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, 2000
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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
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BIOSPECIFICS TECHNOLOGIES CORP.
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(Name of small business issuer in its charter)
Delaware 11-3054851
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 Wilbur Street, Lynbrook, New York 11563
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(Address of principal executive offices) (Zip Code)
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
-----------------------------
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
approximately $6,621,000. The aggregate market value of common voting stock held
by non-affiliates of the Issuer was approximately $8,533,000 computed by
reference to the last sale price at which the stock was sold on April 20, 2000
as reported by Nasdaq. As of April 20, 2000, 4,529,766 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 2000 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"). These revenues are derived from two sources i.) sales of
Collagenase ABC enzyme in powder form (the "product" or the "enzyme") and
ii.) royalties derived from sales of Collagenase Santyl(R) Ointment, which
contains the product. Since 1972, the Company has sold Collagenase ABC,
its only commercial product to date, principally in the United States
through KPC. On January 31, 2000, KPC sublicensed its exclusive marketing
rights to Smith & Nephew, Inc. with the Company's permission. See
"Agreements for the Distribution of Collagenase ABC". 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.
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. Collagenase ABC does not attack collagen in healthy tissue or in
newly formed granulation tissue.
Agreements for the Distribution of Collagenase ABC
--------------------------------------------------
Collagenase ABC enzyme powder (the "product" or the
"enzyme") is the active ingredient of a topical ointment. The Company does
not directly market the product to end-users. It supplies the product in
powder form to pharmaceutical companies (primarily KPC) for compounding
into ointment. The pharmaceutical companies market the ointment to
end-users. The Company's production of the product was voluntarily
suspended due to ongoing and planned renovation at its manufacturing
facilities in Curacao and Lynbrook to address various FDA concerns,
although final stage production and testing continues at the Lynbrook
facility. Until completion of the renovation, the Company will supply
customers with the product from its inventory. See "Government
Regulation." Pursuant to the agreement with KPC, the Company supplies KPC
with the product and controls the production by KPC 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.
* As used in this Report on Form 10-KSB, the terms "Company" and
"Registrant" are used interchangeably and denote BioSpecifics
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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.
KPC Agreement and Sublicense
----------------------------
The Company has 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 uses its best efforts to
increase sales. 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 2000 and 1999 were
approximately $2,947,000 and $2,506,000, respectively. As part of the KPC
Agreement, KPC and its U.S. affiliates have (i) 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, (ii) will make no efforts to achieve registration
with the FDA for collagenase powder manufactured by parties other than the
Company, and (iii) will not collaborate with any third party attempting to
achieve a registration.
On January 31, 2000, pursuant to a sublicense and
assignment agreement (the "Sublicense Agreement"), to which ABC is not a
party, KPC sublicensed its rights to Smith & Nephew, Inc. ("S&N") with the
consent of ABC. Under the sublicense, KPC will continue to purchase the
product from the Company and manufacture the ointment. S&N will market the
ointment. In connection with the sublicense, the Company entered into
several agreements with KPC and S&N. These included an agreement
allocating responsibility under the KPC Agreement among ABC, KPC, and S&N
for both the sublicense and license period. Another agreement imparts
certain obligations upon ABC to address the FDA issues concerning the
Curacao and Lynbrook manufacturing facilities. KPC will assign its license
rights in the KPC Agreement to S&N in the event of FDA approval of a
compliance program being undertaken by ABC. See "Government Regulation".
If the license rights are assigned to S&N, the KPC agreement will be
automatically extended at that time until 2013.
KPC accounted for approximately $5,970,000 and
$6,353,000in product sales and royalties of the Company for the fiscal
years ended January 31, 2000 and 1999, respectively. These amounts were
approximately 90% of the Company's revenues during both the respective
fiscal years. As of January 31, 2000, the Company had approximately $2.1
million of firm booked orders with KPC for the product, compared to
approximately $1.0 million of firm booked orders with KPC as of January
31, 1999. The Company's product is approved in two other countries, Brazil
and India, and sold to commercial customers in those countries, who
compound the product into ointment. In fiscal 2000, sales to the customers
in Brazil and India represented approximately 8% of total revenues. There
is no license and supply agreement with the customer in Brazil. The
product and purified collagenase are also sold for non-sponsored research
purposes.
Other Agreements for the distribution of Collagenase ABC
--------------------------------------------------------
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 the
German health authority grants marketing approval of Collagenase ABC
ointment. 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.
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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, 2000 and
1999.
The Company entered into a license agreement with a
company in India that began marketing collagenase ointment in India in
1995. The licensee's purchases of the product were not material in either
of the fiscal years ended January 31, 2000 and 1999.
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
--------------------------
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 Dupuytren's disease, Peyronie's
disease, and keloids. See "Investigational New Drug Applications ("IND's")
for Injectable Collagenase ABC". The Company produced purified collagenase
for injection at its facilities in Curacao and New York which are being
used in U.S. clinical trials. The Company plans to renovate its pilot
facility in Lynbrook for manufacture of purified injectable collagenase in
order to support plans for Phase 3 trials for Dupuytren's disease. The
Company sells purified collagenase for non-human research in the United
States and other countries.
Investigational New Drug Applications ("INDs") for Injectable Collagenase
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ABC
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The Company and its affiliates have filed INDs with the
FDA and are 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
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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
for the treatment of Dupuytren's disease has received "orphan drug"
designation from the FDA. Orphan drug designation imparts certain benefits
including a seven year period of exclusivity after approval for marketing,
the ability to apply for clinical research grant funds, tax credits for
costs of clinical trials performed in the U.S., assistance from FDA in
protocol development, and likely exemption from "user fees" charged by FDA
after drug approval. 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
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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 with the last patient enrolled in February 1999.
Dose ranging studies are being conducted at Stony Brook and Stanford
University. Investigators at Stony Brook have completed their portion of
the dose ranging trial and Stanford is scheduled to begin in May 2000.
Preliminary open-label results at Stanford are positive.
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 was awarded a patent for this use in March 2000,
has been assigned another 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 Devine-Tidewater Urology, Norfolk,
Virginia, the largest United States center for the study and treatment of
Peyronie's disease. In August 1999, the trial's investigator reported on
27 patients who were treated in an open label trial. The investigator
reported that the results were encouraging and additional trials are
planned.
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. The Company has been assigned a United States patent for this
application of purified collagenase. Approximately 40 persons have been
treated for this condition. While this use for injectable collagenase
shows potential, the Company is focusing its development activities on
Dupuytren's and Peyronie's diseases at this time.
Nucleolysin(R) and Agreements to Distribute Nucleolysin(R)
----------------------------------------------------------
The Company 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 obtained the
registered trademark Nucleolysin(R). 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. While the Company has clinically
tested Nucleolysin(R) in the United States, there are no plans to proceed
with the clinical program.
In 1990, the Company entered into an agreement with an
unaffiliated Swiss company to obtain the approval of the appropriate
agencies in Italy and Switzerland to market Nucleolysin(R) in such
countries. In late 1999, the Italian health regulatory authority advised
the licensee that additional information and clinical trials were
required. The licensee then advised the Company that it was abandoning
this program and amicably terminated the agreement, leaving each party
free from further obligation. As a result, the Company recognized $130,000
as a license fee in fiscal 2000, which had been received and recorded as
deferred revenue in prior fiscal year periods.
Other Proposed Products and Uses for Products
Treatment of Burns
------------------
Collagenase Santyl(R) has 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
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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. Papers presented at the John A. Boswick, MD. Burn
and Wound Care Symposium in February 1999 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 Ophthalmology (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
limited 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.
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Manufacturing
The Company produces Collagenase ABC, which is the active
ingredient of a topical ointment. It supplies the product in powder form
to pharmaceutical companies for compounding into ointment. These
pharmaceutical companies market the ointment to end-users. The Company's
production of the product was voluntarily suspended due to ongoing and
planned renovation at its manufacturing facilities in Curacao and Lynbrook
to address various FDA concerns, although final stage production and
testing continues at the Lynbrook facility. Until completion of the
renovation, the Company will supply customers with the product from its
inventory. See "Government Regulation". Pursuant to the agreements with
KPC and S&N, the Company supplies KPC with the product and controls the
production by KPC of an ointment containing the product, which since
February 1, 2000 has been marketed by S&N.
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 Healthpoint Ltd and the Dow B. Hickam division of Marion
Labs. 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
hydrotherapy. The Company believes enzymatic debridement 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 compounded and sold ointment containing the product
in countries other than the United States under KAG's trademarked name,
"Iruxol(R)." The contract expired in 1992. KAG now produces 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, which enzyme KAG acquired in connection with 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.
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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 selling costs, 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, and since February 1, 2000, Smith & Nephew.
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".
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 $22
million in research on collagenase and other products, and it is
continuing to conduct testing on such products. The Company incurred
approximately $1,660,000 and $2,050,000 in research and development
activities during its fiscal years ended January 31, 2000 and1999,
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
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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. The Company's
production of the product was voluntarily suspended due to ongoing and
planned renovation at its manufacturing facilities in Curacao and Lynbrook
to address various FDA concerns, although final stage production and
testing continues at the Lynbrook facility.
In January and March of 1999, ABC was issued a List of
Inspectional Observations on FDA Form 483 (the "Form 483") from FDA
inspectors, citing numerous inspectional observations relating to
deficiencies in the Company's compliance with FDA regulations at its
Lynbrook, New York and Curacao, Netherlands Antilles facilities. In
addition, on May 10, 1999, ABC 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 at KPC. The FDA Letter
advised ABC that the FDA will institute formal proceedings to revoke the
ABC's Establishment License to manufacture Collagenase Santyl(R) Ointment
unless ABC provided satisfactory assurances to the FDA, including
submitting to the FDA a comprehensive plan of corrective action to address
the observations listed in the Form 483 and the FDA Letter, and otherwise
demonstrate compliance with applicable regulatory requirements. The
Company has provided the FDA with a plan of corrective action and has had
a number of meetings with the FDA to discuss the plan of corrective action
and the renovation of the Curacao production facility. ABC has submitted a
number of periodic updates to the FDA on progress under the plan. ABC
hired outside consultants and employed additional staff for its Quality
Unit.
The Company invested approximately $1.1 in new equipment
through April 2000 and will invest at least an additional $2.2 million to
$2.6 million in new equipment and renovations at its Curacao, Netherlands
Antilles and Lynbrook, New York facilities over the next twelve months.
This investment is intended to address matters described in the Form 483
and the FDA Letter, as well as to modernize and ensure the efficiency of
the Company's production process. Through January 31, 2000 the Company had
spent approximately $1,000,000 for professional fees and other expenses in
connection with the remediation of the FDA's deficiency observations, and
estimates it could spend an additional $600,000 in fees and other expenses
in connection with the remediation of the FDA's deficiency observations.
The Company started extensive renovations at the Curacao
facility in March 2000. As a result of the renovation at the Curacao
facility that began March 1, 2000, the Company abandoned equipment and
improvements with a carrying value of approximately $200,000 for the year
ended January 31, 2000.
A supplement (the "supplement') to ABC's Establishment
License will have to be approved by the FDA after renovation before any
additional enzyme produced at the Curacao facility can be used by KPC. As
part of the approval process for the supplement, the FDA may conduct an
inspection of the Curacao facility. The Company estimates that in the
best-case scenario, either one or both the Curacao and Lynbrook facilities
could be back in production by the fourth quarter of calendar 2000 and
produce enzyme which could be available to KPC during the fourth quarter
of 2001. Due to the uncertainty of the FDA approval process however, there
can be no assurances that target dates will be met. In anticipation of the
renovation and suspension of manufacturing operations, the Company
accumulated an inventory of the enzyme which KPC will use to contract
manufacture Collagenase Santyl(R) Ointment during the renovation. In the
opinion of the Company, this inventory will permit KPC to compound enough
Collagenase Santyl(R) ointment to fulfill the forecasted requirements of
S&N through the second quarter of 2002.
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Although the Company believes that it has made
considerable progress in addressing the FDA concerns addressed in the Form
483 and the FDA Letter, if the Company is unable to further address these
matters in a timely manner, there may be delays in the delivery of product
produced in the renovated facilities to KPC for use to contract
manufacture Collagenase Santyl(R) Ointment. Such delays could have a
material adverse effect on the Company's future operating results.
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 has produced 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 plant in which the
product has been produced and the production process are subject to
inspection by the Pharmaceutical Bureau under the laws and regulations of
the Netherlands Antilles. Production has been suspended until renovations
are completed and approved, as discussed above in "Regulation in the
United States".
Patent and Trademark Protection
Patents
-------
The Company is the assignee or licensee of eleven U.S.
patents. 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 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 36 full-time employees, of which 31 are
located at the Lynbrook facility, 4 are at the Curacao facility, and 1 is
in Germany. There are also 6 part-time employees in Lynbrook and 4 in
Curacao. 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
10
<PAGE>
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 former 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, 2000,
the Company recorded general and administrative expenses of $60,000
relating to this agreement, comprised of consulting fees. 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 for that fiscal year and which expired in 1999.
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. 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 each
of the fiscal years ended January 31, 2000 and 1999, the Company paid rent
of $125,000 and real estate taxes of approximately $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 has been 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
11
<PAGE>
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 20, 2000, the closing price for the Company's Common Stock was
$4.0625. The table below sets forth the high and low sale prices for the
Company's Common Stock for the period February 1, 1998 through January 31,
2000, as reported by Nasdaq.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C> <C>
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
April 30, 1999 $4 $3-5/16
July 31, 1999 $3-3/4 $2-15/16
October 31, 1999 $2-15/16$1-7/8
January 31, 2000 $2-1/2 $1-5/8
</TABLE>
On April 20, 2000, there were 111 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, 2000, a total of
361,380 shares have been repurchased at an average price of $5.29 per
share. The Company has not repurchased shares since July 1999 and has
suspended the buyback for the immediate future.
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, are
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, the
ability of the Company to complete the renovation of its production
facilities and comply with the Form 483 and FDA Letter, the Company's
estimate that its inventory of product is sufficient until the renovated
facilities can produce again, changing market conditions, the impact of
12
<PAGE>
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 product sales were $3,543,563 and $4,556,033 for the
fiscal years ended January 31, 2000 and 1999, respectively, a decrease in
fiscal 2000 of $1,012,470 or 22%. Sales of the product, Collagenase ABC,
to KPC decreased by 22% and sales to the Company's customer in Brazil
decreased by 30%, due to timing of deliveries. At January 31, 2000 the
Company had approximately $380,000 of deliveries in arrears due to the
product not being ready for delivery. The remaining decrease represents
reduction in the volume of sales orders, which the Company views as
temporary.
Royalties earned on Collagenase Santyl(R) ointment sales
by KPC were $2,947,302 and $2,505,851 for the fiscal years ended January
31, 2000 and 1999, respectively, representing an increase in fiscal 2000
of $441,451 or 18%. During the fourth quarter of fiscal 2000, KPC
initiated a sales promotion for Santyl(R). Wholesalers responded by buying
at record levels, as reported to the Company by KPC.
The Company recorded a $130,000 license fee in the fiscal
year ended January 31, 2000 as a result of the reversal of revenue that
was deferred in prior years, under a license agreement that was
terminated. In fiscal 1999, there was no licensing activity. See
"Collagenase ABC - Agreements for the Distribution of Collagenase ABC".
Cost of sales was $2,080,000 and $2,163,695,
respectively, in fiscal 2000 and 1999, a decrease in fiscal 2000 of
$83,695 or 4%. The gross profit percentage decreased by 10 percentage
points in fiscal 2000 (42%) versus fiscal 1999 (52%) because certain of
the Company's fixed production costs were absorbed into a lower number of
units sold in fiscal 2000 as compared to fiscal 1999.
Selling, general and administrative expenses ("SG&A") were
$2,971,635 and $1,776,293 respectively, in fiscal 2000 and 1999, an
increase in fiscal 2000 of $1,195,342, or 67%. Since May 1999, the Company
engaged consultants to assist in responding to FDA observations from FDA
inspectors made on FDA's Form 483 ("483's), the cost of which is included
in SG&A. Additionally, production laboratory personnel were highly
involved in the response effort as well, resulting in some level of
production inactivity. Therefore, some of their employment costs are
included in SG&A in fiscal 2000. The Company anticipates that it will
continue to incur considerable consultation costs and the involvement of
its laboratory personnel in responding to the 483s through the foreseeable
future, although such involvement could decrease in future periods. See
"Liquidity, Capital Resources, and Changes in Financial Condition".
Research and development expenses ("R&D") were $1,659,087
and $2,050,049 respectively, in fiscal 2000 and 1999, a decrease in fiscal
2000 of $390,962 or 19%. The Company is currently sponsoring Phase 2
clinical trials of injectable collagenase for Dupuytren's disease and a
Phase 1 trial for Peyronie's disease, both of which have been granted
Orphan Drug status by the FDA. Internal R&D costs have declined as
development moves to clinics. Also, as described above, laboratory
personnel have been involved in the response effort to the 483s, including
R&D personnel, whose costs have been partially allocated to SG&A. The
Company anticipates that there will be continued involvement of its R&D
personnel in responding to the 483s, although such involvement should
decrease in future periods.
13
<PAGE>
Capital asset abandonment charges were $200,000 and
$87,250 respectively, in fiscal 2000 and 1999. In fiscal 2000, the Company
wrote off certain production assets as a result of the renovation at the
Curacao facility that began March 1, 2000. In fiscal 1999, the Company
also wrote off certain production assets.
Other income, net was $158,128 and $434,911 respectively,
in fiscal 2000 and 1999, a decrease in fiscal 2000 of $276,783. The
decrease was due to the decrease in market value of the Company's
investments in equity securities held as trading securities.
The Company's benefit (provision) for income taxes was
$302,000 and $(139,300) respectively in fiscal 2000 and 1999. The fiscal
2000 benefit represents an increase in deferred tax assets, principally
relating to orphan drug tax credits, offset by current tax liabilities of
$36,000 for federal, state and foreign income taxes. The fiscal 1999
provision represents current taxes of $309,100 on taxable earnings, offset
by a $109,800 increase in deferred tax assets, principally related to
orphan drug tax credits and other credits. 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 recognition of orphan drug and
other tax credits available to the Company as a result of its qualified
research and development expenditures, and a 2% tax rate applicable to
pre-tax earnings from operations of the Company's subsidiary in Curacao,
state income tax benefit, and non-deductible items. The 2% tax rate
granted to the Company's subsidiary by the Curacao government (the "tax
holiday") expired December 31, 1999. The Company has requested an
extension of the tax holiday but has not yet been informed of the Curacao
government's decision. If the tax holiday is not extended, the tax rate
applicable to pre-tax earnings from operations could go up to 30%. There
can be no assurance the Curacao government will extend the tax holiday.
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, 2000, the Company had working capital of
approximately $7.8 million which includes cash and cash equivalents, and
marketable securities of approximately $5.2 million. The principal source
of cash in fiscal 2000 was approximately $909,000 from operating
activities. This was offset by approximately $897,000 million used to
purchase plant, property and equipment and approximately $700,000 for
investing activities.
The Company's manufacturing facilities in New York and
Curacao are registered with, and licensed by, the FDA. In January and
March of 1999, ABC was issued a List of Inspectional Observations on FDA
Form 483 (the "Form 483") from FDA inspectors, citing numerous
inspectional observations relating to deficiencies in the Company's
compliance with FDA regulations at its Lynbrook, New York and Curacao,
Netherlands Antilles facilities. In addition, on May 10, 1999, ABC
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 at KPC. The FDA Letter advised ABC that the FDA
will institute formal proceedings to revoke the ABC's Establishment
License to manufacture Collagenase Santyl(R) Ointment unless ABC provided
satisfactory assurances to the FDA, including submitting to the FDA a
comprehensive plan of corrective action to address the observations listed
in the Form 483 and the FDA Letter, and otherwise demonstrate compliance
with applicable regulatory requirements. The Company has provided the FDA
with a plan of corrective action and has had a number of meetings with the
FDA to discuss the plan of corrective action and the renovation of the
Curacao production facility. ABC has submitted a number of periodic
updates to the FDA on progress under the plan. ABC hired outside
consultants and employed additional staff for its reorganized Quality
Unit. The Company has retained an outside consulting firm with expertise
in FDA regulatory compliance matters to assist in developing and
implementing the corrective action plan.
The Company has produced the enzyme Collagenase ABC (the
"enzyme"), the active ingredient in Collagenase Santyl(R) Ointment, at its
Lynbrook and Curacao facilities. The Company started extensive renovations
at the Curacao facility in March 2000, which resulted in the suspension of
enzyme production there. The Company voluntarily suspended the production
14
<PAGE>
of the enzyme at the Lynbrook facility and is in the process of planning
renovations for that facility, although final stage production and testing
continues there. As a result of the renovation at the Curacao facility
that began March 1, 2000, the Company wrote off production assets with a
carrying value of approximately $200,000 for the year ended January 31,
2000.
The Company invested approximately $1.1 in new equipment
through April 2000 and will invest at least an additional $2.2 million to
$2.6 million in new equipment and renovations at its Curacao, Netherlands
Antilles and Lynbrook, New York facilities over the next twelve months.
This investment is intended to address matters described in the Form 483
and the FDA Letter, as well as to modernize and ensure the efficiency of
the Company's production process. Through January 31, 2000 the Company had
spent approximately $1,000,000 for professional fees and other expenses in
connection with the remediation of the FDA's deficiency observations, and
estimates it could spend an additional $600,000 in fees in connection with
the remediation of the FDA's deficiency observations.
A supplement (the "supplement') to ABC's Establishment
License will have to be approved by the FDA after renovation before any
additional enzyme produced at the Curacao facility can be used by KPC. As
part of the approval process for the supplement, the FDA may conduct an
inspection of the Curacao facility. The Company estimates that in the
best-case scenario, either one or both the Curacao and Lynbrook facilities
could be back in production by the fourth quarter of calendar 2000 and
have enzyme available for KPC during the third quarter of calendar 2001.
Due to the uncertainty of the FDA approval process however, there can be
no assurances that target dates will be met. In anticipation of the
renovation and suspension of manufacturing operations, the Company
accumulated an inventory of the product which it estimates KPC can use to
contract manufacture Collagenase Santyl(R) Ointment into the second
quarter of calendar 2001. In the opinion of the Company, this would permit
KPC to supply S&N with the ointment through the second quarter of calendar
2002.
Although the Company believes that it has made
considerable progress in addressing the FDA concerns addressed in the Form
483 and the FDA Letter, if the Company is unable to further address these
matters in a timely manner, there may be delays in the delivery of the
product produced in the renovated facilities to KPC for use to contract
manufacture Collagenase Santyl(R) Ointment. Such delays could have a
material adverse effect on the Company's future operating results.
With approximately $7.8 million of working capital,
including approximately $5.2 million in cash and marketable securities at
January 31, 2000, the Company believes it has adequate financial resources
needed to take corrective action and continue its operations.
Year 2000 Compliance
--------------------
The Company experienced no difficulties related to
preparing its computer systems and hardware to contend with the issues
related to the year 2000 ("Year 2000"). The Company continues to monitor
its computer systems and hardware.
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS
Page
----
<S> <C>
Independent Auditors' Reports ........................................................................... F-1
.......................................................................................................... F-1A
Consolidated Balance Sheet as of January 31, 2000....................................................... F-2
Consolidated Statements of Income for Years ended January 31, 2000 and 1999............................... F-3
Consolidated Statements of Cash Flows for Years ended January 31, 2000 and 1999........................... F-4
Consolidated Statements of Stockholders' Equity for Years ended January 31, 2000 and 1999................. 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.
KPMG LLP was previously the principal accountants for
Biospecifics Technologies Corp. ("the Registrant"). On August
30, 1999, KPMG's appointment as principal accountants was
terminated by the Registrant and Grant Thornton LLP was
engaged as principal accountants. The decision to change
accountants was approved by the Executive Committee of the
Board of Directors of the Registrant.
In connection with the audits of the two fiscal years ended
January 31, 1999, and the subsequent interim period through
August 30, 1999, there were no disagreements with KPMG LLP on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion
to the subject matter of the disagreement.
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 2000 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
2000 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 2000 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 2000
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 2000 meeting of shareholders.
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Exhibits Filed
<TABLE>
<CAPTION>
<S> <C>
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.)
16
<PAGE>
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 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 10.7 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 10.8 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 10.9 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 10.10 Regulatory Compliance Agreement between Advance
Biofactures Corp., Knoll Pharmaceutical Company, and
Smith and Nephew, Inc. (Previously filed on the
Registrant's Form 8-K dated March 3, 2000 and
incorporated herein by reference.)
17
<PAGE>
Exhibit 10.11 Allocation of Responsibilities Agreement between
Advance Biofactures Corp., Knoll Pharmaceutical Company,
and Smith and Nephew, Inc. (Previously filed on the
Registrant's Form 8-K dated March 3, 2000 and
incorporated herein by reference.)
Exhibit 10.12 Adverse Event ("AE") Agreement between Advance
Biofactures Corp., Knoll Pharmaceutical Company, and
Smith and Nephew, Inc. (Previously filed on the
Registrant's Form 8-K dated March 3, 2000 and
incorporated herein by reference.)
Exhibit 10.13 Recourse Secured Promissory Note between BioSpecifics
Technologies Corp. and Edwin H. Wegman*
Exhibit 10.14 Stock Pledge Agreement between BioSpecifics Technologies
Corp. and Edwin H. Wegman*
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 Grant Thornton LLP.*
Exhibit 23.2 Consent of KPMG LLP.*
Exhibit 27.1 Financial Data Schedule*
</TABLE>
-----------------------------
* Filed herewith
(b) Reports on Form 8-K
Changes in Registrant's Certifying Accountant -
Appointment of Grant Thornton LLP September 2, 1999
Other Events - KPC and Smith & Nephew Agreements and
ABC's Compliance with FDA Regulations- March 3, 2000.
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 15, 2000 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 15, 2000
--------------------------------- Director (Principal Executive Officer)
Edwin H. Wegman
Albert Horcher Secretary, Treasurer, Principal Financial May 15, 2000
--------------------------------- and Chief Accounting Officer
Albert Horcher
Thomas L. Wegman Executive Vice President and Director May 15, 2000
---------------------------------
Thomas L. Wegman
Paul A. Gitman, M.D. Director May 15, 2000
---------------------------------
Paul A. Gitman, M.D.
Henry Morgan Director May 15, 2000
---------------------------------
Henry Morgan
Louis Lasagna, M.D. Director May 15, 2000
---------------------------------
Louis Lasagna, MD.
Rainer Friedel, M.D. Director May 15, 2000
---------------------------------
Rainer Friedel, M.D.
John T. Lane Director May 15, 2000
---------------------------------
John T. Lane
</TABLE>
19
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports ............................................................................ F-1
.......................................................................................................... F-1A
Consolidated Balance Sheet as of January 31, 2000....................................................... F-2
Consolidated Statements of Income for Years ended January 31, 2000 and 1999............................... F-3
Consolidated Statements of Cash Flows for Years ended January 31, 2000 and 1999........................... F-4
Consolidated Statements of Stockholders' Equity for Years ended January 31, 2000 and 1999................. F-5
Notes to Consolidated Financial Statements............................................................... F-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
BioSpecifics Technologies Corp.
We have audited the accompanying consolidated balance sheet of BioSpecifics
Technologies Corp. and Subsidiaries as of January 31, 2000, and the related
consolidated statement of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BioSpecifics
Technologies Corp. and Subsidiaries as of January 31, 2000, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
GRANT THORNTON LLP
Melville, New York
April 13, 2000 (except for
Note 14, as to which the
date is April 24, 2000)
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Biospecifics Technologies Corp.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Biospecifics Technologies Corp. and
subsidiaries for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Biospecifics Technologies Corp. and subsidiaries for the year 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 3 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 3. 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 3, which is as of
May 10, 1999
F-1A
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheet
January 31, 2000
<TABLE>
<CAPTION>
Assets
------
Current assets:
<S> <C>
Cash and cash equivalents $ 4,221,447
Marketable securities 951,398
Accounts receivable 1,484,326
Inventories 1,779,531
Deferred tax assets, net 686,206
Prepaid expenses and other current assets 268,942
-----------
Total current assets 9,391,850
Property, plant and equipment, net 1,221,337
Due from related party 119,780
Other assets 28,812
-----------
$10,761,779
===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,516,915
Notes payable to related parties 13,010
Income taxes payable 2,342
Deferred revenue 45,000
-----------
Total current liabilities 1,577,267
Commitments and contingencies
Minority interest in subsidiaries 271,448
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 7,826,810
Accumulated other comprehensive loss 7,412
-----------
11,573,488
Less: Treasury stock, 361,380 shares at cost (1,911,237)
Notes receivable from chairman (750,815)
-----------
Total stockholders' equity 8,911,436
-----------
$10,761,779
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended January 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues:
Net sales $ 3,543,563 4,556,033
Royalties 2,947,302 2,505,851
License fees 130,000 --
----------- -----------
6,620,865 7,061,884
Costs and expenses:
Cost of sales 2,080,000 2,163,695
Selling, general and administrative 2,971,635 1,776,293
Research and development 1,659,087 2,050,049
Capital asset abandonment charge 200,000 87,250
----------- -----------
6,910,722 6,077,287
Income (loss) from operations (289,857) 984,597
Other income (expense):
Investment and other income 163,049 441,894
Interest expense (4,921) (6,983)
----------- -----------
158,128 434,911
Income (loss) before provision for
income taxes and minority interest (131,729) 1,419,508
Benefit (provision) for income taxes 302,000 (139,300)
----------- -----------
Income before minority interest 170,271 1,280,208
Minority interest in net income of subsidiaries 10,600 40,500
----------- -----------
Net income $ 159,671 1,239,708
=========== ===========
Basic net income per share $ .04 $ .26
=========== ===========
Weighted-average common shares outstanding 4,540,341 4,713,690
=========== ===========
Diluted net income per common share $ .04 $ .26
=========== ===========
Weighted-average common and dilutive
potential common shares outstanding 4,542,028 4,800,406
=========== ===========
</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, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 159,671 1,239,708
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and
capital asset abandonment charge 389,605 349,593
Options issued to third parties -- 97,200
Loss (gain) on sales of marketable securities, net 86,848 (93,895)
Minority interest in earnings of subsidiaries 10,600 40,500
Cumulative translation adjustment 10,511 253
Changes in operating assets and liabilities:
Accounts receivable (282,323) 110,994
Inventories (291,006) (5,805)
Prepaid expenses and other current assets (133,320) 133,394
Due from related party 75,000 (75,000)
Deferred tax assets, net (338,000) (169,206)
Due from related parties -- 25,506
Other assets 24,882 (16,893)
Marketable securities, net 1,064,705 334,745
Accounts payable and accrued expenses 337,015 (130,072)
Income taxes payable (74,596) 16,726
Deferred revenue (130,000) --
----------- -----------
Net cash provided by operating activities 909,592 1,857,748
----------- -----------
Cash flows from investing activities:
Due from related party (6,500) --
Increase in notes receivable from chairman (693,995) --
Expenditures for property, plant and equipment (897,226) (115,666)
----------- -----------
Net cash used in investing activities (1,597,721) (115,666)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 20,175
Increase in notes payable to related parties 500 500
Treasury stock purchases (177,649) (1,107,087)
----------- -----------
Net cash used in financing activities (177,149) (1,086,412)
----------- -----------
Change in cash and cash equivalents (865,278) 655,670
Cash and cash equivalents at beginning of year 5,086,725 4,431,055
----------- -----------
Cash and cash equivalents at end of year $ 4,221,447 5,086,725
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 4,921 6,983
=========== ===========
Income taxes $ 108,327 224,940
=========== ===========
</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, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional other
------------ paid-in Retained comprehensive Treasury
Shares Amount capital earnings (loss)/gain stock
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
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)
========= ===== ========= ========= ======= ==========
Treasury stock purchases -- -- -- -- -- (177,649)
Change in cumulative
translation adjustment -- -- -- -- -- --
Notes receivable from Chairman -- -- -- -- 10,513 --
Net income -- -- -- 159,671 -- --
-------- ------ ---------- ---------- -------- -----------
Balance at January 31, 2000 4,891,146 $4,891 $3,734,375 $7,826,810 $ 7,412 $(1,911,237)
========= ====== ========== ========== ======== ===========
(RESTUBBED TABLE)
Notes
Receivable
from Comprehensive
Chairman Total income
-------- ----- ------
<C> <C> <C>
Balance at January 31, 1998 - $9,419,469 --
Options exercised -- 20,175 --
Options granted to consultant -- 97,200 --
Treasury stock purchases -- (1,107,087) --
Change in cumulative
translation adjustment -- 253 --
Net income -- 1,239,708 1,239,708
---------- --------- ---------
Balance at January 31, 1999 -- 9,669,718 1,239,961
========== ========= =========
Treasury stock purchases -- (177,649) --
Change in cumulative -- 10,513 10,513
translation adjustment
Notes receivable from Chairman (750,815) (750,815) --
Net income -- 159,671 159,671
---------- ---------- ---------
Balance at January 31, 2000 $(750,815) $8,911,436 $170,184
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000 and 1999
1. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
BioSpecifics Technologies Corp. (the "Company"), its majority-owned
subsidiaries, Advance Biofactures Corp. ("ABC - New York") and Advance
Biofactures of Curacao N.V. ("ABC - Curacao") and its wholly-owned
subsidiary, Biospecifics Pharma GmbH ("Bio Pharma") of Germany. All
significant intercompany transactions and balances have been
eliminated in consolidation.
2. Description of Business
-----------------------
The Company produces a fermentation-derived enzyme named Collagenase ABC
(the "product" or "enzyme") which is licensed by the U.S. Food and
Drug Administration (the "FDA"). The Company operates a production
facility in Lynbrook, New York (the "Lynbrook Plant or Facility") and
in Curacao, Netherlands Antilles (the "Curacao Plant or Facility").
The Company is also researching and developing additional products
derived from this enzyme for potential use as pharmaceuticals.
In the fiscal year ended January 31, 2000, the Company derived 85% of its
net sales of product revenues and 100% its royalty revenues from one
customer, Knoll Pharmaceutical Company ("KPC"). KPC acts as the
Company's contract manufacturer by compounding the product into
Collagenase Santyl(R) (Santyl(R)), an ointment used to treat various
types of skin wounds, particularly chronic dermal ulcers and severely
burned areas. The Company and KPC are parties to a licensing agreement
expiring in August 2003 providing KPC with exclusive rights to market
Santyl(R) ointment in North America in exchange for purchases of the
product and royalties on KPC's Santyl(R) sales to distributors. The
license agreement has an automatic ten-year renewal clause unless KPC
elects not to renew the agreement. The rest of the Company's revenues
come from product sales to pharmaceutical companies in Brazil and
India.
On January 31, 2000, KPC sublicensed its exclusive marketing rights to
Smith & Nephew Inc. ("S&N") with the Company's consent (See Note 3).
3. Regulatory Compliance Matter and Subsequent Events
--------------------------------------------------
In 1999, the Company was issued a list of inspectional observations made
by the FDA in Form 483 citing numerous deficiencies in the Company's
compliance with FDA regulations at its manufacturing plants in
Lynbrook and Curacao and at KPC's contract manufacturing facility. The
FDA advised the Company that they would revoke the Company's license
to manufacture the enzyme and ointment unless the Company could
immediately provide satisfactory assurance to the FDA (including
submitting a comprehensive plan of corrective action) addressing the
FDA's observations and otherwise demonstrate compliance with the
applicable regulations.
The Company responded to the FDA by submitting a comprehensive plan of
corrective action providing for (i) the renovation of the Lynbrook and
Curacao manufacturing plants, (ii) the reorganization of the Company's
quality control and quality assurance departments, (iii) an upgrade of
quality control standards and procedures and (iv) the hiring of
additional personnel in the quality control and quality assurance
departments. The Company has retained an outside consulting firm with
expertise in FDA regulatory compliance matters to assist in developing
and implementing the corrective action plan.
F-6
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company started renovating the Curacao plant in March 2000 and as a
result suspended the production of enzyme at that location. The
Curacao plant will not resume the production of enzyme until
construction is complete, the plant is validated and the FDA permits
the Company to resume operations and approves the product itself. The
Company also voluntarily suspended the production of enzyme at its
Lynbrook facility, although final-stage production and testing
continue there. Renovations at the Lynbrook facility are planned to
begin in the second quarter of calendar 2000. In anticipation of the
renovations and suspension of manufacturing operations, the Company
accumulated an inventory of the product which it estimates KPC can use
to contract manufacture Santyl(R) into the second quarter of calendar
2001. In the opinion of the Company, this would permit KPC to supply
S&N with Santyl(R) through the second quarter of calendar 2002.
Management estimates that the Company will spend approximately $3.5
million to remediate both plants. Approximately $1.1 million has been
spent through April 2000 on new equipment. In addition, the Company
incurred consulting fees and other expenses of approximately $1
million through January 31, 2000 and believes it will incur additional
expenses of approximately $600,000 during the fiscal year ended
January 31, 2001. The Company believes that the plant remediation
program and changes in the Company quality control policies and
procedures outlined in the corrective plan will adequately address the
FDA's concerns. Management also believes that the capital-spending
plan will modernize the Company's facilities and improve operational
efficiency.
A supplement to ABC's Establishment License will have to be approved by
the FDA after the renovation before any additional enzyme produced at
the Curacao facility can be used by KPC. As part of the approval
process for the supplement, the FDA may conduct an inspection of the
Curacao facility. The Company currently estimates that either one or
both the Curacao and Lynbrook facilities could be back in production
by the fourth quarter of calendar 2000 and have enzyme available for
KPC during the third quarter of calendar 2001. Due to the uncertainty
of the FDA approval process however, there can be no assurances that
target dates will be met.
Although the Company believes that it has made considerable progress in
addressing the FDA concerns addressed in the Form 483 and the FDA
Letter, if the Company is unable to further address these matters in a
timely manner, there may be delays in the delivery of product produced
in the renovated facilities to KPC for use to contract manufacture
Collagenase Santyl(R) Ointment. Such delays could have a material
adverse effect on the Company's future operating results. 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.
With approximately $7.8 million of working capital, including
approximately $5.2 million in cash and marketable securities at
January 31, 2000, the Company believes it has adequate financial
resources needed to take corrective action and continue its
operations.
On January 31, 2000, pursuant to a sublicense and assignment agreement,
to which ABC is not a party, KPC sublicensed its rights to Smith &
Nephew, Inc. ("S&N") with the consent of ABC. Under the sublicense,
KPC will continue to purchase the product from the Company and
manufacture the ointment. S&N will market the ointment. In connection
with the sublicense, the Company entered into several agreements with
KPC and S&N.
F-7
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
These included an agreement allocating responsibility under the KPC
Agreement among ABC, KPC, and S&N for both the sublicense and license
period. Another agreement imparts certain obligations upon ABC to
address the FDA issues concerning the Curacao and Lynbrook
manufacturing facilities. KPC will assign its license rights in the
KPC Agreement to S&N in the event of FDA approval of a compliance
program being undertaken by ABC. If the license rights are assigned to
S&N, the KPC agreement will be automatically extended at that time
until 2013.
4. Summary of Significant Accounting Policies
------------------------------------------
Marketable Securities
---------------------
Marketable securities principally consist of investments in common and
preferred stocks. These investments are classified as trading
securities and are adjusted to market value at the end of each
accounting period. 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 stated at cost, less accumulated
depreciation. Machinery and equipment, furniture and fixtures, and
autos are depreciated using the straight-line method over their
estimated useful lives of 5 to 10 years. Leasehold improvements are
amortized over the shorter of estimated useful lives or the term of
the lease.
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. The Company recorded
capital asset abandonment charges of $200,000 and $87,500 in the
fourth quarter of fiscal 2000 and fiscal 1999, respectively.
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 was approximately
$800,000 of cash equivalents at January 31, 2000.
Cumulative Translation Adjustment
---------------------------------
The functional currency of Bio Pharma is the German mark and its assets
and liabilities 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). The assets and liabilities of ABC Curacao
are denominated in U.S. dollars. Certain local transactions are
conducted in local currency and translated at average exchange rates
for the period.
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. License fees for potential products are recognized as income
in the year agreements are entered into if related license fees are
non-refundable. License fees attributable to agreements which contain
refund provisions are deferred until all provisions of the agreements
are fulfilled.
Research and Development
------------------------
The Company conducts various research and development activities for the
approved product and for potential products. Research and development
costs are charged to expense when incurred. These costs amounted to
$1,659,087 and $2,050,049 in 2000 and 1999, respectively.
Net Income Per Share
--------------------
Basic EPS is calculated by dividing net income available to common
stockholders by the weighted-average number of common shares
outstanding during the year. Diluted EPS reflects the potential
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. The treasury
stock method is used to calculate the number of dilutive shares, which
represents the gross number of dilutive shares reduced by the number
of shares purchasable from the proceeds of stock options assumed to be
exercised.
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
F-9
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 2000 and 1999 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
receivables due from the Chairman and a related party, and notes
payable to related parties approximates their carrying values as their
stated interest rates are similar to other rates currently offered by
local institutions for similar term loans.
Reclassifications
-----------------
Certain fiscal 1999 amounts have been reclassified to conform to the
fiscal 2000 presentation.
5. Marketable Securities
---------------------
Marketable securities at January 31, 2000 consist of common and preferred
stock, with a cost basis of $1,027,740, unrealized holding losses of
$76,342, and fair market value of $951,398. Fair values are based upon
quoted market prices.
6. Inventories
-----------
Inventories at January 31, 2000 consist of:
Raw materials $ 101,961
Work-in-process 1,381,331
Finished goods 296,239
-----------
$1,779,531
===========
F-10
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. Property, Plant and Equipment, net
----------------------------------
Property, plant and equipment at January 31, 2000 consist of:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $1,372,278
Furniture and fixtures 321,250
Leasehold improvements 729,626
Automobiles 67,019
-----------
2,490,173
Less accumulated depreciation and amortization (1,268,836)
-----------
$1,221,337
===========
</TABLE>
Depreciation and amortization expense amounted to $189,605 and $275,548 in
fiscal 2000 and 1999, respectively. The Company had capital asset
abandonment charges of $200,000 and $87,500 in the fourth quarter of
fiscal 2000 and 1999, respectively.
8. Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses at January 31, 2000 consist of:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable and accrued expenses $1,118,508
Accrued legal and other professional fees 159,738
Accrued payroll and related costs 238,669
------------
$1,516,915
============
</TABLE>
9. Income Taxes
------------
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current:
--------
Federal $ (27,900) $(218,700)
State (6,000) (76,000)
Foreign (2,100) (14,400)
--------- ----------
(36,000) (309,100)
Deferred:
---------
Federal 336,000 168,800
State 2,000 1,000
--------- ----------
338,000 169,800
$302,000 $(139,300)
========= ==========
</TABLE>
F-11
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The effective income tax rate of the Company differs from the federal
statutory tax rate of 34% in fiscal 2000 and 1999 as a result of the
effect of the following items:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed tax provision (benefit) at statutory rate $ (47,600) $482,633
Tax effect of foreign sourced income, net of foreign taxes (24,000) (188,781)
State income taxes, net of federal benefit 4,000 50,820
Non-deductible expenses 22,700 16,689
Minority interest in subsidiaries - 13,770
Orphan drug and other tax credits (257,100) (312,340)
Other, net - 76,509
---------- ---------
$ (302,000) $139,300
========== =========
</TABLE>
The Company intends to reinvest the accumulated earnings of its foreign
subsidiaries and does not currently plan to repatriate such earnings
(approximately $5,514,000 as of January 31, 2000) to the United
States.
The benefit for deferred taxes of $338,000 and $169,800 in fiscal 2000 and
1999, respectively, resulted principally from the generation of tax
credits, capitalization of certain inventory costs, 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, 2000 is primarily comprised of Orphan Drug and other tax
credits and certain expenses that are non-deductible for tax purposes
currently.
10. 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 to ABC-Curacao, with interest at the bank's prime
lending rate (12% at January 31, 2000). 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, 2000.
11. 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,
F-12
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 2000 would have been reduced to a loss of ($68,920) and
consolidated net earnings in fiscal 1999 would have been reduced to
$1,102,513. Basic and diluted earnings per share in fiscal 2000 and
1999 would have been reduced to a loss of ($.02) per share, and $.23
per share, respectively.
The per share weighted average fair value of stock options issued to
employees by the Company during fiscal 2000 and 1999 was $1.29 and
$2.56, respectively, on the date of grant. In fiscal 2000 and 1999,
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 2000 and fiscal
1999.
The summary of the stock options activity is as follows:
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
--------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 387,550 $5.27 422,900 $5.62
Options granted 177,350 2.12 73,500 4.63
Options exercised - - (5,050) 4.00
Options canceled or expired (12,100) 3.73 (103,800) 4.99
-------- ---------
Outstanding at end of year 552,800 4.29 387,550 5.27
-------- ---------
Options exercisable at year end 361,190 5.04 316,130 5.15
Shares available for future grant 284,000 - 449,250 -
</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
F-13
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
consultant (note 14) at an exercise price of $5.00 per share. In
connection with these options, the Company recorded an expense of
approximately $30,000 in fiscal 1999. These options expired January
10, 1999. During fiscal 2000 and 1999, the Company granted 177,350 and
53,500 options, respectively, to employees of the Company at prices
ranging from $1.625 to $5.81.
Options for 361,190 shares are currently exercisable at prices ranging from
$3.00 to $8.00 with a weighted average exercise price of $5.04 and a
weighted average remaining contractual life of 7 years. The remaining
191,610 options outstanding are exercisable at prices ranging from
$1.88 to $6.05, have a weighted average exercise price of $2.88, and a
remaining weighted average contractual life of 7 years.
Warrants
--------
Underwriter's warrants to purchase up to 120,000 shares of common stock at
an exercise price of $3.75 per share expired on November 21, 1999.
12. 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,
-----------------------
2001 $191,000
2002 191,000
2003 191,000
2004 191,000
2005 191,000
F-14
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Rentexpense under all operating leases amounted to approximately $191,000
in both fiscal 2000 and 1999, respectively. The S.J. Wegman Company,
which is owned by the Company's President and certain of his
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 representing rent and real estate taxes to WSC in fiscal 2000
and 1999. 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 2000
and 1999.
F-15
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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 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 $2,947,302 and
$2,505,851 in fiscal 2000 and 1999, respectively. As discussed in Note
3, the Collagenase ABC agreement was sublicensed on January 31, 2000.
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 the German
health authority grants marketing approval of Collagenase ABC
ointment. Accordingly, deferred revenue at January 31, 2000 is $45,000
from this agreement. The deferred revenue is refundable if approval in
Germany is not obtained.
The Company had a distribution agreement with a Swiss company, pursuant to
which that company would attempt to obtain approval from the
appropriate agencies in certain countries, including Italy, to sell
Nucleolysin(R). The licensee paid $130,000, which was included in
deferred revenue in prior periods. In late 1999, the Italian health
regulatory authority advised the licensee that additional information
and clinical trials were required. The licensee then advised the
Company that it was abandoning this program and amicably terminated
the agreement, leaving each party free from further obligation.
Therefore, the Company recognized in fiscal 2000 the $130,000
previously deferred as a license fee.
(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 2000 and 1999, the Company has recorded $25,500 and $24,000,
respectively, representing payments to Board members under these
agreements. The Company has oral agreements with two of the eight
members of the Board and a written agreement with two other members
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
F-16
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 Company or the managing director
upon one year's written notice can terminate the contract. 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.
13. Segment Information
-------------------
(a) Major Customer
--------------
Approximately 90% of the Company's revenues were earned from one
pharmaceutical manufacturer and distributor in the United States in
both fiscal 2000 and 1999.
(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, 2000: America Europe Eliminations Consolidated
- ---------------------------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
unaffiliated customers $5,987,229 $633,636 - $6,620,865
Intercompany revenue between
geographic regions - 913,805 (913,805) -
Income (loss) from operations (264,498) (25,359) - (289,857)
Identifiable assets 5,570,189 5,656,282 (464,692) 10,761,779
Capital expenditures 215,715 681,511 - 897,226
Depreciation, amortization, and
capital asset abandonment charge 101,267 288,338 - 389,605
</TABLE>
F-17
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
North S.A. and
Year ended January 31, 1999: America Europe Eliminations Consolidated
- ---------------------------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
unaffiliated customers $6,369,193 $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, amortization, and
capital asset abandonment charge 151,500 198,093 - 349,593
</TABLE>
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 management believes to
be equivalent to those made at arms-length.
14. Related Party Transactions
--------------------------
At January 31, 1999, outstanding loans due from the Company's chairman
amounted to $131,820, comprised of a promissory note of $56,820 and a
loan of $75,000. During the year ended January 31, 2000, the chairman
repaid the loan of $75,000 outstanding at January 31, 1999 and the
Company loaned an additional $693,995 to the chairman. These loans
made during the year ended January 31, 2000, plus additional loans
made to the chairman through April 10, 2000, were converted into a
recourse secured promissory note payable January 31, 2001 in the
amount of $865,394, with interest at 9% per annum. Since the note is
collateralized with shares of the Company's common stock, the loans
made through January 31, 2000 totaling $693,995, plus the other
promissory note of $56,820, have been classified as a component of
stockholder's equity in the accompanying balance sheet.
Due from related parties includes a non-amortizing mortgage in the amount
of $82,606 bearing interest at 9% per annum, plus advances which
amount to $37,174, due from Wilbur Street Corporation (See note 12) at
January 31, 2000.
During the fiscal year ended January 31, 1999, the Company's Chairman made
principal payments amounting to $335,114 on previously outstanding
loans plus interest of $28,225. The interest is included in investment
and other income in the 1999 consolidated statement of income.
ABC-New York has notes payable to a former director of the Company and to
a partner of the S.J. Wegman Company, an affiliate, amounting to
$13,010 at January 31, 2000. The notes, which bear interest at 9% per
annum, are payable on demand.
F-18
<PAGE>
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 former 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 2000, the Company recorded
general and administrative expenses of $60,000 relating to this
agreement, comprised of consulting fees. 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. 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.
15. 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, 2000 and 1999.
F-19
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
Exhibit 10.13 Recourse Secured Promissory Note between BioSpecifics
Technologies Corp. and Edwin H. Wegman
Exhibit 10.14 Stock Pledge Agreement between BioSpecifics Technologies
Corp. and Edwin H. Wegman
Exhibit 23.1 Consent of Grant Thornton LLP
Exhibit 23.2 Consent of KPMG LLP
Exhibit 27.1 Financial Data Schedule
RECOURSE SECURED PROMISSORY NOTE
--------------------------------
$865,394 April 24, 2000
FOR VALUE RECEIVED, the undersigned, EDWIN H. WEGMAN (the
"Borrower"), hereby promises to pay to the order of BIOSPECIFICS TECHNOLOGIES
CORP., a Delaware corporation (the "Company"), the principal sum of EIGHT
HUNDRED SIXTY FIVE THOUSAND THREE HUNDRED NINETY FOUR Dollars ($865,394) (the
"Principal Amount") in lawful money of the United States of America, payable on
January 31, 2001, and to pay simple interest at the rate of 9% per annum (the
"Interest Rate") (computed on the basis of a 365 or 366 day year, as the case
may be) on the unpaid principal amount from and after the date of each of the
borrowings as set forth on Schedule A. At the time of payment of any principal
amount, the interest accrued on that amount shall be payable at that time (with
such interest being credited prior to the principal).
This Note is intended to be evidence of the borrowing of the
Principal Amount by the Borrower from the Company (the "Loan"). Payment of the
principal of and interest on this Note is secured pursuant to the terms of a
Stock Pledge Agreement, dated as of even date herewith, between the Borrower and
the Company (the "Pledge Agreement"), reference to which is made for a
description of the collateral provided thereby and the rights of the Company and
the holder of this Note in respect of such collateral.
This Note is subject to the following further terms and
conditions:
1. Payment and Prepayment. All payments and prepayments of
principal of and interest on this Note shall be made to the Company or its
order, or to the legal holder of this Note or such holder's order, in lawful
money of the United States of America at the principal offices of the Company
(or at such other place as the holder hereof shall notify the Borrower in
writing). The Borrower may, at his option, prepay this Note in whole or in part
at any time or from time to time without penalty or premium. Any prepayments of
any portion of the principal amount of this Note shall be accompanied by payment
of all interest accrued but unpaid on the principal amount being prepaid. Upon
final payment of principal of and interest on this Note it shall be surrendered
for cancellation.
1
<PAGE>
2. Events of Default. Upon the occurrence of any of the
following events ("Events of Default"):
(a) If the Borrower shall default in the payment of
any principal or interest due under this Note or any under the
Pledge Agreement when the same shall become due and payable,
whether at maturity or by acceleration or otherwise; or
(b) If the Borrower shall file a voluntary petition
in bankruptcy, or shall be adjudicated a bankrupt or
insolvent, or shall file any petition or answer seeking any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present
or any future federal bankruptcy act or other applicable
federal, state or other statute, law or regulation, or shall
file any answer admitting the material allegation of a
petition filed against the Borrower in such proceeding, or
shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of the Borrower of all or
any substantial part of the properties of the Borrower, or the
Borrower shall commence the winding up or the dissolution or
liquidation of the Borrower; or
(c) If the Borrower should breach any of the
covenants, representations, warranties, terms or conditions
contained in this Note or in the Pledge Agreement and, if such
breach is of a type that is curable, such breach is not cured
within fifteen (15) days after the Borrower becomes aware of
such breach;
then, and in any such event, (A) if such event is an Event of Default
specified in paragraph (b) above with respect to the Borrower, automatically the
Note shall immediately terminate and the entire principal amount of this Note
outstanding and any accrued and unpaid interest hereunder shall become due and
payable without presentment, demand, protest, notice of dishonor and all other
demands and notices of any kind, all of which are hereby expressly waived, and
(B) if such event is any Event of Default specified in paragraphs (a) and (c),
the holder of this Note may declare, by notice of default given to the Borrower,
the entire principal amount of this Note to be forthwith due and payable,
whereupon the entire principal amount of this Note outstanding and any accrued
and unpaid interest hereunder shall become due and payable without presentment,
demand, protest, notice of dishonor and all other demands and notices of any
kind, all of which are hereby expressly waived. Upon the occurrence of any Event
of Default, the accrued and unpaid interest hereunder shall thereafter bear the
same rate of interest as on the principal hereunder, but in no event shall such
interest be charged which would violate any applicable usury law.
2
<PAGE>
3. Representations of Borrower. The Borrower hereby represents
and warrants to the Borrower as follows: (a) the Borrower has the power and
authority to make, deliver and perform this Note; (b) this Note has been duly
executed and delivered by the Borrower and constitutes a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms; and (c) the execution, delivery and performance by
the Borrower of this Note (i) will not violate any law or regulation, or any
order or decree of any court or government instrumentality, (ii) will not
conflict with or result in the breach of, or constitute a default under, any
indenture, mortgage, deed of trust, lease, agreement, or any other instrument to
which the Borrower is a party or any of its assets or properties is bound, and
(iii) does not require the consent or approval of any governmental body, agency,
authority or any other Person which consent has not been obtained.
4. Costs and Expenses. The Borrower agrees to pay all
reasonable out-of-pocket costs and expenses incurred by the Borrower in
connection with the enforcement of any of the Borrower's rights and remedies
under this Note.
5. Remedies. No failure or delay on the part of the holder of
this Note in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and are not exclusive of any remedies
provided by law.
6. Waiver. The Borrower hereby waives presentment, demand for
payment, notice of default, dishonor or nonpayment, protest and notice of
protest and all other demands and notices in connection with the delivery,
acceptance, performance or enforcement of this Note.
7. Assignment. This Note shall be binding upon and inure to
the benefit of the parties hereto and their respective successors.
8. Governing Law. THIS NOTE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, this Note has been duly executed and
delivered by the Borrower on the date first above written.
/s/ Edwin H. Wegman
---------------------------
Edwin H. Wegman
3
<PAGE>
SCHEDULE A
- ---------------------------- -------------------------------
Date of borrowing Amount
- ---------------------------- -------------------------------
2/17/99 $5,451
- ---------------------------- -------------------------------
3/1/99 3,298
- ---------------------------- -------------------------------
3/9/99 30,000
- ---------------------------- -------------------------------
3/10/99 12,918
- ---------------------------- -------------------------------
3/30/99 75,000
- ---------------------------- -------------------------------
4/1/99 70,000
- ---------------------------- -------------------------------
5/1/99 4,196
- ---------------------------- -------------------------------
5/4/99 30,000
- ---------------------------- -------------------------------
5/27/99 10,273
- ---------------------------- -------------------------------
6/11/99 12,044
- ---------------------------- -------------------------------
6/15/99 50,771
- ---------------------------- -------------------------------
6/30/99 20,000
- ---------------------------- -------------------------------
7/14/99 50,000
- ---------------------------- -------------------------------
7/23/99 2,802
- ---------------------------- -------------------------------
8/26/99 45,000
- ---------------------------- -------------------------------
8/31/99 30,000
- ---------------------------- -------------------------------
9/10/99 13,782
- ---------------------------- -------------------------------
9/24/99 45,000
- ---------------------------- -------------------------------
9/14/99 45,000
- ---------------------------- -------------------------------
10/1/99 5,974
- ---------------------------- -------------------------------
10/12/99 15,000
- ---------------------------- -------------------------------
10/21/99 3,839
- ---------------------------- -------------------------------
10/29/99 25,000
- ---------------------------- -------------------------------
12/2/99 35,000
- ---------------------------- -------------------------------
12/14/99 45,000
- ---------------------------- -------------------------------
1/16/00 8,646
- ---------------------------- -------------------------------
2/16/00 50,000
- ---------------------------- -------------------------------
3/17/00 56,400
- ---------------------------- -------------------------------
3/28/00 15,000
- ---------------------------- -------------------------------
4/10/00 50,000
- ---------------------------- -------------------------------
Totals $865,394
- ---------------------------- -------------------------------
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT dated as of April 24, 2000 is made
and entered into by and between BIOSPECIFICS TECHNOLOGIES CORP., a Delaware
corporation (the "Company"), and EDWIN H. WEGMAN (the "Pledgor").
RECITALS
A. The Company has loaned to Pledgor the principal sum of
eight hundred sixty five thousand three hundred ninety four dollars ($865,394)
(the "Principal Amount") and simultaneously herewith the Pledgor is delivering
to the Company a Recourse Secured Promissory Note of the Pledgor (the "Recourse
Note") evidencing such loan.
B. The Pledgor wishes to grant further security and assurance
to the Company in order to secure all of the Pledgor's obligations under the
Recourse Note, including, without limitation, the prompt payment when due of the
principal of and interest on the Recourse Note (collectively, the
"Obligations"), by pledging to the Company, simultaneously with the Pledgor's
delivery of the Recourse Note, the common stock of the Company owned by Pledgor
or his affiliates in the amount equal to 200% of the Principal Amount of the
Recourse Note (the "Shares"), based upon the closing price of the Company's
common stock ended on the date first above written.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Pledge. The Pledgor hereby delivers to the Company the
Shares and the certificates evidencing the same (together with any securities to
be delivered to the Pledgor pursuant to Section 2(b) hereof, the "Pledged
Securities"), and hereby grants to the Company a first priority security
interest in the Pledged Securities and in any other property to be delivered to
the Pledgor pursuant to Section 2(b) hereof (collectively, the "Pledged
Collateral") as collateral security for the prompt and complete payment when due
(whether at the stated maturity, acceleration or otherwise) of the Obligations.
1
<PAGE>
The Pledgor hereby delivers to the Company appropriate undated
security transfer powers duly executed in blank for the Shares and will deliver
appropriate undated security transfer powers duly executed in blank for any
additional Pledged Securities to be pledged hereunder from time to time
hereafter.
The Pledgor shall immediately upon request by the Company and
in confirmation of the security interests hereby created, execute and deliver to
the Company such further instruments, deeds, transfers, assurances and
agreements in form and substance as the Company shall request, including any
financing statements and amendments thereto, or any other documents required
under New York law or any other applicable law, to protect the security
interests created hereunder.
2. Administration of Security. The following provisions shall
govern the administration of the Pledged Collateral:
(a) So long as no Event of Default has occurred and
is continuing (as used herein, "Event of Default" shall mean the occurrence of
any Event of Default under the Recourse Note), the Pledgor shall be entitled to
act with respect to the Pledged Collateral in any manner not inconsistent with
this Stock Pledge Agreement or the Recourse Note.
(b) If while this Stock Pledge Agreement is in
effect, the Pledgor shall become entitled to receive or shall receive any debt
or equity security certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital, or issued in connection with
any reorganization), option or right, or any other property, whether as a
dividend or distribution or other issuance in respect of, in substitution of, or
in exchange for any Pledged Securities, or any non-cash proceeds from any sale,
transfer or other disposition (collectively, a "Sale") of any Pledged Securities
or any non-cash proceeds from any Sale of any such non-cash proceeds or other
Pledged Collateral, the Pledgor agrees to accept the same as the Company's agent
and to hold the same in trust on behalf of and for the benefit of the Company
and to deliver the same forthwith to the Company in the exact form received,
with the endorsement of the Pledgor when necessary and/or appropriate undated
security transfer powers duly executed in blank, to be held by the Company,
subject to the terms of this Stock Pledge Agreement, as additional collateral
security for the Obligations.
2
<PAGE>
Notwithstanding the foregoing, it is agreed that the Pledgor
may exercise any option or right received as contemplated in the preceding
sentence, and the Company will exercise any such option or right upon receipt of
written instructions to that effect and any required payments or documents from
the Pledgor, and the securities received upon such exercise of any such option
or right shall thereafter be held by the Company as contemplated by the
preceding sentence.
(c) Subject to any Sale by the Company of the Pledged
Collateral pursuant to this Stock Pledge Agreement, the Pledged Collateral shall
be returned to the Pledgor upon payment in full of all Obligations.
(d) The Company's sole duty with respect to the
custody, safekeeping and physical preservation of any of the Pledged Collateral
in its possession shall be to deal with them in the same manner as the Company
deals with similar securities and property for its own account. Neither the
Company nor any of its directors, officers, employees or agents shall be liable
for failure to demand, collect or realize upon any of the Pledged Collateral or
for any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any of the Pledged Collateral upon the request of the Pledgor or
otherwise.
3. Remedies in Case of an Event of Default.
(a) In case an Event of Default shall have occurred
and be continuing, the Company shall have in each case all of the remedies of a
secured party under the New York Uniform Commercial Code, and, without limiting
the generality of the foregoing, shall have the right, in its sole discretion,
to sell, resell, assign and deliver all or, from time to time, any part of the
Pledged Collateral, or any interest in or option or right to purchase any part
thereof, on any securities exchange on which the Pledged Securities or any of
them may be listed (in the case of Pledged Securities), at any private sale or
at public auction, with or without demand of performance or other demand,
advertisement or notice of the time or place of sale or adjournment thereof or
otherwise (except that the Company shall give ten days' notice to the Pledgor of
the time and place of any sale pursuant to this Section 3), for cash, on credit
or for other property, for immediate or future delivery, and for such price or
prices and on such terms as the Company shall, in its sole discretion,
determine, the Pledgor hereby waiving and releasing any and all right or equity
of redemption whether before or after sale hereunder. At any such sale the
Company may bid for and purchase the whole or any part of the Pledged Collateral
so sold free from any such right or equity of redemption.
3
<PAGE>
The Company shall apply the proceeds of any such sale first to
the payment of all costs and expenses, including reasonable attorneys' fees,
incurred by the Company in enforcing its rights under this Stock Pledge
Agreement, and second to the payment of accrued and unpaid interest on and then
of unpaid principal of the Recourse Note, and thereafter to the payment of any
other Obligations, and the Pledgor shall continue to be liable for any
deficiency.
(b) The Pledgor recognizes that the Company may be
unable to effect a public sale of all or a part of any Pledged Securities
constituting part of the Pledged Collateral by reason of certain prohibitions
contained in the Securities Act of 1933 or in the rules and regulations
promulgated thereunder or in applicable state securities or "blue sky" laws, but
may be compelled to resort to one or more private sales to a restricted group of
purchasers who will be obliged to agree, among other things, to acquire the
Pledged Securities for their own account, for investment and not with a view to
the distribution or resale thereof. The Pledgor agrees that private sales so
made may be at prices and on other terms less favorable to the seller than if
the Pledged Securities were sold at public sale, and that the Company has no
obligation to delay the sale of the Pledged Securities for the period of time
necessary to permit the registration of the Pledged Securities for public sale
under the Securities Act of 1933 and under applicable state securities or "blue
sky" laws. The Pledgor agrees that a private sale or sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
(c) If any consent, approval or authorization of any
state, municipal or other governmental department, agency or authority should be
necessary to effectuate any sale or disposition by the Company pursuant to this
Section 3 of the Pledged Collateral, the Pledgor will execute all such
applications and other instruments as may be required in connection with
securing any such consent, approval or authorization and will otherwise use the
Pledgor's best efforts to secure the same.
4. Pledgor's Obligations Not Affected. The obligations of the
Pledgor under this Stock Pledge Agreement shall remain in full force and effect
without regard to, and shall not be impaired or affected by: (a) any
subordination, amendment or modification of or addition or supplement to the
Recourse Note, or any assignment or transfer of any thereof; (b) any exercise or
non-exercise by the Company or any affiliate of the Company of any right,
remedy, power or privilege under or in respect of this Stock Pledge Agreement,
the Recourse Note, or any waiver of any such right, remedy, power or privilege;
4
<PAGE>
(c) any waiver, consent, extension, indulgence or other action
or inaction in respect of this Stock Pledge Agreement, the Recourse Note, or any
assignment or transfer of any thereof; or
(d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or the like, of the Company, whether or
not the Pledgor shall have notice of any of the foregoing.
5. Transfer by Pledgor. The Pledgor will not sell, assign,
transfer or otherwise dispose of, grant any option with respect to, or mortgage,
pledge or otherwise encumber any of the Pledged Collateral or any interest
therein. In the event of a sale, assignment, or transfer, the Pledged Securities
so sold, assigned, transferred or otherwise disposed of shall be released from
the pledge hereunder and the proceeds shall be applied as set forth in the
Recourse Note and in this Stock Pledge Agreement.
6. Attorney-in-Fact. The Company is hereby appointed the
attorney-in-fact of the Pledgor for the purpose of carrying out the provisions
of this Stock Pledge Agreement and taking any action and executing any
instrument which the Company reasonably may deem necessary or advisable to
accomplish the purposes hereof, including, without limitation, the execution of
the agreements, financing statements and other instruments described in Section
1 hereof, which appointment as attorney-in-fact is irrevocable as one coupled
with an interest.
7. Termination. Upon payment in full of all Obligations and
upon the due performance of and compliance with and subject to all the
provisions of the Recourse Note, this Stock Pledge Agreement shall terminate and
the Pledgor shall be entitled to the return of such of the Pledged Collateral as
has not theretofore been sold, released or otherwise applied pursuant to the
provisions of this Stock Pledge Agreement, and the Company shall file UCC-3
termination statements terminating its security interest in any Pledged
Collateral with respect to which any financing statement had been filed by the
Company.
8. Notices. All notices or other communications required or
permitted to be given hereunder shall be delivered, if to the Pledgor or to the
Company, c/o BioSpecifics Technologies Corporation, 35 Wilbur Street, Lynbrook,
New York 11563, or to such other address as an addressee may hereafter specify
for such purpose to the other party.
9. Binding Effect, Successors and Assigns. This Stock Pledge
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors.
5
<PAGE>
10. Miscellaneous. The Company shall have no obligation in
respect of the Pledged Collateral under this Stock Pledge Agreement, except to
hold and dispose of the same in accordance with the terms of this Stock Pledge
Agreement. Neither this Stock Pledge Agreement nor any provision hereof may be
amended, modified, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
amendment, modification, waiver, discharge or termination is sought. The
captions in this Stock Pledge Agreement are for convenience of reference only
and shall not define or limit the provisions hereof. This Stock Pledge Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of New York, without regard to the conflicts of law rules thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Stock
Pledge Agreement to be executed and delivered on the date first above written.
BIOSPECIFICS TECHNOLOGIES
CORP.
By: /s/ Albert Horcher
------------------
Name: Albert Horcher
Title: Secretary, Treasurer
PLEDGOR
By: /s/ Edwin H. Wegman
-------------------
Name: Edwin H. Wegman
6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 13, 2000 (except for Note 14 as to which
the date is April 24, 2000), accompanying the consolidated financial statements
included in the annual report of BioSpecifics Technologies Corp. on Form 10-KSB
for the year ended January 31, 2000. We hereby consent to the incorporation by
reference of said report in the Registration Statement of BioSpecifics
Technologies, Corp. on Form S-8.
Grant Thornton LLP
New York, New York
May 10, 2000
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 3, which is as of May 10, 1999,
relating to the consolidated statements of income, stockholders' equity and cash
flows of Biospecifics Technologies Corp. and subsidiaries for the year ended
January 31, 1999, which report appears in the January 31, 2000 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 10, 2000
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jan-31-2000
<PERIOD-START> Feb-01-1999
<PERIOD-END> Jan-31-2000
<CASH> 4,221,447
<SECURITIES> 951,398
<RECEIVABLES> 1,484,326
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<INVENTORY> 1,779,531
<CURRENT-ASSETS> 268,942
<PP&E> 2,490,173
<DEPRECIATION> 1,268,836
<TOTAL-ASSETS> 10,761,779
<CURRENT-LIABILITIES> 1,577,267
<BONDS> 0
0
0
<COMMON> 4,891
<OTHER-SE> 11,561,185
<TOTAL-LIABILITY-AND-EQUITY> 10,761,779
<SALES> 6,490,865
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<CGS> 2,080,000
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<OTHER-EXPENSES> 1,659,087
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<INCOME-TAX> (302,000)
<INCOME-CONTINUING> 159,671
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