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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (603) 964-8006
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
---- ----
The number of shares of the registrant's common stock outstanding as of November
4, 2002 was 17,403,022.
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 3
Consolidated Statements of Operations and of
Comprehensive Income for the three months ended
September 30, 2002 and 2001, and the nine months
ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 2002 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 4. Controls and Procedures 25
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) September 30, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,232 $ 5,736
Short-term investments 21,575 --
Receivables, net 9,790 6,937
Inventories, net 4,096 2,563
Deferred taxes 155 141
Prepaid expenses and other 704 462
--------- ---------
Total current assets 41,552 15,839
--------- ---------
Non-current assets:
Fixed assets, net 7,969 5,595
Drug licenses and related costs, net 10,731 10,276
Other 508 409
--------- ---------
Total non-current assets 19,208 16,280
--------- ---------
$ 60,760 $ 32,119
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,189 $ 4,820
Accrued expenses 4,227 2,490
Short-term borrowings 881 1,757
Current portion of long-term debt 191 --
Deferred income 229 496
--------- ---------
Total current liabilities 11,717 9,563
--------- ---------
Non-current liabilities:
Taxes payable 1,995 1,827
Long-term debt 230 142
Other 164 163
--------- ---------
Total non-current liabilities 2,389 2,132
--------- ---------
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, 17,403 and 14,585 shares 348 292
Stock purchase warrants (to purchase 3,292 and 3,424
shares of common stock) 431 433
Additional paid-in capital 121,069 97,501
Accumulated deficit (73,387) (74,332)
Accumulated other comprehensive loss (1,807) (3,470)
--------- ---------
Total stockholders' equity 46,654 20,424
--------- ---------
$ 60,760 $ 32,119
========= =========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-3-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE INCOME
(in thousands, except per share data) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Net product sales $ 8,561 $ 6,316 $ 27,942 $ 18,255
Research and development collaborations 103 -- 278 --
-------- -------- -------- --------
Total revenues 8,664 6,316 28,220 18,255
Cost of net product sales 3,672 2,708 12,212 7,844
-------- -------- -------- --------
Gross profit 4,992 3,608 16,008 10,411
-------- -------- -------- --------
Operating expenses:
Selling and marketing 2,353 2,030 7,571 6,472
General and administrative 1,072 880 3,481 2,743
Research and development 625 468 1,972 1,352
Depreciation and amortization 250 223 734 670
-------- -------- -------- --------
Total operating expenses 4,300 3,601 13,758 11,237
-------- -------- -------- --------
Gain on sale of drug licenses -- 113 592 5,090
-------- -------- -------- --------
Income from operations 692 120 2,842 4,264
-------- -------- -------- --------
Other income (expenses):
Interest income 101 30 194 121
Interest expense (48) (61) (158) (184)
Other 14 7 18 21
-------- -------- -------- --------
Income before income taxes 759 96 2,896 4,222
Provision for foreign income taxes 468 245 1,951 2,298
-------- -------- -------- --------
Net income (loss) $ 291 $ (149) $ 945 $ 1,924
======== ======== ======== ========
Net income (loss) per common share:
Basic $ 0.02 $ (0.01) $ 0.06 $ 0.14
======== ======== ======== ========
Diluted $ 0.01 $ (0.01) $ 0.05 $ 0.12
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 17,377 14,308 16,288 14,064
======== ======== ======== ========
Diluted 20,706 14,308 19,677 15,594
======== ======== ======== ========
Net income (loss) $ 291 $ (149) $ 945 $ 1,924
Other comprehensive income (loss):
Foreign currency translation gains (losses) (183) 978 1,663 (501)
-------- -------- -------- --------
Comprehensive income $ 108 $ 829 $ 2,608 $ 1,423
======== ======== ======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-4-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
$.02 Par Value
Common Stock Stock Additional Other
------------ Purchase Paid-in Accumulated Comprehensive
Shares Amount Warrants Capital Deficit Loss Total
------ ------ -------- --------- ------------ ------------ --------
Balance at December 31, 2001 14,585 $ 292 $ 433 $ 97,501 $(74,332) $ (3,470) $ 20,424
Offering of common stock, net 2,500 50 -- 22,058 -- -- 22,108
Exercise of stock options/warrants 304 6 (2) 1,368 -- -- 1,372
Equity based compensation 14 -- -- 142 -- -- 142
Foreign currency translation
adjustments, net -- -- -- -- -- 1,663 1,663
Net income -- -- -- -- 945 -- 945
------ -------- -------- -------- -------- -------- --------
Balance at September 30, 2002 17,403 $ 348 $ 431 $121,069 $(73,387) $ (1,807) $ 46,654
====== ======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-5-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
---------------------------------------
(in thousands) 2002 2001
---- ----
Cash flows from operating activities:
Net income $ 945 $ 1,924
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Gain on sale of drug licenses (592) (5,090)
Depreciation and amortization 734 670
Equity-based compensation expense 142 226
Other non-cash items 1,383 379
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (1,601) (831)
Inventories (1,152) (741)
Prepaid expenses and other current assets (303) (227)
Other assets (103) (10)
Accounts payable and accrued expenses 920 768
Deferred income (267) 1,625
Other liabilities -- (71)
-------- --------
Net cash provided by (used in) operating activities 106 (1,378)
-------- --------
Cash flows from investing activities:
Proceeds from sale of drug licenses 598 2,695
Proceeds from sale of investments 27,690 23,295
Purchase of investments (49,240) (23,226)
Additions to fixed assets (2,221) (1,196)
Additions to drug licenses and related costs, net (406) (416)
-------- --------
Net cash (used in) provided by investing activities (23,579) 1,152
-------- --------
(Continued on following page)
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-6-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
For the Nine Months Ended September 30,
---------------------------------------
(in thousands) 2002 2001
---- ----
Cash flows from financing activities:
Proceeds from offering of common stock, net $ 22,108 $ --
Proceeds from exercise of stock options/warrants 1,374 1,827
Repayment of borrowings (2,804) (3,447)
Proceeds from borrowings 2,184 1,784
-------- --------
Net cash provided by financing activities 22,862 164
-------- --------
Effect of exchange rate changes on cash 107 (65)
-------- --------
Net decrease in cash and cash equivalents (504) (127)
Cash and cash equivalents at beginning of period 5,736 4,816
-------- --------
Cash and cash equivalents at end of period $ 5,232 $ 4,689
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the period for (in thousands):
Interest $ 152 $ 185
======== ========
Income taxes $ 1,049 $ 88
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES
The Company has issued Common Stock in exchange for services as follows
(in thousands):
Shares 14 39
======== ========
Amount $ 142 $ 226
======== ========
Fixed asset and drug license purchases included in accounts payable $ 852 $ 372
======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-7-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries is a U.S.-based
international specialty pharmaceutical company focused on advanced drug delivery
technologies and pharmaceutical products. We own U.S. and international patent
and other proprietary rights to technologies that enhance or facilitate the
absorption of drugs across biological membranes. We are developing products
incorporating these technologies and seek to form strategic alliances with other
pharmaceutical and biotechnology companies to facilitate the development and
commercialization of our products. We currently have strategic alliances with
Pfizer Inc and Auxilium Pharmaceuticals, Inc. and are in preliminary discussions
with a number of pharmaceutical companies to form additional alliances. Bentley
Pharmaceuticals is incorporated in the State of Delaware.
We also have a commercial presence in Spain, where we manufacture and
market branded and generic pharmaceutical products primarily within four
therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious
diseases.
We anticipated the opportunities that the emerging generic drug market
in Spain presented and began taking measures over three years ago to enter the
Spanish generic drug market. We created Laboratorios Davur, a wholly-owned
subsidiary of our Spanish entity, Laboratorios Belmac, to register, market and
distribute generic pharmaceutical products in Spain and began aligning our
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 our Spanish generic subsidiary as a leader in the Spanish generic drug
market. In July 2000, we entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd. ("Teva"), whereby we have received the right to
register and market in Spain more than 75 of Teva's products. Teva also entered
into a supply agreement with us pursuant to which Teva will manufacture the
products and supply them to us for marketing and sale in Spain. Teva was also
granted a right of first refusal to acquire Laboratorios Davur in the event that
we decide to sell that subsidiary or its direct parent, Laboratorios Belmac. We
also granted Teva the right to bid for Laboratorios Belmac in the event we
decide to sell that subsidiary.
-8-
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of Bentley Pharmaceuticals, at
September 30, 2002 and 2001 included herein, have been prepared by us, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with Accounting Principles Generally
Accepted in the United States of America have been condensed or omitted in so
far as such information was disclosed in our consolidated financial statements
for the year ended December 31, 2001. These consolidated financial statements
should be read in conjunction with the summary of significant accounting
policies and the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of management, the accompanying unaudited consolidated
financial statements for the period ended September 30, 2002 and 2001 are
presented on a basis consistent with the audited consolidated financial
statements for the year ended December 31, 2001 and contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
Bentley's financial position as of September 30, 2002 and the results of our
operations and our cash flows for the nine months ended September 30, 2002 and
2001. The results of operations for the nine months ended September 30, 2002
should not necessarily be considered indicative of the results to be expected
for the year.
CASH AND CASH EQUIVALENTS:
Included in cash and cash equivalents at September 30, 2002 and
December 31, 2001 are approximately $3,091,000 and $4,560,000, respectively, of
short-term investments considered to be cash equivalents, as the original
maturity dates of such investments were three months or less when purchased.
SHORT-TERM INVESTMENTS:
We have classified our marketable securities as "available-for-sale"
and, accordingly, carry such securities at aggregate fair value. Fair value has
been determined based on quoted market prices. Marketable securities at
September 30, 2002 consist of approximately $11,575,000 in Federal Home Loan
Mortgage Corporation Notes and approximately $10,000,000 in FNMA Discount Notes
that mature within 30 days.
-9-
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being
determined on the first in, first out ("FIFO") method, and are comprised of the
following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 2,576 $ 1,387
Finished goods 1,578 1,230
------- ------
4,154 2,617
Less allowance for slow moving inventory (58) (54)
------- ------
$ 4,096 $ 2,563
======= ======
FIXED ASSETS:
Fixed assets consist of the following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Land $ 871 $ 790
Buildings and improvements 5,530 3,008
Equipment 3,462 3,168
Furniture and fixtures 860 610
Leasehold improvements 52 44
------- ------
10,775 7,702
Less-accumulated depreciation (2,806) (2,107)
------- ------
$ 7,969 $ 5,595
======= ======
Depreciation expense of approximately $80,000 and $28,000 has been
charged to operations as a component of Depreciation and amortization expense on
the Consolidated Statements of Operations for the three months ended September
30, 2002 and 2001, respectively. We have included depreciation totaling
approximately $148,000 and $79,000 in Cost of net product sales during the three
months ended September 30, 2002 and 2001, respectively.
Depreciation expense of approximately $194,000 and $85,000 has been
charged to operations as a component of Depreciation and amortization expense on
the Consolidated Statements of Operations for the nine months ended September
30, 2002 and 2001, respectively. We have included depreciation totaling
approximately $399,000 and $222,000 in Cost of net product sales during the nine
months ended September 30, 2002 and 2001, respectively.
-10-
STOCKHOLDERS' EQUITY:
On April 17, 2002, we completed an equity offering of 2,500,000 shares
of our Common Stock at $9.80 per share, and received net proceeds of
approximately $22,108,000, after deducting offering costs.
On October 14, 2002, our Board of Directors extended the expiration
date of our Class B warrants from December 31, 2002 to December 31, 2003. Two
Class B warrants, together, entitle the holder to purchase one share of our
Common Stock at a price of $5.00 per share.
During the nine months ended September 30, 2002, stock options to
purchase approximately 172,000 shares of our Common Stock were exercised,
generating net proceeds to us of approximately $714,000. Also, during this
nine-month period, approximately 264,000 Class B Warrants were exercised to
acquire approximately 132,000 shares of our Common Stock, generating net
proceeds to us of approximately $660,000.
A substantial amount of our 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. The exchange
rate at September 30, 2002 and December 31, 2001 was 1.02 Euros and 1.12 Euros
per U.S. dollar, respectively. Coincidentally, the weighted average exchange
rate for the three months ended September 30, 2002 and 2001 was 1.02 Euros and
1.12 Euros per U.S. dollar, respectively. The weighted average exchange rate for
the nine months ended September 30, 2002 and 2001 was 1.08 Euros and 1.12 Euros
per U.S. dollar, respectively. The effect of foreign currency fluctuations on
net assets for the nine months ended September 30, 2002 was an increase of
$1,663,000. The cumulative historical effect of foreign currency fluctuations on
net assets as of September 30, 2002 is a decrease of $1,807,000, as reflected in
our Consolidated Balance Sheets as Accumulated other comprehensive loss.
SALE OF BIOLID(R):
In February 2002, we agreed to sell the trademark, registration rights
and dossier for our pharmaceutical product, Biolid(R), to a third party for
601,000 Euros (approximately $526,000). We received a deposit of 303,000 Euros
(approximately $265,000) from the purchaser in February 2002, which was
reflected as Deferred income in the Consolidated Balance Sheet as of March 31,
2002. We received the balance of 298,000 Euros (approximately $261,000) upon
approval of the transfer of the rights to the purchaser by the Spanish Ministry
of Health during the quarter ended June 30, 2002, which resulted in a second
quarter pre-tax gain of approximately $520,000.
-11-
SALE OF LACTOLIOFIL(R):
In November 2001, we agreed to sell the trademark, registration rights
and dossier for our pharmaceutical product, Lactoliofil(R), to a third party for
162,000 Euros (approximately $145,000). We received a deposit of 81,000 Euros
(approximately $72,500) from the purchaser in November 2001, which was reflected
as Deferred income in the Consolidated Balance Sheet as of December 31, 2001. We
received a second payment of 81,000 Euros (approximately $72,500) upon approval
of the transfer of the rights to the purchaser by the Spanish Ministry of
Health, which occurred during the quarter ended March 31, 2002. As a result, we
recognized a pre-tax gain on this sale of approximately $72,000 during the first
quarter of 2002.
PROVISION FOR INCOME TAXES:
We recorded a provision for foreign income taxes totaling $468,000 and
$1,951,000 for the three and nine months ended September 30, 2002, respectively,
as a result of reporting taxable income for tax purposes in Spain, including the
capital gains tax arising from the sale of Lactoliofil(R) and Biolid(R) drug
licenses. These amounts represent 34% and 39%, respectively, of pre-tax income
reported in Spain. No benefit has been recorded for U.S. losses, which totaled
$988,000 and $3,191,000 for the three and nine months ended September 30, 2002,
respectively. The provision for income taxes differs from the amount computed by
applying the U.S. federal income tax rate of 34% to pretax income primarily as a
result of the increase in the valuation allowance to offset domestic deferred
tax assets and certain nondeductible expenses in Spain.
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Basic and diluted net income (loss) per common share is based on the
weighted average number of shares of common stock outstanding during each
period. The effect of our outstanding stock options and stock purchase warrants
were considered in the diluted income per share calculations for the three and
nine months ended September 30, 2002 and 2001.
The following is a reconciliation between basic and diluted net income
per common share for the three months ended September 30, 2002 and the nine
months ended September 30, 2002 and 2001. Dilutive securities issuable for the
three and nine months ended September 30, 2002 include approximately 1,351,000
and 1,375,000 shares issuable as a result of Class B Warrants, respectively, and
approximately 1,978,000 and 2,014,000 shares issuable as a result of various
stock options and other warrants that are outstanding, respectively. Dilutive
securities issuable for the nine months ended September 30, 2001 include
approximately 439,000 shares issuable as a result of Class B Warrants and
approximately 1,091,000 shares issuable as a result of various stock options and
other warrants that are outstanding.
(in thousands, except per share data)
For the Three Months Ended September 30, 2002:
Effect of
Basic Dilutive Diluted
EPS Securities EPS
----- ---------- -------
Net Income $ 291 -- $ 291
Number of Common Shares 17,377 3,329 20,706
Net Income Per Common Share $ .02 $ (.01) $ .01
-12-
For the Nine Months Ended September 30, 2002:
Effect of
Basic Dilutive Diluted
EPS Securities EPS
----- ---------- -------
Net Income $ 945 -- $ 945
Number of Common Shares 16,288 3,389 19,677
Net Income Per Common Share $ .06 $ (.01) $ .05
For the Nine Months Ended September 30, 2001:
Effect of
Basic Dilutive Diluted
EPS Securities EPS
----- ---------- -------
Net Income $ 1,924 -- $ 1,924
Number of Common Shares 14,064 1,530 15,594
Net Income Per Common Share $ .14 $ (.02) $ .12
SUBSEQUENT EVENT:
On November 1, 2002, Bentley reported that the FDA approved the use of
Auxilium Pharmaceuticals, Inc.'s testosterone replacement gel, Testim, which
contains Bentley's patented CPE-215 drug delivery technology.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the
current period's presentation. Such reclassifications are not material to the
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 supersedes APB No. 16, Business Combinations, and SFAS No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for by a single method -
the purchase method. SFAS No. 141 also provides guidance on the recognition of
intangible assets identified in a business combination and requires enhanced
financial statement disclosures. SFAS No. 142 adopts a more aggregate view of
goodwill and bases the accounting for goodwill on the units of the combined
entity into which an acquired entity is integrated. In addition, SFAS No. 142
concludes that goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 is
required for fiscal years
-13-
beginning after December 15, 2001 (the year 2002 for Bentley), except for the
non-amortization and amortization provisions which are required for goodwill and
intangible assets acquired after June 30, 2001. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a material impact on our financial position, results
of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144 supersedes previous guidelines for financial accounting and reporting for
the impairment or disposal of long-lived assets and for segments of a business
to be disposed of. The adoption of SFAS No. 144, on January 1, 2002, did not
have a material impact on our financial position, results of operations or cash
flows.
-14-
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our significant accounting policies are more fully described in Note 2
to our consolidated financial statements in our Annual Report of Form 10-K for
the year ended December 31, 2001. However, certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of operations and require the application of significant judgment by our
management; as a result they are subject to an inherent degree of uncertainty.
In applying those policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources, as appropriate.
Our significant accounting policies include:
o Inventories. Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow
moving and obsolete inventories are provided based on historical experience
and current product demand. We evaluate the adequacy of these reserves
quarterly.
o Revenue recognition and accounts receivable. Revenue on product sales is
recognized when persuasive evidence of an arrangement exists, the price is
fixed and final delivery has occurred and there is a reasonable assurance
of collection of the sales proceeds. We generally obtain purchase
authorizations from our customers for a specified amount of product at a
specified price and consider delivery to have occurred when the risk of
ownership has transferred to the customer. We provide our customers with a
limited right of return. Revenue is generally recognized at shipment and a
reserve for sales returns is recorded. We have demonstrated the ability to
make reasonable and reliable estimates of product returns in accordance
with SFAS No. 48 and of allowances for doubtful accounts based on
significant historical experience. Revenue from service sales is recognized
when the service procedures have been completed or applicable milestones
have been achieved. Revenue from research and development contracts is
recognized over applicable contractual periods or as defined milestones are
attained, as specified by each contract and as costs related to the
contracts are incurred.
o Foreign currency translation. The financial position and results of
operations of our 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 other comprehensive income (loss).
Foreign currency translation gains and losses arising from cash
transactions are credited to or charged against current earnings.
-15-
o Drug licenses and related costs. Drug licenses and related costs incurred
in connection with acquiring licenses, patents and other proprietary rights
related to our 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 quarterly and are adjusted for any diminution in
value.
RESULTS OF OPERATIONS:
- ----------------------
THREE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS THREE MONTHS
ENDED SEPTEMBER 30, 2001
- ---------------------------------------------------------
Net Product Sales. Net product sales increased by 36% from $6,316,000
in the three months ended September 30, 2001 to $8,561,000 in the three months
ended September 30, 2002. The $2,245,000 increase was primarily the result of
our continuing efforts to increase sales in the generic drug market in Spain. We
anticipated the opportunities in the emerging generic drug market in Spain and
began taking measures over three years ago to enter the Spanish generic drug
market. We began to register, manufacture and market generic pharmaceutical
products in Spain and began aligning our business model to be competitive in
this arena, including hiring and training a new generic products sales force,
submission of generic-equivalent products to the Spanish Ministry of Health for
approval and a marketing campaign designed to position ourselves as a leader in
the Spanish generic drug market. We experienced an increase in net sales of 23%
in local currency in Spain in the third quarter of 2002 compared to the same
quarter of the prior year. A 10% increase in the weighted average value of the
Euro, in relation to the U.S. Dollar, over the past 12 months, had the effect of
increasing revenues by approximately $777,000 during the quarter ended September
30, 2002.
Research and Development Collaboration Revenues. Research and
development collaboration revenues totaled $103,000 in the three months ended
September 30, 2002. We entered into a research collaboration whereby our
collaborator agreed to fund a research and development program to combine
Bentley's patented CPE-215 drug delivery technologies with certain proprietary
compounds. Our collaborator advanced to us $250,000 during the fourth quarter of
2001, which we recorded as Deferred income as of December 31, 2001, and we are
recognizing it as revenue when the related costs are incurred. We have
recognized $227,000 of this revenue through September 30, 2002. The remaining
$23,000 is reflected on the Consolidated Balance Sheet as Deferred income as of
September 30, 2002. We also recognized revenues totaling $50,000 during the
quarter ended September 30, 2002, related to a product license agreement with
Auxilium Pharmaceuticals, Inc., which we have included in the Consolidated
Statement of Operations as Research and development collaboration revenues.
Gross Profit. Gross profit increased by 38% from $3,608,000 in the
three months ended September 30, 2001 to $4,992,000 in the three months ended
September 30, 2002. The $1,384,000 increase was the direct result of the growth
in our net product sales during the period. Our gross margins on net product
sales for the third quarter of 2002 remained constant at 57% compared to the
same quarter of the prior year. We experienced an increase in gross profit of
27% in local currency in Spain in the third quarter of 2002 compared to the same
quarter of
-16-
the prior year. An increase in the weighted average value of the Euro, in
relation to the U.S. Dollar over the past 12 months, had the effect of
increasing gross profit by approximately $415,000 during the quarter ended
September 30, 2002. Sales of generic products accounted for approximately 42% of
our net product sales during the quarter ended September 30, 2002, compared to
35% in the third quarter of the prior year. Although we expect to continue to
benefit from economies of scale in the future as we grow, gross margins may
decrease as sales of generic products, with lower margins, become more
significant in the future. Additionally, the Ministry of Health in Spain levies
a tax on pharmaceutical companies for the purposes of funding rising healthcare
costs in Spain. In the third quarter of 2002, this tax had the effect of
reducing gross profit by approximately $118,000 and gross margins by
approximately 1 percentage point.
Selling and Marketing Expenses. Selling and marketing expenses
increased by 16% from $2,030,000 in the third quarter of 2001 to $2,353,000 in
the third quarter of 2002. The $323,000 increase was instrumental in achieving a
36% increase in net product sales during the quarter, as a result of our
successful sales and marketing programs. More than two-thirds of this $323,000
increase was the result of the increase in the weighted average value of the
Euro, in relation to the U.S. Dollar, over the past 12 months, which had the
effect of increasing selling and marketing expenses by $221,000 in the third
quarter of 2002. Selling and marketing expenses as a percentage of net product
sales decreased to only 28% in the third quarter of 2002, compared to 32% of
sales in the third quarter of 2001.
General and Administrative Expenses. General and administrative
expenses increased by 22% from $880,000 in the third quarter of 2001 to
$1,072,000 in the third quarter of 2002. The $192,000 increase was the result of
increased general and administrative activities required to support our revenue
growth in the third quarter of 2002. General and administrative expenses as a
percent of total revenues decreased to only 12% in the third quarter of 2002
compared to 14% of revenues in the third quarter of 2001. General and
administrative expenses would have been approximately $82,000 lower in the third
quarter of 2002, absent the increase in the weighted average value of the Euro,
in relation to the U.S. Dollar, over the past 12 months.
Research and Development Expenses. Research and development expenses
increased by 34% from $468,000 in the third quarter of 2001 to $625,000 in the
third quarter of 2002. The $157,000 increase was the result of an increase in
our costs associated with our research and development collaboration as well as
our Phase I/II Clinical Studies (treatment of nail fungal infections),
pre-clinical programs underway in collaboration with universities and with
product formulation and testing efforts being performed in the laboratory in our
U.S. headquarters and at our facility in Zaragoza, Spain. We are using our U.S.
laboratory to develop potential product applications using our drug delivery
technologies. The expenditures in research and development reflect our focus on
projects that are necessary for expansion of our portfolio of marketed products
and clinical trials involving our drug delivery technologies. We expect that our
future expenditures for research and development activities will continue to
increase as a result of programs that are necessary to advance new applications
of our technologies.
-17-
Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in the third quarter of 2002. However, since we
are not assured of future profitable domestic operations, we have recorded a
valuation allowance for any future tax benefit of such losses in the U.S.
Therefore, no benefit has been recognized with respect to U.S. losses reported
in the third quarter of 2002. We recorded a provision for foreign income taxes
totaling $468,000 (34% of Spanish pre-tax income) for the third quarter of 2002
compared to a provision for foreign income taxes of $245,000 in the third
quarter of the prior year. The provision for foreign income taxes would have
been approximately $44,000 lower than reported, absent the increase in the
weighted average value of the Euro, in relation to the U.S. Dollar, over the
past 12 months.
Net Income. We reported income from operations of $692,000 for the
third quarter of 2002 compared to income from operations of $120,000 in the
third quarter of the prior year. The combination of income from operations of
$692,000 and the non-operating items, primarily the provision for foreign income
taxes of $468,000, resulted in net income of $291,000, or $.02 per basic common
share ($.01 per diluted common share) on 17,377,000 weighted average basic
common shares outstanding (20,706,000 weighted average diluted common shares
outstanding) for the third quarter of 2002, compared to a net loss in the third
quarter of the prior year of $149,000, or $.01 per basic and diluted common
share on 14,308,000 weighted average basic and diluted common shares
outstanding.
Nine Months Ended September 30, 2002 versus Nine Months Ended September 30, 2001
Net Product Sales. Net product sales increased by 53% from $18,255,000
in the nine months ended September 30, 2001 to $27,942,000 in the nine months
ended September 30, 2002. The $9,687,000 increase was primarily the result of
our continuing efforts to increase sales in the generic drug market in Spain. We
anticipated the opportunities in the emerging generic drug market in Spain and
began taking measures over three years ago to enter the Spanish generic drug
market. We began to register, manufacture and market generic pharmaceutical
products in Spain and began aligning our business model to be competitive in
this arena, including hiring and training a new generic products sales force,
submission of generic-equivalent products to the Spanish Ministry of Health for
approval and a marketing campaign designed to position ourselves as a leader in
the Spanish generic drug market. We experienced an increase in net sales of 48%
in local currency in Spain in the nine months ended September 30, 2002 compared
to the same period of the prior year. An increase in the weighted average value
of the Euro, in relation to the U.S. Dollar, over the past 12 months, had the
effect of increasing revenues by approximately $941,000 during the nine months
ended September 30, 2002.
Research and Development Collaboration Revenues. Research and
development collaboration revenues totaled $278,000 in the nine months ended
September 30, 2002. We entered into a research collaboration whereby our
collaborator agreed to fund a research and development program to combine
Bentley's patented CPE-215 drug delivery technologies with certain proprietary
compounds. Our collaborator advanced to us $250,000 during the fourth quarter of
2001, which we recorded as Deferred income as of December 31, 2001, and we are
recognizing it as revenue when the related costs are incurred. We also
recognized revenues totaling $50,000 during the quarter ended September 30,
2002, related to a product license agreement with Auxilium Pharmaceuticals,
Inc., which we have included in the Consolidated Statement of Operations as
Research and development collaboration revenues.
-18-
Gross Profit. Gross profit increased by 54% from $10,411,000 in the
nine months ended September 30, 2001 to $16,008,000 in the nine months ended
September 30, 2002. The $5,597,000 increase was the direct result of the growth
in our net product sales during the period. Our gross margins on net product
sales for the first nine months of 2002 decreased slightly to 56% compared to
57% in the same period of the prior year. We experienced an increase in gross
profit of 49% in local currency in Spain in the nine months ended September 30,
2002 compared to the same period of the prior year. An increase in the weighted
average value of the Euro, in relation to the U.S. Dollar over the past 12
months, had the effect of increasing gross profit by approximately $503,000
during the nine months ended September 30, 2002. Sales of generic products
accounted for approximately 42% of our net product sales during the nine months
ended September 30, 2002, compared to 27% in the same period of the prior year.
Although we expect to continue to benefit from economies of scale in the future
as we grow, gross margins may decrease as sales of generic products, with lower
margins, become more significant in the future. Additionally, the Ministry of
Health in Spain levies a tax on pharmaceutical companies for the purposes of
funding rising healthcare costs in Spain. In the first nine months of 2002, this
tax had the effect of reducing gross profit by approximately $387,000 and gross
margins by approximately 1 percentage point.
Selling and Marketing Expenses. Selling and marketing expenses
increased by 17% from $6,472,000 in the first nine months of 2001 to $7,571,000
in the first nine months of 2002. The $1,099,000 increase was instrumental in
achieving a 53% increase in net product sales during the period, as a result of
our successful sales and marketing programs. The increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, over the past 12
months had the effect of increasing selling and marketing expenses by $252,000
in the nine months ended September 30, 2002. Selling and marketing expenses as a
percentage of net product sales decreased to 27% in the first nine months of
2002 compared to 35% of sales in the first nine months of 2001.
General and Administrative Expenses. General and administrative
expenses increased by 27% from $2,743,000 in the first nine months of 2001 to
$3,481,000 in the first nine months of 2002. The $738,000 increase was the
result of increased general and administrative activities required to support
our revenue growth in the first nine months of 2002. General and administrative
expenses as a percent of total revenues decreased to only 12% in the first nine
months of 2002, compared to 15% of revenues in the first nine months of 2001.
General and administrative expenses would have been approximately $102,000 lower
in the nine months ended September 30, 2002, absent the increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, over the past 12
months.
Research and Development Expenses. Research and development expenses
increased by 46% from $1,352,000 in the first nine months of 2001 to $1,972,000
in the first nine months of 2002. The $620,000 increase was the result of an
increase in our costs associated with our research and development collaboration
as well as our Phase I/II Clinical Studies (treatment of nail fungal
-19-
infections), pre-clinical programs underway in collaboration with universities
and with product formulation and testing efforts being performed in the
laboratory in our U.S. headquarters and at our facility in Zaragoza, Spain. We
are using our U.S. laboratory to develop potential product applications using
our drug delivery technologies. The expenditures in research and development
reflect our focus on projects that are necessary for expansion of our portfolio
of marketed products and clinical trials involving our drug delivery
technologies. We expect that our future expenditures for research and
development activities will continue to increase as a result of programs that
are necessary to advance new applications of our technologies.
Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in the first nine months of 2002. However, since
we are not assured of future profitable domestic operations, we have recorded a
valuation allowance for any future tax benefit of such losses in the U.S.
Therefore, no benefit has been recognized with respect to U.S. losses reported
in the first nine months of 2002. We recorded a provision for foreign income
taxes totaling $1,951,000 (39% of Spanish pre-tax income) for the first nine
months of 2002 compared to a provision for foreign income taxes of $2,298,000 in
the same period of the prior year. The provision for income taxes for the nine
months ended September 30, 2002 included approximately $1,741,000 as a result of
reporting taxable income from operations in Spain and approximately $210,000 as
a result of capital gains taxes arising from the sale of Biolid(R) and
Lactoliofil(R) drug licenses, whereas the provision for income taxes in the
first nine months of the prior year included approximately $437,000 as a result
of reporting taxable income from operations in Spain and approximately
$1,861,000 as a result of capital gains taxes arising from the sale of drug
licenses. The provision for foreign income taxes would have been approximately
$77,000 lower than reported, absent the increase in the weighted average value
of the Euro, in relation to the U.S. Dollar, over the past 12 months.
Net Income. Including the $592,000 pre-tax gain on sale of the
Biolid(R) and Lactoliofil(R) drug licenses, we reported income from operations
of $2,842,000 for the first nine months of 2002 compared to income from
operations of $4,264,000 (including $4,977,000 of pre-tax gain on sale of the
Controlvas(R) drug license) in the first nine months of the prior year.
Excluding the $592,000 pre-tax gain from the sale of the Biolid(R) and
Lactoliofil(R) drug licenses, the income from operations for the nine months
ended September 30, 2002 totaled $2,250,000. The combination of income from
operations of $2,842,000 and the non-operating items, primarily the provision
for foreign income taxes of $1,951,000, resulted in net income of $945,000, or
$.06 per basic common share ($.05 per diluted common share) on 16,288,000
weighted average basic common shares outstanding (19,677,000 weighted average
diluted common shares outstanding) for the first nine months of 2002, compared
to net income in the first nine months of the prior year of $1,924,000, or $.14
per basic common share ($.12 per diluted common share) on 14,064,000 weighted
average basic common shares outstanding (15,594,000 weighted average diluted
common shares outstanding).
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Total assets increased from $32,119,000 at December 31, 2001 to
$60,760,000 at September 30, 2002, while Stockholders' Equity increased from
$20,424,000 at December 31, 2001 to $46,654,000 at September 30, 2002. The
increase in Stockholders' Equity primarily reflects the net proceeds of
$22,108,000 from the April 2002 common stock offering, the exercise
-20-
of stock options and warrants totaling $1,374,000, the positive impact of the
fluctuation of the Euro/US dollar exchange rate which totaled $1,663,000 and
year to date net income of $945,000.
Working capital increased from $6,276,000 at December 31, 2001 to
$29,835,000 at September 30, 2002, primarily as a result of proceeds from the
April 2002 common stock offering and exercises of stock options and warrants,
partially offset by additions to fixed assets.
Cash, cash equivalents and short-term investments increased from
$5,736,000 at December 31, 2001 to $26,807,000 at September 30, 2002, primarily
as a result of net proceeds received from the April 2002 common stock offering,
the net proceeds of which totaled $22,108,000, proceeds received from exercises
of stock options and warrants totaling $1,374,000 and cash provided by operating
activities of $106,000, partially offset by repayment of borrowings of $620,000
and additions to fixed assets totaling $2,221,000. Included in cash and cash
equivalents at September 30, 2002 are approximately $3,091,000 of short-term
investments considered to be cash equivalents.
Receivables increased from $6,937,000 at December 31, 2001 to
$9,790,000 at September 30, 2002 as a direct result of the increase in net
product sales. Receivables increased by approximately $1,925,000 in local
currency, but fluctuations in foreign currency exchange rates increased
receivables reported in U.S. dollars by approximately $2,833,000. We have not
experienced any delinquent accounts on our receivables that have had a material
effect on our financial position, results of operations or cash flows.
Inventories increased from $2,563,000 at December 31, 2001 to $4,096,000 at
September 30, 2002 as a result of raw materials purchases and strategic
increases in finished goods inventories in anticipation of continuing demand for
our generic products. Inventories increased by approximately $1,153,000 in local
currency, but fluctuations in foreign currency exchange rates increased
inventories reported in U.S. dollars by approximately $1,533,000.
The combined total of accounts payable and accrued expenses increased
from $7,310,000 at December 31, 2001 to $10,416,000 at September 30, 2002,
primarily due to accruals for taxes payable (approximately $1,366,000), as well
as for inventory purchases (approximately $289,000), additions to drug licenses
(approximately $38,000) and reserves for potential sales returns (approximately
$21,000), as well as by the effect of fluctuations in foreign currency exchange
rates (approximately $958,000), partially offset by a decrease in the accrual
for additions to fixed assets of $235,000.
Short-term borrowings and current portion of long-term debt decreased
from $1,757,000 at December 31, 2001 to $1,072,000 at September 30, 2002, as a
result of net repayment of short-term borrowings partially offset by the effect
of fluctuations in foreign currency exchange rates. The weighted average
interest rate on our short-term borrowings and current portion of long-term debt
is 5.0%.
Long-term debt, which totaled $142,000 at December 31, 2001, increased
to $230,000 during the nine months ended September 30, 2002 as a result of
long-term equipment financing. The weighted average interest rate (including
imputed interest) on our long-term debt is 5.4%.
-21-
Operating activities for the nine months ended September 30, 2002
provided net cash of $106,000. Investing activities, primarily the purchase of
short-term investments using the proceeds received from the April 2002 offering
of common stock, as well as additions to machinery and equipment and capital
improvements made to the manufacturing facility in Spain used net cash of
$23,579,000 during the nine months ended September 30, 2002. Financing
activities, consisting primarily of net proceeds received from the April 2002
offering of common stock and the proceeds received from the exercise of stock
options and warrants, partially offset by net repayment of borrowings, provided
net cash of $22,862,000 during the nine months ended September 30, 2002.
Seasonality. In the past, we have experienced lower sales in the third
calendar quarter and higher sales in the fourth calendar quarter due to
seasonality. As we market 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 our net product sales or income from operations
for the periods presented.
Liquidity. Given our current liquidity and cash balances, and
considering our future strategic plans (including our budgeted capital
improvements and planned equipment purchases), we should have sufficient
liquidity to fund operations for at least the next twenty-four months, which
should be a sufficient time frame for us to advance our strategic objectives and
generate sufficient net product sales and cash flow to support our operating
cash flow needs. As mentioned above, we have cash, cash equivalents and
short-term liquid investments totaling approximately $26,807,000 as of September
30, 2002. These resources, combined with available lines of credit, should be
adequate to satisfy our capital and operating requirements during at least the
next twenty-four months. We also have outstanding at September 30, 2002
warrants, including our publicly traded Class B Warrants, to purchase
approximately 3,292,000 shares of Common Stock. There can be no assurance that
any of the warrants will be exercised prior to expiration; however, if all
warrants that are currently outstanding are exercised, we would receive
aggregate cash proceeds of approximately $15,358,000. On October 14, 2002, our
Board of Directors extended the expiration date of our Class B warrants from
December 31, 2002 to December 31, 2003. Two Class B Redeemable Warrants,
together, entitle a holder, until December 31, 2003, to purchase one share of
Common Stock at a price of $5.00 per share. There can be no assurance, however,
that changes in our research and development plans, capital expenditures or
other events affecting our net product sales or operating expenses will not
result in the earlier depletion of our funds. We continue to explore alternative
sources for financing our business activities. In appropriate situations, that
will be strategically determined, we may seek financial assistance from other
sources, including contribution by others to joint ventures and other
collaborative or licensing arrangements for the development, testing,
manufacturing and marketing of products under development.
-22-
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 supersedes APB No. 16, Business Combinations, and SFAS No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for by a single method -
the purchase method. SFAS No. 141 also provides guidance on the recognition of
intangible assets identified in a business combination and requires enhanced
financial statement disclosures. SFAS No. 142 adopts a more aggregate view of
goodwill and bases the accounting for goodwill on the units of the combined
entity into which an acquired entity is integrated. In addition, SFAS No. 142
concludes that goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 is
required for fiscal years beginning after December 15, 2001 (the year 2002 for
Bentley), except for the non-amortization and amortization provisions which are
required for goodwill and intangible assets acquired after June 30, 2001. The
adoption of SFAS No. 141 and SFAS No. 142 did not have a material impact on our
financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144 supersedes previous guidelines for financial accounting and reporting for
the impairment or disposal of long-lived assets and for segments of a business
to be disposed of. The adoption of SFAS No. 144, on January 1, 2002, did not
have a material impact on our financial position, results of operations or cash
flows.
-23-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Foreign Currency. A substantial amount of our 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. The
exchange rate at September 30, 2002 and December 31, 2001 was 1.02 Euros and
1.12 Euros per U.S. dollar, respectively. Coincidentally, the weighted average
exchange rate for the three months ended September 30, 2002 and 2001 was 1.02
Euros and 1.12 Euros per U.S. dollar, respectively. The weighted average
exchange rate for the nine months ended September 30, 2002 and 2001 was 1.08
Euros and 1.12 Euros per U.S. dollar, respectively. The effect of foreign
currency fluctuations on net assets for the nine months ended September 30, 2002
was an increase of $1,663,000. The cumulative historical effect of foreign
currency fluctuations on net assets as of September 30, 2002 is a decrease of
$1,807,000, as reflected in our Consolidated Balance Sheets as Accumulated other
comprehensive loss. Although exchange rates fluctuated significantly in recent
years, we do not believe that the effect of foreign currency fluctuation is
material to our results of operations as the expenses related to much of our
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 net product sales
and expenses. Nonetheless, we do not plan to modify our business practices.
We have relied primarily upon financing activities to fund our
operations in the United States. In the event that we are 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 us. However,
at the present time, we do not anticipate altering our business plans and
practices to compensate for future currency fluctuations.
Interest Rates. The weighted average interest rate on our short-term
borrowings and current portion of long-term debt is 5.0% and the balance
outstanding is $1,072,000 as of September 30, 2002. A portion of our long-term
borrowings is non-interest bearing and the balance outstanding on these
borrowings at September 30, 2002 is $236,000 including imputed interest (at
6.0%) of $72,000. The balance of our long-term borrowings of $59,000 bears
interest at the rate of 2.9%. Consequently, the weighted average interest rate
on our long-term borrowings is 5.4%. The effect of an increase in the interest
rate of one hundred basis points (to 6.0% on short-term borrowings and to 6.4%
on long-term borrowings) would have the effect of increasing interest expense by
approximately $14,000 annually.
-24-
CONTROLS AND PROCEDURES
- -----------------------
Bentley maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in Bentley's reports that
are filed with the Securities and Exchange Commission is recorded, processed and
reported within the time periods required for each report and that such
information is reported to Bentley's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Within 90 days prior to the date of this report, Bentley carried out an
evaluation, under the supervision and with the participation of Bentley's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Bentley's
disclosure controls and procedures. Based on that evaluation, Bentley's Chief
Executive Officer and Chief Financial Officer concluded that Bentley's
disclosure controls and procedures are effective in timely alerting them to
material information relating to Bentley (including its consolidated
subsidiaries) which is required to be included in its publicly filed reports.
There have been no significant changes in Bentley's internal controls or in
other factors which could significantly affect internal controls since that
evaluation.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- -------------------------------------------------------------------------
The statements contained in this Quarterly Report on Form 10-Q, which
are not historical facts contain forward looking information with respect to
plans, projections or future performance of Bentley Pharmaceuticals, Inc.
("Bentley"), the occurrence of which involve certain risks and uncertainties
that could cause our actual results to differ materially from those expected by
Bentley, including but not limited to risks associated with identifying suitable
drugs for combination with our drug delivery technologies, expanding generic and
branded drug operations, development and commercialization of our products,
relationships with our strategic partners, uncertainty of clinical trials
results, regulatory approval process, product sales concentration,
unpredictability of patent protection, technological changes, the effect of
economic conditions, and other uncertainties detailed in Bentley's Annual Report
on Form 10-K (SEC File No. 1-10581) for the year ended December 31, 2001.
-25-
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
See Item 1. Legal Proceedings in our Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
(b) Reports on Form 8-K filed during the quarter ended September 30, 2002:
None.
All other items required in Part II have been previously filed or are
not applicable for the quarter ended September 30, 2002.
-26-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
--------------------------------------------------
Registrant
November 4, 2002 By: /s/ James R. Murphy
-----------------------------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
November 4, 2002 By: /s/ Michael D. Price
-----------------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)
-27-
FORM 10-Q
CERTIFICATION
I, James R. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bentley
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 4, 2002
/s/ James R. Murphy
- -------------------------------------
James R. Murphy
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
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FORM 10-Q
CERTIFICATION
I, Michael D. Price, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bentley
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 4, 2002
/s/ Michael D. Price
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Michael D. Price
Vice President and Chief
Financial Officer
(Principal Financial Officer)
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