employer shall honor the
Employee's exercise of the Employee's outstanding stock options and any other
stock related rights, in accordance with this Employment Agreement. After a
Change in Control has occurred and the Employee's employment is terminated as a
result thereof, the Employee (or his designated beneficiary or personal
representative(s) shall also receive, except to the extent already paid pursuant
to Section 9 (c) (i) hereof or otherwise, the sums the Employee would otherwise
have received (whether under this Agreement, by law or otherwise) by reason of
termination of employment as if a Change of Control had not occurred.
(e) Notwithstanding anything in this Agreement to the contrary, the Employee
shall have the right, prior to the receipt by him of any amounts due hereunder,
to treat some or all of such amounts as a loan from the Employer which the
Employee shall repay to the Employer, within 90 days from the date of receipt,
with interest at the rate provided in Section 7872 of the Code. The repayment of
the loan balance will be with the deferred severance which will then be supplied
by the Employer. Notice of any such waiver or treatment of amounts received as a
loan shall be given by the Employee to the Employer in writing and shall be
binding upon the Employer.
(f) The Employee shall not be required to mitigate the payment of the
Termination Compensation or other benefits or payments by seeking other
employment. To the extent that the Employee shall, after the Term of this
Agreement, receive compensation from any other employment, the payment of
Termination Compensation or other benefits or payments shall not be adjusted.
8. Disclosure, Proprietary Rights.
The Employee agrees that during the Term of his employment by the Employer, he
will disclose only to the Employer all ideas, methods, plans, formulas,
processes, trade
7
<PAGE>
secrets, developments, or improvements known by him which relate directly or
indirectly to the business of the Employer, including any lines of business,
acquired by the Employee during his employment by the Employer; provided, that
nothing in this Section 10 shall be construed as requiring any such
communication where the idea, plan, method or development is lawfully protected
from disclosure, including but not limited to trade secrets of third parties.
For purposes of the Agreement, the term "the business of the Employer" shall
include, without limitation, the following: the design, development, obtaining
regulatory approval, production, manufacturing, marketing, and licensing of
prescription and non-prescription drugs, medical devices, and methods for the
diagnosis, evaluation, treatment or correction of any disease, injury, illness
or other medical or health condition and such other lines of business as the
Employer shall engage in during the Term hereof. The parties further agree that
any inventions, formulas, trade secrets, ideas, or secret processes which shall
arise form any disclosure made by the Employee pursuant to this paragraph,
whether or not patentable, shall be and remain the sole property of the
Employer.
11. Confidentiality.
The Employee agrees to keep in strict secrecy and confidence any and all
information the Employee assimilates or to which he has access during his
employment by the Employer and which has not been publicly disclosed and is not
a matter of common knowledge in the fields of work of the Employer. The Employee
agrees that both during and after the Term of his employment by the Employer, he
will not, without prior written consent of the employer, disclose any such
confidential information to any third person, partnership, joint venture,
company, corporation, or other organization.
12. Non-Competition
Through the Term of this Agreement and for a period of one year thereafter, if
the Employee is terminated for good cause the Employee covenants that he will
not engage, directly or indirectly, alone or in conjunction with others, as an
agent, employee, investor, director, shareholder or partner in any business
which provides products, information and/or services to the public which are
competitive with those provided by the Employer Group; provided, however, that
the ownership by the Employee of 5% or less of the issued and outstanding shares
of any class of securities which is traded on a national securities exchange or,
in the over the counter market shall not constitute a breach of the provisions
of this section. Through the Term of this Agreement and for a period of one year
thereafter, the Employee will not on his own behalf or on behalf of any other
business enterprise, directly or indirectly, solicit or induce any creditor,
customer, client, supplier, officer, employee or agent of the Employer Group to
sever his/her or its relationship with or leave the employ of the Employer
Group.
13. Conflict of Interest
8
<PAGE>
(a) Conflict of Interest. The employee shall devote his full time, energy and
attention to the benefit and business of the employer and its affiliates and
shall not be employed by another entity, except as permitted in Section 5. (b)
Essential Element. It is understood by and between the parties hereto that the
foregoing restrictive covenants set forth in Sections 10, 11, 12, and 13(a) and
14 are essential elements of this Agreement, and that but for the Agreement of
the Employee to comply with such covenants, the Employer would not have entered
into this Agreement. Notwithstanding anything to the contrary in this Agreement,
the terms and provisions of Sections 11, and 12, 13(a) and 14 of this Agreement,
together with any definitions used in such terms and provisions, shall survive
the termination or expiration of this Agreement. The existence of any claim or
cause of action of the Employee against the Employer, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Employer of such covenants.
14. Specific Performance.
The Employee agrees that damages at law will be insufficient remedy to the
Employer if the employee violates the terms of Sections 10, 11, or 12 or 13 of
this Agreement and that the Employer shall be entitled, upon application to a
court of competent jurisdiction, to obtain injunctive relief to enforce the
provisions of such Sections, which injunctive or other equitable relief shall be
in addition to any other rights or remedies available to the Employer, and the
Employee agrees that he will not raise and hereby waives any objection or
defense that there is an adequate remedy at law.
15. Compliance with Other Agreements.
The Employee represents and warrants that the execution of this Agreement by him
and his performance of his obligation hereunder will not conflict with, result
in the breach of any provision of, terminate, or constitute a default under any
agreement to which the Employee is or may be bound.
16. Waiver of Breach.
The waiver by the Employer of a breach of any of the provisions of this
Agreement by the Employee shall not be construed as a waiver of any subsequent
breach by the Employee.
17. D&O Insurance; Indemnification.
The Employer hereby agrees to maintain in full force and effect for the duration
of this Agreement, Director's and Officer's Liability Insurance of at least
$2,000,000 and to indemnify and hold harmless to the full extent permitted by
law, the Employee for acts performed by him in carrying out his duties and
responsibilities in accordance with this Agreement.
9
<PAGE>
18. Binding Effect, Assignment.
The rights and obligations of the Employer under this Agreement shall inure to
the benefit of and shall be binding upon the successors and assigns of the
Employer. This Agreement is a personal employment contract and the rights,
obligations and interests of the Employee hereunder may not be sold or assigned
or hypothecated.
19. Successors and Assigns; Assignment.
Whenever in this Agreement reference is made to any party, such reference shall
be deemed to include the successors, assigns, heirs, and legal representatives
of such party, and without limiting the generality of the foregoing, all
representations, warranties, covenants and other agreements made by or on behalf
of the Employee in this Agreement shall inure to the benefit of the successors
and assigns of the Employer; provided, however, that nothing herein shall be
deemed to authorize or permit the Employee to assign any of his rights or
obligations under this Agreement to any other person (whether or not a family
member or other affiliate or the Employee other than stated in section 7 of this
Agreement), and the Employee covenants and agrees that he shall not make any
such assignments.
20. Modification, Amendment, Etc.
Each and every modification and amendment of this Agreement shall be in writing
and signed by all of the parties hereto, and each and every waiver of, or
consent to any departure from, any representation, warranty, covenant or other
term or provision of this Agreement shall be in writing and signed by each
affected party hereto.
21. Notice.
Any notice required or permitted to be given under this Agreement shall be
sufficient if in writing and if sent by certified or registered mail, first
class, return receipt requested, to the parties at the following addresses:
Employer: Bentley Pharmaceuticals, Inc Employee: Michael D. Price
Two Urban Centre, Suite 400 11114 Carrollwood Dr.
4890 W, Kennedy Blvd. Tampa, FL 33618
Tampa, FL 33609
22. Severability.
It is agreed by the Employer and Employee that if any portion of the covenants
set forth in this Agreement are held to be unreasonable, arbitrary or against
public policy, then that portion of such covenants shall be considered divisible
both as to time and geographical area. The Employer and Employee agree that if
any court of competent jurisdiction determines the specific time period or the
specified geographical area applicable to this
10
<PAGE>
Agreement to be unreasonable , arbitrary or against public policy, then a lesser
time period or geographical are which is determined to be reasonable,
non-arbitrary and not against public policy may be enforced against the
Employee. The Employer and Employee agree that the foregoing covenants are
appropriate and reasonable when considered in light of the nature and extent of
the business conducted by the Employer.
23. Entire Agreement. This Agreement contains the entire agreement between the
Employer and the Employee and superseded all prior agreement and understandings,
oral or written, with respect to the subject matter hereof. It is expressly
agreed that the terms of this Employment Agreement govern any prior stock option
grants to the Employee.
24. Headings. The headings contained in this agreement are for reference
purposes only and shall not affect the meaning or interpretation of the
Agreement.
25. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of Florida.
26. Counterparts. This Agreement may be executed in two counterparts copies of
the entire document or of signature pages to the document, each of which may be
executed by one or more of the parties hereto, but all of which when taken
together, shall constitute a single agreement binding upon all of the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first written.
Employer: Employee:
Bentley Pharmaceuticals, Inc. Michael D. Price
---------------------------------
By: ________________________ By: /s/ Michael D. Price
Compensation Committee Chairman, President and CEO
Bentley Pharmaceuticals, Inc.
Board of Directors By: ________________________
11
EXHIBIT 21.1
BENTLEY PHARMACEUTICALS, INC.
LIST OF SUBSIDIARIES
Laboratorios Belmac S.A.
Bentley Healthcare Corporation
Belmac Health Corporation
Belmac Hygiene, Inc.
Belmac Holdings, Inc.
Belmac A.I., Inc.
B.O.G. International Finance, Inc.
Belmac Jamaica, Ltd.
Bentley Pharma, Inc.
Pharma de Espana, Inc.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements (Nos.
33-35941, 33-43868, 33-43866, 33-45994, 33-45142, 33-54382, 33-69946, 33-75088
and 333-28593) of Bentley Pharmaceuticals, Inc. and subsidiaries (the "Company")
on Form S-3 and the Registration Statement No. 33-85154 of the Company on Form
S-8 of our reports dated March 26, 1999, appearing in the Annual Report on Form
10-K of the Company for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Tampa, Florida
March 26, 1999
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