SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
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[ ] 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 0-19879
BIOSPECIFICS TECHNOLOGIES CORP.
(Name of small business issuer in its charter)
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<CAPTION>
Delaware 11-3054851
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
35 Wilbur Street, Lynbrook, New York 11563
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (516) 593-7000
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Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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Check whether the Issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 __
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were
$7,062,000. The aggregate market value of common voting stock held by
non-affiliates of the Issuer was approximately $5,530,000 computed by reference
to the last sale price at which the stock was sold on April 14, 1999 as reported
by Nasdaq. As of April 14, 1999, 4,565,866 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 9, 10, 11, and 12
is incorporated by reference to the Registrant's proxy statement in connection
with the 1999 annual meeting of shareholders, which will be filed by the
Registrant within 120 days after the close of its fiscal year.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
The Company* is engaged in the business of producing and
licensing for sale by others a fermentation derived enzyme named
Collagenase ABC which is approved by the U.S. Food and Drug Administration
("FDA"), and researching and developing additional products derived from
this enzyme for potential use as pharmaceuticals. The Company currently
derives substantially all of its revenues through a license agreement with
a pharmaceutical company in the United States, Knoll Pharmaceutical
Company ("KPC"). The Company also has license agreements with foreign
companies which are marketing or will attempt to market Collagenase ABC or
products in development in licensed territories when permitted by local
governmental authorities. Since 1972, the Company has sold Collagenase
ABC, its only commercial product to date, principally in the United States
through KPC.
Description of Product
Collagenase ABC
The Company's principal drug product, Collagenase ABC, is
an enzyme that digests collagen, the body's principal connective tissue.
The drug is approved by the FDA and is indicated for topical enzymatic
debridement of dermal ulcers (wounds), such as pressure ulcers (also known
as "bed sores") and second and third degree burns.
In general, necrotic (i.e., dead or devitalized) tissue
must be debrided (removed) from a dermal ulcer either surgically, by
enzyme, or by autolysis (the much slower natural process) before proper
healing can take place. Necrotic tissue is anchored to dermal ulcers by
strands of collagen. The unique ability of collagenase to digest collagen
in necrotic tissue and thereby effect the debridement of necrotic tissue
in a wound is an important part of the healing process associated with
dermal ulcers and helps provide a healthy base for the growth of new
tissue. Collagen in healthy tissue or in newly formed granulation tissue
is not attacked by Collagenase ABC.
Agreements for the Distribution of Collagenase ABC
Collagenase ABC is the active ingredient of a topical
ointment. The Company does not directly market Collagenase ABC (the
"product") to end users. It currently supplies the product in powder form
to other pharmaceutical companies for compounding into ointment. These
licensees market the ointment to end users. Pursuant to the agreement with
KPC, the Company supplies KPC with the product and controls the production
of an ointment containing the product. KPC has been marketing this
ointment under its registered trademark, Collagenase Santyl(R) in the
United States since 1972, and in Canada since 1994.
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* As used in this Report on Form 10-KSB, the terms "Company" and
"Registrant" are used interchangeably and denote BioSpecifics
Technologies Corp., a holding company for three related entities,
Advance Biofactures Corp. ("ABC-NY"), Advance Biofactures of Curacao,
N.V. ("ABC-Curacao"), and Biospecifics Pharma GmbH ("Bio Pharma"). The
Company owns approximately 97.2% of the capital stock of each of ABC-NY
and ABC-Curacao, and 100% of Bio Pharma. Unless the context indicates
otherwise, references to the Company and the Registrant includes these
entities.
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The Company entered into an agreement with KPC (the "KPC
Agreement") which runs through 2003 and automatically renews for an
additional 10 year period unless KPC notifies the Company, at least 6
months prior to the renewal date, of its intention to terminate at the
conclusion of the initial term. The KPC Agreement provides that KPC is the
Company's exclusive licensee to market Collagenase Santyl(R) ("Santyl(R)")
in the United States and Canada so long as KPC shows a reasonable annual
increase in Santyl(R) sales and uses its best efforts to increase sales.
If Santyl(R) sales for any year are level or fall below that of the
previous year's sales and if for the following 12 month period sales
levels are not reasonably increased, the Company may change the license
granted to KPC from an exclusive license to a non-exclusive license. KPC
pays the Company for the product, at a price that is subject to annual
adjustment based upon increases in the Company's actual manufacturing
costs, not to exceed increases in the consumer price index for certain
items. KPC also pays the Company a royalty based upon KPC's net Santyl(R)
sales in increasing percentages as sales reach certain amounts on an
annual basis. Royalties for fiscal 1999 and 1998 were approximately
$2,506,000 and $2,436,000, respectively. As part of the KPC Agreement, KPC
and its U.S. affiliates have agreed not to seek or become a party to any
license or other agreement for the production or purchase of collagenase
powder or collagenase ointment from any source other than the Company,
will make no efforts to achieve registration with the FDA for collagenase
powder manufactured by parties other than the Company, and will not
collaborate with any third party attempting to achieve a registration.
KPC accounted for approximately $6,353,000 and $5,388,000
in product sales and royalties of the Company for the fiscal years ended
January 31, 1999 and 1998, respectively. These amounts were approximately
90% and 92% of the Company's revenues during the respective fiscal years.
As of January 31, 1999, the Company had approximately $1.0 million of firm
booked orders with KPC for the product, compared to approximately $1.5
million of firm booked orders with KPC as of January 31, 1998. The
Company's product is approved in two other countries, Brazil and India,
and sold to commercial customers in those countries. In fiscal 1999, sales
to the customer in Brazil represented approximately 9% of total revenues.
There is no license and supply agreement with this customer. The product
and purified collagenase are also sold for non-sponsored research
purposes.
In July 1996, the Company entered into an agreement to
license the product for sale as an ointment in Germany to the German
subsidiary of an international pharmaceutical company. The agreement calls
for an initial payment on signing and further payments if and when
marketing approval of Collagenase ABC ointment is granted by the German
health authority. During fiscal 1997, the Company recognized $20,000 in
license fees and deferred revenue of $45,000 from this agreement. The
Company's German subsidiary (see "Marketing") has submitted collagenase
ointment to the German health authority for marketing approval, which
decision is pending.
In June 1994, the Company entered into a multi-year
license with an Italian pharmaceutical company which has agreed to market
an ointment containing the product in Italy subject to the receipt of
requisite Italian governmental approval. The licensee has agreed to
purchase the product in agreed minimum amounts increasing in each of the
three years following such approval. For the fiscal years ended January
31, 1999 and 1998, the Company recognized no revenues from this contract.
In July 1994, the Company entered into a license and
supply agreement with a Swiss pharmaceutical company to market an ointment
containing the product in two European countries and several Middle
Eastern countries. The agreement runs for ten years from first market
introduction of the product in each country. The Company recognized no
revenue from this agreement in fiscal years ended January 31, 1999 and
1998.
The Company entered into a license agreement with a
company in India that began marketing collagenase ointment in India in
1995. The licensee purchased immaterial amounts of the product during the
fiscal years ended January 31, 1999 and 1998.
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The Company completed preliminary clinical trials of
Collagenase ABC in Great Britain and is seeking a licensee for that
country. The Company continues to seek new licensees to market the product
in parts of the world not yet licensed, where business conditions warrant.
Proposed Products and Uses for Products
Injectable Collagenase ABC and Nucleolysin(R)
---------------------------------------------
The Company has developed a non-patented proprietary
process to further purify Collagenase ABC. The Company has investigated
using this purified form of collagenase as an injectable to remove
collagen tissue which interferes with normal bodily functioning or is
unsightly. The Company is clinically testing in the United States
injectable collagenase for treatment of Peyronie's disease, Dupuytren's
disease, and keloids. See "Investigational New Drug Applications ("IND's")
for Injectable Collagenase ABC". The Company produces purified collagenase
for injection at its facilities in Curacao and New York.
The Company has clinically tested in the United States
and Europe the use of injectable Collagenase ABC for the non-surgical
treatment of herniated spinal discs, for which the Company has been
granted the registered trademark Nucleolysin(R). The Company distributes
Nucleolysin(R) to physicians in the Netherlands Antilles and sells
purified collagenase for non-human research in the United States and other
countries. The Company has not received approval to sell Nucleolysin(R)
from the FDA or a similar agency in any country other than the Netherlands
Antilles.
Agreements to Distribute Nucleolysin(R)
---------------------------------------
In 1990, the Company entered into an agreement with an
unaffiliated Swiss company, pursuant to which that company had three years
(subject to a six month extension) to obtain the approval of the
appropriate agencies in Italy and Switzerland to market Nucleolysin(R) in
such countries for a period of 12 years from the date of its first
commercial sale, subject to automatic yearly renewals unless either party
provides notice of non-renewal. In May 1993, the Company and the licensee
amended the agreement to provide for a period of three years from their
application to obtain the approvals for use of Nucleolysin(R) for the
treatment of herniated spinal discs. In addition to an advance payment of
$50,000 previously received, the Company will be paid a total of $210,000
at certain milestone dates. To date, the licensee has paid $130,000
relating to the extension, which has been recorded as deferred revenue.
The advances are subject to certain credits and/or refund if the Italian
approval is not obtained, depending on the reasons therefor. The licensee
completed the equivalent of Phase 3 clinical trials in an unaffiliated
foreign clinic. The licensee submitted its application to obtain approval
from the Italian and Swiss governments in 1996. Decisions by those
governments are pending.
In late 1994, the Company, through an agent, filed a new
drug application for final review and marketing approval of Nucleolysin(R)
in Germany. Comments from the German health authorities are pending.
Investigational New Drug Applications ("INDs") for Injectable
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Collagenase ABC
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The Company and its affiliates have received INDs from
the FDA and is in the clinical testing process for additional products
using injectable Collagenase ABC. The INDs permit the Company to test the
drugs on humans. None of these products has completed testing.
Dupuytren's Disease
-------------------
Dupuytren's disease is a deforming condition of the hand
in which one or more fingers, usually the ring and little fingers,
contract toward the palm, often resulting in functional disability. The
Company was granted a United States patent for the use of its collagenase
enzyme to treat this condition in February 1997. The use of collagenase
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for the treatment of Dupuytren's disease has received "orphan drug"
designation from the FDA. The Company is collaborating with investigators
at State University at Stony Brook School of Medicine ("Stony Brook") in
conducting Phase 1 and 2 trials for this indication. Phase 1 clinical
results were presented at the 44th annual meeting of the Orthopaedic
Research Society in March 1998 in a paper entitled Enzyme Injection as a
Non-Operative Treatment for Dupuytren's Disease: A Clinical Trial of
Injectable Clostridial Collagenase. An update of these clinical trials was
presented at the 7th Congress of the International Federation of Societies
for Surgery of the Hand in May 1998. The investigators at Stony Brook
received a grant from the FDA to conduct expanded clinical trials to
determine safety and efficacy of collagenase for this use. This
investigation also resulted in a research grant from the New York State
Center for Advanced Technology in Medical Biotechnology. This center
provides co-funding for collaborative R&D projects between faculty and New
York state companies that show significant economic potential. A Phase 2
trial has been completed and is being analyzed.
Peyronie's Disease
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The Company is developing a product for the treatment of
Peyronie's disease, a condition in which collagen plaques form on the
shaft of the penis and interfere with erection and sexual intercourse.
Initial tests on approximately 200 men have shown favorable results in
dissolving the plaques by injecting purified collagenase directly into
such plaques. The Company has been assigned a United States patent for
this use and received "orphan drug" designation from the FDA in March
1996. The favorable findings of a Phase 2 double-blind clinical
investigation appeared in the January 1993 Journal of Urology of the
American Urological Association and its use was also reported on favorably
at The International Conference on Peyronie's disease held in March 1993
at the National Institutes of Health in Bethesda, Maryland. The Company
believes that no other effective pharmaceutical treatment for this
condition currently exists. A study to optimize this treatment is ongoing
at the largest United States center for the study and treatment of
Peyronie's disease.
Keloids
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In another use, high doses of purified collagenase have
been injected directly into keloids and hypertrophic scars. A keloid is a
sharply elevated, irregularly shaped, and progressively enlarging scar due
to the formation of excessive amounts of collagen during connective tissue
repair. Approximately 40 persons have been treated for this condition,
with encouraging results. The Company has been assigned a United States
patent for this application of purified collagenase. In February 1997,
positive preliminary results from the ongoing Phase 1 study were reported
at the annual International Burn Foundation Conference on advances in
wound healing, burn care, and infection control. In initial trials for
both keloids and Peyronie's disease, the Company has used very high doses
of injectable purified Collagenase ABC. The Company is not aware of any
significant side effects or allergic reactions to these higher dosages,
even when the doses were administered over a period of several months.
Other Proposed Products and Uses for Products
Treatment of Burns
------------------
Collagenase Santyl(R) has received FDA approval for the
treatment of burns. A pilot study was conducted which compared the
efficacy of Collagenase Santyl(R) to standard treatment for deep second
degree burns. The results of this study were published in the Journal of
the American Burn Association (January/February 1994 issue). Based on
these results, a multi-center study was conducted in which eight medical
centers specializing in the treatment of burns participated. The study,
which involved 79 patients, showed collagenase treatment resulted in
faster cleaning and healing than deep second degree burn wounds receiving
the standard treatment. The study was reported in the May/June 1995 issue
of the Journal of the American Burn Association and in the
November/December 1995 issue of Wounds. Recent papers presented at the
John A. Boswick, MD. Burn and Wound Care Symposium in February 1999
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reported the economic benefits of collagenase application, including
shortening of treatment time and hospital stay. Another study found that
in 63% of the cases treated, skin grafts were not required. The February
1998 meeting of the International Burn Foundation included positive
presentations made by physicians who use Collagenase Santyl(R) ointment
for burns.
Collagenase for Wound Healing
-----------------------------
In vitro studies conducted at Tufts University Medical
School showed that collagenase treatment of skin cells significantly
enhances cell growth and migration after injury. An article relating to
this development was published in the March/April 1996 issue of Wounds.
Clinical and laboratory investigations further profiling the potential
role of collagenase and its pharmacological activity in wound healing are
being pursued. The Company has been assigned two patents awarded to Tufts
University relating to this discovery.
Glaucoma and Treatment of Other Eye Disorders
---------------------------------------------
The Company and Bausch & Lomb collaborated in a clinical
investigation to confirm previous studies on the use of the Company's
collagenase to treat glaucoma. The collagenase treatment reduced IOP
(intraocular pressure) in open angle glaucoma patients for at least three
months post treatment with no vision-threatening complications. The
results of the clinical investigation were presented at the annual
Association for Research in Vision and Opthamology (ARVO) meeting in May
1998.
The Company is exploring the possible use of purified
injectable Collagenase ABC for the treatment of opaque scar tissue in the
vitreous humor of the eye. Accordingly, its use may assist in the surgical
removal of scar tissue without tearing the retina to which the tissue is
attached. If effective, this use may be beneficial in the treatment of
blindness resulting from diabetes and certain other causes. To date,
approximately 20 persons have been treated with this product on an
experimental basis.
Product Liability
The sale of the product, as well as the marketing of any
additional products of the Company, exposes the Company to potential
product liability claims both directly from patients using the product as
well as from the Company's agreement to indemnify certain distributors of
the products for claims made against such distributors. The Company has
product liability insurance for the use of Collagenase Santyl(R) and
clinical experiments in the United States for its additional product
candidates. To date, no product liability claims have been made against
the Company.
Competition
The pharmaceutical industry is characterized by rapidly
evolving technology and intense competition. Many companies of all sizes,
including major pharmaceutical companies and specialized biotechnology
companies, are engaged in activities similar to those of the Company. Many
of the Company's competitors have substantially greater financial and
other resources, larger research and development staffs, and significantly
greater experience in regulatory approval procedures. The Company does not
have comparable resources and does not intend to compete with major
pharmaceutical companies in drug marketing except in possible niche
marketing for one or more of the products, if feasible.
The Company's debriding ointment product, Collagenase
Santyl(R), competes primarily with other available enzymatic debridement
products in the United States. Those currently available are manufactured
or marketed by the Dow B. Hickam division of Marion Labs, and Healthpoint
Ltd. A potential debridement agent was known to be under development by
Genzyme Tissue Repair Division, and other large drug companies may also
have debridement products under development. Debriding products also
compete with surgical debridement and mechanical debridement using
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hydrotherapy. The Company believes its enzymatic debridement product is
superior to surgical and mechanical debridement, because those procedures
are painful, labor intensive and remove viable tissue along with necrotic
tissue.
In December 1994, the Federal Agency for Health Care
Policy and Research ("AHCPR") issued Clinical Practice Guideline Number 15
entitled "Treatment of Pressure Ulcers". Collagenase is the only product
suggested for enzymatic treatment of pressure ulcers by the guideline.
Unlike the other available enzymatic debriding products, the Company's is
collagen specific. Approximately 75% of skin is collagen, making this
enzyme particularly appropriate for the debridement of necrotic tissue.
The Company had an agreement with Knoll AG ("KAG"), a
German company affiliated with KPC, whereby the Company supplied the
product to KAG, which sold ointment containing the product in countries
other than the United States under KAG's trademarked name, "Iruxol(R)."
The contract expired on December 31, 1992, although the Company continued
to sell the product to KAG through fiscal 1994. KAG now manufactures its
own form of collagenase ointment which it markets under its trademark
outside the United States, since it is not FDA approved for sale in the
United States. The Company, through its foreign licensees for topical
collagenase, will compete with KAG in Europe if and when the licensees
receive marketing and pricing approval from their respective health
agencies. (See "Collagenase ABC - Agreements for the Distribution of
Collagenase ABC"). KAG currently markets a non-collagenase enzyme,
chymopapain for the treatment of herniated disks, through its acquisition
of The Boots Company (USA). This drug will compete with Nucleolysin(R) (if
and when Nucleolysin(R) is approved for sale).
Colleges, universities, governmental agencies and other
public and private research organizations continue to conduct research and
are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with that of the
Company. The Company expects competition to intensify as technological
advances occur in the area of the development of pharmaceutical products
of biologic origin.
The Company believes that it can compete effectively
through its licensing agreements for Collagenase ABC. The Company believes
that licensing the ointment product is a more effective strategy than
directly marketing the ointment product.
Marketing
The Company does not have its own sales staff and instead
relies upon its licensees who have recognition and acceptance in the
marketplace. By licensing those companies which already have a strong
marketing and sales force dedicated to specialties, the Company has a very
limited cost of selling, while the licensee enhances the efficacy of its
sales and marketing staff by adding additional products.
In the United States, the Company is gaining recognition as the
manufacturer of Collagenase Santyl(R) as the Company's name and that of
its U.S. subsidiary are required to appear on the end-use package sold by
KPC.
The European Union ("EU") is now the largest
pharmaceutical market in the world. The Company is actively seeking
approval to enter this market through its European licensees. The Company
believes that its contacts and licenses with a number of European
companies will be of substantial assistance to it in this regard, although
there is no assurance that the Company can make any substantial
penetration, or that its licensees will be successful in obtaining product
approvals.
In November 1995, the Company established a German
subsidiary, Biospecifics Pharma GmbH. Its purpose is to identify
additional licensees, assist the Company in achieving the clinical and
scientific data necessary to obtain product approvals in the EU, and
assist licensees in registration of products. See "Employees".
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The Company may decide to directly market certain
products under development, particularly if the market is well defined and
the number of specialists who address the targeted indication is small.
Research and Development
Since inception (1957 and 1976 for the New York and
Curacao subsidiaries, respectively), the Company has expended over $20.5
million in research on collagenase and other products, and it is
continuing to conduct testing on such products. The Company incurred
approximately $2,050,000 and $1,905,000 in research and development
activities during its fiscal years ended January 31, 1999 and 1998,
respectively.
Government Regulation
Regulation in the United States
-------------------------------
All pharmaceutical manufacturers in the U.S. are subject
to extensive regulation by the federal government, principally the FDA,
and, to a lesser extent, by state governments. The Federal Food, Drug, and
Cosmetic Act, the Public Health Service Act, and other federal statutes
and regulations govern or influence the testing, approval, manufacture,
safety, labeling, storage, record keeping, advertising, promotion, sale
and distribution of products. Non-compliance with applicable requirements
can result in fines, recall or seizure of products, total or partial
suspension of production and/or distribution, refusal of the government to
enter into supply contracts or to approve new drug applications, and
criminal prosecution. The FDA also has the authority to revoke drug
approvals previously granted.
The Company's products in development will require
regulatory clearance prior to commercialization. The nature and extent of
regulation may differ with respect to different products. In order to
test, produce and market certain therapeutic products in the United
States, mandatory procedures and safety standards, approval processes, and
manufacturing and marketing practices established by the FDA must be
satisfied. Obtaining FDA approval has historically been a costly and
time-consuming process.
The Company is also licensed by, registered with, and
subject to periodic inspection and regulation by, the U.S. Department of
Agriculture, the New York State Department of Health and the New York
State Board of Pharmacy, pursuant to federal and state legislation
relating to drugs and narcotics.
The Company's manufacturing facilities in New York and
Curacao are registered with, and licensed by, the FDA.
In January and March of 1999, the Company was issued a List of
Inspectional Observations ("483s") from FDA inspectors, citing numerous
inspectional observations relating to deficiencies in the Company's "good
manufacturing practice" at its Lynbrook, New York and Curacao, Netherlands
Antilles facilities, respectively. In addition, on May 10, 1999, the
Company received a letter from the FDA (the "FDA Letter") citing certain
inspectional observations relating to deficiencies at its Lynbrook, New
York facility, Curacao, Netherlands Antilles facility, and contract
manufacturing facility. The FDA Letter advised the Company that the FDA
will institute formal proceedings to revoke the Company's license to
manufacture Collagenase Santyl(R) Ointment unless the Company provides
satisfactory assurances to the FDA, including submitting to the FDA a
detailed, comprehensive plan of corrective action within 30 days, and
undertakes significant remedial action to address the observations listed
in the 483s and the FDA Letter, and otherwise demonstrates compliance with
applicable regulatory requirements. The Company has hired outside
consultants, has employed and will continue to employ additional staff for
the Quality Control and Quality Assurance departments to assist in
developing and executing a corrective action plan, and is taking steps to
reorganize the Quality Control and Quality Assurance departments.
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The Company intends to use its best efforts to address the
observations cited in the 483s and the FDA Letter to the satisfaction of
the FDA. However, there can be no assurance that the Company will be able
to address all the cited observations in a manner that is satisfactory to
the FDA or that the cost of the required remedial action will not have a
material adverse effect on the Company's operations. Failure to adequately
address the observations cited in the 483s and the FDA Letter will result
in the revocation of the Company's license and will cause the Company to
terminate operations. In addition, the FDA can take other actions which
would not involve termination of the Company's license, but which would
nevertheless have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations."
In order to ensure a supply of Santyl(R) ointment, the Company
has entered into an agreement with KPC (the "Reimbursement Agreement"),
pursuant to which KPC will continue to produce ointment from Collagenase
ABC enzyme provided by the Company. In the event that the FDA does not
permit the Company to release the ointment prepared by KPC due to the
Company's foregoing compliance issues, the Company has agreed to reimburse
KPC for the material and direct labor manufacturing costs for ointment
lots produced after April 23, 1999 until June 1999, which period may be
extended.
Foreign Regulation of Pharmaceutical Products
---------------------------------------------
The marketing of pharmaceutical products outside the
United States is subject to the regulatory requirements of the country in
which the product is marketed. These requirements may vary widely from
country to country. Approval in foreign countries is required regardless
of whether FDA approval has been obtained in the United States.
Nevertheless, the time required to obtain such approval may be longer or
shorter than required to obtain FDA approval, and there can be no
guarantees that such approvals will be granted.
ABC-Curacao produces the pharmaceutical substance
"Collagenase ABC (Sterile)" for incorporation into ointment. As this
product is not a pharmaceutical end product, it need not be officially
registered with the Bureau of Pharmaceutical Affairs of the Netherlands
Antilles (the "Pharmaceutical Bureau"). However, the manufacturing plant
in which the product is produced and the manufacturing process are subject
to inspection by the Pharmaceutical Bureau under the laws and regulations
of the Netherlands Antilles.
The manufacturing plant of the Company's Curacao
subsidiary producing Nucleolysin(R) and the manufacturing process of
Nucleolysin(R) are subject to inspection by the Pharmaceutical Bureau.
According to a certificate of the Director of the Bureau dated March 7,
1991, such subsidiary conforms to requirements for good practices in the
manufacture and quality control in accordance with the pharmaceutical laws
and regulations of the Netherlands Antilles and as recommended by the
World Health Organization, with respect to products to be sold or
distributed within the country of origin or to be exported, and
Nucleolysin(R) may be placed on the market for use in the Netherlands
Antilles. Further, such subsidiary has a license for the preparation of
medicine and the wholesale supply of medicine it prepares. This license
was issued by the Minister of Public Health and Environmental Hygiene in
1983 and remains in effect until canceled or unless not used for an
uninterrupted period of 24 months.
Patent and Trademark Protection
Patents
-------
The Company is the assignee or licensee of ten U.S.
patents. The patents expire 17 years from the date of grant. The Company
is not able to ascertain whether these patents will provide it with any
value either prior to their expirations or at any time thereafter. The
Company is the assignee of additional U.S. patent rights that have expired
as well as certain foreign patent rights corresponding to certain of the
foregoing patents. The Company has other patents under active preparation
for filing. There can be no assurances when, if ever, such patents will be
issued, or that such patents, if issued, will be of any value to the
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Company. The Company is obligated to engage in research and development of
certain products or uses underlying the patent rights licensed or assigned
to it.
Trademarks
----------
The Company has registered the name, Nucleolysin(R), as a
trademark in the United States and in other countries. The trademark
registration extends until 2001 in the United States. The Company has also
registered the name Salutyl(R) for its collagenase ointment in a number of
countries other than the United States. Trademarks for other countries are
protected for varying periods of time.
Employees
The Company has 38 full-time employees, of which 9 are
located in Curacao, 1 in Germany, and 8 part-time employees. None of such
employees are represented by a union. The Company considers its
relationship with its employees to be excellent.
The Company has entered into confidentiality agreements
with most of its employees, other than its executive officers. Pursuant to
such agreements, each employee in New York agrees to keep all of the
Company's proprietary and other information secret and confidential and to
return the same to the Company upon termination. These employees further
agree not to divulge any trade secrets during their respective terms of
employment and thereafter without the Company's prior written consent and
further to assign to the Company all inventions, discoveries, and
improvements which they make during the term of employment, within one
year thereafter, or utilizing any of the Company's trade secrets. The
agreement executed by Curacao employees provides that they will not
divulge any data connected with the production process in Curacao. There
can be no assurance that any particular court would enforce any or all of
the terms of any of such agreements.
The Company's subsidiary in Germany, Bio Pharma, is
managed by Rainer Friedel, MD., Ph.D. Dr. Friedel is a member of the
Company's board of directors. Dr. Friedel and the Company have executed an
employment agreement, as mandated by German law.
Consulting Agreement
--------------------
The Company entered into a one-year consulting agreement
with Stephen A. Vogel (the "consultant") effective October 10, 1997. Mr.
Vogel is a son of a member of the Company's board of directors. The
agreement provided that the consultant provide the Company with such
advice, service, consultation, and assistance as the Company will seek
with respect to the Company's financial matters and provide such other
services as the Board of Directors requests. The agreement provided for a
consulting fee of $10,000 per month and an option to purchase 100,000
shares of the Company's common stock at $5.00 per share. The agreement
also provided for the consultant to receive fees if certain events occur
as a result of the consultant's actions or recommendations. The Company
reimbursed the Consultant for out of pocket and other expenses incurred in
connection with rendering services. The agreement expired on October 10,
1998. The options expired January 10, 1999. Since October 11, 1998, Mr.
Vogel has been retained as a financial consultant on a month to month
basis and receives a consulting fee of $5,000 per month, and reimbursement
for out of pocket expenses. During the fiscal year ended January 31, 1999,
the Company recorded general and administrative expenses of $131,580
relating to this agreement, comprised of $101,580 in consulting fees and
$30,000 for the estimated value of the options granted effective October
10, 1997. During the fiscal year ended January 31, 1998, the Company
recorded general and administrative expenses of $56,275 relating to this
agreement, comprised of $36,275 in consulting fees and $20,000 for the
estimated value of the options granted for the fiscal year.
10
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases two facilities, one in Lynbrook, New
York and one in Curacao, Netherlands Antilles. The New York facility, also
the Company's administrative headquarters, contains 3,500 square feet of
office space and 10,500 square feet of laboratory, production, and storage
facilities. The Company leases this facility from the Wilbur Street
Corporation ("WSC"), which is owned by The S.J. Wegman Company, the
principal stockholder of the Company and an affiliate of Edwin H. Wegman,
President of the Company. The lease ran month to month at an annual rate
of $90,000 during the fiscal year ended January 31, 1998. On January 30,
1998, WSC and the Company entered into a triple net lease agreement which
provides for an annual rent starting at $125,000, which can increase
annually by the amount of annual increase in the Consumer Price Index for
the greater New York metropolitan region. The lease term is 7 years,
expiring January 31, 2005. During the fiscal year ended January 31, 1999,
the Company paid rent of $125,000 and real estate taxes of $36,000
relating to this lease agreement. The Company believes that the terms of
this lease are reasonable and the rent charged is no greater than that
which would be charged by an unaffiliated landlord for comparable
facilities, based on appraisals of the property. The Company continues to
sublease a portion of the space subject to this lease to an unaffiliated
entity for $24,000 per year, pursuant to a verbal lease agreement.
The Company also leases from a company wholly-owned by
the Insular Territory of Curacao a building in Brievengat, Curacao,
Netherlands Antilles. This building is the Company's principal
manufacturing facility, and is licensed by the FDA to produce Collagenase
ABC. The facility has approximately 15,750 square feet of usable space.
The lease, which was originally entered into with the Insular Territory of
Curacao on January 1, 1977, is automatically renewable upon the same terms
every five years, unless either party gives notice of termination three
months prior to the expiration of the five-year period. The lessor is
entitled to revalue the rent for each successive five-year period, and the
lease has been automatically renewed through March 1, 2001. The current
rent is approximately $30,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq National
Market tier of the Nasdaq Stock Market ("Nasdaq") under the Symbol "BSTC".
On April 14, 1999, the closing price for the Company's Common Stock was
$3.375. The table below sets forth the high and low sale prices for the
Company's Common Stock for the period February 1, 1997 through January 31,
1999, as reported by Nasdaq.
Quarter Ended High Low
------------- ---- ---
April 30, 1997 $4-5/8 $3-1/8
July 31, 1997 $6-3/4 $3-7/8
October 31, 1997 $6-5/8 $4-1/4
January 31, 1998 $5-3/8 $4-1/4
April 30, 1998 $8-1/4 $4-1/2
July 31, 1998 $6-1/8 $4-1/2
October 31, 1998 $6-1/4 $4-1/8
January 31, 1999 $5 $3-1/4
11
<PAGE>
On April 14, 1999, there were 114 stockholders of record
of the Company's Common Stock. The Company believes it has approximately
1,000 beneficial owners of its Common Stock.
It is the Company's current policy to retain earnings to
finance the growth and development of its business. Any payment of cash
dividends in the future will depend upon the financial condition, capital
requirements and earnings of the Company as well as such other factors as
the Board of Directors may deem relevant. The Company's Board of Directors
has authorized two buyback programs for the repurchase of a total of
600,000 shares of common stock. Through January 31, 1999, a total of
310,780 shares have been repurchased at an average price of $5.58 per
share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
------------------------------------------------------------------------
of 1995
-------
Information provided by the Company or statements
contained in this report or made by its employees, if not historical, is
forward looking information which involve uncertainties and risk. The
Company cautions readers that important factors may affect the Company's
actual results and could cause such results to differ materially from
forward-looking statements made by or on behalf of the Company. Such
factors include, but are not limited to government regulation, changing
market conditions, the impact of competitive products and pricing, the
timely development and approval by the FDA and foreign health authorities
of potential products, market acceptance of the Company's potential
products, and other risks detailed herein and in other filings the Company
makes with the Securities and Exchange Commission. Further, any forward
looking statement or statements speak only as of the date on which such
statements were made, and the Company undertakes no obligation to update
any forward looking statement or statements to reflect events or
circumstances after the date on which such statement or statements were
made.
Results of Operations
Net sales were $4,556,033 and $3,389,315 for the fiscal
years ended January 31, 1999 and 1998, respectively, an increase of
$1,166,718 or 34%. Sales of the product, Collagenase ABC, to KPC increased
by 26% and sales to the Company's customer in Brazil increased by 62%.
Sales to the Brazilian customer may decrease in fiscal
2000 from levels achieved in fiscal 1999 due to economic turmoil in
Brazil. Sales to KPC may decrease in fiscal 2000 versus fiscal 1999, based
on KPC's current backlog of orders.
Royalties earned on Collagenase Santyl(R) ointment sales
by KPC were $2,505,851 and $2,435,518 for the fiscal years ended January
31, 1999 and 1998, respectively, representing an increase of $70,333 or 3%
due to an increase in Santyl(R) sales during the fiscal year.
The Company did not earn license fees in the fiscal years
ended January 31, 1999, and 1998. There were no agreements reached in
either fiscal 1999 or 1998. See "Collagenase ABC Agreements for the
Distribution of Collagenase ABC".
Cost of sales was $2,250,945 and $1,665,202,
respectively, in fiscal 1999 and 1998, an increase of $585,743 or 35% due
to (i) the 34% increase in net sales of the product, and (ii) a reserve of
$120,000 for inventory that will be reprocessed and tested as a result of
observations made by the FDA in its latest inspection of the Company's
facilities. See "Government Regulation Regulation in the United States".
Selling, general and administrative expenses ("SG&A")
were $1,776,293 and $1,526,534, respectively, in fiscal 1999 and 1998, an
increase of $249,759, or 16%. SG&A costs increased due to higher
consulting and professional fees, and higher administrative salaries.
12
<PAGE>
Research and development expenses ("R&D") were $2,050,049
and $1,904,808, respectively, in fiscal 1999 and 1998, an increase of
$145,241 or 8%. The increase was primarily a result of continued
expenditures for clinical trials in the United States for Dupuytren's
Disease, which are in Phase 2, and Peyronie's Disease (see "Proposed
Products and Uses for Products"). The Company also incurred development
expenses in Europe relating to its ointment product. The Company believes
fiscal 2000 R&D expense may exceed that of fiscal 1999, as these clinical
trials are ongoing and may progress to expanded trials.
Other income, net was $434,911 and $505,678,
respectively, in fiscal 1999 and 1998, a decrease of $70,767. The higher
amount in fiscal 1998 was due primarily to a profit of $96,683 realized on
the sale of non-production related real estate in Curacao.
The Company's provision for income taxes was $139,300 and
$363,820, respectively in fiscal 1999 and 1998. The principal reason for
the difference between the United States Federal statutory tax rate of 34%
and the Company's effective tax rate is due to a 2% tax rate applicable to
pre-tax earnings from operations of the Company's subsidiary in Curacao,
and recognition of Orphan Drug and other tax credits available to the
Company as a result of its expenditures for clinical trials for Peyronie's
and Dupuytren's diseases. The higher tax provision in fiscal 1998 was due
to the higher level of investment and other income generated in Curacao
which is taxed at rates approximating 30%, and lower tax credits
available.
Liquidity, Capital Resources and Changes in Financial Condition
The Company's primary source of working capital is from
operations, which includes sales of product, royalties, and periodic
license fees. At January 31, 1999, the Company had working capital of
approximately $9.0 million which includes cash and cash equivalents, and
marketable securities of approximately $7.2 million. The principal source
of cash in fiscal 1999 was approximately $1.9 million from operating
activities. This was offset by approximately $1.1 million used to purchase
treasury stock during fiscal 1999.
In January and March of 1999, the Company was issued a List of
Inspectional Observations ("483s") from FDA inspectors, citing numerous
inspectional observations relating to deficiencies in the Company's "good
manufacturing practice" at its Lynbrook, New York and Curacao, Netherlands
Antilles facilities, respectively. In addition, on May 10, 1999, the
Company received a letter from the FDA (the "FDA Letter") citing certain
inspectional observations relating to deficiencies at its Lynbrook, New
York facility, Curacao, Netherlands Antilles facility, and contract
manufacturing facility. The FDA Letter advised the Company that the FDA
will institute formal proceedings to revoke the Company's license to
manufacture Collagenase Santyl(R) Ointment unless the Company provides
satisfactory assurances to the FDA, including submitting to the FDA a
detailed, comprehensive plan of corrective action within 30 days, and
undertakes significant remedial action to address the observations listed
in the 483s and the FDA Letter, and otherwise demonstrates compliance with
applicable regulatory requirements. The Company has hired outside
consultants, has employed and will continue to employ additional staff for
the Quality Control and Quality Assurance departments to assist in
developing and executing a corrective action plan, and is taking steps to
reorganize the Quality Control and Quality Assurance departments.
As a result of the observations made by the FDA, the Company
reserved during the fiscal year ended January 31, 1999, $120,000 for
inventory that may need to be reprocessed to comply with FDA requirements.
With regard to the Reimbursement Agreement with KPC, in the event the FDA
does not permit the Company to release such ointment prepared by KPC, the
Company would be liable to reimburse KPC an amount estimated by the
Company to be approximately $500,000 for the material and direct labor
manufacturing costs of such ointment lots. Such a charge would apply to
fiscal year 2000, and may have a material adverse effect on fiscal 2000
results.
13
<PAGE>
The Company plans to invest between $1.5 million and $2.0
million in new equipment and its installation, at its Lynbrook, New York,
and Curacao, Netherlands Antilles facilities. This investment is intended
to address pertinent observations in the 483s and the FDA letter and
position the Company to insure the efficiency of its production process.
The Company estimates it could spend an additional $500,000 for
professional fees and other expenses in connection with the remediation of
the FDA observations. With approximately $9 million of working capital,
including approximately $7.2 million in cash and marketable securities at
January 31, 1999, the Company believes it has adequate financial resources
for these expenditures. In view of the Company's working capital position
and anticipated future profitable operations, although there can be no
assurance, management believes that the Company has sufficient liquidity
and capital resources to meet its immediate operating needs. The Company
believes that cash on hand and cash provided by operations will be
sufficient to meet its cash needs on an ongoing basis. However, if the
Company is unable to address and remedy the observations listed in the
483s and the FDA Letter, it will be required to suspend or terminate
operations. Due to the uncertainty of the outcome of the FDA issue, the
Company's independent auditors, KPMG LLP have noted in their report
the FDA Letter raises substantial doubt about the Company's ability
to continue as a going concern.
New Reporting Pronouncements
----------------------------
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe the adoption of
this statement will have a material effect on the Company's consolidated
financial statements.
Year 2000 Compliance
--------------------
The Company is preparing its computer systems and
hardware to contend with the issues related to the year 2000 ("Year
2000"). The Year 2000 issue results from computer programs being written
using two digits rather than four to define the applicable year and to
assume that the first two digits of a year were 19. As the year 2000
approaches, systems using such programs may recognize a date ending in
"00" as the year 1900 rather than the year 2000, and so may not accurately
process certain date-based information. To the extent that the Company's
software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications will be necessary to
avoid system failures and the temporary inability to process transactions
or engage in other normal business activities.
The initial phase of the Company's preparation for the
Year 2000 consists of assessment and planning. The assessment phase
includes the assessment of all computer hardware, software, systems and
processes ("IT systems") and non-information technology systems and other
equipment containing embedded microprocessor technology ("non-IT
systems").
The Company believes that all of its mission-critical
computer programs and hardware are currently Year 2000 compliant. The
Company has also assessed the risk relating to manufacturing equipment
which may be impacted by the Year 2000 issue. The Company believes that
its manufacturing equipment will not be affected by the Year 2000 issue
because its manufacturing equipment's embedded chips and software
programs, if any, are not date critical. In addition to the assessment of
the IT systems and non-IT systems, the Company has identified
relationships with third parties, including customers, vendors, suppliers
and service providers, which the Company believes are critical to its
business operations. The Company has one significant customer, which
represents approximately 90% of its fiscal 1999 revenues. The Company is
in the process of determining the extent to which these third parties are
addressing their Year 2000 compliance issues. Based on its assessment to
date of the Year 2000 readiness of its key customers, suppliers, including
vendors, service providers and other third parties on which it relies for
business operations, the Company believes that these third parties are
taking action related to the Year 2000. However, the Company has limited
ability to test and control such third parties' Year 2000 readiness, and
it cannot provide assurance that failure of such third parties to address
the Year 2000 issue will not cause an interruption of the Company's
business. The Company will continue to monitor the progress of these third
parties in resolving Year 2000 issues. The cost of ensuring Year 2000
14
<PAGE>
compliance is not expected to be material. The Company believes that under
a worst-case scenario, it could continue its normal business activities on
a manual basis. With respect to potential Year 2000 failures of its
vendors and suppliers, the Company plans to mitigate this risk by
purchasing and storing critical raw materials used in the production
process in advance, which the Company believes will enable it to continue
normal operations for several months.
There can be no assurance that the Company will fully
achieve Year 2000 compliance in a timely manner, that the Company will not
have to increase significantly its expenditures relating to any such
non-compliance, or that its business will not be materially adversely
affected by any such non-compliance.
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS
Page
----
<S> <C>
Independent Auditors' Report ............................................................................ F-1
Consolidated Balance Sheet as of January 31, 1999....................................................... F-2
Consolidated Statements of Income for Years ended January 31, 1999 and 1998............................... F-3
Consolidated Statements of Cash Flows for Years ended January 31, 1999 and 1998 .......................... F-4
Consolidated Statements of Stockholders' Equity for Years ended January 31, 1999 and 1998................. F-5
Notes to Consolidated Financial Statements............................................................... F-6
</TABLE>
15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item 9 as to directors
is incorporated by reference to the information captioned "Election of
Directors" included in the Registrant's definitive proxy statement in
connection with the 1999 meeting of shareholders. The information
regarding compliance with Section 16 of the Securities Exchange Act of
1934 and the Rules promulgated thereunder is incorporated by reference
therein to the Company's definitive proxy statement in connection with the
1999 meeting of shareholders.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 is incorporated
by reference to the information captioned "Remuneration and Other
Transactions with Management" included in the Registrant's definitive
proxy statement in connection with the 1999 meeting of shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated
by reference to the information captioned "Voting Securities" included in
the Registrant's definitive proxy statement in connection with the 1999
meeting of shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 is incorporated
by reference to the information captioned "Remuneration and Other
Transactions with Management" included in the Registrant's definitive
proxy statement in connection with the 1999 meeting of shareholders.
16
<PAGE>
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Exhibits Filed
Exhibit 3.1 Certificate of Amendment of Certificate of Incorporation
of Registrant, as amended. (Previously filed with
Registrant's Registration Statement on Form S-18
"Registration Statement" and incorporated herein by
reference.)
Exhibit 3.2 Registrant's by-laws as amended. (Previously filed as
Exhibit 3.2 and 3.2(a) to Registrant's Registration
Statement and incorporated herein by reference.)
Exhibit 4.1 Copy of Promissory Note executed by Edwin H. Wegman
in favor of Advance Biofactures Corporation. (Previously
filed as Exhibit 28.1 to Registrant's Registration
Statement and incorporated herein by reference.)
Exhibit 4.2 Copy of Promissory Note executed by Edwin H. Wegman in
favor of Sherman C. Vogel and Clarification of Loan
executed by Edwin H. Wegman, Sherman C. Vogel, and
Advance Biofactures Corporation. (Previously filed as
Exhibit 28.2 to Registrant's Registration Statement and
incorporated herein by reference.)
Exhibit 4.3 Copy of Promissory Note executed by Advance Biofactures
Corporation in favor of Myron E. Wegman. (Previously
filed as Exhibit 28.3 to Registrant's Registration
Statement and incorporated herein by reference.)
Exhibit 10.1 Form of 1991 Stock Option Plan of the Registrant.
(Previously filed as Exhibit 10.1 to Registrant's
Registration Statement and incorporated herein by
reference.)
Exhibit 10.2 Form of 1993 Stock Option Plan of Registrant. (Previously
filed on the Registrant's Form S-8 Registration No.
33-95116 dated August 27, 1995 and incorporated herein by
reference.)
Exhibit 10.3 Copy of Agreement between Advance Biofactures Corporation
and Knoll Pharmaceutical Company, without exhibits.
(Previously filed as exhibit 10.3 to Registrant's 10-KSB
for the year ended January 31, 1995 and incorporated
herein by reference.)
Exhibit 10.4 Copy of Lease between Advance Biofactures Corporation and
the Wilbur Street Corporation. (Previously filed as
exhibit 10.4 to Registrant's 10-KSB for the year ended
January 31, 1998 and incorporated herein by reference.)
Exhibit 10.5 Copy of Lease between the Curacao Industrial and
International Trade Development Company (Curinde) N.V.
and Advance Biofactures Corporation of Curacao, N.V.
(English translation). (Previously filed as Exhibit 10.5
to Registrant's Registration Statement and incorporated
herein by reference.)
Exhibit 10.6 Copy of Agreement between Advance Biofactures of Curacao,
N.V. and a Swiss company regarding a license for
Nucleolysin(R) for Switzerland and Italy, without
exhibits. (Previously filed as Exhibit 10.7 to
Registrant's Registration Statement and incorporated
herein by reference.)
Exhibit 10.7 Copy of Agreement between Advance Biofactures Corporation
and Bernard J. Sussman, as amended. (Previously filed as
Exhibit 10.8 to Registrant's Registration Statement and
incorporated herein by reference.)
Exhibit 10.8 Copy of Agreement between Advance Biofactures of Curacao,
N.V. and physician regarding testing of Nucleolysin(R).
(Previously filed as Exhibit 10.9 to Registrant's
Registration Statement and incorporated herein by
reference.)
17
<PAGE>
Exhibit 10.9 Form of Financial Consulting Agreement between the
Company and S.D. Cohn & Co., Inc.
Exhibit 10.10 Copy of Agreement between Bio-Specifics N.V. (a
wholly-owned subsidiary of Advance Biofactures of
Curacao, N.V.) and Sheldon R. Pinnell, MD. (Previously
filed as Exhibit 10.17 to Registrant's Registration
Statement and incorporated herein by reference.)
Exhibit 10.11 Copy of Employment Agreement with Dr. Rainer Friedel
(English summary attached). (Previously filed as exhibit
10.18 to Registrant's 10-KSB for the year ended January
31, 1996 and incorporated herein by reference.)
Exhibit 10.12 Copy of agreement to extend expiration of Underwriter's
warrants and Assignee of Warrants among Registrant, S.D.
Cohn & Co., and John C. Dello- Iacono. (Previously filed
as exhibit 10.19 to Registrant's 10-KSB for the year
ended January 31, 1996 and incorporated herein by
reference.)
Exhibit 10.13 Copy of Collagenase ABC license agreement between Advance
Biofactures of Curacao, N.V. and an Italian company,
without exhibits. (Previously filed as exhibit 29.1 to
Registrant's 10-KSB for the year ended January 31, 1995
and incorporated herein by reference.)
Exhibit 10.14 Copy of Collagenase ABC license agreement between Advance
Biofactures of Curacao, N.V. and a Swiss company, without
exhibits. (Previously filed as exhibit 29.2 to
Registrant's 10-KSB for the year ended January 31, 1995
and incorporated herein by reference.)
Exhibit 10.15 Copy of Promissory Note executed by Edwin H. Wegman in
favor of Advance Biofactures Corp. (Previously filed as
exhibit 29.3 to Registrant's 10-KSB for the year ended
January 31, 1995 and incorporated herein by reference.)
Exhibit 10.16 Copy of Consulting Agreement between BioSpecifics
Technologies Corp. and Stephen A. Vogel. (Previously
filed as exhibit 10.23 to Registrant's 10-KSB for the
year ended January 31, 1998 and incorporated herein by
reference.)
Exhibit 10.17 Form of 1997 Stock Option Plan of Registrant. (Previously
filed on the Registrant's Form S- 8 Registration No.
333-36485 dated September 26, 1997 and incorporated
herein by reference.)
Exhibit 22 Subsidiaries of the Registrant. (Previously filed as
exhibit 22 to Registrant's 10-KSB for the year ended
January 31, 1996 and incorporated herein by reference.)
Exhibit 23.1 Consent of KPMG LLP.*
Exhibit 27.1 Financial Data Schedule*
-----------------------------
* Filed herewith
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BIOSPECIFICS TECHNOLOGIES CORP.
(Registrant)
Date: May 17, 1999 By: /s/Edwin H. Wegman
---------------------------------------
Edwin H. Wegman, Chairman and President
In accordance with the Securities Exchange Act, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Edwin H. Wegman Chairman of the Board, President and May 17, 1999
--------------------- Director (Principal Executive Officer)
Edwin H. Wegman
May 17, 1999
Albert Horcher Secretary, Treasurer, Principal Financial
--------------------- and Chief Accounting Officer
Albert Horcher
May 17, 1999
Thomas L. Wegman Executive Vice President and Director
--------------------
Thomas L. Wegman
May 17, 1999
Paul A. Gitman, MD. Director
--------------------
Paul A. Gitman, MD.
May 17, 1999
Henry Morgan Director
--------------------
Henry Morgan
May 17, 1999
Sherman C. Vogel Director
--------------------
Sherman C. Vogel
May 17, 1999
Rainer Friedel Director
--------------------
Rainer Friedel
</TABLE>
19
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Biospecifics Technologies Corp.:
We have audited the accompanying consolidated balance sheet of Biospecifics
Technologies Corp. and subsidiaries as of January 31, 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two-year period ended January 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biospecifics
Technologies Corp. and subsidiaries at January 31, 1999 and the results of their
operations and their cash flows for each of the years in the two-year period
ended January 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has received a letter from the
United States Food and Drug Administration regarding the possible revocation of
the Company's license to manufacture its primary product which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Melville, New York
April 16, 1999, except as to
note 2, which is as of
May 10, 1999
F-1
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheet
January 31, 1999
Assets
------
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 5,086,725
Marketable securities 2,102,951
Accounts receivable 1,202,003
Inventories 1,488,525
Deferred tax assets, net 348,206
Prepaid expenses and other current assets 135,623
Due from related party 75,000
-------------
Total current assets 10,439,033
Property, plant and equipment, net 713,716
Due from related parties 170,101
Other assets 53,693
-------------
$ 11,376,543
=============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,179,900
Notes payable to related parties 12,510
Income taxes payable 78,566
Deferred revenue 175,000
-------------
Total current liabilities 1,445,976
Minority interest in subsidiaries 260,849
Stockholders' equity:
Series A Preferred stock, $.50 par value, 700,000 shares authorized; none
outstanding Common stock, $.001 par value; 10,000,000 shares authorized;
4,891,146 shares issued 4,891
Additional paid-in capital 3,734,375
Retained earnings 7,667,141
Accumulated other comprehensive loss (3,101)
-------------
11,403,306
Less: Treasury stock, 310,780 shares at cost (1,733,588)
-------------
Total stockholders' equity 9,669,718
-------------
Commitments and contingencies $ 11,376,543
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended January 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Net sales $ 4,556,033 3,389,315
Royalties 2,505,851 2,435,518
--------------- -------------
7,061,884 5,824,833
Costs and expenses:
Cost of sales 2,250,945 1,665,202
Selling, general and administrative 1,776,293 1,526,534
Research and development 2,050,049 1,904,808
--------------- -------------
6,077,287 5,096,544
--------------- -------------
Income from operations 984,597 728,289
Other income (expense):
Investment and other income 441,894 513,291
Interest expense (6,983) (7,613)
--------------- -------------
434,911 505,678
--------------- -------------
Income before provision for income taxes
and minority interest 1,419,508 1,233,967
Provision for income taxes 139,300 363,820
--------------- -------------
Income before minority interest 1,280,208 870,147
Minority interest in net income of subsidiaries 40,500 34,305
--------------- -------------
Net income $ 1,239,708 835,842
=============== =============
Basic net income per share $.26 .17
=============== =============
Weighted-average common shares outstanding 4,713,690 4,839,408
=============== =============
Diluted net income per common share $.26 .17
=============== =============
Weighted-average common and dilutive
potential common shares outstanding 4,800,406 4,914,268
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,239,708 835,842
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 349,593 305,057
Options issued to third parties 97,200 20,000
Gain on sales of marketable securities, net (93,895) (40,476)
Gain on sale of property - (96,683)
Minority interest in earnings of subsidiaries 40,500 34,305
Changes in operating assets and liabilities:
Accounts receivable 110,994 (412,041)
Inventories (5,805) (143,639)
Prepaid expenses and other current assets 133,394 13,860
Due from related party (75,000) 30,695
Deferred tax assets, net (169,206) (89,000)
Due from related parties 25,506 366,047
Other assets (16,893) (47,496)
Marketable securities, net 334,745 (490,351)
Accounts payable and accrued expenses (130,072) 769,073
Notes payable to related parties 500 500
Income taxes payable 16,726 51,490
Cumulative translation adjustment 253 14,261
------------- --------------
Net cash provided by operating activities 1,858,248 1,121,444
------------- --------------
Cash flows from investing activities:
Proceeds from sale of property - 156,534
Expenditures for property, plant and equipment (115,666) (207,374)
-------------- ---------------
Net cash used in investing activities (115,666) (50,840)
-------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options 20,175 10,860
Treasury stock purchases (1,107,087) (443,991)
-------------- ---------------
Net cash used in financing activities (1,086,912) (433,131)
-------------- ---------------
Increase in cash and cash equivalents 655,670 637,473
Cash and cash equivalents at beginning of year 4,431,055 3,793,582
------------- --------------
Cash and cash equivalents at end of year $ 5,086,725 4,431,055
============= ==============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 6,983 7,616
============= ==============
Income taxes $ 224,940 242,820
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Stock paid in Retained comprehensive Treasury
Shares Amount capital earnings loss stock
------ ------ ------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997 4,883,396 $4,883 $3,586,145 $5,591,591 $(17,615) $(182,510)
Options exercised 2,700 3 10,860 -- -- --
Options granted to consultant -- -- 20,000 -- -- --
Treasury stock purchases -- -- -- -- -- (443,991)
Change in cumulative
translation adjustment -- -- -- -- 14,261 --
Net income -- -- -- 135,842 -- --
-------- ----- --------- -------- ------ --------
Balance at January 31, 1998 4,886,096 4,886 3,617,005 6,427,433 (3,354) (626,501)
Options exercised 5,050 5 20,170 -- -- --
Options granted to consultant -- -- 97,200 -- -- --
Treasury stock purchases -- -- -- -- -- (1,107,087)
Change in cumulative
translation adjustment -- -- -- -- 253 --
Net income -- -- -- 1,239,708 -- --
---------- ------ ---------- ---------- -------- ------------
Balance at January 31, 1999 4,891,146 $4,891 $3,734,375 $7,667,141 $(3,101) $(1,733,588)
========== ====== ========== ========== ======== ============
(RESTUBBED TABLE)
Comprehensive
Total income
----- ------
Balance at January 31, 1997 $8,982,494 $ --
Options exercised 10,860 --
Options granted to consultant 20,000 --
Treasury stock purchases (443,991) --
Change in cumulative
translation adjustment 14,261 14,261
Net income 835,842 835,842
-------- -------
Balance at January 31, 1998 9,419,469 850,103
=======
Options exercised 20,175 --
Options granted to consultant 97,200 --
Treasury stock purchases (1,107,087) --
Change in cumulative
translation adjustment 253 253
Net income 1,239,708 1,239,708
---------- ----------
Balance at January 31, 1999 $9,669,718 $1,239,961
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999 and 1998
(1) Description of Business
-----------------------
BioSpecifics Technologies Corp. (the "Company") serves as a holding
company for Advance Biofactures Corporation ("ABC-New York"), Advance
Biofactures of Curacao, N.V. and subsidiaries ("ABC-Curacao"), and
Biospecifics Pharma GmbH ("Bio Pharma"), Germany.
The Company, through its subsidiaries, is engaged in the business of
producing and licensing for sale by others a fermentation derived
enzyme named Collagenase ABC (the "product") which is approved by the
U.S. Food and Drug Administration ("FDA"), and researching and
developing additional products derived from this enzyme for potential
use as pharmaceuticals. The Company currently derives revenues through
a license agreement with a U.S. pharmaceutical company (notes 11 (b)
and 12). Sales in fiscal 1999 and 1998 of the product have been
principally to that pharmaceutical company in the United States. The
license with this United States customer expires in 2003. The non
renewal at expiration of the license agreement by the United States
customer could have a material adverse impact on the financial
condition of the Company unless the Company secures other licensees.
The Company also has licensing agreements with a number of foreign
companies, some of which are marketing the product and others of which
will attempt to market the product or products in development in
licensed territories when permitted by local governmental authorities.
(2) Basis of Presentation and Subsequent Event
------------------------------------------
In January and March of 1999, the Company was issued a List of
Inspectional Observations ("483s") from FDA inspectors, citing
numerous inspectional observations relating to deficiencies in the
Company's "good manufacturing practice" at its Lynbrook, New York and
Curacao, Netherlands Antilles facilities, respectively. In addition,
on May 10, 1999, the Company received a letter from the FDA (the "FDA
Letter") citing certain inspectional observations relating to
deficiencies at its Lynbrook, New York facility, Curacao, Netherlands
Antilles facility, and contract manufacturing facility. The FDA Letter
advised the Company that the FDA will institute formal proceedings to
revoke the Company's license to manufacture Collagenase Santyl(R)
Ointment unless the Company provides satisfactory assurances to the
FDA, including submitting to the FDA a detailed, comprehensive plan of
corrective action within 30 days, and undertakes significant remedial
action to address the observations listed in the 483s and the FDA
Letter, and otherwise demonstrates compliance with applicable
regulatory requirements. The Company has hired outside consultants,
has employed and will continue to employ additional staff for the
Quality Control and Quality Assurance departments to assist in
developing and executing a corrective action plan, and is taking steps
to reorganize the Quality Control and Quality Assurance departments.
The Company intends to use its best efforts to address the observations
cited in the 483s and the FDA Letter to the satisfaction of the FDA.
However, there can be no assurance that the Company will be able to
address all the cited observations in a manner that is satisfactory to
the FDA or that the cost of the required remedial action will not have
a material adverse effect on the Company's operations. Failure to
adequately address the observations cited in the 483s and the FDA
letter will result in the revocation of the Company's license and
will cause the Company to terminate operations. In addition, the FDA
can take other actions which would not involve termination of the
Company's license, but which would nevertheless have a material
adverse effect on the Company.
F-6
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In order to ensure a supply of Santyl(R) ointment, the Company has
entered into an agreement with its major customer, Knoll
Pharmaceutical Company ("KPC"), pursuant to which KPC will continue to
produce ointment from Collagenase ABC enzyme provided by the Company.
In the event that the FDA does not permit the Company to release the
ointment prepared by KPC due to the Company's foregoing compliance
issues, the Company has agreed to reimburse KPC for the material and
direct labor manufacturing costs for ointment lots produced after
April 23, 1999 until June 1999, which period may be extended.
As a result of the observations made by FDA, the Company reserved during
the fiscal year ended January 31, 1999, $120,000 for inventory that
may need to be reprocessed to comply with FDA requirements. With
regard to an agreement with KPC, pursuant to which KPC will continue
to produce Santyl(R) ointment from collagenase enzyme provided by the
Company after April 23, 1999, in the event the FDA does not permit the
Company to release such ointment prepared by KPC, the Company would be
liable to reimburse KPC an amount estimated by the Company to be
$500,000 for the material and direct labor manufacturing costs of such
ointment lots. Such a charge would apply to fiscal year 2000, and
would have a material adverse affect on fiscal 2000 results.
The Company believes it will need to invest between $1.5 million and $2.0
million in new equipment and its installation, at its Lynbrook, New
York and Curacao, Netherlands Antilles facilities. This investment is
intended to address pertinent observations in the 483s and will also
position the Company to insure the efficiency of its production
process. The Company estimates it could spend an additional $500,000
for professional fees in connection with the remediation of the FDA
observations. With approximately $9 million of working capital,
including approximately $7.2 million in cash and marketable securities
at January 31, 1999, the Company believes it has adequate financial
resources needed to take corrective action.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
the incurrence of liabilities in the normal course of business. The
uncertainty associated with the ultimate outcome of the FDA matter
described above indicates that the Company may not be able to continue
as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments relating to the
recoverability of assets or the incurrence of additional liabilities
that may result if the Company's license to manufacture its primary
product is revoked.
(3) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries, ABC-New York and
ABC-Curacao, and its wholly-owned subsidiary, Bio Pharma. All
significant inter-company transactions and balances have been
eliminated in consolidation.
F-7
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Marketable Securities
---------------------
Marketable securities include investments in stocks and bonds. The Company
classifies its debt and marketable equity securities as trading
securities. Trading securities are bought and held principally for the
purpose of selling them in the near term and are recorded at fair
value. Unrealized holding gains and losses on trading securities are
included in investment and other income in the accompanying
consolidated statements of income.
Inventories
-----------
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Long-Lived Assets
-----------------
Property, plant and equipment are carried at cost. Depreciation and
amortization of property, plant and equipment is computed by the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C> <C>
Machinery, equipment, furniture and fixtures 5 to 10 years
Automobiles 5 to 10 years
Leasehold improvements lesser of the anticipated useful life
of the leasehold improvement or the term of the lease
</TABLE>
The Company reviews its long-lived assets for impairment whenever events
or circumstances indicate the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and
without interest, is less than the carrying amount of the asset, an
impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
Other Assets
------------
Other assets include the costs of patents filed and applied for. These
costs are generally amortized on a straight line basis over 4 to 6
years. Patent application costs are expensed when a patent is denied
or abandoned.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method
whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
F-8
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company considers all
temporary investments and time deposits with original maturities of
three months or less to be cash equivalents. There were approximately
$1,493,000 of cash equivalents at January 31, 1999.
Cumulative translation adjustment
---------------------------------
Assets and liabilities of ABC-Curacao and Bio Pharma are translated into
the U.S. dollar at year-end exchange rates and income and expense
items are translated at average exchange rates for the period. Gains
and losses resulting from translation are included in stockholders'
equity as accumulated other comprehensive income (loss).
Royalties and License Fee Income
--------------------------------
The Company enters into licensing agreements with pharmaceutical companies
regarding the sale of the Company's approved product and potential
products. Royalties on the approved product are recognized as income
in the year earned.
License fees for potential products are recognized as income in the year
applicable agreements are entered into if related license fees are
non-refundable and the Company is not responsible for obtaining
government approvals for the sale of such products. License fees
attributable to agreements which contain refund provisions or require
significant participation by the Company for obtaining government
approvals for product sales are deferred until all provisions of the
agreements are fulfilled.
Research and Development
------------------------
The Company conducts various research and development activities for
potential products. Research and development costs are charged to
expense when incurred. These costs amounted to $2,050,049 and
$1,904,808 in 1999 and 1998, respectively.
Net Income Per Share
--------------------
Basic EPS excludes dilution and is computed by dividing earnings available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the dilution that
would occur if common stock equivalents were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Dilutive common stock
options and warrants are included in the diluted EPS calculation using
the treasury stock method.
F-9
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock Based Compensation
------------------------
The Company accounts for stock options in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation", which gives companies the
choice to adopt the fair value method for expense recognition of
employee stock options or continue to account for stock options and
stock based awards using the intrinsic value method as outlined under
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") and to make pro forma disclosure of
net income and net income per share as if the fair value method had
been applied. The Company has elected to continue to apply APB 25 for
stock options and stock based awards and has disclosed pro forma net
earnings and net earnings per share for the years ended January 31,
1999 and 1998 as if the fair value method had been applied.
Use of estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Fair value of Financial Instruments
-----------------------------------
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of accounts receivable, prepaid assets,
accounts payable, and accrued expenses approximate fair value because
of the short maturity of those instruments. The fair value of notes
payable to related parties approximates the carrying value as the
stated interest rate is similar to other rates currently offered by
local institutions for similar term loans.
Comprehensive Income (loss)
---------------------------
In Fiscal 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income and its components. The only component of other
comprehensive income (loss) is the cumulative translation adjustment.
New Reporting Standard
----------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities",
which is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management does not believe the adoption of this
statement will have a material effect on the Company's consolidated
financial statements.
F-10
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Marketable Securities
---------------------
Marketable securities at January 31, 1999 consist of trading securities.
Fair values are based upon quoted market prices. The gross unrealized
holding gain (loss) and fair value of trading securities by major
types at January 31, 1999 were as follows:
<TABLE>
<CAPTION>
Gross unrealized
holding gain (loss) Fair Value
------------------- ----------
<S> <C> <C>
U.S. Government obligations $3,312 $211,562
Common and preferred stocks 31,436 1,751,417
Corporate bonds (29) 139,972
------- ----------
$34,719 $2,102,951
======= ==========
</TABLE>
Maturities of investment securities (excluding common and preferred
stock) as of January 31, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Due after one year through five years $311,562
Due after five years through fifteen years 39,972
-----------
$351,534
===========
</TABLE>
(5) Inventories
-----------
<TABLE>
<CAPTION>
Inventories at January 31, 1999 consist of:
<S> <C>
Raw materials $200,207
Work-in-process 959,079
Finished goods 329,239
-----------
$1,488,525
===========
</TABLE>
(6) Property, Plant and Equipment, net
----------------------------------
Property, plant and equipment at January 31, 1999 consist of:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $2,131,554
Furniture and fixtures 294,376
Leasehold improvements 523,456
Automobiles 50,084
------------
2,999,470
Less accumulated depreciation and amortization (2,285,754)
------------
$713,716
============
</TABLE>
Depreciation and amortization expense amounted to $275,548 and $186,876 in
fiscal 1999 and 1998, respectively. The fiscal 1999 amount includes a
write down of $87,250 relating to certain idle machinery and equipment.
F-11
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses at January 31, 1999 consist of:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable and accrued expenses $ 899,133
Accrued legal and other professional fees 106,255
Accrued payroll and related costs 174,512
------------
$ 1,179,900
============
</TABLE>
(8) Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Federal $218,700 $334,000
State 76,000 65,000
Foreign 14,400 53,820
--------- --------
309,100 452,820
--------- --------
Deferred:
Federal (168,800) (80,000)
State (1,000) (9,000)
--------- --------
(169,800) (89,000)
--------- --------
$139,300 $363,820
========= ========
</TABLE>
The effective income tax rate of the Company differs from the federal
statutory tax rate of 34% in fiscal 1999 and 1998 as a result of the
effect of the following items:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed tax provision at statutory rate $482,633 $419,549
Tax effect of foreign sourced income, net of foreign taxes (188,781) (168,186)
State income taxes, net of federal benefit 50,820 37,339
Non-deductible expenses 16,689 17,000
Minority interest in subsidiaries 13,770 12,000
Orphan drug and other tax credits (312,340) -
Other, net 76,509 46,118
-------- --------
$139,300 $363,820
======== ========
</TABLE>
The Company intends to reinvest the undistributed earnings of its foreign
subsidiaries and does not currently plan to repatriate such
undistributed earnings (approximately $5,477,000 as of January 31,
1999) to the United States.
F-12
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The benefit for deferred taxes of $169,800 and $89,000 in fiscal 1999 and
1998, respectively resulted principally from the capitalization of
certain inventory costs, generation of deferred tax credits, and
certain expenses that are currently non-deductible for tax purposes.
The Company has not recorded a valuation allowance against these
deferred tax assets as the Company believes that it is more likely
than not that such amounts will be recovered. The deferred tax asset
as of January 31, 1999 is primarily comprised of Orphan Drug and other
tax credits and certain expenses that are non-deductible for tax
purposes currently.
(9) Line of Credit
--------------
The Company, through its subsidiary, ABC-Curacao, maintains a line of
credit with a Netherlands Antilles bank under which the bank will lend
up to $110,000 (NAf 200,000) to ABC-Curacao, with interest at the
bank's prime lending rate (12% at January 31, 1999). Drawings under
the line of credit would be secured by substantially all of the assets
of ABC-Curacao, payable on demand, and guaranteed by ABC-New York.
There were no borrowings under such line of credit at January 31,
1999.
(10) Stockholders' Equity
--------------------
Stock Option Plans
------------------
In April 1991, the Company established a stock option plan (the "1991
plan") for eligible key employees, directors, independent agents, and
consultants who make a significant contribution toward the Company's
success and development and to attract and retain qualified employees.
Under the 1991 plan, qualified incentive stock options and
non-qualified stock options may be granted to purchase up to an
aggregate of 220,000 shares of the Company's common stock, subject to
certain anti-dilution provisions. The option price per common share
may not be less than 100% (110% for qualified incentive stock options
granted to stockholders owning at least 10% of common shares) of the
fair market value of common shares on the date of grant. In general,
the options will vest and become exercisable in four equal annual
installments following the date of grant, although the Board of
Directors, at its discretion, may provide for different vesting
schedules, and expire ten years (five years for qualified incentive
stock options granted to stockholders owning at least 10% of common
shares) after such date.
In July 1994, stockholders approved a stock option plan (the "1993 plan")
with terms identical to the 1991 plan. The 1993 plan authorizes the
granting of awards of up to an aggregate of 200,000 shares of the
Company's common stock, subject to certain anti-dilution provisions.
In July 1997, stockholders approved a stock option plan (the "1997 plan")
with terms identical to the 1991 and 1993 plans. The 1997 plan
authorizes the granting of awards of up to an aggregate of 500,000
shares of the Company's common stock, subject to certain anti-dilution
provisions.
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Had compensation cost been recognized
consistent with SFAS 123, the Company's consolidated net earnings in
fiscal 1999 would have been reduced to $1,102,513 and consolidated net
earnings in fiscal 1998 would have been reduced to $685,714. Earnings
per share in fiscal 1999 and 1998 would have been reduced to $.23 per
share, and $.14 per share, respectively.
F-13
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The per share weighted average fair value of stock options issued to
employees by the Company during fiscal 1999 and 1998 was $2.56 and
$2.82, respectively, on the date of grant. In fiscal 1999 and 1998,
the assumptions of no dividends, expected volatility of approximately
60%, and an average expected life of 5 years were used by the Company
in determining the fair value of the stock options granted using the
Black Scholes option pricing model. In addition, the calculations
assumed a risk free interest rate of 5.0% in fiscal 1999 and 6.25%
fiscal 1998.
The summary of the stock options activity is as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
-------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 422,900 $5.62 207,475 $6.20
Options granted 73,500 4.63 231,850 5.23
Options exercised (5,050) 4.00 (2,700) 4.21
Options canceled or expired (103,800) 4.99 (13,725) 8.13
--------- --------
Outstanding at end of year 387,550 5.27 422,900 5.62
Options exercisable at year end 316,130 5.15 242,900 5.73
Shares available for future grant 449,250 - 418,950 -
</TABLE>
During fiscal 1999, the Company granted a total of 20,000 options to a
member of the scientific advisory board at an exercise price of $5.81
per share. These options vest at the rate of 25% per year. In
connection with these options, the Company recorded an expense of
$67,200 representing the estimated fair value of the options. During
fiscal 1998, the Company granted a total of 100,000 options to a
consultant (note 13) at an exercise price of $5.00 per share. These
options were exercisable beginning one year from the date of grant and
are only exercisable for a three-month period one year from the date
of grant. In connection with these options, the Company recorded an
expense of approximately $30,000 in fiscal 1999 and $20,000 in fiscal
1998 representing the estimated fair value of the options. These
options expired January 10, 1999. During fiscal 1999 and 1998, the
Company granted 53,500 and 131,850 options, respectively, to employees
of the Company at prices ranging from $4.00 to $5.81.
Options for 316,130 shares are currently exercisable at prices ranging from
$3.00 to $8.00 with a weighted average exercise price of $5.15 and a
weighted average remaining contractual life of 7 years. The remaining
71,420 options outstanding have a weighted average exercise price of
$5.79 and a remaining weighted average contractual life of 3 years.
F-14
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Warrants
The Company has underwriter's warrants outstanding to purchase up to
120,000 shares of common stock at an exercise price of $3.75 per
share, which are exercisable until November 21, 1999.
(11) Commitments and Contingencies
-----------------------------
(a) Lease Agreements
----------------
The Company's operations are principally conducted in leased premises.
Future minimum annual rental payments required under noncancellable
operating leases are approximated as follows:
Year ending January 31,
1999 191,000
2000 191,000
2001 191,000
2002 191,000
2003 191,000
Rentexpense under all operating leases amounted to approximately $191,000
and $119,000 in fiscal 1999 and 1998, respectively. The S.J. Wegman
Company, which is owned by the Company's President and certain
relatives, is the 100% shareholder of the Wilbur Street Corporation
("WSC"), which owns and leases a facility to ABC-New York. On January
30, 1998, WSC and the Company entered into a triple net lease
agreement which provides for an annual rent starting at $125,000,
which can increase annually by the amount of the annual increase in
the consumer price index for the greater New York metropolitan region.
The lease term is 7 years, expiring January 31, 2005. The Company paid
$161,000 and $90,000 representing rent and real estate taxes to WSC in
fiscal 1999 and 1998, respectively. The Company subleases a portion of
the space subject to this lease to an unaffiliated entity for $24,000
per year, pursuant to a verbal lease agreement.
ABC-Curacao leases a building in Brievengat, Curacao, Netherlands Antilles
from a company wholly-owned by the Insular Territory of Curacao. The
lease term, which originally commenced on January 1, 1977 is
automatically renewed upon the same terms every five years, unless
either party gives three months notice prior to the expiration of the
five-year period. The lessor is entitled to revalue the rent for each
successive five-year period. The lease has been renewed through March
1, 2001. Rent expense amounted to approximately $30,000 in fiscal 1999
and 1998.
(b) Royalty and License Agreements
------------------------------
The Company's major royalty and license agreements are for its FDA
approved product, Collagenase ABC, and for Nucleolysin(R), a product
in development.
The Company's principal Collagenase ABC agreement is with a United States
licensee and was renewed in 1993 on terms similar to the prior
agreement. It extends for ten years with automatic renewal for a like
period unless the licensee notifies the Company of its intention to
terminate 6 months prior to renewal date. The agreement provides that
the license is exclusive in the United States and Canada provided
there are reasonable annual increases in Collagenase Santyl(R)
Ointment sales and best efforts are made to increase sales. The
licensee pays the Company for the product and an annual royalty
calculated as a percent of net sales of Collagenase Santyl(R)
Ointment. The minimum annual royalty is $60,000 per year. Royalties
from this licensee were $2,505,851 and $2,435,518 in fiscal 1999 and
1998, respectively.
F-15
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In fiscal 1997, the Company entered into an agreement to license
Collagenase ABC for sale in Germany to the German subsidiary of an
international pharmaceutical company. The agreement calls for an
initial payment on signing and further payments if and when marketing
approval of Collagenase ABC ointment is granted by the German health
authority. Accordingly, included in deferred revenue at January 31,
1999 is $45,000 from this agreement. The deferred revenue is
refundable if approval in Germany is not obtained.
The Company has a distribution agreement with a Swiss company pursuant to
which that company will attempt to obtain approval from the
appropriate agencies in certain countries, including Italy, to sell
Nucleolysin(R). The agreement provides for exclusive rights within the
countries. To date, the licensee has paid $130,000, which is included
in deferred revenue at January 31, 1999. The advance payments are
subject to certain credits and/or refund if approval in Italy is not
obtained, depending on the reasons therefor. The agreement with the
Swiss company is multi-year, subject to automatic yearly renewals
unless either party provides notice of non-renewal.
There were no license fees earned in fiscal 1999 or 1998.
(c) Scientific Advisory Board
-------------------------
The Company has an eight member Scientific Advisory Board ("the Board")
that provides research and consultation services to the Company. In
fiscal 1999 and 1998, the Company has recorded $24,000 and $22,500,
respectively, representing payments to Board members under these
agreements. The Company has oral agreements with three of the eight
members of the Board and a written agreement with one member providing
for honoraria of approximately $6,000 each, terminable at the option
of the Company.
(d) Potential Product Liability
---------------------------
The sale of Collagenase ABC, as well as the development and marketing of
any potential products of the Company, expose the Company to potential
product liability claims both directly from patients using the product
or products in development, as well as from the Company's agreement to
indemnify certain distributors of the product for claims made by
others. The Company has product liability insurance which covers the
use of the licensed product, Collagenase Santyl(R) and clinical
experiments of potential products, in the United States. No known
claims are pending against the Company at the current time.
(e) Employment Agreement
--------------------
The Company has an employment agreement with the managing director of its
German subsidiary, Bio Pharma. The contract can be terminated by the
Company or the managing director upon one year's written notice. The
agreement provides for an annual salary, currently $195,000, and a
like severance payment if the agreement is terminated by the Company
without cause.
F-16
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Segment Information
-------------------
(a) Major Customer
--------------
Approximately 90% and 92% of the Company's revenues were earned from one
pharmaceutical manufacturer and distributor in the United States in
fiscal 1999 and 1998, respectively.
(b) Operations by Geographic Area
-----------------------------
The Company is engaged in one segment, specifically research, development,
production and distribution of pharmaceutical products. Operations in
this business segment are summarized below by geographic area. All
unaffiliated revenues from South America are generated by ABC-Curacao
and primarily represent export sales made to South America and India
("S.A.").
<TABLE>
<CAPTION>
North S.A. and
Year ended January 31, 1999: America Europe Eliminations Consolidated
- ---------------------------- ------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
unaffiliated customers $6,369,073 $692,691 - $7,061,884
Intercompany revenue between
geographic regions - 1,073,656 (1,073,656) -
Income from operations 1,222,858 386,425 (624,686) 984,597
Identifiable assets 6,369,430 5,669,427 (662,314) 11,376,543
Capital expenditures 78,429 37,237 - 115,666
Depreciation and amortization 151,500 198,093 - 349,593
North S.A. and
Year ended January 31, 1998: America Europe Eliminations Consolidated
- ---------------------------- ------- ------ ------------ ------------
Revenues from
unaffiliated customers $5,387,819 $437,014 - $5,824,833
Intercompany revenue between
geographic regions - 854,070 (854,070) -
Income from operations 853,577 388,862 (514,150) 728,289
Identifiable assets 6,850,140 4,938,410 (589,910) 11,198,640
Capital expenditures 133,677 73,697 - 207,374
Depreciation and amortization 178,557 126,500 - 305,057
</TABLE>
F-17
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The information presented above may not be indicative of results if the
geographic areas were independent organizations. Intercompany
transactions are made at transfer prices which are believed to be
equivalent to those made at arms-length.
(13) Related Party Transactions
--------------------------
Included in due from related party is an unsecured loan to the Company's
president in the amount of $75,000. This amount was repaid in March
1999. Included in due from related parties at January 31, 1999 is a
promissory note from the Company's president for $56,820, payable to
ABC-New York. The note is payable upon demand and bears interest at 9%
per annum. Also included is $30,675 representing advances made to
Wilbur St. Corporation and a 9% non-amortizing mortgage from Wilbur
Street Corporation in the amount of $82,606 (note 11).
In fiscal 1999, the Company's president repaid the Company a total of
$363,339 representing $335,114 of principal borrowings and $28,225 of
interest, which is included in investment and other income in the
accompanying statements of consolidated income. In fiscal 1998, the
Company recorded approximately $68,000 of interest from related party
loans, which is included in investment and other income in the
accompanying statements of consolidated income.
ABC-New York has notes payable to a director of the Company and to a
partner of the S.J. Wegman Company, an affiliate, amounting to $12,510
at January 31, 1999. The notes, which bear interest at 9% per annum,
are payable on demand.
The Company entered into a one-year consulting agreement with Stephen A.
Vogel (the "consultant") effective October 10, 1997. Mr. Vogel is a
son of a member of the Company's Board of Directors. The agreement
provided that the consultant provide the Company with such advice,
service, consultation, and assistance as the Company would seek with
respect to the Company's financial matters and provide such other
services as the Board of Directors requests. The agreement provided
for a consulting fee of $10,000 per month and an option to purchase
100,000 shares of the Company's common stock at $5.00 per share. The
agreement also provided for the consultant to receive fees if certain
events occurred as a result of the consultant's actions or
recommendations. The Company reimbursed the consultant for out of
pocket and other expenses incurred in connection with rendering
services. The agreement expired on October 10, 1998. On January 10,
1999, the options expired. During fiscal 1999, the Company recorded
general and administrative expenses of $131,580 relating to this
agreement, comprised of $101,580 of consulting fees and $30,000 for
the estimated fair value of the options granted on October 10, 1997.
During fiscal 1998, the Company recorded general and administrative
expenses of $56,275 relating to this agreement, comprised of $36,275
in consulting fees and $20,000 for the estimated fair value of the
options granted for the fiscal year. Mr. Vogel continues to be
retained on a month to month basis and receives a consulting fee of
$5,000 per month, and reimbursement of out of pocket expenses.
(14) Employee Benefit Plan
---------------------
ABC-New York has a 401(k) Profit Sharing Plan for employees who meet minimum age
and service requirements. Contributions to the plan by ABC - New York are
discretionary and subject to certain vesting provisions. The Company made no
contributions to this plan for the years ended January 31, 1999 and 1998.
F-18
<PAGE>
EXHIBIT INDEX
Exhibit
-------
Exhibit 23.1 Consent of KPMG LLP
Exhibit 27.1 Financial Data Schedule
Independent Auditors' Consent
The Board of Directors
Biospecifics Technologies Corp.:
We consent to incorporation by reference in the Registration Statements No.
33-95116 and No. 333-36485 on Form S-8 of Biospecifics Technologies Corp. of our
report dated April 16, 1999, except as to note 2, which is as of May 10, 1999,
relating to the consolidated balance sheet of Biospecifics Technologies Corp.
and subsidiaries as of January 31, 1999 and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in the
two-year period ended January 31, 1999, which report appears in the January 31,
1999 annual report on Form 10-KSB of Biospecifics Technologies Corp. Our report
contains an explanatory paragraph that states that the Company has received a
letter from the United States Food and Drug Administration regarding the
possible revocation of the Company's license to manufacture its primary product
which raises substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Melville, New York
May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-01-1997
<PERIOD-END> Jan-31-1998
<CASH> 4,431,055
<SECURITIES> 2,343,801
<RECEIVABLES> 1,312,997
<ALLOWANCES> 0
<INVENTORY> 1,482,720
<CURRENT-ASSETS> 10,018,589
<PP&E> 3,044,398
<DEPRECIATION> 2,170,798
<TOTAL-ASSETS> 11,198,640
<CURRENT-LIABILITIES> 1,558,822
<BONDS> 0
0
0
<COMMON> 4,886
<OTHER-SE> 10,044,438
<TOTAL-LIABILITY-AND-EQUITY> 11,198,640
<SALES> 5,824,833
<TOTAL-REVENUES> 5,824,833
<CGS> 1,665,202
<TOTAL-COSTS> 1,665,202
<OTHER-EXPENSES> 1,904,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,613
<INCOME-PRETAX> 1,233,967
<INCOME-TAX> 363,820
<INCOME-CONTINUING> 835,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
