Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2000
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE
ACT OF 1934 for the transition period from to
----------- ------------
Commission File Number 1-10581
--------
BENTLEY PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 59-1513162
- ----------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
- ----------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 964-8006
---------------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -------------------------------------------
Common Stock, $.02 par value American Stock Exchange and Pacific Exchange, Inc.
Class B Redeemable Warrants American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
Title of Class Aggregate Market Value As of Close of Business on
-------------- ------------------ --------------------------
Common Stock, $.02 par value $48,826,000 March 26, 2001
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title of Class Shares Outstanding As of Close of Business on
-------------- ------------------ --------------------------
Common Stock, $.02 par value 13,918,325 March 26, 2001
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2001 Annual Meeting of Stockholders - Incorporated by
Reference into Part III of this Form 10-K
PART I
ITEM 1. BUSINESS
--------
GENERAL
Bentley Pharmaceuticals, Inc. (the "Registrant") is a U.S.-based drug delivery
company specializing in the development of products based upon innovative and
proprietary drug delivery systems. The Registrant also has a commercial presence
in Europe, where it manufactures, markets and distributes branded and generic
pharmaceutical products. The Registrant owns rights to certain U.S. and
international patents and related technology covering methods to enhance the
absorption of drugs delivered to biological tissues. The Registrant is
developing this technology and is targeting U.S., European and other
international markets for the new product applications. The Registrant is in
negotiations with larger pharmaceutical companies with the objective of
collaborating in the development and marketing of various product applications,
including the treatment of onychomycosis, delivery of insulin, hormone
replacement therapies, vaccines and peptides.
It is the Generally Recognized as Safe ("GRAS") status, format independence, and
lack of irritation that set the Registrant's technology apart from other related
drug delivery systems. Studies have demonstrated that the excipients resulting
from this technology enhance the absorption of pharmaceutical products, whether
formulated in creams, ointments, gels, solutions, lotions, or patches, and have
proven to be efficient in delivering both hydrophilic and lipophilic agents.
The Registrant is currently investigating technologies which may lead to
additional patents in drug delivery, both in the extension of its current
technology and as new systems applicable to pharmaceutical patches, peptides and
oral absorption. The Registrant's objective is to enter into several new
licensing collaborations in the near future, utilizing its permeation
enhancement technology and improved oral formulations.
The Registrant's corporate headquarters and research laboratories are located in
New Hampshire, where it develops and optimizes enhanced formulations utilizing
its permeation technology.
In Spain, the Registrant acquires, licenses or develops and registers late stage
products, and manufactures, packages and distributes its own products and
products under contract for other pharmaceutical companies. Research is
conducted in the Registrant's Zaragoza, Spain facility, with the objective of
improving drug solubility, dispersion, absorption, and creating improved oral
delivery of drugs. Ninety-nine percent of the Registrant's revenues for the year
ended December 31, 2000 were derived from its operating subsidiaries,
Laboratorios Belmac S.A. and Laboratorios Davur S.L., in Spain.
2
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant emphasizes branded and
generic product manufacturing, marketing and distribution in Spain, strategic
alliances and product acquisitions. Its overall strategy has been expanded due
to the 1999 acquisition of permeation enhancement technology, which will require
some development expenditures while providing a multitude of opportunities for
strategic partnerships and/or alliances, which are anticipated to lead to
milestone payments and royalty arrangements with the strategic partners bearing
or reimbursing the majority of development costs. Since this technology is based
on a series of GRAS compounds, products may be developed in a quicker and less
costly fashion. The technology facilitates the permeation of drugs administered
through skin, across mucosa or through the cornea in a variety of independent
pharmaceutical formats. The excipient most advanced in facilitating absorption
is referred to by the Registrant as CPE-215, although there are a number of
other related compounds under the same patents that have equally impressive
enhancing characteristics.
The Registrant anticipated the opportunities that the emerging generic market in
Spain present and began taking measures over two years ago to enter the Spanish
generic market. The Registrant created a wholly-owned subsidiary to register,
market and distribute generic pharmaceutical products in Spain and began
aligning its business model to be competitive in this arena, including hiring
and training a new generic sales force, submission of generic-equivalent
products to the Spanish Ministry of Health for approval and a marketing campaign
designed to position the Registrant as a leader in the Spanish generic market.
In July 2000, the Registrant entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd., whereby the Registrant will initially receive
licenses to more than 75 of Teva's products for registration and marketing in
Spain. Teva will supply the bulk pharmaceutical products to the Registrant and
the Registrant's Spanish subsidiaries, Laboratorios Belmac and Laboratorios
Davur, will market the products in Spain. Teva was also granted a right of first
refusal to acquire Laboratorios Davur in the event that the Registrant decides
to divest that subsidiary. Sales from the products are expected to begin
gradually, but will progress over the next two to three years. An investment in
additional sales representatives will be required, along with an increase in
regulatory activities, both of which may create a short-term reduction in the
Registrant's earnings.
The Registrant was organized under the laws of the State of Florida in February
1974 and operated as a Florida corporation until October 1999, when it changed
its state of incorporation to Delaware by effecting a merger of the Registrant
with and into Bentley Pharma, Inc., a Delaware corporation, which was a
wholly-owned subsidiary of the Registrant. Bentley Pharma, Inc. was the
surviving entity of the merger and its name was changed to Bentley
Pharmaceuticals, Inc., the name that the Registrant uses to conduct its
business. The Registrant also adopted a certificate of incorporation and bylaws,
which conform to Delaware law.
PRODUCT LINES
The Registrant currently manufactures, markets and sells generic and branded
pharmaceutical products in Spain and exports certain of those products to
various countries.
3
The Registrant's net sales by its primary product lines are as follows (in
thousands of U.S. dollars):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
Pharmaceutical and Consumer Health Care Products $18,617 $20,249 $15,148
Disposable Products * - - 95
------- ------- -------
Total $18,617 $20,249 $15,243
======= ======= =======
* Disposable products were discontinued in December 1998.
PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN
Laboratorios Belmac, the Registrant's subsidiary in Spain, manufactures and
markets pharmaceutical products within four primary therapeutic categories of
cardiovascular, gastrointestinal, neurological, and infectious diseases.
Laboratorios Davur, a wholly-owned subsidiary of Laboratorios Belmac, markets
generic drug products within the same four primary categories. The Registrant
manufactures or distributes a variety of dosage forms of various pharmaceuticals
in its manufacturing facility in Zaragoza, Spain both for its own sales and
under contract for others. The manufacturing facility was renovated in 1995 and
brought into full compliance with European Union Good Manufacturing Practices
(GMPs) for solid and liquid dosage forms. Additional renovations were completed
in 1998, 1999 and 2000 and expansion of the facility is underway during 2001.
The Registrant has budgeted approximately $1,343,000 for year 2001 capital
improvements and equipment purchases at its manufacturing facility in Spain,
which it expects to fund with cash flows from operations.
The Registrant is in the process of reviewing its product portfolio and has made
the decision to divest products that it considers to be redundant or that have
become non-strategic. In November 2000, the Registrant agreed to sell its
registration rights and trademark to its branded version of enalapril
(Controlvas(R)), which the Registrant manufactured and marketed during 2000. The
sale of this product, for approximately $4,800,000, was completed during the
first quarter of 2001. Controlvas(R) is an angiotensin converting enzyme
inhibitor useful in the treatment of hypertension and congestive heart failure.
The strategic restructuring of the Registrant's product portfolio also resulted
in the purchase of the registration rights and trademark to the branded product,
Codeisan(R), for approximately $5,200,000, during the year ended December 31,
2000. Codeisan(R) is used to relieve symptoms of cough and bronchitis.
In addition to the steps taken above, the Registrant has developed and is in the
process of registering its own pharmaceutical products in Spain. Among the
products Laboratorios Belmac manufactures and/or distributes, each of which is
registered with Spain's Ministry of Health, are:
Belmazol(R). Belmazol, whose generic name is omeprazole, is used
primarily for hyperacidity problems related to ulcers and, secondarily, for the
treatment of gastroesophageal reflux disease.
4
Omeprazole is a proton pump inhibitor, which inhibits the hydrogen/potassium
ATPase enzyme system at the secretory surface of gastric parietal cells. Because
this enzyme system is regarded as an acid pump within the gastric mucosa, it has
been characterized as a gastric acid pump inhibitor in that it blocks the final
step of acid production. This compound has been used in combination with
antibiotics for the treatment of ulcers when it is suspected that Helicobacter
pylori bacteria are the etiologic agent. Omeprazole is marketed in the United
States by AstraZeneca.
Fluoxetine. Fluoxetine is in the class of compounds that prevents
serotonin uptake by CNS neurons and is a leading antidepressant medication. It
is marketed in the United States by Eli Lilly and Co. under the trade name,
Prozac(R).
Enalapril. Enalapril is an angiotensin converting enzyme inhibitor
useful in the treatment of hypertension and congestive heart failure. It is
marketed in the United States by Merck & Company under the trade name,
Vasoretic(R).
Codeisan(R). Codeisan(R)products are useful for relieving symptoms of
cough and bronchitis.
Pentoxifyline. Pentoxifyline is a product used in the treatment of
peripheral vascular ischemia.
Selegiline. Selegiline is a compound used in the treatment of
Parkinson's Disease. It is marketed in the United States under the trade name,
Eldepryl(R).
Trimetazadine. Trimetazadine is an anti-ischemic drug used in the
treatment of angina pectoris.
Plantago Ovata. Plantago Ovata is a medication of plant origin used in
the treatment of bowel irregularity.
Belmalax(R). Belmalax, whose generic name is lactulose, is used
primarily for treating constipation in the elderly and, secondly, for the
treatment of hepatic encephalopathy, a central nervous system impairment. The
degradation of lactulose in the intestine acidifies the colon contents. Ammonia,
which is a cause of encephalopathy, will migrate into the colon, be transformed
into the ammonium ion and eliminated from the body.
Senioral(TM). Senioral is a combination product useful in the treatment
of congestive symptoms of the upper respiratory tract.
Arzimol(TM). Arzimol, whose generic name is Cefprozil, is an oral
antibiotic in the cephalosporin class, marketed in Spain by the Registrant under
a distribution agreement with Bristol Myers Squibb.
Loperamida(R). Loperamida, whose generic name is loperamide
hydrochloride, is a compound that inhibits gastrointestinal motility and is
useful in the treatment of diarrheal conditions and colitis. Loperamide
hydrochloride is marketed in the United States by several drug companies,
including
5
McNeil, Proctor & Gamble, Teva and Geneva.
Lactoliofil(R). Lactoliofil is an anti-diarrheal agent whose mechanism
of action is the restoration of gastrointestinal flora.
Neurodavur(R) and Neurodavur Plus(R). Neurodavur and Neurodavur Plus
are vitamin B compounds used for the enhancement of activity in the central and
peripheral nervous systems.
Diflamil(R). Diflamil is an anti-inflammatory analgesic used in the
treatment of arthritis.
Resorborina(R). Resorborina is a compound that has local anesthetic and
anti-inflammatory properties for the treatment of pharyngitis and mouth
afflictions.
Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are compounds
used to treat local fungal infections, especially around the nail beds.
Otogen(R). Otogen is a product used for the treatment of ear infections
and ear pain.
Spirometon(R). Spirometon is a combination of spironolactone and
bendroflumethazide useful in the treatment of congestive heart failure,
hypertension and edema. (Spirometon diuretics preserve the body's supply of
potassium).
Anacalcit(R). Anacalcit is a calcium-binding product used for the
treatment of kidney stones. The Spanish government has specifically requested
that Laboratorios Belmac continue to manufacture this product, as Laboratorios
Belmac is the only supplier of this type of product in Spain.
Relaxibys(R). Relaxibys is a combination of an analgesic (paracetamol)
and a muscle relaxant (carisoprodol).
Cimascal and Cimascal D Forte(R). Cimascal is a calcium carbonate
product useful in the prevention of osteoporosis. It is also marketed in
combination with Vitamin D.
Rimagrip Complex(R). Rimagrip Complex is a product used for the
treatment of cough, cold and flu symptoms.
Amantadine(R). Amantadine is an anti-viral product for the prevention
of influenza symptoms and symptoms associated with Parkinson's Disease.
Generic Antibiotics. Laboratorios Belmac and Laboratorios Davur sell
various other types of generic antibiotics for which patent protection no longer
exists, such as ciprofloxacin, amoxicillin, ampicillin and injectable forms of
penicillin (Bactosone Retard(R)).
Belmazol(R) and Controlvas(R) represent approximately 35% and 12%, respectively,
of the sales of the Registrant during the year ended December 31, 2000.
6
As the Spanish government did not recognize international conventions for patent
protection for pharmaceutical products until 1992, the Registrant, while owning
the right to manufacture the drugs described above as well as other
pharmaceuticals, will often be one of several companies which has the right to
manufacture and sell products which are patent protected in other parts of the
world. The Spanish regulatory authorities specify the amounts each company can
charge for its products. Therefore, the Registrant's competitors may sell
similar products at the same, higher or lower prices.
The Registrant maintains an internal marketing and sales staff of approximately
122 in Spain to market the pharmaceuticals it produces. The Registrant's sales
force competes by emphasizing highly individualized customer service in all
major cities, provinces and territorial islands of Spain.
The Registrant exports pharmaceuticals manufactured by Laboratorios Belmac
outside Spain through local distributors and brokers, particularly in Eastern
Europe, Northern Africa, China, Central and South America.
PRODUCT SUPPLY
Since Laboratorios Belmac currently utilizes less than 100% of its plant
capacity to manufacture its own products, Laboratorios Belmac has engaged in
manufacturing of pharmaceuticals owned by other companies such as Italpharmaco,
Ratiopharm, Juste, and Ethypharm. The Registrant manufactures these
pharmaceuticals to its customers' specifications, and packages them with the
customers' labels. Occasionally, to assure product uniformity and quality,
representatives of these customers will inspect the Registrant's manufacturing
facility. The Registrant has experienced growth in sales of its own branded and
generic products in recent years; consequently, the Registrant is currently
utilizing more of its manufacturing facility capacity to manufacture its own
products and expects that contract manufacturing activities will decrease as a
percentage of net sales as the Registrant continues to use more and more of its
capacity to manufacture its own products.
As a result of Spain's entry into the European Union, Spain implemented new
pharmaceutical manufacturing standards and the Registrant modified its facility
to comply with these regulations. Laboratorios Belmac accomplished such
renovations without interruption of sales or distribution. After an inspection
in July 1995, the operating areas of the facility were determined to be in
compliance with European GMPs by Spain's Ministry of Health. Additional
renovations were undertaken in 1998, 1999 and 2000 to further upgrade the
Registrant's manufacturing facility and an inspection in November 1999 confirmed
continuing compliance with European GMPs. Expansion of the facility is underway
in 2001.
PRODUCTS UNDER DEVELOPMENT
The Registrant acquired patents and related permeation enhancement technology in
February 1999 and plans to develop such technology into product applications.
(See "--Research and Development"). Due to the expense and time commitment
required to bring a pharmaceutical product to market, the Registrant is seeking
co-marketing, licensing, promotional arrangements and other collaborations with
other international or national pharmaceutical companies. Generally,
7
management believes that the Registrant can compete more effectively in certain
markets through collaborative arrangements with companies that have an
established presence in a particular geographic area and greater resources than
those of the Registrant. There can be no assurance that the Registrant will have
the resources to bring any of these products to market or, if such resources are
available, that the products can be successfully developed, manufactured or
marketed.
The Registrant was assigned certain patents and hydrogel drug delivery
technology during the year ended December 31, 1999, in settlement of a judgment
against its former joint venture partner, and has contacted other pharmaceutical
companies with the objective of licensing such patents and technology for
co-development and marketing of product applications that may result from the
exploitation of this technology. The Registrant is currently conducting a Phase
I Clinical Study (treatment of nail fungal infections) at the University of
Alabama at Birmingham. Pre-clinical programs are underway in collaboration with
the University of New Hampshire and Dartmouth College.
The Registrant entered into a license agreement with Auxilium A2, Inc. in May
2000, whereby Auxilium licensed the Registrant's CPE-215 drug delivery
technology. Auxilium is applying this technology to a topical gel formulation of
testosterone. Clinical studies have been undertaken by Auxilium and a Phase III
study has recently commenced. The Registrant and Auxilium entered into a letter
of intent in March 2001, whereby Auxilium has expressed interest in licensing
the Registrant's technology for two additional products. The Registrant
continues to have discussions with other potential licensees for its drug
delivery technology.
The Registrant has also received strong interest from the pharmaceutical
industry in its recently filed patents for improved oral dosage forms of
acetaminophen. Potential collaborators from Europe, Asia and the United States
have expressed preliminary interest in developing and licensing this product
which is based upon improved oral delivery technology.
In addition, the Registrant has licensed from Dartmouth College exclusive rights
to a patent covering the novel use of androgen therapy for treating fibromyalgia
and chronic fatigue syndrome.
Laboratorios Belmac purchased dossiers and/or submitted new registrations for a
number of new products during 1998, 1999 and 2000, such as fluoxetine (an
anti-depressant product), Diltiazem SR (a cardiovascular product), Pentoxyfiline
SR (a peripheral vasodilator), Ibuprofen (a non-steroidal anti-inflammatory
analgesic), Selegilene (a product for treatment of Parkinson's Disease),
Ciprofloxacin (an antibiotic) and Doxazocin (a product for treatment of benign
prostatic hyperplasia (BPH)). The Spanish registration process for these
products could span one to two years before authorization to market these
products is received.
In addition, the Registrant has entered into a research agreement with a large
pharmaceutical company whereby the Registrant's drug delivery technology is
being evaluated in combination with various product applications.
8
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Registrant purchases, in the ordinary course of business, necessary raw
materials and supplies essential to the Registrant's operations from numerous
suppliers. There have been no availability problems or supply shortages nor are
any anticipated.
PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS
Few of the products currently being sold by the Registrant are protected by
patents owned by the Registrant. However, where possible, patents and trademarks
will be sought and obtained in the United States and in all countries of
principal marketing interest to the Registrant. The Registrant has filed or has
rights to certain patent applications, particularly with regard to its
permeation enhancement technology and hydrogel technology. However, there can be
no assurance that its rights will afford adequate protection to the Registrant.
In addition, the Registrant also relies on unpatented proprietary technology in
the development and commercialization of its products. There is no assurance
that others may not independently develop the same or similar technology.
The Registrant also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovations to develop its competitive position.
However, there can be no assurance that others may not acquire or independently
develop similar technology or, if patents in all major countries are not issued
with respect to the Registrant's products, that the Registrant will be able to
maintain information pertinent to such research as proprietary technology or
trade secrets.
The Registrant acquired patents and related permeation enhancement technology in
February 1999 and plans to develop alternative delivery methods for currently
marketed products, thereby extending their marketing exclusivity. The patent
coverage includes the United States, Japan, Korea and most major European
markets.
Laboratorios Belmac owns approximately 50 trademarks for pharmaceutical products
and one patent, which was granted by Spain's Bureau of Patents, and Trademarks.
The Registrant filed two patent submissions during the year ended December 31,
2000. In Spain, patents expire after 20 years. Trademarks expire after 10 years,
but can be renewed. All prescription pharmaceutical products marketed by
Laboratorios Belmac and Laboratorios Davur in Spain have been registered with
and approved by Spain's Ministry of Health. To register a pharmaceutical with
the Ministry requires the submission of a registration dossier, which includes
all pre-clinical, clinical and manufacturing information. The registration
process can take two years or more. There can be no assurance that a competitor
has not or will not submit additional registrations for products substantially
similar to those marketed by Laboratorios Belmac and Laboratorios Davur.
COMPETITION
All of the Registrant's current and future products face strong competition both
from existing drugs and products and from new drugs and products being developed
by others, including generic equivalents. This competition potentially includes
national and multi-national pharmaceutical and health care companies of all
sizes. Many of these other pharmaceutical and health care concerns have
9
far greater financial resources, technical staffs and manufacturing and
marketing capabilities than the Registrant. Acceptance by hospitals, physicians
and patients is crucial to the success of a pharmaceutical or health care
product.
The Registrant competes primarily in Spain, which is a large, developed
population center in Europe. Since Spain is a member of the European Union, the
Registrant expects to be able to target the European Union's larger population
as harmonization eliminates the barriers between countries.
Laboratorios Belmac and Laboratorios Davur compete with both large multinational
companies and national Spanish companies, which produce most of the same
products Laboratorios Belmac manufactures. For example, there are currently many
companies, such as Astra Espana S.A., which market and sell omeprazole.
Similarly, many companies currently sell enalapril, with Merck, Sharp & Dome de
Espana, S.A. being the product leader. Other products sold by Laboratorios
Belmac and Laboratorios Davur, such as Onico-Fitex, are more unusual and have
fewer competitors.
CUSTOMERS
The incidence of certain infectious diseases, which occur at various times in
different areas of the world, affects the demand for the Registrant's antibiotic
products when they are marketed in each area. Orders for the Registrant's
products are generally filled on a current basis, and no order backlog existed
at December 31, 2000. No material portion of the Registrant's business is
subject to renegotiation of profits or termination of contracts at the election
of any governmental authority. With the exception of one customer, Cofares,
whose purchases accounted for 14% of consolidated net sales, there were no other
customers whose purchases accounted for in excess of 10% of the Registrant's
consolidated net sales during the year ended December 31, 2000. Two customers'
purchases accounted for in excess of 10% of consolidated net sales during the
year ended December 31, 1999. Each of Cofares and Antibioticos Farma accounted
for 13% of consolidated net sales during the year ended December 31, 1999,
respectively. One customer, Cofares, accounted for 12% of the Registrant's
consolidated net sales during the year ended December 31, 1998; however, no
other customers accounted for sales in excess of 10% of consolidated net sales
in 1998.
RESEARCH AND DEVELOPMENT
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant has moved from a research
and development-oriented pharmaceutical company, which required developing
products from the chemistry laboratory through marketing, to a company seeking
to acquire late-stage development compounds or currently marketed products. The
February 1999 acquisition of permeation enhancement technology will require some
developmental expenditures while providing a multitude of opportunities for
strategic partnerships and/or alliances. In conjunction with its relocation from
Florida, the Registrant established a laboratory in New Hampshire during the
year ended December 31, 1999 for formulation development and testing of
potential product applications. The Registrant is currently pursuing strategic
alliances with respect to this technology, which are anticipated to lead to
milestone payments and royalty arrangements with the strategic partners bearing
or reimbursing the majority of development costs. This technology is based on
United States Food and Drug Administration ("FDA") GRAS compounds, which should
10
result in significantly reduced pre-clinical trials (animal testing) and
developmental costs. The Registrant is currently conducting a Phase I Clinical
Study (treatment of nail fungal infections) at the University of Alabama at
Birmingham. Pre-clinical programs are underway in collaboration with the
University of New Hampshire and Dartmouth College.
Research and development expense totaled $1,102,000, $685,000 and $153,000 in
the years ended December 31, 2000, 1999 and 1998, respectively, aimed at
developing new products and processes and improving existing products and
processes. The Registrant intends to continue to carefully manage its research
and development activities with the establishment of priorities based on both
technical and commercial criteria and to carefully supervise such expenditures
in view of its limited resources. Research and development expenditures in 2001
are expected to be greater than in recent years, however, due to planned
development of the permeation enhancement technology described above. The costs
of clinical trials, which are necessary to obtain product approvals, are a
significant component of research and development expense. The Registrant is
currently conducting clinical trials with respect to its drug delivery
technology. Costs of government regulation can also result in a significant
amount of research and development expense, as explained further below.
Laboratorios Belmac is also engaged in limited research of drug delivery
systems, such as sustained release and time-release formulations, through a
collaborative agreement with a customer.
REGULATION
The development, manufacture, sale, and distribution of the Registrant's
products are subject to comprehensive government regulation, and the general
trend is toward more stringent regulation. Government regulation, which includes
detailed inspection and control over research laboratory procedures, clinical
investigations, manufacturing, marketing, and distribution practices by various
federal, state, and local agencies, substantially increases the time, difficulty
and cost incurred in obtaining and maintaining the approval to market newly
developed and existing products.
United States. The steps required before a pharmaceutical agent may be marketed
in the United States include (i) pre-clinical laboratory and animal tests, (ii)
the submission to the FDA of an Investigational New Drug Application, which must
become effective before human clinical trials may commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) the submission of a New Drug Application ("NDA") to the FDA, and
(v) the FDA approval of the NDA prior to any commercial sale or shipment of the
drug. In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with current GMPs for drugs. To supply products for use in the
United States, foreign manufacturing establishments must comply with GMPs and
are subject to periodic inspection by the FDA or by regulatory authorities in
such countries under reciprocal agreements with the FDA.
Following completion of laboratory animal testing, clinical trials are typically
conducted in three sequential phases that may overlap. In Phase I, the initial
introduction of the pharmaceutical into healthy human volunteers, the emphasis
is on testing for safety (adverse effects), dosage tolerance,
11
metabolism, excretion and clinical pharmacology. Phase II involves studies in a
limited patient population to determine the efficacy of the pharmaceutical for
specific targeted indications, to determine dosage tolerance and optimal dosage
and to identify possible adverse side effects and safety risks. Once a compound
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate clinical efficacy
further and to further test for safety within an expanded patient population at
multiple clinical study sites. The FDA reviews both the clinical plans and the
results of the trials and may discontinue the trials at any time if there are
significant safety issues.
The results of the pre-clinical and clinical trials are submitted to the FDA in
the form of a NDA for marketing approval. The approval process is affected by a
number of factors, including the severity of the disease, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review process and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials would be necessary to gain approval
for the use of the product for any additional indications. The FDA may also
require post-marketing testing to monitor for adverse effects, which can involve
significant expense.
The Registrant's products under development, including potential products
arising from the use of its permeation enhancement drug delivery technology or
its hydrogel technology, must go through the approval process delineated above
prior to gaining approval by the FDA for commercialization.
Spain. As a manufacturer in Spain, which is a member of the European Union,
Laboratorios Belmac is subject to the regulations enacted by the European Union.
Prior to Spain's entry into the European Union in 1993, the pharmaceutical
regulations in Spain were less stringent and Laboratorios Belmac, along with all
Spanish companies, have had to modify their procedures to adapt to the new
regulations, which are similar to the regulations promulgated by the FDA
discussed above. In general, these regulations are essentially consistent with
those of the FDA and require a manufacturer of a proposed pharmaceutical to show
efficacy and safety. The development process in Spain goes through the same
phases (i.e. I, II, III) as in the United States to assure their safety and
efficacy. A dossier on each pharmaceutical is prepared, which could take one to
two years or more for review by the Ministry of Health. The pharmaceutical can
then only be sold to the public with a prescription from a medical doctor.
General. Continuing reviews of the utilization, safety, and efficacy of health
care products and their components are being conducted by industry, government
agencies, and others. Such studies, which employ increasingly sophisticated
methods and techniques, can call into question the utilization, safety, and
efficacy of previously marketed products and in some cases have resulted, and
may in the future result, in the discontinuance of such products and give rise
to claims for damages from persons who believe they have been injured as a
result of their use. The Registrant has product liability insurance for such
potential claims; however, no such claims have ever been asserted against the
Registrant.
The cost of human health care continues to be a subject of investigation and
action by governmental agencies, legislative bodies, and private organizations.
In the United States, most states have enacted
12
generic substitution legislation requiring or permitting a dispensing pharmacist
to substitute a different manufacturer's version of a drug for the one
prescribed. Federal and state governments continue their efforts to reduce costs
of subsidized heath care programs, including restrictions on amounts agencies
will reimburse for the use of products. Efforts to reduce health care costs are
also being made in the private sector. Health care providers have responded by
instituting various cost reduction and containment measures of their own. It is
not possible to predict the extent to which the Registrant or the health care
industry in general might be affected by the matters discussed above.
Many countries, directly or indirectly through reimbursement limitations,
control the selling price of certain health care products. Furthermore, many
developing countries limit the importation of raw materials and finished
products. In Western Europe, efforts are under way by the European Union to
harmonize technical standards for many products, including drugs and medical
devices, and to make more uniform the requirements for marketing approval from
the various regulatory agencies. The Registrant is subject to reimbursement
status of prescription products in Spain and periodically products are
identified as non-reimbursable by the social security system. Although these
products can continue to be marketed, the non-reimbursable status could reduce
the market size of such products.
Most of the Registrant's sales are generated from Spain. International
operations are subject to certain additional risks inherent in conducting
business outside the United States, including price and currency exchange
controls, changes in currency exchange rates, limitations on foreign
participation in local enterprise, expropriation, nationalization, and other
governmental action.
A substantial amount of the Registrant's business is conducted in Europe and is
therefore influenced by the extent to which there are fluctuations in the
dollar's value against other currencies, specifically the Euro and Peseta. (See
discussion of foreign currency in Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk".)
To the best of its knowledge, the Registrant is presently in substantial
compliance with all existing applicable environmental laws and does not
anticipate that such compliance will have a material effect on its future
capital expenditures, earnings or competitive position with respect to any of
its operations.
EMPLOYEES
The Registrant and its subsidiaries employ approximately 209 people, 9 of whom
are employed in the United States and 200 in Spain, as of March 15, 2001.
Approximately 60 of these employees are principally engaged in manufacturing
activities, 122 in sales and marketing, 8 in product development and 19 in
management and administration. In general, the Registrant considers its
relations with its employees to be good.
FINANCIAL INFORMATION RELATING TO GEOGRAPHIC AREAS AND FOREIGN OPERATIONS
For information regarding the Registrant's foreign operations, see Note 12 of
Notes to Consolidated Financial Statements.
13
RISK FACTORS
RISKS ASSOCIATED WITH OUR PAST FINANCIAL RESULTS
We could be required to cut back or stop operations if we are unable to raise or
- --------------------------------------------------------------------------------
obtain needed funding
- ---------------------
We have experienced losses since inception, resulting in the need to fund our
operations through outside financing. A 1996 Public Offering resulted in net
proceeds of approximately $5,700,000, some of which was used to repay debt
incurred in 1995 private placements. We also received approximately $9,800,000
in 1997, when approximately 70% of our then outstanding Class A Warrants were
exercised and approximately $2,600,000 in 1999 upon the exercise of
approximately 859,000 Class A Warrants. The remaining 1,252,000 Class A Warrants
expired unexercised. We received approximately $2,808,000 in 2000 from the
exercise of options and warrants, including approximately 197,000 Class B
Warrants. The remaining Class B Warrants, if not exercised or redeemed, are
scheduled to expire on August 14, 2001. The Class A Warrants and underlying
Class B Warrants originally were sold as components of the 1996 Public Offering.
Our future existence and profitability depends on our ability to fund and expand
operations in an effort to achieve profits from operations. We cannot assure you
that our business will ultimately generate sufficient revenue to fund our
operations on a continuing basis.
Although we were founded in 1974, we have only generated revenue from
product-related sales since August 1991. We have used cash from outside
financing to fund our operations. We have made progress toward commercialization
of specific products and have begun to commercialize others. We are now
generating revenues from sales of products by our subsidiary, Laboratorios
Belmac S.A., a pharmaceutical manufacturer located in Spain and its wholly-owned
subsidiary, Laboratorios Davur S.L. We acquired Laboratorios Belmac in February
1992. Substantial amounts of time and financial and other resources will be
required to complete the development and clinical testing of our products
currently under development. Due to our limited cash, we are seeking strategic
partners for development and marketing of potential products employing our
technology. We cannot assure you that we will receive additional funding
necessary to continue research and development activities, that we will be
successful in attracting strategic partners or that we will otherwise succeed in
developing any additional products with commercially valuable applications.
We believe that with our emphasis on product distribution in Spain, strategic
alliances and product acquisitions together with careful management of our
research and development activities and the net proceeds from the 1996 Public
Offering and the exercise of the Class A and Class B Warrants, that we should
have sufficient liquidity to enable us to conduct our existing operations for
the year 2001 and into 2002. However, our pharmaceutical products being
developed, and which may be developed, will require the investment of
substantial additional time as well as financial and other resources in order to
become commercially successful. Following the development period, our products
will generally be required to go through lengthy governmental approval
processes, including extensive clinical testing, followed by educating
physicians, pharmacists and consumers about the benefits of the products and
developing a market for them. Revenues from our
14
operations and cash may not be sufficient over the next several years for
commercializing any of the products we are currently developing. Consequently,
we may require additional licensees or partners and/or additional financing. We
cannot assure you that we can conclude such commercial arrangements or obtain
additional capital when needed on acceptable terms, if at all.
We have a history of losses and if we do not achieve profitability we may not be
- --------------------------------------------------------------------------------
able to continue our business in the future
- -------------------------------------------
As of December 31, 2000 we have accumulated losses (accumulated deficit) of
approximately $75,693,000. We may incur additional losses until we can
successfully market and distribute our products and develop new technologies and
commercially viable future products. If we are unable to do so, we will continue
to have losses and might not be able to continue our operations.
We incurred the following losses in 1998, 1999 and 2000:
o Fiscal year ended December 31, 1998 ............... $2,876,000
o Fiscal year ended December 31, 1999 ............... $1,090,000
o Fiscal year ended December 31, 2000................ $ 745,000
We may be restricted from using our net operating loss carry forwards due to a
- --------------------------------------------------------------------------------
change in equity ownership and a change in our tax year
- -------------------------------------------------------
As of December 31, 2000, we had net operating loss carryforwards ("NOLs") of
approximately $32,773,000 available to offset future U.S. taxable income. The
use of the NOLs generated through December 31, 1997 may be limited to
approximately $1,000,000 each year as a result of stock, option and warrant
issuances resulting in an ownership change of more than 50% of our outstanding
equity. The NOL of approximately $3,200,000 generated during the tax year ended
December 31, 1998 is available to offset future taxable income without
limitation. Additionally, approximately $1,800,000 of the NOL generated in 1995
will be available to offset future U.S. taxable income is limited to
approximately $300,000 per year over the subsequent six years due to the change
in tax year end during 1995. If not offset against future taxable income, the
NOL carry forwards will expire in tax years 2007 through 2021.
RISKS ASSOCIATED WITH OUR BUSINESS
Successful development of current and future products is uncertain
- ------------------------------------------------------------------
We purchased technology to enhance the penetration of certain pharmaceutical
products through the dermal layers of the skin. Although several systems have
been developed by various pharmaceutical companies to enhance the transdermal
delivery of specific drugs, relatively limited research has been conducted in
the expansion of transdermal delivery systems to a wider range of pharmaceutical
products. Transdermal delivery systems are currently marketed for only a limited
number of products. In addition, transdermal delivery systems used to date have
often demonstrated adverse side effects for users, such as skin irritation and
delivery difficulties.
15
Some of our proposed products are in the early development stage, require
significant further development, testing and regulatory clearances and are
subject to the risks of failure inherent in the development of products based on
innovative technologies. Due to our limited resources, collaboration will be
essential in order to complete the development of specific products. No
assurance can be given that the necessary collaboration will be obtained. Risks
during development include the possibilities that any or all of the proposed
products may be found to be ineffective, have untoward side effects, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, we do not expect to be able to realize royalty revenues from the sale
of any drugs in the near term.
Clinical trial results may result in failure to obtain regulatory approval and
- --------------------------------------------------------------------------------
inability to sell products
- --------------------------
Any human pharmaceutical product developed by us would require clearance by
Spain's Ministry of Health for sales in Spain, the U.S. FDA for sales in the
United States and similar agencies in other countries. Before approving a drug
for commercial sale as treatment for a disease, the FDA and other regulatory
authorities generally require that the safety and efficacy of a drug be
demonstrated in humans. If our clinical trials do not demonstrate the safety or
efficacy of our products, or if we otherwise fail to obtain regulatory approval
for our products, we will not be able to generate revenues from the commercial
sale of our products. The process of obtaining these approvals is costly and
time-consuming, and there can be no assurance that such approvals will be
granted. In general, only a small percentage of new pharmaceutical products
achieve commercial success. Such governmental regulation may prevent or
substantially delay the marketing of our products and may cause us to undertake
costly procedures with respect to our research and development and clinical
testing operations which may provide a competitive advantage to more
substantially capitalized companies which compete with Bentley. Even if we
receive regulatory approval, these agencies may, nevertheless, limit the uses of
the product. In addition, we are required, in connection with our activities, to
comply with good manufacturing practices (GMPs) and local, state and federal
regulations. Non-compliance with these regulations could have a material adverse
effect on us and/or prevent the commercialization of our products and can, among
other things, result in:
o fines;
o suspended regulatory approvals;
o refusal to approve pending applications;
o refusal to permit exports from the United States;
o product recalls;
o seizure of products;
o injunctions;
o operating restrictions; and
o criminal prosecutions.
16
We will rely on third parties to commercialize our products in the United
- --------------------------------------------------------------------------------
States.
- -------
We require substantial additional funds to complete development of our products
and anticipate forming alliances with others to manufacture and market our
products in the United States and throughout the world. We continue to pursue
corporate partners to fund development and commercialization of our products. We
may not be successful in finding corporate partners or obtaining other financing
and, if obtained, the terms of any such arrangements may not be favorable to us.
If we are not able to obtain any such corporate partners or financing,
development of our products could be delayed or curtailed, which could
materially adversely affect our results of operations and financial condition.
Any partner with which we enter into a collaboration partners may not be
successful in commercializing our products or may terminate their collaborative
agreement with us. If we obtain any collaborative arrangements, we will depend
on the efforts of these collaborative partners and we will have limited or no
control over the development, manufacture and commercialization of the products
subject to the collaboration. If our collaborative partners terminate the
related agreements or fail to develop, manufacture or commercialize products, we
would be materially adversely affected. Because we will generally retain a
royalty interest in sales of products licensed to third parties, our revenues
will be less than if we marketed products directly.
Any manufacturing facilities for any of our compounds are subject to FDA
inspection both before and after NDA approval to determine compliance with GMP
requirements. Facilities used to produce our compounds may not have complied, or
may not be able to maintain compliance, with GMP. The GMP regulations are
complex, and failure to be in compliance could lead to non-approval or delayed
approval of the NDA. A delay in approval of the NDA would delay product launch.
If approval of the NDA has been obtained, this may result in remedial action,
penalties and delays in production of products.
Our products are early stage and may not be successful.
- -------------------------------------------------------
We are investigating a variety of pharmaceutical compounds and have other
products at various stages of development. The products we are developing are
subject to the risk in connection with our enhancement technology that any or
all of them are found to be ineffective or unsafe, or otherwise fail to receive
necessary regulatory clearances. We are unable to predict whether any of our
products will receive regulatory clearances or be successfully manufactured or
marketed. Further, due to the extended testing and regulatory review process
required before marketing clearance can be obtained, the time frames for
commercialization of any products or procedures are long and uncertain.
We could be materially harmed if our agreements were terminated.
- ----------------------------------------------------------------
Our agreements with licensors and licensees generally provide the other party
with rights to terminate the agreement, in whole or in part, under certain
circumstances. Many of our agreements require us to diligently pursue
development of the underlying product or risk loss of the license or incur
penalties. Termination of certain agreements could substantially reduce the
likelihood of
17
successful commercialization of a particular product. Depending upon the
importance to us of the product that is subject to any such agreement, this
could materially adversely affect our business.
Our failure to develop additional product candidates will impair our ability to
- --------------------------------------------------------------------------------
grow.
- -----
In order to continue to grow, we must continue to apply our technology to
additional products. The success of this strategy depends upon our ability to
continue to identify products that work with our technology. Identifying
suitable products is a lengthy and complex process. In addition, other companies
with substantially greater financial, marketing and sales resources may compete
with us using other enhancement technology.
Our patent position is uncertain and our success depends on our proprietary
- --------------------------------------------------------------------------------
rights
- ------
We have filed numerous patent applications and have been granted or have
acquired a number of patents. However, there can be no assurance that our
pending applications will be issued as patents or that any of our issued patents
will afford adequate protection to us or our licensees. Other private and public
entities have also filed applications for, or have been issued, patents and are
expected to obtain patents and other proprietary rights to technology, which may
be harmful to the commercialization of our products. We cannot determine the
ultimate scope and validity of patents which are now owned by or may be granted
to third parties in the future, the extent to which we may wish or be required
to acquire rights under such patents, or the cost or availability of such
rights. In addition, we also rely on unpatented proprietary technology in the
development and commercialization of our products. There is no assurance that
others may not independently develop the same or similar technology or obtain
access to our proprietary technology. Additionally, if our technologies, product
candidates, methods or processes infringe upon the intellectual property rights
of other parties, we could incur substantial liability costs and we may have to:
o obtain licenses from the owners of such intellectual property rights;
o redesign our product candidates or processes to avoid infringement;
o stop using the subject matter claimed in the patents held by others;
o pay damages; or
o defend litigation or administrative proceedings which may be costly
whether we win or lose.
We also rely upon trade secrets, unpatented proprietary know-how and continuing
technological innovations to develop our competitive position. All of our
employees with access to our proprietary information have entered into
confidentiality agreements and have agreed to assign to us any inventions
relating to our business made by them while in our employ. However, there can be
no assurance that others may not acquire or independently develop similar
technology or, if patents in all major countries are not issued with respect to
our products, that we will be able to maintain information pertinent to such
research as proprietary technology or trade secrets.
18
We may have to lower prices or spend more money to effectively compete against
- --------------------------------------------------------------------------------
companies with greater resources than us, which could result in lower revenues
- --------------------------------------------------------------------------------
and/or profits
- --------------
We compete with other pharmaceutical companies, biotechnology firms and chemical
companies, many of which have substantially greater financial, marketing and
human resources than us (including substantially greater experience in clinical
testing, production and marketing of pharmaceutical products). We cannot assure
you that we will be able to compete successfully given these factors. For
example, if our competitors offer lower prices, we could be forced to lower
prices, which would result in reduced margins and a decrease in revenues. If we
do not lower prices we could lose sales and market share. In either case, if we
are unable to compete against companies who can afford to cut prices, we would
not be able to generate sufficient revenues to grow Bentley or reverse our
history of losses. We also experience competition in the development of our
products and processes from individual scientists, hospitals, universities and
other research institutions and, in some instances, compete with others in
acquiring technology from these sources.
Rapid technological change may result in our products becoming obsolete before
- --------------------------------------------------------------------------------
we recoup a significant portion of related costs
- ------------------------------------------------
The pharmaceutical industry has undergone rapid and significant technological
change. We expect the technology to continue to develop rapidly, and our success
will depend significantly on our ability to maintain a competitive position. Our
strategic focus does not rely on research and development of pharmaceuticals
from concept through marketing. Instead, we seek to acquire late-stage
development compounds that can be marketed within approximately one year and
currently-marketed products. Rapid technological development may result in
actual and proposed products or processes becoming obsolete before we recoup a
significant portion of related research and development, acquisition and
commercialization costs.
Pharmaceutical pricing is uncertain and may result in a negative effect on our
- --------------------------------------------------------------------------------
profitability
- -------------
Our levels of revenues and profitability may be negatively affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, including Spain, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, there
have been, and we expect that there will continue to be, a number of federal and
state proposals to implement similar government control. While we cannot predict
whether any such legislative or regulatory proposals will be adopted, the
adoption of such proposals could have a material adverse effect on our business,
financial condition and profitability. In addition, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third party payers, such as government and private insurance
plans. Third party payers are increasingly challenging the prices charged for
medical products and services. If we succeed in bringing one or more products to
the market, there can be no assurance that these products will be considered
cost effective and that reimbursement to the consumer will be available or will
be sufficient to allow us to sell our products on a competitive basis.
19
We depend on key personnel and must continue to attract and retain key employees
- --------------------------------------------------------------------------------
We believe that we have been able to attract skilled and experienced management
and scientific personnel. We cannot assure you, however, that we will continue
to attract and retain personnel of high caliber. While we believe that we have
assembled an effective management team, the loss of several individuals who are
considered key management or scientific personnel could have an adverse impact
on Bentley.
We face product liability risks
- -------------------------------
We face an inherent business risk of exposure to product liability claims in the
event that the use of our technology or prospective products is alleged to have
resulted in adverse effects. While we have taken, and will continue to take,
what we believe are appropriate precautions, there can be no assurance that we
will avoid significant liability exposure. We maintain product liability
insurance in the amount of $5 million. However, we cannot assure you that this
coverage will be adequate in terms and scope to protect us in the event of a
product liability claim. In connection with our clinical testing activities, we
may, in the ordinary course of business, be subject to substantial claims by,
and liability to, subjects who participate in our studies.
We may be affected by changes in pharmaceutical pricing and reimbursement.
- --------------------------------------------------------------------------
Efforts of governmental and third party payors to contain or reduce the cost of
health care will affect our business. Successful commercialization of many of
our products may depend on the availability of reimbursement for the cost of
such products and related treatment from third-party health care payors, such as
the government, private insurance plans and managed care organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Such reimbursement may not be available for any of our products at
all or for the duration of the recommended treatment with the drug, which could
materially adversely affect our ability to commercialize the drug. The
increasing emphasis on managed care in the U.S. continues to increase the
pressure on pharmaceutical pricing.
There have been, and we anticipate that there will continue to be a number of
proposals to implement government control over the pricing or profitability of
prescription pharmaceuticals, as is currently the case in many foreign markets.
The announcement or adoption of such proposals could adversely affect us.
Furthermore, our ability to commercialize our products may be adversely affected
to the extent that such proposals materially adversely affect the business,
financial condition and profitability of companies that are prospective
collaborative partners.
We face risks when doing business outside of the United States
- --------------------------------------------------------------
Nearly all of our revenues during the three years ended December 31, 2000 have
been generated outside the United States, from our subsidiaries in Spain. There
are risks in operations outside the United States, including, among others, the
difficulty of administering businesses abroad, exposure to foreign currency
fluctuations and devaluations or restrictions on money supplies, foreign and
20
domestic export law and regulations, taxation, tariffs, import quotas and
restrictions and other political and economic events beyond our control. We have
not yet experienced any material effects of these risks; however, there can be
no assurance that they will not have such an effect in the future.
RISKS ASSOCIATED WITH OUR SECURITIES
Your percentage of ownership, voting power and price of Bentley common stock may
- --------------------------------------------------------------------------------
decrease as a result of events, which increase the number of shares of our
- --------------------------------------------------------------------------------
outstanding common stock
- ------------------------
As of December 31, 2000, we had the following capital structure:
Common stock outstanding: 13,914,000
Common stock issuable upon:
Exercise of Class B warrants: 2,778,000
Exercise of underwriter warrants: 690,000
Exercise of other warrants: 570,000
Exercise of options: 2,457,000
Other shares issuable: 11,000
----------
Total common stock outstanding assuming conversion/
exercise of all outstanding securities: 20,420,000
==========
If all of the outstanding warrants and options, which were exercisable at
December 31, 2000, were exercised, Bentley would receive proceeds of
approximately $25,446,000. In addition, we may conduct additional future
offerings of our common stock or other securities with rights to convert the
securities into shares of our common stock. Conversion or exercise of our
outstanding convertible securities, options and warrants into common stock may
significantly and negatively affect the market price for the common stock as
well as decrease your percentage of ownership and voting power of the common
stock.
Our stock is volatile.
- ----------------------
The market prices for our securities and for securities of emerging growth
companies have historically been highly volatile. Future announcements
concerning us or our competitors may have a significant impact on the market
price of our Common Stock. Factors which may affect our market price include:
o Results of clinical studies and regulatory reviews;
o Technological innovations by us or our competitors;
o Market conditions in the pharmaceutical and biotechnology industries;
o Competitive products;
o Financings or corporate collaborations;
21
o Sales or the possibility of sales of our Common Stock;
o Our results of operations and financial condition;
o Proprietary rights;
o Public concern as to the safety or commercial value of our products;
and
o General economic conditions
These uncertainties have adversely affected and may continue to adversely affect
the market price of our Common Stock. Furthermore, the stock market has
experienced significant price and volume fluctuation unrelated to the operating
performance of particular companies. These market fluctuations may also
adversely affect the market price of our Common Stock.
Obligations in connection with warrants and options may hinder our ability to
- --------------------------------------------------------------------------------
obtain future financing
- -----------------------
As of December 31, 2000, we have outstanding options and warrants to purchase
6,495,000 shares of Common Stock at exercise prices ranging from $1.50 to
$177.50 (weighted average exercise price of $4.58). The holders of the warrants
and options are likely to exercise or convert them at a time when we are able to
obtain additional equity capital on terms more favorable than those provided by
such warrants and options. Certain warrants and options also grant to the
holders certain demand registration rights and "piggy back" registration rights.
These obligations may hinder our ability to obtain future financing.
Your interest in Bentley may be diluted by the issuance of Preferred Stock with
- --------------------------------------------------------------------------------
greater rights than the Common Stock, which we can sell, or issue at any time
- -----------------------------------------------------------------------------
The sale or issuance of any shares of Preferred Stock having rights superior to
those of the Common Stock may result in a decrease in the value or market price
of the Common Stock. The issuance of Preferred Stock could have the effect of
delaying, deferring or preventing a change of ownership without further vote or
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock.
Our board of directors is authorized to issue up to 2,000,000 shares of
Preferred Stock. The board has the power to establish the dividend rates,
preferential payments on our liquidation, voting rights, redemption and
conversion terms and privileges for any series of Preferred Sock.
We have not paid dividends on our Common Stock and do not intend to pay
- --------------------------------------------------------------------------------
dividends in the foreseeable future
- -----------------------------------
We have not paid dividends on our Common Stock since our inception and do not
intend to pay any dividends on our Common Stock in the foreseeable future. We
are incorporated under Delaware law, which provides that a corporation may pay
dividends out of surplus, out of the corporation's net profits for the preceding
fiscal year, or both, provided that there remains in the stated capital account
an amount equal to the par value represented by all shares of the corporation's
stock having a distribution preference.
22
Certain laws and provisions in our certificate of incorporation and bylaws may
- --------------------------------------------------------------------------------
make it more difficult or discourage third parties from attempting to control
- --------------------------------------------------------------------------------
Bentley
- -------
We are subject to Section 203 of the Delaware General Corporate Law, as amended,
which is a statutory provision intended to discourage certain takeover attempts
of Delaware corporations which are not approved by the Board of Directors.
Section 203 prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested director, unless:
o prior to such date, our Board of Directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
o upon conclusion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
o on or subsequent to such date, the business combination is approved by
the Board of Directors and authorized at a meeting of stockholders,
and not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 of the Delaware General Corporation Law defines business
combinations to include:
o any merger or consolidation involving Bentley and any interested
stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of Bentley to an interested stockholder;
o any transaction that results in the issuance or transfer by Bentley of
any of our stock to an interested stockholder;
o any transaction involving Bentley that has the effect of increasing
the proportionate share of any class or series of our stock
beneficially owned by an interested stockholder; or
o any receipt by an interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through Bentley.
In general, Section 203 of the Delaware General Corporation Law defines an
interested stockholder as any entity or person beneficially owning 15% or more
of our outstanding voting stock and any entity or person affiliated with,
controlling or controlled by such entity or person.
23
Our certificate of incorporation and bylaws include provisions that may have the
effect of discouraging, delaying or preventing a change in control of us or an
unsolicited acquisition proposal that a stockholder might consider favorable.
Our Board of Directors, without a stockholder vote, can adjust the number of
members on the Board of Directors between one and thirteen. Vacancies on the
Board of Directors and newly created directorships may be filled solely by a
majority of the remaining directors. A director may only be removed for cause by
the holders of at least two-thirds of the voting power of Bentley. The positive
vote of at least two-thirds of the voting power of Bentley is required to
approve a merger, a sale or lease of all or most of the assets of Bentley,
certain other business combinations or the dissolution or liquidation of
Bentley, and a "fair price" requirement also exists in each of the foregoing
transactions. Finally, an affirmative vote of two-thirds is required to amend
any provision in the certificate of incorporation relating to directors and
officers of Bentley or to amend any provision in the certificate which requires
the positive vote of two-thirds of the voting power of Bentley.
Additionally, our certificate of incorporation authorizes a class of Preferred
Stock commonly known as "blank check" Preferred Stock. The Preferred Stock may
be issued from time to time in one or more series, and the Board of Directors,
without further approval of our stockholders, is authorized to fix the relative
rights and restrictions applicable to each series of Preferred Stock. Any
Preferred Stock that is issued may have rights superior to those of the Common
Stock. In the event of any issuances of Preferred Stock, the holders of Bentley
stock will not have any preemptive or similar rights to acquire any Preferred
Stock or any of our other capital stock. The potential issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of
Bentley, may restrict dividends on our Common Stock, may discourage bids for our
Common Stock at a premium over the market price of our Common Stock, may impair
the liquidation rights of the Common Stock and may adversely affect the market
price of, and the voting and other rights of the holders of, Common Stock.
Section 203 and our "anti-takeover" provisions could have the effect of
lessening the possibility that our stockholders would be able to receive a
premium above market value for their shares in the event of a takeover. These
provisions could also have an adverse effect on the market value of our shares
of Common Stock. To the extent that these provisions may restrict or discourage
takeover attempts, they may render less likely a takeover opposed by the Board
of Directors and may make removal of the Board or management less likely as
well. Additionally, the existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of Common Stock.
In December 1999, our Board of Directors adopted a stockholder rights plan
designed to prevent a potential acquirer from gaining control of Bentley without
fairly compensating all of our stockholders and to protect Bentley from coercive
takeover attempts. The Board of Directors approved the declaration of the
dividend of one right for each outstanding share of our Common Stock on the
record date of December 27, 1999. Each of the rights, which are not currently
exercisable, entitles the holder to purchase one one-thousandth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $16.50.
The rights will become exercisable only if any person or group of affiliated
persons beneficially acquire(s) 15% or more of our Common Stock. Under certain
circumstances, each holder of a right (other than the person or group
24
who acquired 15% or more of our Common Stock) is entitled to purchase a defined
number of shares of our Common Stock at 50% of the market price of the Common
Stock at the time that the right becomes exercisable.
ITEM 2. PROPERTIES
----------
UNITED STATES
The Registrant's corporate headquarters are presently located at 65 Lafayette
Road, 3rd Floor, North Hampton, NH 03862 and include 3,200 square feet, which
are occupied in accordance with a lease agreement, which expires in March 2004.
SPAIN
Manufacturing is performed at the Registrant's facilities in Zaragoza, Spain.
These facilities were renovated in 1995 to comply with the requirements for
European GMPs and further renovated during 1998, 1999 and 2000. Expansion of the
facilities is presently underway. The facilities, which are owned by the
Registrant, consist of approximately 55,000 square feet located in a prime
industrial park and seated on sufficient acreage that would allow for future
expansion. The manufacturing facility is capable of producing tablets, capsules,
suppositories, creams, ointments, lotions, liquids and sachets, as well as
microgranulated and microencapsulated products. The facility also includes
analytical chemistry, quality control and quality assurance laboratories. The
GMPs certification allows the Registrant to undertake contract manufacturing for
a number of international pharmaceutical companies either engaged in or
contemplating emergence into the Spanish market or for export. The Registrant's
administrative offices in Spain are located in Madrid in approximately 5,500
square feet of renovated, leased offices, which leases expire in 2001. The
Registrant has entered into a new lease agreement, whereby it has agreed to
lease approximately 10,700 square feet of new office space northwest of Madrid,
which lease is scheduled to expire in 2006. The Registrant plans to relocate its
Madrid administrative offices during the summer and fall of 2001.
The Registrant's facilities are deemed suitable and provide adequate productive
capacity for the foreseeable future. In the event the Registrant considers it
necessary or appropriate, the Registrant is of the opinion that comparable
facilities can be located.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Registrant was awarded a judgment of approximately $2,130,000 in the Circuit
Court of the Thirteenth Judicial Circuit, State of Florida, Hillsborough County
Civil Division during the year ended December 31, 1998, relating to the
Registrant's claims of civil theft and breach of employment agreement filed
against its former President and Chief Executive Officer, Michael M.
Harshbarger. The judgment included treble damages totaling $418,000 related to
its civil theft claim and $1,712,000 related to its breach of employment
agreement claim. Harshbarger originally filed suit against the Registrant in
November 1993, alleging wrongful termination, seeking monetary damages in excess
of $1,400,000. In addition to establishing a receivable on its books, the
Registrant has established a reserve equal to the receivable, as the Registrant
is of the opinion that
25
Harshbarger does not have the financial resources to satisfy the judgment.
Harshbarger filed a Motion for Relief From Judgment in September 1999, alleging
among other things that he was not provided notice of the August 24, 1998 jury
trial. Discovery is ongoing and a hearing is expected to be held to determine
the merits of Harshbarger's claims. In the opinion of management, the outcome is
expected to have no material effect on the financial position, results of
operations or cash flows of the Registrant.
In November 1999, Creative Technologies, Inc. ("Creative") commenced a lawsuit
against the Registrant and others in the Superior Court of New Jersey, Essex
County, asserting that the Registrant breached a brokerage or finder's fee
contract with Creative regarding its 1999 acquisition of permeation enhancement
technology. On January 22, 2001, this controversy was settled out of court, when
the Registrant agreed to pay $140,000 to Creative and Creative agreed to the
dismissal of the related suit with prejudice. The Registrant has included the
accrual of the $140,000 charge and related legal costs in the Consolidated
Balance Sheets at December 31, 2000 and in operating expenses for the year ended
December 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
On July 31, 1990 and March 27, 1996, the Registrant's Common Stock began trading
on the American Stock Exchange and the Pacific Exchange, Inc., respectively,
under the symbol BNT. The following table sets forth the high and low sales
prices for the Common Stock as reported on the American Stock Exchange for the
periods indicated.
Quarter Ended High Sales Price Low Sales Price
- ------------- ---------------- ---------------
March 31, 1999 $1.94 $1.38
June 30, 1999 3.50 1.44
September 30, 1999 3.31 2.75
December 31, 1999 6.44 2.75
March 31, 2000 $12.50 $5.88
June 30, 2000 9.50 5.88
September 30, 2000 11.00 6.88
December 31, 2000 11.00 3.56
As of March 15, 2001 there were 1,732 holders of record of the Registrant's
Common Stock, which does not reflect stockholders whose shares are held in
street name. No dividends have ever been declared or paid on the Registrant's
Common Stock and the Registrant does not anticipate paying any dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected consolidated financial data of the Registrant and its
subsidiaries has been derived from the Registrant's consolidated financial
statements. The selected financial data should be read in conjunction with the
Registrant's consolidated financial statements and the notes thereto, which
should be read in their entirety and are included elsewhere in this Annual
Report on Form 10-K. (See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations.")
27
SUMMARY OF OPERATIONS
FISCAL YEAR ENDED
DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------
2000(1) 1999(2) 1998(3) 1997(4) 1996(5)
------- ------- ------- ------- -------
Net sales $18,617 $20,249 $15,243 $14,902 $23,133
Cost of sales 7,189 8,445 6,601 8,010 15,638
------- -------- ------- ------- -------
Gross profit 11,428 11,804 8,642 6,892 7,495
Operating expenses 11,942 11,226 10,710 8,438 8,794
------- -------- ------- ------- -------
Other income (expense) and income taxes (231) 1,666 808 2,269 1,174
------- -------- ------- ------- -------
Loss before extraordinary item (5) (745) (1,090) (2,876) (3,815) (2,473)
------- -------- ------- ------- -------
Net loss $(745) $(1,090) $(2,876) $(3,815) $(2,919)
======= ======== ======= ======= =======
Loss per Common Share before extraordinary
item $(.06) $(.12) $(.35) $(.97) $(.79)
======= ======== ======= ======= =======
Basic and diluted net loss per Common Share $(.06) $(.12) $(.35) $(.97) $(.92)
======= ======== ======= ======= =======
Weighted average number of Common Shares
outstanding 12,981 9,147 8,431 4,072 3,334
======= ======== ======= ======= =======
BALANCE SHEET INFORMATION
AT DECEMBER 31,
-------------------------------------------------------------------------------
(IN THOUSANDS) 2000(1) 1999(2) 1998(3) 1997(4) 1996(5)
------- ------- ------- ------- -------
Working capital $3,742 $1,130 $6,835 $10,758 $4,265
Non-current assets 15,773 10,548 7,857 6,034 6,746
Total assets 28,877 22,237 20,318 21,043 16,558
Non-current liabilities 1,699 104 5,700 5,549 5,513
Redeemable Preferred Stock - - - 2,338 2,203
Stockholders' equity 17,816 11,574 8,992 8,905 3,295
(1) The Registrant converted all of its 12% Debentures into shares of
Common Stock during the year ended December 31, 2000. See Note 2 below.
Also, during the year ended December 31, 2000, the Registrant acquired
the product, Codeisan (R), for approximately $5,200,000 and agreed to
sell its product, Controlvas (R), for approximately $4,800,000. The
Registrant received a 50% deposit prior to year end, which is reflected
as Deferred income in the Consolidated Balance Sheets as of December
31, 2000. The transaction was completed subsequent to December 31,
2000.
(2) The Registrant classified its 12% Debentures as a current liability at
December 31, 1999 as a result of issuing a Notice of Redemption in
March 2000, reducing working capital by $5,362,000. The Debentures were
each convertible into 400 shares of Common Stock or redeemable for
$1,054 (see Notes 8 and 10).
28
(3) Operating expenses in 1998 included charges of $1,176,000 related to
costs of abandoned acquisitions, which resulted from attempts to
acquire certain assets from Schwarz Pharma as well as certain other
acquisitions. All of the Registrants' outstanding Redeemable Preferred
Stock was converted into Common Stock in October 1998.
(4) Revenues declined during 1997 due to the Registrant's divestiture of
its French subsidiary, Chimos/LBF, on June 26, 1997. Other (income)
expense for the year ended December 31, 1997 included interest expense
of $1,086,000 and a provision for loss on disposition of subsidiary,
which totaled $591,000, including realized exchange loss of $386,000
due to fluctuations in the currency exchange rates used to translate
the foreign currency financial statements and a loss of $205,000
recognized upon the sale of Chimos/LBF. The Registrant also recorded a
provision for income taxes during 1997 totaling $621,000. During the
fourth quarter of 1997, the Registrant received proceeds of
approximately $9,800,000 from the exercise of approximately 4,900,000
Class A Warrants.
(5) Revenues in France declined beginning in the second quarter of 1996,
due to the March 31, 1996 expiration of the distribution agreement for
the product Ceredase, which accounted for approximately 60% of the
Registrant's revenues in 1995 and approximately 54% of its revenues in
the quarter ended March 31, 1996. Ceredase gross margins, as a percent
of sales, were approximately 5% during the quarter ended March 31,
1996. The Registrant completed a public offering in February 1996,
whereby it issued $6,900,000 of 12% convertible subordinated debentures
and warrants. Consequently, the Registrant incurred interest expense
totaling $1,227,000 in 1996. The Registrant incurred an extraordinary
charge of $446,000, representing the unamortized discount and issuance
costs at the date of repayment of Notes from its October 1995 private
placements. Operating expenses for the year ended December 31, 1996
included approximately $340,000, representing a provision for goodwill
impairment related to Chimos/LBF.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
The Registrant is a U.S.-based drug delivery company specializing in the
development of products based upon innovative and proprietary drug delivery
systems. The Registrant also has a commercial presence in Europe, where it
manufactures, markets and distributes branded and generic pharmaceutical
products. Historically, most of its revenues have come from its operations in
Europe.
The Registrant reported a net loss of $745,000, or $.06 per basic and diluted
common share, on revenues of $18,617,000 for the year ended December 31, 2000.
The Registrant intends to continue to focus its efforts on business activities
which management believes should result in operating profits in the future, of
which there can be no assurance. To improve its results, the Registrant's
management focuses on increasing higher margin pharmaceutical product sales,
controlling expenses, carefully allocating resources to limited product
development projects and seeking to acquire marketable products in the United
States or Europe that are compatible with the Registrant's strategy for growth.
(See "--Liquidity and Capital Resources"). For business segment information on
the Registrant's operations outside the United States, see Note 12 of Notes to
Consolidated Financial Statements.
29
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2000 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------
The Registrant reported net sales of $18,617,000 and a net loss of $745,000 or
$.06 per basic and diluted common share for the fiscal year ended December 31,
2000 compared to net sales of $20,249,000 and a net loss of $1,090,000 or $.12
per basic and diluted common share in the prior year.
The Registrant's Spanish subsidiaries, Laboratorios Belmac S.A. and Laboratorios
Davur S.L., reported an increase in net sales of 5% in local currency for the
fiscal year ended December 31, 2000 compared to the prior year; however, a 16%
decline in the value of the Spanish Peseta and related Euro negatively impacted
net sales by $2,736,000, resulting in net sales generated in Spain of
$18,487,000 when expressed in U.S. dollars. Net sales were also impacted in the
third and fourth quarters by increased generic drug competition that has reduced
sales of certain of the Registrant's branded pharmaceutical products. The
Registrant expects generic competitive pressure to continue to impact sales of
its branded pharmaceutical products that are subject to generic competition,
which may result in lower sales until the Registrant's generic drug products can
capture sufficient market share to offset this impact. The Registrant
anticipated the opportunities that the emerging generic drug market in Spain
present and began taking measures over two years ago to enter the Spanish
generic drug market. The Registrant, through its wholly-owned Spanish
subsidiaries, began to register, market and distribute generic pharmaceutical
products in Spain and began aligning its business model to be competitive in
this arena, including hiring and training a new generic product sales force,
submission of generic-equivalent products to the Spanish Ministry of Health for
approval and a marketing campaign designed to position the Registrant as a
leader in the Spanish generic drug market. Also impacting revenues was a
decision by the Spanish Ministry of Health to suspend from commercialization a
class of drugs that included Finedal, a product previously marketed by the
Registrant. The Registrant's net sales for the fiscal year ended December 31,
2000 included sales of Finedal totaling approximately $230,000, while net sales
for the fiscal year ended December 31, 1999 included Finedal sales of
approximately $880,000. The Registrant does not anticipate any future sales of
this product nor does it anticipate incurring any future costs with respect to
this product. Net sales for the fiscal year ended December 31, 2000 include
$130,000 related to research and licensing agreements and fees derived from
research and product formulation activities performed in the United States.
Gross margins, which declined modestly in the most recent quarter, for the
fiscal year ended December 31, 2000 increased to 61% compared to gross margins
of 58% in the prior year, primarily as a result of the mix of products sold and
manufacturing efficiencies realized at the manufacturing facility during the
fiscal year ended December 31, 2000 compared to the prior year. The Ministry of
Health and the Pharma Industry in Spain had entered into a two-year agreement
that expired in December 1999, whereby pharmaceutical companies in Spain,
including the Registrant's Spanish subsidiaries, were taxed on their growth as a
vehicle for funding rising health care costs in Spain. A new agreement was
reached in March 2001, which did not have a significant impact on the results of
operations for the year ended December 31, 2000. However, this tax is expected
to result in slightly lower gross margins for the year ending December 31, 2001.
30
The Registrant entered into a strategic alliance with Teva Pharmaceutical
Industries, Ltd. in July 2000, whereby the Registrant, through its Spanish
subsidiaries, will receive licenses for more than 75 of Teva's products for
registration and marketing in Spain. The products will be comprised of both
branded and generic forms. An investment in additional sales representatives
will be required, along with an increase in regulatory activities, both of which
may create a short-term reduction in the Registrant's earnings. The Registrant,
through its subsidiary, Laboratorios Davur, has also submitted registrations to
the Spanish Ministry of Health for generic versions of various products, in
response to growing interest in generic products in Spain. The price of a
generic product is typically lower than the price for the comparable branded
product; consequently, the Registrant believes that resulting gross margins may
be lower on sales of such products. The Registrant's decision to enter the
generic market was based on its objectives to remain competitive and to grow
sales and market share.
Selling, general and administrative expenses increased by $278,000 or 3%, to
$10,260,000 for the year ended December 31, 2000 compared to $9,982,000 for the
prior year. Selling, general and administrative expenses increased from 49% of
1999 net sales to 55% of 2000 net sales as a result of the Registrant's 8%
decrease in net sales and its efforts to control general and administrative
expenses. A significant portion (63% or $6,494,000 during 2000) of these
expenses are selling and marketing expenses, which are necessary for the
Registrant to maintain and grow sales and market share in Spain. Selling and
marketing expenses increased by $328,000, or 5% over the same period of the
prior year, and as a percent of net sales, increased from 30% in the year ended
December 31, 1999 to 35% in the year ended December 31, 2000. Selling and
marketing expenses, as reported in U.S. dollars, were approximately $1,012,000
lower than would have been reported as a result of the 16% decline in the value
of the Spanish Peseta and related Euro in relation to the U.S. dollar during the
period. General and administrative expenses decreased slightly from $3,816,000
in the year ended December 31, 1999 to $3,766,000 in the fiscal year ended
December 31, 2000. However, as a percentage of net sales, such expenses
increased slightly from 19% of fiscal year 1999 net sales to 20% of fiscal year
2000 net sales. General and administrative expenses, as reported in U.S.
dollars, were approximately $274,000 lower than would have been reported as a
result of the 16% decline in the value of the Spanish Peseta and related Euro in
relation to the U.S. dollar during the period. To the extent practical, the
Registrant intends to continue its efforts to control general and administrative
expenses in its effort to reach and maintain profitability.
The Registrant reported research and development expenses of $1,102,000 for the
year ended December 31, 2000 compared to $685,000 for the prior year. Amounts
charged to research and development totaled $1,263,000 for the year ended
December 31, 2000 and were offset by $161,000 as a result of a negotiated
reduction in an amount previously accrued for research and development expenses.
The increase in the Registrant's costs for research and development is primarily
the result of costs associated with a Phase I Clinical Study (treatment of nail
fungal infections) that is underway at the University of Alabama at Birmingham,
pre-clinical programs underway in collaboration with the University of New
Hampshire and Dartmouth College and with product formulation and testing efforts
being performed in the laboratory in the Registrant's U.S. headquarters, located
in New Hampshire. This laboratory is being used by the Registrant to develop
potential product applications using its permeation enhancement technology. The
limited expenditures in research and development reflect the Registrant's
continued de-emphasis of basic research and redirection of its
31
resources to developmental expenses necessary for expansion of its portfolio of
marketed products. The Registrant intends to continue to carefully manage its
research and development expenditures in order to ensure that its development
programs are efficient and cost effective.
Depreciation and amortization expenses totaled $580,000 for the fiscal year
ended December 31, 2000, compared to $559,000 for the prior year. The increase
was primarily due to higher depreciation charges with respect to renovations and
improvements at the Registrant's manufacturing facility and its U.S. laboratory
and higher amortization charges with respect to recently acquired drug licenses
and technologies, partially offset by the effect of fluctuations in foreign
currency exchange rates.
Interest income totaled $347,000 for the year ended December 31, 2000 compared
to $244,000 for the prior year primarily as a result of higher short-term
interest bearing investment balances and higher interest rates earned on the
investment balances during the year ended December 31, 2000 than in 1999.
Interest expense totaled $439,000 for the year ended December 31, 2000 compared
to $1,168,000 for the prior year. The Registrant incurred first quarter 2000
interest expense related to its 12% Senior Subordinated Debentures of
approximately $233,000, which was eliminated beginning in the second quarter of
2000, as a result of the conversion of all Debentures into shares of Common
Stock. Consequently, interest expense with respect to the Debentures will not
recur in the future and should result in substantially lower interest expense on
a prospective basis. Interest expense incurred during the nine months ended
December 31, 2000 resulted primarily from the outstanding balances on lines of
credit used for operating purposes and lines of credit and borrowings used to
fund the purchase of the product Codeisan(R), in Spain, during the third and
fourth quarters of 2000. The Registrant financed approximately $4,900,000 of the
purchase, using short-term lines of credit and long-term borrowings. The
Registrant used a portion of the deposit that it received from the sale of the
trademark, registration rights and dossier for its branded pharmaceutical
product, Controlvas(R), to reduce short-term borrowings during the fourth
quarter of 2000. The remaining balances outstanding at December 31, 2000 have
been reflected as short-term and long-term debt on the Registrant's Consolidated
Balance Sheets, which will result in interest charges in the future.
In November 2000, the Registrant agreed to sell its registration rights and the
related trademark to its branded version of enalapril (Controlvas(R)) for
950,000,000 Spanish pesetas (approximately $4,800,000) and received a 50%
deposit from the purchaser. The sale of Controlvas(R) was completed subsequent
to December 31, 2000 and the Registrant will record the gain in the first
quarter of 2001. As of December 31, 2000, the Registrant has treated the deposit
as Deferred income on the Consolidated Balance Sheets. For Spanish tax purposes,
however, the gain on sale of Controlvas(R) was recognized during the year ended
December 31, 2000; consequently, the Registrant has recognized taxes payable
with respect to this transaction and has reflected the financial statement
effect in the Consolidated Balance Sheets as a deferred tax asset and taxes
payable as of December 31, 2000. Taxes payable for Spanish statutory purposes
are payable beginning in 2004.
The Registrant recorded a current provision for foreign income taxes totaling
$222,000 for the year ended December 31, 2000 as a result of taxable income
earned in Spain, compared to $781,000 in the
32
same period of the prior year. The provision for foreign income taxes would have
been $31,000 higher than reported, absent the 16% decline in the value of the
Spanish Peseta and related Euro in relation to the U.S. dollar during the
period. The Registrant has available, for U.S. federal income tax reporting
purposes, net operating loss carry-forwards. However, since the Registrant has
not yet achieved profitable domestic operations, it has recorded a valuation
allowance for the entire net deferred tax asset.
The Registrant reported a loss from operations of $514,000 for the year ended
December 31, 2000 compared to income from operations of $578,000 in the prior
year. The impact of non-operating items, primarily interest income of $347,000,
interest expense of $439,000 and the provision for income taxes of $222,000
resulted in a net loss of $745,000, or $.06 per basic and diluted common share
(12,981,000 weighted average common shares outstanding) for the year ended
December 31, 2000, compared to the net loss in the prior year, of $1,090,000, or
$.12 per basic and diluted common share (9,147,000 weighted average common
shares outstanding).
FISCAL YEAR ENDED DECEMBER 31, 1999 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------
The Registrant reported net sales of $20,249,000 and a net loss of $1,090,000 or
$.12 per basic and diluted common share for the fiscal year ended December 31,
1999 compared to net sales of $15,243,000 and a net loss of $2,876,000 or $.35
per basic and diluted common share for the year ended December 31, 1998.
Excluding the effect of the 1998 charge of $1,176,000, representing the costs of
abandoned acquisitions, the Registrant's net loss for the fiscal year ended
December 31, 1998 would have been $1,700,000 or $.21 per basic and diluted
common share.
The 33% increase in net sales was primarily attributable to increased sales by
the Registrant's Spanish subsidiary, Laboratorios Belmac S.A., which reported an
increase in net sales of 41% in local currency for the fiscal year ended
December 31, 1999 compared to the year ended December 31, 1998; however,
fluctuations in foreign currency exchange rates negatively impacted net sales by
$1,183,000, resulting in net sales of $20,249,000 when expressed in U.S.
dollars.
Gross margins for the fiscal year ended December 31, 1999 increased slightly to
58% compared to gross margins of 57% in the prior year, primarily as
manufacturing efficiencies associated with higher levels of production during
the fiscal year ended December 31, 1999 compared to the fiscal year ended
December 31, 1998.
Selling, general and administrative expenses increased by 10%, or $904,000, to
$9,982,000 for the fiscal year ended December 31, 1999 compared to $9,078,000
for the prior year. However, selling, general and administrative expenses, as a
percentage of net sales, were reduced from 60% of 1998 net sales to 49% of 1999
net sales as a result of the Registrant's 33% increase in net sales and its
efforts to control general and administrative expenses. A significant portion
(62% or $6,166,000) of these expenses were marketing and selling expenses, which
were necessary for the Registrant's growth in sales and market share in Spain.
Selling and marketing expenses increased by $1,205,000, or 24% over the prior
year; however, as a percent of net sales, these expenses decreased from 33% in
1998 to 30% in 1999. General and administrative expenses decreased by 7% from
$4,117,000 in 1998 to $3,816,000 in 1999, and decreased from 27% of 1998 net
sales to 19% of 1999 net sales. Selling,
33
general and administrative expenses in 1999 included bonuses in the form of
Common Stock valued at $225,000, in lieu of cash, issued to executive officers
of the Registrant.
Research and development expenses were $685,000 for the fiscal year ended
December 31, 1999 compared to $153,000 for the prior year. The increase in
research and development expenses was primarily the result of establishing a
laboratory in the Registrant's relocated U.S. headquarters in New Hampshire. The
laboratory is being used by the Registrant to develop potential product
applications from its permeation enhancement technology. The limited
expenditures in research and development reflect the Registrant's continued
de-emphasis of basic research and redirection of its resources to developmental
expenses necessary for expansion of its portfolio of marketed products.
Depreciation and amortization expenses totaled $559,000 for the fiscal year
ended December 31, 1999, compared to $303,000 for the prior year. The increase
was primarily due to higher depreciation charges with respect to renovations and
improvements at the Registrant's manufacturing facility; renovations and
purchase of equipment to establish its U.S. laboratory and higher amortization
charges with respect to acquired drug licenses and technologies.
Included in operating expenses for the fiscal year ended December 31, 1998 was a
charge of $1,176,000, which represented costs of abandoned acquisitions.
Interest income was $244,000 for the fiscal year ended December 31, 1999
compared to $499,000 for the prior year primarily as a result of lower
short-term interest bearing investment balances during the fiscal year ended
December 31, 1999 than in 1998. Interest expense, which primarily reflected
interest on the Registrant's Debentures, totaled $1,168,000 for the fiscal year
ended December 31, 1999 compared to $1,076,000 for the prior year as a result of
higher average outstanding short term debt balances used for operating purposes
in Spain.
The Registrant recorded a provision for foreign income taxes totaling $781,000
for the fiscal year ended December 31, 1999 as a result of taxable income earned
in Spain compared to $236,000 in the prior year, which included a benefit from a
refundable amount of U.S. income taxes in the amount of $280,000. The prior year
provision for income taxes would have totaled $516,000, if not for the U.S.
income tax benefit.
The Registrant reported income from operations of $578,000 for the fiscal year
ended December 31, 1999 compared to a loss from operations of $2,068,000 in the
prior year. Excluding the effect of the costs of abandoned acquisitions, the
Registrant's loss from operations for the fiscal year ended December 31, 1998
would have been $892,000. The effect of combining non-operating items, primarily
interest income of $244,000, interest expense of $1,168,000, and provision for
income taxes of $781,000 resulted in a net loss of $1,090,000, or $.12 per basic
and diluted common share for the fiscal year ended December 31, 1999, compared
to the net loss in the prior year, of $2,876,000, or $.35 per basic and diluted
common share. Excluding the 1998 charge for costs of abandoned acquisitions, the
prior year net loss for the fiscal year ended December 31, 1998 would have been
$1,700,000 or $.21 per basic and diluted common share.
34
SELECTED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows:
(in thousands, except per share data) FISCAL 2000 QUARTERS
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net sales $5,085 $4,594 $3,626 $5,312
Gross profit 3,127 2,858 2,143 3,300
Income (loss) from operations 468 (101) (476) (405)
Net income (loss) 41 (182) (419) (185)
Basic and diluted net income (loss)
per common share $0.00 $(0.01) $(0.03) $(0.02)
FISCAL 1999 QUARTERS
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net sales $4,358 $4,750 $5,187 $5,954
Gross profit 2,343 2,757 3,125 3,579
Income (loss) from operations (239) (58) 325 550
Net income (loss) (547) (452) (188) 97
Basic and diluted net loss
per common share $(0.06) $(0.05) $(0.02) $0.01
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased from $22,237,000 at December 31, 1999 to $28,877,000 at
December 31, 2000, while Stockholders' Equity increased from $11,574,000 at
December 31, 1999 to $17,816,000 at December 31, 2000. The increase in
Stockholders' Equity reflects primarily the conversion of 7,254 of the
Registrant's 12% Convertible Debentures into approximately 2,901,000 shares of
Common Stock, the exercise of 197,000 Class B Redeemable Warrants resulting in
the issuance of 99,000 shares of Common Stock, the exercise of 460 Underwriter's
Warrants resulting in the issuance of 460 Debentures and 460,000 Class A
Redeemable Warrants, the exercise of other stock purchase warrants to purchase
an aggregate of 670,000 shares of Common Stock and the exercise of stock
purchase options to purchase 14,000 shares of Common Stock, partially offset by
the negative impact of the fluctuation of the Spanish peseta (and related Euro)
exchange rate on the foreign currency translation and the net loss of $745,000
for the year ended December 31, 2000.
The Registrant's working capital increased from $1,130,000 at December 31, 1999
to $3,742,000 at December 31, 2000, primarily as a result of conversion of 7,254
of the Registrant's 12% Debentures (which were classified as current liabilities
at December 31, 1999) into shares of Common Stock and cash proceeds of
approximately $2,843,000 received from the exercise of 197,000 Class B Warrants,
460 Underwriter's Warrants, 670,000 other stock purchase warrants and 14,000
stock purchase options during the year ended December 31, 2000. At December 31,
2000 there were no Debentures outstanding.
Cash and cash equivalents increased from $4,422,000 at December 31, 1999 to
$4,816,000 at December 31, 2000, primarily as a result of using cash for
operating and investing activities, offset by cash proceeds of approximately
$2,843,000 received from the exercise of 197,000 Class B Warrants, 460
Underwriter's Warrants, 670,000 other stock purchase warrants and 14,000 stock
purchase options and as a result of the maturities of approximately $1,893,000
of marketable securities and the
35
deposit received from the purchaser of the product, Controlvas(R), a portion of
which was used to reduce borrowings that originated from the earlier purchase of
the product, Codeisan(R). Included in cash and cash equivalents at December 31,
2000 are approximately $4,126,000 of short-term investments which are considered
to be cash equivalents.
Accounts receivable increased from $4,016,000 at December 31, 1999 to $5,135,000
at December 31, 2000 and include taxes receivable totaling $214,000 at December
31, 2000 which represents a refund due from payment of income taxes for the year
ended December 31, 2000. Trade receivables increased by approximately $1,115,000
in local currency, but fluctuations in foreign currency exchange rates offset
the increase by approximately $182,000. The Registrant has not experienced any
material delinquent accounts on its trade receivables. Inventories increased to
$1,827,000 at December 31, 2000 compared to $965,000 at December 31, 1999
primarily as a result of raw materials purchases and production of finished
goods, partially offset by the effect of fluctuations in foreign currency
exchange rates. Inventory levels at December 31, 1999 were lower than average
and the Registrant expects that its inventory levels will more closely resemble
the levels at December 31, 2000 on a prospective basis.
Prepaid expenses and other current assets increased from $393,000 at December
31, 1999 to $475,000 at December 31, 2000, primarily as a result of prepaid
expenses that are being amortized over the applicable periods to which they
relate, partially offset by recurring amortization charges and the effect of
fluctuations in foreign currency exchange rates.
The combined total of accounts payable and accrued expenses decreased from
$4,240,000 at December 31, 1999 to $3,613,000 at December 31, 2000, primarily
due to payment of an amount previously accrued for research and development
expenses, a portion of which was reduced and offset against research and
development expenses during the year ended December 31, 2000, inventory
purchases and the effect of fluctuations in foreign currency exchange rates.
Short-term borrowings increased from $952,000 at December 31, 1999 to $2,447,000
at December 31, 2000, as a result of higher outstanding balances on lines of
credit used for operating purposes in Spain and for the acquisition of drug
licenses and related costs, including the product Codeisan(R), during the year
ended December 31, 2000, partially offset by the effect of fluctuations in
foreign currency exchange rates. The Registrant paid 986,000,000 pesetas
(approximately $5,200,000) to the seller of Codeisan(R). The Registrant financed
942,000,000 pesetas (approximately $4,900,000) of the purchase price, of which
approximately $2,300,000 was repaid in the fourth quarter of 2000, using a
portion of the proceeds from the deposit received from the sale of
Controlvas(R). The remaining balance is reflected as a combination of short-term
and long-term debt on the Registrant's Consolidated Balance Sheets. The weighted
average interest rate on the Registrant's short-term and long-term borrowings is
6.0% as of December 31, 2000.
As discussed above, in November 2000, the Registrant agreed to sell its
registration rights and the related trademark to its branded version of
enalapril (Controlvas(R)) for 950,000,000 Spanish pesetas (approximately
$4,800,000) and received a 50% deposit from the purchaser. The sale of
Controlvas(R) was completed subsequent to December 31, 2000 and the Registrant
will record the gain in the first quarter of 2001. As of December 31, 2000, the
Registrant has treated the deposit as
36
Deferred income on the Consolidated Balance Sheets. For Spanish tax purposes,
however, the gain on sale of Controlvas(R) was recognized during the year ended
December 31, 2000; consequently, the Registrant has recognized taxes payable
with respect to this transaction and has reflected the financial statement
effect in the Consolidated Balance Sheets as a deferred tax asset and taxes
payable as of December 31, 2000. Taxes payable for Spanish statutory purposes
are payable beginning in 2004.
Debentures called for redemption totaling $5,362,000 at December 31, 1999 were
reduced to zero during the year ended December 31, 2000 as a result of the
conversion of all 7,254 Debentures into approximately 2,901,000 shares of Common
Stock, partially offset by accretion recorded on the Debentures prior to
conversion. Long-term debt, which was zero at December 31, 1999, increased to
$623,000 at December 31, 2000 as a result of financing the acquisition of the
product Codeisan, as discussed above.
Fixed assets, net increased from $3,684,000 at December 31, 1999 to $4,139,000
at December 31, 2000, due primarily to additions to machinery and equipment and
renovations at the Spanish manufacturing facility, including manufacturing
equipment acquired in the purchase on the product Codeisan(R) during the year
ended December 31, 2000, as well as computer equipment purchases in the U.S.,
offset by recurring depreciation charges and the effect of fluctuations in
foreign currency exchange rates.
Drug licenses and related costs, net increased from $5,807,000 at December 31,
1999 to $10,979,000 at December 31, 2000, primarily due to the additions to drug
licenses and related costs, partially offset by the effect of fluctuations in
foreign currency exchange rates and recurring amortization charges. In July
2000, the Registrant announced that, through its subsidiary, Laboratorios
Belmac, it had acquired rights to market and manufacture, in Spain, the product
and trademark, Codeisan(R), from Abello, a subsidiary of Merck & Co., Inc. for
approximately $5,200,000, as discussed above.
Receivables from related parties represent loans totaling $440,000 made to
executive officers of the Registrant in March 2000. Proceeds from the loans were
used to pay the income taxes on stock-based compensation provided to such
officers in the prior year. The loans, in the form of promissory notes, are
secured by an aggregate of 50,000 shares of Common Stock owned by the officers
and bear interest at 6.59% annually. Accrued interest payable totaling $23,000
is included in the amounts receivable at December 31, 2000.
Other non-current assets decreased from $1,057,000 at December 31, 1999 to
$192,000 at December 31, 2000, primarily due to the conversion of all 7,254 of
the Registrant's 12% Debentures into approximately 2,901,000 shares of Common
Stock during the year ended December 31, 2000. Unamortized debt issuance costs
totaling $929,000 were credited to Stockholders' Equity as a result of such
conversions. Other non-current assets were also reduced as a result of the
effect of fluctuations in foreign currency exchange rates and recurring
amortization charges during the year.
Other non-current liabilities increased from $104,000 at December 31, 1999 to
$168,000 at December 31, 2000, primarily as a result of recording a liability to
recognize the Registrant's obligation to issue Common Stock to employees' 401(k)
retirement plan accounts in conjunction with the Registrant's 401(k) matching
program.
37
Investing activities used net cash of $2,428,000 during the year ended December
31, 2000. The Registrant received net proceeds from the sale of investments and
deferred income resulting from the Registrant's sale of its registration rights
and the related trademark to its branded version of enalapril (Controlvas(R)).
Such receipts were offset by additions to drug licenses and related costs,
primarily in Spain; additions to machinery and equipment and capital
improvements to the manufacturing facility in Spain as well as computer
equipment purchases in the U.S.; and loans made to Executive Officers of the
Registrant, the proceeds of which were used to pay income taxes on stock-based
compensation. Financing activities, primarily proceeds from the exercise of
197,000 Class B Warrants, the exercise of 460 Underwriter's Warrants, the
exercise of other stock purchase warrants to purchase an aggregate of 670,000
shares of Common Stock, the exercise of stock purchase options to purchase
14,000 shares of Common Stock and proceeds from short-term borrowings for
working capital purposes and from short-term and long-term borrowings used for
the purchase of the product Codeisan(R) in Spain offset by repayment of a
portion of short-term and long-term borrowings during the year ended December
31, 2000, provided net cash of $5,568,000. Operating activities for the year
ended December 31, 2000 used net cash of $2,700,000.
Seasonality. In the past, the Registrant has experienced lower sales in the
third calendar quarter and higher sales in the fourth calendar quarter due to
seasonality. As the Registrant markets more pharmaceutical products whose sales
are seasonal, seasonality of sales may become more significant.
Effect of inflation and changing prices. Neither inflation nor changing prices
has materially impacted the Registrant's net sales nor income (loss) from
continuing operations for the three years ended December 31, 2000.
Financings. An aggregate of 6,900 Units (the "Units") were sold in a February
1996 Public Offering. Each Unit consisted of a One Thousand Dollars ($1,000)
Principal Amount 12% Convertible Senior Subordinated Debenture due February 13,
2006 (the "Debentures") and 1,000 Class A Redeemable Warrants, each to purchase
one share of Common Stock and one Class B Redeemable Warrant. Two Class B
Redeemable Warrants entitle a holder to purchase one share of Common Stock. The
Debentures and Class A Redeemable Warrants initially traded only as a Unit but
began trading separately on May 29, 1996. Gross and net proceeds (after
deducting underwriting commissions and the other expenses of the offering) were
approximately $6,900,000 and $5,700,000, respectively, a portion of which were
used to retire $1,770,000 principal balance of debt incurred in previous private
placements.
Of the Unit purchase price of $1,000, for financial reporting purposes, the
consideration allocated to the Debenture was $722, to the conversion discount
feature of the Debenture was $224 and to the 1,000 Class A Warrants was $54.
None of the Unit purchase price was allocated to the Class B Warrants. Such
allocation was based upon the relative fair values of each security on the date
of issuance. Such allocation resulted in recording a discount on the Debentures
of approximately $1,900,000. The effective interest rate on the Debentures,
which have been converted into shares of Common Stock, was 18.1%.
38
In order to generate working capital necessary to sustain the Registrant's long
range strategic objectives, the Registrant temporarily lowered the exercise
price on its Class A and Class B Redeemable Warrants. Effective September 16,
1997, the exercise price of the Class A Warrants was lowered by $1.00, to $2.00
each. This exercise period at the reduced price expired on December 5, 1997.
After this date, the Class A Warrants reverted back to the original exercise
price of $3.00 per share until their expiration, which was August 16, 1999.
Holders of the Registrant's Class A Warrants exercised approximately 70% of the
outstanding Class A Redeemable Warrants (approximately 4,900,000 Class A
Warrants) during 1997, which generated approximately $9,800,000 in proceeds to
the Registrant. The exercise of the Class A Warrants during 1997 resulted in
issuance of approximately 4,900,000 shares of Common Stock and approximately
4,900,000 Class B Warrants.
The exercise price of the Registrant's Class B Redeemable Warrants was also
temporarily lowered by $2.00, to $3.00 as to each two Class B Warrants effective
September 16, 1997 through January 13, 1998. After January 13, 1998, the Class B
Warrants reverted back to the original exercise price of $5.00 per share until
their expiration, which has been extended to August 14, 2001. Holders of the
Registrant's Class B Warrants exercised 5,000 Class B Warrants in January 1998,
generating proceeds to the Registrant of $7,500, which resulted in the issuance
of 2,500 shares of Common Stock in 1998.
Approximately 859,000 Class A Warrants were exercised during the year ended
December 31, 1999, generating cash proceeds of approximately $2,600,000. Such
exercises resulted in the issuance of approximately 859,000 shares of Common
Stock and approximately 859,000 Class B Warrants during 1999. The remaining
1,252,000 Class A Warrants that were not exercised as of August 16, 1999 expired
unexercised.
During the year ended December 31, 2000, the Registrant received net cash
proceeds of approximately $2,843,000 from the exercise of various warrants
(including 460 Underwriter's warrants and 197,000 Class B Warrants) and stock
options. On March 9, 2000, the Registrant's Board of Directors decided to redeem
the Registrant's Debentures. As a result, all 7,254 of the Debentures
outstanding were converted into approximately 2,901,000 shares of the
Registrant's Common Stock.
Given the Registrant's current liquidity and cash balances and considering its
future strategic plans (including its 2001 budgeted capital improvements and
planned equipment purchases of approximately $1,343,000), the Registrant should
have sufficient liquidity to fund operations for the year 2001 and into the year
2002, which should be a sufficient time frame for the Registrant to advance its
strategic objectives and generate revenues and cash flow to support the
Registrant's cash flow needs. As mentioned above, the Registrant has cash and
cash equivalents of approximately $4,816,000 as of December 31, 2000 and
received the balance of the amount due from the sale of Controlvas (R) in
February 2001. These resources, combined with available lines of credit, should
be adequate to satisfy the Registrant's capital and operating requirements, as
stated above. The Registrant also has stock purchase warrants, including its
publicly traded Class B Warrants, outstanding at December 31, 2000, to purchase
approximately 4,038,000 shares of Common Stock. The exercise of such warrants
would generate cash proceeds of approximately $17,800,000. There can be no
assurance, however, that changes in the Registrant's research and development
plans or other events affecting the Registrant's revenues or operating expenses
will not result in the earlier depletion of the Registrant's funds. The
Registrant, however, continues to explore alternative sources for financing its
business activities. In appropriate situations, that will be strategically
determined, the Registrant may seek financial assistance from other sources,
including contribution by others to joint ventures and other collaborative or
licensing arrangements for the
39
development, testing, manufacturing and marketing of products under development.
DERIVATIVE INSTRUMENTS AND HEDGING
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The Registrant adopted SFAS No. 133 on January
1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the
Registrant's consolidated financial statements.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
- --------------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------
The statements contained in or incorporated by reference into this Annual Report
on Form 10-K which are not historical facts contain forward looking information
with respect to plans, projections or future performance of the Registrant, the
occurrence of which involve certain risks and uncertainties that could cause the
Registrant's actual results to differ materially from those expected by the
Registrant. See certain risk factors listed in Item 1. "Business - Risk
Factors".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
FOREIGN CURRENCY.
A substantial amount of the Registrant's business is conducted in Europe and is
therefore influenced by the extent to which there are fluctuations in the
dollar's value against other currencies, specifically the euro and the peseta.
On January 1, 1999, the euro became the official currency of 11 European Union
(EU) member states with a fixed conversion rate against their national
currencies. The value of the euro against the dollar and all other currencies,
including those of the four EU member states that are not participating in the
euro zone, will fluctuate according to market conditions. Although euro notes
and coins will not appear until January 1, 2002, the new currency has been used
by consumers, retailers, companies and public administrations since January 1,
1999, in the form of "written money," i.e. by means of checks, traveler's
checks, bank transfers, credit card transactions, etc. The permanent value of
one euro in Spain is fixed at 166.39 pesetas. The exchange rate at December 31,
2000 and 1999 was 178.02 and 165.23 pesetas per U.S. dollar, respectively. The
weighted average exchange rate for the years ended December 31, 2000 and 1999
was 180.66 and 156.16 pesetas per U.S. dollar, respectively. The effect of
foreign currency fluctuations on long lived assets for the year ended December
31, 2000 was a decrease of $289,000 and the cumulative historical effect was a
decrease of $2,628,000, as reflected in the Registrant's Consolidated Balance
Sheets as accumulated other comprehensive loss. Although exchange rates
fluctuated significantly in recent years, and in particular, the weakening of
the euro in relation to the U.S. dollar in 2000, the Registrant does not believe
that the effect of foreign currency fluctuation is material to the
40
Registrant's results of operations as the expenses related to much of the
Registrant's foreign currency revenues are in the same currency as such
revenues. However, the carrying value of assets and reported values can be
materially impacted by foreign currency translation, as can the translated
amounts of revenues and expenses. Nonetheless, the Registrant does not plan to
modify its business practices.
The Registrant has relied primarily upon financing activities to fund the
operations of the Registrant in the United States. In the event that the
Registrant is required to fund United States operations or cash needs with funds
generated in Spain, currency rate fluctuations in the future could have a
significant impact on the Registrant. However, at the present time, the
Registrant does not anticipate altering its business plans and practices to
compensate for future currency fluctuations.
The weighted average interest rate on the Registrant's short-term borrowings is
6.0% and the balance outstanding is $2,447,000 as of December 31, 2000. The
weighted average interest rate on the Registrant's long-term borrowings is also
6.0% and the balance outstanding is $1,361,000. The effect of an increase in the
interest rate of one hundred basis points (to 7.0% on short-term borrowings and
long-term borrowings) would have the effect of increasing interest expense by
approximately $38,000 annually.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------
Not applicable.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following information is furnished with respect to each director
and executive officer of the Registrant.
Position of the Year First
Registrant Class of Became
Name Age Presently Held Director Director
---- --- -------------- -------- --------
James R. Murphy 51 Chairman, President, III 1993
Chief Executive Officer
and Director (1)
Michael McGovern 57 Vice Chairman and I 1997
Director (1),(3)
Robert M. Stote 61 Senior Vice President, III 1993
Chief Science Officer
and Director (1)
Michael D. Price 43 Vice President, I 1995
Chief Financial Officer,
Treasurer, Secretary
and Director
Robert J. Gyurik 54 Vice President of II 1998
Pharmaceutical
Development and
Director
Jordan A. Horvath 39 Vice President and - -
General Counsel
Charles L. Bolling 77 Director (1), (2), (3) II 1991
Russell Cleveland 62 Director (1), (3) I 1999
Miguel Fernandez 70 Director (1), (2),(3) III 1999
William A. Packer 66 Director (1),(2),(3) II 1999
(1) Member of the Strategic Planning Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
42
JAMES R. MURPHY became President of the Registrant in September 1994, was named
Chief Executive Officer effective January 1995 and became Chairman of the Board
in June 1995. Prior to rejoining the Registrant, Mr. Murphy served as Vice
President of Business Development at MacroChem Corporation, a publicly owned
pharmaceutical and drug delivery company, from March 1993 through September
1994. From September 1992 until March 1993, Mr. Murphy served as a consultant in
the pharmaceutical industry with his primary efforts directed toward product
licensing. Prior thereto, Mr. Murphy served as Director - Worldwide Business
Development and Strategic Planning of the Registrant from December 1991 to
September 1992. Mr. Murphy previously spent 14 years in basic pharmaceutical
research and product development with SmithKline Corporation and in
international business development with contract research and consulting
laboratories. Mr. Murphy received a B.A. in Biology from Millersville University
and attended the Massachusetts School of Law in 1993 and 1994.
MICHAEL MCGOVERN was named Vice Chairman of the Registrant in October 1999 and
serves as President of McGovern Enterprises, a provider of corporate and
financial consulting services, which he founded in 1975. Mr. McGovern is
Chairman of the Board of Specialty Surgicenters, Inc., is Vice Chairman of the
Board of Employment Technologies, Inc. and is a Director on the corporate boards
of Suburban Lodges of America Inc., Training Solutions Interactive, Inc., and
the Reynolds Development Company. Mr. McGovern received a B.S. and M.S. in
accounting and his Juris Doctor from the University of Illinois. Mr. McGovern is
a Certified Public Accountant and a member of the State Bar of Georgia and the
American Bar Association.
ROBERT M. STOTE, M.D. became Senior Vice President and Chief Science Officer of
the Registrant in March 1992. Prior to joining the Registrant, Dr. Stote was
employed for 20 years by SmithKline Beecham Corporation serving as Senior Vice
President and Medical Director, Worldwide Medical Affairs from 1989 to 1992, and
Vice President-Clinical Pharmacology-Worldwide from 1987 to 1989. From 1984 to
1987, Dr. Stote was Vice President-Phase I Clinical Research, North America. Dr.
Stote was Chief of Nephrology at Presbyterian Medical Center of Philadelphia
from 1972 to 1989 and was Clinical Professor of Medicine at the University of
Pennsylvania. Dr. Stote serves as a Director of Datatrak International, Inc. Dr.
Stote received a B.S. in Pharmacy from the Albany College of Pharmacy, an M.D.
from Albany Medical College and is Board Certified in Internal Medicine and
Nephrology. He was a Fellow in Nephrology and Internal Medicine at the Mayo
Clinic and is currently a Fellow of the American College of Physicians.
MICHAEL D. PRICE became Chief Financial Officer, Vice President/Treasurer and
Secretary of the Registrant in October 1993, April 1993 and November 1992,
respectively. He has served the Registrant in other capacities since March 1992.
Prior to joining the Registrant, he was employed as a financial and management
consultant with Carr Financial Group in Tampa, Florida from March 1990 to March
1992. Prior thereto, he was employed as Vice President of Finance with Premiere
Group, Inc., in Tampa, Florida from June 1988 to February 1990. Prior thereto,
Mr. Price was employed by Price Waterhouse in Tampa, Florida from January 1982
to June 1988 where his last position with that firm was as an Audit Manager. Mr.
Price received a B.S. in Business Administration with a concentration in
Accounting from Auburn University and an M.B.A. from Florida State University.
Mr. Price is a Certified Public Accountant in the State of Florida.
43
ROBERT J. GYURIK became Vice President of Pharmaceutical Development of the
Registrant in March 1999. Mr. Gyurik was Manager of Development and Quality
Control at Macrochem Corporation, a position he held from 1993 to February 1999.
From 1971 to 1993 Mr. Gyurik worked in various positions at SmithKline Beecham
ranging from Associate Senior Investigator in the Nutrition/Production Enhancer
Research Group and Pharmaceutical Development Group to Senior Medical Chemist in
the Parasitology Research Group. Prior thereto, Mr. Gyurik worked at Schering as
a Medicinal Chemist. Mr. Gyurik attended Rutgers University and received a B.A.
in Biology and Chemistry from Immaculata College. Mr. Gyurik is a member of the
American Chemical Society, International Society for Chronobiology and the New
York Academy of Sciences and holds a number of patents in the areas of drug
delivery systems, medical devices and new drug discoveries.
JORDAN A. HORVATH became Vice President and General Counsel of the Registrant in
August 2000. Prior to joining the Registrant, he was a partner at Parker Chapin
LLP, the Company's legal counsel in New York City (which has since merged to
become Jenkens & Gilchrist Parker Chapin LLP), since 1996. He was an associate
of that firm from 1991 to 1995. Mr. Horvath received an A.B. from Princeton
University and a J.D. from the University of California, Berkeley.
CHARLES L. BOLLING served from 1968 to 1973 as Vice President of Product
Management and Promotion (U.S.), from 1973 to 1977 as Vice President of
Commercial Development and from 1977 to 1986 as Director of Business Development
(International) at SmithKline & French Laboratories. Mr. Bolling has been
retired since 1986.
RUSSELL CLEVELAND is the principal founder and the majority stockholder of
Renaissance Capital Group, Inc. ("Renaissance"). Renaissance provides capital to
emerging publicly owned companies. For more than the past five years, Mr.
Cleveland has served as President and Managing General Partner of Renaissance
Capital Partners, Ltd. President and Director of Renaissance Capital Growth &
Income Fund III, Inc., and a Director of Renaissance U.S. Growth and Income
Trust PLC and BFS U.S. Special Opportunities Trust PLC. Mr. Cleveland's
background includes executive positions with various major southwest regional
brokerage firms. Mr. Cleveland also currently serves as a director of Danzer
Corp. (formerly Global Environmental Corp.), Tutogen Medical, Inc. and
Integrated Security Systems, Inc. Mr. Cleveland is a Chartered Financial Analyst
and a graduate of the University of Pennsylvania, Wharton School of Finance and
Commerce.
MIGUEL FERNANDEZ served from 1980 to 1996 as President of the International
Division and corporate Vice President at Carter-Wallace, Inc., where he was
responsible for all product lines outside of the United States. Prior thereto,
Mr. Fernandez was employed for approximately eight years by SmithKline Beecham,
where his last position was Vice President for Latin America. Before SmithKline
Beecham, Mr. Fernandez served as Managing Director of Warner Lambert in
Argentina for two years. From 1962 to 1970, Mr. Fernandez was employed by
Merck/Frost in Canada. Mr. Fernandez received a Bachelors of commerce degree
from the University of British Columbia and an MBA from the Ivey School of
Business at the University of Western in Ontario, Canada. Mr. Fernandez has been
retired since 1996.
44
WILLIAM A. PACKER has been a business and industry consultant to a number of
biopharmaceutical companies since 1998. From 1992 until 1998, Mr. Packer was
President and Chief Financial Officer of Virus Research Institute, Inc., a
publicly owned biotechnology company. Prior to this, Mr. Packer was employed by
SmithKline Beecham Plc ("SmithKline"), a major pharmaceutical company, where he
held various senior management positions, the most recent as Senior Vice
President, Biologicals, in which position he was responsible for the direction
of SmithKline's global vaccine business. Mr. Packer is a Chartered Accountant.
The Registrant's Articles of Incorporation and By-Laws provide for a classified
Board of Directors. The Board is divided into three classes, designated Class I,
Class II and Class III. The directors included in Class I above will hold office
until the 2003 Annual Meeting of Stockholders, the directors included in Class
II above will hold office until the 2001 Annual Meeting of Stockholders, and the
directors included in Class III above will hold office until the 2002 Annual
Meeting of Stockholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Registrant's executive officers and directors, and any persons who own more than
10% of any class of the Registrant's equity securities, to file certain reports
relating to their ownership of such securities and changes in such ownership
with the Securities and Exchange Commission and the American Stock Exchange and
to furnish the Registrant with copies of such reports. To the Registrant's
knowledge during the year ended December 31, 2000, all Section 16(a) filing
requirements have been satisfied.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information called for by this item is incorporated by reference to the
Registrant's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information called for by this item is incorporated by reference to the
Registrant's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information called for by this item is incorporated by reference to the
Registrant's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Page Herein
-----------
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations and of Comprehensive Loss
for the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-29
(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule F-30
Schedule II - Valuation and qualifying accounts and reserves F-31
All other schedules have been omitted because they are inapplicable or
are not required, or the information is included elsewhere in the
consolidated financial statements or notes thereto.
46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
North Hampton, New Hampshire
We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2000
and 1999, and the related consolidated statements of operations and of
comprehensive loss, changes in stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2001
F-1
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) DECEMBER 31,
------------------------
2000 1999
---- ----
ASSETS
- ------
Current assets:
Cash and cash equivalents $4,816 $4,422
Marketable securities - 1,893
Receivables, net 5,135 4,016
Inventories, net 1,827 965
Prepaid expenses and other 475 393
Deferred taxes 851 -
------- -------
Total current assets 13,104 11,689
------- -------
Non-current assets:
Fixed assets, net 4,139 3,684
Drug licenses and related costs, net 10,979 5,807
Receivables from related parties 463 -
Other non-current assets, net 192 1,057
------- -------
Total non-current assets 15,773 10,548
------- -------
$28,877 $22,237
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $2,645 $2,702
Accrued expenses 968 1,538
Short-term borrowings 2,447 952
Current portion of long-term debt 738 5
Deferred income-sale of drug licenses 2,564 -
Debentures called for redemption - 5,362
------- -------
Total current liabilities 9,362 10,559
------- -------
Non-current liabilities:
Long-term debt 623 -
Taxes payable 908 -
Other non-current liabilities 168 104
------- -------
Total non-current liabilities 1,699 104
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 2,000 shares,
issued and outstanding, zero shares - -
Common stock,$.02 par value, authorized 35,000 shares, issued
and outstanding, 13,914 and 10,230 shares 278 204
Stock purchase warrants (to purchase 4,038 and 4,806
shares of common stock) 632 799
Additional paid-in capital 95,227 87,858
Accumulated deficit (75,693) (74,948)
Accumulated other comprehensive loss (2,628) (2,339)
------- -------
17,816 11,574
------- -------
$28,877 $22,237
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-2
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OF COMPREHENSIVE LOSS
(in thousands except per share data) For the Year Ended
December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Net sales $18,617 $20,249 $15,243
Cost of sales 7,189 8,445 6,601
------ ------ ------
Gross profit 11,428 11,804 8,642
Operating expenses:
Selling, general and administrative 10,260 9,982 9,078
Research and development 1,102 685 153
Depreciation and amortization 580 559 303
Costs of abandoned acquisitions - - 1,176
------ ------ ------
Total operating expenses 11,942 11,226 10,710
------ ------ ------
(Loss) income from operations (514) 578 (2,068)
Other income (expenses):
Interest income 347 244 499
Interest expense (439) (1,168) (1,076)
Other income (expense), net 83 37 5
------ ----- ------
Loss before income taxes (523) (309) (2,640)
(Provision) benefit for income taxes:
Domestic - - 280
Foreign (222) (781) (516)
------ ----- ------
Net loss ($745) ($1,090) ($2,876)
====== ===== ======
Basic and diluted net loss per common share ($.06) ($0.12) ($0.35)
====== ===== ======
Weighted average common shares outstanding 12,981 9,147 8,431
====== ===== ======
Other comprehensive income (loss):
Foreign currency translation (losses) gains (289) (737) 253
------ ----- ------
Comprehensive loss ($1,034) ($1,827) ($2,623)
====== ===== ======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
$.02 Par Value Accumulated
Common Stock Additional Other Other
-------------------- Paid-In Accumulated Comprehensive Equity
Shares Amount Capital Deficit Loss Transactions Total
------ ------ ------- ------- ---- ------------ -----
Balance at December 31, 1997 8,426 $168 $81,382 ($70,982) ($1,855) $192 $8,905
Exercise of Class B Redeemable Warrants 2 - 8 - - - 8
Issuance of warrants - - - - - 364 364
Accrual of dividends - preferred stock - - (101) - - - (101)
Conversion of redeemable preferred stock 15 - 2,439 - - - 2,439
Foreign currency translation adjustment - - - - 253 - 253
Net loss - - - (2,876) - - (2,876)
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance at December 31, 1998 8,443 168 83,728 (73,858) (1,602) 556 8,992
Exercise of Class A Redeemable Warrants 859 18 2,584 - - (39) 2,563
Exercise of other stock warrants 50 1 116 - - (42) 75
Conversion of Debentures 77 1 132 - - - 133
Issuance of warrants to acquire technology - - - - - 375 375
Common stock issued to acquire technology 585 12 838 - - - 850
Common stock issued as compensation 150 3 222 - - - 225
Common stock issued to consultants 66 1 187 - - - 188
Expiration of unexercised warrants - - 51 - - (51) -
Foreign currency translation adjustment - - - - (737) - (737)
Net loss - - - (1,090) - - (1,090)
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance at December 31, 1999 10,230 204 87,858 (74,948) (2,339) 799 11,574
Exercise of Class B Redeemable Warrants 99 1 493 - - (2) 492
Conversion of Debentures 2,901 58 4,682 - - - 4,740
Exercise of stock options/warrants 684 15 2,197 - - (414) 1,798
Exercise of underwriter's warrants - - (3) - - 249 246
Foreign currency translation adjustment - - - - (289) - (289)
Net loss - - - (745) - - (745)
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance at December 31, 2000 13,914 $278 $95,227 ($75,693) ($2,628) $632 $17,816
========= =========== ========== ========== =========== =========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
----------------------------------
(in thousands) 2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss ($745) ($1,090) ($2,876)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 580 559 303
Equity-based compensation expense 69 225 -
Non-cash costs of abandoned acquisitions - - 158
Other non-cash items 262 904 501
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (1,385) (1,495) (599)
Inventories (1,003) 85 (412)
Prepaid expenses and other current assets (205) 504 (544)
Other assets (97) 109 (72)
Accounts payable and accrued expenses (171) 163 907
Other liabilities (5) (27) 70
------ ------- ------
Net cash used in operating activities (2,700) (63) (2,564)
------ ------- ------
Cash flows from investing activities:
Acquisition of drug licenses and related costs (5,560) (1,775) (1,559)
Additions to fixed assets (1,014) (969) (559)
Deferred income - sale of drug licenses 2,564 - -
Receivables from related parties (440) - -
Proceeds from sale of investments 17,193 - -
Purchase of investments (15,171) (1,893) -
Capitalized acquisition costs - - 448
------ ------- ------
Net cash used in investing activities (2,428) (4,637) (1,670)
------ ------- ------
(continued on following page)
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
(in thousands) For the Year Ended
December 31,
-------------------------------
2000 1999 1998
----- ------ ------
Cash flows from financing activities:
Proceeds from exercise of stock options/warrants $2,843 $2,639 $8
Proceeds from borrowings 5,009 1,418 946
Repayment of borrowings (2,279) (1,533) (946)
Payments on capital leases (5) (5) (5)
------ ------ ------
Net cash provided by financing activities 5,568 2,519 3
------ ------ ------
Effect of exchange rate changes on cash (46) (100) (183)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 394 (2,281) (4,414)
Cash and cash equivalents at beginning of year 4,422 6,703 11,117
----- ----- ------
Cash and cash equivalents at end of year $4,816 $4,422 $6,703
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the year for (in thousands):
Interest $ 486 $1,003 $ 972
====== ====== =====
Taxes $ 897 $ 980 $ 884
====== ====== =====
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued or is obligated to issue Common Stock in exchange
for services and the purchase of drug delivery
technology as follows (in thousands):
Shares 8 801 -
====== ====== =====
Amount $ 69 $1,263 $ -
====== ====== =====
During the year ended December 31, 2000, 7,254 of the Company's 12% Convertible Debentures with principal amount of
$7,254,000, net of discount of $1,585,000 (and applicable unamortized debt issuance costs totaling $929,000) were
converted into approximately 2,901,000 shares of Common Stock.
During the year ended December 31, 1999, the Company issued Warrants to purchase 450,000 shares of Common Stock as
partial consideration for the purchase of drug delivery technology, of which 50,000 were exercised during the year
ended December 31, 1999. During the year ended December 31, 1999, 193 of the Company's 12% Convertible Debentures were
converted into 77,200 shares of Common Stock. The Company recorded the assignment of patents and technology with an
estimated value of $553,000 during the year ended December 31, 1999.
During the year ended December 31, 1998, the Company issued Warrants to purchase 425,000 shares of Common Stock in
exchange for services. The holders of the Company's Series A Preferred Stock converted the remaining 60,000 shares of
Redeemable Preferred Stock into approximately 15,000 shares of Common Stock during the year ended December 31, 1998.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-6
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY AND OPERATIONS
Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Company") is a
U.S.-based international pharmaceutical and drug delivery company specializing
in the development of products based upon innovative and proprietary drug
delivery systems. The Company also has a commercial presence in Europe, where it
manufactures, markets and distributes branded and generic pharmaceutical
products. The Company owns rights to certain U.S. and international patents and
related technology covering methods to enhance the absorption of drugs delivered
through biological tissues. The Company is developing this technology and is
targeting U.S., European and other international markets for the new product
applications. The Company is in negotiations with larger pharmaceutical
companies with the objective of entering into collaborations for the development
and marketing of various product applications, including: for the treatment of
onychomycosis, delivery of insulin, hormone replacement therapies, vaccines and
peptides. In Spain, the Company develops and registers late stage products, and
manufactures, packages and distributes both its own and other companies'
pharmaceutical products.
The strategic focus of the Company has shifted in response to the evolution of
the global health care environment. The Company emphasizes product distribution
in Spain, strategic alliances and product acquisitions. Its overall strategy has
been expanded due to the 1999 acquisition of permeation enhancement technology,
which will require limited development expenditures while providing a multitude
of opportunities for strategic partnerships and/or alliances, which are
anticipated to lead to milestone payments and royalty arrangements, with the
strategic partners bearing the majority of development costs. Since this
technology is based on a series of GRAS (Generally Recognized As Safe)
compounds, products may be developed in a quicker and less costly fashion. The
technology facilitates the permeation of drugs administered through skin, across
mucosa or through the cornea in a variety of independent pharmaceutical formats.
The excipient most advanced in facilitating absorption is referred to by the
Company as CPE-215, although there are a number of other related compounds under
the same patents that have equally impressive enhancing characteristics.
The Company anticipated the opportunities that the emerging generic drug market
in Spain present and began taking measures over two years ago to enter the
Spanish generic drug market. The Company created a wholly-owned subsidiary to
register, market and distribute generic pharmaceutical products in Spain and
began aligning its business model to be competitive in this arena, including
hiring and training a new generic sales force, submission of generic-equivalent
products to the Spanish Ministry of Health for approval and a marketing campaign
designed to position the Company as a leader in the Spanish generic drug market.
In July 2000, the Company also announced that it has entered into a strategic
alliance with Teva Pharmaceutical Industries, Ltd., whereby the Company will
initially receive licenses to more than 75 of Teva's products for
F-7
registration and marketing in Spain. Teva will supply the bulk pharmaceutical
products to the Company and the Company's Spanish subsidiaries, Laboratorios
Belmac and Laboratorios Davur will market the products in Spain. Teva was also
granted a right of first refusal to acquire Laboratorios Davur in the event that
the Company decides to divest that subsidiary.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As reflected in the
consolidated financial statements, the Company has incurred net losses as well
as negative operating cash flows for all periods presented. Management of the
Company is confident that it has taken the appropriate steps, as discussed
above, to align its strategic plan and business model to be competitive in the
drug delivery market space and achieve profitability in the near future. Given
the Company's current liquidity and cash balances and expectations with respect
to the execution of its business model, management beieves that it has
sufficient resources to fund operations for the year 2001 and into the year
2002. However, there can be no assurance that changes in the Company's research
and development plans or other events affecting the Company's revenues or
operating expenses will not result in the earlier depletion of the Company's
funds.
The Company was organized under the laws of the State of Florida in February
1974 and operated as a Florida corporation until October 1999, when it changed
its state of incorporation to Delaware by effecting a merger with and into
Bentley Pharma, Inc., a Delaware corporation, which was a wholly-owned
subsidiary of the Company. Bentley Pharma, Inc. was the surviving entity of the
merger and its name was changed to Bentley Pharmaceuticals, Inc. The Company
also adopted a certificate of incorporation and bylaws, which conform to
Delaware law. The Company relocated its corporate headquarters from Tampa,
Florida to North Hampton, New Hampshire in 1999.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Pharma de Espana, Inc. and its wholly-owned
subsidiary, Laboratorios Belmac S.A. and its wholly-owned subsidiary,
Laboratorios Davur S.L.; Bentley Healthcare Corporation and its wholly-owned
subsidiary, Belmac Hygiene, Inc.; Belmac Health Corporation; Belmac Holdings,
Inc. and its wholly-owned subsidiary, Belmac A.I., Inc.; B.O.G. International
Finance, Inc.; and Belmac Jamaica, Ltd. All significant intercompany balances
have been eliminated in consolidation. The financial position and results of
operations of the Company's foreign subsidiaries are measured using local
currency as the functional currency. Assets and liabilities of each foreign
subsidiary are translated at the rate of exchange in effect at the end of the
period. Revenues and expenses are translated at the average exchange rate for
the period. Foreign currency translation gains and losses not impacting cash
flows are credited to or charged against Stockholders' Equity. Foreign currency
translation gains and losses arising from cash transactions are credited to or
charged against current earnings.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents for purposes of the
Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
Investments in securities which do not meet the definition of cash equivalents
are classified as marketable securities available-for-sale in the Consolidated
Balance Sheets.
F-8
MARKETABLE SECURITIES
The Company classified its marketable securities at December 31, 1999 as
"available-for-sale" and, accordingly, reported such securities at aggregate
fair value. Fair value was determined based on quoted market prices. Marketable
securities at December 31, 1999 included $605,000 of Spanish government Treasury
Bills, which matured in May 2000 and $1,288,000 of Federal Home Loan Mortgage
Corporation Notes that matured in March 2000. The Company had no marketable
securities at December 31, 2000.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out ("FIFO") method.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the following estimated economic lives of the assets:
YEARS
-----
Buildings 30
Equipment 3 - 7
Furniture and fixtures 5 - 7
Other 5
Leasehold improvements are amortized over the life of the specific asset or of
the respective lease, whichever is shorter. Expenditures for replacements and
improvements that significantly add to productive capacity or extend the useful
life of an asset are capitalized, while expenditures for maintenance and repairs
are charged against operations as incurred. When assets are sold or retired, the
cost of the asset and the related accumulated depreciation are removed from the
accounts and any gain or loss is recognized currently.
DRUG LICENSES AND RELATED COSTS
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Company's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Carrying values of such assets are reviewed annually by the
Company and are adjusted for any diminution in value.
F-9
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS
Original issue discount related to the issuance of debt was amortized to
interest expense using the effective interest method over the lives of the
related debt. The costs related to the issuance of debt were capitalized and
amortized to interest expense using the effective interest method over the lives
of the related debt.
F-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures about
Fair Value of Financial Instruments" requires disclosure of the estimated fair
values of certain financial instruments. The estimated fair value amounts have
been determined using available market information or other appropriate
valuation methodologies that require considerable judgment in interpreting
market data and developing estimates. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value of cash, cash equivalents, accounts receivable, accounts payable, accrued
expenses and debt amounts. The carrying amounts of all financial instruments
approximate their estimated fair values.
The fair value information presented herein is based on information available to
management as of December 31, 2000. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore the current estimates of fair value
may differ significantly from the amounts presented herein.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans.
REVENUE RECOGNITION
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and final, delivery has occured and there
is a reasonable assurance of collection of the sales proceeds. The Company
generally obtains oral or written purchase authorizations from its customers for
a specified amount of product at a specified price and considers delivery to
have occured at the time of shipment. The Company provides its customers with a
limited right of return. Revenue is recognized at shipment and a reserve for
sales returns is recorded. The Company has demonstrated the ability to make
reasonable and reliable estimates of product returns in accordance with SFAS No.
48 based on significant historical experience.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax assets and liabilities
relating to the expected future tax consequences of events that have been
recognized in the Company's consolidated financial statements and tax returns.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted loss per common
share is not presented as it is
F-11
antidilutive. Stock options, stock warrants and convertible debentures are the
only securities issued which would have been included in the diluted loss per
share calculation. Common Stock Equivalents totaling 3,013,000, 3,025,000 and
3,861,000, representing the effect of potential exercises of options and
warrants and the effect of potential conversion of Debentures into shares of
Common Stock for each of the years ended December 31, 2000, 1999 and 1998,
respectively, were not included in the computation of diluted loss per common
share because the effect would have been antidilutive. Preferred stock dividends
of approximately $101,000 have been included in the determination of loss per
share during the year ended December 31, 1998.
COMPREHENSIVE LOSS
The difference between net loss as reported and comprehensive loss is the effect
of foreign currency translation (losses) gains totaling approximately
($289,000), ($737,000) and $253,000 for years ended December 31, 2000, 1999 and
1998, respectively.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a company's
operating segments. The Company operates in one business segment (see Note 12).
DERIVATIVE INSTRUMENTS AND HEDGING
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure these instruments at fair
value. The accounting for changes in the fair value of a derivative (that is,
gains and losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The Company adopted SFAS No. 133, as amended, on
January 1, 2001. The adoption of SFAS No. 133 did not have a significant impact
on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation format. Such reclassifications are not material to the
consolidated financial statements.
F-12
NOTE 3--RECEIVABLES
Current receivables consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Trade receivables (of which $967 and $949, respectively, collateralize
short-term borrowings with Spanish financial institutions) $4,807 $3,815
Taxes receivable 214 -
Other 184 215
----- -----
5,205 4,030
Less-allowance for doubtful accounts (70) (14)
----- -----
$5,135 $4,016
====== ======
Non-current receivables consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Receivables from related parties $ 463 $ -
====== ====
The Company provided loans to each of Messrs. Murphy, Price and Gyurik, who are
Executive Officers of the Company, in the amounts of $250,000, $50,000 and
$140,000, respectively, in March 2000, which Messrs. Murphy, Price and Gyurik
used to pay income taxes on equity-based compensation received in the prior
year. The loans, which bear interest at 6.59% annually, mature in March 2003 and
are secured by 28,000, 6,000 and 16,000 shares of the Company's Common Stock
owned by Messrs. Murphy, Price and Gyurik, respectively. Accrued interest on
such loans totals approximately $23,000 at December 31, 2000.
F-13
NOTE 4--INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Raw materials $ 692 $ 436
Finished goods 1,196 599
------- ------
1,888 1,035
Less-allowance for slow moving inventory (61) (70)
------- ------
$ 1,827 $ 965
======= ======
NOTE 5--FIXED ASSETS
Fixed assets consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Land $ 830 $ 893
Buildings 2,607 2,789
Equipment 1,843 955
Furniture and fixtures 610 584
Leasehold improvements 44 41
Equipment under capital lease 27 27
------- -------
5,961 5,289
Less-accumulated depreciation (1,822) (1,605)
------- -------
$ 4,139 $ 3,684
======= =======
Depreciation expense of approximately $72,000, $43,000 and $165,000 has been
charged to operations as a component of Depreciation and amortization expense on
the Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998, respectively. The Company has included depreciation totaling
approximately $260,000, $203,000 and $221,000 in cost of sales during the years
ended December 31, 2000, 1999 and 1998, respectively.
F-14
Net book value of equipment under capital lease was approximately $1,000 and
$7,000 at December 31, 2000 and 1999, respectively.
NOTE 6--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Drug licenses and related costs $12,269 $6,802
Less-accumulated amortization (1,290) (995)
------- ------
$10,979 $5,807
======= ======
Subsequent to December 31, 2000, Laboratorios Belmac, S.A., a subsidiary of the
Company, recognized the sale of the trademark, registration rights and dossier
for its branded pharmaceutical product, Controlvas (R), to a third party for
950,000,000 Spanish pesetas (approximately $4,800,000), less the net product
contribution generated by sales of the product from the date of the agreement
(November 21, 2000) to the date that the transfer of title was completed and the
gain on sale became recognizable in accordance with accounting principles
generally accepted in the United States of America. The Company received a 50%
deposit from the purchaser in November 2000, which has been reflected as
Deferred income in the Consolidated Balance Sheets as of December 31, 2000.
The Company acquired the rights to market and manufacture in Spain, the product
and trademark Codeisan (R) from Abello, a subsidiary of Merck & Co., Inc. during
the year ended December 31, 2000 for 986,000,000 pesetas (approximately
$5,200,000). The brand line consists of tablet and liquid presentations, which
is marketed and promoted by the Laboratorios Belmac sales force. Also acquired
in the transaction was the associated manufacturing equipment.
On February 11, 1999, the Company acquired rights to certain U.S. and
international patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological tissues. Consideration
for the Assets was paid to Yungtai Hsu, an individual, in the form of a cash
payment of approximately $1.1 million, approximately 226,000 shares of Common
Stock and ten-year warrants to purchase 450,000 shares of common stock. In
addition, approximately 359,000 shares of Common Stock were conveyed to Conrex
Pharmaceutical Corporation. The total of all consideration paid for the Assets
were approximately $2,600,000.
F-15
Furthermore, terms of this transaction provide for certain royalty payments upon
commercialization of products using the technologies.
Belmac Hygiene, Inc., a wholly owned subsidiary of the Company, entered into a
50/50 partnership in March 1994 with Maximed Corporation ("Maximed") to develop
and market feminine health care products. Maximed contributed the hydrogel-based
technology and the Company, through its subsidiary, was responsible for
providing financing and funding of the partnership's activities. In December
1994, the Company commenced litigation against its partner and was awarded a
judgment in the amount of $7.68 million in 1998, which was affirmed by the U.S.
Court of Appeals. The Company attempted to collect the judgment, but was unable
to obtain cash from its partner to satisfy the judgment. Consequently, the
Company decided to seek assignment of the technology and related patents in an
effort to satisfy the judgment. As a result, the technology and patents were
assigned to the Company in October 1999 and the Company treated such assignment
as a distribution from the partnership. The Company estimated the value of the
patents and technology to be approximately $550,000 and recorded these assets as
Drug Licenses and Related Costs, Net during the year ended December 31, 1999.
The Company recorded no gain or loss as a result of this assignment. Management
has determined that no reserve for impairment in value is necessary at December
31, 2000. The partnership is not currently engaged in business activities, nor
does the Company anticipate that it will engage in any business activities in
the future.
The Company purchased the product Senioral from Sanofi-Winthrop during the year
ended December 31, 1998 for approximately $1,400,000. Senioral is a combination
product useful in the treatment of congestive symptoms of the upper respiratory
tract. The Company's Spanish subsidiary, Laboratorios Belmac S. A., had
commenced marketing Senioral in October 1998.
Amortization expense for drug licenses and related costs was approximately
$508,000, $516,000 and $138,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Other accrued expenses $686 $745
Foreign income taxes payable 13 169
Other foreign taxes payable - 268
Accrued payroll 269 356
---- ----
$968 $1,538
==== ======
F-16
NOTE 8--DEBT
Short-term borrowings consist of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate on the note
is 6.0% and 5.3%, respectively. $967 $949
Revolving lines of credit (with Spanish financial institutions),
average interest rate is 6.0% and 4.8%, respectively. 1,480 3
------ ------
$2,447 $952
====== ======
The weighted average stated interest rate on short-term borrowings outstanding
at December 31, 2000 and 1999 was 6.0% and 5.3%, respectively.
The Company has revolving lines of credit with Spanish financial institutions,
which lines total $5,954,000 at December 31, 2000. The lines are scheduled to
mature on various dates through November 30, 2001 and are renewable. At December
31, 2000, advances outstanding under the lines of credit were approximately
$1,480,000. The weighted average interest rate at December 31, 2000 and 1999 was
6.0% and 4.8%, respectively, and interest is payable quarterly.
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------
2000 1999
---- ----
Debentures, with original maturity of February 13, 2006,
converted into Common Stock in 2000, stated rate of
interest 12% (net of $1,432 discount at December 31, 1999) $ - $5,362
Long-term debt (with Spanish financial institutions), average interest
rate is 6.0% 1,360 -
Capitalized lease obligations relating to equipment 1 5
------- -------
1,361 5,367
Less-current portion (738) (5,367)
------- -------
Total long-term debt $ 623 $ -
======= =======
Aggregate future principal payments of long-term debt total approximately
$738,000, $450,000 and $173,000 for the years ending December 31, 2001, 2002 and
2003, respectively.
F-17
In February 1996, the Company completed a Public Offering of its securities,
whereby an aggregate of 6,900 Units were sold at a price of $1,000 per Unit.
Each Unit consisted of One Thousand Dollars ($1,000) Principal Amount 12%
Convertible Senior Subordinated Debenture due February 13, 2006 and 1,000 Class
A Redeemable Warrants, each to purchase one share of Common Stock and one Class
B Redeemable Warrant. Two Class B Redeemable Warrants entitle a holder to
purchase one share of Common Stock. Interest on the Debentures was payable
quarterly until such Debentures were converted into shares of Common Stock.
On May 29, 1996, the Debentures and Class A Redeemable Warrants began trading
separately. The characteristics of the Debentures and Class A Redeemable
Warrants were consistent with their description as a component of the Units
except that the expiration date of the Class A Warrants was extended to August
16, 1999. The expiration date of the underlying Class B Warrants was
subsequently extended to August 16, 2001.
During the year ended December 31, 2000, holders of the Company's 12%
Debentures, which were classified as current liabilities at December 31, 1999,
converted all 7,254 of such Debentures, with a net carrying value of
approximately $5,669,000, into approximately 2,901,000 shares of Common Stock.
As of December 31, 2000, 1999 and 1998, there were $0, $6,794,000 and $6,987,000
principal amount of the 12% Convertible Debentures outstanding, respectively.
For financial reporting purposes, the $1,000 purchase price of each Unit was
allocated as follows: $722 to the Debenture, $224 to the conversion discount
feature of the Debenture and $54 to the 1,000 Class A Warrants. None of the Unit
purchase price was allocated to the Class B Warrants. Such allocation was based
upon the relative fair value of each security on the date of issuance. Such
allocation resulted in recording a discount on the Debentures of approximately
$1,900,000. The original issue discount and the costs related to the issuance of
the Debentures was being amortized to interest expense using the effective
interest method over the lives of the related Debentures until the date that
such Debentures were converted into shares of Common Stock. The remaining
unamortized original issue discount and related issuance costs were recorded as
an offset to Additional Paid-in Capital at the time of conversion. The effective
interest rate on the Debentures was 18.1%. As a result of the Company's decision
in March 2000 to redeem the Debentures not converted into shares of Common Stock
by the redemption date of April 12, 2000, such Debentures were classified as a
current liability as of December 31, 1999.
NOTE 9--PREFERRED STOCK
The Company has 2,000,000 shares of $1.00 Preferred Stock available for
issuance, however, as of December 31, 2000 and 1999, no shares of Preferred
Stock are outstanding.
F-18
NOTE 10--STOCKHOLDERS' EQUITY
At December 31, 2000 the Company had the following Common Stock reserved for
issuance under various plans and agreements (in thousands):
COMMON SHARES
-------------
For exercise of stock purchase warrants 4,038
For exercise of stock options 2,457
For other 11
-------
6,506
=======
The Company has never paid any dividends on its Common Stock. The current policy
of the Board of Directors is to retain earnings to finance the operation of the
Company's business. Accordingly, it is anticipated that no cash dividends will
be paid to the holders of the Common Stock in the foreseeable future.
STOCK PURCHASE WARRANTS
At December 31, 2000, stock purchase warrants to purchase an aggregate of
approximately 4,038,000 shares of Common Stock were outstanding, which were
exercisable at prices ranging from $1.50 to $20.00 per share, of which 400,000
warrants have an exercise price of $1.50 per share, 150,000 warrants have an
exercise price of $2.50 per share, 460,000 warrants have an exercise price of
$3.00 per share, approximately 3,008,000 warrants have an exercise price of
$5.00 per share and 20,000 warrants have an exercise price of $20.00 per share.
The warrants expire on various dates from August 2001 through December 2009.
During the year ended December 31, 2000, approximately 197,000 Class B Warrants
were exercised to acquire approximately 99,000 shares of Common Stock.
Approximately 670,000 of other stock purchase warrants were also exercised to
acquire approximately 670,000 shares of Common Stock, and 460 Underwriter's
Warrants were exercised to acquire 460 Debentures and 460,000 Underwriter A
Warrants. The Company received net cash proceeds of approximately $2,808,000
from all such exercises during the year ended December 31, 2000.
During the year ended December 31, 1999, the Company issued stock purchase
warrants to purchase an aggregate of 450,000 shares of the Company's Common
Stock at $1.50 per share as partial consideration for the purchase of permeation
enhancement technology (see Note 6), of which 50,000 were exercised during 1999.
During the year ended December 31, 1999, the Company also issued Class B
Warrants to purchase 659,000 shares of Common Stock for $5.00 per share. In
addition, approximately 859,000 Class A Warrants were exercised during the year
ended December 31, 1999 to acquire approximately 859,000 shares of Common Stock
and approximately 859,000 Class B Warrants, resulting in net cash proceeds to
the Company of approximately $2,600,000. Warrants to purchase approximately
1,322,000 shares of Common
F-19
Stock (including approximately 1,252,000 Class A Warrants) expired unexercised
during the year ended December 31, 1999.
During the year ended December 31, 1998, the Company issued stock purchase
warrants to purchase an aggregate of 425,000 shares of the Company's Common
Stock at $2.50 per share. During 1998, 5,000 Class B Warrants were exercised,
resulting in the purchase of 2,500 shares of Common Stock. Warrants to purchase
approximately 192,000 shares of Common Stock expired unexercised during the year
ended December 31, 1998.
In addition, the Company has granted warrants in connection with private
placements of its securities and as consideration for various services. These
warrants have been granted for terms not exceeding ten years from the date of
grant.
The table below summarizes warrant activity for the years ended December 31,
1998, 1999 and 2000.
WEIGHTED
NUMBER OF AVERAGE PRICE
(in thousands except per share data) COMMON SHARES PER SHARE
------------- ----------
Outstanding at December 31, 1997 5,697 $ 4.39
Granted 425 $ 2.50
Exercised (2) $ 3.00
Canceled (192) $20.69
------
Outstanding at December 31, 1998 5,928 $ 3.84
Granted 1,109 $ 3.58
Exercised (909) $ 2.92
Canceled (1,322) $ 3.05
------
Outstanding at December 31, 1999 4,806 $ 4.17
Exercised (768) $ 2.93
------
Outstanding at December 31, 2000 4,038 $ 4.41
======
F-20
COMMON STOCK TRANSACTIONS
During the year ended December 31, 2000, the Company issued approximately 99,000
shares of Common Stock as a result of the exercise of approximately 197,000
Class B Warrants, approximately 670,000 shares of Common Stock upon exercise of
other stock purchase warrants, approximately 14,000 shares of Common Stock upon
exercise of stock purchase options and approximately 2,901,000 shares of Common
Stock upon conversion of 7,254 of the Company's 12% Convertible Debentures.
During the year ended December 31, 1999, the Company issued approximately
585,000 shares of Common Stock as partial consideration for the acquisition of
permeation enhancement technology, approximately 859,000 shares of Common Stock
as a result of the exercise of approximately 859,000 Class A Warrants,
approximately 77,000 shares of Common Stock upon conversion of 193 of the
Company's 12% Convertible Debentures, 150,000 shares of Common Stock as
compensation in lieu of cash, 66,000 shares of Common Stock for consulting fees
earned in 1996, 1997 and 1998 and 50,000 shares of Common Stock upon exercise of
other stock purchase warrants.
During the year ended December 31, 1998, the Company issued approximately 15,500
shares of Common Stock as a result of the conversion of 60,000 shares of
Redeemable Preferred Stock and issued 2,500 shares of Common Stock as a result
of the exercise of 5,000 Class B Warrants.
STOCK OPTION PLANS
The Company has in effect Stock Option Plans (the "Plans"), pursuant to which
directors, officers, and employees of the Company who contribute materially to
the success of the Company are eligible to receive grants of options for the
Company's Common Stock. Approximately 2,484,000 shares of Common Stock have been
reserved for issuance under the Plans, of which approximately 957,000 are
outstanding under the 1991 Plan and 1,500,000 are outstanding under the
Executive Plan as of December 31, 2000. Options may be granted for terms not
exceeding ten years from the date of grant except for stock options which are
granted to persons owning more than 10% of the total combined voting power of
all classes of stock of the Company. For these individuals, options may be
granted for terms not exceeding five years from the date of grant. Options may
not be granted at a price, which is less than 100% of the fair market value on
the date the options are granted (110% in the case of persons owning more than
10% of the total combined voting power of the Company). Options to purchase
14,000 shares of Common Stock were exercised during the year ended December 31,
2000, resulting in net cash proceeds of approximately $35,000. No such options
were exercised during the years ended December 31, 1999 or 1998.
Had the compensation cost for the Company's Plans been determined based on the
fair value at the grant dates for awards under the Plans, consistent with the
method described in SFAS 123, the Company's net loss and basic and diluted net
loss per common share on a pro forma basis would have been (in thousands except
per share data):
F-21
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
Net loss ($3,299) ($1,365) ($3,067)
Basic and diluted net loss per common share ($0.25) ($0.15) ($0.38)
The preceding pro forma results were calculated using the Black-Scholes
option-pricing model. The following assumptions were used for the years ended
December 31, 2000, 1999 and 1998, respectively: (1) risk-free interest rates of
6.6%, 5.8% and 5.4%, respectively; (2) dividend yields of 0.0%; (3) expected
lives of 10 years; and (4) volatility of 126.9%, 90.0% and 85.3%, respectively.
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 was $4.48, $2.62 and $1.95, respectively.
Results may vary depending on the assumptions applied within the model.
The table below summarizes activity in the Company's Plans for the years ended
December 31, 1998, 1999 and 2000.
(in thousands except per share data)
NUMBER OF WEIGHTED AVERAGE
COMMON SHARES EXERCISE PRICE
------------- --------------
Outstanding at December 31, 1997 1,741 $ 5.81
Granted 98 2.25
Canceled (16) 3.20
------ ------
Outstanding at December 31, 1998 1,823 5.64
Granted 105 2.98
Canceled (1) 2.75
------ ------
Outstanding at December 31, 1999 1,927 5.50
Granted 570 7.56
Exercised (14) 2.52
Canceled (26) 113.96
------ ------
Outstanding at December 31, 2000 2,457 $ 4.87
====== ======
F-22
The table below summarizes options outstanding and exercisable at December 31,
2000:
OPTIONS OUTSTANDING OPTIONS CURRENTLY EXERCISABLE
------------------------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OF EXERCISE REMAINING OF EXERCISE
PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
------ ------- ----- ------------ ------- -----
$ 1.50 - 2.89 644,355 $ 2.79 5.8 644,355 $2.78
3.00 - 3.75 707,500 3.61 5.6 707,500 3.61
4.73 500,001 4.73 5.3 500,001 4.73
5.88 - 6.38 160,000 5.91 9.0 - -
7.25 - 7.75 286,500 7.51 9.5 - -
8.00 - 10.75 98,000 9.29 9.5 - -
11.25 - 22.50 57,000 16.15 5.5 32,000 19.53
45.00 3,000 45.00 2.1 3,000 45.00
177.50 1,000 177.50 1.0 1,000 177.50
------------- --------- ----- --- --------- ------
$ 1.50-177.50 2,457,356 $4.87 6.4 1,887,856 $ 4.05
============= ========= ===== === ========= ======
Options and warrants outstanding include approximately 4,038,000 warrants, all
of which are exercisable, and approximately 2,457,000 options, of which
approximately 1,888,000 are vested and exercisable at December 31, 2000. If all
such warrants and options, which were exercisable on December 31, 2000, were
exercised in accordance with existing terms, the Company would receive cash
proceeds of approximately $25,446,000.
Options and warrants outstanding at December 31, 1999 included approximately
4,806,000 warrants, all of which were exercisable at December 31, 1999, and
approximately 1,927,000 options, of which approximately 1,822,000 were vested
and exercisable at December 31, 1999 at a weighted average execise price of
$5.64.
401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under which
eligible employees may contribute, on a pre-tax basis, between 1% to 15% of
their respective total annual income from the Company, subject to maximum
aggregate annual contribution imposed by the Internal Revenue Code of 1986, as
amended. All full-time employees who work for the Company in the U.S. are
eligible to participate in the 401(k) Plan. All employee contributions are
allocated to the employee's individual account and are invested in various
investment options as directed by the employee. Cash contributions are fully
vested and nonforfeitable. The Company made matching cash contributions to the
401(k) Plan for the 2000 fiscal year of approximately $2,500 and in the form of
approximately 7,000 shares of the Company's Common Stock valued at approximately
$57,000. Such shares of Common Stock are issuable as of December 31, 2000 and
have been reflected in the Consolidated Balance Sheets as a non-current
liability as of such date.
F-23
STOCKHOLDER RIGHTS PLAN
On December 22, 1999, the Board of Directors adopted a stockholder rights plan.
The Board of Directors approved the declaration of the dividend of one right for
each outstanding share of the Company's Common Stock on the record date of
December 27, 1999. Each of the rights, which are not currently exercisable,
entitles the holder to purchase one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $16.50. The rights will
become exercisable only if any person or group of affiliated persons
beneficially acquire(s) 15% or more of the Company's Common Stock. Under certain
circumstances, each holder of a right (other than the person or group who
acquired 15% or more of the Company's Common Stock) is entitled to purchase a
defined number of shares of the Company's Common Stock at 50% of the market
price of the Common Stock at the time that the right becomes exercisable. The
plan is designed to prevent a potential acquirer from gaining control of the
Company without fairly compensating all of the Company's stockholders and to
protect the Company from coercive takeover attempts.
NOTE 11--PROVISION FOR INCOME TAXES
The components of the Company's deferred taxes are as follows (in thousands):
December 31,
------------
2000 1999
---- ----
Deferred tax assets:
NOL carryforwards $12,651 $12,128
Capital loss carryforwards 10,641 10,641
Disposition of subsidiary 6,750 6,750
Foreign tax on deferred income 851 -
Tax credit carryforwards 415 415
Other, net 428 1,456
------ ------
Total deferred tax assets 31,736 31,390
Deferred tax liabilities (270) (270)
Valuation allowance (30,615) (31,120)
------ ------
Deferred tax asset, net $ 851 $ -
------ ------
The Company has established a valuation allowance equal to the full amount of
the domestic deferred tax asset, as future domestic operating profits cannot be
assured. The Company has a current deferred tax asset of $851,000 and a
non-current tax liability of $908,000 due to temporary differences arising as a
result of the Company's Spanish subsidiary recording the gain on the sale of
Controlvas (R) and the corresponding taxes for Spanish statutory purposes during
the year ended December 31, 2000. The deferred tax asset is a result of taxes
that related to deferred income and the tax liability results from taxes that
will be payable in Spain beginning in 2004.
Under the provisions of the Internal Revenue Code, certain substantial changes
in the Company's ownership may have limited, or may limit in the future, the
amount of net operating loss (the "NOL") carryforwards which could be utilized
annually to offset future taxable income and income tax liabilities. The amount
of any annual limitation is determined based upon the Company's value prior to
an ownership change.
At December 31, 2000, the Company has NOL carryforwards of approximately
$32,773,000 available to offset future U.S. taxable income. The Company
calculates that its use of the NOL generated through December 31, 1997 may be
limited to approximately $1,000,000 each year as a result of stock, option and
warrant issuances resulting in an ownership change of more than 50% of the
Company's outstanding equity. The NOL of approximately $3,200,000 generated
during the tax year ended December 31, 1998 is available to offset future
taxable income without
F-24
limitation. Additionally, approximately $1,800,000 of the NOL generated in 1995
available to offset future U.S. taxable income will be limited to approximately
$300,000 per year over the subsequent six years due to the change in tax year
end during 1995. If not offset against future taxable income, the NOL
carryforwards will expire in tax years 2007 through 2021.
Total income tax expense was $222,000 (all foreign) for the year ended December
31, 2000, which arose from current operations of the Company's foreign
subsidiaries. This amount differs from the amount computed by applying the U.S.
federal income tax rate of 34% to pretax income as a result of the increase in
the valuation allowance established to offset domestic deferred tax assets and
the Company's tax position in Spain. Total income tax expense was $781,000 (all
foreign) for the year ended December 31, 1999, which arose from current
operations of the Company's foreign subsidiaries. This amount differs from the
amount computed by applying the U.S. federal income tax rate of 34% to pretax
loss as a result of the change in the valuation allowance established to offset
domestic deferred tax assets and the Company's tax position in Spain. Total
income tax expense (benefit) was ($280,000) (domestic) and $516,000 (foreign)
for the year ended December 31, 1998. These amounts differ from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax loss as a
result of the increase in the valuation allowance established to offset domestic
deferred tax assets and the Company's tax position in Spain.
The valuation allowance (decreased) increased by approximately ($505,000),
$1,720,000 and $10,500,000 for each of the years ended December 31, 2000, 1999
and 1998, respectively.
NOTE 12--BUSINESS SEGMENT INFORMATION
The Company is a U.S.-based drug delivery company, specializing in the
development of products based upon innovative and proprietary drug delivery
systems. The Company also has a commercial presence in Europe. The Company's
Spanish subsidiaries, Laboratorios Belmac S.A. and Laboratorios Davur S.L.,
manufacture, market and distribute branded and generic pharmaceutical products
from Spain. In the U.S., the Company's activities consist primarily of limited
product research and development, corporate management, and administration.
Laboratorios Belmac derives its revenues from the sales of its own products as
well as from product manufacturing for others, within four primary therapeutic
categories of cardiovascular, gastrointestinal, neurological and infectious
diseases. Until December 1998, the Company's operations in the United States
included sales of disposable linen products. The Company discontinued such
activities in December 1998 in order to focus on acquisition and development of
permeation enhancement technology and potential product applications, in
addition to other corporate office functions, including management,
administration and raising of capital.
Set forth in the tables below is certain financial information with respect to
the Company's operating segments for the years ended December 31, 2000, 1999 and
1998. The operating segments use the same accounting policies as those described
in the summary of significant
F-25
accounting policies in Note 2.
(in thousands)
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
CORPORATE/
CONSOLIDATION/
SPAIN ELIMINATION CONSOLIDATED
----- ----------- ------------
Net sales $18,487 $130 $18,617
Interest income 16 331 347
Interest expense 205 234 439
Depreciation and amortization expense 235 345 580
Income (loss) before income taxes 2,603 (3,126) (523)
Income tax expense 222 - 222
Net income (loss) 2,381 (3,126) (745)
Fixed assets 3,959 180 4,139
Drug licenses 7,135 3,844 10,979
Total assets 19,896 8,981 28,877
Total liabilities 10,567 494 11,061
Expenditures for drug licenses/delivery
technology 5,518 42 5,560
Expenditures for fixed assets 957 57 1,014
(in thousands)
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
CORPORATE/
CONSOLIDATION/
SPAIN ELIMINATION CONSOLIDATED
----- ----------- ------------
Net sales $20,249 $ - $20,249
Interest income - 244 244
Interest expense 147 1,021 1,168
Depreciation and amortization expense 289 270 559
Income (loss) before income taxes 1,686 (1,995) (309)
Income tax expense 781 - 781
Net income (loss) 905 (1,995) (1,090)
Fixed assets 3,512 172 3,684
Drug licenses 1,709 4,098 5,807
Total assets 11,739 10,498 22,237
Total liabilities 4,499 6,164 10,663
Expenditures for drug licenses/delivery
technology 440 1,335 1,775
Expenditures for fixed assets 799 170 969
F-26
(in thousands)
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
CORPORATE/
CONSOLIDATION/
SPAIN ELIMINATION CONSOLIDATED
----- ----------- ------------
Net sales $15,148 $95 $15,243
Interest income - 499 499
Interest expense 105 971 1,076
Depreciation and amortization expense 250 53 303
Non-recurring charge - 1,176 1,176
Income (loss) before income taxes 1,410 (4,050) (2,640)
Income tax expense (benefit) 516 (280) 236
Net income (loss) 894 (3,770) (2,876)
Fixed assets 3,515 36 3,551
Drug licenses 2,433 - 2,433
Total assets 11,777 8,541 20,318
Total liabilities 7,809 3,517 11,326
Expenditures for drug licenses 141 1,418 1,559
Expenditures for fixed assets 548 11 559
Interest income and interest expense are based upon the actual results of each
operating segment's assets and borrowings. The consolidation/elimination column
includes the elimination of all inter-segment amounts as well as corporate
segment amounts. The principal component of the inter-segment amounts related to
inter-segment advances.
Revenues from one customer exceeded 10% of consolidated net sales during the
year ended December 31, 2000, accounting for 14% of 2000 consolidated net sales.
Revenues from two customers exceeded 10% of consolidated net sales during the
year ended December 31, 1999, each accounting for 13% of 1999 consolidated net
sales, and revenues from a single customer exceeded 10% of consolidated net
sales during the year ended December 31, 1998, accounting for 12% of 1998
consolidated net sales.
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company was awarded a judgment of approximately $2,130,000 during the year
ended December 31, 1998, relating to the Company's claims of civil theft and
breach of employment agreement filed against its former President and Chief
Executive Officer, Michael M. Harshbarger, in 1993. The judgment included treble
damages totaling $418,000 related to its civil theft claim and $1,712,000
related to its breach of employment agreement claim. In addition to establishing
a receivable on its books, the Company has established a reserve equal to the
receivable. Harshbarger filed a Motion for Relief From Judgment in September
1999, alleging among other things that he was not provided notice of the August
24, 1998 jury trial. Discovery is ongoing and a hearing is expected to be held
to determine the merits of
F-27
Harshbarger's claims. In the opinion of management, the outcome is expected to
have no adverse material effect on the consolidated financial position or
results of operations of the Company.
The Company is obligated to pay certain royalty payments upon commercialization
of products using technologies acquired in a transaction, which it consummated
during the year ended December 31, 1999 (see Note 6).
The Company has entered into various employment agreements with its executive
officers, which agreements provide for salaries, potential bonuses and other
benefits in exchange for services provided by the executive officers. The
employment agreements also provide for certain compensation in the event of
termination or change in control of the Company. Such agreements, which are
renewable, are scheduled to expire on various dates through December 31, 2003.
The Company leases certain equipment and facilities under noncancellable
operating leases, which expire through the year 2006. Total charges to
operations under operating leases were approximately $557,000, $442,000 and
$487,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum lease payments under operating leases are as follows (in
thousands):
YEAR ENDING DECEMBER 31,
--------------------------
2001 $647
2002 660
2003 685
2004 666
2005 and beyond 789
NOTE 14--COSTS OF ABANDONED ACQUISITIONS
During 1998, the Company negotiated to acquire a manufacturing facility in the
United States, along with a portfolio of products. The Company decided to
abandon this effort in May 1998 and, consequently, recorded a charge of
$1,176,000 (including $158,000 of non-cash items) in the second quarter of 1998,
representing costs of abandoned acquisitions. Of this amount, $448,000 was paid
during the year ended December 31, 1997.
NOTE 15--SUBSEQUENT EVENT
On January 22, 2001, the Company settled a legal dispute, by paying $140,000 to
Creative Technologies, Inc. and Creative Technologies, Inc. agreed to the
dismissal of the related suit with prejudice. Creative Technologies had asserted
that it was due a brokerage or finder's fee
F-28
with respect to the Company's 1999 acquisition of permeation enhancement
technology (see Note 6). The Company has included the accrual for the $140,000
charge in the Consolidated Balance Sheets as of December 31, 2000 and has
included the $140,000 charge and related legal costs of approximately $55,000 in
operating expenses in the Consolidated Statements of Operations for the year
ended December 31, 2000.
F-29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
North Hampton, New Hampshire
We have audited the consolidated financial statements of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2000
and 1999, and for each of the three years in the period ended December 31, 2000,
and have issued our report thereon dated March 16, 2001; such consolidated
financial statements and report are included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedule of the
Company listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2001
F-30
BENTLEY PHARMACEUTICALS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
------------------- ---------------- -------------------------- --------------- --------------
Additions
-------------------------
Balance at Charged to Charged to
beginning of costs and other accounts- Deductions- Balance at
Description period expenses describe (a) describe end of period
----------- ------ -------- ------------ -------- -------------
Accumulated amortization - drug
licenses and related costs:
For the year ended December 31, 2000 $995,000 $508,000 ($115,000) ($98,000)(b) $1,290,000
For the year ended December 31, 1999 711,000 516,000 (232,000) - 995,000
For the year ended December 31, 1998 528,000 138,000 45,000 - 711,000
Reserve for inventory obsolescence:
For the year ended December 31, 2000 $70,000 - ($5,000) ($4,000)(c) $61,000
For the year ended December 31, 1999 108,000 - (11,000) (27,000)(c) 70,000
For the year ended December 31, 1998 125,000 - 7,000 (24,000)(c) 108,000
Allowances for sales returns:
For the year ended December 31, 2000 - $56,000 - - $56,000
- -------------------
(a) Effect of exchange rate fluctuations.
(b) Represents sale of drug licenses.
(c) Represents disposition of inventory which has been fully reserved.
F-31
EXHIBIT INDEX
(3) Exhibits filed as part of this report:
Exhibit
Number Description
- -------- --------------------------------------------------------------
3.1 Articles of Incorporation of the Registrant, as amended and
restated. (Reference is made to Appendix B to the Registrant's
Definitive Proxy Statement for Annual Meeting of Stockholders
filed with the Securities and Exchange Commission on May 18,
1999, which exhibit is incorporated herein by reference.)
3.2 Bylaws of the Registrant, as amended and restated. (Reference
is made to Appendix C to the Registrant's Definitive Proxy
Statement for Annual Meeting of Stockholders filed with the
Securities and Exchange Commission on May 18, 1999, which
exhibit is incorporated herein by reference.)
3.3 Rights Agreement, dated as of December 22, 1999, between the
Registrant and American Stock Transfer and Trust Company, as
Rights Agent, including the form of Rights Certificate as
Exhibit B thereto. (Reference is made to Exhibit 4.1 to the
Registrant's Form 8-K, filed December 27, 1999 (date of
earliest event reported December 22, 1999), Commission File
No. 1-10581, which exhibit is incorporated herein by
reference.)
4.1 Registrant's Amended and Restated 1991 Stock Option Plan.
(Reference is made to Appendix D to the Registrant's
Definitive Proxy Statement for Annual Meeting of Stockholders
filed with the Securities and Exchange Commission on May 18,
1999, which exhibit is incorporated herein by reference.)
4.2 Form of Non-qualified Stock Option Agreement under the
Registrant's 1991 Stock Option Plan. (Reference is made to
Exhibit 4.25 to the Registrant's Form 10-K dated June 30,
1992, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
4.3 Form of Warrant Agreement, including form of Class A and Class
B Warrant. (Reference is made to Exhibit 4.29 to the
Registrant's Registration Statement on Form S-1, Commission
File No. 33-65125, which exhibit is incorporated herein by
reference.)
4.4 Form of Underwriter Warrant. (Reference is made to Exhibit
4.30 to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
47
Exhibit
Number Description
- -------- --------------------------------------------------------------
4.5 Registration Rights Agreement between the Registrant and
Yungtai Hsu ("Hsu"), dated February 11, 1999. (Reference is
made to exhibit 7.3 to the Registrant's Form 8-K filed
February 26, 1999, Commission File No. 1-10581, which exhibit
is incorporated herein by reference.)
4.6 Warrant issued by the Registrant for the benefit of Hsu, dated
February 11, 1999. (Reference is made to exhibit 7.4 to the
Registrant's Form 8-K filed February 26, 1999, Commission File
No. 1-10581, which exhibit is incorporated herein by
reference.)
4.7 Registration Rights Agreement between the Registrant and
Conrex Pharmaceutical Corporation ("Conrex"), dated February
11, 1999. (Reference is made to exhibit 7.6 to the
Registrant's Form 8-K filed February 26, 1999, Commission File
No. 1-10581, which exhibit is incorporated herein by
reference.)
10.1 Employment Agreement dated as of July 1, 1998 between the
Registrant and James R. Murphy. (Reference is made to exhibit
10.1 to the Registrant's Form 10-K dated December 31, 1998,
Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
10.2 Employment Agreement dated as of August 31, 1998 between the
Registrant and Robert M. Stote, M.D. (Reference is made to
Exhibit 10.2 to the Registrant's Form 10-K dated December 31,
1998, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
10.3 Employment Agreement dated as of July 1, 1998 between the
Registrant and Michael D. Price. (Reference is made to Exhibit
10.3 to the Registrant's Form 10-K dated December 31, 1998,
Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
10.4 Employment Agreement dated as of March 9, 1999 between the
Registrant and Robert J. Gyurik. (Reference is made to Exhibit
10.4 to the Registrant's Form 10-K dated December 31, 1999,
Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
10.5 Employment Agreement dated as of August 14, 2000 between the
Registrant and Jordan A. Horvath. (Reference is made to
Exhibit 10.1 to the Registrant's Form 10-Q dated September 30,
2000, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
10.6 Agreement between the Registrant and Hsu dated February 1,
1999, effective as of December 31, 1998. (Reference is made to
Exhibit 7.1 to the Registrant's Form 8-K filed February 26,
1999, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
48
Exhibit
Number Description
- -------- --------------------------------------------------------------
10.7 Agreement between the Registrant and Fabrica De Productos
Quimicos Y Farmaceuticos Abello, S.A. relating to the
Registrant's acquisition of the Codeisan Health Registration
in Spain, along with the related trademark, inventory and
production equipment. (Reference is made to Exhibit 10.2 to
the Registrant's Form 10-Q dated September 30, 2000,
Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
10.8 Purchase and Sale Agreement between Laboratorios Belmac, S.A.
and the Purchaser dated November 21, 2000 relating to the sale
of the registration rights and dossier of the product
Controlvas (in summary translation from Spanish)** (Reference
is made to Exhibit 2.1 to the Registrant's Form 8-K filed
March 2, 2001, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
10.9 Purchase and Sale Agreement between Laboratorios Belmac, S.A.
and the Purchaser dated November 21, 2000 relating to the sale
of the trademark to the product Controlvas (in summary
translation from Spanish).** (Reference is made to Exhibit 2.2
to the Registrant's Form 8-K filed March 2, 2001, Commission
File No. 1-10581, which exhibit is incorporated herein by
reference.)
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K filed during the fiscal quarter ended
December 31, 2000:
None.
Subsequent to December 31, 2000, the Registrant filed the
following Report on Form 8-K:
Report on Form 8-K filed March 2, 2001 whereby the Registrant
announced the sale of the trademark, registration rights and
dossier for its branded pharmaceutical product, Controlvas(R),
(generic name:enalapril) to a third party**. (Items 2 and 7).
- ---------------
* Filed herewith.
** Confidential Treatment has been requested with respect to the identity of the
Purchaser. The complete document has been submitted confidentially to the
Securities and Exchange Commission.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
By: /s/ James R. Murphy
-----------------------------------
James R. Murphy
Chairman, President and
Chief Executive Officer
Date: March 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James R. Murphy Chairman, President, March 27, 2001
- ------------------------------------ Chief Executive Officer
James R. Murphy and Director (principal
executive officer)
/s/Michael McGovern Vice Chairman and Director March 27, 2001
- ------------------------------------
Michael McGovern
/s/ Robert M. Stote Senior Vice President, March 27, 2001
- ------------------------------------ Chief Science Officer and
Robert M. Stote, M.D. Director
/s/ Michael D. Price Vice-President, March 27, 2001
- ------------------------------------ Chief Financial Officer,
Michael D. Price Treasurer, Secretary and
Director (principal
financial and accounting officer)
/s/Robert J. Gyurik Vice President of March 27, 2001
- ------------------------------------ Pharmaceutical Development
Robert J. Gyurik and Director
/s/Charles L. Bolling Director March 27, 2001
- ------------------------------------
Charles L. Bolling
/s/Russell Cleveland Director March 27, 2001
- ------------------------------------
Russell Cleveland
/s/Miguel Fernandez Director March 27, 2001
- ------------------------------------
Miguel Fernandez
/s/William A. Packer Director March 27, 2001
- -----------------------------
William A. Packer