UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________________
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA No. 59-1513162
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4890 W. Kennedy Blvd., Suite 400, Tampa, FL 33609
--------------------------------------------------
(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (813) 281-0961
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares of the Registrant's common stock outstanding as of May 12,
1999 was 8,443,192.
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Operations and of Comprehensive Loss
(unaudited) for the three months ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Common Stockholders'
Equity (unaudited) for the three months ended March 31, 1999 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. OTHER INFORMATION 18
-----------------
2
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
March 31, December 31,
1999 1998
---- ----
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $5,419 $6,703
Receivables 3,448 3,730
Inventories 1,087 1,208
Prepaid expenses and other 657 820
------- -------
Total current assets 10,611 12,461
------- -------
Fixed assets, net 3,561 3,551
Drug licenses and related costs, net 4,732 2,433
Other non-current assets, net 1,714 1,873
------- -------
$20,618 $20,318
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $2,309 $2,835
Accrued expenses 1,640 1,563
Short term borrowings 1,678 1,223
Current portion of long term debt 5 5
------- -------
Total current liabilities 5,632 5,626
------- -------
Long term debt, net 5,434 5,410
------- -------
Other non-current liabilities 1,287 290
------- -------
Commitments and contingencies
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 8,443 shares 168 168
Stock purchase warrants (to purchase 6,348 and 5,928
shares of common stock) 875 556
Additional paid-in capital 83,728 83,728
Accumulated deficit (74,405) (73,858)
Cumulative foreign currency translation adjustment (2,101) (1,602)
------- -------
8,265 8,992
------- -------
$20,618 $20,318
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
3
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) For the Three
Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Sales $4,358 $3,500
Cost of sales 2,015 1,510
------ ------
Gross margin 2,343 1,990
------ ------
Operating expenses:
Selling, general and administrative 2,442 1,924
Research and development 45 33
Depreciation and amortization 95 60
------ ------
Total operating expenses 2,582 2,017
------ ------
Loss from operations (239) (27)
Other (income) expenses:
Interest expense 278 270
Interest income (68) (148)
Other (income) expense, net (2) -
------ ------
Loss before income taxes (447) (149)
Provision for income taxes 100 234
------ ------
Net loss
Other comprehensive loss: (547) (383)
Foreign currency translation losses 499 116
------ ------
Comprehensive loss ($1,046) ($499)
====== ======
Basic net loss per common share ($0.06) ($0.05)
====== ======
Weighted average common shares outstanding 8,443 8,427
====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$.02 Par Value
Common Stock Additional Other
-------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit Transactions Total
------ ------ ------- ----------- ------------ -----
<S> > <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,443 $168 $83,728 ($73,858) ($1,046) $8,992
Issuance of stock options/warrants - - - - 319 319
Foreign currency translation
adjustment - - - - (499) (499)
Net loss - - - (547) - (547)
----- ----- ------- -------- -------- --------
Balance at March 31, 1999 8,443 $168 $83,728 ($74,405) ($1,226) $8,265
===== ===== ======= ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
5
<PAGE>
<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three
Months Ended
March 31,
-------------------------------
(IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($547) ($383)
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Depreciation and amortization 95 60
Other non-cash items 297 (25)
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables 4 157
Inventories 26 70
Prepaid expenses and other current assets 48 (166)
Other assets 111 (69)
Accounts payable and accrued expenses (345) 447
Other liabilities 5 (1)
------- -------
Net cash (used in) provided by operating activities (306) 90
------- -------
Cash flows from investing activities:
Acquisition of drug delivery technology/drug licenses (1,242) -
(Additions to) dispositions of fixed assets (336) 14
------- -------
Net cash (used in) provided by investing activities (1,578) 14
------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
6
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short term borrowings $601 ($636)
Proceeds from exercise of stock options/warrants, net - 8
------- -------
Net cash provided by (used in) financing activities 601 (628)
------- -------
Effect of exchange rate changes on cash (1) (1)
------- -------
Net decrease in cash and cash equivalents (1,284) (525)
Cash and cash equivalents at beginning of period 6,703 11,117
------- -------
Cash and cash equivalents at end of period $5,419 $10,592
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (IN THOUSANDS):
Interest $233 $232
======= =======
Taxes - -
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Registrant has issued or is obligated to issue Common Stock in exchange for
services and purchase of drug delivery technology as follows (IN THOUSANDS):
Number of shares 735 -
======== =======
Amount $1,000 -
======== =======
</TABLE>
The Registrant issued Warrants to purchase 450,000 shares of Common Stock as
partial consideration for the purchase of drug delivery technology, during the
three months ended March 31, 1999.
The Registrant issued Warrants to purchase 425,000 shares of Common Stock in
exchange for services, during the three months ended March 31, 1998.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
7
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Registrant") is an
international pharmaceutical and health care company engaged primarily in the
manufacturing, marketing and distribution of pharmaceutical products in Spain.
The Registrant develops and registers late stage products, and manufactures,
packages and distributes both its own and other companies' pharmaceutical
products.
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant has moved from a research
and development-oriented pharmaceutical company, 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 Registrant
has decreased its research and development expenses dramatically over the past
few years as well as implemented cost-cutting measures throughout the
Registrant's operations. However, with the February 1999 acquisition of
permeation enhancement technology, limited development expenditures will be
required prior to entering into formal collaboration with other companies.
In February 1999, the Registrant acquired rights to certain U.S. and
international patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological tissues. The acquisition
price included a cash payment of approximately $1.1 million, an obligation to
issue 225,800 shares of Common Stock and ten-year warrants to purchase 450,000
shares of common stock. In addition, the Registrant is obligated to issue
359,282 shares of Common Stock to Conrex Pharmaceutical Corporation. The total
value of all consideration paid for the Assets was approximately $2.4 million.
Furthermore, terms of this transaction provide for certain royalty payments upon
commercialization of products using the technologies purchased.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at March 31, 1999 and
1998 included herein, have been prepared by the Registrant, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the summary of significant
accounting policies and the audited consolidated financial statements and notes
thereto included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
8
<PAGE>
The consolidated financial statements include the accounts of the Registrant and
its wholly-owned subsidiaries: Laboratorios Belmac S.A.; Bentley Healthcare
Corporation and its wholly-owned subsidiary, Belmac Hygiene, Inc.; Belmac Health
Corporation; Belmac Holdings, Inc. and its wholly-owned subsidiary, Belmac A.I.,
Inc.; B.O.G. International Finance, Inc.; Bentley Pharma, Inc.; Pharma de
Espana, Inc.; and Belmac Jamaica, Ltd. Belmac Hygiene, Inc. entered into a 50/50
partnership with Maximed Corporation of New York in March 1994. Belmac Hygiene's
participation in the partnership is accounted for using the equity method. All
significant intercompany balances have been eliminated in consolidation. The
financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency. All
significant intercompany balances have been eliminated in consolidation. The
financial position and results of operations of the Registrant's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect at the end of the period. Revenues and expenses are
translated at the average exchange rate for the period. Foreign currency
translation gains and losses not impacting cash flows are credited to or charged
against Common Stockholders' Equity. Foreign currency translation gains and
losses arising from cash transactions are credited to or charged against current
earnings.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended March 31, 1999 and 1998 are presented on a basis
consistent with the audited consolidated financial statements for the year ended
December 31, 1998 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of March 31, 1999 and the results of its operations and its cash
flows for the three months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 should not be considered
indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
The Registrant considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents for purposes of
the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being determined on
the first in, first out ("FIFO") method and are comprised of the following (in
thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Raw Materials $499 $505
Finished goods 588 703
------ ------
$1,087 $1,208
====== ======
9
<PAGE>
DRUG LICENSES AND RELATED COSTS:
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Registrant's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Costs of acquiring pharmaceuticals requiring further development
are expensed as purchased research and development. Carrying values of such
assets are reviewed annually by the Registrant and are adjusted for any
diminution in value.
As discussed above, the Registrant acquired rights to certain U.S. and
international patents and related technology in February 1999. The purchase
price, which included cash, shares of Common Stock and warrants to purchase
Common Stock, of approximately $2.4 million has been capitalized as drug
licenses and related costs, net on the Consolidated Balance Sheets.
PROVISION FOR INCOME TAXES:
The Registrant has utilized all of its Spanish tax net operating loss
carryforwards. As a result, the Registrant recorded a provision for income taxes
totaling $100,000 for the three months ended March 31, 1999 as a result of its
taxable income in Spain. This amount differs from the amount computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result of
certain nondeductible expenses in Spain.
BASIC NET LOSS PER COMMON SHARE:
Basic net loss per common share is presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128).
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during each period adjusted for actual shares
issued during the period. Diluted loss per common share is not presented, as it
is antidilutive. The effect of the Registrant's outstanding stock options, stock
warrants and convertible debentures were considered in the diluted loss per
share calculation.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the current
period's presentation format. These reclassifications are not material to the
consolidated financial statements.
10
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 versus Three Months Ended March 31, 1998
The Registrant reported revenues of $4,358,000 and a net loss of $547,000 or
$.06 per common share for the three months ended March 31, 1999 compared to
revenues of $3,500,000 and a net loss of $383,000 or $.05 per common share for
the same period in the prior year.
The 25% increase in revenues is primarily attributable to the Registrant's
Spanish subsidiary, Laboratorios Belmac S.A., which reported an increase in
revenues of 22% in local currency; however, fluctuations in foreign currency
exchange rates increased revenues to $4,358,000 in U.S. dollars for the quarter
ended March 31, 1999.
Gross margins for the quarter ended March 31, 1999 decreased to 54% compared to
57% in the comparable period of the prior year, primarily as a result of a
change in the mix of products sold during the quarter ended March 31, 1999
compared to the quarter ended March 31, 1998. The Registrant is currently
experiencing a change in product mix and consequently expects margins to improve
in the second and subsequent quarters of 1999.
Selling, general and administrative expenses increased $518,000, to $2,442,000
(56% of revenues) for the three months ended March 31, 1999 compared to
$1,924,000 (55% of revenues) for the same period in the prior year. A
significant portion of these expenses are marketing and selling costs, which are
necessary for the Registrant's plans to increase sales and market share in
Spain. In addition, certain non-recurring compensation charges were recorded
during the quarter ended March 31, 1999, which represent bonuses in the form of
Common Stock, in lieu of cash, issuable to executive officers of the Registrant.
To the extent practical, however, the Registrant intends to continue its efforts
to control general and administrative expenses in its effort to reach and
maintain profitability.
Research and development expenses totaled $45,000 for the quarter ended March
31, 1999 compared to $33,000 for the same period of the prior year. The minimal
expenditures in research and development reflect the Registrant's recent
de-emphasis of basic research and redirection of its resources to developmental
expenses necessary for expansion of its portfolio of marketed products. The
Registrant intends to continue to carefully manage its research and development
expenditures; however, future expenditures will be greater than in recent
periods due to planned limited development expenditures related to recently
acquired permeation enhancement technology.
Depreciation and amortization expenses totaled $95,000 for the three months
ended March 31, 1999, compared to $60,000 for the same period of the prior year.
The increase was primarily
11
<PAGE>
due to higher depreciation charges with respect to renovations and improvements
at the Registrant's manufacturing facility and higher amortization charges with
respect to recently acquired drug licenses.
Interest expense totaled $278,000 for the three months ended March 31, 1999
compared to $270,000 for the same period of the prior year. Interest income
totaled $68,000 for the three months ended March 31, 1999, compared to $148,000
for the same period of the prior year. The decrease was due to interest earned
on lower short-term interest bearing investment balances during the first
quarter of 1999. The Registrant recorded a provision for income taxes totaling
$100,000 for the three months ended March 31, 1999 as a result of taxable income
earned in Spain.
The Registrant reported a loss from operations of $239,000 for the quarter ended
March 31, 1999 compared to a loss from operations of $27,000 in the same period
of the prior year. The effect of combining non-operating items, primarily
interest expense of $278,000, interest income of $68,000 and an income tax
provision of $100,000 resulted in a net loss of $547,000, or $.06 per common
share for the quarter ended March 31, 1999, compared to the net loss in the
comparable period of the prior year, of $383,000, or $.05 per common share.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased from $20,318,000 at December 31, 1998 to $20,618,000 at
March 31, 1999, while Common Stockholders' Equity decreased from $8,992,000 at
December 31, 1998 to $8,265,000 at March 31, 1999. The decrease in Common
Stockholders' Equity reflects primarily the loss incurred by the Registrant for
the three months ended March 31, 1999 and the negative impact of the Spanish
peseta exchange rate on the foreign currency translation adjustment, offset by
the Registrant's issuance of stock purchase warrants as a result of the February
1999 acquisition of permeation enhancement technology.
The Registrant's working capital decreased from $6,835,000 at December 31, 1998
to $4,979,000 at March 31, 1999, primarily as a result of the loss from
operations incurred by the Registrant during the period and use of cash for
acquisition of permeation enhancement technology and for manufacturing facility
renovations.
Cash and cash equivalents decreased from $6,703,000 at December 31, 1998 to
$5,419,000 at March 31, 1999, primarily as a result of using cash for operating
activities, purchase of permeation enhancement technology and renovation of the
manufacturing facility in Spain. Included in cash and cash equivalents at March
31, 1999 are approximately $4,706,000 of short-term investments considered to be
cash equivalents.
Accounts receivable decreased from $3,730,000 at December 31, 1998 to $3,448,000
at March 31, 1999 primarily as a result of fluctuation in foreign currency
exchange rates. The Registrant has not experienced any material delinquent
accounts. Inventories decreased to $1,087,000 at March 31, 1999 compared to
$1,208,000 at December 31, 1998 primarily as a result of
12
<PAGE>
fluctuation in foreign currency exchange rates. Prepaid expenses and other
current assets decreased from $820,000 at December 31, 1998 to $657,000 at March
31, 1999, primarily as the result of recurring amortization charges and other
recurring business activities during the quarter ended March 31, 1999.
The combined total of accounts payable and accrued expenses decreased from
$4,398,000 at December 31, 1998 to $3,949,000 at March 31, 1999, primarily as a
result of payment of obligations and fluctuation in foreign currency exchange
rates. Short-term borrowings increased from $1,223,000 at December 31, 1998 to
$1,678,000 at March 31, 1999, as a result of higher outstanding balances on
lines of credit used for operating purposes in Spain, offset by the effect of
fluctuation in foreign currency exchange rates.
Fixed assets, net increased from $3,551,000 at December 31, 1998 to $3,561,000
at March 31, 1999, due primarily to renovations at the Spanish manufacturing
facility, offset by recurring depreciation charges and the effect of
fluctuations in foreign currency exchange rates.
Drug licenses and related costs, net increased from $2,433,000 at December 31,
1998 to $4,732,000 at March 31, 1999, primarily due to the February 1999
acquisition of permeation enhancement technology, which was purchased for a
combination of cash, shares of the Registrant's Common Stock and issuance of
stock purchase warrants, offset by the effect of fluctuations in foreign
currency exchange rates and recurring amortization charges.
Other non-current assets decreased from $1,873,000 at December 31, 1998 to
$1,714,000 at March 31, 1999, primarily due to the effect of fluctuations in
foreign currency exchange rates and recurring amortization charges.
Long term debt increased from $5,410,000 at December 31, 1998 to $5,434,000 at
March 31, 1999, due primarily to accretion recorded on the Debentures issued in
the Registrant's February 1996 public offering. Other non-current liabilities
increased from $290,000 at December 31, 1998 to $1,287,000 at March 31, 1999,
primarily as a result of recording an obligation to issue approximately 585,000
shares of Common Stock and 450,000 stock purchase warrants as the result of the
February 1999 acquisition of permeation enhancement technology and an obligation
to issue 150,000 shares of Common Stock to executive officers of the Registrant,
which shares represent bonuses in lieu of cash.
Investing activities, primarily the acquisition of drug delivery technology and
capital improvements to the manufacturing facility in Spain, used net cash of
$1,578,000 during the three months ended March 31, 1999. Financing activities,
primarily short term borrowings, for the three months ended March 31, 1999,
provided net cash of $601,000 and operating activities for the three months
ended March 31, 1999 used net cash of $306,000.
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
13
<PAGE>
revenues and cash flow to support the Registrant's cash requirements. 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
subsidiaries.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue has arisen because many existing computer programs use only
the last two digits of any particular year, rather than all four digits, to
identify that year. These computer programs cannot properly distinguish between
the years 1900 and 2000 or 1901 and 2001, for example. If not corrected, many
computer applications could fail or create erroneous results. The Year 2000
Issue can affect information technology ("IT") as well as non-IT systems. In
fact, many non-IT systems typically include imbedded technology such as
microcontrollers. These types of systems are more difficult to assess and repair
than IT systems. It may even be necessary to replace non-IT systems if they
cannot be modified. The extent of the potential impact of the Year 2000 Issue is
not yet known, and if not timely corrected, could affect the global economy.
The Registrant has recognized the need to ensure that its business operations
will not be adversely impacted by the Year 2000 Issue and is aware of the time
sensitive nature of the problem. As a result, the Registrant has completed an
assessment of how it may be impacted by the Year 2000 Issue. The Registrant
engaged information system consultants to evaluate its systems and technology.
The Registrant's assessment process included a review of its IT as well as
non-IT systems. The Registrant has also considered the potential impact on its
operations and business model in the event that third parties with whom it has
material relationships fail to resolve their own Year 2000 issues.
The Registrant has completed its assessment phase of the Year 2000 issue. As a
result, it was determined that certain IT systems (hardware and software) needed
upgrading or replacing. The Registrant has completed the remediation project of
upgrading and/or replacing its IT systems where appropriate. In addition, the
Registrant is in the process of installing a new IT system at its operating
subsidiary in Spain, at a total approximate cost of $80,000, approximately
one-half of which has been incurred and capitalized to date. This project was
not accelerated nor precipitated by the Year 2000 issue; however, it is
anticipated that all aspects of the new system are Year 2000 compliant. Such
expenditures have been budgeted and are being funded from operations. It is
anticipated that the new system will be completely installed and tested before
the end of the third quarter of 1999. Management of the Registrant has also
conducted a review of its non-IT systems and has concluded that it is not
materially exposed to non-IT system risks.
The Registrant has polled its significant suppliers, service providers and other
third parties with whom it has material relationships to determine the extent to
which it is vulnerable to a failure of any such third party to adequately
address its own Year 2000 Issue. The Registrant has received
14
<PAGE>
responses from 60% of such parties, and is following up on those who have not
responded. No additional risks have been identified as a result of the responses
received to date.
External consultants have tested the Registrant's systems, other than the new IT
system in Spain, and have determined that its existing upgraded/replaced IT
systems are now Year 2000 compliant. Upon completion of the installation of the
new IT system in Spain, it too will be tested for Year 2000 compliance.
In the view of management of the Registrant, not only is it possible that
management may not have access to vital information, which is used to make
management decisions, but the manufacturing process could even be interrupted,
due to unavailability of raw materials or inoperable equipment and/or systems if
the Registrant's assessment and remediation program is not successful.
The Registrant's total Year 2000 project cost and estimates to complete the
project 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 its Year 2000 project by September 30, 1999 at
a total cost of $85,000 excluding the new IT system in Spain. The total
remaining cost of the Year 2000 project is estimated at $20,000, excluding the
new IT system installation in Spain, discussed above. Of the total project cost,
approximately $35,000 is attributable to the purchase of new hardware and
software, of which $25,000 has been capitalized. The remaining $10,000, 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 $40,000 related to the assessment of, remediation and testing for
compliance with its year 2000 project.
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
materials, production of greater than normal quantities of finished goods, and
implementation of manual back-up systems where appropriate.
15
<PAGE>
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.
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 March 31, 1999 and December 31,
1998 was 154.42 and 141.97 pesetas per U.S. dollar, respectively. The weighted
average exchange rate for the three months ended March 31, 1999 and 1998 was
148.30 and 154.27 pesetas per U.S. dollar, respectively. The effect of foreign
currency fluctuations on long lived assets for the three months ended March 31,
1999 was a decrease of $499,000 and the cumulative historical effect was a
decrease of $2,101,000, 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
16
<PAGE>
Registrant does not anticipate altering its business plans and practices to
compensate for future currency fluctuations.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Quarterly Report on Form 10-Q which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of the Registrant, the occurrence of which
involve certain risks and uncertainties that could cause the Registrant's actual
results to differ materially from those expected by the Registrant, including
the history of operating losses; uncertainty of future financial results;
possible negative cash flow from operating activities; additional financing
requirements; no assurance of successful and timely development of new products;
risks inherent in pharmaceutical development; dependence on regulatory
approvals; uncertainty of pharmaceutical pricing or profitability;
unpredictability of patent protection; rapid technological change; competition;
and other uncertainties detailed in the Registrant's Registration Statement on
Form S-3 (SEC Commission file No. 333-28593) declared effective by the
Securities and Exchange Commission on June 10, 1997 and any amendments thereto.
17
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
27.1 Financial Data Schedule
(b)Reports on Form 8-K filed during the quarter ended March 31, 1999:
Report on Form 8-K, dated February 26, 1999 regarding
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).
The Registrant has not filed any reports on Form 8-K subsequent to
March 31, 1999.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended March 31, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
------------------------------------
Registrant
May 12, 1999 By: /s/ James R. Murphy
------------------------------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
May 12, 1999 By: /s/ Michael D. Price
------------------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000821616
<NAME> BENTLEY PHARMACEUTICALS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,419
<SECURITIES> 0
<RECEIVABLES> 3,472
<ALLOWANCES> (24)
<INVENTORY> 1,087
<CURRENT-ASSETS> 10,611
<PP&E> 5,095
<DEPRECIATION> (1,534)
<TOTAL-ASSETS> 20,618
<CURRENT-LIABILITIES> 5,632
<BONDS> 5,434
<COMMON> 168
0
0
<OTHER-SE> 8,097
<TOTAL-LIABILITY-AND-EQUITY> 20,618
<SALES> 4,358
<TOTAL-REVENUES> 4,426
<CGS> 2,015
<TOTAL-COSTS> 4,597
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278
<INCOME-PRETAX> (447)
<INCOME-TAX> 100
<INCOME-CONTINUING> (547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
