UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
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DELAWARE No. 59-1513162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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 November
2, 2000 was 13,914,132.
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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INDEX
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Part I. FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations and of Comprehensive
Income (Loss) (unaudited) for the three months ended
September 30, 2000 and 1999, and the nine months ended 4
September 30, 2000 and 1999
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 2000 5
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 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 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 26
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(unaudited)
(in thousands) SEPTEMBER 30, DECEMBER 31,
------------ ------------
2000 1999
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ASSETS
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Current Assets:
Cash and cash equivalents $4,349 $4,422
Marketable securities - 1,893
Receivables, net 4,474 4,016
Inventories, net 1,434 965
Prepaid expenses and other 597 393
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Total current assets 10,854 11,689
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Fixed assets, net 3,614 3,684
Drug licenses and related costs, net 10,582 5,807
Receivables from related parties 456 -
Other non-current assets, net 214 1,057
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$25,720 $22,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $1,784 $2,702
Accrued expenses 1,243 1,538
Short-term borrowings 4,423 952
Current portion of non-current liabilities 5 5
Debentures called for redemption - 5,362
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Total current liabilities 7,455 10,559
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Long-term debt 1,428 -
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Non-current liabilities 165 104
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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, 13,685 and 10,230 shares 273 204
Stock purchase warrants (to purchase 4,067 and 4,806
shares of common stock) 633 799
Additional paid-in capital 94,573 87,858
Accumulated deficit (75,508) (74,948)
Accumulated other comprehensive loss (3,299) (2,339)
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16,672 11,574
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$25,720 $22,237
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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 INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share data) For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
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2000 1999 2000 1999
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Sales $3,626 $5,187 $13,305 $14,295
Cost of sales 1,483 2,062 5,177 6,070
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Gross profit 2,143 3,125 8,128 8,225
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Operating expenses:
Selling, general and administrative 2,243 2,438 7,209 7,349
Research and development 233 226 608 527
Depreciation and amortization 143 136 420 321
------- ------- ------- -------
Total operating expenses 2,619 2,800 8,237 8,197
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Income (loss) from operations (476) 325 (109) 28
Other (income) expenses:
Interest expense 46 291 342 860
Interest income (85) (58) (269) (180)
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Income (loss) before income taxes (437) 92 (182) (652)
(Benefit) provision for income taxes (18) 280 378 535
-------- ------- ------- -------
Net loss (419) (188) (560) (1,187)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses 599 (196) 960 555
------- ------- ------- -------
Comprehensive income (loss) ($1,018) $8 ($1,520) ($1,742)
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Basic and diluted net loss per common share ($0.03) ($0.02) ($0.04) ($0.14)
======== ======= ======= ========
Weighted average common shares outstanding 13,662 9,522 12,672 8,808
======= ====== ======= =======
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The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
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BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
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$.02 Par Value
Common Stock Additional Accumu- Accumulated Other
------------ Paid-In lated Other Compre- Equity
Shares Amount Capital Deficit hensive Loss Transactions Total
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Balance at December 31, 1999 10,230 $204 $87,858 ($74,948) ($2,339) $799 $11,574
Exercise of Class B Redeemable Warrants 90 1 447 - - (2) 446
Conversion of Debentures 2,901 58 4,682 - - - 4,740
Exercise of stock options/warrants 464 10 1,589 - - (413) 1,186
Exercise of underwriter's warrants - - (3) - - 249 246
Foreign currency translation adjustment - - - - (960) - (960)
Net income (loss) - - - (560) - - (560)
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Balance at September 30, 2000 13,685 $273 $94,573 ($75,508) ($3,299) $633 $16,672
=========== ========= =========== ========== ========== =========== ===========
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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)
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For the Nine
Months Ended
September 30,
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(In thousands) 2000 1999
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Cash flows from operating activities:
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Net loss ($560) ($1,187)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 420 321
Other non-cash items 42 552
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (277) (335)
Inventories (676) (199)
Prepaid expenses and other current assets (343) (352)
Other assets (126) 102
Accounts payable and accrued expenses (483) 88
Other liabilities 6 (2)
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Net cash used in operating activities (1,997) (1,012)
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Cash flows from investing activities:
Additions to drug licenses and related costs (5,375) (1,518)
Additions to fixed assets (680) (785)
Receivables from related parties (440) -
VAT receivable (716) -
Proceeds from sale of investments 10,843 -
Purchase of investments (8,858) (1,271)
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Net cash used in investing activities (5,226) (3,574)
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(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)
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For the Nine
Months Ended
September 30,
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2000 1999
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Cash flows from financing activities:
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Net increase (decrease) in short-term borrowings $3,596 ($174)
Net increase in long-term debt 1,428 -
Proceeds from exercise of stock options/warrants 2,169 2,577
Payments on capital leases (4) (4)
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Net cash provided by financing activities 7,189 2,399
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Effect of exchange rate changes on cash (39) 137
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Net decrease in cash and cash equivalents (73) (2,050)
Cash and cash equivalents at beginning of period 4,422 6,703
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Cash and cash equivalents at end of period $4,349 $4,653
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (in thousands):
Interest $299 $699
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Income taxes $346 $265
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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 8 801
======= ======
Amount $67 $1,188
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During the nine months ended September 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 nine months ended September 30, 1999, the Registrant issued Warrants
to purchase 450,000 shares of Common Stock as partial consideration for the
purchase of drug delivery technology. Fifty of the Registrant's 12% Convertible
Debentures were converted into 20,000 shares of Common Stock during the nine
months ended September 30, 1999.
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 through 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.
The Registrant anticipated the opportunities that the recently created generic
market in Spain present and began taking measures over two years ago to enter
the Spanish generic market. The Registrant created a wholly-owned subsidiary to
register, market and distribute generic pharmaceutical products in Spain and
began aligning its business model to be competitive in this arena, including
hiring and training a new generic sales force, submission of generic-equivalent
products to the Spanish Ministry of Health for approval and a marketing campaign
designed to position the Registrant as a leader in the Spanish generic market.
In July 2000, the Registrant
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also announced that it has entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd., whereby the Registrant will initially 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, but will progress for the next two to three years. 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.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at September 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 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 September 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 September 30, 2000 and the results of its operations and its cash
flows for the nine months ended September 30, 2000 and 1999. The results of
operations
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for the three or nine months ended September 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):
September 30, 2000 December 31, 1999
-------------------- ------------------
Raw materials $496 $436
Finished goods 996 599
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1,492 1,035
Less allowance for slow moving inventory (58) (70)
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$1,434 $965
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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 approval of
the transfer to Laboratorios Belmac of the rights to commercialize by the
Spanish Ministry of Health. Upon completion of the transfer of these rights
during the three months ended September 30, 2000, the Registrant paid to the
seller of Codeisan the full purchase price of 986,000,000 pesetas (approximately
$5,200,000). The Registrant financed 942,000,000 pesetas (approximately
$4,900,000) of the purchase, which is reflected as a combination of short-term
and long-term debt on the Registrant's Consolidated Balance Sheets.
10
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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:
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 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 $16,000 at September 30, 2000.
DEBT:
During the nine months ended September 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.
The Registrant financed 942,000,000 pesetas (approximately $4,900,000) of the
purchase of the rights to Codeisan in Spain and related manufacturing equipment,
which is reflected as a combination of short-term and long-term debt on the
Registrant's Consolidated Balance Sheets.
STOCKHOLDERS' EQUITY:
During the nine months ended September 30, 2000, holders of the Registrant's
Class B Redeemable Warrants exercised approximately 179,000 of such warrants,
resulting in the issuance of approximately 90,000 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 14,000 of such
options, resulting in the issuance of 14,000 shares of Common Stock. The
Registrant issued an aggregate of approximately 554,000 shares of Common Stock
and received aggregate net proceeds from all such exercises of approximately
$2,169,000.
Subsequent to September 30, 2000, holders of the Registrant's Class B Redeemable
Warrants exercised 18,400 of such warrants, resulting in the issuance of 9,200
shares of Common Stock and other warrant holders exercised an aggregate of
220,000 stock purchase warrants resulting in the issuance of 220,000 shares of
Common Stock. The Registrant received aggregate net proceeds from all such
exercises of approximately $658,500.
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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 benefit for foreign income taxes totaling $18,000 for
the three months ended September 30, 2000 as a result of reporting a loss for
tax purposes in Spain. The benefit is the result of a tax loss incurred in Spain
during the three months ended September 30, 2000, however, the Spanish
subsidiary did record net income for the quarter ended September 30, 2000 after
the elimination of certain inter-company charges. The Registrant recorded a
provision for income taxes totaling $378,000 for the nine months ended September
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.
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 nine
months ended September 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.
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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.
13
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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 September 30, 2000 versus Three Months Ended September 30,
--------------------------------------------------------------------------------
1999
----
The Registrant reported revenues of $3,626,000 and a net loss of $419,000 or
$.03 per basic and diluted common share for the three months ended September 30,
2000 compared to revenues of $5,187,000 and a net loss of $188,000 or $.02 per
basic and diluted common share for the same period in the prior year.
The Registrant's Spanish subsidiary, Laboratorios Belmac S.A. reported a
decrease in revenues of 20% in local currency for the three months ended
September 30, 2000 compared to the same period of the prior year; in addition, a
16% decline in the value of the Spanish Peseta and related Euro negatively
impacted revenues by $562,000, resulting in revenues generated in Spain of
$3,586,000 when expressed in U.S. dollars. Revenues were impacted in the third
quarter by increased generic competition that has reduced sales of certain of
the Registrant's branded products. The Registrant expects generic competitive
pressure to continue to impact sales of its branded products that are subject to
generic competition, which may result in lower sales until such time that the
Registrant's generic products can capture sufficient market share to offset this
impact. The Registrant anticipated the opportunities that the recently created
generic market in Spain present and began taking measures over two years ago to
enter the Spanish generic market. The Registrant, through its wholly-owned
subsidiary, began to register, market and distribute generic pharmaceutical
products in Spain and began aligning its business model to be competitive in
this arena, including hiring and training a new generic sales force, submission
of generic-equivalent products to the Spanish Ministry of Health for approval
and a marketing campaign designed to position the Registrant as a leader in the
Spanish generic market. 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 previously marketed by the Registrant. The
Registrant's revenues for the three months ended September 30, 1999 included
sales of Finedal totaling approximately $255,000, while revenues for the three
months ended September 30, 2000 included no sales of Finedal. The Registrant
does not anticipate any future sales of this product nor does it anticipate
incurring any future costs with respect to this product. Revenues for the three
months ended September 30, 2000 include fees derived from research and product
formulation activities performed in the Unites States, which total $40,000.
Gross margins for the three months ended September 30, 2000 decreased slightly
to 59% compared to gross margins of 60% in the same period of the prior year,
primarily as a result of the mix of products sold as well as the lower sales
volume during the three months ended September 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
14
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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 September 30, 2000. Such taxes would have been
approximately $90,000 for the three months ended September 30, 2000 if the
agreement had continued beyond December 31, 1999.
The Registrant entered into a strategic alliance with Teva Pharmaceutical
Industries, Ltd. in July 2000, whereby the Registrant, through its Spanish
subsidiaries, has received the right to register and market, in Spain, more than
75 of Teva's products. 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 increase in the Registrant's losses. 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 a generic product
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 remain competitive and 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 decreased by $195,000 or 8%, to
$2,243,000 for the three months ended September 30, 2000 compared to $2,438,000
for the same period of the prior year. Selling, general and administrative
expenses, as a percentage of revenues, increased from 47% of third quarter 1999
revenues to 62% of third quarter 2000 revenues. A significant portion (67% or
$1,496,000) of these expenses are marketing and selling expenses, which are
necessary for the Registrant to maintain and grow sales and market share in
Spain. Selling and marketing expenses decreased by $18,000, or 1% over the same
period of the prior year, and as a percent of revenues, increased from 29% in
the third quarter of 1999 to 41% in the third quarter of 2000. Selling and
marketing expenses, as reported in U.S. dollars, were approximately $240,000
lower than would have been reported as a result of the 16% 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 decreased by 19% from $924,000
in the third quarter of 1999 to $747,000 in the third quarter of 2000,
increasing from 18% of third quarter 1999 revenues to 21% of third quarter 2000
revenues. General and administrative expenses, as reported in U.S. dollars, were
approximately $50,000 lower than would have been reported as a result of the 16%
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 be profitable.
The Registrant reported research and development expenses of $233,000 for the
three months ended September 30, 2000 compared to $226,000 for the same period
of the prior year. The
15
<PAGE>
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,
pre-clinical programs underway in collaboration with the University of New
Hampshire and with product formulation and testing efforts being performed in
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 $143,000 for the three months
ended September 30, 2000, compared to $136,000 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, partially offset by the effect of
fluctuations in foreign currency exchange rates.
Interest expense totaled $46,000 for the three months ended September 30, 2000
compared to $291,000 for the same period of the prior year. The Registrant
incurred first quarter 2000 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 third quarter of 2000 resulted
primarily from the outstanding balances on lines of credit used for operating
purposes and lines of credit and borrowings used to fund the purchase of the
product Codeisan, during the three months ended September 30, 1999, in Spain.
The Registrant financed approximately $4,900,000 of the purchase, which is
reflected as a combination of short-term and long-term debt on the Registrant's
Consolidated Balance Sheets, which will result in increased interest charges in
the future.
Interest income totaled $85,000 for the three months ended September 30, 2000
compared to $58,000 for the same period of the prior year primarily as a result
of higher short-term interest bearing investment balances and higher interest
rates earned on the investment balances during the three months ended September
30, 2000 than in the same period of 1999.
The Registrant recorded a benefit for foreign income taxes totaling $18,000 for
the three months ended September 30, 2000 as a result of reporting a loss for
tax purposes in Spain, compared to the provision of $280,000 in the same period
of the prior year, as a result of taxable income earned in Spain. The benefit is
the result of a tax loss incurred in Spain during the three months ended
September 30, 2000, however, the Spanish subsidiary did record net income for
the quarter ended September 30, 2000 after the elimination of certain
inter-company charges. The benefit for foreign income taxes would have been
$6,000 higher than reported, absent the 16% decline in the value of the Spanish
Peseta and related Euro in relation to the U.S. dollar during
16
<PAGE>
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 $476,000 for the three months
ended September 30, 2000 compared to income from operations of $325,000 in the
same period of the prior year. The impact of the loss from operations and the
non-operating items, primarily interest expense of $46,000, offset by interest
income of $85,000 and a benefit for income taxes of $18,000 resulted in a net
loss of $419,000, or $.03 per basic and diluted common share (13,662,000
weighted average common shares outstanding) for the three months ended September
30, 2000, compared to a net loss in the same period of the prior year of
$188,000, or $.02 per basic and diluted common share (9,522,000 weighted average
common shares outstanding).
Nine Months Ended September 30, 2000 versus Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------
The Registrant reported revenues of $13,305,000 and a net loss of $560,000 or
$.04 per basic and diluted common share for the nine months ended September 30,
2000 compared to revenues of $14,295,000 and a net loss of $1,187,000 or $.14
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 5% in local currency for the nine months ended September
30, 2000 compared to the same period of the prior year; however, a 14% decline
in the value of the Spanish Peseta and related Euro negatively impacted revenues
by $1,778,000, resulting in revenues generated in Spain of $13,240,000 when
expressed in U.S. dollars. Revenues were impacted in the third quarter by
increased generic competition that has reduced sales of certain of the
Registrant's branded products. The Registrant expects generic competitive
pressure to continue to impact sales of its branded products that are subject to
generic competition, which may result in lower sales until such time that the
Registrant's generic products can capture sufficient market share to offset this
impact. The Registrant anticipated the opportunities that the recently created
generic market in Spain present and began taking measures over two years ago to
enter the Spanish generic market. The Registrant, through its wholly-owned
subsidiary, began to register, market and distribute generic pharmaceutical
products in Spain and began aligning its business model to be competitive in
this arena, including hiring and training a new generic sales force, submission
of generic-equivalent products to the Spanish Ministry of Health for approval
and a marketing campaign designed to position the Registrant as a leader in the
Spanish generic market. 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 previously marketed by the Registrant. The
Registrant's revenues for the nine months ended September 30, 1999 included
sales of Finedal totaling approximately $705,000, while revenues for the nine
months ended September 30, 2000 included Finedal sales of approximately
$200,000. The Registrant does not anticipate any future sales of this product
nor does it anticipate incurring any future costs with respect to this product.
Revenues for the nine months ended September 30, 2000 include $65,000 related to
research and
17
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licensing agreements and fees derived from research and product formulation
activities performed in the United States.
Gross margins, which declined modestly in the most recent quarter, for the nine
months ended September 30, 2000 increased to 61% compared to gross margins of
58% in the same period of the prior year, primarily as a result of the mix of
products sold and manufacturing efficiencies realized at the manufacturing
facility during the nine months ended September 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 nine months ended September 30, 2000. Such taxes would have been
approximately $335,000 for the nine months ended September 30, 2000 if the
agreement had continued beyond December 31, 1999.
As discussed in the Notes to Consolidated Financial Statements, the Registrant
entered into a strategic alliance with Teva Pharmaceutical Industries, Ltd. in
July 2000, 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 a generic product 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 remain competitive and 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 decreased by $140,000 or 2%, to
$7,209,000 for the nine months ended September 30, 2000 compared to $7,349,000
for the same period of the prior year. Even though selling, general and
administrative expenses decreased overall, as a percentage of revenues, they
increased from 51% of year-to-date 1999 revenues to 54% of year-to-date 2000
revenues as a result of the Registrant's 7% decrease in revenues and its efforts
to control general and administrative expenses. A significant portion (64% or
$4,634,000) of these expenses are marketing and selling expenses, which are
necessary for the Registrant to maintain and grow sales and market share in
Spain. Selling and marketing expenses increased by $150,000, or 3% over the same
period of the prior year, and as a percent of revenues, increased from 31% in
the first nine months of 1999 to 35% in the first nine months of 2000. Selling
and marketing
18
<PAGE>
expenses, as reported in U.S. dollars, were approximately $650,000 lower than
would have been reported as a result of the 14% 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 10% from $2,865,000 in
the first nine months of 1999 to $2,575,000 in the first nine months of 2000,
and decreased slightly from 20% of year-to-date 1999 revenues to 19% of
year-to-date 2000 revenues. General and administrative expenses, as reported in
U.S. dollars, were approximately $165,000 lower than would have been reported as
a result of the 14% 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 $608,000 for the
nine months ended September 30, 2000 compared to $527,000 for the same period of
the prior year. Amounts charged to research and development totaled $769,000 for
the nine months ended September 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, pre-clinical programs underway in collaboration with
the University of New Hampshire and with product formulation and testing efforts
being performed in 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 $420,000 for the nine months
ended September 30, 2000, compared to $321,000 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, partially offset by the effect of
fluctuations in foreign currency exchange rates.
Interest expense totaled $342,000 for the nine months ended September 30, 2000
compared to $860,000 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 second quarter of
2000, as a result of the conversion of all Debentures into shares of Common
Stock. Interest expense incurred during the six months ended September 30, 2000
resulted primarily from the outstanding balances on lines of credit used for
operating purposes and lines of credit and borrowings used to fund the purchase
of the product Codeisan, during the three months ended September 30, 1999, in
Spain. The Registrant financed approximately $4,900,000 of the purchase, which
is reflected as a combination of short-term and long-term
19
<PAGE>
debt on the Registrant's Consolidated Balance Sheets, which will result in
increased interest charges in the future.
Interest income totaled $269,000 for the nine months ended September 30, 2000
compared to $180,000 for the same period of the prior year primarily as a result
of higher short-term interest bearing investment balances and higher interest
rates earned on the investment balances during the nine months ended September
30, 2000 than in the same period of 1999.
The Registrant recorded a provision for foreign income taxes totaling $378,000
for the nine months ended September 30, 2000 as a result of taxable income
earned in Spain, compared to $535,000 in the same period of the prior year. The
provision for foreign income taxes would have been $43,000 higher than reported,
absent the 14% 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 $109,000 for the nine months
ended September 30, 2000 compared to income from operations of $28,000 in the
same period of the prior year. The impact of non-operating items, primarily
interest expense of $342,000, interest income of $269,000 and provision for
income taxes of $378,000 resulted in a net loss of $560,000, or $.04 per basic
and diluted common share (12,672,000 weighted average common shares outstanding)
for the nine months ended September 30, 2000, compared to the net loss in the
same period of the prior year, of $1,187,000, or $.14 per basic and diluted
common share (8,808,000 weighted average common shares outstanding).
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Total assets increased from $22,237,000 at December 31, 1999 to $25,720,000 at
September 30, 2000, while Stockholders' Equity increased from $11,574,000 at
December 31, 1999 to $16,672,000 at September 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 179,000 Class B Redeemable Warrants resulting in
the issuance of 90,000 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 14,000 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 $560,000
for the nine months ended September 30, 2000.
The Registrant's working capital increased from $1,130,000 at December 31, 1999
to $3,399,000 at September 30, 2000, primarily as a result of conversion of
7,254 of the Registrant's 12% Debentures (which were classified as current
liabilities at December 31, 1999)
20
<PAGE>
into shares of Common Stock and cash proceeds of approximately $2,169,000
received from the exercise of 179,000 Class B Warrants, 460 Underwriter's
Warrants, 450,000 other stock purchase warrants and 14,000 stock purchase
options during the first nine months of 2000.
Cash and cash equivalents decreased from $4,422,000 at December 31, 1999 to
$4,349,000 at September 30, 2000, primarily as a result of using cash for
operating and investing activities, offset by cash proceeds of approximately
$2,169,000 received from the exercise of 179,000 Class B Warrants, 460
Underwriter's Warrants, 450,000 other stock purchase warrants and 14,000 stock
purchase options and as a result of the maturities of approximately $1,893,000
of marketable securities and proceeds from borrowings. Included in cash and cash
equivalents at September 30, 2000 are approximately $4,005,000 of short-term
investments considered to be cash equivalents.
Accounts receivable increased from $4,016,000 at December 31, 1999 to $4,474,000
at September 30, 2000 and include VAT receivable totaling $716,000 at September
30, 2000 as a result of the purchase of the product Codeisan. Trade receivables
increased by approximately $277,000 in local currency, but fluctuations in
foreign currency exchange rates offset the increase by approximately $535,000.
The Registrant has not experienced any material delinquent accounts on its trade
receivables. Inventories increased to $1,434,000 at September 30, 2000 compared
to $965,000 at December 31, 1999 primarily as a result of raw materials
purchases and production of finished goods, partially offset by the effect of
fluctuations in foreign currency exchange rates.
Prepaid expenses and other current assets increased from $393,000 at December
31, 1999 to $597,000 at September 30, 2000, primarily as a result of prepaid
expenses that 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 $3,027,000 at September 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 nine months ended September 30, 2000, inventory
purchases and the effect of fluctuations in foreign currency exchange rates.
Short-term borrowings increased from $952,000 at December 31, 1999 to $4,423,000
at September 30, 2000, as a result of higher outstanding balances on lines of
credit used for operating purposes in Spain and for the acquisition of drug
licenses and related costs, including the product Codeisan, during the nine
months ended September 30, 2000, partially offset by the effect of fluctuations
in foreign currency exchange rates. The Registrant paid to the seller of
Codeisan, the full purchase price of 986,000,000 pesetas (approximately
$5,200,000). The Registrant financed 942,000,000 pesetas (approximately
$4,900,000) of the purchase, which is reflected as a combination of short-term
and long-term debt on the Registrant's Consolidated Balance Sheets. The weighted
average interest rate on the Registrant's short-term borrowings is 5.1% and the
weighted average interest rate on the Registrant's long-term borrowings is 6% as
of
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<PAGE>
September 30, 2000.
Debentures called for redemption totaling $5,362,000 at December 31, 1999 were
reduced to zero at September 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. Long-term debt,
which was zero at December 31, 1999, increased to $1,428,000 at September 30,
2000 due to financing the acquisition of the product Codeisan, which occurred
during the three months ended September 30, 2000.
Fixed assets, net decreased from $3,684,000 at December 31, 1999 to $3,614,000
at September 30, 2000, due primarily to additions to machinery and equipment and
renovations at the Spanish manufacturing facility including manufacturing
equipment acquired in the purchase on the product Codeisan during the three
months ended September 30, 2000 as well as computer equipment purchases in the
U.S., offset by recurring depreciation charges and the effect of fluctuations in
foreign currency exchange rates.
Drug licenses and related costs, net increased from $5,807,000 at December 31,
1999 to $10,582,000 at September 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 which
occurred during the three months ended September 30, 2000, the Registrant paid
to the seller of Codeisan, the full purchase price of 986,000,000 pesetas
(approximately $5,200,000).
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 $16,000
is included in the amounts receivable at September 30, 2000.
Other non-current assets decreased from $1,057,000 at December 31, 1999 to
$214,000 at September 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 $165,000
at September 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.
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<PAGE>
Investing activities, primarily proceeds received from the sale of investments,
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 in the
U.S.; and loans made to Executive Officers of the Registrant, the proceeds of
which were used to pay income taxes on stock-based compensation, used net cash
of $5,226,000 during the nine months ended September 30, 2000. Financing
activities, primarily proceeds from the exercise of 179,000 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 14,000 shares of Common Stock and
proceeds from short term borrowings for working capital purposes and from
short-term and long-term borrowings used for the purchase of the product
Codeisan in Spain during the nine months ended September 30, 2000, provided net
cash of $7,189,000. Operating activities for the nine months ended September 30,
2000 used net cash of $1,997,000.
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 operations for
the periods presented.
Given the Registrant's current liquidity and cash balances and considering its
future strategic plans (including its budgeted capital improvements and planned
equipment purchases), the Registrant should have sufficient liquidity to fund
operations for the remainder of 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's publicly traded
Class B Redeemable Warrants are scheduled to expire on February 14, 2001. Two
Class B Redeemable Warrants, together, entitle a holder, until February 14,
2001, to purchase one share of Common Stock at a price of $5.00 per share. As of
November 1, 2000, there remain approximately 5,556,000 Class B Warrants
outstanding. There can be no assurance that any of the Class B Warrants will be
exercised prior to expiration in February 2001; however, if all Class B Warrants
that are currently outstanding are exercised, the Registrant would receive
aggregate proceeds of approximately $13.9 million. 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.
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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.
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 September 30,
2000 and December 31, 1999 was 189.06 and 165.23 pesetas per U.S. dollar,
respectively. The weighted average exchange rate for the three months ended
September 30, 2000 and 1999 was 184.16 and 158.62 pesetas per U.S. dollar,
respectively; the weighted average exchange rate for the nine months ended
September 30, 2000 and 1999 was 177.05 and 154.78 pesetas per U.S. dollar,
respectively. The exchange rate at October 31, 2000 was 196.87. The effect of
foreign currency fluctuations on long lived assets for the nine months ended
September 30, 2000 was a decrease of
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$960,000 and the cumulative historical effect was a decrease of $3,299,000, 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 5.1% and the balance outstanding is $4,423,000 as of
September 30, 2000. The weighted average interest rate on the Registrant's
long-term borrowings is 6% and the balance outstanding is $1,428,000 as of
September 30, 2000. The effect of an increase in the interest rate of one
hundred basis points (to 6.1% on short term borrowings and 7% on long-term
borrowings) would have the effect of increasing interest expense by
approximately $59,000 annually.
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 we
depend on key personnel and must continue to attract and retain key
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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.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)Exhibits:
10.1 Employment Agreement dated as of August 14, 2000 between the
Registrant and Jordan A. Horvath (Filed herewith.)
10.2 Agreement between the Registrant and Fabrica De Productos
Quimicos Y Farmaceuticos Abello, S.A. relating to the Registrant's
acquisition of the Codeisan Health Registration in Spain, along with
the related trademark, inventory and production equipment (Filed
herewith.)
27.1 Financial Data Schedule (Filed herewith.)
(b)Reports on Form 8-K filed during the quarter ended September 30,
2000:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
September 30, 2000.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 2000.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
-------------------------------------------
Registrant
November 2, 2000 By: /s/ James R. Murphy
---------------------------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
November 2, 2000 By: /s/ Michael D. Price
---------------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)
