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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934 for the transition period from __________ to
_____________
Commission File Number 1-10581
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BENTLEY PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
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Delaware No.59-1513162
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
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65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 964-8006
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Securities registered pursuant to section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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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 B Redeemable Warrants American Stock Exchange
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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.
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Title of Class Aggregate Market Value As of Close of Business on
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Common Stock, $.02 par value $95,989,178 March 9, 2000
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
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Common Stock, $.02 par value 10,826,028 March 9, 2000
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DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Annual Meeting of Stockholders - Incorporated by
Reference into Part III of this Form 10-K
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PART I
ITEM 1. BUSINESS
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GENERAL
Bentley Pharmaceuticals, Inc. (the "Registrant") is a U.S.-based drug
delivery company specializing in the development of products based upon
innovative and proprietary drug delivery systems, which also has a
commercial presence in Europe, where it manufactures, markets and
distributes branded and generic pharmaceutical products. The Registrant
owns 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 is developing this
technology and is targeting U.S., European and other international
markets for the new product applications. The Registrant is in
negotiations with larger pharmaceutical companies with the objective of
collaborating in the development and marketing of various product
applications, including the treatment of onychomycosis, delivery of
insulin, hormone replacement therapies, vaccines and peptides.
It is the Generally Recognized as Safe ("GRAS") status, format
independence, and lack of irritation that set the Registrant's
technology apart from other related drug delivery systems. Studies have
demonstrated that the excipients resulting from this technology enhance
the absorption of pharmaceutical products, whether formulated in
creams, ointments, gels, solutions, lotions, or patches and have proven
to be efficient in delivering both hydrophilic and lipophilic agents.
The Registrant is currently investigating additional patents in drug
delivery, both in the extension of its current technology and as new
systems applicable to pharmaceutical patches, peptides and vaccines.
The Registrant's objective is to enter into several new licensing
collaborations in the near future, utilizing its permeation enhancement
technology.
The Registrant relocated its corporate headquarters from Florida to New
Hampshire in 1999, where it also opened a research facility to develop
and optimize enhanced formulations utilizing its permeation technology.
Studies are performed in vitro utilizing freshly excised human skin to
demonstrate the permeation of drugs through the stratum corneum and are
quantified in the epidermis, dermis and receptor fluid.
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. All of the Registrant's revenues for the year ended December
31, 1999 are derived from its operating subsidiary, Laboratorios Belmac
S.A., in Spain.
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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 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 bearing the majority of development costs.
Since this technology is based on a series of GRAS compounds, products
may be developed in a quicker and less costly fashion. The technology
facilitates the permeation of drugs administered through skin, across
mucosa or through the cornea in a variety of independent
pharmaceutical formats. The excipient most advanced in facilitating
absorption is referred to by the Registrant as CPE-215, although there
are a number of other related compounds under the same patents that
have equally impressive enhancing characteristics.
The Registrant was organized under the laws of the State of Florida in
February 1974 and operated as a Florida corporation until October 1999,
when it changed its state of incorporation to Delaware by effecting a
merger of the Registrant with and into Bentley Pharma, Inc., a Delaware
corporation, which was a wholly-owned subsidiary of the Registrant.
Bentley Pharma, Inc. was the surviving entity of the merger and its
name was changed to Bentley Pharmaceuticals, Inc., the name that the
Registrant uses to conduct its business. The Registrant also adopted a
certificate of incorporation and bylaws, which conform to Delaware law.
In December 1999, the Registrant's Board of Directors adopted a
stockholder rights plan designed to prevent a potential acquirer from
gaining control of the Registrant without fairly compensating all of
the Registrant's stockholders and to protect the Registrant from
coercive takeover attempts. The Board of Directors approved the
declaration of the dividend of one right for each outstanding share of
the Registrant's Common Stock on the record date of December 27, 1999.
Each of the rights, which are not currently exercisable, entitles the
holder to purchase one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $16.50. The
rights will become exercisable only if any person or group of
affiliated persons beneficially acquire(s) 15% or more of the
Registrant's Common Stock. Under certain circumstances, each holder of
a right (other than the person or group who acquired 15% or more of the
Registrant's Common Stock) is entitled to purchase a defined number of
shares of the Registrant's Common Stock at 50% of the market price of
the Common Stock at the time that the right becomes exercisable.
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.
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The Registrant's sales by its primary product lines are as follows (in
thousands):
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FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997
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Pharmaceutical and Consumer Health Care Products $20,249 $15,148 $14,520
Disposable Linen Products - 95 382
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Total $20,249 $15,243 $14,902
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PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN
Laboratorios Belmac, the Registrant's subsidiary in Spain, manufactures
and markets pharmaceutical products within four primary therapeutic
categories of cardiovascular, gastrointestinal, neurological, and
infectious diseases. The Registrant manufactures or distributes a
variety of 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. Additional
renovations were completed in 1998 and 1999 and expansion of the
facility is underway during 2000. The Registrant has budgeted
approximately $1,400,000 for year 2000 capital improvements and
equipment purchases at its manufacturing facility in Spain, which it
expects to fund with cash flows from operations. 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, bacteria, are the etiologic agent. Omeprazole is marketed in
the United States by AstraZeneca.
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.
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.
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Senioral(TM). Senioral is a combination product useful in the
treatment of congestive symptoms of the upper respiratory tract.
Arzimol(TM). Arzimol, whose generic name is Cefprozil, is an
oral antibiotic in the cephalosporin class, marketed in Spain by the
Registrant under a distribution agreement with Bristol Myers Squibb.
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, Teva and Geneva.
Lactoliofil(R). Lactoliofil is an anti-diarrheal agent whose
mechanism of action is the restoration of gastrointestinal flora.
Neurodavur(R) and Neurodavur Plus(R). Neurodavur and
Neurodavur Plus are vitamin B compounds used for the enhancement of
activity in the central and peripheral nervous systems.
Diflamil(R). Diflamil is an anti-inflammatory analgesic used
in the treatment of arthritis.
Resorborina(R). Resorborina is a compound that has local
anesthetic and anti-inflammatory properties for the treatment of
pharyngitis and mouth 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.
Relaxibys(R). Relaxibys is a combination of an analgesic
(paracetamol) and a muscle relaxant (carisoprodol) purchased from
Econature.
Cimascal and Cimascal D Forte(R). Cimascal is a calcium
carbonate product useful in the prevention of osteoporosis. It is also
marketed in combination with Vitamin D.
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Rimagrip Complex(R). Rimagrip Complex is a product used for
the treatment of cough, cold and flu symptoms.
Amantadine(R). Amantadine is an anti-viral product for the
prevention of influenza symptoms and symptoms associated with
Parkinson's Disease.
Generic Antibiotics. Laboratorios Belmac sells various other
types of generic antibiotics for which patent protection no longer
exists, such as amoxicillin, ampicillin and injectable forms of
penicillin (Bactosone Retard(R)).
Controlvas and Belmazol, together, represent approximately 52% 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 82 in Spain to market the 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.
The Registrant exports pharmaceuticals manufactured by Laboratorios
Belmac outside Spain through local distributors and brokers,
particularly in Eastern Europe, Northern Africa, China, 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 Italpharmaco,
Ratiopharm, Juste, and Ethypharm. 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. The Registrant has experienced significant
growth in sales of its own products in recent years; consequently, the
Registrant is currently utilizing more of its manufacturing facility
capacity to manufacture its own products and expects that contract
manufacturing activities will decrease in the future as the Registrant
continues to use more and more of its capacity to manufacture its own
products.
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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 and 1999 to further upgrade the
Registrant's manufacturing facility and inspection in November 1999
confirmed continuing compliance with European GMPs. Expansion of the
facility is underway in 2000.
PRODUCTS UNDER DEVELOPMENT
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.
The Registrant was assigned certain patents and hydrogel drug delivery
technology during the year ended December 31, 1999 (See "--Partnership
Venture") and has contacted other pharmaceutical companies with
objective of licensing such patents and technology for co-development
and marketing of product applications that may result from the
exploitation of this technology.
Laboratorios Belmac purchased dossiers and/or submitted new
registrations for a number of new products during 1998 and 1999, such
as Fluoxitine (an anti-depressant product), Diltiazem SR (a
cardiovascular product), Pentoxyfiline SR (a peripheral vasodilator),
Ibuprofen (a non-steroidal anti-inflammatory analgesic), Selegilene (a
product for treatment of Parkinson's Disease), Ciprofloxacin (an
antibiotic) and Doxazocin (a product for treatment of benign prostatic
hyperplasia (bph)). The Spanish registration process for these products
could span one to two years before authorization to market these
products is received.
PARTNERSHIP VENTURE
In March 1994 a subsidiary of the Registrant formed a partnership with
a subsidiary of Maximed Corporation, 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
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1998, which was affirmed by the U.S. Court of Appeals. The Registrant
attempted to collect the judgment, but was unable to obtain cash from
its partner to satisfy the judgment. Consequently, the Registrant
decided to seek assignment of partnership technology and related
patents in an effort to satisfy the judgment. As a result, the
technology and patents were assigned to the Registrant in October 1999
and the Registrant recorded such assignment as a distribution from the
partnership. Although the Registrant remains responsible for funding
activities of the partnership, the partnership is not currently engaged
in business activities, nor does the Registrant anticipate that it will
engage in any business activities in the future. The affairs of the
partnership are in the process of being concluded and the Registrant
plans to dissolve the partnership.
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 certain patent applications,
particularly with regard to its permeation enhancement technology and
hydrogel technology. 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 acquired patents and related permeation enhancement
technology in February 1999 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.
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.
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
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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 strong
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 far 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 Astra Espana 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.
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, 1999. 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. With the exception of two customers (Cofares and
Antibioticos Farma) whose purchases accounted for 13.0% and 12.6% of
consolidated revenues, respectively, there were no other customers who
accounted for in excess of 10% of the Registrant's consolidated
revenues during the year ended December 31, 1999. One customer
(Cofares) accounted for 11.5% of the Registrant's consolidated revenues
during the year ended December 31, 1998; however, no other customers
accounted for sales in excess of 10% of consolidated revenues in 1998.
There were no customers during the year ended December 31, 1997 who
accounted for in excess of 10% of the Registrant's consolidated
revenues.
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RESEARCH AND DEVELOPMENT
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 or two years or
currently marketed products. The Registrant had decreased its research
and development spending over the past few years. However, the
Registrant's strategy shifted due to the February 1999 acquisition of
permeation enhancement technology, which will require limited
developmental expenditures while providing a multitude of opportunities
for strategic partnerships and/or alliances. In conjunction with its
relocation from Florida, the Registrant established a laboratory in New
Hampshire during the year ended December 31, 1999 for formulation
development and testing of potential product applications. The
Registrant is currently pursuing strategic alliances with respect to
this technology, which 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 Recognized As Safe) compounds, which should result in
significantly reduced pre-clinical trials (animal testing) and
developmental costs.
The Registrant spent $685,000, $153,000 and $324,000 in the years ended
December 31, 1999, 1998 and 1997, respectively, on research and
development to develop new products and processes and to improve
existing products and processes. 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 2000 are
expected to be greater than in recent years, however, due to planned
development of the permeation enhancement technology described above.
Laboratorios Belmac is also engaged in limited research of drug
delivery systems, 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, 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)
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the FDA approval of the NDA prior to any commercial sale or shipment of
the drug. In addition to obtaining FDA approval for each product, each
domestic drug-manufacturing establishment must be registered with the
FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with current GMPs for drugs. To
supply products for use in the United States, foreign manufacturing
establishments must comply with GMPs and are subject to periodic
inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Following completion of laboratory animal testing, 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.
The Registrant's products under development, including potential
products arising from the use of its permeation enhancement drug
delivery technology or its hydrogel technology, must go through the
approval process delineated above prior to gaining approval by the FDA
for commercialization.
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Spain. As a manufacturer in Spain, which is a member of the European
Union, Laboratorios Belmac is subject to the regulations enacted by the
European Union. Prior to Spain's entry into the European Union in 1993,
the pharmaceutical regulations in Spain were less stringent and
Laboratorios Belmac, along with all Spanish companies, have had to
modify their procedures to adapt to the new regulations, which are
similar to the regulations promulgated by the United States Food & Drug
Administration discussed above. In general, these regulations are
essentially consistent with those of 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 could take one to 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, all of the Registrant's sales are
now generated from Spain. International operations are subject
12
<PAGE>
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.
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 Peseta. (See discussion of foreign currency
in Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk".)
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 164 people, 7
of whom are employed in the United States and 157 in Spain, as of March
9, 2000. Of such employees, approximately 61 are principally engaged in
manufacturing activities, 82 in sales and marketing, 4 in product
development and 17 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.
RISK FACTORS
RISKS ASSOCIATED WITH OUR PAST FINANCIAL RESULTS
We could be required to cut back or stop operations if we are unable to
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raise or obtain needed funding
------------------------------
We have experienced losses since inception, resulting in the need to
fund our operations through outside financing. A 1996 Public Offering
resulted in net proceeds of approximately $5,700,000, some of which was
used to repay debt incurred in 1995 private placements. We also
received approximately $9,800,000 in 1997, when approximately 70% of
our then outstanding Class A Warrants were exercised and approximately
$2,600,000 in 1999 upon the exercise of approximately 859,000 Class A
Warrants. The remaining 1,252,000 Class A Warrants expired unexercised.
The Class A Warrants originally were sold as a component of the 1996
Public Offering. Our future existence and profitability depends on our
ability to fund and expand
13
<PAGE>
operations in an effort to achieve profits from operations. We cannot
assure you that our business will ultimately generate sufficient
revenue to fund our operations on a continuing basis.
Although we were founded in 1974, we have only generated revenue from
product-related sales since August 1991. We have used cash from outside
financing to fund our operations. We have made progress toward
commercialization of specific products and have begun to commercialize
others. We are now generating revenues from sales of products by our
subsidiary, Laboratorios Belmac, S.A., a pharmaceutical manufacturer
located in Spain. We acquired Laboratorios Belmac in February 1992.
Substantial amounts of time and financial and other resources will be
required to complete the development and clinical testing of our
products currently under development. Due to our limited cash, we are
seeking strategic partners for development and marketing of potential
products employing our technology. We cannot assure you that we will
receive additional funding necessary to continue research and
development activities, that we will be successful in attracting
strategic partners or that we will otherwise succeed in developing any
additional products with commercially valuable applications.
We believe that with our emphasis on product distribution in Spain,
strategic alliances and product acquisitions together with careful
management of our research and development activities and the net
proceeds from the 1996 Public Offering, that we should have sufficient
liquidity to enable us to conduct our existing operations for the year
2000 and into 2001, of which we cannot assure you. However, our
pharmaceutical products being developed, and which may be developed,
will require the investment of substantial additional time as well as
financial and other resources in order to become commercially
successful. Following the development period, our products will
generally be required to go through lengthy governmental approval
processes, including extensive clinical testing, followed by educating
physicians, pharmacists and consumers about the benefits of our product
and developing a market for our product. Revenues from our operations
and cash may not be sufficient over the next several years for
commercializing any of the products we are currently developing.
Consequently, we may require additional licensees or partners and/or
additional financing. We cannot assure you that we can conclude such
commercial arrangements or obtain additional capital when needed on
acceptable terms, if at all.
At December 31, 1999, we had net operating loss carry forwards (the
"NOLs") of approximately $30,900,000 available to offset future U.S.
taxable income. NOLs are losses reflected on tax returns that we could
use to offset future U.S. taxable income, subject to various legal
restrictions.
We have a history of losses and if we do not achieve profitability we
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may not be able to continue our business in the future
------------------------------------------------------
As of December 31, 1999 we have accumulated losses (accumulated
deficit) of approximately $74,948,000. Although we reported profits in
the fourth quarter of 1999, we may incur additional losses until we can
successfully market and distribute our products and develop new
technologies and commercially viable future products. If we are unable
to do so, we will continue to have losses and might not be able to
continue our operations.
14
<PAGE>
We have incurred the following losses since 1997:
Fiscal year ended:
o December 31, 1997 ............... $3,815,000
o December 31, 1998 ............... $2,876,000
o December 31, 1999 ............... $1,090,000
We may be restricted from using our net operating loss carry forwards
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due to a change in equity ownership and a change in our tax year
----------------------------------------------------------------
As of December 31, 1999, we had NOLs of approximately $30,900,000
available to offset future U.S. taxable income. The use of the NOLs
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 our outstanding
equity. The NOL of approximately $1,600,000 and $3,200,000 generated
during the tax years ended December 31, 1999 and 1998, respectively,
are 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. We used approximately $14,000,000
of NOLs to offset taxable income during 1997. If not offset against
future taxable income, the NOL carry forwards will expire in tax years
2008 through 2019.
RISKS ASSOCIATED WITH OUR BUSINESS
Successful development of current and future products is uncertain
------------------------------------------------------------------
We recently purchased technology to enhance the penetration of certain
pharmaceutical products through the dermal layers of the skin. Although
several systems have been developed by various pharmaceutical companies
to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal
delivery systems to a wider range of pharmaceutical products.
Transdermal delivery systems are currently marketed for only a limited
number of products. In addition, transdermal delivery systems used to
date have often demonstrated adverse side effects for users, such as
skin irritation and delivery difficulties.
Our proposed products are in the early development stage, require
significant further development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of
products based on innovative technologies. Due to our limited
resources, collaboration will be essential in order to complete the
development of specific products. No assurance can be given that the
necessary collaboration will be obtained. Risks during development
include the possibilities that any or all of the proposed products may
be found to be ineffective or toxic, or otherwise may fail to receive
necessary regulatory clearances; that the proposed products, although
effective, may be uneconomical to market; or that third parties may
market superior or equivalent products. Due to
15
<PAGE>
the extended testing and regulatory review process required before
marketing clearance can be obtained, we do not expect to be able to
realize royalty revenues from the sale of any drugs in the near term.
Clinical trial results may result in failure to obtain regulatory
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approval and inability to sell products
---------------------------------------
Before approving a drug for commercial sale as treatment for a disease,
the FDA and other regulatory authorities generally require that the
safety and efficacy of a drug be demonstrated in humans. If our
clinical trials do not demonstrate the safety or efficacy of our
products, or if we otherwise fail to obtain regulatory approval for our
products, we will not be able to generate revenues from the commercial
sale of our products. Any human pharmaceutical product developed by us
would require clearance by Spain's Ministry of Health for sales in
Spain, the U.S. Food and Drug Administration for sales in the United
States and similar agencies in other countries. The process of
obtaining these approvals is costly and time-consuming, and there can
be no assurance that such approvals will be granted. In general, only a
small percentage of new pharmaceutical products achieve commercial
success. Such governmental regulation may prevent or substantially
delay the marketing of our products and may cause us to undertake
costly procedures with respect to our research and development and
clinical testing operations which may provide a competitive advantage
to more substantially capitalized companies which compete with Bentley.
Even if we receive regulatory approval, these agencies may,
nevertheless, limit the uses of the product. In addition, we are
required, in connection with our activities, to comply with good
manufacturing practices (GMPs) and local, state and federal
regulations. Non-compliance with these regulations could have a
material adverse effect on Bentley and/or prevent the commercialization
of our products and can, among other things, result in:
o fines;
o suspended regulatory approvals;
o refusal to approve pending applications;
o refusal to permit exports from the United States;
o product recalls;
o seizure of products;
o injunctions;
o operating restrictions; and
o criminal prosecutions.
Our patent position is uncertain and our success depends on our
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proprietary rights
------------------
We have filed numerous patent applications and have been granted or
have acquired a number of patents. However, there can be no assurance
that our pending applications will be issued as patents or that any of
our issued patents will afford adequate protection to us or our
licensees. Other private and public entities have also filed
applications for, or have been issued, patents and are expected to
obtain patents and other proprietary rights to technology, which may be
harmful to the commercialization of our products. We cannot determine
the ultimate scope and validity of patents
16
<PAGE>
which are now owned by or may be granted to third parties in the
future, the extent to which we may wish or be required to acquire
rights under such patents, or the cost or availability of such rights.
In addition, we also rely on unpatented proprietary technology in the
development and commercialization of our products. There is no
assurance that others may not independently develop the same or similar
technology or obtain access to our proprietary technology.
Additionally, if our technologies, product candidates, methods or
processes infringe upon the intellectual property rights of other
parties, we could incur substantial liability costs and we may have to:
o obtain licenses from the owners of such intellectual property
rights;
o redesign our product candidates or processes to avoid
infringement;
o stop using the subject matter claimed in the patents held by
others;
o pay damages; or
o defend litigation or administrative proceedings which may be
costly whether we win or lose.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovations to develop our competitive
position. All of our employees with access to our proprietary
information have entered into confidentiality agreements and have
agreed to assign to us any inventions relating to our business made by
them while in our employ. However, there can be no assurance that
others may not acquire or independently develop similar technology or,
if patents in all major countries are not issued with respect to our
products, that we will be able to maintain information pertinent to
such research as proprietary technology or trade secrets.
We may have to lower prices or spend more money to effectively compete
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against companies with greater resources than us, which could result in
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lower revenues and/or profits
-----------------------------
We compete with other pharmaceutical companies, biotechnology firms and
chemical companies, many of which have substantially greater financial,
marketing and human resources than us (including substantially greater
experience in clinical testing, production and marketing of
pharmaceutical products). We cannot assure you that we will be able to
compete successfully given these factors. For example, if our
competitors offer lower prices, we could be forced to lower prices,
which would result in reduced margins and a decrease in revenues. If we
do not lower prices we could lose sales and market share. In either
case, if we are unable to compete against companies who can afford to
cut prices, we would not be able to generate sufficient revenues to
grow Bentley or reverse our history of losses. We also experience
competition in the development of our products and processes from
individual scientists, hospitals, universities and other research
institutions and, in some instances, compete with others in acquiring
technology from these sources.
Rapid technological change may result in our products becoming obsolete
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before we recoup a significant portion of related costs
-------------------------------------------------------
The pharmaceutical industry has undergone rapid and significant
technological change. We expect the technology to continue to develop
rapidly, and our success will depend significantly on our
17
<PAGE>
ability to maintain a competitive position. We have recently shifted
our strategic focus so that we do not rely on research and development
of pharmaceuticals from concept through marketing. Instead, we seek to
acquire late-stage development compounds that can be marketed within
approximately one year and currently-marketed products. Rapid
technological development may result in actual and proposed products or
processes becoming obsolete before we recoup a significant portion of
related research and development, acquisition and commercialization
costs.
Pharmaceutical pricing is uncertain and may result in a negative effect
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on our profitability
--------------------
Our levels of revenues and profitability may be negatively affected by
the continuing efforts of governmental and third party payers to
contain or reduce the costs of health care through various means. For
example, in certain foreign markets, including Spain, pricing or
profitability of prescription pharmaceuticals is subject to government
control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to
implement similar government control. While we cannot predict whether
any such legislative or regulatory proposals will be adopted, the
adoption of such proposals could have a material adverse effect on our
business, financial condition and profitability. In addition, sales of
prescription pharmaceuticals are dependent in part on the availability
of reimbursement to the consumer from third party payers, such as
government and private insurance plans. Third party payers are
increasingly challenging the prices charged for medical products and
services. If we succeed in bringing one or more products to the market,
there can be no assurance that these products will be considered cost
effective and that reimbursement to the consumer will be available or
will be sufficient to allow us to sell our products on a competitive
basis.
We depend on third parties for commercialization in the United States
---------------------------------------------------------------------
We intend to sell our products in the United States and internationally
in collaboration with one or more marketing partners. We do not
presently possess the resources or experience necessary to market our
products in the U.S. We presently have no agreements for the licensing
or marketing of our product candidates, and we cannot assure you that
we will be able to enter into any such agreements in a timely manner or
on commercially favorable terms, if at all. Development of an effective
sales force requires significant financial resources, time and
expertise. We cannot assure you that we will be able to obtain the
financing necessary or to establish such a sales force in a timely or
cost effective manner, if at all, or that such a sales force will be
capable of generating demand for our product candidates.
As a producer of "Orphan Drugs" we may be required to continue
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producing the product regardless of its potential
-------------------------------------------------
An Orphan Drug is a product or products used to treat a rare disease or
condition, which, as defined under United States law, is a disease or
condition that affects populations of less than 200,000 individuals or,
if victims of a disease number more than 200,000, the sponsor
establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs. If a product is
18
<PAGE>
designated an Orphan Drug, then the sponsor is entitled to receive
certain incentives to undertake the development and marketing of the
product. In Spain, Orphan Drugs are given a preference in the
pharmaceutical review process by Spain's Ministry of Health if it can
be shown that the product is an important therapeutic agent and there
is unequivocal data supporting its efficacy. The Ministry of Health has
the authority to require pharmaceutical manufacturers to continue to
produce products, which are Orphan Drugs regardless of their commercial
potential. As required by the Ministry of Health, Laboratorios Belmac
currently manufactures and distributes one Orphan Drug, Anacalcit,
which is used in the treatment of nephrolithiasis. We do not currently
market any Orphan Drugs in the United States.
We depend on key personnel and must continue to attract and retain key
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employees
---------
We believe that we have been able to attract skilled and experienced
management and scientific personnel. We cannot assure you, however,
that we will continue to attract and retain personnel of high caliber.
While we believe that we have assembled an effective management team,
the loss of several individuals who are considered key management or
scientific personnel could have an adverse impact on Bentley.
We face product liability risks
-------------------------------
We face an inherent business risk of exposure to product liability
claims in the event that the use of our technology or prospective
products is alleged to have resulted in adverse effects. While we have
taken, and will continue to take, what we believe are appropriate
precautions, there can be no assurance that we will avoid significant
liability exposure. We maintain product liability insurance in the
amount of $5 million. However, we cannot assure you that this coverage
will be adequate in terms and scope to protect us in the event of a
product liability claim. In connection with our clinical testing
activities, we may, in the ordinary course of business, be subject to
substantial claims by, and liability to, subjects who participate in
our studies.
We face risks when doing business outside of the United States
--------------------------------------------------------------
Nearly all of our revenues during the three years ended December 31,
1999 have been generated outside the United States, from our subsidiary
in Spain. There are risks in operations outside the United States,
including, among others, the difficulty of administering businesses
abroad, exposure to foreign currency fluctuations and devaluations or
restrictions on money supplies, foreign and domestic export law and
regulations, taxation, tariffs, import quotas and restrictions and
other political and economic events beyond our control. We have not
experienced any material effects of these risks as of yet; however
there can be no assurance that they will not have such an effect in the
future.
19
<PAGE>
Our computer systems may fail which may disrupt our business
------------------------------------------------------------
We recognized the need to ensure that our business operations would not
be adversely impacted by the Year 2000 issue. As a result, we completed
an assessment of how we might be impacted by the Year 2000 issue. We
engaged information system consultants to evaluate our systems and
technology. Our assessment process included a review of our information
as well as non-information technology systems. We also considered the
potential impact on our operations and business model in the event that
third parties with whom we have material relationships failed to
resolve their own Year 2000 issues. The results of our assessment phase
indicated that certain information technology systems (hardware and
software) needed upgrading or replacing. Our management also conducted
a review of our non-information technology systems and concluded that
it was not materially exposed to non-information technology system
risks. We polled our significant suppliers, service providers and other
third parties with whom we have material relationships to determine the
extent to which we were vulnerable to a failure of any such third party
to adequately address its own Year 2000 issue.
We modified, where needed, our computer applications to ensure that
they will function properly beyond 1999. We replaced certain systems
and applications with the assistance of external consultants. We
believe that the modifications to existing software and conversions to
new software applications, which are year 2000 compliant, mitigated the
year 2000 issue. We have determined that we have no exposure to
contingencies related to the Year 2000 issue for the products we have
sold or anticipate selling in the future.
Now that we have entered the Year 2000, testing of our information
systems has been continued, and to date, we have not experienced any
material Year 2000 disruptions or failures of our systems, nor have we
been notified of any disruptions or failures of the systems of any of
the third parties with whom we do business. However, there is an
ongoing risk that Year 2000 related problems could still occur and we
will continue to monitor Year 2000 issues as they relate to our
internal computer systems and third party computer systems with whom we
interact. We cannot provide assurance that our Year 2000 compliance
program, or similar programs by third parties with whom we do business,
will be successful. We may incur significant costs in resolving any
Year 2000 issues that may arise in the future. If not resolved, these
issues could have a significant adverse impact on our business,
operating results and financial position.
RISKS ASSOCIATED WITH OUR SECURITIES
Your percentage of ownership, voting power and price of Bentley common
-----------------------------------------------------------------------
stock may decrease as a result of events, which increase the number of
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shares of our outstanding common stock
--------------------------------------
As of December 31, 1999, we had the following capital structure:
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Common stock outstanding: 10,230,000
Common stock issuable upon:
Exercise of Class B warrants: 2,876,000
Exercise of underwriter warrants: 690,000
Conversion of Debentures: 2,902,000
Exercise of other warrants: 1,240,000
Exercise of options: 1,927,000
Other Shares issuable: 3,000
---------
Total Common stock outstanding assuming conversion/ 19,868,000
exercise of all outstanding securities: ==========
</TABLE>
On March 9, 2000, our Board of Directors agreed to redeem our 12%
Convertible Senior Subordinated Debentures. Written notice is being
provided to all holders of the Debentures, which provides that if the
Debentures are not converted into shares of our Common Stock by April
12, 2000, then the remaining Debentures will be redeemed by us for
105% of the principal amount plus accrued interest, or $1,050 plus
accrued interest of $4 per Debenture. Each Debenture is convertible
into 400 shares of Common Stock until April 12, 2000. As of March 9,
2000, there are 6,985 Debentures outstanding, which if all converted
into shares of Common Stock, will result in the issuance of 2,794,000
shares of Common Stock, reducing interest expense by approximately
$1,000,000 per year.
However, if the holders of all 6,985 Debentures outstanding on March
9, 2000 decided not to convert such Debentures into shares of our
Common Stock, but decided instead to receive cash of $1,054 (including
accrued interest) for each outstanding Debenture, we would have to pay
an aggregate of $7,362,000 to redeem the Debentures. As long as the
market price of the Common Stock remains above $2.625 per share, the
holders of the Debentures would receive Common Stock upon conversion,
which is worth more than the cash they would receive upon redemption.
If all of the outstanding warrants and options, which are exercisable,
were exercised, Bentley would receive proceeds of approximately
$30,600,000. In addition, we may conduct additional future offerings
of our common stock or other securities with rights to convert the
securities into shares of our common stock. Conversion or exercise of
our outstanding convertible securities, options and warrants into
common stock may significantly and negatively affect the market price
for the common stock as well as decrease your percentage of ownership
and voting power of the common stock.
The market price of our shares has been volatile. In July 1995 Bentley
effected a one-for-ten reverse stock split. Factors such as
announcements of technological innovations or new commercial products
by our competitors, the results of clinical testing, patent or
proprietary rights,
21
<PAGE>
developments, general market conditions or other matters may have a
significant impact on the market price of the common stock.
Obligations in connection with warrants and options may hinder our
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ability to obtain future financing
----------------------------------
As of December 31, 1999, we have outstanding options and warrants to
purchase 6,733,000 shares of Common Stock at exercise prices ranging
from $1.50 to $177.50. The holders of the warrants and options are
likely to exercise or convert them at a time when we are able to obtain
additional equity capital on terms more favorable than those provided
by such warrants and options. Certain warrants and options also grant
to the holders certain demand registration rights and "piggy back"
registration rights. These obligations may hinder our ability to obtain
future financing.
Your interest in Bentley may be diluted by the issuance of preferred
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stock with greater rights than the common stock, which we can sell, or
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issue at any time
-----------------
The sale or issuance of any shares of preferred stock having rights
superior to those of the common stock may result in a decrease in the
value or market price of the common stock. The issuance of preferred
stock could have the effect of delaying, deferring or preventing a
change of ownership without further vote or action by the stockholders
and may adversely affect the voting and other rights of the holders of
common stock.
Our board of directors is authorized to issue up to 2,000,000 shares of
preferred stock. The board has the power to establish the dividend
rates, preferential payments on our liquidation, voting rights,
redemption and conversion terms and privileges for any series of
preferred stock.
We have not paid dividends on our common stock and do not intend to pay
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dividends in the foreseeable future
-----------------------------------
We have not paid dividends on our common stock since our inception and
do not intend to pay any dividends on our common stock in the
foreseeable future. However, at our annual meeting of stockholders held
on June 30, 1999, our stockholders approved a proposal to change our
state of incorporation from Florida to Delaware and to adopt a
certificate of incorporation and bylaws, which conform to Delaware law,
which was completed in October 1999. Delaware law provides that a
corporation may pay dividends out of surplus, out of the corporation's
net profits for the preceding fiscal year, or both, provided that there
remains in the stated capital account an amount equal to the par value
represented by all shares of the corporation's stock having a
distribution preference.
Certain laws and provisions in our certificate of incorporation and
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bylaws may make it more difficult or discourage third parties from
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attempting to control Bentley
-----------------------------
We are subject to Section 203 of the Delaware General Corporate Law, as
amended, which is a
22
<PAGE>
statutory provision intended to discourage certain takeover attempts of
Delaware corporations which are not approved by the Board of Directors.
Section 203 prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of
three years following the date that such stockholder became an
interested director, unless:
o prior to such date, our Board of Directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
o upon conclusion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned
(1) by persons who are directors and also officers and (2) by
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
o on or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at a meeting of
stockholders, and not by written consent, by the affirmative vote
of at least two-thirds of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 of the Delaware General Corporation Law defines business
combinations to include:
o any merger or consolidation involving Bentley and any interested
stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of
the assets of Bentley to an interested stockholder;
o any transaction that results in the issuance or transfer by
Bentley of any of our stock to an interested stockholder;
o any transaction involving Bentley that has the effect of
increasing the proportionate share of any class or series of our
stock beneficially owned by an interested stockholder; or
o any receipt by an interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through Bentley.
In general, Section 203 of the Delaware General Corporation Law
defines an interested stockholder as any entity or person beneficially
owning 15% or more of our outstanding voting stock and any entity or
person affiliated with, controlling or controlled by such entity or
person.
Our certificate of incorporation and bylaws include provisions that
may have the effect of discouraging, delaying or preventing a change
in control of us or an unsolicited acquisition
23
<PAGE>
proposal that a stockholder might consider favorable. Our Board of
Directors, without a stockholder vote, can adjust the number of
members on the Board of Directors between one and thirteen. Vacancies
on the Board of Directors and newly created directorships may be
filled solely by a majority of the remaining directors. A director
may only be removed for cause by the holders of at least two-thirds
of the voting power of Bentley. The positive vote of at least
two-thirds of the voting power of Bentley is required to approve a
merger, a sale or lease of all or most of the assets of Bentley,
certain other business combinations or the dissolution or liquidation
of Bentley, and a "fair price" requirement also exists in each of the
foregoing transactions. Finally, an affirmative vote of two-thirds is
required to amend any provision in the certificate of incorporation
relating to directors and officers of Bentley or to amend any
provision in the certificate which requires the positive vote of
two-thirds of the voting power of Bentley.
Additionally, our certificate of incorporation authorizes a class of
Preferred Stock commonly known as "blank check" Preferred Stock. The
Preferred Stock may be issued from time to time in one or more series,
and the Board of Directors, without further approval of our
stockholders, is authorized to fix the relative rights and
restrictions applicable to each series of Preferred Stock. Any
Preferred Stock that is issued may have rights superior to those of
the Common Stock. In the event of any issuances of Preferred Stock,
the holders of Bentley stock will not have any preemptive or similar
rights to acquire any Preferred Stock or any of our other capital
stock. The potential issuance of Preferred Stock may have the effect
of delaying or preventing a change in control of Bentley, may restrict
dividends on our Common Stock, may discourage bids for our Common
Stock at a premium over the market price of our Common Stock, may
impair the liquidation rights of the Common Stock and may adversely
affect the market price of, and the voting and other rights of the
holders of, Common Stock.
Section 203 and our "anti-takeover" provisions could have the effect
of lessening the possibility that our stockholders would be able to
receive a premium above market value for their shares in the event of
a takeover. These provisions could also have an adverse effect on the
market value of our shares of Common Stock. To the extent that these
provisions may restrict or discourage takeover attempts, they may
render less likely a takeover opposed by the Board of Directors and
may make removal of the Board or management less likely as well.
Additionally, the existence of these provisions could limit the price
that investors might be willing to pay in the future for shares of
Common Stock.
In December 1999, our Board of Directors adopted a stockholder rights
plan designed to prevent a potential acquirer from gaining control of
Bentley without fairly compensating all of our stockholders and to
protect Bentley from coercive takeover attempts. The Board of
Directors approved the declaration of the dividend of one right for
each outstanding share of our Common Stock on the record date of
December 27, 1999. Each of the rights, which are not currently
exercisable, entitles the holder to purchase one one-thousandth of a
share of Series A Junior Participating Preferred Stock at an exercise
price of $16.50. The rights will become exercisable only if any person
or group of affiliated persons beneficially acquire(s) 15% or more of
our Common Stock. Under certain circumstances, each holder of a right
(other than the person or group
24
<PAGE>
who acquired 15% or more of our Common Stock) is entitled to purchase
a defined number of shares of our Common Stock at 50% of the market
price of the Common Stock at the time that the right becomes
exercisable.
ITEM 2. PROPERTIES
----------
UNITED STATES
The Registrant's corporate headquarters are presently located at 65
Lafayette Road, 3rd Floor, North Hampton, NH 03862 and include 3,200
square feet, which are occupied in accordance with a lease agreement,
which expires in March 2004.
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 and
1999. Expansion of the facilities is presently underway. 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. The Registrant plans to renew such leases,
prior to expiration, for an additional two-year term.
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
-----------------
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, 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 in the United States District Court for
the Southern District of New York 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 attempted to
25
<PAGE>
collect the judgment, but was unable to obtain cash from its partner
to satisfy the judgment. Consequently, the Registrant decided to seek
assignment of partnership technology and related patents in an effort
to satisfy the judgment. As a result, the technology and patents were
assigned to the Registrant in October 1999 and the Registrant recorded
such assignment as a distribution from the partnership.
The Registrant was awarded a judgment of approximately $2,130,000 in
the Circuit Court of the Thirteenth Judicial Circuit, State of
Florida, Hillsborough County Civil Division during the year ended
December 31, 1998, relating to the Registrant's claims of civil theft
and breach of employment agreement filed against its former President
and Chief Executive Officer, Michael M. Harshbarger. The judgment
included treble damages totaling $418,000 related to its civil theft
claim and $1,712,000 related to its breach of employment agreement
claim. Harshbarger originally filed suit against the Registrant in
November 1993, alleging wrongful termination, seeking monetary damages
in excess of $1,400,000. In addition to establishing a receivable on
its books, the Registrant has established a reserve equal to the
receivable, as the Registrant is of the opinion that Harshbarger does
not have the financial resources to satisfy the judgment. Harshbarger
filed a Motion for Relief From Judgment in September 1999, alleging
among other things that he was not provided notice of the August 24,
1998 jury trial. Discovery is ongoing and a hearing is expected to be
held to determine the merits of Harshbarger's claims. In the opinion
of management, the outcome is expected to have no material effect on
the financial position, results of operations or cash flows of the
Registrant.
In November 1999, Creative Technologies, Inc. ("Creative") commenced a
lawsuit against the Registrant and others in the Superior Court of New
Jersey, Essex County, asserting that the Registrant breached a
brokerage or finder's fee contract with Creative regarding its 1999
acquisition of permeation enhancement technology. Creative also
asserts claims for breach of the implied covenant of good faith and
fair dealing and for tortious interference with contract. The
Registrant has made a motion to dismiss the complaint and each count
therein for failure to state a cause of action and for lack of
personal jurisdiction over the Registrant. In the opinion of
management, the claims are without merit and the outcome is not
expected to have a material effect on the financial position or
results of operations of the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
26
<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, 1998 $3.38 $2.13
June 30, 1998 3.06 2.19
September 30, 1998 2.38 .81
December 31, 1998 1.69 .81
March 31, 1999 $1.94 $1.38
June 30, 1999 3.50 1.44
September 30, 1999 3.31 2.75
December 31, 1999 6.44 2.75
As of March 9, 2000 there were 1,865 holders of record of the
Registrant's Common Stock, which does not reflect stockholders whose
shares are 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.)
27
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
FISCAL YEAR ENDED
DECEMBER 31,
------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1999(1) 1998(2) 1997(3) 1996(4) 1995(4)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales $20,249 $15,243 $14,902 $23,133 $31,437
Cost of sales 8,445 6,601 8,010 15,638 25,586
------ ------ ----- ----- -----
Gross margin 11,804 8,642 6,892 7,495 5,851
Operating expenses 11,226 10,710 8,438 8,794 8,198
------ ------ ----- ----- -----
Other (income) expense 1,668 808 2,269 1,174 (21)
------ ------ ----- ----- -----
Loss before extraordinary item (4) 1,090 (2,876) (3,815) (2,473) (2,326)
------ ------ ----- ----- -----
Net loss $(1,090) $(2,876) $(3,815) $(2,919) $(2,326)
====== ====== ====== ====== ======
Loss per Common Share before extraordinary
item $(.12) $(.35) $(.97) $(.79) $(.83)
====== ====== ====== ====== ======
Basic and diluted net loss per Common
Share $(.12) $(.35) $(.97) $(.92) $(.83)
====== ====== ====== ====== ======
Weighted average number of Common Shares
outstanding 9,147 8,431 4,072 3,334 2,999
====== ====== ====== ====== ======
</TABLE>
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) 1999(1) 1998(2) 1997(3) 1996(4) 1995(4)
------- ------- ------- ------- -------
Working capital $1,130 $6,835 $10,758 $4,265 $3,113
Non-current assets 10,548 7,857 6,034 6,746 6,523
Total assets 22,237 20,318 21,043 16,558 16,290
Non-current liabilities 104 5,700 5,549 5,513 2,252
Redeemable Preferred Stock -0- -0- 2,338 2,203 2,068
Stockholders' Equity 11,574 8,992 8,905 3,295 5,316
</TABLE>
(1) The Registrant classified its 12% Debentures as a current liability at
December 31, 1999 as a result of issuing a Notice of Redemption in
March 2000, reducing working capital by $5,362,000. The Debentures are
each convertible into 400 shares of Common Stock or are redeemable for
$1,054 (see Note 15).
(2) Operating expenses in 1998 include charges of $1,176,000 related to
costs of abandoned acquisitions, which resulted from attempts to
acquire certain assets from Schwarz Pharma as well as certain other
acquisitions.
28
<PAGE>
All of the Registrants' outstanding Redeemable Preferred Stock was
converted into Common Stock in October 1998.
(3) 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.
(4) 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
The Registrant is a U.S.-based drug delivery company specializing in
the development of products based upon innovative and proprietary drug
delivery systems, which also has a commercial presence in Europe, where
it manufactures, markets and distributes branded and generic
pharmaceutical products. Historically most of its revenues have come
from its operations in Europe.
The Registrant incurred a net loss of $1,090,000 on revenues of
$20,249,000 for the year ended December 31, 1999. 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 focuses on increasing higher margin
pharmaceutical product sales, controlling expenses, carefully
allocating resources to limited product development projects and
potentially acquiring marketable products or profitable businesses 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.
The Registrant sold its French subsidiary, Chimos/LBF S.A. (referred to
herein as Chimos/LBF) in June 1997, whose activities, 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 also marketed disposable
linens and other related products in the United States until December
1998, when it discontinued such activities in order to
29
<PAGE>
focus on the acquisition and development of its permeation enhancement
technology and potential product applications.
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 charge of $1,176,000 in the second quarter of
1998, representing costs of abandoned acquisitions.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999 VERSUS FISCAL YEAR ENDED DECEMBER
-----------------------------------------------------------------------
31, 1998
--------
The Registrant reported revenues of $20,249,000 and a net loss of
$1,090,000 or $.12 per basic and diluted common share for the fiscal
year ended December 31, 1999 compared to revenues of $15,243,000 and a
net loss of $2,876,000 or $.35 per basic and diluted common share for
the year ended December 31, 1998. Excluding the effect of the 1998
charge of $1,176,000, representing the costs of abandoned acquisitions,
the Registrant's net loss for the fiscal year ended December 31, 1998
would have been $1,700,000 or $.21 per basic and diluted common share.
The 33% increase in revenues is primarily attributable to increased
sales by the Registrant's Spanish subsidiary, Laboratorios Belmac S.A.,
which reported an increase in revenues of 41% in local currency for the
fiscal year ended December 31, 1999 compared to the year ended December
31, 1998; however, fluctuations in foreign currency exchange rates
negatively impacted revenues by $1,183,000, resulted in revenues of
$20,249,000 when expressed in U.S. dollars.
Gross margins for the fiscal year ended December 31, 1999 increased
slightly to 58% compared to gross margins of 57% in the prior year,
primarily as manufacturing efficiencies associated with higher levels
of production during the fiscal year ended December 31, 1999 compared
to the fiscal year ended December 31, 1998.
Selling, general and administrative expenses increased by 10%, or
$904,000, to $9,982,000 for the fiscal year ended December 31, 1999
compared to $9,078,000 for the prior year. However, selling, general
and administrative expenses, as a percentage of revenues, were reduced
from 60% of 1998 revenues to 49% of 1999 revenues as a result of the
Registrant's 33% increase in revenues and its efforts to control
general and administrative expenses. A significant portion (62% or
$6,166,000) of these expenses are marketing and selling expenses, which
are necessary for the Registrant's growth in sales and market share in
Spain. Selling and marketing expenses increased by $1,205,000, or 24%
over the prior year, however, as a percent of revenues, decreased from
33% in 1998 to 30% in 1999. General and administrative expenses
decreased by 7% from $4,117,000 in 1998 to $3,816,000 in 1999, and
decreased from 27% of 1998 revenues to 19% of 1999 revenues. Selling,
general and administrative expenses in 1999 included bonuses in the
form of Common Stock valued at $225,000, in lieu of cash, issued to
executive officers of the Registrant in the first quarter. To the
extent practical, however, the Registrant intends to continue its
efforts to control general and administrative expenses in its effort to
achieve and maintain profitability.
30
<PAGE>
Research and development expenses were $685,000 for the fiscal year
ended December 31, 1999 compared to $153,000 for the prior year. The
increase in research and development expenses is primarily the result
of establishing a laboratory in the Registrant's new U.S. headquarters,
located in New Hampshire. This laboratory is being used by the
Registrant to develop potential product applications from its recently
acquired permeation enhancement technology. The limited expenditures in
research and development reflect the Registrant's continued de-emphasis
of basic research and redirection of its resources to developmental
expenses necessary for expansion of its portfolio of marketed products.
The Registrant intends to continue to carefully manage its research and
development expenditures in order to ensure that its development
programs are efficient and cost effective.
Depreciation and amortization expenses totaled $559,000 for the fiscal
year ended December 31, 1999, compared to $303,000 for the prior year.
The increase was primarily due to higher depreciation charges with
respect to renovations and improvements at the Registrant's
manufacturing facility; renovations and purchase of equipment to
establish its U.S. laboratory and higher amortization charges with
respect to recently acquired drug licenses and technologies.
Included in operating expenses for the fiscal year ended December 31,
1998 is a charge of $1,176,000, which represents costs of abandoned
Schwarz Pharma and other related acquisitions. These costs were charged
during the second quarter of 1998 after negotiations ended during May
1998.
Interest expense, which primarily reflects interest on the Registrant's
Debentures, totaled $1,168,000 for the fiscal year ended December 31,
1999 compared to $1,076,000 for the prior year as a result of higher
average outstanding short term debt balances used for operating
purposes in Spain. Interest income was $244,000 for the fiscal year
ended December 31, 1999 compared to $499,000 for the prior year
primarily as a result of lower short-term interest bearing investment
balances during the fiscal year ended December 31, 1999 than in 1998.
The Registrant recorded a provision for foreign income taxes totaling
$781,000 for the fiscal year ended December 31, 1999 as a result of
taxable income earned in Spain compared to $236,000 in the prior year,
which includes a benefit from a refundable amount of U.S. income taxes
in the amount of $280,000. The prior year provision for income taxes
would have totaled $516,000, if not for the U.S. income tax benefit.
The Registrant reported income from operations of $578,000 for the
fiscal year ended December 31, 1999 compared to a loss of $2,068,000 in
the prior year. Excluding the effect of the costs of abandoned
acquisitions, the Registrant's loss from operations for the fiscal year
ended December 31, 1998 would have been $892,000. The effect of
combining non-operating items, primarily interest expense of
$1,168,000, interest income of $244,000 and provision for income taxes
of $781,000 resulted in a net loss of $1,090,000, or $.12 per basic and
diluted common share for the fiscal year ended December 31, 1999,
compared to the net loss in the prior year, of $2,876,000, or
31
<PAGE>
$.35 per basic and diluted common share. Excluding the 1998 charge for
costs of abandoned acquisitions, the prior year net loss for the fiscal
year ended December 31, 1998 would have been $1,700,000 or $.21 per
basic and diluted common share.
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 charge of $1,176,000, representing costs of abandoned acquisitions,
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 by $221,000 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 (55% or
$4,961,000) of these expenses were marketing and selling expenses,
which were necessary for the Registrant's plans to increase sales and
market share in Spain. Selling and marketing expenses increased by
$773,000, or 18% over the prior year and as a percentage of revenues,
increased from 28% of 1997 revenues to 33% of revenues in 1998. General
and administrative expenses increased by 13% from $3,631,000 in 1997 to
$4,117,000 in 1998, and increased from 24% of 1997 revenues to 27% of
1998 revenues.
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 was
a charge of $1,176,000, which represents costs specific to the
abandoned Schwarz Pharma and other related acquisitions.
32
<PAGE>
These costs were charged during the second quarter of 1998 after
negotiations ended in May 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 benefit for a refundable amount 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 charge of $1,176,000 representing costs
specific to the abandoned Schwarz Pharma and other related
acquisitions. Excluding the effect of the costs of abandoned
acquisitions, 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
charge for costs of abandoned acquisitions, the net loss would have
been $1,700,000 or $.21 per common share for the year ended December
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Total assets increased from $20,318,000 at December 31, 1998 to
$22,237,000 at December 31, 1999, while Stockholders' Equity increased
from $8,992,000 at December 31, 1998 to $11,574,000 at December 31,
1999. The increase in Stockholders' Equity reflects primarily the
Registrant's issuance of approximately 585,000 shares of Common Stock
and 450,000 stock purchase warrants as a result of the February 1999
acquisition of permeation enhancement technology, the issuance of
150,000 shares of Common Stock to executive officers of the Registrant
during the first quarter of 1999, which shares represent bonuses in
lieu of cash, the exercise of approximately 859,000 Class A Warrants
during the third quarter of 1999, the issuance during 1999 of 66,000
shares of Common Stock to a consultant for services performed prior to
1999, the conversion of 193 of the Registrant's 12% Convertible
Debentures into approximately 77,000 shares of Common Stock and the
exercise of stock purchase warrants to purchase 50,000 shares of Common
Stock, partially offset by the loss incurred by the Registrant for the
year ended December 31, 1999 and the negative impact of the fluctuation
of the Spanish peseta (and related euro) exchange rate on the foreign
currency translation. The Registrant's working capital decreased from
$6,835,000 at December 31, 1998 to $1,130,000 at
33
<PAGE>
December 31, 1999, primarily as a result of classifying $5,362,000 of
Debentures as a current liability as of December 31, as a result of the
Registrant's decision in March 2000 to redeem any Debentures which are
not converted into shares of Common Stock and remain outstanding on the
date fixed for redemption, which is April 12, 2000, the loss incurred
by the Registrant during the year and use of cash for the acquisition
of permeation enhancement technology in the U.S. and for manufacturing
facility renovations in Spain and the development of a laboratory in
the United States, partially offset by cash proceeds of approximately
$2,600,000 received from the exercise of approximately 859,000 Class A
Warrants during the third quarter of 1999.
Cash and cash equivalents decreased from $6,703,000 at December 31,
1998 to $4,422,000 at December 31, 1999, primarily as a result of using
cash for operating activities, purchase of permeation enhancement
technology, renovation of the manufacturing facility in Spain and
establishing a laboratory in the U.S., which was partially offset by
cash proceeds of approximately $2,600,000 received from the exercise of
approximately 859,000 Class A Warrants, a portion of which was used to
purchase marketable securities, which are classified as available for
sale. Included in cash and cash equivalents at December 31, 1999 are
approximately $3,569,000 of short-term investments considered to be
cash equivalents. There are also approximately $1,893,000 of marketable
securities (six-month maturities) classified as available for sale at
December 31, 1999.
Accounts receivable increased from $3,228,000 at December 31, 1998 to
$4,016,000 at December 31, 1999 as a result of the Registrant's
increase in revenues in the fourth quarter of 1999 offset by
fluctuation in foreign currency exchange rates. The Registrant has not
experienced any material delinquent accounts. Inventories decreased to
$965,000 at December 31, 1999 compared to $1,208,000 at December 31,
1998 primarily due to fluctuation in foreign currency exchange rates.
Prepaid expenses and other current assets decreased from $1,322,000 at
December 31, 1998 to $393,000 at December 31, 1999, primarily as a
result of transferring capitalized costs associated with acquisitions
of drug licenses to drug licenses and related costs, net, when such
assets were placed in service, recurring amortization charges and the
effect of fluctuations in foreign currency exchange rates.
The combined total of accounts payable and accrued expenses decreased
from $4,398,000 at December 31, 1998 to $4,240,000 at December 31,
1999, primarily as a result of payment of liabilities and fluctuations
in foreign currency exchange rates, offset by an increase in the
accrual for foreign income taxes payable on profits earned in Spain.
Short-term borrowings decreased from $1,223,000 at December 31, 1998 to
$952,000 at December 31, 1999, as a result of lower outstanding
balances on lines of credit used for operating purposes in Spain and
the effect of fluctuations in foreign currency exchange rates.
Fixed assets, net increased from $3,551,000 at December 31, 1998 to
$3,684,000 at December 31, 1999, due primarily to renovations at the
Spanish manufacturing facility and establishing a laboratory in the
U.S., partially offset by recurring depreciation charges and the effect
of fluctuations in foreign currency exchange rates.
34
<PAGE>
Drug licenses and related costs, net increased from $2,433,000 at
December 31, 1998 to $5,807,000 at December 31, 1999, primarily due to
the February 1999 acquisition of permeation enhancement technology in
the U.S., which was purchased for a combination of cash, shares of the
Registrant's Common Stock and issuance of stock purchase warrant, the
acquisition of drug licenses in Spain, and the distribution in the form
of assignment of patents and related technology, valued at
approximately $550,000, from its joint venture partner in settlement of
a judgment that the Registrant had obtained against its partner (See
additional discussion below), partially offset by the effect of
fluctuations in foreign currency exchange rates and recurring
amortization charges.
Other non-current assets decreased from $1,873,000 at December 31, 1998
to $1,057,000 at December 31, 1999, primarily due to the reduction of
the net carrying value of its investment in its partnership venture of
$553,000, upon receiving a distribution in the form of assignment of
patents and technology from its partner as settlement of the judgment
that the Registrant obtained against its partner (See discussion
above), and the effect of fluctuations in foreign currency exchange
rates and recurring amortization charges.
Long-term debt of $5,410,000 at December 31, 1998 was reduced to
$5,362,000 at December 31, 1999 and classified as a current liability
as a result of the Registrant's decision to redeem such Debentures
which the holders thereof do not convert into shares of Common Stock by
April 12, 2000, which is the date fixed for redemption. The conversion
of 193 Debentures into approximately 77,000 shares of Common Stock was
partially offset by accretion recorded on the Debentures issued in the
Registrant's February 1996 public offering. Other non-current
liabilities decreased from $290,000 at December 31, 1998 to $104,000 at
December 31, 1999, primarily as a result of the issuance of
approximately 66,000 shares of Common Stock to satisfy a liability of
approximately $188,000 to a consultant for fees earned prior to 1999.
Investing activities, primarily the acquisition of drug delivery
technology and other drug licenses, capital improvements to the
manufacturing facility in Spain, establishing a laboratory in the U.S.
and the purchase of marketable securities used net cash of $4,637,000
during the year ended December 31, 1999. Financing activities,
primarily the exercise of approximately 859,000 Class A Warrants,
partially offset by repayment of short-term borrowings for the year
ended December 31, 1999, provided net cash of $2,519,000 and operating
activities for the year ended December 31, 1999 used net cash of
$63,000.
Seasonality. In the past, the Registrant has experienced a positive
fluctuation in the fourth quarter due to seasonality. As the Registrant
markets more pharmaceutical products whose sales are seasonal,
seasonality of sales may become more significant.
Effect of inflation and changing prices. Neither inflation nor changing
prices has materially impacted the Registrant's net sales or income
from continuing operations for the three years ended December 31, 1999.
35
<PAGE>
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 into shares of Common Stock
at any time prior to the redemption date, which is April 12, 2000, 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%.
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 was 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) during 1997, which generated approximately
$9,800,000 in proceeds to the Registrant. The exercise of the Class A
Warrants during 1997 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 Class B 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 in 1998.
Approximately 859,000 Class A Warrants were exercised in the third
quarter prior to their expiration on August 16, 1999, generating cash
proceeds of approximately $2,600,000. Such
36
<PAGE>
exercises resulted in the issuance of approximately 859,000 shares of
Common Stock and approximately 859,000 Class B Warrants during 1999.
The remaining 1,252,000 Class A Warrants that were not exercised as of
August16, 1999 expired unexercised.
As of March 9, 2000, the Registrant had received net cash proceeds of
$1,894,500 from the exercise of various warrants (including 460
Underwriter's warrants) in exchange for the issuance of 460 Debentures
and 460,000 stock purchase warrants to the Underwriter of its 1996
public offering and 488,500 shares of Common Stock, subsequent to
December 31, 1999. Also on March 9, 2000, the Registrant's Board of
Directors decided to redeem the Registrant's Debentures. If such
Debentures are not converted into shares of the Registrant's Common
Stock by April 12, 2000, such remaining Debentures will be redeemed by
the Registrant for 105% of the principal amount plus accrued interest,
or $1,050 plus accrued interest of $4 per Debenture. Each Debenture is
convertible into 400 shares of the Registrant's Common Stock until
April 12, 2000. As of March 9, 2000, 269 of the Registrant's Debentures
have been voluntarily converted into 107,600 shares of the Registrant's
Common Stock subsequent to December 31, 1999 and 6,985 Debentures
remain outstanding as of March 9, 2000. Conversion of 100% of the
remaining 6,985 Debentures would result in the issuance of 2,794,000
shares of Common Stock.
As long as the market price of the Registrant's Common Stock remains
above $2.625 per share, holders, upon conversion, will receive Common
Stock having a greater market value ($4,725 as of March 9, 2000) than
the cash ($1,054) they would receive upon redemption of each Debenture.
The conversion/redemption of the Debentures will eliminate essentially
all of the Registrant's long-term debt and will result in a reduction
of interest expense of approximately $1,000,000 per year. Management of
the Registrant expects the majority, if not all, of the holders of its
Debentures to convert such Debentures into shares of Common Stock;
consequently, the Registrant expects that redemption, while possible,
is unlikely to require the use of a significant amount of cash.
However, if the holders of all 6,985 Debentures outstanding on March 9,
2000 decided not to convert such Debentures into shares of Common
Stock, but decided instead to receive cash of $1,054 (including accrued
interest) for each outstanding Debenture, the Registrant would have to
pay an aggregate of $7,362,000 to redeem the Debentures. Although the
Registrant expects the majority, if not all, of the holders to convert
the Debentures into shares of Common Stock, management believes that
its cash, cash equivalents, marketable securities and lines of credit
will be sufficient to purchase any Debentures that are not converted
and presented for redemption.
Given the Registrant's current liquidity and cash balances and
considering its future strategic plans (including its year 2000
budgeted capital improvements and planned equipment purchases of
approximately $1,400,000), the Registrant should have sufficient
liquidity to fund operations for the year 2000 and into the year 2001,
which should be a sufficient time frame for the Registrant to advance
its strategic objectives and generate revenues and cash flow to support
the Registrant's cash flow needs. There can be no assurance, however,
that changes in the Registrant's research and development plans or
other events affecting the Registrant's revenues or operating expenses
will not result in the earlier depletion of the Registrant's funds. The
Registrant, however, continues to explore alternative sources for
financing its business activities. In appropriate situations, that will
be
37
<PAGE>
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue came about because many existing computer programs
were originally designed to use only the last two digits of any
particular year, rather than all four digits, to identify that year.
These computer programs were not able to properly distinguish between
the years 1900 and 2000 or 1901 and 2001, for example. The Year 2000
Issue affected information technology ("IT") as well as non-IT systems.
In fact, many non-IT systems typically include imbedded technology such
as micro controllers.
The Registrant recognized the need to ensure that its business
operations would not be adversely impacted by the Year 2000 Issue. As a
result, the Registrant assessed how it may be impacted by the Year 2000
Issue. Consequently, the Registrant modified, where needed, its
computer applications to ensure that they will function properly beyond
1999. The Registrant replaced certain systems and applications with the
assistance of external consultants. The Registrant believes that the
modifications to existing software and conversions to new software
applications, which are Year 2000 Compliant, mitigated the Year 2000
Issue.
The Registrant polled its significant suppliers and service providers
to determine the extent to which it was vulnerable to a failure of any
such third party to adequately address its own Year 2000 Issue.
However, there can be no guarantee that the failure of systems of other
companies on which the Registrant's systems rely will not have a
material adverse effect on the Registrant in the future. 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 completed the Year 2000 project prior to December 31,
1999. Of the total project cost of $75,000, approximately $15,000 was
attributable to the purchase of new software, which was capitalized. To
date, the Registrant has incurred and expensed approximately $60,000
related to the assessment of its Year 2000 project and the development
and implementation of a remediation plan.
Now that the Registrant has entered the Year 2000, testing of its
information systems has been continued, and to date, it has not
experienced any material Year 2000 disruptions or failures of its
systems, nor has it been notified of any disruptions or failures of the
systems of any of its third parties with whom it does business.
However, there is an ongoing risk that Year 2000 related problems could
still occur and the Registrant will continue to monitor Year 2000
issues as they relate to its internal computer systems and third party
computer systems with whom it interacts. The Registrant cannot provide
assurance that its Year 2000 compliance program, or similar programs by
third parties with whom it does business, will be successful. The
Registrant may incur significant costs in resolving any Year 2000
issues that may arise in the future. If not resolved, these issues
could have a
38
<PAGE>
significant adverse impact on the Registrant's business, operating
results and financial position.
DERIVATIVE INSTRUMENTS AND HEDGING
Statement of Financial Accounting Standards No. 133 (SFAS No. 133)
"Accounting for Derivative Instruments and Hedging Activities" 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. SFAS No. 133, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, and is not intended to
be applied retroactively. The Registrant plans to adopt SFAS No. 133 on
January 1, 2001. Management does not believe that the adoption of SFAS
No. 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. (See certain risk factors listed in Item 1. "Business -
Risk Factors".)
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 euro zone, 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 after 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 in Spain
is fixed at 166.39 pesetas. The exchange rate at December 31, 1999 and
1998 was 165.23 and 141.97 pesetas per U.S. dollar, respectively. The
weighted average exchange rate for the years ended December 31, 1999
and 1998 was 156.16 and 149.40 pesetas per U.S. dollar, respectively.
The effect of foreign currency fluctuations on long lived assets for
the year ended December 31, 1999 was an decrease of $737,000 and the
cumulative historical effect was a decrease of $2,339,000, as reflected
in the Registrant's Consolidated Balance
39
<PAGE>
Sheets in the "Liabilities and Stockholders' Equity" section. Although
exchange rates fluctuated significantly in recent years, and in
particular, the continuing weakening of the euro in relation to the
U.S. dollar in 1999 and year to date 2000, 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, as
can the translated amounts of revenues and expenses. 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.
The weighted average interest rate on the Registrant's short-term
borrowings is 5.3% and the balance outstanding is $952,000 as of
December 31, 1999. The effect of an increase in the interest rate of
one hundred basis points (to 6.3%) would have the effect of increasing
interest expense by approximately $9,500. The Registrant also has
$6,794,000 principal amount of 12% Debentures outstanding at December
31, 1999 with a fixed rate of interest. Such Debentures are convertible
into shares of the Registrant's Common Stock and the market value of
such Debentures is influenced by the value of the underlying Common
Stock. A $1.00 increase in the market value of the Common Stock would
increase the market value of the 6,794 Debentures outstanding at
December 31, 1999 by approximately $2,718,000, from $16,628,000 to
$19,346,000.
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.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following information is furnished with respect to each director
and executive officer of the Registrant.
<TABLE>
<CAPTION>
Position of the Year First
Registrant Class of Became
Name Age Presently Held Director Director
---- --- -------------- -------- --------
<S> <C> <C> <C> <C>
James R. Murphy 50 Chairman, President, III 1993
Chief Executive Officer
and Director (1)
Michael McGovern 56 Vice Chairman and I 1997
Director (1),(3)
Robert M. Stote 60 Senior Vice President, III 1993
Chief Science Officer
And Director
Michael D. Price 42 Vice President, I 1995
Chief Financial Officer,
Treasurer, Secretary and
Director
Robert J. Gyurik 53 Vice President of II 1998
Pharmaceutical
Development and
Director
Charles L. Bolling 76 Director (2), (3) II 1991
Russell Cleveland 61 Director (1) I 1999
Miguel Fernandez 69 Director (1), (2),(3) III 1999
William A. Packer 65 Director (1),(2),(3) II 1999
</TABLE>
(1) Member of the Strategic Planning Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
41
<PAGE>
JAMES R. MURPHY became President 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 and drug
delivery 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 and consulting laboratories. Mr. Murphy received a
B.A. in Biology from Millersville University and attended the
Massachusetts School of Law in 1993 and 1994.
MICHAEL MCGOVERN was named Vice Chairman of the Registrant in October
1999 and 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. 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.
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.
42
<PAGE>
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
positions 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 Research 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 and
holds a number of patents in the areas of drug delivery systems,
medical devices and new drug discoveries.
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.
RUSSELL CLEVELAND is the principal founder and the majority stockholder
of Renaissance Capital Group, Inc. ("Renaissance"). Renaissance
provides capital to emerging publicly owned companies. For more than
the past five years, Mr. Cleveland has served as President and Managing
General Partner of Renaissance Capital Partners, Ltd. President and
Director of Renaissance Capital Growth & Income Fund III, Inc., and a
Director of Renaissance U.S. Growth and Income Trust PLC. Mr.
Cleveland's background includes executive positions with various major
southwest regional brokerage firms. Mr. Cleveland also currently serves
as a director of Danzer Corp. (formerly Global Environmental Corp.),
Feminique, Inc. (formerly Biopharmaceutics, Inc.), Tutogen Medical,
Inc. and Technology Research, Inc. Mr. Cleveland is a Chartered
Financial Analyst and a graduate of the University of Pennsylvania,
Wharton School of Finance and Commerce.
MIGUEL FERNANDEZ has been retired since 1996. Mr. Fernandez served from
1980 to 1996 as President of the International Division and corporate
Vice President at Carter-Wallace, Inc., where he was responsible for
all product lines outside of the United States. Prior thereto, Mr.
Fernandez was employed for approximately eight years by SmithKline
Beecham, where his last position was Vice President for Latin America.
Before SmithKline Beecham, Mr. Fernandez served as Managing Director of
Warner Lambert in Argentina for two years. From 1962 to 1970, Mr.
Fernandez was employed by Merck/Frost in Canada. Mr. Fernandez received
a Bachelors of commerce degree from the University of British Columbia
and an MBA from the Ivey School of Business at the University of
Western in Ontario, Canada.
WILLIAM A. PACKER has been a business and industry consultant to a
number of biopharmaceutical companies since 1998. From 1992 until 1998,
Mr. Packer was President and Chief Financial Officer of Virus Research
Institute, Inc., a publicly owned biotechnology company. Prior to this,
Mr. Packer was employed by SmithKline Beecham Plc ("SmithKline"), a
major pharmaceutical company, where
43
<PAGE>
he held various senior management positions, the most recent as Senior
Vice President, Biologicals, in which position he was responsible for
the direction of SmithKline's global vaccine business. Mr. Packer is a
Chartered Accountant.
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 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, and the directors
included in Class III above will hold office until the 2002 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, 1999, 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 2000 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 2000 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 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
--------------------------------------------------------------
8-K
---
<TABLE>
<CAPTION>
Page Herein
-----------
<S> <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, 1999 and 1998 F-2
Consolidated Statements of Operations and of Comprehensive Loss
for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-29
(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule F-30
Schedule II - Valuation and qualifying accounts and reserves F-31
</TABLE>
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.
45
<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 Appendix B to the Registrant's
Definitive Proxy Statement for Annual Meeting of Stockholders
filed with the Securities and Exchange Commission on May 18,
1999, which exhibit is incorporated herein by reference.)
3.2 Bylaws of the Registrant, as amended and restated. (Reference
is made to Appendix C to the Registrant's Definitive Proxy
Statement for Annual Meeting of Stockholders filed with the
Securities and Exchange Commission on May 18, 1999, which
exhibit is incorporated herein by reference.)
3.3 Rights Agreement, dated as of December 22, 1999, between the
Registrant and American Stock Transfer and Trust Company, as
Rights Agent, including the form of Rights Certificate as
Exhibit B thereto. (Reference is made to Exhibit 4.1 to the
Registrant's Form 8-K, filed December 27, 1999 (date of
earliest event reported December 22, 1999), Commission File
No. 1-10581, which exhibit is hereby incorporated by
reference.)
4.1 Registrant's Amended and Restated 1991 Stock Option Plan.
(Reference is made to Appendix D to the Registrant's
Definitive Proxy Statement for Annual Meeting of Stockholders
filed with the Securities and Exchange Commission on May 18,
1999, 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.)
46
<PAGE>
Exhibit
Number Description
- ------ -----------
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.)
4.7 Subscription Agreement between the Registrant and Yungtai Hsu
("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.)
4.8 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.)
4.9 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.)
4.10 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.)
4.11 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. (Reference is made to exhibit
10.1 to the Registrant's Form 10-K filed March 31, 1999,
Commission File No. 1-10581, which is incorporated herein by
reference.)
47
<PAGE>
Exhibit
Number Description
- ------ -----------
10.2 Employment Agreement dated as of August 31, 1998 between the
Registrant and Robert M. Stote, M.D. (Reference is made to
exhibit 10.2 to the Registrant's Form 10-K filed March 31,
1999, Commission File No. 1-10581, which is incorporated
herein by reference.)
10.3 Employment Agreement dated as of July 1, 1998 between the
Registrant and Michael D. Price. (Reference is made to exhibit
10.3 to the Registrant's Form 10-K filed March 31, 1999,
Commission File No. 1-10581, which is incorporated herein by
reference.)
10.4* Employment Agreement dated as of March 9, 1999 between the
Registrant and Robert J. Gyurik.
10.5 Agreement between the Registrant and 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, 1999:
Report on Form 8-K filed December 27, 1999 (date of
earliest event reported December 22, 1999) regarding
adoption of a Stockholder Rights Plan. (Items 5 and
7).
Subsequent to December 31, 1999, the Registrant filed the
following Report on Form 8-K:
None.
48
<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 24, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James R. Murphy Chairman, President, March 24, 2000
- ------------------------------------ Chief Executive Officer
James R. Murphy and Director (principal
executive officer)
/s/Michael McGovern Vice Chairman and Director March 24, 2000
- ------------------------------------
Michael McGovern
/s/ Robert M. Stote Senior Vice President, March 24, 2000
- ------------------------------------ Chief Science Officer and
Robert M. Stote, M.D. Director
/s/ Michael D. Price Vice-President, March 24, 2000
- ------------------------------------ Chief Financial Officer,
Michael D. Price Treasurer, Secretary and
Director (principal
financial and accounting officer)
/s/Robert J. Gyurik Vice President of March 24, 2000
- ------------------------------------ Pharmaceutical Development
Robert J. Gyurik and Director
/s/Charles L. Bolling Director March 24, 2000
- ------------------------------------
Charles L. Bolling
/s/Russell Cleveland Director March 24, 2000
- ------------------------------------
Russell Cleveland
/s/Miguel Fernandez Director March 24, 2000
- ------------------------------------
Miguel Fernandez
/s/William A. Packer Director March 24, 2000
- ------------------------------------
William A. Packer
</TABLE>
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
North Hampton, New Hampshire
We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations and of
comprehensive loss, changes in stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 10, 2000
F-1
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,422 $6,703
Marketable Securities 1,893 -
Receivables, net 4,016 3,228
Inventories, net 965 1,208
Prepaid expenses and other 393 1,322
------ ------
Total current assets 11,689 12,461
------ ------
Fixed assets, net 3,684 3,551
Drug licenses and related costs, net 5,807 2,433
Other non-current assets, net 1,057 1,873
------ ------
$22,237 $20,318
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $2,702 $2,835
Accrued expenses 1,538 1,563
Short term borrowings 952 1,223
Current portion of long term debt 5 5
Debentures called for redemption (Note 15) 5,362 -
------ ------
Total current liabilities 10,559 5,626
------ ------
Long term debt, net - 5,410
------ ------
Other non-current liabilities 104 290
------ ------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $1.00 par value, authorized 2,000 shares,
issued and outstanding, zero shares - -
Common stock,$.02 par value, authorized 35,000 shares,
issued and outstanding, 10,230 and 8,443 shares 204 168
Stock purchase warrants (to purchase 4,806 and 5,928
shares of common stock) 799 556
Additional paid-in capital 87,858 83,728
Accumulated deficit (74,948) (73,858)
Accumulated other comprehensive loss (2,339) (1,602)
------- -------
11,574 8,992
------- -------
$22,237 $20,318
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-2
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
(in thousands except per share data) For the Year Ended
December 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $20,249 $15,243 $14,902
Cost of sales 8,445 6,601 8,010
------- ------- -------
Gross margin 11,804 8,642 6,892
Operating expenses:
Selling, general and administrative 9,982 9,078 7,819
Research and development 685 153 324
Depreciation and amortization 559 303 295
Costs of abandoned acquisitions - 1,176 -
------- ------- -------
Total operating expenses 11,226 10,710 8,438
------- ------- -------
Income (loss) from operations 578 (2,068) (1,546)
Other (income) expenses:
Interest expense 1,168 1,076 1,086
Interest income (244) (499) (123)
Other (income) expense, net (37) (5) 685
------- ------- -------
Loss before income taxes (309) (2,640) (3,194)
Provision (benefit) for income taxes:
Domestic - (280) 280
Foreign 781 516 341
------- ------- -------
Net loss ($1,090) ($2,876) ($3,815)
======== ======== ========
Other comprehensive (income) loss:
Foreign currency translation losses (gains) 737 (253) 388
------- ------- -------
Comprehensive loss ($1,827) ($2,623) ($4,203)
======== ======== ========
Basic and diluted net loss per common share ($0.12) ($0.35) ($0.97)
======== ======== ========
Weighted average common shares outstanding 9,147 8,431 4,072
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands)
- -------------- $.02 Par Value Accumulated
Common Stock Additional Other Other
-------------------- Paid-In Accumulated Comprehensive Equity
Shares Amount Capital Deficit Loss Transactions Total
------ ------ ------- ------- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,345 $67 $71,146 ($67,167) ($1,081) $330 $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) (1,855) 192 8,905
Exercise of Class B Redeemable Warrants 2 - 8 - - - 8
Issuance of warrants - - - - - 364 364
Accrual of dividends - preferred stock - - (101) - - - (101)
Conversion of redeemable preferred stock 15 - 2,439 - - - 2,439
Foreign currency translation adjustment - - - - 253 - 253
Net loss - - - (2,876) - - (2,876)
------- -------- --------- -------- -------- ------- -------
Balance at December 31, 1998 8,443 168 83,728 (73,858) (1,602) 556 8,992
Exercise of Class A Redeemable Warrants 859 18 2,584 - - (39) 2,563
Exercise of other stock warrants 50 1 116 - - (42) 75
Conversion of Debentures 77 1 132 - - - 133
Issuance of warrants to acquire technology - - - - - 375 375
Common stock issued to acquire technology 585 12 838 - - - 850
Common stock issued as compensation 150 3 222 - - 225
Common stock issued to consultants 66 1 187 - - - 188
Expiration of unexercised warrants - - 51 - - (51) -
Foreign currency translation adjustment - - - - (737) - (737)
Net Loss - - - (1,090) - - (1,090)
-------- ------- -------- -------- ------- ------- --------
Balance at December 31, 1999 10,230 $204 $87,858 ($74,948) ($2,339) $799 $11,574
======== ======= ======== ======== ======= ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
(in thousands) 1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ($1,090) ($2,876) ($3,815)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 559 303 295
Non-cash costs of abandoned acquisitions - 158 -
Loss on disposition of subsidiary - - 591
Equity-based compensation expense 225 - 2
Other non-cash items 904 501 265
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (1,495) (599) (137)
Inventories 85 (412) (229)
Prepaid expenses and other current assets 504 (544) (340)
Other assets 109 (72) (649)
Accounts payable and accrued expenses 163 907 257
Other liabilities (27) 70 (222)
------- ------- -------
Net cash used in operating activities (63) (2,564) (3,982)
------- ------- -------
Cash flows from investing activities:
Acquisition of drug delivery technology/drug licenses (1,775) (1,559) (40)
Purchase of marketable securities (1,893) - -
Additions to fixed assets, net (969) (559) (108)
Capitalized acquisition costs - 448 -
Net proceeds from disposition of subsidiary - - 378
Proceeds from sale of investments - - 166
------- ------- -------
Net cash (used in) provided by investing activities (4,637) (1,670) 396
------- ------- -------
</TABLE>
(continued on following page)
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
<TABLE>
<CAPTION>
(in thousands) For the Year Ended
- -------------- December 31,
-------------------------
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from exercise of stock options/warrants, net $2,639 $8 $10,353
Net (decrease) increase in short term borrowings (115) - 363
Payments on capital leases (5) (5) (5)
-------- ------- --------
Net cash provided by financing activities 2,519 3 10,711
-------- ------- --------
Effect of exchange rate changes on cash (100) (183) (433)
-------- ------- --------
Net (decrease) increase in cash and cash equivalents (2,281) (4,414) 6,692
Cash and cash equivalents at beginning of year 6,703 11,117 4,425
-------- ------- --------
Cash and cash equivalents at end of year $4,422 $6,703 $11,117
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the year for (in thousands):
Interest $1,003 $972 $965
======== ======= =======
Taxes $980 $884 $12
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common Stock in exchange for services and the
purchase of drug delivery technology as follows (in thousands):
Shares issued 801 - 1
======== ======= =======
Amount $1,263 - $2
======== ======= =======
</TABLE>
During the year ended December 31, 1999, the Company issued Warrants to purchase
450,000 shares of Common Stock as partial consideration for the purchase of drug
delivery technology of which, 50,000 were exercised during the year ended
December 31, 1999. During the year ended December 31, 1999, 193 of the Company's
12% Convertible Debentures were converted into 77,200 shares of Common Stock.
The Company recorded the assignment of partnership patents and technology with
an estimated value of $553,000 as a distribution from the partnership during the
year ended December 31, 1999.
During the year ended December 31, 1998, the Company issued Warrants to purchase
425,000 shares of Common Stock in exchange for services. 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 accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-6
<PAGE>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY AND OPERATIONS
Bentley Pharmaceuticals, Inc. (the "Company") is a U.S.-based drug delivery
company specializing in the development of products based upon innovative and
proprietary drug delivery systems, which also has a commercial presence in
Europe, where it manufactures, markets and distributes branded and generic
pharmaceutical products. The Company owns rights to certain U.S. and
international patents and related technology covering methods to enhance the
absorption of drugs delivered to biological tissues. The Company is developing
this technology and has targeted U.S., European and other international markets
for the new product applications. The Company was organized under the laws of
the State of Florida in February 1974 and operated as a Florida corporation
until October 1999, when it changed its state of incorporation to Delaware by
effecting a merger with and into Bentley Pharma, Inc., a Delaware corporation,
which was a wholly-owned subsidiary of the Company. Bentley Pharma, Inc. was the
surviving entity of the merger and its name was changed to Bentley
Pharmaceuticals, Inc. The Company also adopted a certificate of incorporation
and bylaws, which conform to Delaware law.
The Company sold its French subsidiary, Chimos/LBF S.A. (referred to herein as
Chimos/LBF), in June 1997 for approximately $3,650,000. Until that time, 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.
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 was 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 during 1997. The exercise of the Class A Warrants during
1997 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 and 5,000 Class B Warrants were exercised during
the first quarter of 1998. The terms of the Class A Warrants were again modified
in February 1999 by extending their expiration date by 183 days to August 16,
1999. Approximately 859,000 Class A Warrants were exercised during 1999,
generating cash proceeds of approximately $2,600,000. The remaining 1,252,000
Class A Warrants that were not exercised by August 16, 1999, expired. The
proceeds from the Class A Warrant exercises are being used for working capital
needs. Given the Company's current liquidity and cash balances and considering
its future strategic plans, management believes that it now has sufficient
resources to fund operations for the year 2000 and into the year 2001. However,
there can be no assurance that changes in the Company's research and development
plans or other events affecting the Company's revenues or operating expenses
will not result in the earlier depletion of the Company's funds. The Company has
also called for the redemption of its 12% Debentures subsequent to year end and
although the Company expects most, if not all, of the Debenture holders to
convert such Debentures into shares of the Company's Common Stock, the
possibility does exist for some Debenture holders to choose redemption instead
of conversion. As long as the price of the Company's Common Stock remains above
$2.625 per share, holders, upon conversion, would receive Common Stock with a
market value greater than the cash they would receive upon redemption.
Management believes it has the liquid resources to purchase any Debentures
presented for redemption using cash and cash equivalents, proceeds from the sale
of marketable securities and/or lines of credit.
The Company had considered and negotiated for 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 the Company's Spanish subsidiary, Laboratorios
Belmac, S.A. 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.
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 to two years 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 1999 acquisition of permeation enhancement
technology (see Note 6), limited development expenditures will be required prior
to entering into formal collaboration with other companies. The Company
emphasizes product distribution in Spain, strategic alliances and product
acquisitions, which management of the Company expects should result in
profitability in the near future.
F-8
<PAGE>
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: Pharma de Espana, Inc. and its wholly-owned
subsidiary, 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.;
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 was accounted for using the equity method until
October 1999, when the Company wrote off its investment after agreeing to accept
an assignment of the patents and technology from its partner in settlement of a
judgment. The Company has decided to dissolve the partnership. 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 Stockholders' Equity.
Foreign currency translation gains and losses arising from cash transactions are
credited to or charged against current earnings.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents for purposes of the
Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
Investments in securities which do not meet the definition of cash equivalents
are classified as marketable securities available-for-sale in the Consolidated
Balance Sheets.
MARKETABLE SECURITIES
The Company has classified its marketable securities as "available-for-sale"
and, accordingly, carries such securities at aggregate fair value. Fair value
has been determined based on quoted market prices. Marketable securities at
December 31, 1999 included $605,000 of Spanish government Treasury Bills, which
mature in May 2000 and $1,288,000 of Federal Home Loan Mortgage Corporation
Notes that mature in March 2000.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out ("FIFO") method.
F-9
<PAGE>
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 3 - 7
Furniture and fixtures 5 - 7
Other 5
Leasehold improvements are amortized over the life of the specific asset or of
the respective lease, whichever is shorter. 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. 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, was responsible for
providing financing and funding of the partnership's activities. In December
1994, the Company commenced litigation against its partner and was awarded a
judgment in the amount of $7.68 million in 1998, which was affirmed by the U.S.
Court of Appeals. The Company attempted to collect the judgment, but was unable
to obtain cash from its partner to satisfy the judgment. Consequently, the
Company decided to seek assignment of the technology and related patents in an
effort to satisfy the judgment. As a result, the technology and patents were
assigned to the Company in October 1999 and the Company treated such assignment
as a distribution from the partnership. The Company has estimated the value of
the patents and technology to be approximately $550,000 and has recorded these
assets as Drug Licenses and Related Costs, Net during the year ended December
31, 1999. Management has determined that no reserve for impairment in value is
necessary at December
F-10
<PAGE>
31, 1999. Although the Company is responsible for funding activities of the
partnership, the partnership is not currently engaged in business activities,
nor does the Company anticipate that it will engage in any business activities
in the future (see Note 5).
RESEARCH AND DEVELOPMENT
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 estimates.
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.
Subsequent to December 31, 1999 the Company called its 12% Debentures, which are
convertible into shares of the Company's Common Stock, for redemption. The
Company expects most, if not all, of the Debenture holders to convert such
Debentures into shares of Common Stock. Upon conversion, the net carrying value
of the Debentures will be recorded as Common Stock and additional paid-in
capital in Stockholders' Equity. If a Debenture holder chooses redemption
instead of conversion, the difference between the redemption amount and the net
carrying value of the Debentures will be expensed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107) "Disclosures
about Fair Value of Financial Instruments" 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 value of approximately
$16,628,000 and $7,406,000 as of December 31, 1999 and 1998, respectively (based
upon market prices on such respective dates). The
F-11
<PAGE>
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, 1999. 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 Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting 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
believe a reserve for returns and allowances is necessary based upon the
Company's favorable historical experience.
INCOME TAXES
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax assets and liabilities
relating to the expected future tax consequences of events that have been
recognized in the Company's consolidated financial statements and tax returns.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
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. Common Stock Equivalents
totaling 3,025,000, 2,861,000 and 3,015,000, representing the effect of
potential exercises of options and warrants and the effect of potential
conversion of Debentures into shares of Common Stock for each of the years ended
December 31, 1999, 1998 and 1997, respectively, were not included in the
computation of diluted loss per common share because the effect would have been
antidilutive.
COMPREHENSIVE INCOME
The difference between net loss as reported and comprehensive loss is the effect
of foreign currency translation losses (gains) totaling $737,000, ($253,000) and
$388,000 for years ended December 31,1999, 1998 and 1997, respectively.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information"
was issued in June 1997 and redefines how operating segments are determined and
requires disclosure of
F-12
<PAGE>
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. SFAS No. 131 was adopted by the Company on January 1, 1998 (see Note
12).
DERIVATIVE INSTRUMENTS AND HEDGING
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" 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. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and is not intended to
be applied retroactively. The Company plans to adopt SFAS No. 133, as amended,
on January 1, 2001. Management does not believe that the adoption of SFAS No.
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,
------------
1999 1998
---- ----
Trade receivables $3,815 $2,972
Other 215 273
----- -----
4,030 3,245
Less-allowance for doubtful accounts (14) (17)
----- -----
$4,016 $3,228
====== ======
F-13
<PAGE>
NOTE 4--INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
------------
1999 1998
---- -----
Raw materials $436 $ 505
Finished goods 599 811
----- -----
1,035 1,316
Less allowance for slow moving inventory (70) (108)
----- -----
$ 965 $1,208
===== ======
NOTE 5--FIXED ASSETS
Fixed assets consist of the following (in thousands):
DECEMBER 31,
------------
1999 1998
----- ----
Land $ 893 $1,040
Buildings 2,789 2,782
Equipment 955 754
Furniture and fixtures 584 539
Leasehold improvements 41 -
Equipment under capital lease 27 27
----- -----
5,289 5,142
Less-accumulated depreciation (1,605) (1,591)
----- -----
$3,684 $3,551
====== ======
Depreciation expense was $283,000, $165,000 and $185,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Net book value of equipment under capital lease was approximately $7,000 and
$12,000 at December 31, 1999 and 1998, respectively.
F-14
<PAGE>
NOTE 6--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (in thousands):
DECEMBER 31,
1999 1998
---- ----
Drug licenses and related costs $6,802 $3,144
Less-accumulated amortization (995) (711)
----- -----
$5,807 $2,433
====== ======
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, approximately 226,000 shares of Common
Stock and ten-year warrants to purchase 450,000 shares of common stock. In
addition, approximately 359,000 shares of Common Stock were conveyed to Conrex
Pharmaceutical Corporation. The total of all consideration paid for the Assets
were approximately $2.6 million. Furthermore, terms of this transaction provide
for certain royalty payments upon commercialization of products using the
technologies.
The Company has accepted assignment of patents and hydrogel drug delivery
technology as settlement of a judgment against its partner and has estimated the
value of the patents and technology to be approximately $550,000 and has
recorded these assets as Drug Licenses and Related Costs, Net during the year
ended December 31, 1999. Management has determined that no reserve for
impairment in value is necessary at December 31, 1999.
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
$385,000, $138,000 and $110,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
F-15
<PAGE>
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
------------
1999 1998
---- ----
Miscellaneous $ 337 $ 315
Foreign income taxes payable 264 242
Other foreign taxes payable 581 562
Accrued payroll 356 444
------ ------
1,538 $1,563
====== ======
NOTE 8--DEBT
Short-term borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate on the note
is 5.3% and 5.9%, respectively. $949 $ 633
Revolving lines of credit (with Spanish financial institutions),
average interest rate is 4.8% and 5.6%, respectively. 3 590
------ ------
$952 $1,223
====== ======
</TABLE>
The weighted average stated interest rate on short-term borrowings outstanding
at December 31, 1999 and 1998 was 5.3% and 5.7%, respectively.
The Company has revolving lines of credit with Spanish financial institutions,
which lines total $3,268,000 at December 31, 1999. At December 31, 1999,
advances outstanding under the lines of credit were approximately $3,000. The
weighted average interest rate at December 31, 1999 was 4.8% and interest is
payable quarterly.
F-16
<PAGE>
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Debentures, maturing February 13, 2006, stated rate of
interest 12% (net of $1,432 and $1,584 discount,
respectively) $5,362 $5,403
Capitalized lease obligations, relating to equipment used
by the Company 5 12
----- -----
5,367 5,415
Less current portion (5,367) (5)
----- -----
Total long term debt $ -0- $5,410
====== ======
</TABLE>
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 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. 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 was extended to August
16, 1999.
During the year ended December 31, 1997, the Underwriter of the Public Offering
exercised 110 Underwriter Warrants, acquiring 110 12% Convertible Debentures and
110,000 Class A Warrants. Twenty-three of the 12% Convertible Debentures were
voluntarily converted into approximately 9,000 shares of Common Stock during the
year ended December 31, 1997 and 193 of the 12% Convertible Debentures were
converted into approximately 77,000 shares of Common Stock during the year ended
December 31, 1999. As of December 31, 1999, 1998 and
F-17
<PAGE>
1997, there were $6,794,000, $6,987,000 and $6,987,000 principal amount of the
12% Convertible Debentures outstanding, respectively.
For financial reporting purposes, the $1,000 purchase price of each Unit was
allocated as follows: $722 to the Debenture, $224 to the conversion discount
feature of the Debenture and $54 to the 1,000 Class A Warrants. None of the Unit
purchase price was allocated to the Class B Warrants. Such allocation was based
upon the relative fair value 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 into shares of Common Stock at any time prior to
the redemption date at a conversion price per share of $2.50 (see Note 15). As a
result of the Company's decision in March 2000 to redeem the Debentures that are
not converted into shares of Common Stock by the redemption date of April 12,
2000, such Debentures have been classified as a current liability as of December
31, 1999.
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 Series A
and B Preferred Stock met the definition of Mandatorily Redeemable Preferred
Stock, it was excluded from the Stockholders' Equity section of the Consolidated
Balance Sheets. As of December 31, 1998, all 290,000 shares 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.
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, 1997 60 $2,338
Accrual of 9% dividends - 101
Conversion (60) (2,439)
------ ------
Balance at December 31, 1998 and 1999 - $ -
====== ======
F-18
<PAGE>
NOTE 10--STOCKHOLDERS' EQUITY
At December 31, 1999 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 4,806
For conversion of debentures 2,902
For exercise of stock options 2,504
For other 3
---------
10,215
=========
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, 1999, stock purchase warrants to purchase an aggregate of
approximately 4,806,000 shares of Common Stock were outstanding, which were
exercisable at prices ranging from $1.50 to $20.00 per share, of which 400,000
warrants have an exercise price of $1.50 per share, 775,000 warrants have an
exercise price of $2.50 per share, 460,000 warrants have an exercise price of
$3.00 per share, 25,000 warrants have an exercise price of $3.50 per share,
approximately 3,106,000 warrants have an exercise price of $5.00 per share,
20,000 warrants have an exercise price of $5.63 per share and 20,000 warrants
have an exercise price of $20.00 per share. The warrants expire through December
2009.
During the year ended December 31, 1999, the Company issued stock purchase
warrants to purchase an aggregate of 450,000 shares of the Company's Common
Stock at $1.50 per share as partial consideration for the purchase of permeation
enhancement technology (see Note 6), of which 50,000 were exercised during 1999,
and issued Class B Warrants to purchase 659,000 shares of Common Stock for $5.00
per share. In addition, approximately 859,000 Class A Warrants were exercised
during the year ended December 31, 1999 to acquire approximately 859,000 shares
of Common Stock and approximately 859,000 Class B Warrants, resulting in net
cash proceeds to the Company of approximately $2,600,000. Warrants to purchase
approximately 1,322,000 shares of Common Stock (including approximately
1,252,000 Class A Warrants) expired unexercised during the year ended December
31, 1999.
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.
F-19
<PAGE>
During 1998, 5000 Class B Warrants were exercised, resulting in the purchase of
2,500 shares of Common Stock. Warrants to purchase approximately 192,000 shares
of Common Stock expired unexercised during the year ended December 31, 1998.
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). 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 and
approximately 4,900,000 Class B Warrants. 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, as discussed above.
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 principal amount 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 value of each on the date of issuance. Warrants to purchase
approximately 120,000 shares of Common Stock expired unexercised during the year
ended December 31, 1997.
In addition, the Company has granted warrants 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.
F-20
<PAGE>
The table below summarizes warrant activity for the years ended December 31,
1997, 1998 and 1999.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE PRICE
(in thousands except per share data) COMMON SHARES PER SHARE
------------- ---------
<S> <C> <C>
Outstanding at December 31, 1996 8,304 $ 3.55
Granted 2,574 $ 4.93
Exercised (5,061) $ 2.02
Canceled (120) $17.34
-----
Outstanding at December 31, 1997 5,697 $ 4.39
Granted 425 $ 2.50
Exercised (2) $ 3.00
Canceled (192) $20.69
-----
Outstanding at December 31, 1998 5,928 $ 3.84
Granted 1,109 $ 3.58
Exercised (909) $ 2.92
Canceled (1,322) $ 3.05
-------
Outstanding at December 31, 1999 4,806 $ 4.17
=====
</TABLE>
COMMON STOCK TRANSACTIONS
During the year ended December 31, 1999, the Company issued approximately
585,000 shares of Common Stock as partial consideration for the acquisition of
permeation enhancement technology, approximately 859,000 shares of Common Stock
as a result of the exercise of approximately 859,000 Class A Warrants,
approximately 77,000 shares of Common Stock upon conversion of 193 of the
Company's 12% Convertible Debentures, 150,000 shares of Common Stock as
compensation in lieu of cash, 66,000 shares of Common Stock for consulting fees
earned in 1996, 1997 and 1998 and 50,000 shares of Common Stock upon exercise of
stock purchase warrants.
F-21
<PAGE>
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 granted 600 shares of
Common Stock to outside Directors as compensation. The Company also issued
approximately 4,900,000 shares 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 12% Debentures.
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 2,504,000 shares of Common Stock have
been reserved for issuance under the Plans, of which approximately 427,000 are
outstanding under the 1991 and 1994 Plans and 1,500,000 are outstanding under
the Executive Plan as of December 31, 1999. 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). No such options were
exercised during the years ended December 31, 1999 or 1998; however, during the
year ended December 31, 1997, 9,000 stock options were exercised to purchase
9,000 shares of the Company's Common Stock.
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 described in SFAS 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,
--------------------------
1999 1998 1997
---- ---- ----
Net loss ($1,365) ($3,067) ($3,938)
Basic and diluted net loss per common share ($0.15) ($0.38) ($1.00)
The preceding pro forma results were calculated using the Black-Scholes
option-pricing model. The following assumptions were used for the years ended
December 31, 1999, 1998 and 1997, respectively: (1) risk-free interest rates of
5.8%, 5.4% and 6.2%; (2) dividend yields of 0.0%;
F-22
<PAGE>
(3) expected lives of 10, 10 and 9.7 years; and (4) volatility of 90.0%, 85.3%
and 73.1%. Results may vary depending on the assumptions applied within the
model.
The table below summarizes activity in the Company's Plans for the years ended
December 31, 1997, 1998 and 1999.
(in thousands except per share data)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
COMMON SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
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
Granted 105 $ 2.98
Canceled (1) $ 2.75
------ ------
Outstanding at December 31, 1999 1,927 $ 5.50
===== ======
</TABLE>
The table below summarizes options outstanding and exercisable at December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY EXERCISABLE
--------------------------------------------------------------- -----------------------------
WEIGHTED
RANGE OF NUMBER WEIGHTED WEIGHTED AVG. NUMBER AVERAGE
EXERCISE OF AVERAGE REMAINING LIFE OF EXERCISE
PRICES OPTIONS EXERCISE PRICE (YEARS) OPTIONS PRICE
------ ------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.50-$2.89 664,856 $2.77 6.8 643,856 $2.78
3.00-3.75 707,500 3.61 6.6 623,000 3.69
4.73 500,000 4.73 6.3 500,000 4.73
11.25-22.50 32,000 19.53 3.7 32,000 19.53
45.00 3,000 45.00 3.1 3,000 45.00
145.00-177.50 20,000 153.38 2.1 20,000 153.38
------------- --------- ------ --- ------ ------
$ 1.50-$177.50 1,927,356 $5.50 6.5 1,821,856 $5.64
============== ========= ====== === ========= =====
</TABLE>
Options and warrants outstanding include approximately 4,806,000 warrants, all
of which are exercisable, and approximately 1,927,000 options, of which
approximately 1,822,000 are vested
F-23
<PAGE>
and exercisable at December 31, 1999. If all such warrants and options, which
are exercisable on December 31, 1999, were exercised, the Company would receive
cash proceeds of approximately $30,600,000.
Options and warrants outstanding at December 31, 1998 included 5,928,000
warrants and 1,823,000 options, of which 5,928,000 and 720,000, respectively,
were exercisable at that date. Options and warrants outstanding at December 31,
1997, included 6,122,000 warrants and 1,741,000 options, of which 6,122,000 and
679,000, respectively, were exercisable at that date.
On December 22, 1999, the Board of Directors adopted a stockholder rights plan.
The Board of Directors approved the declaration of the dividend of one right for
each outstanding share of the Company's Common Stock on the record date of
December 27, 1999. Each of the rights, which are not currently exercisable,
entitles the holder to purchase one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $16.50. The rights will
become exercisable only if any person or group of affiliated persons
beneficially acquire(s) 15% or more of the Company's Common Stock. Under certain
circumstances, each holder of a right (other than the person or group who
acquired 15% or more of the Company's Common Stock) is entitled to purchase a
defined number of shares of the Company's Common Stock at 50% of the market
price of the Common Stock at the time that the right becomes exercisable. The
plan is designed to prevent a potential acquirer from gaining control of the
Company without fairly compensating all of the Company's stockholders and to
protect the Company from coercive takeover attempts.
NOTE 11--PROVISION FOR INCOME TAXES
The Company has recognized a deferred tax asset of approximately $31,120,000 as
of December 31, 1999, primarily related to net operating loss and capital loss
carryforwards. The Company has established a valuation allowance equal to the
full amount of the deferred tax asset, as future domestic operating profits
cannot be assured.
At December 31, 1999, the Company has net operating loss (the "NOL")
carryforwards of approximately $30,900,000 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 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 2008 through 2019.
F-24
<PAGE>
Total income tax expense was $781,000 (all foreign) for the year ended December
31, 1999, which arose from current operations of the Company's foreign
subsidiaries. This amount differs from the amount 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. 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 valuation allowance increased (decreased) by $1,720,000, $10,500,000 and
($2,100,000) for each of the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 12--BUSINESS SEGMENT INFORMATION
The Company is a U.S.-based drug delivery company, specializing in the
development of products based upon innovative and proprietary drug delivery
systems, which also has a commercial presence in Europe. 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
limited product research and development, corporate management, and
administration. 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, 1999, 1998 and
1997. The operating
F-25
<PAGE>
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.
<TABLE>
<CAPTION>
(in thousands)
YEAR ENDED DECEMBER 31, 1999
----------------------------
CORPORATE/
CONSOLIDATION/
SPAIN ELIMINATION CONSOLIDATED
----- ----------- ------------
<S> <C> <C> <C>
Revenues $20,249 - $20,249
Interest income - $244 244
Interest Expense 147 1,021 1,168
Depreciation and amortization expense 289 270 559
Net income (loss) before income taxes 1,686 (1,995) (309)
Income tax expense (benefit) 781 - 781
Net income (loss) 905 (1,995) (1,090)
Fixed assets 3,512 172 3,684
Drug licenses 1,709 4,098 5,807
Total assets 11,739 10,498 22,237
Total liabilities 4,499 6,164 10,663
Expenditures for drug licenses/delivery technology 440 1,335 1,775
Expenditures for fixed assets 799 170 969
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
YEAR ENDED DECEMBER 31, 1998
----------------------------
CORPORATE/
CONSOLIDATION/
SPAIN ELIMINATION CONSOLIDATED
----- ----------- ------------
<S> <C> <C> <C>
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
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
YEAR ENDED DECEMBER 31, 1997
----------------------------
CORPORATE/
CONSOLIDATION/
SPAIN FRANCE ELIMINATION CONSOLIDATED
----- ------ ----------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>
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 two customers exceeded 10% of consolidated revenues during the
year ended December 31, 1999, accounting for 13.0% and 12.6% of 1999
consolidated revenues, respectively and revenues from a single customer exceeded
10% of consolidated revenues during the year ended December 31, 1998, accounting
for 11.5% of 1998 consolidated revenues. 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 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 in 1997. An escrow fund in the amount of
approximately $350,000, representing the balance due the Company, was
established for certain contingent obligations or liabilities. The Company
established a reserve in the amount of $100,000 during 1998 to reflect the
estimated realizable value, taking into consideration certain contingencies
being claimed by the buyer. The Company agreed to accept approximately $207,000
during 1999 in full settlement of the amount owed and charged the remaining
$43,000 to general and administrative expense during the year ended December 31,
F-27
<PAGE>
1999.
In November 1999, Creative Technologies, Inc. ("Creative") commenced a lawsuit
against the Company and others, asserting that the Company breached a brokerage
or finder's fee contract with Creative regarding its 1999 acquisition of
permeation enhancement technology. The Company has made a motion to dismiss the
complaint and each count therein. In the opinion of management, the claims are
without merit and the outcome is expected to have no material effect on the
financial position or results of operations of the Company.
The Company was awarded a judgment of approximately $2,130,000 during the year
ended December 31, 1998, 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 judgment included treble damages
totaling $418,000 related to its civil theft claim and $1,712,000 related to its
breach of employment agreement claim. In addition to establishing a receivable
on its books, the Company has established a reserve equal to the receivable.
Harshbarger filed a Motion for Relief From Judgment in September 1999, alleging
among other things that he was not provided notice of the August 24, 1998 jury
trial. Discovery is ongoing and a hearing is expected to be held to determine
the merits of Harshbarger's claims. In the opinion of management, the outcome is
expected to have no adverse material effect on the financial position or results
of operations of the Company.
The Company is obligated to pay certain royalty payments upon commercialization
of products using technologies acquired in a transaction, which it consummated
during the year ended December 31, 1999 (see Note 6).
The Company leases certain of its assets under noncancellable operating leases,
which expire through the year 2004. Total charges to operations under operating
leases were approximately $442,000, $487,000 and $350,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Future minimum lease payments
under operating leases are as follows:
(in thousands)
YEAR ENDING DECEMBER 31,
------------------------
2000 $400
2001 412
2002 422
2003 435
2004 407
NOTE 14--COSTS OF ABANDONED ACQUISITIONS
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 charge
of $1,176,000 (including $158,000 of non-cash items) in the second quarter of
1998, representing costs of abandoned acquisitions. Of this
F-28
<PAGE>
amount, $448,000 was paid during the year ended December 31, 1997.
NOTE 15--SUBSEQUENT EVENTS
As of March 9, 2000, the Company had received net cash proceeds of $1,894,500
from the exercise of various warrants (including 460 Underwriters' warrants), in
exchange for the issuance of 460 Debentures and 460,000 stock purchase warrants
to the Underwriter of its 1996 public offering and 488,500 shares of Common
Stock, subsequent to December 31, 1999.
On March 9, 2000, the Company's Board of Directors voted to redeem the Company's
12% Convertible Senior Subordinated Debentures. Written notice is being provided
to all holders of the Debentures, which provides that if such Debentures are not
converted into shares of the Company's Common Stock by April 12, 2000, such
remaining Debentures will be redeemed by the Company for 105% of the principal
amount plus accrued interest, or $1,054, per Debenture. Each Debenture is
convertible into 400 shares of the Company's Common Stock until April 12, 2000.
As of March 9, 2000, 269 of the Company's 12% Convertible Debentures had been
voluntarily converted into 107,600 shares of the Company's Common Stock
subsequent to December 31, 1999 and 6,985 of the 12% Convertible Debentures
remain outstanding as of March 9, 2000.
As long as the market price of the Company's Common Stock remains above $2.625
per share, holders, upon conversion, will receive Common Stock having a greater
market value than the cash they would receive upon redemption. However, if the
holders of all 6,985 Debentures outstanding on March 9, 2000 decide not to
convert such Debentures into shares of Common Stock, but decide instead to
receive cash of $1,054 (including accrued interest) for each outstanding
Debenture, the Company would have to pay an aggregate of $7,363,000 to redeem
the Debentures. Consequently, the Company has classified such Debentures as a
current liability as of December 31, 1999.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Bentley Pharmaceuticals, Inc.
North Hampton, New Hampshire
We have audited the consolidated financial statements of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
and have issued our report thereon dated March 10, 2000; 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
Boston, Massachusetts
March 10, 2000
F-30
<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, 1999 $711,000 $385,000 ($101,000) $995,000
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
Goodwill:
For the year ended December 31, 1999 - -
For the year ended December 31, 1998 - -
For the year ended December 31, 1997 $564,000 $564,000(b) -
Reserve for inventory obsolescence:
For the year ended December 31, 1999 $108,000 ($11,000) $27,000(c) $70,000
For the year ended December 31, 1998 125,000 7,000 24,000(c) 108,000
For the year ended December 31, 1997 827,000 (24,000) 678,000 (d) 125,000
</TABLE>
- ----------------------
(a) Effect of exchange rate fluctuations.
(b) Represents goodwill related to the Registrant's French subsidiary,
which was divested in June 1997.
(c) Represents disposition of inventory which has been fully reserved.
(d) 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-31
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 9th day of March 1999 (the
"Effective Date") by and between Bentley Pharmaceuticals. Inc., a Florida
corporation, (the "Employer") and Robert J. Gyurik (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, Pharmaceutical Research 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
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 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 March 9, 1999, the Employer shall pay to the Employee
as compensation for all services rendered by the Employee an annual base salary
of $120,000 plus annual bonuses as determined by the Compensation Committee of
the Board of Directors, subject to Sections 3(d) and 3(e). Annual reviews of the
Employee will be on a calendar year basis.
1
<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, 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 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 of each year. The specific amount of bonus will
be determined based upon (i). attainment of research collaborations and the
value of those collaborations (to be mutually agreed upon with the Compensation
Committee). (ii) In the event of an 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 eligible for a cash
bonus award. Upon a Change in Control (as defined below), the Employee will be
entitled to the maximum cash bonus award.
(e) ANNUAL REVIEW. The Employee shall be reviewed by the CEO and CSO 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. The Employee will be eligible for periodic stock option
grants under the 1991 Stock Option Plan (the "Plan") or another plan as
determined by the Board of Director's Compensation Committee.
(g) SIGN-ON BONUS. The Employee shall be granted such number of shares of the
Employer's common stock that are equivalent to the loss realized by the
Employee as a result of non-vesting of stock options on March 8,1999 by
using a formula of MCHM common stock price on March 8th less the
Employee's option strike price multiplied by the number of options not
vested on that date.
4. DUTIES. The Employee is engaged as the Vice President, Pharmaceutical
Research of the Employer. 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 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
2
<PAGE>
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 in advance
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 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
3
<PAGE>
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 alcohol, amphetamines,
barbiturates, methadone, cannabis, cocaine, PCP, THC, LSD, or narcotic
drug. Should the Employee dispute such a determination, the parties
4
<PAGE>
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.
9. 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 Section 3(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 compensation or
duties as constituted immediately prior to the Change in Control,
5
<PAGE>
(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) 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
6
<PAGE>
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.
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
7
<PAGE>
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: Robert J. Gyurik
65 Lafayette Road 12 Ashbrook Rd.
Third Floor Exeter, NH 03833
North Hampton, NH 03862
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. Robert J. Gyurik
By: /s/ James R. Murphy By: /s/ Robert J. Gyurik
------------------- ---------------------
Compensation Committee Chairman, and CEO
Bentley Pharmaceuticals, Inc.
Board of Directors By: /s/ James R. Murphy
---------------------
11
EXHIBIT 21.1
BENTLEY PHARMACEUTICALS, INC.
LIST OF SUBSIDIARIES
Pharma de Espana, Inc.
Laboratorios Belmac S.A.
Laboratorios Davur 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.
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,
333-28593 and 333-80729 on Form S-3 and Registration Statement No. 33-85154 on
Form S-8, of our reports dated March 10, 2000, appearing in the Annual Report on
Form 10-K of Bentley Pharmaceuticals, Inc. and subsidiaries for the year ended
December 31, 1999.
/s/Deloitte & Touche LLP
Boston, Massachusetts
March 28, 2000
E-1
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