UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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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)
DELAWARE No. 59-1513162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
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(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (603) 964-8006
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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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The number of shares of the Registrant's common stock outstanding as of August
3, 2000 was 13,658,532.
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
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INDEX
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<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations and of Comprehensive
Loss (unaudited) for the three months ended June 30, 2000
and 1999, and the six months ended June 30, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the six months ended June 30, 2000 5
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
(in thousands) JUNE 30, DECEMBER 31,
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2000 1999
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ASSETS
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Current Assets:
<S> <C> <C>
Cash and cash equivalents $5,660 $4,422
Marketable securities - 1,893
Receivables, net 4,053 4,016
Inventories, net 1,445 965
Prepaid expenses and other 503 393
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Total current assets 11,661 11,689
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Fixed assets, net 3,705 3,684
Drug licenses and related costs, net 6,273 5,807
Receivables from related parties 448 -
Other non-current assets, net 259 1,057
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$22,346 $22,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $2,225 $2,702
Accrued expenses 1,395 1,538
Short term borrowings 1,021 952
Current portion of non-current liabilities 5 5
Debentures called for redemption - 5,362
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Total current liabilities 4,646 10,559
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Non-current liabilities 145 104
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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, 13,658 and 10,230 shares 273 204
Stock purchase warrants (to purchase 4,293 and 4,806
shares of common stock) 633 799
Additional paid-in capital 94,438 87,858
Accumulated deficit (75,089) (74,948)
Accumulated other comprehensive loss (2,700) (2,339)
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17,555 11,574
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$22,346 $22,237
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</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
3
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $4,594 $4,750 $9,679 $9,108
Cost of sales 1,736 1,993 3,694 4,008
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Gross profit 2,858 2,757 5,985 5,100
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 2,528 2,469 4,966 4,911
Research and development 298 256 375 301
Depreciation and amortization 133 90 277 185
------ ------ ------ ------
Total operating expenses 2,959 2,815 5,618 5,397
------ ------ ------ ------
Income (loss) from operations (101) (58) 367 (297)
Other (income) expenses:
Interest expense 30 291 296 569
Interest income (92) (54) (184) (122)
Other (income) expense, net - 2 - -
------ ------ ------ ------
Income (loss) before income taxes (39) (297) 255 (744)
Provision for income taxes:
Domestic - - - -
Foreign 143 155 396 255
------ ------ ------ ------
Net loss (182) (452) (141) (999)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses (3) 252 361 751
------ ------ ------ ------
Comprehensive loss ($179) ($704) ($502) ($1,750)
====== ====== ====== ======
Basic net loss per common share ($0.01) ($0.05) ($0.01) ($0.12)
====== ===== ====== =====
Diluted net loss per common share ($0.01) ($0.05) ($0.01) ($0.12)
====== ===== ====== =====
Weighted average common shares outstanding 13,561 8,444 12,172 8,444
====== ===== ====== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
$.02 Par Value
Common Stock Additional Accumu- Accumulated Other
------------ Paid-In lated Other Compre- Equity
Shares Amount Capital Deficit hensive Loss Transactions Total
------ ------ ------- ------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 10,230 $204 $87,858 ($74,948) ($2,339) $799 $11,574
Exercise of Class B Redeemable Warrants 64 1 315 - - (1) 315
Conversion of Debentures 2,901 58 4,682 - - - 4,740
Exercise of stock options/warrants 463 10 1,586 - - (414) 1,182
Exercise of underwriter's warrants - - (3) - - 249 246
Foreign currency translation adjustment - - - - (361) - (361)
Net loss - - - (141) - - (141)
------ ------ ------ ------ ------ ------ ------
Balance at June 30, 2000 13,658 $273 $94,438 ($75,089) ($2,700) $633 $17,555
====== ====== ====== ====== ====== ====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
5
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30,
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(in thousands) 2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss ($141) ($999)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 277 185
Other non-cash items (4) 451
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (259) (702)
Inventories (559) (460)
Prepaid expenses and other current assets (157) (213)
Other assets (159) 107
Accounts payable and accrued expenses (217) 510
Other liabilities (4) 7
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Net cash used in operating activities (1,223) (1,114)
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Cash flows from investing activities:
Additions to drug licenses and related costs (766) (1,423)
Additions to fixed assets (414) (478)
Receivables from related parties (440) -
Proceeds from sale of investments 6,993 -
Purchase of investments (5,025) -
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Net cash provided by (used in) investing activities 348 (1,901)
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</TABLE>
(Continued on following page)
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
6
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(unaudited)
<TABLE>
<CAPTION>
(in thousands) For the Six
Months Ended
June 30,
----------------
2000 1999
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<S> <C> <C>
Cash flows from financing activities:
Net increase in short term borrowings $124 $238
Proceeds from exercise of stock options/warrants 2,049 15
Payments on capital leases (2) (3)
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Net cash provided by financing activities 2,171 250
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Effect of exchange rate changes on cash (58) 81
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Net increase (decrease) in cash and cash equivalents 1,238 (2,684)
Cash and cash equivalents at beginning of period 4,422 6,703
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Cash and cash equivalents at end of period $5,660 $4,019
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (in thousands):
Interest $265 $477
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Income taxes $161 $47
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SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Registrant has issued or is obligated to issue Common Stock in exchange for
services and purchase of drug delivery technology as follows (in thousands):
Number of shares 6 735
====== ======
Amount $45 $1,000
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</TABLE>
During the six months ended June 30, 2000, 7,254 Debentures with principal
amount of $7,254,000, net of discount of $1,585,000 (and applicable unamortized
debt issuance costs totaling $929,000) were converted into approximately
2,901,000 shares of Common Stock.
During the six months ended June 30, 1999, the Registrant issued Warrants to
purchase 450,000 shares of Common Stock as partial consideration for the
purchase of drug delivery technology.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
7
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Registrant") is a
U.S.-based international pharmaceutical and 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 collaborations in the development
and marketing of various product applications, including the treatment of
onychomycosis, delivery of insulin, hormone replacement therapies, vaccines and
peptides. In Spain, the Registrant develops and registers late stage products,
and manufactures, packages and distributes both its own and other companies'
pharmaceutical products.
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant 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 (Generally Recognized As Safe)
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.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at June 30, 2000 and
1999 included herein, have been prepared by the Registrant, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted
8
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Accounting Principles in the United States have been condensed or omitted. It is
suggested that these consolidated financial statements be read in conjunction
with the summary of significant accounting policies and the audited consolidated
financial statements and notes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999.
The consolidated financial statements include the accounts of the Registrant and
its wholly-owned subsidiaries: Pharma de Espana, Inc. and its wholly-owned
subsidiary, Laboratorios Belmac S.A. and its wholly-owned subsidiary,
Laboratorios Davur S.L.; 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. All significant intercompany balances
have been eliminated in consolidation. The financial position and results of
operations of the Registrant's foreign subsidiaries are measured using local
currency as the functional currency. Assets and liabilities of foreign
subsidiaries are translated at the rate of exchange in effect at the end of the
period. Revenues and expenses are translated at the average exchange rate for
the period. Foreign currency translation gains and losses not impacting cash
flows are credited to or charged against Accumulated other comprehensive loss in
the Stockholders' Equity section of the Consolidated Balance Sheets. Foreign
currency translation gains and losses arising from cash transactions are
credited to or charged against current earnings.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended June 30, 2000 and 1999 are presented on a basis
consistent with the audited consolidated financial statements for the year ended
December 31, 1999 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of June 30, 2000 and the results of its operations and its cash
flows for the six months ended June 30, 2000 and 1999. The results of operations
for the three or six months ended June 30, 2000 should not be considered
indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
The Registrant considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents for purposes of
the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
Investments in securities that do not meet the definition of cash equivalents
are classified as marketable securities available-for-sale in the Consolidated
Balance Sheets.
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being determined on
the first in, first out ("FIFO") method and are comprised of the following (in
thousands):
9
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<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
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<S> <C> <C>
Raw materials $561 $436
Finished goods 947 599
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1,508 1,035
Less allowance for slow moving inventory (63) (70)
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$1,445 $965
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</TABLE>
DRUG LICENSES AND RELATED COSTS:
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Registrant's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Carrying values of such assets are reviewed annually by the
Registrant and are adjusted for any diminution in value.
In July 2000, the Registrant announced that, through its subsidiary,
Laboratorios Belmac, it had acquired rights to market and manufacture, in Spain,
the product and trademark, Codeisan, from Abello, a subsidiary of Merck & Co.,
Inc. The brand line consists of tablet and liquid presentations, which will be
marketed and promoted by the Laboratorios Belmac sales force, upon transfer to
Laboratorios Belmac of the rights to commercialize by the Spanish Ministry of
Health. This transfer is expected to occur later in 2000 and, upon completion,
the Registrant is required to pay the seller the full purchase price of
986,000,000 pesetas (approximately $5,600,000). The Registrant has received
financing commitments from lenders in order to finance the acquisition of
Codeisan. Also acquired in the transaction was the associated manufacturing
equipment, which will be transferred to Laboratorios Belmac's production
facilities in Zaragosa, Spain.
In July 2000, the Registrant also announced that it has entered into a strategic
alliance with Teva Pharmaceutical Industries, Ltd., whereby the Registrant will
receive licenses to more than 75 of Teva's products for registration and
marketing in Spain. Teva will supply the bulk pharmaceutical products to the
Registrant and the Registrant's Spanish subsidiaries, Laboratorios Belmac and
Laboratorios Davur will market the products in Spain. Teva was also granted a
right of first refusal to acquire Laboratorios Davur in the event that the
Registrant decides to divest that subsidiary. Sales from the products are
expected to begin gradually over the next 12 months. An investment in additional
sales representatives will be required, along with an increase in regulatory
activities, both of which may create a short term reduction in the Registrant's
earnings.
RECEIVABLES FROM RELATED PARTIES:
The Registrant provided loans to each of Messrs. Murphy, Price and Gyurik, who
are Executive Officers of the Registrant, in the amounts of $250,000, $50,000
and $140,000, respectively, in
10
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March 2000, which Messrs. Murphy, Price and Gyurik used to pay income taxes on
equity-based compensation received in the prior year. The loans, which bear
interest at 6.59% annually, mature in March 2003 and are secured by 28,000,
6,000 and 16,000 shares of the Registrant's Common Stock owned by Messrs.
Murphy, Price and Gyurik, respectively. Accrued interest on such loans totals
approximately $8,000 at June 30, 2000.
DEBT:
During the six months ended June 30, 2000, holders of the Registrant's 12%
Debentures, which were classified as current liabilities at December 31, 1999,
converted all 7,254 of such Debentures, with a net carrying value of
approximately $5,669,000, into approximately 2,901,000 shares of Common Stock.
STOCKHOLDERS' EQUITY:
During the six months ended June 30, 2000, holders of the Registrant's Class B
Redeemable Warrants exercised approximately 126,000 of such warrants, resulting
in the issuance of approximately 63,000 shares of Common Stock, the Underwriters
of the Registrant's 1996 Public Offering exercised 460 Underwriter's Warrants,
resulting in the issuance of 460 Debentures and 460,000 Class A Redeemable
Warrants, other warrant holders exercised an aggregate of 450,000 stock purchase
warrants, resulting in the issuance of 450,000 shares of Common Stock, and
holders of stock purchase options exercised 13,000 of such options, resulting in
the issuance of 13,000 shares of Common Stock. The Registrant received aggregate
net proceeds from all such exercises of approximately $2,049,000.
PROVISION FOR INCOME TAXES:
The Registrant accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 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 Registrant's
consolidated financial statements and tax returns.
The Registrant recorded a provision for income taxes totaling $396,000 for the
six months ended June 30, 2000 as a result of its taxable income in Spain. This
amount differs from the amount computed by applying the U.S. federal income tax
rate of 34% to pretax income primarily as a result of an increase in the
valuation allowance to offset domestic deferred tax assets and certain
nondeductible expenses in Spain.
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BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Basic net income (loss) per common share is presented in accordance with SFAS
No. 128, "Earnings per Share".
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during each period adjusted for actual shares
issued during the period. Diluted loss per common share for the three and six
months ended June 30, 2000 and 1999 is the same as the basic loss per common
share as a result of the net loss reported in each period. The effect of the
Registrant's outstanding stock options and stock purchase warrants were
considered in the diluted loss per share calculation.
NEW ACCOUNTING PRONOUNCEMENTS:
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 by SFAS No. 137, 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective in the
quarter ended December 31, 2000, and requires companies to report any changes in
revenue recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes." The Registrant is currently assessing the impact of SAB
101 on its financial position and results of operations.
12
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Three Months Ended June 30, 2000 versus Three Months Ended June 30, 1999
------------------------------------------------------------------------
The Registrant reported revenues of $4,594,000 and a net loss of $182,000 or
$.01 per basic and diluted common share for the three months ended June 30, 2000
compared to revenues of $4,750,000 and a net loss of $452,000 or $.05 per basic
and diluted common share for the same period in the prior year.
The Registrant's Spanish subsidiary, Laboratorios Belmac S.A. reported an
increase in revenues of 8% in local currency for the three months ended June 30,
2000 compared to the same period of the prior year; however, an 11% decline in
the value of the Spanish Peseta and related Euro negatively impacted revenues by
$541,000, resulting in revenues of $4,594,000 when expressed in U.S. dollars.
Also impacting revenues was a decision by the Spanish Ministry of Health to
suspend from commercialization a class of drugs that included Finedal, a product
marketed by the Registrant. The Registrant's revenues for the three months ended
June 30, 1999 included sales of Finedal totaling approximately $300,000, while
revenues for the three months ended June 30, 2000 included no sales of Finedal.
The Registrant does not anticipate any future sales of this product. The
Registrant has not experienced any product liability claims with respect to this
product and does not expect any such claims. Revenues for the three months ended
June 30, 2000 include $25,000 received from Auxilium A2, Inc. related to
research and licensing agreements.
Gross margins for the three months ended June 30, 2000 increased to 62% compared
to gross margins of 58% in the same period of the prior year, primarily as a
result of manufacturing efficiencies associated with higher levels of production
during the three months ended June 30, 2000 compared to the same period of the
prior year. The Ministry of Health and the Pharma Industry in Spain had entered
into a two-year agreement that expired in December 1999, whereby pharmaceutical
companies in Spain, including the Registrant's Spanish subsidiaries, were taxed
on their growth as a vehicle for funding rising health care costs in Spain. This
agreement has expired and, as of this date, has not been renewed nor has the
Registrant received any indication that it will be renewed or if it is renewed
that the effective date will be retroactive to the beginning of the year.
Consequently, the Registrant has not accrued any such taxes for the three months
ended June 30, 2000. Such taxes would have been approximately $109,000 for the
three months ended June 30, 2000 if the agreement had continued beyond December
31, 1999.
As discussed in the Notes to Consolidated Financial Statements, subsequent to
June 30, 2000, the Registrant entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd., whereby the Registrant, through its Spanish
subsidiaries, will receive licenses for more than 75 of Teva's products for
registration and marketing in Spain. The products will be comprised of both
13
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branded and generic forms. An investment in additional sales representatives
will be required, along with an increase in regulatory activities, both of which
may create a short term reduction in the Registrant's earnings. The Registrant,
through its subsidiary, Laboratorios Davur, has also submitted registrations to
the Spanish Ministry of Health for generic versions of various products, in
response to growing interest in generic products in Spain. The price of generic
products is typically lower than the price for the comparable branded product;
consequently, the Registrant believes that resulting gross margins may be lower
on sales of such products. The Registrant's decision to enter the generic market
was based on its objectives to be competitive and to continue to grow sales and
market share. The Registrant believes that lower gross margins in the future
will be offset by increased sales, the net effect of which is expected to be
beneficial to the results of operations of the Registrant.
Selling, general and administrative expenses increased by $59,000 or 2%, to
$2,528,000 for the three months ended June 30, 2000 compared to $2,469,000 for
the same period of the prior year. Selling, general and administrative expenses,
as a percentage of revenues, increased from 52% of second quarter 1999 revenues
to 55% of second quarter 2000 revenues. A significant portion (63% or
$1,592,000) 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 $37,000, or 2% over the same period
of the prior year, and as a percent of revenues, increased from 33% in the
second quarter of 1999 to 35% in the second quarter of 2000. Selling and
marketing expenses, as reported in U.S. dollars, were approximately $200,000
lower than would have been reported as a result of the 11% decline in the value
of the Spanish Peseta and related Euro in relation to the U.S. dollar during the
period. General and administrative expenses also increased by 2% from $914,000
in the second quarter of 1999 to $936,000 in the second quarter of 2000,
increasing from 19% of second quarter 1999 revenues to 20% of second quarter
2000 revenues. General and administrative expenses, as reported in U.S. dollars,
were approximately $60,000 lower than would have been reported as a result of
the 11% decline in the value of the Spanish Peseta and related Euro in relation
to the U.S. dollar during the period. To the extent practical, the Registrant
intends to continue its efforts to control general and administrative expenses
in its effort to reach and maintain profitability.
The Registrant reported research and development expenses of $298,000 for the
three months ended June 30, 2000 compared to $256,000 for the same period of the
prior year. The increase in the Registrant's costs for research and development
is primarily the result of costs associated with a Phase I Clinical Study
(treatment of nail fungal infections) that is underway at the University of
Alabama at Birmingham and the laboratory in the Registrant's U.S. headquarters,
located in New Hampshire. This laboratory is being used by the Registrant to
develop potential product applications using its 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.
14
<PAGE>
Depreciation and amortization expenses totaled $133,000 for the three months
ended June 30, 2000, compared to $90,000 for the same period of the prior year.
The increase was primarily due to higher depreciation charges with respect to
renovations and improvements at the Registrant's manufacturing facility and its
U.S. laboratory and higher amortization charges with respect to recently
acquired drug licenses and technologies.
Interest expense totaled $30,000 for the three months ended June 30, 2000
compared to $291,000 for the same period of the prior year. The Registrant
incurred first quarter interest expense related to its Debentures of
approximately $233,000, which was eliminated beginning with the second quarter
of 2000, as a result of the conversion of all Debentures into shares of Common
Stock. Interest expense incurred during the second quarter of 2000 resulted
primarily from the outstanding balances on lines of credit used for operating
purposes in Spain.
Interest income totaled $92,000 for the three months ended June 30, 2000
compared to $54,000 for the same period of the prior year primarily as a result
of higher short-term interest bearing investment balances during the three
months ended June 30, 2000 than in the same period of 1999.
The Registrant recorded a provision for foreign income taxes totaling $143,000
for the three months ended June 30, 2000 as a result of taxable income earned in
Spain, compared to $155,000 in the same period of the prior year. The provision
for foreign income taxes would have been $14,000 higher than reported, absent
the 11% decline in the value of the Spanish Peseta and related Euro in relation
to the U.S. dollar during the period. The Registrant has available, for U.S.
federal income tax reporting purposes, net operating loss carry-forwards.
However, since the Registrant has not yet achieved profitable domestic
operations, it has recorded a valuation allowance for the entire net deferred
tax asset.
The Registrant reported a loss from operations of $101,000 for the three months
ended June 30, 2000 compared to a loss of $58,000 in the same period of the
prior year. The impact of non-operating items, primarily interest expense of
$30,000, interest income of $92,000 and provision for income taxes of $143,000
resulted in a net loss of $182,000, or $.01 per basic and diluted common share
(13,561,000 weighted average common shares outstanding) for the three months
ended June 30, 2000, compared to a net loss in the same period of the prior
year, of $452,000, or $.05 per basic and diluted common share (8,444,000
weighted average common shares outstanding).
Six Months Ended June 30, 2000 versus Six Months Ended June 30, 1999
--------------------------------------------------------------------
The Registrant reported revenues of $9,679,000 and a net loss of $141,000 or
$.01 per basic and diluted common share for the six months ended June 30, 2000
compared to revenues of $9,108,000 and a net loss of $999,000 or $.12 per basic
and diluted common share for the same period in the prior year.
15
<PAGE>
The Registrant's Spanish subsidiary, Laboratorios Belmac S.A., reported an
increase in revenues of 19% in local currency for the six months ended June 30,
2000 compared to the same period of the prior year; however, an 11% decline in
the value of the Spanish Peseta and related Euro negatively impacted revenues by
$1,216,000, resulting in revenues of $9,679,000 when expressed in U.S. dollars.
Also impacting revenues was a decision by the Spanish Ministry of Health to
suspend from commercialization a class of drugs that included Finedal, a product
marketed by the Registrant. The Registrant's revenues for the six months ended
June 30, 1999 included sales of Finedal totaling approximately $450,000, while
revenues for the three months ended June 30, 2000 included Finedal sales of
approximately $200,000. The Registrant does not anticipate any future sales of
this product. The Registrant has not experienced any product liability claims
with respect to this product and does not expect any such claims. Revenues for
the six months ended June 30, 2000 include $25,000 received from Auxilium A2,
Inc. related to research and licensing agreements.
Gross margins for the six months ended June 30, 2000 increased to 62% compared
to gross margins of 56% in the same period of the prior year, primarily as a
result of manufacturing efficiencies associated with higher levels of production
during the six months ended June 30, 2000 compared to the same period of the
prior year. The Ministry of Health and the Pharma Industry in Spain had entered
into a two-year agreement that expired in December 1999, whereby pharmaceutical
companies in Spain, including the Registrant's Spanish subsidiaries, were taxed
on their growth as a vehicle for funding rising health care costs in Spain. This
agreement has expired and, as of this date, has not been renewed nor has the
Registrant received any indication that it will be renewed or if it is renewed
that the effective date will be retroactive to the beginning of the year.
Consequently, the Registrant has not accrued any such taxes for the six months
ended June 30, 2000. Such taxes would have been approximately $245,000 for the
six months ended June 30, 2000 if the agreement had continued beyond December
31, 1999.
As discussed in the Notes to Consolidated Financial Statements, subsequent to
June 30, 2000, the Registrant entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd., whereby the Registrant, through its Spanish
subsidiaries, will receive licenses for more than 75 of Teva's products for
registration and marketing in Spain. The products will be comprised of both
branded and generic forms. An investment in additional sales representatives
will be required, along with an increase in regulatory activities, both of which
may create a short term reduction in the Registrant's earnings. The Registrant,
through its subsidiary, Laboratorios Davur, has also submitted registrations to
the Spanish Ministry of Health for generic versions of various products, in
response to growing interest in generic products in Spain. The price of generic
products is typically lower than the price for the comparable branded product;
consequently, the Registrant believes that resulting gross margins may be lower
on sales of such products. The Registrant's decision to enter the generic market
was based on its objectives to be competitive and to continue to grow sales and
market share. The Registrant believes that lower gross margins in the future
will be offset by increased sales, the net effect of which is expected to be
beneficial to the results of operations of the Registrant.
16
<PAGE>
Selling, general and administrative expenses increased by $55,000 or 1%, to
$4,966,000 for the six months ended June 30, 2000 compared to $4,911,000 for the
same period of the prior year. Selling, general and administrative expenses, as
a percentage of revenues, were reduced from 54% of first half 1999 revenues to
51% of first half 2000 revenues as a result of the Registrant's 6% increase in
revenues and its efforts to control general and administrative expenses. A
significant portion (63% or $3,138,000) 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 $168,000, or
6% over the same period of the prior year, however, as a percent of revenues,
decreased slightly from 33% in the first half of 1999 to 32% in the first half
of 2000. Selling and marketing expenses, as reported in U.S. dollars, were
approximately $410,000 lower than would have been reported as a result of the
11% decline in the value of the Spanish Peseta and related Euro in relation to
the U.S. dollar during the period. General and administrative expenses decreased
by 6% from $1,941,000 in the first half of 1999 to $1,828,000 in the first half
of 2000, and decreased from 21% of first half 1999 revenues to 19% of first half
2000 revenues. General and administrative expenses, as reported in U.S. dollars,
were approximately $115,000 lower than would have been reported as a result of
the 11% decline in the value of the Spanish Peseta and related Euro in relation
to the U.S. dollar during the period. To the extent practical, the Registrant
intends to continue its efforts to control general and administrative expenses
in its effort to reach and maintain profitability.
The Registrant reported research and development expenses of $375,000 for the
six months ended June 30, 2000 compared to $301,000 for the same period of the
prior year. Amounts charged to research and development totaled $536,000 for the
six months ended June 30, 2000 and were offset by $161,000 as a result of a
negotiated reduction in an amount previously accrued for research and
development expenses. The increase in the Registrant's costs for research and
development is primarily the result of costs associated with a Phase I Clinical
Study (treatment of nail fungal infections) that is underway at the University
of Alabama at Birmingham and the laboratory in the Registrant's U.S.
headquarters, located in New Hampshire. This laboratory is being used by the
Registrant to develop potential product applications using its 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 $277,000 for the six months ended
June 30, 2000, compared to $185,000 for the same period of the prior year. The
increase was primarily due to higher depreciation charges with respect to
renovations and improvements at the Registrant's manufacturing facility and its
U.S. laboratory and higher amortization charges with respect to recently
acquired drug licenses and technologies.
Interest expense totaled $296,000 for the six months ended June 30, 2000
compared to $569,000 for the same period of the prior year. The Registrant
incurred first quarter interest expense related to the Debentures of
approximately $233,000, which was eliminated beginning in the
17
<PAGE>
second quarter of 2000, as a result of the conversion of all Debentures into
shares of Common Stock.
Interest income was $184,000 for the six months ended June 30, 2000 compared to
$122,000 for the same period of the prior year primarily as a result of higher
short-term interest bearing investment balances during the six months ended June
30, 2000 than in the same period of 1999.
The Registrant recorded a provision for foreign income taxes totaling $396,000
for the six months ended June 30, 2000 as a result of taxable income earned in
Spain, compared to $255,000 in the same period of the prior year. The provision
for foreign income taxes would have been $37,000 higher than reported, absent
the 11% decline in the value of the Spanish Peseta and related Euro in relation
to the U.S. dollar during the period. The Registrant has available, for U.S.
federal income tax reporting purposes, net operating loss carry-forwards.
However, since the Registrant has not yet achieved domestic operations, it has
recorded a valuation allowance for the entire net deferred tax asset.
The Registrant reported income from operations of $367,000 for the six months
ended June 30, 2000 compared to a loss of $297,000 in the same period of the
prior year. The impact of non-operating items, primarily interest expense of
$296,000, interest income of $184,000 and provision for income taxes of $396,000
resulted in a net loss of $141,000, or $.01 per basic and diluted common share
(12,172,000 weighted average common shares outstanding) for the six months ended
June 30, 2000, compared to the net loss in the same period of the prior year, of
$999,000, or $.12 per basic and diluted common share (8,444,000 weighted average
common shares outstanding).
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
Total assets increased from $22,237,000 at December 31, 1999 to $22,346,000 at
June 30, 2000, while Stockholders' Equity increased from $11,574,000 at December
31, 1999 to $17,555,000 at June 30, 2000. The increase in Stockholders' Equity
reflects primarily the conversion of 7,254 of the Registrant's 12% Convertible
Debentures into approximately 2,901,000 shares of Common Stock, the exercise of
126,000 Class B Redeemable Warrants resulting in the issuance of 63,000 shares
of Common Stock, the exercise of 460 Underwriter's Warrants resulting in the
issuance of 460 Debentures and 460,000 Class A Redeemable Warrants, the exercise
of stock purchase warrants to purchase an aggregate of 450,000 shares of Common
Stock and the exercise of stock purchase options to purchase 13,000 shares of
Common Stock, partially offset by the negative impact of the fluctuation of the
Spanish peseta (and related Euro) exchange rate on the foreign currency
translation and the net loss of $141,000 for the six months ended June 30, 2000.
The Registrant's working capital increased from $1,130,000 at December 31, 1999
to $7,015,000 at June 30, 2000, primarily as a result of conversion of 7,254 of
the Registrant's 12% Debentures into shares of Common Stock and cash proceeds of
approximately $2,049,000 received from the exercise of 126,000 Class B Warrants,
460 Underwriter's Warrants, 450,000 other stock purchase warrants and 13,000
stock purchase options during the first half of 2000.
18
<PAGE>
Cash and cash equivalents increased from $4,422,000 at December 31, 1999 to
$5,660,000 at June 30, 2000, primarily as a result of cash proceeds of
approximately $2,049,000 received from the exercise of 126,000 Class B Warrants,
460 Underwriter's Warrants, 450,000 other stock purchase warrants and 13,000
stock purchase options and as a result of the maturities of approximately
$1,893,000 of marketable securities, partially offset by use of cash for working
capital purposes and investing activities. Included in cash and cash equivalents
at June 30, 2000 are approximately $5,137,000 of short-term investments
considered to be cash equivalents.
Accounts receivable increased from $4,016,000 at December 31, 1999 to $4,053,000
at June 30, 2000 and the Registrant has not experienced any material delinquent
accounts on its trade receivables. Inventories increased to $1,445,000 at June
30, 2000 compared to $965,000 at December 31, 1999 primarily as a result of raw
materials purchases and production of finished goods in anticipation of higher
levels of sales, partially offset by fluctuation in foreign currency exchange
rates.
Prepaid expenses and other current assets increased from $393,000 at December
31, 1999 to $503,000 at June 30, 2000, primarily as a result of prepaid expenses
which are being amortized over the applicable periods to be benefited, partially
offset by recurring amortization charges and the effect of fluctuations in
foreign currency exchange rates.
The combined total of accounts payable and accrued expenses decreased from
$4,240,000 at December 31, 1999 to $3,620,000 at June 30, 2000, primarily due to
payment of an amount previously accrued for research and development expenses, a
portion of which was reduced and offset against research and development
expenses during the six months ended June 30, 2000, inventory purchases and
fluctuations in foreign currency exchange rates. Short-term borrowings increased
from $952,000 at December 31, 1999 to $1,021,000 at June 30, 2000, as a result
of higher outstanding balances on lines of credit used for operating purposes in
Spain, partially offset by the effect of fluctuations in foreign currency
exchange rates.
Debentures called for redemption totaling $5,362,000 at December 31, 1999 were
reduced to zero at June 30, 2000 as a result of the conversion of all 7,254
Debentures into approximately 2,901,000 shares of Common Stock, partially offset
by accretion recorded on the Debentures prior to conversion. As discussed below,
the Registrant has secured financing commitments to fund the acquisition of
Codeisan, which is expected to occur later in 2000. Such borrowings, totaling
approximately $5,600,000, will be reflected as debt on the Registrant's
Consolidated Balance Sheets upon completion of this transaction.
Fixed assets, net increased from $3,684,000 at December 31, 1999 to $3,705,000
at June 30, 2000, due primarily to additions to machinery and equipment and
renovations at the Spanish manufacturing facility as well as computer equipment
purchases at the U.S. offices, partially offset by recurring depreciation
charges and the effect of fluctuations in foreign currency exchange rates.
19
<PAGE>
Drug licenses and related costs, net increased from $5,807,000 at December 31,
1999 to $6,273,000 at June 30, 2000, primarily due to the additions to drug
licenses and related costs, partially offset by the effect of fluctuations in
foreign currency exchange rates and recurring amortization charges. In July
2000, the Registrant announced that, through its subsidiary, Laboratorios
Belmac, it had acquired rights to market and manufacture, in Spain, the product
and trademark, Codeisan, from Abello, a subsidiary of Merck & Co., Inc. Upon
completion of the transfer of the rights by the Spanish Ministry of Health later
in 2000, the Registrant will be required to pay the seller the full purchase
price of 986,000,000 pesetas (approximately $5,600,000). The Registrant has
received financing commitments from lenders in order to finance the acquisition
of Codeisan. Also acquired in the transaction was the associated manufacturing
equipment, which will be transferred to Laboratorios Belmac's production
facilities in Zaragosa, Spain.
Receivables from related parties represent loans totaling $440,000 made to
executive officers of the Registrant in March 2000. Proceeds from the loans were
used to pay the income taxes on stock-based compensation provided to such
officers in the prior year. The loans, in the form of promissory notes, are
secured by an aggregate of 50,000 shares of Common Stock owned by the officers
and bear interest at 6.59% annually. Accrued interest payable totaling $8,000 is
included in the amounts receivable at June 30, 2000.
Other non-current assets decreased from $1,057,000 at December 31, 1999 to
$259,000 at June 30, 2000, primarily due to the conversion of all 7,254 of the
Registrant's 12% Debentures into approximately 2,901,000 shares of Common Stock.
Unamortized debt issuance costs totaling $929,000 were credited to Stockholders'
Equity as a result of such conversions. Other non-current assets were also
reduced as a result of the effect of fluctuations in foreign currency exchange
rates and recurring amortization charges during the period.
Non-current liabilities increased from $104,000 at December 31, 1999 to $145,000
at June 30, 2000, primarily as a result of recording a liability to recognize
the Registrant's obligation to issue Common Stock to employees' 401(k)
retirement plan accounts in conjunction with the Registrant's 401(k) matching
program.
Investing activities, primarily proceeds received from the sale of investments,
partially offset by additions to drug licenses and related costs, primarily in
Spain; additions to machinery and equipment and capital improvements to the
manufacturing facility in Spain as well as computer equipment purchases at the
U.S. offices; and loans made to Executive Officers of the Registrant, the
proceeds of which were used to pay income taxes on stock-based compensation,
provided net cash of $348,000 during the six months ended June 30, 2000.
Financing activities, primarily the exercise of 126,000 Class B Warrants, the
exercise of 460 Underwriter's Warrants, the exercise of other stock purchase
warrants to purchase an aggregate of 450,000 shares of Common Stock and the
exercise of stock purchase options to purchase 13,000 shares of Common Stock and
proceeds from short term borrowings for working capital purposes in Spain during
the six months ended June 30, 2000, provided net cash of $2,171,000. Operating
activities for the six months ended June 30, 2000 used net cash of $1,223,000.
20
<PAGE>
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 operations for
the periods presented.
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 and acquisition of
Codeisan for approximately $5,600,000 for which financing has been secured), 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 sufficient revenues
and cash flow to support the Registrant's operating 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
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.
NEW ACCOUNTING PRONOUNCEMENTS
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 by SFAS No. 137, 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective in the
quarter ended December 31, 2000, and requires companies to report any changes in
revenue recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board Opinion No. 20,
21
<PAGE>
"Accounting Changes." The Registrant is currently assessing the impact of SAB
101 on its financial position and results of operations.
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 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 the 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 has been used
by consumers, retailers, companies and public administrations since 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 June 30, 2000
and December 31, 1999 was 174.27 and 165.23 pesetas per U.S. dollar,
respectively. The weighted average exchange rate for the six months ended June
30, 2000 and 1999 was 173.49 and 152.86 pesetas per U.S. dollar, respectively.
The effect of foreign currency fluctuations on long lived assets for the six
months ended June 30, 2000 was a decrease of $361,000 and the cumulative
historical effect was a decrease of $2,700,000, as reflected in the Registrant's
Consolidated Balance Sheets in the "Liabilities and Stockholders' Equity"
section. Although exchange rates fluctuated significantly in recent years, 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.
Interest Rates. The weighted average interest rate on the Registrant's short
term borrowings is 5% and the balance outstanding is $1,021,000 as of June 30,
2000. The effect of an increase in the interest rate of one hundred basis points
(to 6%) would have the effect of increasing interest expense by approximately
$10,000 annually.
22
<PAGE>
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
--------------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
------------------------------------------------
The statements contained in this Quarterly Report on Form 10-Q, which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of Bentley Pharmaceuticals, Inc. ("Bentley"),
the occurrence of which involve certain risks and uncertainties that could cause
Bentley's actual results to differ materially from those expected by Bentley,
including the risk that we could be required to cut back or stop operations if
we are unable to raise or obtain needed funding; that we have a history of
losses and if we do not achieve profitability we may not be able to continue our
business in the future; that we may be restricted from using our net operating
loss carry forwards due to a change in equity ownership and a change in our tax
year; that successful development of current and future products is uncertain;
that clinical trial results may result in failure to obtain regulatory approval
and inability to sell products; that our patent position is uncertain and our
success depends on our proprietary rights; that we may have to lower prices or
spend more money to effectively compete against companies with greater resources
than us, which could result in lower revenues and/or profits; that rapid
technological change may result in our products becoming obsolete before we
recoup a significant portion of related costs; that pharmaceutical pricing is
uncertain and may result in a negative effect on our profitability; that we
depend on third parties for commercialization in the United States; that as a
producer of "Orphan Drugs" we may be required to continue producing the product
regardless of its potential; that we depend on key personnel and must continue
to attract and retain key employees; that we face product liability risks; that
we face risks when doing business outside of the United States; that our
computer systems may fail, which may disrupt our business; that your percentage
of ownership, voting power and price of Bentley common stock may decrease as a
result of events which increase the number of shares of our outstanding common
stock; that obligations in connection with warrants and options may hinder our
ability to obtain future financing; that your interest in Bentley may be diluted
by the issuance of preferred stock with greater rights than the common stock,
which we can sell or issue at any time; that we have not paid dividends on our
common stock and do not intend to pay dividends in the foreseeable future; that
certain laws and provisions in our certificate of incorporation and by laws make
it more difficult or discourage third parties from attempting to control
Bentley, and other uncertainties detailed in Bentley's Annual Report on Form
10-K (SEC File No. 1-10581) for the year ended December 31, 1999.
23
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Stockholders of the Registrant was held on June 9, 2000
for the purpose of electing three directors. Proxies for the meeting were
solicited pursuant to Regulation 14D of the Securities Exchange Act of 1934, as
amended, and there was no solicitation in opposition. The following members were
elected to the Registrant's Board of Directors.
<TABLE>
<CAPTION>
Nominee Term Expiring Shares Voted For Shares Voted Against
------- ------------- ---------------- --------------------
<S> <C> <C> <C>
Russell Cleveland 2003 12,604,204 32,034
Michael McGovern 2003 12,604,217 32,021
Michael D. Price 2003 12,604,094 32,144
</TABLE>
Directors whose terms of office continued after the meeting are as follows:
Name Term Expiring
---- -------------
James R. Murphy 2002
Robert M. Stote 2002
Miguel Fernandez 2002
Robert J. Gyurik 2001
Charles L. Bolling 2001
William A. Packer 2001
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)Exhibits:
27.1 Financial Data Schedule (Filed herewith.)
(b)Reports on Form 8-K filed during the quarter ended June 30, 2000:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
June 30, 2000.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 2000.
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
-----------------------------
Registrant
August 3, 2000 By: /s/ James R. Murphy
-----------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
August 3, 2000 By: /s/ Michael D. Price
-----------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)
