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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, 1996
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________ to _________
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Florida No. 59-1513162
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
4830 W. Kennedy Blvd., Suite 548, Tampa, FL 33609
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 286-4401
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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 Stock
Exchange
12% Convertible Senior American Stock Exchange and Pacific Stock
Subordinated Debentures Exchange
Class A Redeemable Warrants American Stock Exchange and Pacific 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 stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, 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 $10,443,375 March 27, 1997
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 3,348,195 March 27, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual Meeting of Stockholders - Incorporated by
Reference into Part III of this Form 10-K
PART I
ITEM 1. BUSINESS
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GENERAL
Bentley Pharmaceuticals, Inc. is an international pharmaceutical and health care
company engaged primarily in the manufacturing, marketing and distribution of
pharmaceutical products in Spain and France, with limited distribution of health
care products in the United States. The Registrant's operations in France
consist of the brokerage of fine chemicals, sourcing of raw materials and
pharmaceutical intermediates and the distribution of ethical drugs. The
Registrant has entered negotiations to sell its French subsidiary (see
"--Pharmaceutical Marketing and Sales in France"). In Spain, the Registrant
develops and registers late stage products, and manufactures, packages and
distributes both its own and other companies' pharmaceutical products. In the
United States, the Registrant markets disposable linens to emergency healthcare
services which are manufactured under contract. The percentage of the
Registrant's total revenues for the year ended December 31, 1996 which are
attributable to its operations in France, Spain and the United States are
approximately 50%, 49% and 1%, respectively. The Registrant's chemical and
pharmaceutical operations in France and Spain are a result of its 1991
acquisition of Chimos S.A. and the establishment of a pharmaceutical subsidiary
in France, Laboratoires Belmac S.A. ("Laboratoires Belmac") (these two entities
in France have since been merged into one entity named Chimos/LBF S.A. and
referred to herein as Chimos) and the 1992 acquisition of Rimafar S.A.
(subsequently renamed and referred to herein as Laboratorios Belmac S.A.),
respectively.
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, developing products from the
chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one year, and the
acquisition of currently marketed products. As a result of this transition, the
Registrant has decreased its research and development expenses dramatically over
the past few years as well as implemented cost-cutting measures throughout the
Registrant's operations. The Registrant emphasizes product distribution in Spain
and France, strategic alliances and product acquisitions, which management of
the Registrant expects will move the Registrant closer to profitability in the
near future.
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The Registrant's sales by its primary product lines are as follows (In
Thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
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Pharmaceutical and Consumer Health Care Products $22,924 $31,188 $26,826
Disposable Linen Products 209 249 184
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Total $23,133 $31,437 $27,010
======= ======= =======
PRODUCT LINES
The Registrant currently manufactures, markets and sells pharmaceutical products
in Spain, distributes pharmaceutical and biotechnology products and brokers fine
chemicals in France, and markets and sells disposable linens in the United
States.
PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN
Laboratorios Belmac S.A., the Registrant's subsidiary in Spain ("Laboratorios
Belmac"), manufactures, markets and sells pharmaceutical products whose four
primary categories are cardiovascular, gastrointestinal, neurological, and
infectious diseases. The Registrant manufactures over 60 types of
pharmaceuticals in its facility in Zaragoza, Spain both for its own sales and
under contract for others. The manufacturing facility was recently renovated and
brought into full compliance with European Union Good Manufacturing Practices
(GMPs). 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. 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, a bacteria,
is the etiologic agent. Omeprazole is marketed in the United States by
Astra-Merck.
Controlvas(R). Controlvas, whose generic name is enalapril, is an
angiotensin converting enzyme inhibitor useful in the treatment of hypertension
and congestive heart failure. Enalapril is marketed in the United States by
Merck & Company.
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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.
EZ Detect Home Test(TM). The EZ Detect Home Test detects minute
traces of blood in the stool. The presence of blood in the stool may indicate
bleeding problems such as cancer of the colon or rectum, ulcers, hemorrhoids,
polyps, colitis, diverticulitis and other intestinal disorders. The test is more
safe and sanitary and easier to use than other test kits on the market. The test
is manufactured by Biomerica, Inc. in Newport Beach, California and distributed
by Laboratorios Belmac.
EZ-H.P.(TM). EZ-H.P. is a rapid version of the original H. pylori
Test GAP which was the first test of its kind to be commercialized. The H.
pylori Test GAP was developed to detect the presence of Helicobacter pylori, the
bacterium responsible for up to 90% of all ulcers. The EZ- H.P. can be used in
doctors' offices and requires very few steps to perform compared to other
products. The test is manufactured by Biomerica, Inc. in Newport Beach,
California and distributed by Laboratorios Belmac.
Finedal(R). Finedal is an anti-obesity agent of the amphetamine class
for the treatment of obesity in conjunction with dietary control but with
reduced adverse effects common to that class of compounds.
Loperamida(R). Loperamida, whose generic name is loperamide
hydrochloride, a product launched by the Registrant in Spain in March 1995, 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 McNeil, Proctor & Gamble,
Novo Pharm and Geneva.
Lactoliofil(R). Lactoliofil is an anti-diarrheal agent whose
mechanism of action is the restoration of gastrointestinal flora.
Ergodavur(R), Neurodavur(R) and Neurodavur Plus(R). Ergodavur,
Neurodavur and Neurodavur Plus are 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
infections.
Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are compounds
used to treat local fungal infections, especially around the nails.
4
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.
Clisemina(R). Clisemina (doxycycline) is a tetracycline antibiotic
used for a multitude of infectious diseases.
Amantadina Juventus(R). Amantadina Juventus is an oral anti-viral
agent used in the treatment of viral infections and also has applications in
treating Parkinson's Disease.
Belmacina(R). Belmacina is a ciprofloxacin antibiotic. The Registrant
sold its Spanish marketing rights to Belmacina to CEPA, a Spanish company, in
1994 for 200 million Spanish Pesetas (approximately $1,556,000) and the related
trademark to CEPA for 50 million Spanish Pesetas (approximately $380,000) in
1995. The Registrant maintains the right to manufacture and export this product.
Belmacina was acquired by the Registrant in September 1992 for approximately
$577,000. The gain on sale of the marketing rights (approximately $884,000) was
included in the Registrant's income for the year ended December 31, 1994. The
Registrant recorded the gain on the sale of the related trademark (approximately
$380,000) as deferred revenue in its consolidated financial statements for the
year ended December 31, 1994, and recognized such revenue in 1995. See Note 6 of
Notes to Consolidated Financial Statements.
Rimafungol(R). Rimafungol is the Registrant's form of
cyclopiroxolamine, a broad-spectrum antifungal product for treating fungal
infections of the skin and vagina.
Rofanten(R). Rofanten is the Registrant's formulation of naproxen
sodium, an anti-inflammatory/analgesic.
Generic Antibiotics. Laboratorios Belmac sells various other types of
generic antibiotics for which patent protection no longer exists, such as
amoxicillin, ampicillin (Bactosone Retard(R)) and injectable forms of
penicillin.
Controlvas and Belmazol, together, represent approximately 57% of the sales of
Laboratorios Belmac.
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
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which has the right to manufacture and sell substantially similar products. 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. Many of these competitors are larger,
better capitalized and have more developed sales networks than the Registrant.
The Registrant maintains an internal marketing and sales staff of approximately
55, including 41 employees and 14 independent sales representatives working on
commission in Spain to market the pharmaceuticals it produces. The Registrant's
sales force competes by emphasizing highly individualized customer service.
In 1995, the Registrant commenced the export of pharmaceuticals manufactured by
Laboratorios Belmac outside Spain through local distributors and brokers,
particularly in Eastern Europe, Northern Africa, China, the Middle East, Central
and South America.
CONTRACT MANUFACTURING. Since Laboratorios Belmac currently utilizes less than
100% of its plant capacity to manufacture its own products, Laboratorios Belmac
has engaged in contract manufacturing of pharmaceuticals owned by other
companies such as Rhone-Poulenc's subsidiary Natterman S.A., Ciba Geigy's
subsidiary Zyma, Fournier, Italpharmaco, Beijing Pharmaceutical, Instituto
Llorente, Laboratorios Juventus, S.A. and Ethypharm. Other contracts are
contemplated in the near future. The Registrant manufactures these
pharmaceuticals to its customers' specifications, packaging them with the
customers labels. Occasionally, to assure product uniformity and quality,
employees of these customers will work at the Registrant's manufacturing
facility. As a result of Spain's entry into the European Union, Spain
implemented new pharmaceutical manufacturing standards and the Registrant was
required to modify its facility to comply with these regulations. Such
renovations were accomplished by Laboratorios Belmac without interruption of
sales or distribution. After an inspection, in July 1995 the operating parts of
the facility were determined to be in compliance with European GMPs by Spain's
Ministry of Health.
PHARMACEUTICAL MARKETING AND SALES IN FRANCE
Chimos, the Registrant's subsidiary in France, is engaged in the import and
distribution of specialty pharmaceutical products to hospitals and others in
France. Chimos has concentrated on the sale of "orphan drugs" (drugs used for
the treatment of rare diseases) and biotechnology products. The Registrant has
marketed throughout France over 26 pharmaceutical products from Europe and the
United States.
Chimos is authorized by France's Ministry of Health to act as a distributor of
ethical drugs. The primary customer of Chimos is Pharmacie Centrale des
Hopitaux, which purchases drugs from Chimos. Chimos marketed Ceredase, a drug
used in the treatment of Gaucher's Disease, in France until the distribution
agreement between Genzyme Corporation and Chimos expired on March 31, 1996 (see
"--Customers").
6
Consequently, the Registrant's sales in France declined significantly beginning
in the second quarter of 1996 as a result of the expiration of the distribution
agreement. Notwithstanding the relative significance of its sales volume, the
Ceredase gross margins as a percentage of sales were minimal, therefore the
impact on operating profits was not material. The Registrant is exploring
alternative uses for its working capital that has historically supported the
Ceredase distribution arrangement.
Chimos, as one of the authorized distributors of Orphan Drugs in France, is
occasionally contacted by manufacturers of such products outside of France to
act as their distributor. In addition, the Registrant from time to time supplies
Chimos with a list of Orphan Drugs approved by the FDA in the United States and
Chimos contacts their manufacturers to seek becoming their distributor in
France.
CHEMICAL BROKERAGE. Chimos is engaged in the import and supply in France of
approximately 39 fine chemicals, such as furosemide, phenobarbital and
trihexyphenidyl HCl, used in the manufacture of pharmaceuticals, from countries
such as Japan, Taiwan, China, Pakistan and several European countries. The
brokerage of fine chemicals by Chimos provides a necessary link between the
manufacturer and end-user. The manufacturer produces the chemicals to meet
product specifications and provides a certificate of analysis as to the purity
of the chemicals. The products are provided to the end-user, which generally
verifies the analysis with its own quality control procedures. Chimos generally
acts as agent for the manufacturer, arranging for shipping, import and customs
documentation, invoicing and collection of payments. Chimos also acts on
occasion on behalf of the end-user, which requests that Chimos source a
particular product from one of its sources or conduct a world-wide search for
the product.
The Registrant is currently engaged in negotiations with a subsidiary of a large
European conglomerate to sell its French subsidiary, Chimos. The transaction is
expected to be finalized early in the second quarter of 1997. As no definitive
agreement has been signed, there can be no assurance that such sale will be
consummated. Since the expiration of the Ceredase distribution agreement, Chimos
has been generating revenues at the rate of approximately $5.5 million per
annum.
MARKETING AND DISTRIBUTION OF DISPOSABLE LINENS IN THE UNITED STATES
The Registrant markets and distributes disposable linen products to the
emergency health care industry in the United States through Belmac Healthcare
Corporation, one of the Registrant's U.S. subsidiaries ("Healthcare"). These
disposable linens include products such as blankets, sheets and pillowcases and
are distributed to entities engaged in the provision of emergency health care
services, such as emergency rooms and ambulance services, located primarily in
the southwestern region of the United States.
Healthcare receives orders for these products at the Registrant's headquarters
in Tampa, Florida and subcontracts the manufacturing of the disposable linens in
accordance with Healthcare's specifications. The raw materials for these
products are provided by Healthcare and stored with one of the manufacturers
until needed. Once produced, the products are shipped directly to the customer
from the manufacturer or held in inventory in anticipation of customer demand.
7
The supply of disposable linens to health care providers in the United States is
a highly competitive business that includes many large companies. The Registrant
concentrates its marketing on the emergency services segment of the health care
market, an area which demands greater individual attention. Healthcare believes
that it competes on the basis of customer service.
Healthcare advertises this service nationwide through several mediums, such as
print advertisements, trade shows and direct mail (sales brochures). The
manufacture and sale of disposable linens is subject to regulation by the FDA,
which monitors the composition and labeling of health care products.
PRODUCTS UNDER DEVELOPMENT
Although the Registrant significantly reduced its research and development
activities when it implemented its austerity program in 1993, the Registrant has
maintained its rights to selected products. 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. Due to the expense and time commitment
required to bring a pharmaceutical product to market, the Registrant is seeking
co-marketing, licensing and promotional arrangements and other collaborations
with other international or national pharmaceutical companies. Generally,
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. The Registrant is currently seeking partners to assist
in the further development and marketing of Biolid(R) and Alphanon(R).
BIOLID(R)
Biolid(R) is a non-crystalline form of erythromycin with a potential for
enhanced bioavailability (quantity absorbed in blood over time compared to dose
received). Initially, Biolid was produced in Europe in a sachet formulation,
which is a powder formulation contained in a packet, which is mixed with water
prior to oral administration. This formulation for drugs is more popular in
Europe than in the United States, necessitating the Registrant's development of
a tablet formulation for marketing in the United States. The Registrant was
granted a United States patent for Biolid in June 1992. An international patent
application covering ten additional countries was granted in January 1994.
Regulatory approval was received in Spain in 1994 and an Investigational New
Drug Application ("IND") is on file with the FDA.
Initial Sachet Formulation Studies. Five double blind clinical studies of
Biolid, using its sachet formulation, were completed in 1992 in a total of 612
patients in France, Germany, Belgium and Holland. Four studies used
roxithromycin (Rulid, Hoescht-Roussel) as a reference drug, and Biolid showed
equal efficacy and tolerance in both lower and upper respiratory tract
infections in three of the four studies. In the fifth study, Biolid was compared
to a third generation oral cephalosporin, cefpodoxime (Cefodox,
Hoescht-Roussel), in upper respiratory tract infections, and again, equal
efficacy and tolerance were observed.
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The Registrant has determined to direct its development efforts for Biolid in
the United States to the twice-a-day tablet formulation rather than the sachet
formulation. The Registrant has performed several pilot studies between 1992 and
1994, the most recent of which indicated that the tablet, given with a high fat
meal, had bioavailability which was approximately 25% better when compared on a
milligram for milligram basis with a competitive U.S. tablet of erythromycin.
These results did not achieve the same level of bioavailability as the initial
studies of the sachet formulation. Because of wide variations in the data, an
additional study with a larger number of subjects will be required to
definitively determine the relative bioavailability of the tablet formulation as
compared to standard erythromycin. A study plan was reviewed by the FDA;
however, there can be no assurance that this study will demonstrate enhanced
bioavailability. Management of the Registrant does not have sufficient data to
be able to accurately predict the outcome of the studies at this time. The
Registrant intends to seek collaborative partners to assist in completion of the
development and subsequent marketing of this product.
ALPHANON(R)
Alphanon, the Registrant's original product, was designed for the systemic
treatment of hemorrhoids. The drug was originally developed as a liquid
formulation for intra-navel transdermal application. A double blind placebo
controlled study conducted in France in the late 1980's in 220 patients
demonstrated that Alphanon was effective in the treatment of hemorrhoids and
hemorrhoidal bleeding. This study was conducted prior to the promulgation of and
requirement that clinical studies comply with Good Clinical Practices.
A transdermal patch, a more convenient formulation, has been developed and an
IND is on file with the FDA. The Registrant satisfactorily completed a Phase I
clinical study in December 1992 and is evaluating its alternatives which include
co-development or divestiture. The Registrant has discontinued further research
and development related to Alphanon pending licensing or divestiture.
OTHER PRODUCTS
Phenantramine Analogue. Phenantramine analogue is a pre-clinical stage
antimalarial which has shown effectiveness against sensitive and resistant
strains of Plasmodium falciparum. The Registrant is planning no additional
in-house research and development activity at this time with respect to this
compound unless in a licensing or other collaboration.
PARTNERSHIP VENTURE
In March 1994 the Registrant formed a partnership, through Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation, which is headquartered in New York City, and planned to
market, through this partnership, a range of hydrogel based feminine health care
products, including a contraceptive, an antiseptic, an antifungal and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner claiming interference in the management of the partnership and
misrepresentation under
9
the partnership agreement. On January 12, 1996 the Court ruled that the
Registrant's reliance on its partner's misrepresentation was not justified and
that the Registrant had performed its obligations under the agreement with its
partner. Accordingly, the Registrant's claims as well as the counterclaims of
its partner were dismissed. On September 25, 1996, the Registrant filed an
appeal in the United States Court of Appeals for the Second Circuit. Oral
argument was heard on February 26, 1997 and a decision is expected within the
next few months. Pending resolution of this dispute, the partnership is not
actively engaged in the development of any products.
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
Although few of the products currently being sold by the Registrant are
protected by patents owned by the Registrant, the Registrant believes that
patent and trademark protection of the results of the Registrant's research and
development efforts may contribute to the future success of the Registrant.
Accordingly, 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 patent applications and has been granted a number of
patents. However, there can be no assurance that its pending applications will
be issued as patents or that any of its issued patents will afford adequate
protection to the Registrant or its licensees. 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 or obtain access to the
Registrant's proprietary 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.
Patents for Biolid were granted in the U.S. in June 1992 and in the following
European countries in January 1994: Austria, Belgium, Italy, Liechtenstein,
Netherlands, Sweden, Switzerland, U.K., Germany and France. A patent for Biolid
in Venezuela was granted in September 1995 and in Argentina in April 1996. A
U.S. patent for Phenantramine was granted in October 1993. Trademarks for Biolid
are currently registered in France, Ireland, Portugal, Sweden and the U.K.
Alphanon trademarks are currently registered in the U.S. and Australia.
In addition, Laboratorios Belmac owns approximately 50 trademarks for
pharmaceutical products and one patent which were granted by Spain's Bureau of
Patents and Trademarks. In Spain,
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patents expire after 20 years and trademarks expire after 10 years, but can be
renewed. All prescription pharmaceutical products marketed by Laboratorios
Belmac 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 generally takes
approximately two years. 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.
COMPETITION
All of the Registrant's current and future products face competition both from
existing drugs and products and from new drugs and products being developed by
others. 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 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 France and Spain, which are large,
developed population centers in Europe with populations of approximately
58,000,000 and 39,000,000 people, respectively. In addition, since both
countries are members of the European Union, the Registrant expects to be able
to target the European Union's larger population of approximately 442,000,000 as
harmonization eliminates the barriers between countries.
Laboratorios Belmac competes with both large multinational companies and local
companies, which produce most of the products Laboratorios Belmac manufactures,
on the basis of service and its concentration on select product lines. For
example, there are currently many companies, such as Schering-Plough, 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.
Others of the products sold by Laboratorios Belmac, such as Onico-Fitex, are
more unusual and have fewer competitors. The contract manufacturing performed by
Laboratorios Belmac has a number of competitors, including Tadec Meiji Farma,
Bama Geve, ReigJofre, Aristegui, and Fournier, S.A.
Chimos, as a distributor and broker of fine chemicals, pharmaceutical
intermediates and biotechnology products, competes with numerous multinational
companies as well as companies in France, resulting in low product margins.
Competition in the supply and distribution of pharmaceutical intermediates is
particularly strong from a large number of small companies located in Italy,
India, Pakistan and China. Certain large multinational companies also compete in
the distribution of fine chemicals including Abbott Laboratories--Chemicals
Division, The UpJohn Co. and Bayer A.G. The biotechnology industry is currently
less competitive as many of such products are Orphan Drugs with low volumes.
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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, 1996. Sales of approximately $2,200,000, $7,300,000 and
$8,000,000 to Pharmacie Centrale des Hopitaux accounted for approximately 10%,
23% and 30% of the Registrant's sales for the years ended December 31, 1996,
1995 and 1994, respectively. Due to the March 31, 1996 expiration of the
Registrant's distribution agreement with Genzyme Corporation, for the
distribution of Ceredase, the Registrant experienced a significant decrease in
sales to this customer in 1996 (see "-- Pharmaceutical Marketing and Sales in
France"). 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.
RESEARCH AND DEVELOPMENT
The Registrant's management has shifted the focus from research and development
to a more cost effective strategy of acquiring late-stage development compounds
that can be marketed within one year as well as currently marketed products. As
a result of this shift in operations, the Registrant has decreased its research
and development spending over the past few years. Research and development
activities have been performed, under contract, by various universities and
consulting research laboratories. The Registrant has a research and development
portfolio of two pharmaceutical products. (See "--Products under Development.")
One product is protected by a patent in the United States. Patent and patent
applications have also been filed in other countries of marketing interest to
the Registrant. INDs are on file with the FDA for the macrolide antibiotic,
Biolid, and the transdermal anti-hemorrhoidal patch, Alphanon.
The Registrant spent $29,000, $444,000 and $759,000 in the years ended December
31, 1996, 1995 and 1994, respectively, on research and development to discover
and develop new products and processes and to improve existing products and
processes. Expenditures were concentrated in the development of products for the
treatment of infectious diseases. These decreases are a result of a thorough
review of research and development activities with the establishment of
priorities based on both technical and commercial criteria. The Registrant
intends to continue to carefully manage such expenditures in view of its limited
resources.
Laboratorios Belmac is engaged in limited research of drug delivery systems
("DDS"), such as sustained release and time release formulations, through a
collaborative venture 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 of and controls over research laboratory procedures,
clinical investigations, and manufacturing, marketing, and distribution
practices by various federal, state, and local agencies, substantially increases
the time, difficulty
12
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) preclinical laboratory and animal tests, (ii)
the submission to the FDA of an IND, 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.
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, 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 preclinical 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.
Under the Orphan Drug Act, the FDA may designate a product or products as having
Orphan Drug status to treat a "rare disease or condition," which is a disease or
condition that affects populations of less than 200,000 individuals in the
United States or, if victims of a disease number more than 200,000, the sponsor
establishes that it does not realistically anticipate its product sales will be
sufficient to recover its costs. If a product is designated an Orphan Drug, then
the sponsor is entitled to recover its costs and the sponsor is entitled to
receive certain incentives to undertake the development and marketing of the
product, including limited tax credits and high-priority FDA
13
review of an NDA. In addition, the sponsor that obtains the first marketing
approval for a designated Orphan Drug for a given indication is eligible to
receive marketing exclusivity for a period of seven years.
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 nearly identical to the regulations promulgated by the
United States Food & Drug Administration discussed above. In general, these
regulations are consistent with 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
takes approximately two years for review by the Ministry of Health. They then
can only be sold to the public with a prescription from a medical doctor.
France. Most of the activities of Chimos are not regulated by France's Ministry
of Health, since pharmaceuticals in France are regulated at the level of the
manufacturer, as they produce the products, and pharmacists, as they distribute
the products to the public. Chimos' distribution activities are not regulated.
General. Continuing studies 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 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
14
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.
Although the Registrant markets disposable linen products in the United States,
the majority of the Registrant's sales are in France and 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.
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 110 people, 7 of whom
are employed in the United States, 5 in France and 98 in Spain as of March 27,
1997. Of such employees, approximately 35 are principally engaged in
manufacturing activities, 55 in sales and marketing, including 14 independent
sales representatives, and 20 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.
ITEM 2. PROPERTIES
----------
UNITED STATES
The Registrant's corporate headquarters are located at One Urban Centre, Suite
548, 4830 West Kennedy Boulevard, Tampa, Florida 33609 and presently include
4,900 square feet which are occupied in accordance with a lease agreement which
expires in 1998.
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. The facilities, which are owned by the Registrant, consist of
approximately 45,000 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
15
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.
The Registrant's administrative offices in Spain are located in Madrid in
approximately 3,000 square feet of renovated, leased offices, which leases
expire in 1998.
FRANCE
Chimos is located in Paris, France in leased office space of approximately 2,000
square feet, which leases expire in 1998.
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
-----------------
Michael M. Harshbarger, a former member of the Registrant's Board of Directors
and its former President and Chief Executive Officer filed a suit against the
Registrant in November 1993, in the Circuit Court of the Thirteenth Judicial
Circuit, State of Florida, Hillsborough County Civil Division, alleging wrongful
termination. The plaintiff is seeking monetary damages in excess of $1,400,000.
The Registrant views his claim as meritless and intends to vigorously oppose it.
The Registrant has filed a counterclaim against Harshbarger for wrongful
conversion and civil theft, fraud and deceit, and breach of contract, seeking
the return of corporate assets removed by Harshbarger and for restitution
related to expenses of a personal nature that he charged to the Registrant's
accounts. The Registrant amended its counterclaim to include breach of fiduciary
duty. The Registrant is seeking damages from Harshbarger, relating to its
counterclaim, in excess of $1,000,000. Harshbarger attempted to use the
Americans with Disabilities Act (the "ADA") as a defense to the Registrant's
counterclaim; however, the judge ruled in favor of the Registrant's recent
motion to strike Harshbarger's ADA defense. Harshbarger's counsel then filed a
motion to withdraw from the case, citing irreconcilable differences. The judge
granted this motion on March 21, 1997.
In March 1994 the Registrant formed a partnership, through Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation, which is headquartered in New York City, and planned to
market, through this partnership, a range of hydrogel based feminine health care
products, including a contraceptive, an antiseptic, an antifungal and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner claiming interference in the management of the partnership and
misrepresentation under the partnership agreement. On January 12, 1996 the Court
ruled that the Registrant's reliance on its partner's misrepresentation was not
justified and that the Registrant had performed its obligations under the
agreement with its partner. Accordingly, the Registrant's claims as well as the
counterclaims of its partner were dismissed. On September 25, 1996, the
Registrant filed an
16
appeal in the United States Court of Appeals for the Second Circuit. Oral
argument was heard on February 26, 1997 and a decision is expected within the
next few months. Pending resolution of this dispute, the partnership is not
actively engaged in the development of any products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
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 Stock Exchange, 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. All prices for the period prior to July 25, 1995 have been
adjusted to give retroactive effect to a one-for-ten reverse stock split of the
Registrant's Common Stock effected on that date.
Quarter Ended High Sales Price Low Sales Price
- ------------- ---------------- ---------------
March 31, 1995 $7.50 $3.13
June 30, 1995 9.38 3.75
September 30, 1995 8.63 4.13
December 31, 1995 4.63 2.06
March 31, 1996 $2.88 $2.06
June 30, 1996 4.13 2.13
September 30, 1996 3.94 2.38
December 31, 1996 3.75 2.50
As of March 27, 1997 there were 2,117 holders of record of the Registrant's
Common Stock, excluding shares 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 forseeable future.
17
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. All per share information prior to July 25, 1995 has been
adjusted to give retroactive effect to a one-for-ten reverse stock split of the
Registrant's Common Stock effected on that date. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
SUMMARY OF OPERATIONS
Fiscal Year Ended Six Months Ended Fiscal Year
December 31, December 31, Ended June 30,
----------------------------------------------------- ------------ --------------
(In thousands, except per share data) 1996(1) 1995(2) 1994(2) 1993(3) 1992(4) 1992(5)
-------- -------- -------- -------- -------- --------
Sales $ 23,133 $ 31,437 $ 27,010 $ 19,849 $ 9,708 $ 13,138
Cost of sales 15,638 25,586 21,931 15,100 5,899 8,871
-------- -------- -------- -------- -------- --------
Gross margin 7,495 5,851 5,079 4,749 3,809 4,267
Operating expenses 8,794 8,198 9,050 14,722 23,493 14,758
-------- -------- -------- -------- -------- --------
Other (income) expense 1,620 (21) (393) 263 (153) 320
-------- -------- -------- -------- -------- --------
Net loss before extra-ordinary item $ (2,473) -- -- -- -- --
======== ======== ======== ======== ======== ========
Net loss $ (2,919) $ (2,326) $ (3,578) $(10,236) $(19,531) $(10,811)
======== ======== ======== ======== ======== ========
Net loss per Common Share before
extra-ordinary item $ (.79) $ (.83) $ (1.56) $ (6.32) $ (16.60) $ (11.12)
======== ======== ======== ======== ======== ========
Net loss per Common Share $ (.92) $ (.83) $ (1.56) $ (6.32) $ (16.60) $ (11.12)
======== ======== ======== ======== ======== ========
Weighted average number of Common
Shares outstanding 3,334 2,999 2,395 1,655 1,203 997
======== ======== ======== ======== ======== ========
BALANCE SHEET INFORMATION
At December 31, At June 30,
--------------------------------------------------- -----------
(In thousands) 1996(1) 1995(2) 1994(2) 1993(3) 1992(4) 1992(5)
------- ------- ------- ------- ------- -------
Working capital (deficiency) $ 4,265 $ 3,113 $ 1,928 $ 2,043 $ (3,842) $ 8,449
Non-current assets 6,746 6,523 5,644 5,937 13,497 18,643
Total assets 16,558 16,290 16,332 16,160 21,953 38,753
Non-current liabilities 5,513 2,252 336 2,821 2,349 2,626
Redeemable Preferred Stock 2,203 2,068 2,256 2,218 7,401 7,164
Common Stockholders'
Equity (deficit) 3,295 5,316 4,980 2,941 (95) 17,352
See explanations on the following page.
18
(1) Revenues 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; therefore, the impact on operating
profits is not considered to be material. 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 totalling $1,227,000 in 1996. The Registrant incurred an
extra-ordinary 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
include approximately $340,000, representing a provision for goodwill
impairment related to Chimos. See Notes 1, 8, 13 and 14 of Notes to
Consolidated Financial Statements.
(2) The Registrant sold its Spanish marketing rights to its ciprofloxacin
antibiotic, Belmacina(R), in 1994 and included the gain thereon
(approximately $884,000) in Other (Income) Expense in the year ended
December 31, 1994 and recorded the anticipated gain on sale of the related
trademark of $380,000 as deferred revenue as of December 31, 1994 which was
recognized in the year ended December 31, 1995. Other (Income) Expense for
the year ended December 31, 1995 also includes the recognition of income of
$360,000 from the commercialization of a certain drug provided by the
Registrant's former Chairman and Chief Executive Officer, $533,000 of
expense related to the settlement of litigation with the Registrant's
former Chief Financial Officer and income of $375,000 due to the reversal
of an over-accrual for a liability. See Notes 6, 10 and 13 of Notes to
Consolidated Financial Statements.
(3) The year ended December 31, 1993 includes the effects of writing off
capitalized costs with respect to the sachet formulation of Biolid(R), its
noncrystalline form of erythromycin and a charge to earnings for the
settlement of class action litigation. See Notes 6 and 10 of Notes to
Consolidated Financial Statements.
(4) The Registrant changed its fiscal year end to December 31 effective
December 31, 1992 and sold its marketing rights in France to Amodex(R) on
January 20, 1993. The six months ended December 31, 1992 include other
non-recurring charges totaling $9,321,000.
(5) The Registrant acquired 100% of the shares of Chimos in August 1991 and,
accordingly, for accounting purposes, was no longer considered in the
development stage of operations. The Registrant also acquired 100% of the
shares of Laboratorios Belmac in February 1992, as well as Amodex(R)
trademark and licensing rights in France in December 1991.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
The Registrant is an international pharmaceutical and health care company with
its primary focus on the manufacturing, marketing and distribution of
pharmaceutical and health care products. Substantially all of its revenues have
come from its operations in France and Spain; however, the Registrant markets
disposable linens to emergency healthcare services in the United States.
The Registrant incurred a net loss before extra-ordinary item of $2,473,000 and
a net loss of $2,919,000 for the year ended December 31, 1996. 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 will focus on
increasing higher margin pharmaceutical and health care product sales,
controlling expenses through its austerity program, careful prioritization of
research and development projects resulting in continued low overall research
and development expenditures, and potentially acquiring marketable products or
profitable companies in the United States or Europe that are compatible with the
Registrant's strategy for growth. (See "--Liquidity and Capital Resources.")
Currently, the profit margins for the products sold by the Registrant's
subsidiary in Spain are significantly higher than those generated by the
Registrant's subsidiary in France. The Company is currently engaged in
negotiations with a subsidiary of a large European conglomerate to sell its
French subsidiary, Chimos. The transaction is expected to be finalized early in
the second quarter of 1997. As no definitive agreement has been signed, there
can be no assurance that such sale will be consumated. Sales generated by Chimos
began to decline in the second quarter of 1996 due to the expiration of a
distribution agreement for the product Ceredase. Since the expiration of this
distribution agreement, Chimos has been generating revenues at the rate of
approximately $5.5 million per annum. For business segment information on the
Registrant's operations outside the United States, see Note 12 of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995
The Registrant reported revenues of $23,133,000 and a net loss of $2,919,000 or
$.92 per common share for the year ended December 31, 1996 compared to revenues
of $31,437,000 and a net loss of $2,326,000 or $.83 per common share for the
prior year.
Sales and Cost of Sales. The 26% decrease in revenues is primarily attributable
to a 52% decrease in sales by the Registrant's French subsidiary, Chimos, to
$11,624,000, which was partially offset by a 68% increase in sales by the
Registrant's Spanish subsidiary, Laboratorios Belmac, to $11,299,000, for the
year ended December 31, 1996. As previously reported,
20
revenues declined beginning in the second quarter of 1996, due to the March 31,
1996 expiration of its distribution agreement for the product Ceredase, which
accounted for approximately 60% of the Registrant's revenues in the year ended
December 31, 1995. Ceredase gross margins, as a percent of sales, were
approximately 5%; therefore, the impact on operating profits is not considered
to be material. Gross margins for the year ended December 31, 1996 improved to
32% when compared to gross margins of 19% in the prior year, primarily as a
result of the more rapid rate of growth in sales at Laboratorios Belmac, whose
sales generate significantly higher gross margins than those of Chimos, as well
as the loss of low-margin Ceredase sales. The Registrant's distribution
operations in France, Chimos, generate relatively low gross margins
(approximately 12% for the year ended December 31, 1996) as opposed to the
Registrant's Spanish subsidiary, Laboratorios Belmac, which is experiencing
substantially higher margins (approximately 53% for the year ended December 31,
1996).
Operating Expenses. Selling, general and administrative expenses were $7,923,000
for the year ended December 31, 1996 compared to $7,204,000 for the prior year.
Overall, selling, general and administrative expenses increased and the
composition changed as a result of increased selling expenses incurred by the
Spanish subsidiary, which are necessary in order to sustain the increase in
sales volume that the Spanish sales force has generated in the year ended
December 31, 1996. This increase was offset in part by a decrease in selling,
general and administrative expenses by Chimos, primarily due to the loss of
Ceredase sales, during the year ended December 31, 1996. The Registrant intends
to continue its efforts to control general and administrative expenses as part
of its austerity program in its effort to reach and maintain profitability.
Research and development expenses were $29,000 for the year ended December 31,
1996 compared to $444,000 for the prior year. The Registrant's management has
shifted the focus from research and development to a more cost effective
strategy of acquiring late-stage development compounds that can be marketed
within one year as well as currently marketed products. As a result of this
shift in operations, the Registrant has decreased its research and development
spending over the past few years. Research and development activities have been
performed, under contract, by various universities and consulting research
laboratories.
Depreciation and amortization expenses decreased by 9% to $502,000 for the year
ended December 31, 1996, compared to $550,000 for the prior year, primarily due
to the disposal of certain fixed assets during the quarters ended June 30 and
September 30, 1996 as a result of the Registrant's move to smaller, more cost
effective office space.
As a result of estimating the proceeds from the proposed sale of Chimos, the
Registrant reviewed, for impairment, the recoverable value of the carrying
amount of long-lived assets and intangibles. Based upon this review, the
Registrant charged to operations, a provision for goodwill impairment,
representing the remaining unamortized Chimos goodwill of approximately $340,000
at December 31, 1996.
Other Income/Expense. Interest expense was $1,227,000 for the year ended
December 31, 1996 compared to $563,000 for the prior year. The $664,000 increase
reflects interest expense arising primarily from (i) the Notes sold by the
Registrant in its October 1995 private placements, which
21
Notes were paid with the proceeds of the Public Offering completed in February
1996 and (ii) the Debentures sold in the February 1996 Public Offering. The
Registrant incurred an extra-ordinary charge of $446,000, representing the
unamoritized discount and issuance costs at the date of repayment of the Notes
from its October 1995 private placements. Interest income was $103,000 for the
year ended December 31, 1996 compared to $3,000 for the prior year. The increase
was with respect to interest earned on the proceeds of the Public Offering and
cash collected from Ceredase receivables which have been temporarily invested in
short-term interest bearing investments included in cash and cash equivalents in
the Balance Sheet.
Other (income) expense, net of $50,000 for the year ended December 31, 1996, is
substantially lower than other (income) expense, net of ($581,000) for the prior
year, which is primarily comprised of ($360,000) related to settlement of
litigation, a ($380,000) gain recognized upon the sale of the Registrant's
Belmacina trademark in Spain and the effect of a reversal of an over-accrual of
a liability related to the proposed sale of Biolid(R), which did not occur, in
the amount of ($375,000), offset by a charge of $533,000 for cancellation of the
stock subscription receivable and related interest from a former officer of the
Registrant.
Although the Registrant reported a 26% decrease in sales, the improved gross
margins of 32% and controlled spending with respect to operating expenses in the
year ended December 31, 1996, resulted in a $1,048,000 improvement in its loss
from operations from $2,347,000 in the prior year to $1,299,000 for the year
ended December 31, 1996. The 1996 loss from operations includes a charge of
$340,000 for a provision for goodwill impairment related to the proposed Chimos
disposition. This improvement was offset by interest expense associated with (i)
the Notes sold by the Registrant in its October 1995 private placements, and
(ii) the Debentures sold in the February 1996 Public Offering, resulting in a
net loss of $2,919,000, or $.92 per common share for the year ended December 31,
1996, compared to a net loss of $2,326,000, or $.83 per common share for the
prior year.
FISCAL YEAR ENDED DECEMBER 31, 1995 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1994
The Registrant reported revenues of $31,437,000 and a net loss of $2,326,000 or
$.83 per common share for the year ended December 31, 1995 compared to revenues
of $27,010,000 and a net loss of $3,578,000 or $1.56 per common share for the
prior year.
Sales and Cost of Sales. The 16% increase in revenues is primarily attributable
to an increase in sales by the Registrant's subsidiary in France, Chimos, which
distributes specialty pharmaceutical products and fine chemicals in France.
Consolidated gross margins for the year ended December 31, 1995 remained
consistent at 19% when compared to the prior year, including the effect of a
$571,000 charge to cost of sales in the year ended December 31, 1995,
representing an increase in the Registrant's reserves for slow moving or
obsolete inventory in Europe. The Registrant's distribution operations in France
(Chimos) (whose sales accounted for approximately 78% of revenues) generate
relatively low gross margins as opposed to the Registrant's Spanish subsidiary,
Laboratorios Belmac (whose sales accounted for approximately 21% of revenues),
and is experiencing substantially higher margins. The Registrant expects sales
in 1996 to decline as a result of the March 31, 1996 expiration of its
distribution agreement for the product, Ceredase, which accounted for
approximately 60% of its revenues in 1995. Ceredase
22
gross margins, as a percent of sales, have been minimal; therefore, the impact
on operating profits is not expected to be material.
Operating Expenses. Selling, general and administrative expenses were
$7,204,000, or 23% of sales, for the year ended December 31, 1995 compared to
$7,716,000, or 29% of sales, for the prior year. The decrease from 29% to 23% of
sales is primarily attributable to cost control measures implemented by the
Registrant. The Registrant intends to continue its efforts to control general
and administrative expenses as part of its austerity program in its effort to
reach and maintain profitability.
Research and development expenses were $444,000 for the year ended December 31,
1995 compared to $759,000 for the prior year. The 42% decrease reflects the
results of a thorough review of all research and development activities and the
establishment of priorities based upon both technical and commercial criteria.
During this period, the Registrant did not commence any new research and
development programs. The Registrant intends to continue to carefully manage its
research and development expenditures in the future in view of its limited
resources.
Depreciation and amortization expenses remained relatively unchanged at $550,000
for the year ended December 31, 1995 compared to $575,000 in the prior year.
Other Income/Expense. Interest expense was $563,000 for the year ended December
31, 1995 compared to $423,000 for the prior year. The 33% increase reflects
approximately $348,000 of fourth quarter interest arising primarily from the
Notes sold by the Registrant in its October 1995 private placements and, to a
lesser degree, interest on higher average outstanding balances on short term
borrowings, which are used to finance working capital needs. Interest income was
$3,000 for the year ended December 31, 1995 compared to $123,000 for the prior
year. The $120,000 decrease reflects the Registrant's use of its resources for
working capital needs, resulting in reduced earnings on liquid assets. Interest
expense and interest income will both be higher in 1996 than in 1995 as a result
of the Registrant's February 1996 public offering of Units (as hereinafter
defined) (See "-- Liquidity and Capital Resources -- Financings"). Other
(income) expense, net, of ($581,000) for the year ended December 31, 1995 is
primarily comprised of income of ($360,000) related to a settlement of
litigation (see Note 13 of Notes to Consolidated Financial Statements) and the
($380,000) gain recognized upon the sale of the Registrant's Belmacina trademark
in Spain, which was previously reflected in the Registrant's consolidated
financial statements as deferred revenue as of December 31, 1994. The Registrant
has since transferred the trademark to the purchaser and collected the balance
of the related receivable in the fourth quarter of 1995. Other (income) expense,
net, also includes the effect of a reversal of an over-accrual of a liability
related to the proposed sale of Biolid, which did not occur, in the amount of
($375,000), offset by a charge of $533,000 for cancellation of the stock
subscription receivable and related interest from a former officer of the
Registrant. One-half of the loss (approximately $37,000) incurred by Maximed
Pharmaceuticals, the Registrant's partnership with Maximed Corporation, is also
included in other (income) expense, net, in the year ended December 31, 1995.
Although the Registrant is in a dispute with its partner, and has ceased funding
the partnership's activities until such dispute is resolved, appropriate
operating costs have been accrued and charged to operations during the year
ended December 31, 1995.
23
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Total assets increased from $16,290,000 at December 31, 1995 to $16,558,000 at
December 31, 1996, while Common Stockholders' Equity decreased from $5,316,000
at December 31, 1995 to $3,295,000 at December 31, 1996. The decrease in Common
Stockholders' Equity reflects primarily the February 1996 Public Offering of
Units, offset by a fluctuation in the exchange rates of European currencies
compared to the U.S. Dollar and the loss incurred by the Registrant for the year
ended December 31, 1996.
The Registrant's working capital increased from $3,113,000 at December 31, 1995
to $4,265,000 at December 31, 1996. The increase in working capital is primarily
attributable to the proceeds from the February 1996 Public Offering of Units.
Cash and cash equivalents increased from $1,120,000 at December 31, 1995 to
$4,425,000 at December 31, 1996. The increase in cash and cash equivalents is
primarily attributable to the completion of a Public Offering of its securities
in February 1996 and collection of receivables for sales of Ceredase.
Receivables decreased from $6,836,000 at December 31, 1995 to $3,632,000 at
December 31, 1996, primarily as the result of the decline in sales by its French
subsidiary, Chimos, as a result of the expiration of the Ceredase distribution
agreement as of March 31, 1996. The Registrant reduced its receivables by
$4,999,000 since that date primarily by collecting receivables for sales of
Ceredase, which were utilized to reduce accounts payable balances by $1,233,000
and to reduce the amount of short-term borrowings by $544,000 during the nine
months ended December 31, 1996. A significant portion of the Registrant's trade
receivables arise from sales of pharmaceutical and health care products to the
French government. Payment terms for such sales are typically 90 to 100 days;
the Registrant has not experienced any material delinquent accounts. Inventories
also decreased to $945,000 at December 31, 1996 compared to $1,054,000 at
December 31, 1995, primarily due to the decline in sales by the French
subsidiary and the corresponding reduction in inventory levels.
Although the combined total of accounts payable and accrued expenses decreased
from $5,455,000 at December 31, 1995 to $4,528,000 at December 31, 1996 and
short term borrowings decreased slightly from $1,197,000 at December 31, 1995 to
$1,014,000 at December 31, 1996, as discussed above, such balances are
significantly reduced below their March 31, 1996 balances, as a result of
application of cash collected from receivables during the nine months ended
December 31, 1996.
Fixed assets, net decreased from $4,084,000 at December 31, 1995 to $3,544,000
at December 31, 1996, partly due to a fluctuation in foreign currency exchange
rates and partly due to the disposal of certain unnecessary fixed assets and
write-off of leasehold improvements by the
24
Registrant associated with its relocation to smaller, more cost effective,
office space in April 1996 partially offset by improvements to fixed assets in
Spain.
Other non-current assets increased 31% from $1,319,000 at December 31, 1995 to
$1,727,000 at December 31, 1996 and long term debt increased 281% from
$1,354,000 at December 31, 1995 to $5,164,000 at December 31, 1996, primarily as
a result of the Public Offering of Units in February 1996. The increase in other
non-current assets was partially offset by the provision for goodwill impairment
of $340,000.
Investing activities, including the purchase of investments available for sale
of $166,000 and the addition of fixed assets, used net cash of $175,000 during
the year ended December 31, 1996. Financing activities (primarily the sale of
Units in a Public Offering in February 1996) provided net proceeds of
$3,707,000, after repayment of $1,770,000 of long term debt, for the year ended
December 31, 1996. Operating activities for the year ended December 31, 1996
used net cash of $73,000. The loss on the disposal of fixed assets and write-off
of leasehold improvements associated with the Registrant's relocation to
smaller, more cost effective office space in April 1996 was $79,000.
Seasonality. In the past, the Registrant has experienced lower sales in certain
calendar quarters of each year. Should the Registrant begin large sales of a
pharmaceutical product whose sales are seasonal, seasonality of sales may become
more significant.
Currency. A substantial amount of the Registrant's business is conducted in
Spain and France and is therefore influenced by the extent to which there are
fluctuations in the dollar's value against such countries' currencies. The
effect of foreign currency fluctuations on long lived assets for the year ended
December 31, 1996 was a decrease of $487,000 and the cumulative historical
effect was a decrease of $1,081,000, as reflected in the Registrant's
Consolidated Balance Sheets in the "Liabilities and Stockholders' Equity"
section. Although exchange rates fluctuated significantly in recent years, the
Registrant does not believe that the effect of foreign currency fluctuation is
material to the Registrant's results of operations as the expenses related to
much of the Registrant's foreign currency revenues are in the same currency as
such revenues. The Registrant relies primarily upon financing activities to fund
the operations of the Registrant in the United States and has not transferred
significant amounts into or out of the United States in the recent past. In the
event that the Registrant is required to fund United States operations with
funds generated in Spain or France, 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.
Financings. To finance its operations, in October 1995 the Registrant conducted
two private placements of its securities. In the first placement, the Registrant
sold to certain purchasers for an aggregate purchase price of $720,000, 120,000
shares of the Registrant's Common Stock and 12% promissory notes in the
aggregate principal amount of $720,000 which became payable in full upon the
earlier of July 31, 1996 or the closing of a public offering of the Registrant's
securities. In the second placement, the Registrant sold to certain purchasers
for an aggregate purchase price of $1,050,000, 131,250 shares of Common Stock
and 12% promissory notes in
25
the aggregate principal amount of $1,050,000 which became payable in full upon
the earlier of September 30, 1996 or the completion of a public offering. A
Public Offering was completed in February 1996 and all of such notes were repaid
at that time or converted into Units.
An aggregate of 6,900 Units (the "Units") were sold in the 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. Interest on the Debentures is payable
quarterly. The Debentures are convertible prior to maturity, unless previously
redeemed, at any time commencing February 14, 1997 (the "Anniversary Date") into
shares of Common Stock at a conversion price per share of $2.50. 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
the private placements discussed above.
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 is
18.1%.
Management expects that as a result of completing its recent financings, by
carefully prioritizing research and development activities and continuing its
austerity program, the Registrant should have sufficient liquidity to fund
operations into 1998. The Registrant, however, continues to explore alternative
sources for financing its business. In appropriate situations, that will be
strategically determined, the Registrant may seek financial assistance from
other sources, including contribution by others to joint ventures and other
collaborative or licensing arrangements for the development, testing,
manufacturing and marketing of products under development and the sale of
certain of the assets of, or one or more of, its subsidiaries. The Company is
currently engaged in negotiations with a subsidiary of a large European
conglomerate to sell its French subsidiary, Chimos. The transaction is expected
to be finalized early in the second quarter of 1997. As no definitive agreement
has been signed, there can be no assurance that such sale will be consumated.
Sales generated by Chimos began to decline in the second quarter of 1996 due to
the expiration of a distribution agreement for the product Ceredase. Since the
expiration of this distribution agreement, Chimos has been generating revenues
at the rate of approximately $5.5 million per annum.
26
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, including the history of operating losses; uncertainty of future
financial results; possible negative cash flow from operating activities;
additional financing requirements; no assurance of successful and timely
development of new products; risks inherent in pharmaceutical development;
dependance on regulatory approvals; uncertainty of pharmaceutical pricing or
profitability; unpredictability of patent protection; rapid technological
change; competition; and other uncertainties detailed in the Registrant's
Registration Statement on Form S-1 (SEC File No. 33-65125) declared
effective by the Securities and Exchange Commission on February 14, 1996.
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.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
---------------------------------------------------------------
THE REGISTRANT
--------------
The following information is furnished with respect to each director and
executive officer of the Registrant.
Year First
Positions of the Class of Became
Name Age Registrant Presently Held Director Director
- ---- --- ------------------------- -------- --------
James R. Murphy 47 Chairman, President, III 1993
Chief Executive Officer
and Director
Robert M. Stote, M.D. 57 Senior Vice President, III 1993
Chief Science Officer and
Director
Michael D. Price 39 Vice President, II 1995
Chief Financial Officer,
Treasurer, Secretary and
Director
27
Randolph W. Arnegger 52 Director II 1994
Charles L. Bolling 73 Director II 1991
Doris E. Wardell 58 Director I 1994
JAMES R. MURPHY became President and Chief Operating Officer 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 company, from March 1993 through
September 1994. From September 1992 until March 1993, Mr. Murphy served as a
Consultant to 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 business development with contract research laboratories. Mr. Murphy received
a B.A. in Biology from Millersville University.
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 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., a real estate developer 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.
RANDOLPH W. ARNEGGER is the President of Vantage Point Marketing, a developer
and producer of continuing medical education programs, medically oriented direct
mail programs and medical convention programs, a position he has held since
1986. Prior thereto, Mr. Arnegger served as Vice President of Account Services
for Curtin & Pease/Peneco, a national direct mail firm, and Vice President for
Pro Clinica, a medical advertising agency in New York.
28
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.
DORIS E. WARDELL has been a consultant in the health care industry since July
1995, assisting clients with solutions with respect to patient care and nurse
satisfaction issues. Prior thereto, she was Assistant Professor/Clinical
Services Coordinator at the University of Utah College of Nursing from April
1994 to July 1995, and was previously involved in Integrated Care special
projects at Allegheny General Hospital, serving as Acting Vice President of
Nursing at Allegheny General Hospital from September 1992 to June 1994 and
Assistant Vice President of Nursing from December 1989 to September 1992. Prior
thereto, Mrs. Wardell served as Vice President of Administration at Beaver
Medical Center from April 1987 to November 1989. From March 1980 to April 1987,
she was employed by Chestnut Hill Hospital as Vice President of Nursing and
Director of Nursing Services from August 1978 to March 1980.
The Registrant is currently in arrears on three annual dividend payments on its
Series A Preferred Stock and, therefore, the holders of the Series A Preferred
Stock have the right, as a class, to elect two additional members of the
Registrant's Board of Directors. As of the date hereof, the holders have not
exercised such right.
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 director included in Class I above will hold office
until the 1997 Annual Meeting of Stockholders. The directors included in Class
II above will hold office until the 1998 Annual Meeting of Stockholders. The
directors included in Class III above will hold office until the 1999 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, 1996, all Section 16(a) filing
requirements have been satisfied.
29
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information called for by this item is incorporated by reference to the
Registrant's definitive Proxy Statement for the 1997 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 1997 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 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
30
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, 1996 and
1995 F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Common Stockholders'
Equity for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5 to F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule F-27
Schedule II - Valuation and qualifying accounts and reserves F-28
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.
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 Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Commission File No. 33-65125,
which exhibit is incorporated herein by reference.)
3.2 By-Laws of the Registrant, as amended and restated. (Reference is
made to Exhibit 3.2 to the Registrant's Form 10-K filed June 30,
1989, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
3.3 Amendment to By-Laws of the Registrant. (Reference is made to
Exhibit 3.2(a) to the Registrant's Amendment No. 1 on Form S-3 to
Form S-1 Registration Statement, Commission File No. 33-35941,
which exhibit is incorporated herein by reference.)
4.1 Form of Subscription Agreement between the Registrant and each
purchaser in connection with the Registrant's October 1991 sales
of its $2.25 Convertible Exchangeable Preferred Shares, Series A.
(Reference is made to Exhibit 4.1 to the Registrant's Form 8-K
filed October 17, 1991, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)
4.2 Indenture relating to the Registrant's 9% Convertible
Subordinated Debentures due 2016 (with the Form of Debenture
attached thereto as Exhibit A.) (Reference is made to Exhibit 4.2
to the Registrant's Form 8-K filed October 17, 1991, Commission
File No. 1-10581, which exhibit is incorporated herein by
reference.)
4.3 Specimen Certificate of the Registrant's $2.25 Convertible
Exchangeable Preferred Shares, Series A. (Reference is made to
Exhibit 4.3 to the Registrant's Form 8-K filed October 17, 1991,
Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)
4.4 Registrant's 1991 Stock Option Plan. (Reference is made to
Exhibit 4.6 to the Registrant's Form 8-K filed October 17, 1991,
Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)
32
Exhibit
Number Description
- ------- -----------------------------------------------------------------
4.5 Amendment to Registrant's 1991 Stock Option Plan. (Reference is
made to Exhibit 4.17 to the Registrant's Form 10-K for the
Transition Period Ended December 31, 1992, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)
4.6 Amendment to Registrant's 1991 Stock Option Plan as approved by
the shareholders on June 9, 1994. (Reference is made to Exhibit
4.16 to the Registrant's Form 10-K for the year ended December
31, 1994, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
4.7 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.)
4.8 Subscription Agreement between the Registrant and Bodel Inc.
dated November 23, 1993. (Reference is made to Exhibit 4.20 to
the Registrant's Form 10-K filed December 31, 1993, Commission
File No. 1-10581, which exhibit is incorporated herein by
reference.)
4.9 Warrants issued by the Registrant to Grant Harshbarger, dated
November 11, 1993 and November 17, 1993, respectively. (Reference
is made to Exhibit 4.8 to the Registrant's Registration Statement
on Form S-3, Commission File No. 33-69946, which exhibit is
incorporated herein by reference.)
4.10 Warrants issued by the Registrant to Healthcare Capital
Investments, Inc., dated November 11, 1993 and November 17, 1993,
respectively. (Reference is made to Exhibit 4.9 to the
Registrant's Registration Statement on Form S-3, Commission File
No. 33-69946, which exhibit is incorporated herein by reference.)
4.11 Subscription Agreement between the Registrant and Western Slops,
Ltd. dated March 29, 1994. (Reference is made to Exhibit 4.29 to
the Registrant's Form 10-K for the year ended December 31, 1994,
Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)
4.12 Subscription Agreement between the Registrant and Shulmit
Pritziker dated December 7, 1994. (Reference is made to Exhibit
4.32 to the Registrant's Form 10-K for the year ended December
31, 1994, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
33
Exhibit
Number Description
- ------- -----------------------------------------------------------------
4.13 Warrants issued by the Registrant to Baytree Associates, Inc.
dated October 18, 1995. (Reference is made to Exhibit 4.23 to the
Registrant's Registration Statement on Form S-1, Commission File
No. 33-65125, which exhibit is incorporated herein by reference.)
4.14 Form of Subscription Agreement between the Registrant and various
purchasers of Units consisting of one note and 10,000 shares of
Common Stock in an October 1995 private placement. (Reference is
made to Exhibit 4.1 to the Registrant's Form 8-K filed November
29, 1995, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
4.15 Form of Note dated September 30, 1995 issued by the Registrant to
the purchasers of Units in an October 1995 private placement.
(Reference is made to Exhibit 4.2 to the Registrant's Form 8-K
filed November 29, 1995, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)
4.16 Form of Subscription Agreement between the Registrant and various
purchasers of Units consisting of one note and 7,500 shares of
Common Stock in an October 1995 private placement. (Reference is
made to Exhibit 4.3 to the Registrant's Form 8-K filed November
29, 1995, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
4.17 Form of Note dated October 25, 1995 issued by the Registrant to
the purchasers of Units in an October 1995 private placement.
(Reference is made to Exhibit 4.4 to the Registrant's Form 8-K
filed November 29, 1995, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)
4.18 Form of Indenture relating to the Registrant's $1,000 Principal
Amount 12% Senior Convertible Subordinated Debentures due
February 13, 2006 (with the Form of Debenture attached thereto as
Exhibit A.) (Reference is made to Exhibit 4.28 to the
Registrant's Registration Statement on Form S-1, Commission File
No. 33-65125, which exhibit is incorporated herein by reference.)
4.19 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.)
4.20 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.)
34
Exhibit
Number Description
- ------- -----------------------------------------------------------------
4.21 Form of Unit Certificate. (Reference is made to Exhibit 4.31 to
the Registrant's Registration Statement on Form S-1, Commission
File No. 33-65125, which exhibit is incorporated herein by
reference.)
10.1 Employment Agreement dated as of June 12, 1995 between the
Registrant and James R. Murphy. (Reference is made to Exhibit
10.1 to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
10.2 Employment Agreement dated as of June 12, 1995 between the
Registrant and Robert M. Stote, M.D. (Reference is made to
Exhibit 10.2 to the Registrant's Registration Statement on Form
S-1, Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
10.3 Employment Agreement dated as of June 12, 1995 between the
Registrant and Michael D. Price. (Reference is made to Exhibit
10.3 to the Registrant's Registration Statement on Form S-1,
Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
10.4 Partnership Agreement dated March 11, 1994 of Belmac/Maximed
Partnership. (Reference is made to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended March 31, 1994,
Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)
21.1 Subsidiaries of the Registrant. (Reference is made to Exhibit
21.1 to the Registrant's Form 10-K for the year ended December
31, 1994, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
23.1* Consent of Deloitte & Touche LLP.
27.1* Financial Data Schedule.
- ---------------
* Filed herewith.
(b) Reports on Form 8-K filed during the fiscal quarter ended December 31,
1996:
None.
Subsequent to December 31, 1996, the Registrant filed the following Reports
on Form 8-K:
None.
35
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, 1997
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, 1997
- ------------------------ Chief Executive Officer
James R. Murphy and Director (principal
executive officer)
/s/ Robert M. Stote Senior Vice President, March 27, 1997
- ------------------------ Chief Science Officer and
Robert M. Stote, M.D. Director
/s/Michael D. Price Vice-President, March 27, 1997
- ------------------------ Chief Financial Officer,
Michael D. Price Treasurer, Secretary and
Director (principal
financial and accounting officer)
/s/ Randolph W. Arnegger Director March 27, 1997
- ------------------------
Randolph W. Arnegger
/s/ Charles L. Bolling Director March 27, 1997
- ------------------------
Charles L. Bolling
/s/ Doris E. Wardell Director March 27, 1997
- ------------------------
Doris E. Wardell
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
common stockholders' equity, and cash flows for each of the three years ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Tampa, FL
March 27, 1997
F-1
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) December 31,
--------------------
1996 1995
-------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,425 $ 1,120
Investments 166 161
Receivables 3,632 6,836
Inventories 945 1,054
Prepaid expenses and other 644 596
-------- --------
Total current assets 9,812 9,767
-------- --------
Fixed assets, net 3,544 4,084
Drug licenses and related costs, net 1,475 1,120
Other non-current assets, net 1,727 1,319
-------- --------
$ 16,558 $ 16,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 2,998 $ 3,883
Accrued expenses 1,530 1,572
Short term borrowings 1,014 1,197
Current portion of long term debt 5 2
-------- --------
Total current liabilities 5,547 6,654
-------- --------
Long term debt, net 5,164 1,354
-------- --------
Other non-current liabilities 349 898
-------- --------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value,
authorized 2,000 shares:
Series A, issued and outstanding, 60 shares 2,203 2,068
-------- --------
Common Stockholders' Equity
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 3,345 and 3,330 shares 67 66
Stock purchase warrants (to purchase 8,304 and 547
shares of common stock) 435 150
Paid-in capital in excess of par value 71,146 70,047
Stock subscriptions receivable (105) (105)
Accumulated deficit (67,167) (64,248)
Cumulative foreign currency translation adjustment (1,081) (594)
-------- --------
3,295 5,316
-------- --------
$ 16,558 $ 16,290
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial satements.
F-2
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) For the Year Ended
December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Sales $ 23,133 $ 31,437 $ 27,010
Cost of sales 15,638 25,586 21,931
-------- -------- --------
Gross margin 7,495 5,851 5,079
-------- -------- --------
Operating expenses:
Selling, general and administrative 7,923 7,204 7,716
Research and development 29 444 759
Depreciation and amortization 502 550 575
Provision for goodwill impairment 340 -- --
-------- -------- --------
Total operating expenses 8,794 8,198 9,050
-------- -------- --------
Loss from operations (1,299) (2,347) (3,971)
Other (income) expenses:
Interest expense 1,227 563 423
Interest income (103) (3) (123)
Other (income) expense, net 50 (581) (693)
-------- -------- --------
Loss before extra-ordinary item (2,473) (2,326) (3,578)
Extra-ordinary item-extinguishment of debt 446 -- --
-------- -------- --------
Net loss ($ 2,919) ($ 2,326) ($ 3,578)
======== ======== ========
Loss per common share before
extra-ordinary item ($ 0.79) ($ 0.83) ($ 1.56)
Extra-ordinary item-
Extinguishment of debt (0.13) -- --
-------- -------- --------
Net loss per common share ($ 0.92) ($ 0.83) ($ 1.56)
======== ======== ========
Weighted average common shares
outstanding 3,334 2,999 2,395
===== ===== =====
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(In thousands, except per share data)
$.02 Par Value
Common Stock Additional Other
-------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit Transactions Total
-------- -------- -------- -------- -------- --------
Balance at December 31, 1993 2,070 $ 41 $ 63,902 ($58,344) ($ 2,658) $ 2,941
Private placements of common stock, net 826 17 4,776 -- -- 4,793
Stock subscriptions receivable -- -- -- -- (1,596) (1,596)
Stock subscriptions received -- -- -- -- 693 693
Conversion of redeemable preferred stock 1 -- 129 -- -- 129
Conversion of stock purchase warrants 2 -- 34 -- -- 34
Repurchase of common stock (41) (1) (620) -- 621 --
Sale of treasury stock 42 1 294 -- -- 295
Common stock issued as compensation 7 -- 146 -- -- 146
Common stock issued to settle litigation 70 2 998 -- -- 1,000
Accrual of dividends - preferred stock -- -- (166) -- -- (166)
Foreign currency translation adjustment -- -- -- -- 289 289
Net loss -- -- -- (3,578) -- (3,578)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 2,977 60 69,493 (61,922) (2,651) 4,980
Private placements of common stock, net 251 5 465 -- -- 470
Stock subscriptions received -- -- -- -- 562 562
Stock subscriptions revaluation/cancellation -- -- (351) -- 883 532
Conversion of redeemable preferred stock 3 -- 340 -- -- 340
Issuance of stock purchase warrants -- -- -- -- 150 150
Conversion of stock purchase warrants 90 2 212 -- -- 214
Common stock issued as compensation 9 -- 58 -- -- 58
Miscellaneous -- (1) (18) -- -- (19)
Accrual of dividends - preferred stock -- -- (152) -- -- (152)
Foreign currency translation adjustment -- -- -- -- 507 507
Net loss -- -- -- (2,326) -- (2,326)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 3,330 66 70,047 (64,248) (549) 5,316
Public offering of units, net -- -- 1,184 -- 285 1,469
Common stock issued as compensation 15 1 50 -- -- 51
Accrual of dividends-preferred stock -- -- (135) -- -- (135)
Foreign currency translation adjustment -- -- -- -- (487) (487)
Net loss -- -- -- (2,919) -- (2,919)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 3,345 $ 67 $ 71,146 ($67,167) ($ 751) $ 3,295
======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
-----------------------------
(In thousands) 1996 1995 1994
------- ------- -------
Cash flows from operating activities:
Loss before extra-ordinary item ($2,473) ($2,326) ($3,578)
Adjustments to reconcile loss before
extra-ordinary item to net cash used
in operating activities:
Depreciation and amortization 502 550 575
Other non-cash items 468 610 254
Extra-ordinary item-Extinguishment of debt (446) -- --
Provision for goodwill impairment 340 -- --
Loss on disposal of fixed assets 79 -- --
Gain on sale of Belmacina(R) -- (380) (884)
Cancellation of stock subscription receivable -- 532 --
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables 2,991 150 124
Inventories 43 (297) 154
Prepaid expenses and other current assets (272) (270) 20
Other assets (93) (160) 349
Accounts payable and accrued expenses (716) (2,246) 228
Other liabilities (496) 500 (657)
------- ------- -------
Net cash used in operating activities (73) (3,337) (3,415)
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of investments 161 214 1,040
Purchase of investments (166) (147) (116)
Net change in fixed assets (170) (603) --
Acquistion of Spanish drug license -- (156) --
Proceeds from sale of Belmacina(R) -- 1,140 651
Investment in partnership -- (13) (648)
Return of deposit -- -- (793)
------- ------- -------
Net cash (used in) provided by investing activities (175) 435 134
------- ------- -------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
(In thousands) For the Year Ended
December 31,
-----------------------------
1996 1995 1994
------- ------- -------
Cash flows from financing activities:
Net (decrease) increase in short term borrowings ($ 120) $ 533 ($ 397)
Proceeds from public offering of units 6,900 -- --
Proceeds from private placements:
Common stock -- 544 3,761
Promissory notes -- 1,226 --
Offering costs (1,275) (187) (377)
Collection of stock subscription receivable, net -- 506 693
Proceeds from exercise of stock warrants, net -- 214 34
Repayment of long term debt (1,770) (59) (203)
Payments on capital leases (28) (33) (72)
------- ------- -------
Net cash provided by financing activities 3,707 2,744 3,439
------- ------- -------
Effect of exchange rate changes on cash (154) (43) (389)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 3,305 (201) (231)
Cash and cash equivalents at beginning of period 1,120 1,321 1,552
------- ------- -------
Cash and cash equivalents at end of period $ 4,425 $ 1,120 $ 1,321
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the period for
(in thousands):
Interest $ 907 $ 222 $ 263
======= ======= =======
Taxes -- -- $ 6
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common Stock in
exchange for services, rights or in settlement
of litigation as follows (in thousands):
Shares issued 15 9 99
======= ======= =======
Amount $ 51 $ 58 $ 1,290
======= ======= =======
In 1996, the Company acquired a drug license in Spain, assuming approximately
$477,000 in liabilities, therefor.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-6
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY AND OPERATIONS
Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical
and health care company engaged primarily in the manufacturing, marketing and
distribution of pharmaceutical products in France and Spain, with limited
distribution of health care products in the United States. The Company's
operations in France consist of the import and distribution of fine chemicals
and the marketing of specialty pharmaceutical products. The Company has entered
negotiations to sell its French subsidiary (see Note 13). In Spain, the Company
manufactures, packages and distributes both its own and other companies'
pharmaceutical products. In the United States, the Company markets disposable
linens, which are manufactured under contract, to emergency health services.
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 shown in the consolidated
financial statements, the Company has incurred net losses as well as negative
operating cash flows for all periods presented.
In order to fund operations, the Company primarily has issued Common Stock and
other securities. During the year ended December 31, 1995, the Company completed
private placements of its securities, which generated net proceeds of
approximately $1,583,000. In February 1996, the Company completed a public
offering of its securities, which generated net proceeds of approximately
$5,700,000, a portion of which was used to retire $1,770,000 principal balance
of debt incurred in the private placements mentioned above (see Notes 8 and 14).
The balance of the net proceeds are being used for working capital needs,
limited research and development activities, and possible acquisitions of
complementary products, technologies and/or businesses. Management believes that
it now has sufficient resources to fund its operations into 1998.
The Company's ultimate success is dependent upon its ability to attain
profitable operations and positive cash flows. Management has shifted the
Company's strategic focus from a research and development-oriented
pharmaceutical company to a company seeking to acquire late-stage development
compounds that can be marketed in one year, and currently marketed products. As
a result, the Company has decreased its research and development budget, and is
carefully managing its operating costs, which it has recently reduced via cost
cutting measures throughout its operations. Management of the Company is now
emphasizing product manufacturing and distribution, strategic alliances and
product acquisitions.
F-7
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: Chimos/LBF S.A. (formerly known as the separate
entities of Laboratoires Belmac S.A. and Chimos S.A.) and its wholly owned
subsidiary, Laboratorios Belmac S.A.; Belmac Healthcare Corporation and its
wholly owned subsidiary, Belmac Hygiene, Inc.; Belmac Holdings, Inc. (formerly
known as Pharmacin Holdings, Inc.), and its wholly owned subsidiary, Belmac
A.I., Inc. (formerly known as Pharmacin Corp.); B.O.G. International Finance,
Inc.; and Belmac Jamaica, Ltd. Belmac Hygiene, Inc. entered into a 50/50
partnership with Maximed Corporation of New York in March 1994. Belmac Hygiene's
participation in the partnership is accounted for using the equity method. 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 foreign subsidiaries are translated at the rate of
exchange in effect at the end of the period. Revenues and expenses are
translated at the average exchange rate for the period. Foreign currency
translation gains and losses not impacting cash flows are credited to or charged
against Common 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 investments available for sale in the Consolidated Balance
Sheets.
INVESTMENTS AVAILABLE FOR SALE
Investments available for sale are reported at approximate market value and
include restricted Certificates of Deposit, collateralizing Letters of Credit,
which mature in June 1997. The Certificates of Deposit earn interest at the rate
of 4.8%. Investments available for sale at December 31, 1995 are comprised of
short term investments in France.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out ("FIFO") method.
F-8
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 5 - 7
Furniture and fixtures 5 - 7
Other 5
Leasehold improvements are depreciated over the life of the respective lease.
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. Costs of acquiring pharmaceuticals requiring further development
are expensed as purchased research and development. Carrying values of such
assets are reviewed annually by the Company and are adjusted for any diminution
in value.
INVESTMENT IN PARTNERSHIP
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, is responsible for providing
financing and funding of the partnership's activities. The investment in the
partnership is accounted for using the equity method.
In December 1994, the Company commenced litigation against its partner claiming
interference in the management of the partnership and misrepresentation under
the partnership agreement. The Court ruled that the Company's reliance on its
partner's misrepresentation was not justified and that the Company had performed
its obligations under the agreement with its partner. Accordingly, the Company's
claims as well as the counterclaims of its partner were dismissed. On September
25, 1996, the Company filed an appeal in the United States Court of Appeals for
the Second Circuit. Oral argument was heard on February 26, 1997 and a decision
is expected within the next few months. Pending resolution of this dispute, the
partnership is not actively engaged in the development of any products (see Note
13). In the opinion of management, the
F-9
carrying value of its investment in the partnership, accounted for using the
equity method, of $553,000 and $513,000 as of December 31, 1996 and 1995,
respectively, is not impaired and no reserve is considered necessary.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 estimated.
ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS
Original issue discount related to the issuance of debt is amortized to interest
expense using the effective interest method over the lives of the related debt.
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of the
related debt.
AMORTIZATION OF GOODWILL
Costs of investments in purchased companies in excess of the underlying fair
value of net identifiable assets at date of acquisition are recorded as goodwill
and included in other non-current assets which are amortized over fifteen years
on a straight-line basis. Carrying values of such assets are reviewed annually
by the Company and are adjusted for any diminution in value.
As a result of estimating the proceeds from the proposed sale of Chimos, the
Company reviewed, for impairment, the recoverable value of the carrying amount
of long-lived assets and intangibles. Based upon this review, the Company fully
reserved the remaining unamortized goodwill of approximately $340,000, at
December 31, 1996. Goodwill amortization expense, excluding the provision for
impairment, for the years ended December 31, 1996, 1995 and 1994 was $38,000,
$38,000 and $40,000, respectively (see Note 13).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FAS 107) 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 judgement
F-10
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 amounts. Long-term debt is estimated to have a fair value
of approximately $8,970,000 as of December 31, 1996. The carrying amount of
other financial instruments approximate their estimated fair values.
The fair value information presented herein is based on information available to
management as of December 31, 1996. 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 APB 25 and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock-based compensation plans.
REVENUE RECOGNITION
Sales of products are recognized by the Company when the products are shipped to
customers. The Company allows sales returns in certain situations, but does not
reserve for returns and allowances based upon the Company's favorable historical
experience.
INCOME TAXES
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (FAS 109) mandates the liability method in accounting for the effects of
income taxes for financial reporting purposes. The Company adopted FAS 109
effective January 1, 1993; however, this statement did not have a material
impact on the Company's consolidated financial statements as a result of
establishing a valuation allowance equal to the deferred tax asset arising
primarily from its net operating loss carryforwards.
NET LOSS PER COMMON SHARE
Primary loss per common share is computed by dividing the net loss (adjusted for
accretion of discount and accrued dividends on mandatorily redeemable preferred
stock) by the weighted average number of shares of Common Stock outstanding
during each period. Common Stock equivalents were not included in the
calculation of primary loss per share as they were determined to be
antidilutive. The Company effected a one-for-ten reverse split of its Common
Stock on July 25, 1995 as a result of an amendment to its Articles of
Incorporation which was approved by the stockholders at the Company's Annual
Stockholders' Meeting held on June 9,
F-11
1995. All information with respect to per share data and number of common shares
has been retroactively adjusted to give effect to the reverse stock split.
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.
NOTE 3--RECEIVABLES
Receivables consist of the following (In Thousands):
December 31,
----------------------
1996 1995
------- -------
Trade receivables $ 3,529 $ 6,510
Other (Notes 6 and 13) 129 487
------- -------
3,658 6,997
Less-allowance for doubtful accounts (26) (161)
------- -------
$ 3,632 $ 6,836
======= =======
NOTE 4--INVENTORIES
Inventories consist of the following (In Thousands):
December 31,
----------------------
1996 1995
------- -------
Raw materials $ 515 $ 374
Work in process -- 1
Finished goods 1,257 1,498
------- -------
1,772 1,873
Less allowance for slow-moving or obsolete inventory (827) (819)
------- -------
$ 945 $ 1,054
======= =======
F-12
NOTE 5--FIXED ASSETS
Fixed assets consist of the following (In Thousands):
December 31,
------------------------
1996 1995
------- -------
Land $ 1,138 $ 1,212
Buildings 2,673 2,675
Equipment 828 973
Furniture and fixtures 501 642
Leasehold improvements 117 335
Equipment under capital lease 27 149
------- -------
5,284 5,986
Less-accumulated depreciation (1,740) (1,902)
------- -------
$ 3,544 $ 4,084
======= =======
Depreciation expense was $345,000, $424,000 and $434,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 6--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (In Thousands):
December 31,
------------------------
1996 1995
------- -------
Drug licenses and related costs $ 1,972 $ 1,526
Less-accumulated amortization (497) (406)
------- -------
$ 1,475 $ 1,120
======= =======
In September 1992, the Company, through its Spanish subsidiary Laboratorios
Belmac, acquired the Spanish license and product rights to Belmacina(R), a
ciprofloxacin antibiotic, for approximately $577,000. The Company sold its
Spanish license and product rights to Belmacina(R) in 1994 for approximately
$1,556,000 and sold the related trademark for approximately $380,000 in 1995.
The Company received approximately $651,000 in cash in 1994, net of transaction
costs and a receivable of approximately $1,140,000, which included amounts
related to the sale of the trademark. The gain on sale of the license and
product rights of approximately
F-13
$884,000 was included in Other income/expense, net for the year ended December
31, 1994 and the gain on the sale of the related trademark was recorded as a
receivable and as deferred revenue as of December 31, 1994. The Company
recognized the gain on the sale of the related trademark upon the transfer of
the trademark to the buyer in 1995.
The Company owns all rights, title and interest to Alphanon(R), a camphor based
anti-hemorrhoidal drug. In connection with the acquisition of Alphanon(R), the
Company agreed to pay for the longer of fifteen years from the first marketing
of Alphanon(R) in each country or the life of an Alphanon(R) patent in each
country, a royalty fee of 5% of the gross profit from the manufacture and sale
of the product and 5% of the net royalty payments received from any licensing
agreements of the product.
Amortization expense for drug licenses and related costs was approximately
$119,000, $88,000 and $102,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following (In Thousands):
December 31,
--------------------
1996 1995
------ ------
Accrued expenses $1,247 $1,189
Accrued payroll and severance benefits 283 383
------ ------
$1,530 $1,572
====== ======
NOTE 8--DEBT
Short term borrowings consist of the following (In Thousands):
December 31,
---------------
1996 1995
------ ------
Trade receivables discounted (with a Spanish financial institution),
with recourse, effective interest rate on the note is 11.6% $ 804 $ 705
Revolving line of credit (with a Spanish financial institution),
interest rate 8.5% 154 --
Revolving line of credit (with a French financial institution),
interest rate 7.5% -- 380
Other 56 112
------ ------
Total short term borrowings $1,014 $1,197
====== ======
F-14
Long-term debt consists the following (In Thousands):
December 31,
------------------
1996 1995
------- -------
Debentures, maturing February 13, 2006, stated rate of interest
12% (net of $1,753 discount) $ 5,147 --
Promissory notes (issued in a private placement), matured February
1996, stated rate of interest 12% (net of $175 discount) -- $ 545
Promissory notes (issued in a private placement), matured February
1996, stated rate of interest of 12% (net of $241 discount) -- 809
Capitalized lease obligations, relating to various equipment used by
the Company 22 2
------- -------
5,169 1,356
Less current portion (5) (2)
------- -------
Total long term debt $ 5,164 $ 1,354
======= =======
- ---------------
The weighted average stated interest rate on borrowings outstanding at December
31, 1996 and 1995 was 11.7% and 12.2% respectively.
The Company has a $154,000 revolving line of credit with a Spanish financial
institution. At December 31, 1996, advances outstanding under the line of credit
were approximately $154,000. The interest rate at December 31, 1996 was 8.5% and
is payable quarterly.
The Company has a $1,000,000 revolving line of credit with a French financial
institution, which is collateralized by trade receivables. At December 31, 1996,
there were no advances outstanding under the line of credit. The interest rate
at December 31, 1995 was 7.5%, and is payable quarterly.
In October 1995, the Company conducted two private placements of its securities.
In the first placement, the Company sold to certain purchasers, for an aggregate
purchase price of $720,000, 120,000 shares of the Company's Common Stock and 12%
promissory notes in the aggregate principal amount of $720,000 (the "A Notes")
which became payable in full upon the earlier of July 31, 1996 or the closing of
a public offering of the Company's securities (a "Public Offering"). The A Notes
were subject to mandatory conversion at a conversion price of $3.00 per share if
no Public Offering was completed by July 31, 1996. The purchase price
F-15
was allocated between the A Notes and the shares of the Company's Common Stock
based upon the relative fair values of these securities on the date of issuance.
Such allocation resulted in recording a discount on the A Notes of approximately
$250,000. The effective interest rate on the A Notes was 83%. The A Notes were
paid in full in February 1996, upon the completion of the Public Offering (see
Note 14). As a result of refinancing the A Notes with long term debt, the A
Notes were classified as long term debt on the Consolidated Balance Sheet as of
December 31, 1995.
In the second placement, the Company sold to certain purchasers for an aggregate
purchase price of $1,050,000, 131,250 shares of Common Stock and 12% promissory
notes in the aggregate principal amount of $1,050,000 (the "B Notes") which
became payable in full upon the earlier of September 30, 1996 or the completion
of a Public Offering. The B Notes were subject to mandatory conversion, at a
conversion price equal to the average closing price for the Common Stock quoted
on the American Stock Exchange for the five trading days immediately preceding
September 30, 1996. The purchase price was allocated between the B Notes and the
shares of the Company's Common Stock based upon the relative fair values of
these securities on the date of issuance. Such allocation resulted in recording
a discount on the B Notes of approximately $294,000. The effective interest rate
on the B Notes was 75%. The B Notes were paid in full in February 1996, upon the
completion of the Public Offering (see Note 14). As a result of refinancing the
B Notes with long term debt, the B Notes were classified as long term debt on
the Consolidated Balance Sheet as of December 31, 1995.
In February 1996, the Company completed a Public Offering of its securities,
whereby an aggregate of 6,900 Units were sold. 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 is payable quarterly.
On May 29, 1996, the Debentures and Class A Redeemable Warrants began trading
separately. The characteristics of the Debentures and Class A Redeemable
Warrants are consistent with their description as components of the Units.
The Debentures are convertible prior to maturity, unless previously redeemed, at
any time into shares of Common Stock at a conversion price per share of $2.50.
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. Approximately $1,770,000 of the net proceeds were used to retire
the principal balance of debt incurred in 1995 private placements (See Note 14).
The balance of the net proceeds, approximately $4,000,000, are being used for
working capital needs.
Of the Unit purchase price of $1,000, for financial reporting purposes, the
consideration allocated to the Debenture is $722, to the conversion discount
feature of the Debenture is $224
F-16
and to the 1,000 Class A Warrants is $54. None of the Unit purchase price is
allocated to the Class B Warrants. Such allocation is 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
original issue discount and the costs related to the issuance of the Debentures
are being amortized to interest expense using the effective interest method over
the lives of the related Debentures. The effective interest rate on the
Debentures is 18.1%.
NOTE 9--REDEEMABLE PREFERRED STOCK
During 1991, the Company issued 290,000 shares of $1 par value Series A
Convertible Exchangeable Preferred Stock (the "Series A Preferred Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred Stock") at $25 per share. The issuance of these shares
provided aggregate proceeds to the Company of $15,750,000. Since the Preferred
Stock meets the definition of Mandatorily Redeemable Preferred Stock, it has
been excluded from the Common Stockholders' Equity section of the Consolidated
Balance Sheets. As of December 31, 1996 and 1995, 230,000 of the Series A
Preferred Stock had been converted into 51,200 shares of Common Stock and all
340,000 shares of the Series B Preferred Stock had been converted into 56,100
shares of Common Stock.
The shares of Series A and B Preferred Stock were convertible at the option of
the holders into Common Stock at any time prior to the close of business on the
date fixed for redemption or exchange, at an initial conversion price for the
Series A Preferred Stock of $115.00 per share (at an initial conversion rate of
approximately .21739 shares of Common Stock for each share of Series A Preferred
Stock) and for the Series B Preferred Stock of $160.00 per share (at an initial
conversion rate of .15625 shares of Common Stock for each share of Series B
Preferred Stock). The conversion rates were adjusted by the Company, in lieu of
paying cumulative dividends of 9% per annum to .3088 and .1703 for the Series A
and B Preferred Stock, respectively. The dividend payment date for Series A
Preferred Stock is October 15. The Series A Preferred Stock has a liquidation
preference equal to $25.00 per share, plus accrued and unpaid dividends up to
the liquidation date. The Series A Preferred Stock is redeemable for cash at the
option of the Company. The Series A Preferred Stock is also redeemable for cash
at the option of the holder upon certain major stock acquisitions or business
combinations at $25.00 per share, plus accrued and unpaid dividends through the
redemption dates. The holders of Preferred Stock have no voting rights except as
required by applicable law and except that if the equivalent of two full annual
cash dividends shall be accrued and unpaid, the holders of the Series A
Preferred Stock shall have the right, as a class, to elect two additional
members of the Company's Board of Directors. As of the date hereof, the holders
of the Series A Preferred Stock have not exercised their right to elect such
directors.
The Series A Preferred Stock is exchangeable in whole, but not in part, at the
option of the Company on any dividend payment date beginning October 15, 1993,
for 9% Convertible Subordinated Debentures of the Company due 2016. Holders of
Series A Preferred Stock will be entitled to $25 principal amount of Debentures
for each share of Series A Preferred Stock.
F-17
The Series A Preferred Stock is recorded at redemption value, which is $25.00
per share plus cumulative dividends of 9% per annum. The following table
summarizes activity of the Series A Preferred Stock: (In Thousands)
Series A
------------------------
SHARES AMOUNTS
------- -------
Balance at December 31, 1994 70 $ 2,256
Converted to Common Stock (10) (340)
Accrual of 9% dividends -- 152
------- -------
Balance at December 31, 1995 60 2,068
Accrual of 9% dividends -- 135
------- -------
Balance at December 31, 1996 60 $ 2,203
======= =======
NOTE 10--COMMON STOCKHOLDERS' EQUITY
At December 31, 1996 the Company had the following Common Stock reserved for
issuances under various plans and agreements: (In Thousands)
COMMON SHARES
-------------
For exercise of stock purchase warrants 12,039
For conversion of debentures 2,988
For exercise of stock options 1,860
For other 47
------
16,934
======
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. Under the
terms of the Series A Preferred Stock, the Company is restricted from paying
dividends on its Common Stock so long as there are arrearages on dividend
payments on the Series A Preferred Stock. There currently are such arrearages.
STOCK PURCHASE WARRANTS
At December 31, 1996, stock purchase warrants to purchase an aggregate of
8,304,000 shares of Common Stock were outstanding, which were exercisable at
prices ranging from $2.50 to $120.00 per share, of which 626,000 warrants have
an exercise price of $2.50 per share and 7,470,000 warrants have an exercise
price of $3.00 per share. The warrants expire through
F-18
December 2004. During the year ended December 31, 1996, the Company issued stock
purchase warrants to purchase an aggregate of 7,845,000 shares of the Company's
Common Stock, all of which were granted at exercise prices which were equal to
or greater than the market price of the Company's Common Stock on the dates of
grant. The Company issued 7,470,000 warrants in connection with a public
offering of its securities. During the year ended December 31, 1996, no stock
purchase warrants were converted into shares of the Company's Common Stock.
During the year ended December 31, 1995, stock purchase warrants were converted
into 90,000 shares of the Company's Common Stock at $2.50 per share. Such
conversions yielded net proceeds of $214,000 to the Company in the year ended
December 31, 1995. During the year ended December 31, 1994, stock purchase
warrants were converted into 2,500 shares of the Company's Common Stock at
$13.75 per share. Such conversions yielded net proceeds of $34,000 to the
Company in the year ended December 31, 1994.
In addition, the Company has granted warrants outside of the Plans 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, 1994, 1995 and 1996.
(IN THOUSANDS EXCEPT PER SHARE DATA)
NUMBER OF PRICE
COMMON SHARES PER SHARE
------------- ---------
Outstanding at December 31, 1993 156
Granted 325 $2.50 - $20.00
Exercised (2) $13.75
------
Outstanding at December 31, 1994 479
Granted 176 $2.50 - $7.50
Exercised (90) $2.50
Canceled (18) $5.00 - $20.00
------
Outstanding at December 31, 1995 547
Granted 7,845 $2.50 - $3.00
Canceled (88) $5.00 - $120.00
------
Outstanding at December 31, 1996 8,304
======
F-19
COMMON STOCK TRANSACTIONS
During the year ended December 31, 1996, the Company issued 14,000 shares of
Common Stock as payment for consulting services and awarded 1,000 shares of
Common Stock to Directors as compensation.
During the year ended December 31, 1995, the Company issued 846,000 shares of
Common Stock and 12% promissory notes in the aggregate principal amount of
$1,770,000 in private placement transactions, with total net proceeds of
$1,583,000, which were allocated between the notes and the Common Stock based
upon the relative fair values of each on the dates of issuance. Also 10,000
shares of the Company's Series A Preferred Stock were converted into 3,100
shares of Common Stock at the conversion price of $110.00 per share. The Company
also issued 800 shares of Common Stock to Directors as compensation during the
year ended December 31, 1995.
During the year ended December 31, 1994, the Company issued 846,000 shares of
Common Stock in private placement transactions, with total net proceeds of
$4,944,000 ($1,596,000 of such proceeds were recorded as stock subscriptions
receivable in the Common Stockholders' Equity section of the Consolidated
Balance Sheets). Also, 4,000 shares of the Company's Series A Preferred Stock
were converted into 1,100 shares of Common Stock at the conversion price of
$115.00 per share. The Company also awarded 7,000 shares of Common Stock to
Directors as compensation and settled litigation with shareholders of the
Company by issuing to them an aggregate of 70,200 shares of Common Stock in the
year ended December 31, 1994.
STOCK SUBSCRIPTIONS RECEIVABLE
Stock subscriptions receivable at December 31, 1996 and 1995 relate to a
subscription agreement whereby the subscriber has entered into a subscription
agreement with the Company and delivered promissory notes for the purchase of
the shares. The shares have been issued in the name of the individual but were
pledged to the Company to secure payment for such shares under the promissory
notes. The shares are released from the pledge as they are paid for. Under the
terms of the subscription agreement and the related promissory note, the
purchase price for the stock is set at the closing price for the Company's
Common Stock on the date that the subscriber makes the payment for shares to be
delivered and payment is made to the Company under the promissory notes. The
stock subscription receivable and additional paid in capital were reduced by
$351,000 during the year ended December 31, 1995 to reflect the current trading
price for the Company's Common Stock.
STOCK OPTION PLANS
The Company has in effect Stock Option Plans (the "Plans"), pursuant to which
directors, officers, and employees of the Company who contribute materially to
the success and profitability of the Company are eligible to receive grants of
options for the Company's
F-20
Common Stock. An aggregate of 1,860,000 shares of Common Stock have been
reserved for issuance under the Plans, of which 218,000 are outstanding under
the 1991 and 1994 Plans and 1,500,000 are outstanding under the Executive Plan
as of December 31, 1996. Options may be granted for terms not exceeding ten
years from the date of grant except for stock options which are granted to
persons owning more than 10% of the total combined voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the fair market value on the date the options
are granted (110% in the case of persons owning more than 10% of the total
combined voting power of the Company). Holders of stock options exercised no
options during the years ended December 31, 1996 or 1995.
Had the compensation cost for the Company's Plans been determined based on the
fair value at the grant dates for awards under the Plans, consistent with the
method of FAS 123, the Company's net loss and loss per common share on a pro
forma basis would have been (in thousands, except per share data):
For the Year Ended
December 31,
------------------------------
1996 1995
---- ----
Net loss ($ 6,354) ($ 2,727)
Net loss per common share ($ 1.95) ($ 0.96)
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, 1996 and 1995, respectively: (1) risk-free interest rates of 6.5%
and 6.4%; (2) dividend yield of 0.0% and 0.0%; (3) expected lives of 10 and 10
years; and (4) volatility of 88.1% and 85.0%. Results may vary depending on the
assumptions applied within the model. The effects of application of FAS 123 are
not likely to be representative of the effects on net income or loss for future
years because options vest over several years and generally additional awards
are made each year.
In addition, the Company has granted options outside of the Plans in connection
with private placements of its securities and as consideration for various
services. These options have been granted for terms not exceeding ten years from
the date of grant. The table below summarizes activity in the Company's Plans
for the years ended December 31, 1994, 1995 and 1996.
F-21
(IN THOUSANDS EXCEPT PER SHARE DATA)
NUMBER OF WEIGHTED AVERAGE
COMMON SHARES EXERCISE PRICE
------------- --------------
Outstanding at December 31, 1993 140 $ 70.11
Granted 34 $ 6.89
Canceled (10) $ 64.93
------
Outstanding at December 31, 1994 164 $ 54.71
Granted 123 $ 3.75
Canceled (74) $ 31.94
------
Outstanding at December 31, 1995 213 $ 33.04
Granted 1,525 $ 3.74
Canceled (20) $ 83.71
------
Outstanding at December 31, 1996 1,718 $ 6.39
======
Options and warrants outstanding include 8,304,000 warrants, all of which are
exercisable, and 1,718,000 options, of which 636,000 are vested and exercisable
at December 31, 1996.
NOTE 11--PROVISION FOR INCOME TAXES
The Company adopted FAS 109, "Accounting for Income Taxes" effective January 1,
1993, and began recognizing income tax benefits for net operating loss
carryforwards, credit carryforwards and certain temporary differences for which
tax benefits have not previously been recorded. As a result of the adoption of
FAS 109, the Company has recognized a deferred tax asset of approximately
$21,000,000 as of December 31, 1996; however, the Company has established a
valuation allowance equal to the full amount of the deferred tax asset, as
future operating profits cannot be assured. The Company expects to recognize the
benefit of the asset when financial reporting and taxable income is generated.
At December 31, 1996, the Company has net operating loss (the "NOL")
carryforwards of approximately $38,000,000 available to offset future U.S.
taxable income. The Company calculates that its use of the NOL may be limited to
approximately $3,000,000 each year as a result of stock, option and warrant
issuances during prior fiscal years resulting in an ownership change of more
than 50% of the Company's outstanding equity. 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 next 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 1997
through 2011.
F-22
In addition, Chimos and Laboratorios Belmac have NOL carryforwards of
approximately $13,300,000 and $2,700,000 available to offset future taxable
income for income tax purposes in France and Spain, respectively. If not offset
against taxable income, the NOL carryforwards will expire in various years
ending 2001.
NOTE 12--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS
The following is a summary of the results of operations and identifiable assets
of the Company's wholly-owned foreign subsidiaries as of and for the years ended
December 31, 1996, 1995 and 1994, respectively.
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
FRANCE SPAIN U.S. CONSOLIDATED
-------- -------- -------- ------------
Revenue $ 11,625 $ 11,299 $ 209 $ 23,133
Net income (loss) $ 178 $ 722 $ (3,819) $ (2,919)
Identifiable assets $ 5,322 $ 7,887 $ 3,349 $ 16,558
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------
FRANCE SPAIN U.S. CONSOLIDATED
-------- -------- -------- ------------
Revenue $ 24,452 $ 6,736 $ 249 $ 31,437
Net income (loss) $ 1,268 $ (313) $ (3,281) $ (2,326)
Identifiable assets $ 7,100 $ 6,829 $ 2,361 $ 16,290
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------
FRANCE SPAIN U.S. CONSOLIDATED
-------- -------- -------- ------------
Revenue $ 20,257 $ 6,569 $ 184 $ 27,010
Net income (loss) $ 595 $ (405) $ (3,768) $ (3,578)
Identifiable assets $ 6,476 $ 7,833 $ 2,023 $ 16,332
Total liabilities attributable to foreign operations were $4,472,000, $5,607,000
and $8,428,000 at December 31, 1996, 1995 and 1994, respectively. There were no
dividends from foreign subsidiaries, and net foreign currency gains (losses)
reflected in results of operations for the years ended December 31, 1996, 1995
and 1994 were approximately ($1,000), $3,000 and $66,000, respectively. Sales in
France for the years ended December 31, 1996, 1995 and 1994 include
approximately $2,200,000, $7,300,000 and $8,000,000, respectively, to Pharmacie
Centrale des Hopitaux.
F-23
NOTE 13-COMMITMENTS AND CONTINGENCIES
The Company is currently engaged in negotiations with a subsidiary of a large
European conglomerate to sell its French subsidiary, Chimos. The transaction is
expected to be finalized early in the second quarter of 1997. As no definitive
agreement has been signed, there can be no assurance that such sale will be
consumated. Sales generated by Chimos began to decline in the second quarter of
1996 due to the expiration of a distribution agreement for the product Ceredase.
Since the expiration of this distribution agreement, Chimos has been generating
revenues at the rate of approximately $5.5 million per annum. As a result of
estimating the proceeds from the proposed sale of Chimos, the Company reviewed,
for impairment, the recoverable value of the carrying amount of long-lived
assets and intangibles. Based upon this review the Company charged to
operations, a provision for goodwill impairment, representing the remaining
unamortized Chimos goodwill of approximately $340,000, at December 31, 1996.
On July 15, 1993, Michael M. Harshbarger was discharged for cause from the
Company as President and Chief Executive Officer. At the time of his discharge,
Harshbarger owed the Company approximately $121,000 as a result of expenses of a
personal nature which he charged to the Company's accounts and removal of
corporate assets for personal use. Harshbarger has sued the Company for wrongful
termination, seeking damages in excess of $1,400,000 and the Company has
countersued for wrongful conversion and civil theft, fraud and deceit, and
breach of contract, in an effort to recover the amounts owed by Harshbarger. The
Company amended its counterclaim against Harshbarger for breach of fiduciary
duty and is seeking damages in excess of $1,000,000. Harshbarger attempted to
use the Americans with Disabilities Act (the "ADA") as a defense to the
Company's counterclaim; however, the judge ruled in favor of the Company's
recent motion to strike Harshbarger's ADA defense. Harshbarger's counsel then
filed a motion to withdraw from the case citing irreconcilable differences. The
judge granted this motion on March 21, 1997. In the opinion of current
management, the amounts will have no material effect on the financial position
or results of operations of the Company.
Belmac Hygiene, Inc. ("Hygiene"), a subsidiary of the Company, filed an action
on December 9, 1994 in the United States District Court for the Southern
District of New York against Medstar, Inc. ("Medstar"), Maximed, Inc.
("Maximed") and Robert S. Cohen. The defendants are Hygiene's partners (or such
partner's control persons) in the Company's partnership with Maximed (the
"Partnership"), which was formed for the development and ultimate sale of
Maximed's intra-vaginal controlled release products. The action sought (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's representatives, and (ii) to recover damages as a result of
defendants' misrepresentations and breach of warranty in the Partnership
agreement. The defendants filed a counterclaim against Hygiene. Medstar also
filed a separate action on May 4, 1995 in the United States District Court for
the Southern District of New York against the Company alleging that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Company pursuant
to its guaranty of Hygiene's obligations. The issues were tried, without a jury,
on August 21 through 23, 1995. Thereafter, post-trial briefs and proposed
findings of fact and conclusions of law were submitted,
F-24
and argument was heard on October 25, 1995. On January 12, 1996, the Court ruled
that the Company's reliance on defendants' misrepresentation was not justified
and that the Company had performed its obligations under the Partnership
agreement. Accordingly, the Court rendered its decision dismissing all claims
and counter-claims asserted by the parties. On September 25, 1996, the Company
filed an appeal in the United States Court of Appeals for the Second Circuit.
Oral argument was heard on February 26, 1997 and a decision is expected within
the next few months.
The Company has determined that it is exposed to certain contingencies with
respect to its operations in Spain totaling approximately $175,000 and has
accrued $113,000 for such contingencies that are considered probable and
included such amount in other non-current liabilities as of December 31, 1996.
The Company is also obligated to pay royalties on sales of the drug Alphanon(R)
(See Note 6).
An agreement entered into between the Company and Jean-Francois Rossignol, its
former Chairman and Chief Executive Officer, in August 1993, entitled the
company to receive aggregate payments of $360,000 upon the commercialization of
a certain drug. The Company received $160,000 of such amount in December 1995
and the remaining $200,000 in 1996. The Company recorded the entire $360,000 as
other income in the year ended December 31, 1995.
On November 30, 1992, Marc S. Ayers resigned as Chief Financial Officer of the
Company and effective December 17, 1992, resigned as a member of the Board of
Directors. At December 31, 1994 Ayers owed the Company $412,000 plus $121,000
accrued interest under two stock subscription notes receivable, both of which
had matured and remained unpaid. Ayers sued the Company alleging breach of
contract and the Company countersued Ayers. This matter was tried in 1994 and a
jury verdict rendered on August 18, 1994, found in favor of Ayers on one issue
and in favor of the Company on another issue. The judge ordered a new trial on
all issues and no judgement was entered in the case. After a jury trial in May
1995, the jury found no binding contract was made between the Company and Ayers
while awarding Ayers a recovery of approximately $27,000 for consulting services
rendered and cancellation of the promissory notes and interest thereon. The
cancellation of the promissory notes and related interest has been included in
other income/expense, net, for the year ended December 31, 1995.
F-25
The Company leases certain of its assets under noncancellable operating leases.
Total charges to operations under operating leases were approximately $448,000,
$493,000 and $360,000, for the years ended December 31, 1996, 1995 and 1994,
respectively. Future minimum lease payments under operating leases are as
follows:
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
--------------------------
1997 $375
1998 315
1999 185
2000 92
2001 and thereafter --
NOTE 14-EXTRA-ORDINARY ITEM
The Company recorded an extra-ordinary charge of $446,000, or $.13 per common
share, in February 1996 upon the extinguishment of debt that it had incurred in
its October 1995 private placements, representing unamortized discount and
issuance costs at the date of repayment (see Note 8).
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida
We have audited the consolidated financial statements of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
and have issued our report thereon dated March 27, 1997; 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. 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
DELOITTE & TOUCHE LLP
Tampa, Florida
March 27, 1997
F-27
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
----------- ---------- ---------- ----------- ----------- -------------
Drug licenses and related costs:
For the year ended December 31, 1996 $406,000 $119,000 ($28,000) -- $497,000
For the year ended December 31, 1995 291,000 88,000 27,000 -- 406,000
For the year ended December 31, 1994 247,000 102,000 -- $58,000 (b) 291,000
Goodwill:
For the year ended December 31, 1996 186,000 378,000 (c) -- -- 564,000
For the year ended December 31, 1995 148,000 38,000 -- -- 186,000
For the year ended December 31, 1994 108,000 40,000 -- -- 148,000
Reserve for inventory obsolescence:
For the year ended December 31, 1996 819,000 136,000 -- 128,000 (d) 827,000
For the year ended December 31, 1995 248,000 571,000 -- -- 819,000
For the year ended December 31, 1994 0 248,000 -- -- 248,000
- ------------------------
(a) Effect of exchange rate fluctuation.
(b) Due to the Registrant's sale of its Spanish marketing rights to
Belmacina(R), the drug license and related accumulated amortization of
approximately $81,000 were removed from the accounts and includes the
effect of exchange rate fluctuation.
(c) Includes approximately $340,000 of unamoritized goodwill related to the
Registrant's French subsidiary that Management has determined may not be
recovered via the proposed sale of its French subsidiary.
(d) Represents reduction of inventory which has been fully reserved.
F-28