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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida No.59-1513162
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4830 W. Kennedy Blvd., Suite 548, Tampa, FL 33609
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 286-4401
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.02 par value American Stock Exchange and
Pacific Exchange, Inc.
12% Convertible Senior American Stock Exchange and
Subordinated Debentures Pacific Exchange, Inc.
Class A Redeemable Warrants American Stock Exchange and
Pacific Exchange, Inc.
Class B Redeemable Warrants Applications Pending
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
Title of Class Aggregate Market Value As of Close of Business on
-------------- ---------------------- --------------------------
Common Stock, $.02 $24,900,000 March 26, 1998
par value
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 8,427,699 March 26, 1998
par value
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Annual Meeting of Stockholders - Incorporated by
Reference into Part III of this Form 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Bentley Pharmaceuticals, Inc. (the "Registrant") is an international
pharmaceutical and health care company engaged in the manufacturing, marketing
and distribution of pharmaceutical products in Spain, with limited distribution
of health care products in the United States. The Registrant was organized under
the laws of the State of Florida in February 1974. In Spain, the Registrant
acquires, licenses or develops and registers late stage products, and
manufactures, packages and distributes its own products and products under
contract for other pharmaceutical companies. The Registrant divested its french
subsidiary, Chimos/LBF S.A. (referred to herein as Chimos/LBF) in June 1997
which, until such time, consisted of the low margin brokerage of fine chemicals,
sourcing of raw materials and pharmaceutical intermediaries and the distribution
of biotechnology or orphan drugs (See "--Pharmaceutical Marketing and Sales in
France"). In the United States, the Registrant markets disposable linens, which
are manufactured under contract, to emergency health care services. The
percentage of the Registrant's total revenues for the year ended December 31,
1997 attributable to its operations in Spain, France and the United States are
approximately 84%, 14% and 2%, respectively. The Registrant's pharmaceutical
operations in Spain are a result of its 1992 acquisition of Rimafar S.A.
(subsequently renamed and referred to herein as Laboratorios Belmac S.A.).
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant has moved from a research
and development-oriented pharmaceutical company, which required developing
products from the chemistry laboratory through marketing, to a company seeking
to acquire late-stage development compounds that can be marketed within one year
or 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, strategic alliances and product acquisitions, which management of the
Registrant expects will move the Registrant closer to profitability in the near
future.
The Registrant has entered into a negotiated letter of intent to purchase
domestic and international rights to a portfolio of branded drugs, with an
emphasis in gastrointestinal products, and a manufacturing facility located in
Mequon, Wisconsin, from Schwarz Pharma, Inc. The letter of intent, dated July
21, 1997, was recently amended to take into consideration the possible transfer
of control of the Registrant's Spanish subsidiary, Laboratorios Belmac, to
Schwarz Pharma, Inc. and will serve as the basis for negotiations for the
definitive agreements. The proposed transaction is subject to completion of due
diligence, the execution of such definitive agreements and approval of the
Registrant's stockholders and debenture holders. Upon execution of the letter of
intent, the Registrant was required to remit a non-refundable deposit in the
amount of $100,000.
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The Registrant's sales by its primary product lines are as follows (In
Thousands):
For the Year Ended December 31,
1997 1996 1995
------- ------- -------
Pharmaceutical and Consumer Health Care Products $14,520 $22,924 $31,188
Disposable Linen Products 382 209 249
------- ------- -------
Total $14,902 $23,133 $31,437
======= ======= =======
PRODUCT LINES
The Registrant currently manufactures, markets and sells pharmaceutical products
in Spain, 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 and markets pharmaceutical products within four primary
therapeutic categories of cardiovascular, gastrointestinal, neurological, and
infectious diseases. The Registrant manufactures or distributes approximately 40
dosage forms of various pharmaceuticals in its manufacturing facility in
Zaragoza, Spain both for its own sales and under contract for others. The
manufacturing facility was recently renovated and brought into full compliance
with European Union Good Manufacturing Practices (GMPs) for solid and liquid
dosage forms. 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.
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 ammoniumion and eliminated from the body.
3
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 that 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, chlorbenzorex, 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 vitamin B compounds used for the enhancement
of activity in the central and peripheral nervous systems.
Diflamil(R). Diflamil is an anti-inflammatory analgesic used in the
treatment of arthritis.
Resorborina(R). Resorborina is a compound that has local anesthetic
and anti-inflammatory properties for the treatment of pharyngitis and mouth
afflictions.
Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are compounds
used to treat local fungal infections, especially around the nail beds.
Otogen(R). Otogen is a product used for the treatment of ear
infections and ear pain.
Spirometon(R). Spirometon is a combination of spironolactone and
bendroflumethazide useful in the treatment of congestive heart failure,
hypertension and edema. (Spirometon diuretics preserve the body's supply of
potassium).
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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.
Rofanten(R). Rofanten is the Registrant's formulation of naproxen
sodium, an anti-inflammatory/analgesic.
Relaxibys(R). Relaxibys is a combination of an analgesic
(paracetamol) and a muscle relaxant (carisoprodol) purchased from Econature.
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 55% 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 which has the right to
manufacture and sell products which are patent protected in other parts of the
world. The Spanish regulatory authorities specify the amounts each company can
charge for its products. Therefore, the Registrant's competitors may sell
similar products at the same, higher or lower prices. Many of these competitors
are larger, better capitalized and have larger sales networks than the
Registrant.
The Registrant maintains an internal marketing and sales staff of approximately
67, including 58 employees and 9 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
all major cities, provinces and territorial islands of Spain.
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., Italpharmaco,
Ratiopharm, Juste, Wasserman-Chiese, Vir, Laboratorios Juventus, S.A. and
Ethypharm. Other contracts are contemplated in the future. The Registrant
manufactures these pharmaceuticals to its customers' specifications, and
packages 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
5
manufacturing standards and the Registrant was required to modify its facility
to comply with these regulations. Laboratorios Belmac accomplished such
renovations without interruption of sales or distribution. After an inspection,
in July 1995 the operating areas of the facility were determined to be in
compliance with European GMPs by Spain's Ministry of Health.
PHARMACEUTICAL MARKETING AND SALES IN FRANCE
Until its divestiture in June 1997, the Registrant's operations in France
consisted of the import and distribution of specialty pharmaceutical products to
hospitals and others in France as well as the concentration of the sales of
"orphan drugs" (drugs used for the treatment of rare diseases) and biotechnology
products. The Registrant had marketed throughout France over 26 pharmaceutical
products from Europe and the United States. The primary customer of Chimos/LBF
was Pharmacie Centrale des Hopitaux. Chimos/LBF marketed Ceredase; a drug used
in the treatment of Gaucher's Disease, in France until the distribution
agreement between Genzyme Corporation and Chimos/LBF expired on March 31, 1996.
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.
The Registrant completed the sale of Chimos/LBF, for approximately $3,650,000 on
June 26, 1997. The Registrant has since received approximately $3,300,000,
including approximately $2,600,000 of cash and cash equivalents which resided on
Chimos/LBF's books prior to its disposition, of which approximately $500,000 was
used to repay indebtedness to the former subsidiary. An escrow fund in the
amount of approximately $350,000, representing the balance due the Registrant,
has been established for certain contingent obligations or liabilities. In the
opinion of management, the resolution of those contingencies will have no
material effect on the Registrant's financial position or results of operation.
The Registrant recorded a loss of $591,000 related to this divestiture,
including realized exchange loss of $386,000 due to fluctuations in the currency
exchange rates used to translate the foreign currency financial statements.
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 Bentley 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 customers
from the manufacturer or held in inventory in anticipation of customer demand.
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, where Bentley Healthcare believes it can compete based upon specialized
specifications and individual attention.
6
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 TO WHICH THE REGISTRANT OWNS RIGHTS
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 owns the rights to Biolid(R) , a
non-crystalline form of erythromycin with a potential for enhanced
bioavailability (quantity absorbed in blood over time compared to dose
received); Alphanon(R) , designed for the systemic treatment of hemorrhoids,
initially as a liquid formulation for intra-navel transdermal application; and a
phenantramine analogue, which is a pre-clinical stage antimalarial that has
shown effectiveness against Plasmodium falciparum.
The Registrant is not currently marketing any of these products nor is the
Registrant planning additional in-house research and development activity at
this time with respect to these compounds 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, 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. (See Item 3. Legal
Proceedings.) 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.
7
PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS
Few of the products currently being sold by the Registrant are protected by
patents owned by the Registrant. However, where possible, patents and
trademarks will be sought and obtained in the United States and in all countries
of principal marketing interest to the Registrant.
The Registrant has filed or has rights to patent applications. However, there
can be no assurance that its rights will afford adequate protection to the
Registrant. In addition, the Registrant also relies on unpatented proprietary
technology in the development and commercialization of its products. There is no
assurance that others may not independently develop the same or similar
technology.
The Registrant also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovations to develop its competitive position.
However, there can be no assurance that others may not acquire or independently
develop similar technology or, if patents in all major countries are not issued
with respect to the Registrant's products, that the Registrant will be able to
maintain information pertinent to such research as proprietary technology or
trade secrets.
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, 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 or more. There can be no assurance that a competitor has
not or will not submit additional registrations for products substantially
similar to those marketed by Laboratorios Belmac.
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 Spain, which is a large, developed
population center in Europe. Since Spain is a member of the European Union, the
Registrant expects to be able to target the European Union's larger population
as harmonization eliminates the barriers between countries.
Laboratorios Belmac competes with both large multinational companies and
national Spanish companies, which produce most of the same products Laboratorios
Belmac manufactures. For example, there are
8
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 Esteve, S.A.
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, 1997. 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. There were no customers during the year ended
December 31, 1997, which accounted for at least 10% of the Registrant's
consolidated revenues. However, sales of approximately $2,200,000 and $7,300,000
to Pharmacie Centrale des Hopitaux accounted for approximately 10% and 23% of
the Registrant's sales for the years ended December 31, 1996 and 1995,
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 during 1996 (see "- - Pharmaceutical Marketing and Sales in France").
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 or 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 spent $324,000, $29,000 and $444,000 in the years ended December
31, 1997, 1996 and 1995, respectively, on research and development to develop
new products and processes and to improve existing products and processes.
Expenditures in 1997 were primarily incurred in Spain and were concentrated in
the development of late stage products. The Registrant intends to continue to
carefully review research and development activities with the establishment of
priorities based on both technical and commercial criteria and 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.
9
Government regulation, which includes detailed inspection and control over
research laboratory procedures, clinical investigations, manufacturing,
marketing, and distribution practices by various federal, state, and local
agencies, substantially increases the time, difficulty and cost incurred in
obtaining and maintaining the approval to market newly developed and existing
products.
United States. The steps required before a pharmaceutical agent may be marketed
in the United States include (i) preclinical laboratory and animal tests, (ii)
the submission to the FDA of an Investgational New Drug Application ("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 review of a NDA. In
addition, the sponsor
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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 similar to the regulations promulgated by the United
States Food & Drug Administration discussed above. In general, these regulations
are essentially 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 or more for review by the Ministry of Health. The
pharmaceutical can then only be sold to the public with a prescription from a
medical doctor.
General. Continuing reviews of the utilization, safety, and efficacy of health
care products and their components are being conducted by industry, government
agencies, and others. Such studies, which employ increasingly sophisticated
methods and techniques, can call into question the utilization, safety, and
efficacy of previously marketed products and in some cases have resulted, and
may in the future result, in the discontinuance of such products and give rise
to claims for damages from persons who believe they have been injured as a
result of their use. The Registrant has product liability insurance for such
potential claims; however, no such claims have ever been asserted against the
Registrant.
The cost of human health care continues to be a subject of investigation and
action by governmental agencies, legislative bodies, and private organizations.
In the United States, most states have enacted generic substitution legislation
requiring or permitting a dispensing pharmacist to substitute a different
manufacturer's version of a drug for the one prescribed. Federal and state
governments continue their efforts to reduce costs of subsidized heath care
programs, including restrictions on amounts agencies will reimburse for the use
of products. Efforts to reduce health care costs are also being made in the
private sector. Health care providers have responded by instituting various cost
reduction and containment measures of their own. It is not possible to predict
the extent to which the Registrant or the health care industry in general might
be affected by the matters discussed above.
Many countries, directly or indirectly through reimbursement limitations,
control the selling price of certain health care products. Furthermore, many
developing countries limit the importation of raw materials and finished
products. In Western Europe, efforts are under way by the European Union to
harmonize technical standards for many products, including drugs and medical
devices, and to make more uniform the requirements for marketing approval from
the various regulatory agencies. The Registrant is subject to reimbursement
status of prescription products in Spain and periodically products are
identified as non-reimbursable by the social security system. Although these
products can continue to be marketed, the non-reimbursable status could reduce
the market size of such products.
11
Although the Registrant markets disposable linen products in the United States,
the majority of the Registrant's sales are in 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 122 people, 5 of whom
are employed in the United States and 117 in Spain as of March 26, 1998. Of such
employees, approximately 40 are principally engaged in manufacturing activities,
67 in sales and marketing, including 9 independent sales representatives, and 15
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 October 1998. The Registrant expects to be able to locate suitable
office space prior to expiration of the lease agreement.
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 55,000 square feet located in a prime industrial park and seated
on sufficient acreage that would allow for future expansion. The manufacturing
facility is capable of producing tablets, capsules, suppositories, creams,
ointments, lotions, liquids and sachets, as well as microgranulated and
microencapsulated products. The facility also includes analytical chemistry,
quality control and quality assurance laboratories. The GMPs certification
allows the Registrant to undertake contract manufacturing for a number of
international pharmaceutical companies either engaged in or contemplating
emergence into the Spanish market or for export. The Registrant's administrative
offices
12
in Spain are located in Madrid in approximately 5,000 square feet of renovated,
leased offices, which leases expire in April 1998. Such leases have been renewed
for one additional year and are renewable under the same terms for an additional
two years.
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 motion to
strike Harshbarger's ADA defense. The Registrant has recently filed a motion to
set this matter for trial and attempted to secure a trial date. However, since
mediation was attempted more than one year ago, the judge ordered another
mediation conference before setting this matter for trial. Harshbarger failed to
appear at his deposition set in January 1998; consequently, discovery in this
matter is still outstanding. On two separate occasions, Harshbarger's counsel
has withdrawn from the case, citing irreconcilable differences. As a result,
Harshbarger is now representing himself in this matter.
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, 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 appeal in the United States Court of Appeals for the Second
Circuit. On August 27, 1997, the United States Court of Appeals for the Second
Circuit affirmed in part and vacated and remanded in part the judgment of the
United States District Court for the Southern District of New York. The appeals
court order vacated that portion of the district court judgment that dismissed
the Registrant's claim of fraud and remanded the claim to the district court for
further proceedings.
13
Those portions of the district court judgment which dismissed the Registrant's
contract claim for breach of warranty, the defendants' counterclaim for fraud
and breach of contract and Medstar, Inc.'s action for breach of an alleged
guaranty were affirmed. On December 17, 1997, the United States District Court
for the Southern District of New York awarded the Registrant a judgment of
$7,686,000 relating to its claim of fraud that the Registrant filed against
defendants Medstar Inc., Maximed Inc., and Robert S. Cohen, both jointly and
severally. On January 16, 1998, the defendants filed a notice of appeal from the
judgment. The defendants have not obtained a stay of execution pending appeal,
and therefore, efforts to collect the judgment are proceeding. These efforts
include a motion that has been filed by the Registrant, for the court to order a
sale of Medstar's interest in the partnership. On March 16, 1998, defendants
filed their appellate brief and the Registrant's brief is due to be filed on
April 16, 1998. Oral argument is scheduled for May 1998. 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.
14
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On July 31, 1990 and March 27, 1996, the Registrant's Common Stock began trading
on the American Stock Exchange and the Pacific Exchange, Inc., respectively,
under the symbol BNT. The following table sets forth the high and low sales
prices for the Common Stock as reported on the American Stock Exchange for the
periods indicated.
Quarter Ended High Sales Price Low Sales Price
- ------------- ---------------- ---------------
March 31, 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
March 31, 1997 $4.25 $2.56
June 30, 1997 3.69 2.75
September 30, 1997 3.63 2.56
December 31, 1997 3.25 2.13
As of March 26, 1998 there were 2,015 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 foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Registrant and its
subsidiaries has been derived from the Registrant's consolidated financial
statements. The selected financial data should be read in conjunction with the
Registrant's consolidated financial statements and the notes thereto, which
should be read in their entirety and are included elsewhere in this Annual
Report on Form 10-K. 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.)
15
SUMMARY OF OPERATIONS
Fiscal Year Ended
December 31,
--------------------------------------------------------------------
(In thousands, except per share data) 1997(1) 1996(2) 1995(3) 1994(3) 1993(4)
-------- -------- -------- -------- --------
Sales $ 14,902 $ 23,133 $ 31,437 $ 27,010 19,849
Cost of sales 8,010 15,638 25,586 21,931 15,100
-------- -------- -------- -------- --------
Gross margin 6,892 7,495 5,851 5,079 4,749
Operating expenses 8,438 8,794 8,198 9,050 14,722
-------- -------- -------- -------- --------
Other (income) expense 2,269 1,174 (21) (393) 263
-------- -------- -------- -------- --------
Loss before extraordinary item (3,815) (2,473) (2,326) (3,578) (10,236)
-------- -------- -------- -------- --------
Net loss $ (3,815) $ (2,919) $ (2,326) $ (3,578) $(10,236)
======== ======== ======== ======== ========
Loss per Common Share
before extraordinary item $ (.97) $ (.79) $ (.83) $ (1.56) $ (6.32)
======== ======== ======== ======== ========
Basic net loss per Common Share $ (.97) $ (.92) $ (.83) $ (1.56) $ (6.32)
======== ======== ======== ======== ========
Weighted average number of
Common Shares outstanding 4,072 3,334 2,999 2,395 1,655
======== ======== ======== ======== ========
BALANCE SHEET INFORMATION
At December 31,
-----------------------------------------------------------
(In thousands) 1997(1) 1996(2) 1995(3) 1994(3) 1993(4)
------- ------- ------- ------- -------
Working capital $10,648 $ 4,265 $ 3,113 $ 1,928 $ 2,043
Non-current assets 6,034 6,746 6,523 5,644 5,937
Total assets 21,043 16,558 16,290 16,332 16,160
Non-current liabilities 5,439 5,513 2,252 336 2,821
Redeemable Preferred
Stock 2,338 2,203 2,068 2,256 2,218
Common Stockholders'
Equity 8,905 3,295 5,316 4,980 2,941
See explanations on the following page.
16
(1) Revenues declined during 1997 due to the Registrant's divestiture of
Chimos/LBF on June 26, 1997. Other (income) expense for the year ended
December 31, 1997 includes interest expense of $1,086,000 and a provision
for loss on disposition of subsidiary, which totals $591,000, including
realized exchange loss of $386,000 due to fluctuations in the currency
exchange rates used to translate the foreign currency financial statements
and a loss of $205,000 recognized upon the sale of Chimos/LBF. The
Regisrant also recorded a provision for income taxes during 1997 totaling
$621,000. During the fourth quarter of 1997, the Registrant received
proceeds of approximately $9,800,000 from the exercise of approximately
4,900,000 Class A Warrants. See Notes 1, 8, 10 and 11 of Notes to
Consolidated Financial Statements.
(2) Revenues in France declined beginning in the second quarter of 1996, due to
the March 31, 1996 expiration of the distribution agreement for the product
Ceredase, which accounted for approximately 60% of the Registrant's
revenues in 1995 and approximately 54% of its revenues in the quarter ended
March 31, 1996. Ceredase gross margins, as a percent of sales, were
approximately 5% during the quarter ended March 31, 1996. The Registrant
completed a public offering in February 1996, whereby it issued $6,900,000
of 12% convertible subordinated debentures and warrants. Consequently, the
Registrant incurred interest expense totaling $1,227,000 in 1996. The
Registrant incurred an extraordinary charge of $446,000, representing the
unamortized discount and issuance costs at the date of repayment of Notes
from its October 1995 private placements. Operating expenses for the year
ended December 31, 1996 include approximately $340,000, representing a
provision for goodwill impairment related to Chimos/LBF. See Notes 1, 8,
10, 13 and 14 of Notes to Consolidated Financial Statements.
(3) 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 as revenue 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.
(4) 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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Registrant is presently an international pharmaceutical and health care
company with its primary focus on the manufacturing, marketing and distribution
of pharmaceutical and health care products. Historically, substantially all of
its revenues have come from its operations in Europe. The Registrant also
markets disposable linens to emergency health care services in the United
States. In an effort to increase its presence in the United States, the
Registrant has entered into a letter of intent to purchase domestic and
international rights to a portfolio of branded drugs and a manufacturing
facility in Wisconsin from Schwarz Pharma Inc. Although no definitive agreements
have been finalized, the letter of intent was recently amended to take into
consideration the possible transfer of control of the Registrant's Spanish
subsidiary, Laboratorios Belmac, to Schwarz Pharma. The proposal transaction is
subject to completion of due diligence, the execution of definitive agreements
and approval of the Registrant's Stockholders and Debenture holders.
The Registrant incurred a net loss of $3,815,000 for the year ended December 31,
1997. 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"). The Company sold its French subsidiary,
Chimos/LBF in June 1997. Sales generated by Chimos/LBF began to decline in the
second quarter of 1996 due to the expiration of a distribution agreement for the
product Ceredase. 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, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996
The Registrant reported revenues of $14,902,000 and a net loss of $3,815,000 or
$.97 per common share for the year ended December 31, 1997 compared to revenues
of $23,133,000 and a net loss of $2,919,000 or $.92 per common share for the
same period in the prior year.
Sales and Cost of Sales. The 36% decrease in revenues is primarily attributable
to an 83% decrease in sales by the Registrant's French subsidiary, Chimos/LBF,
to $2,029,000. The decrease in Chimos/LBF's revenues is due to its divestiture
on June 26, 1997, combined with a decrease in its sales prior to the
divestiture. This decrease was partially offset by a 28% increase in sales
(calculated in local currency) by the Registrant's Spanish subsidiary,
Laboratorios Belmac. However, fluctuation in foreign currency exchange rates
reduced the increase in sales to 11%, when reported in U.S. dollars, to
$12,491,000. The Registrant's revenues began to decline 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
its revenues in the year ended December 31, 1995. Ceredase gross margins, as a
percent of sales, were approximately 5%. Gross margins for the year ended
December 31, 1997 improved to 46% when compared to gross margins of 32% in the
prior year, primarily as a result of the higher proportion of sales from
Laboratorios Belmac, whose sales generate significantly higher gross
18
margins than those of Chimos/LBF, as well as the loss of low-margin Ceredase
sales. Chimos/LBF generated relatively low gross margins (approximately 21% for
the year ended December 31, 1997) compared to Laboratorios Belmac, which
experienced substantially higher margins (approximately 51% for the year ended
December 31, 1997).
Operating Expenses. Selling, general and administrative expenses were $7,819,000
for the year ended December 31, 1997 compared to $7,923,000 for the same period
in the prior year. Chimos/LBF's divestiture in June 1997 resulted in lower
selling, general and administrative expenses in France; however, this decrease
was partially offset by increased selling expenses incurred by the Spanish
subsidiary to support the increase in sales volume generated during the year
ended December 31, 1997. 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 $324,000 for the year ended December 31,
1997 compared to $29,000 for the prior year. The research and development
expenditures for the year ended December 31, 1997 were primarily related to
bio-equivalency studies, which are necessary in order to obtain approval to
export products from Spain to other countries. The modest expenditures in
research and development reflect the Registrant's continued de-emphasis of basic
research and redirection of its resources to developmental expenses necessary
for expansion of its portfolio of marketed products. The Registrant intends to
continue to carefully manage its research and development expenditures in view
of its limited resources.
Depreciation and amortization expenses were $295,000 for the year ended December
31, 1997, compared to $502,000 for the same period of the prior year. The
decrease is primarily due to (i) the divestiture of Chimos/LBF; and (ii) the
disposal of certain fixed assets during 1996 as a result of the Registrant's
move to smaller, more cost effective office space.
Other Income/Expense. Interest expense was $1,086,000 for the year ended
December 31, 1997 compared to $1,227,000 for the same period of the prior year.
The decrease reflects primarily the effect of retiring high-yield promissory
notes in February 1996, using proceeds from the Public Offering, thereby
lowering the effective interest rate on outstanding debt, offset by higher
outstanding balances on short term borrowings, which are used to finance working
capital needs. Interest income was $123,000 for the year ended December 31, 1997
compared to $103,000 for the same period of the prior year. The slight increase
is due to interest earned on higher short-term interest bearing investment
balances in the current year, which resulted from the proceeds of the exercise
of approximately 4,900,000 Class A Warrants during the fourth quarter of 1997.
Other (income) expenses for the year ended December 31, 1997 includes a
provision for loss on disposition of subsidiary, which totals $591,000,
including realized exchange loss of $386,000, due to fluctuations in the
currency exchange rates used to translate the foreign currency financial
statements and a loss of $205,000 recognized upon the sale of Chimos/LBF. Other
(income) expenses in 1996 are
19
primarily comprised of the loss of approximately $71,000 recognized upon the
disposition of certain unnecessary fixed assets and leasehold improvements
associated with the Registrant's relocation to smaller, more cost effective,
office space in April 1996.
The Registrant recorded a provision for income taxes totaling $621,000 for the
year ended December 31, 1997. The income tax expense was $280,000 (domestic) and
$341,000 (foreign) and resulted from U.S. alternative minimum taxes and certain
nondeductible expenses in Spain.
The Registrant reported a loss from operations for the year ended December 31,
1997 of $1,546,000 compared to a loss from operations of $1,299,000 in the prior
year, which was the combined result of lower sales, partially offset by higher
gross margins and lower operating expenses. The effect of combining
non-operating items, primarily (i) interest expense of $1,086,000, and (ii) the
loss of $591,000 upon the disposition of the Registrant's French subsidiary,
and (iii) income tax expenses of $621,000, resulted in a net loss of
$3,815,000, or $.97 per common share for the year ended December 31, 1997.
Non-operating items in the comparable period of the prior year included
primarily (i) interest expense of $1,227,000, and (ii) a loss recognized
upon the extinguishment of debt of approximately $446,000, which,
when combined with the loss from operations, resulted in a net loss of
$2,919,000, or $.92 per common share for the prior year.
The Registrant utilizes software and related technologies throughout its
business that will be affected by the "Year 2000 problem" which is common to
most businesses, and concerns the inability of information systems, primarily
computer software programs, to recognize and process date sensitive information
properly as the year 2000 approaches. An internal study is currently under way
to determine the full scope and related costs of the Year 2000 problem to ensure
that the Registrant's systems continue to meet its internal needs and those of
its customers. The Registrant currently believes it will be able to modify or
replace its affected systems in time to minimize any detrimental effects on
operations. While it is not possible, at present, to give an accurate estimate
of the cost of this project, the Registrant expects that such costs could
possibly be material to its results of operations in one or more fiscal quarters
or years, but will not have a material adverse impact on the long-term results
of operations, liquidity or consolidated financial position of the Registrant.
System maintenance or software modification costs will be expensed as incurred,
while the costs of new software will be capitalized and amortized over the
software's useful life.
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 was primarily attributable
to a 52% decrease in sales by the Registrant's French subsidiary, Chimos/LBF, to
$11,625,000, 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, revenues declined
beginning in the second quarter of 1996, due to the March 31, 1996 expiration of
its distribution agreement for the product
20
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%. 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 generated significantly higher gross margins than those of
Chimos/LBF, as well as the loss of low-margin Ceredase sales. The Registrant's
distribution operations in France, Chimos/LBF, generated relatively low gross
margins (approximately 12% for the year ended December 31, 1996) as opposed to
the Registrant's Spanish subsidiary, Laboratorios Belmac, which experienced
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 were necessary in order to sustain the increase in
sales volume that the Spanish sales force had 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/LBF, primarily due to the loss of
Ceredase sales, during the year ended December 31, 1996.
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
reflected interest expense arising primarily from (i) the Notes sold by the
Registrant in its October 1995 private placements, which 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
extraordinary charge of $446,000, representing the unamortized discount and
issuance costs at the date of repayment of the
21
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 were 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, was
substantially lower than other (income) expense, net of ($581,000) for the prior
year, which was 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 included 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.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Total assets increased from $16,558,000 at December 31, 1996 to $21,043,000 at
December 31, 1997, while Common Stockholders' Equity increased from $3,295,000
at December 31, 1996 to $8,905,000 at December 31, 1997. The increase in Common
Stockholders' Equity reflects primarily the exercise of approximately 4,900,000
Class A Warrants during the fourth quarter of 1997, partially offset by the
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,
1997.
The Registrant's working capital increased from $4,265,000 at December 31, 1996
to $10,648,000 at December 31, 1997. The increase in working capital is
primarily attributable to the fourth quarter exercise of approximately 4,900,000
Class A Warrants, partially offset by the fluctuation of foreign currency
exchange rates and the net cash used by the Registrant's operating activities.
Cash and cash equivalents increased from $4,425,000 at December 31, 1996 to
$11,117,000 at December 31, 1997, primarily as the combined result of proceeds
from the exercise, during the fourth quarter of 1997, of approximately 4,900,000
Class A Warrants and proceeds from short-term borrowings and stock
options/warrants exercises, offset by cash used for operational purposes and,
the
22
effect of foreign exchange rate changes on cash balances. Included in cash and
cash equivalents are approximately $10,860,000 of short-term investments
considered to be cash equivalents.
Accounts receivable decreased from $3,632,000 at December 31, 1996 to $2,428,000
at December 31, 1997 due to a combination of the disposition of the Registrant's
French subsidiary and foreign currency exchange rate fluctuations, which were
offset by higher receivables resulting from increased sales in Spain. The
Registrant has not experienced any material delinquent accounts. Inventories
decreased to $714,000 at December 31, 1997 compared to $945,000 at December 31,
1996, due to the disposition of the Registrant's French subsidiary and the
fluctuation of foreign currency exchange rates, which were partially offset by
an increase in inventory levels in Spain to accommodate the increase in sales
volume.
Prepaid expenses and other current assets increased from $644,000 at December
31, 1996 to $750,000 at December 31, 1997 due to a combination of the
disposition of the Registrant's French subsidiary and the effect of foreign
currency exchange rate fluctuations, which were offset by a combination of
(i) expenditures for marketing and promotional items which will be utilized
by the Registrant's Spanish subsidiary during 1998 and (ii) pre-payment for
certain bio-equivalency studies which are scheduled to take place during 1998.
Accounts payable and accrued expenses decreased from $4,528,000 at December 31,
1996 to $3,216,000 at December 31, 1997 due to the combined effect of (i) the
disposition of the Registrant's French subsidiary; (ii) the effect of foreign
currency exchange rate fluctuations; and (iii) the reversal of an amount owed
for a drug license in Spain, for which the proposed purchase by the Registrant
was canceled, partially offset by income taxes payable totaling $608,000.
Fixed assets, net decreased from $3,544,000 at December 31, 1996 to $2,918,000
at December 31, 1997, due to recurring depreciation charges and a fluctuation in
foreign currency exchange rates.
Drug licenses and related costs, net decreased from $1,475,000 at December 31,
1996 to $691,000 at December 31, 1997, due to a combination of recurring
amortization charges, the effect of foreign currency exchange rate fluctuations
and the cancellation of the proposed purchase of a drug license in Spain.
Other non-current assets increased from $1,727,000 at December 31, 1996 to
$2,425,000 at December 31, 1997 primarily due to capitalization of approximately
$546,000 of pre-acquisition costs, including a non-refundable $100,000 deposit
paid for the proposed acquisition of certain assets owned by Schwarz Pharma,
Inc. and other possible acquisitions, offset by amortization costs related to
the 1996 Public Offering.
Long term debt increased from $5,164,000 at December 31, 1996 to $5,329,000 at
December 31, 1997, due primarily to accretion recorded on the
23
Debentures issued in the February 1996 Public Offering.
Investing activities provided net cash of $396,000 during the year ended
December 31, 1997. Financing activities for the year ended December 31, 1997
provided net cash of $10,711,000 and operating activities for the year ended
December 31, 1997 used net cash of $3,982,000.
Seasonality. In the past, the Registrant has experienced lower sales in certain
calendar quarters of each year, although the Registrant has not experienced
fluctuations due to seasonality during the year ended December 31, 1997 and does
not currently expect fluctuations due to seasonality. 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
Europe and is therefore influenced by the extent to which there are fluctuations
in the dollar's value against other currencies. The effect of foreign currency
fluctuations on long lived assets for the year ended December 31, 1997 was a
decrease of $774,000 and the cumulative historical effect was a decrease of
$1,855,000, 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. However,
the carrying value of assets and reported values can be materially impacted by
foreign currency translation. Nonetheless, the Registrant does not plan to
modify its business practices. The Registrant relies primarily upon financing
activities to fund the operations of the Registrant in the United States. In the
event that the Registrant is required to fund United States operations or cash
needs with funds generated in Spain, currency rate fluctuations in the future
could have a significant impact on the Registrant. However, at the present time,
the Registrant does not anticipate altering its business plans and practices to
compensate for future currency fluctuations.
Financings. An aggregate of 6,900 Units (the "Units") were sold in a February
1996 Public Offering. Each Unit consisted of a One Thousand Dollars ($1,000)
Principal Amount 12% Convertible Senior Subordinated Debenture due February 13,
2006 (the "Debentures") and 1,000 Class A Redeemable Warrants, each to purchase
one share of Common Stock and one Class B Redeemable Warrant. Two Class B
Redeemable Warrants entitle a holder to purchase one share of Common Stock. The
Debentures and Class A Redeemable Warrants initially traded only as a Unit but
began trading separately on May 29, 1996. 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
previous private placements.
24
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%.
In order to generate working capital necessary to sustain the Registrant's long
range strategic objectives, the Registrant temporarily lowered the exercise
price on its Class A and Class B redeemable warrants. Effective September 16,
1997, the exercise price of the Class A warrants was lowered by $1.00, to $2.00
each. This exercise period at the reduced price expired on December 5, 1997.
After this date, the Class A warrants reverted back to the original exercise
price of $3.00 per share until their expiration on February 14, 1999.
Holders of the Registrant's Class A warrants exercised approximately 70% of the
outstanding Class A redeemable warrants (approximately 4,900,000 Class A
warrants), which generated approximately $9,800,000 in proceeds to the
Registrant. The exercise of the Class A warrants resulted in issuance of
approximately 4,900,000 shares of Common Stock and approximately 4,900,000
Class B warrants.
The exercise price of the Registrant's Class B redeemable warrants was also
temporarily lowered by $2.00, to $3.00 as to each two Class B warrants effective
September 16, 1997 through January 13, 1998. After January 13, 1998, the
warrants reverted back to the original exercise price of $5.00 per share until
their expiration on February 14, 2001.
Given the Registrant's current liquidity and significant cash balances and
considering its future strategic plans, the Registrant should have sufficient
liquidity to fund operations and further its strategic objectives. 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 its
subsidiary. As discussed previously, the Registrant has entered into a letter
of intent to acquire pharmaceutical products and a manufacturing facility in
the United States. The Registrant must finance the acquisition of these assets
and is exploring various options intended to secure such financing. The
Registrant has amended its letter of intent to take into consideration the
possible transfer of control of its Spanish subsidiary to Schwarz Pharma, Inc.
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
25
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; dependence 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-3 (SEC File No. 333-28593) declared effective by the Securities and
Exchange Commission on June 10, 1997 and any amendments thereto.
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.
26
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.
Position of the Year First
Registrant Class of Became
Name Age Presently Held Director Director
- ---- --- -------------- -------- --------
James R. Murphy 48 Chairman, President, III 1993
Chief Executive Officer
and Director
Robert M. Stote 58 Senior Vice President, III 1993
Chief Operating Officer
and Director
Michael D. Price 40 Vice President, I 1995
Chief Financial Officer,
Treasurer, Secretary and
Director
Randolph W. Arnegger 54 Director II 1994
Charles L. Bolling 74 Director II 1991
Michael McGovern 54 Director * 1997
* Indicates that person named was appointed to the Board of Directors to
serve until the next Annual Meeting of Stockholders.
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 international business development with contract research laboratories. Mr.
Murphy received a B.A. in Biology from Millersville University and attended the
Massachusetts School of Law in 1993 and 1994.
27
Robert M. Stote, M.D. became Senior Vice President and Chief Science Officer of
the Registrant in March 1992 and was named Chief Operating Officer in March
1998. Prior to joining the Registrant, Dr. Stote was employed for 20 years by
Smith Kline Beecham Corporation serving as Senior Vice President and Medical
Director, Worldwide Medical Affairs from 1989 to 1992, and Vice
President-Clinical Pharmacology-Worldwide from 1987 to 1989. From 1984 to 1987,
Dr. Stote was Vice President-Phase I Clinical Research, North America. Dr. Stote
was Chief of Nephrology at Presbyterian Medical Center of Philadelphia from 1972
to 1989 and was Clinical Professor of Medicine at the University of
Pennsylvania. Dr. Stote serves as a Director of Collaborative Research, Inc. Dr.
Stote received a B.S. in Pharmacy from the Albany College of Pharmacy, an M.D.
from Albany Medical College and is Board Certified in Internal Medicine and
Nephrology. He was a Fellow in Nephrology and Internal Medicine at the Mayo
Clinic and is currently a Fellow of the American College of Physicians.
Michael D. Price became Chief Financial Officer, Vice President/Treasurer and
Secretary of the Registrant in October 1993, April 1993 and November 1992,
respectively. He has served the Registrant in other capacities since March 1992.
Prior to joining the Registrant, he was employed as a financial and management
consultant with Carr Financial Group in Tampa, Florida from March 1990 to March
1992. Prior thereto, he was employed as Vice President of Finance with Premiere
Group, Inc., 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 Targeted 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.
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.
Michael McGovern serves as President of McGovern Enterprises, a provider of
corporate and financial consulting services, which he founded in 1975. Mr.
McGovern is Chairman of the Board of Specialty Surgicenters, Inc., and is a
Director on the corporate boards of North Fulton Bancshares, Suburban Lodges of
America Inc., Career Publishing Network, L.L.C., Training Solutions Interactive
Inc., and the Reynolds Development Company. Mr. McGovern received a B.S. and
M.S. in accounting and his Juris Doctor from the University of Illinois. Mr.
McGovern is a Certified Public Accountant and a member of the State Bar of
Georgia and the American Bar Association.
28
The Registrant is currently in arrears on four 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 directors included in Class II above and the
director designated with * 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. The director included in Class I
above will hold office until the 2000 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, 1997, all Section 16(a) filing
requirements have been satisfied.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the
Registrant's definitive Proxy Statement for the 1998 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 1998 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 1998 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
29
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, 1997 and
1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Changes in Common
Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-27
(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule F-28
Schedule II - Valuation and qualifying accounts and reserves F-29
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.
30
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
Amendment No. 1 on Form S-3 to its Registration Statement on Form
S-1, Commission File No. 33-65125, which exhibit is incorporated
herein by reference.)
3.2* Bylaws of the Registrant, as amended and restated.
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 Amended and Restated 1991 Stock Option Plan.
4.5 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.)
4.6 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.)
31
Exhibit
Number Description
- ------- --------------------------------------------------------------------
4.7 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.)
4.8 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.)
4.9 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.)
4.10 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.)
4.11 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.)
4.12 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.)
4.13 Agreement between the Registrant and Marsing & Co. Ltd., A.S. dated
June 26, 1997. (Reference is made to Exhibit 2.1 to the Registrant's
Form 8-K filed July 10, 1997, Commission File No. 1-10581, 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.)
32
Exhibit
Number Description
- ------- --------------------------------------------------------------------
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.
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, 1997:
None.
Subsequent to December 31, 1997, the Registrant filed the following
Reports on Form 8-K:
None.
33
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 30, 1998
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 30, 1998
- ------------------------ Chief Executive Officer
James R. Murphy and Director (principal
executive officer)
/s/ Robert M. Stote Senior Vice President, March 30, 1998
- ------------------------ Chief Science Officer
Robert M. Stote, M.D. and Director )
/s/ Michael D. Price Vice President, March 30, 1998
- ------------------------ Chief Financial Officer
Michael D. Price Treasurer, Secretary, and
Director (principal financial
and accounting officer)
/s/ Randolph W. Arnegger Director March 30, 1998
- ------------------------
Randolph W. Arnegger
/s/ Charles L. Bolling Director March 30, 1998
- ------------------------
Charles L. Bolling
/s/ Michael McGovern Director March 30, 1998
- ------------------------
Michael McGovern
INDEPENDENT AUDITOR'S 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, 1997
and 1996, and the related consolidated statements of operations, changes in
common stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 27, 1998
F-1
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) December 31,
--------------------
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 11,117 $ 4,425
Investments -- 166
Receivables 2,428 3,632
Inventories 714 945
Prepaid expenses and other 750 644
-------- --------
Total current assets 15,009 9,812
-------- --------
Fixed assets, net 2,918 3,544
Drug licenses and related costs, net 691 1,475
Other non-current assets, net 2,425 1,727
-------- --------
$ 21,043 $ 16,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,493 $ 2,998
Accrued expenses 1,723 1,530
Short term borrowings 1,140 1,014
Current portion of long term debt 5 5
-------- --------
Total current liabilities 4,361 5,547
-------- --------
Long term debt, net 5,329 5,164
-------- --------
Other non-current liabilities 110 349
-------- --------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value,
authorized 2,000 shares:
Series A, issued and outstanding, 60 shares 2,338 2,203
-------- --------
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 8,426 and 3,345 shares 168 67
Stock purchase warrants (to purchase 6,122 and 8,304
shares of common stock) 192 435
Paid-in capital in excess of par value 81,382 71,146
Stock subscriptions receivable -- (105)
Accumulated deficit (70,982) (67,167)
Cumulative foreign currency translation adjustment (1,855) (1,081)
-------- --------
8,905 3,295
-------- --------
$ 21,043 $ 16,558
======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
F-2
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) For the Year Ended
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Sales $ 14,902 $ 23,133 $ 31,437
Cost of sales 8,010 15,638 25,586
-------- -------- --------
Gross margin 6,892 7,495 5,851
Operating expenses:
Selling, general and administrative 7,819 7,923 7,204
Research and development 324 29 444
Depreciation and amortization 295 502 550
Provision for goodwill impairment -- 340 --
-------- -------- --------
Total operating expenses 8,438 8,794 8,198
-------- -------- --------
Loss from operations (1,546) (1,299) (2,347)
Other (income) expenses:
Interest expense 1,086 1,227 563
Interest income (123) (103) (3)
Loss on disposition of subsidiary 591 -- --
Other (income) expense, net 94 50 (581)
-------- -------- --------
Loss before income taxes and extraordinary item (3,194) (2,473) (2,326)
Provision for income taxes 621 -- --
-------- -------- --------
Loss before extraordinary item (3,815) (2,473) (2,326)
Extraordinary item-extinguishment of debt -- 446 --
-------- -------- --------
Net loss ($ 3,815) ($ 2,919) ($ 2,326)
======== ======== ========
Loss per common share before extraordinary item ($ 0.97) ($ 0.79) ($ 0.83)
Extraordinary item - extinguishment of debt -- (0.13) --
-------- -------- --------
Basic net loss per common share ($ 0.97) ($ 0.92) ($ 0.83)
======== ======== ========
Weighted average common shares outstanding 4,072 3,334 2,999
======== ======== ========
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, 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
Exercise of Class A Redeemable Warrants 4,899 98 9,902 -- (202) 9,798
Exercise of other stock options/warrants 172 3 570 -- (150) 423
Exercise of underwriter warrants -- -- 30 -- 7 37
Conversion of Debentures 9 -- 23 -- -- 23
Issuance of stock options/warrants -- -- (51) -- 102 51
Common stock issued as compensation 1 -- 2 -- -- 2
Accrual of dividends-preferred stock -- -- (135) -- -- (135)
Stock subscription receivable cancellation -- -- (105) -- 105 --
Foreign currency translation adjustment -- -- -- -- (774) (774)
Net loss -- -- -- (3,815) -- (3,815)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 8,426 $ 168 $ 81,382 ($70,982) ($ 1,663) $ 8,905
======== ======== ======== ======== ======== ========
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) 1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Loss before extraordinary item ($3,815) ($2,473) ($2,326)
Adjustments to reconcile loss before extraordinary item to
net cash used in operating activities:
Depreciation and amortization 295 502 550
Loss on disposition of subsidiary 591 -- --
Extraordinary item-extinguishment of debt -- (446) --
Provision for goodwill impairment -- 340 --
Loss on disposal of fixed assets -- 79 --
Gain on sale of Belmacina(R) -- -- (380)
Cancellation of stock subscription receivable -- -- 532
Other non-cash items 267 468 610
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables (137) 2,991 150
Inventories (229) 43 (297)
Prepaid expenses and other current assets (340) (272) (270)
Other assets (649) (93) (160)
Accounts payable and accrued expenses 257 (716) (2,246)
Other liabilities (222) (496) 500
------- ------- -------
Net cash used in operating activities (3,982) (73) (3,337)
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of investments 166 161 214
Purchase of investments -- (166) (147)
Net proceeds from disposition of subsidiary 378 -- --
Additions to fixed assets (108) (170) (603)
Acquisition of Spanish drug license (40) -- (156)
Proceeds from sale of Belmacina(R) -- -- 1,140
Investment in partnership -- -- (13)
------- ------- -------
Net cash provided by (used in)investing activities 396 (175) 435
------- ------- -------
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,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in short term borrowings $ 363 ($ 120) $ 533
Proceeds from exercise of Class A warrants, net 9,798 -- --
Proceeds from exercise of other options/warrants, net 423 -- 214
Proceeds from exercise of underwriter warrants, net 132 -- --
Proceeds from public offering of units -- 6,900 --
Proceeds from private placements:
Common stock -- -- 544
Promissory notes -- -- 1,226
Offering costs -- (1,275) (187)
Collection of stock subscription receivable, net -- -- 506
Repayments of long term debt -- (1,770) (59)
Payments on capital leases (5) (28) (33)
-------- -------- --------
Net cash provided by financing activities 10,711 3,707 2,744
-------- -------- --------
Effect of exchange rate changes on cash (433) (154) (43)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,692 3,305 (201)
Cash and cash equivalents at beginning of period 4,425 1,120 1,321
-------- -------- --------
Cash and cash equivalents at end of period $ 11,117 $ 4,425 $ 1,120
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the period for (in thousands):
Interest $ 965 $ 907 $ 222
======== ======== ========
Taxes $ 12 -- --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common Stock
in exchange for services as follows (in thousands):
Shares issued 1 15 9
======== ======== ========
Amount
$ 2 $ 51 $ 58
======== ======== ========
In 1996, the Company acquired a drug license in Spain, assuming approximately $477,000 in liabilities therefore.
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 Spain, with limited distribution of
health care products in the United States. In Spain, the Company develops and
registers late stage products, and 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 Company divested its French subsidiary, Chimos/LBF S.A. (referred to herein
as Chimos/LBF), in June 1997 for approximately $3,650,000. The Company's
operations in France consisted of the low margin brokerage of fine chemicals,
sourcing of raw materials and pharmaceutical intermediaries and the distribution
of biotechnology or orphan drugs. (See Note 13).
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.
The Company has entered into a negotiated letter of intent to purchase domestic
and international rights to a portfolio of branded drugs, with an emphasis in
gastrointestinal products, and a manufacturing facility located in Mequon,
Wisconsin, from Schwarz Pharma, Inc. The letter of intent, dated July 21, 1997,
was recently amended to take into consideration the posible transfer of control
of the Company's Spanish subsidiary, Laboratorios Belmac, to Schwarz Pharma and
will serve as the basis for negotiations for the definitive agreements. The
proposed transaction is subject to completion of due diligence, the execution of
such definitive agreements and approval of the Registrant's stockholders and
Debenture holders. Upon execution of the letter of intent, the Registrant was
required to remit a non-refundable deposit in the amount of $100,000.
In order to fund operations, the Company primarily has issued Common Stock and
other securities. 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 previous private placements (see Notes 8 and 14). The balance of the
net proceeds were used for working capital needs, limited research and
development activities, and search for possible acquisitions of complementary
products, technologies and/or businesses. During the year ended December 31,
1997, the Company temporarily lowered the exercise price on its Class A and
Class B redeemable warrants. Approximately 70% of the outstanding Class A
warrants (approximately 4,900,000 Class A warrants) were exercised during this
period, which generated approximately $9,800,000 in proceeds to the Company. The
exercise of the Class A warrants resulted in issuance of approximately 4,900,000
shares of common stock and 4,900,000 Class B warrants. The exercise price of the
Company's Class B warrants was also temporarily lowered; however, no Class B
warrants were exercised during 1997. The proceeds from the Class A warrant
exercises are being used for working capital needs. Given the Company's current
liquidity and significant cash balances and considering its future strategic
plans, management believes that it now has sufficient resources to fund
operations and further its strategic objectives.
F-7
The strategic focus of the Company has shifted in response to the evolution of
the global health care environment. The Company has moved from a research and
development-oriented pharmaceutical company, which required developing products
from the chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one year or
currently marketed products. As a result of this transition, the Company has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Company's'
operations. The Company emphasizes product distribution in Spain, strategic
alliances and product acquisitions, which management of the Company expects will
move the Company closer to profitability in the near future.
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: Laboratorios Belmac S.A. and until it's
divestiture in June 1997, Chimos/LBF S.A.; Bentley Healthcare Corporation and
its wholly owned subsidiary, Belmac Hygiene, Inc.; Belmac Holdings, Inc. and its
wholly owned subsidiary, Belmac A.I., Inc., 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 each foreign subsidiary are translated at the rate of
exchange in effect at the end of the period. Revenues and expenses are
translated at the average exchange rate for the period. Foreign currency
translation gains and losses not impacting cash flows are credited to or charged
against 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 at
December 31, 1996 were comprised of restricted Certificates of Deposit,
collateralizing Letters of Credit, which the Company redeemed in June 1997.
F-8
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out ("FIFO") method.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the following estimated economic lives of the assets:
Years
-----
Buildings 30
Equipment 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. (See Note 13.)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
F-9
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.
During the year ended December 31, 1996, as a result of estimating the expected
net proceeds from the then pending 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 1996 provision
for impairment, for each of the years ended December 31, 1996 and 1995 was
$38,000. There was no goodwill amortization for the year ended December 31, 1997
(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 judgment in interpreting
market data and developing estimates. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Long-term debt is estimated to have a fair value of approximately
$9,432,000 as of December 31, 1997 (based upon market price on December 31,
1997). The carrying amount of other financial instruments approximate their
estimated fair values.
F-10
The fair value information presented herein is based on information available to
management as of December 31, 1997. 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
The Company applies Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (FAS 109) which mandates the liability method in
accounting for the effects of income taxes for financial reporting purposes.
BASIC NET LOSS PER COMMON SHARE
Basic net loss per common share is presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128
provides for new accounting principles used in the calculation of earnings per
share and is effective for financial statements for both interim and annual
periods ended after December 15, 1997. The Company has recalculated the basic
net loss per common share for all periods presented to give effect to FAS 128.
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted loss per common
share is not presented as it is antidilutive. Stock options, stock warrants and
convertible debentures are the only securities issued which would have been
included in the diluted loss per share calculation.
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, 1995. All information with respect to
F-11
per share data and number of common shares has been retroactively adjusted to
give effect to the reverse stock split.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (FAS 130) was issued in June 1997 and requires businesses to disclose
comprehensive income and its components in their financial statements. FAS 130
is effective for fiscal years beginning after December 15, 1997, and is
applicable to interim periods. Had the Company adopted FAS 130 in 1997,
comprehensive income (loss) would have been ($4,589,000). The difference between
net loss as reported and comprehensive loss is the effect of foreign currency
translation losses totaling $774,000.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information" (FAS 131) was issued in June 1997 and
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. FAS 131 is effective for the Company beginning January 1, 1998. The
statement is not expected to materially affect the results of operations or
financial position of the Company.
NOTE 3--RECEIVABLES
Receivables consist of the following (In Thousands):
December 31,
----------------------
1997 1996
------- -------
Trade receivables $ 2,129 $ 3,529
Other (Note 13) 358 129
------- -------
2,487 3,658
Less-allowance for doubtful accounts (59) (26)
------- -------
$ 2,428 $ 3,632
======= =======
F-12
NOTE 4--INVENTORIES
Inventories consist of the following (In Thousands):
December 31,
----------------------
1997 1996
------- -------
Raw materials $ 338 $ 515
Finished goods 501 1,257
------- -------
839 1,772
Less allowance for slow-moving inventory (125) (827)
------- -------
$ 714 $ 945
======= =======
NOTE 5--FIXED ASSETS
Fixed assets consist of the following (In Thousands):
December 31,
------------------------
1997 1996
------- -------
Land $ 967 $ 1,138
Buildings 2,329 2,673
Equipment 430 828
Furniture and fixtures 435 501
Leasehold improvements 92 117
Equipment under capital lease 27 27
------- -------
4,280 5,284
Less-accumulated depreciation (1,362) (1,740)
------- -------
$ 2,918 $ 3,544
======= =======
Depreciation expense was $185,000, $345,000 and $424,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-13
NOTE 6--DRUG LICENSES AND RELATED COSTS, NET
Drug licenses and related costs consist of the following (In Thousands):
December 31,
------------
1997 1996
------- -------
Drug licenses and related costs $ 1,219 $ 1,972
Less-accumulated amortization (528) (497)
------- -------
$ 691 $ 1,475
======= =======
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 $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. Although the Company owns rights to Alphanon(R), it
has determined that it will not attempt to further develop this product nor
commercialize it without a collaborative partner.
Amortization expense for drug licenses and related costs was approximately
$110,000, $119,000 and $88,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
F-14
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following (In Thousands):
December 31,
------------
1997 1996
------ ------
Accrued expenses $ 924 $1,247
Income taxes payable 608 --
Accrued payroll 191 283
------ ------
$1,723 $1,530
====== ======
NOTE 8--DEBT
Short term borrowings consist of the following (In Thousands):
December 31,
------------
1997 1996
------ ------
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate
on the note is 6.5% and 11.6%, respectively $1,036 $ 804
Revolving line of credit (with a Spanish financial
institution), interest rate 7.5% and 8.5% respectively 104 154
Other -- 56
------ ------
Total short term borrowings $1,140 $1,014
====== ======
F-15
Long-term debt consists the following (In Thousands):
December 31,
------------
1997 1996
------- -------
Debentures, maturing February 13, 2006, stated
rate of interest 12% (net of $1,670 and $1,753
discount, respectively) $ 5,317 $ 5,147
------- -------
Capitalized lease obligations, relating to various
equipment used by the Company 17 22
------- -------
5,334 5,169
Less current portion (5) (5)
------- -------
Total long term debt $ 5,329 $ 5,164
======= =======
The weighted average stated interest rate on short-term borrowings outstanding
at December 31, 1997 and 1996 was 6.6% and 11.7%, respectively.
The Company has $722,000 of available revolving lines of credit with Spanish
financial institutions. At December 31, 1997, advances outstanding under one of
the lines of credit was approximately $104,000. The interest rate at December
31, 1997 was 7.5% and interest is payable quarterly.
In February 1996, the Company completed a Public Offering of its securities,
whereby an aggregate of 6,900 Units were sold at a price of $1,000 per Unit.
Each Unit consisted of One Thousand Dollars ($1,000) Principal Amount 12%
Convertible Senior Subordinated Debenture due February 13, 2006 and 1,000
Class A Redeemable Warrants, each to purchase one share of Common Stock and one
Class B Redeemable Warrant. Two Class B Redeemable Warrants entitle a holder to
purchase one share of Common Stock. Interest on the Debentures is payable
quarterly.
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, was used for working
capital needs, limited research and development activities, and search for
possible acquistions of complementary products, technologies and/or businesses.
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.
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
F-16
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
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%.
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.
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, 1997 and 1996, 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.
F-17
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 has been exchangeable in whole, but not in part, at
the option of the Company on any dividend payment date since 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. 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 Amount
------ ------
Balance at December 31, 1995 60 $2,068
Accrual of 9% dividends -- 135
------ ------
Balance at December 31, 1996 60 2,203
Accrual of 9% dividends -- 135
------ ------
Balance at December 31, 1997 60 $2,338
====== ======
F-18
NOTE 10--COMMON STOCKHOLDERS' EQUITY
At December 31, 1997 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 7,407
For conversion of debentures 2,979
For exercise of stock options 2,091
For other 93
------
12,570
======
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, 1997, stock purchase warrants to purchase an aggregate of
6,122,000 shares of Common Stock were outstanding, which were exercisable at
prices ranging from $2.50 to $24.60 per share, of which 787,000 warrants have an
exercise price of $2.50 per share, 2,571,000 warrants have an exercise price of
$3.00 per share and warrants to purchase 2,450,000 shares have an exercise price
of $5.00 per share. The warrants expire through December 2004. During the year
ended December 31, 1997, the Company issued stock purchase warrants to purchase
an aggregate of 2,999,000 shares of the Company's Common Stock (including Class
B warrants to purchase approximately 2,450,000 shares, which became outstanding
upon exercise of the Class A warrants), 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. During the year ended December 31, 1997, the
Company temporarily lowered the exercise price on its Class A and Class B
redeemable warrants. Approximately 70% of all outstanding Class A redeemable
warrants (approximately 4,900,000 Class A warrants) were exercised during this
period which generated approximately $9,800,000 in proceeds to the Company. The
exercise of the Class A warrants resulted in issuance of approximately 4,900,000
shares of common stock. The exercise price of the Registrant's Class B
redeemable warrants was also temporarily lowered; however, no Class B warrants
were exercised during 1997. Additionally, 162,000 stock purchase warrants were
converted into shares of the Company's Common Stock, yielding net proceeds of
$405,000 to the Company during 1997. Also during 1997, 110 underwriters'
warrants were exercised, providing proceeds of $132,000 to the Company, which
resulted in the issuance of 110 $1,000 face value 12% Debentures due February
13, 2006 and 110,000 Class A warrants. Such warrants were exercised during 1997
and are included in the 4,900,000 discussed above. The proceeds were allocated
between the Debentures, the Class A Warrants and the conversion feature of the
Debentures based upon the relative fair values of each on the date of issuance.
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
F-19
conversions yielded net proceeds of $214,000 to the Company in the year ended
December 31, 1995.
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, 1995, 1996 and 1997.
(In thousands except per share data)
Number of Price
Common Shares Per Share
------------- ---------
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
Granted 2,999 $2.50-$5.00
Exercised (5,061) $2.00-$2.50
Canceled (120) $2.50-$116.25
--------
Outstanding at December 31, 1997 6,122
========
COMMON STOCK TRANSACTIONS
During the year ended December 31, 1997, the Company awarded 600 shares of
Common Stock to outside Directors as compensation. The Company also issued
approximately 4,900,000 shares of Common Stock as a result of the exercise of
approximately 4,900,000 Class A warrants. Also, 172,000 shares of Common Stock
were issued in connection with the exercise of other stock options/warrants and
9,000 shares of Common Stock were issued as the result of conversion of 23 of
the Company's $1,000 face value 12% Debentures due February
F-20
13, 2006.
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 outside Directors as compensation.
During the year ended December 31, 1995, the Company issued 251,000 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 outside Directors as compensation
during the year ended December 31, 1995.
STOCK SUBSCRIPTIONS RECEIVABLE
Stock subscriptions receivable at December 31, 1996 relate to a subscription
agreement whereby the subscriber had entered into a subscription agreement with
the Company and delivered promissory notes for the purchase of the shares. The
shares were 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 were
released from the pledge as they were paid for. Under the terms of the
subscription agreement and the related promissory note, the purchase price for
the stock was set at the closing price for the Company's Common Stock on the
date that the subscriber made the payment for shares to be delivered and payment
was 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. The stock subscription receivable and additional paid in
capital were further reduced by $105,000 in 1997, upon the discontinuation of
this arrangement.
STOCK OPTION PLANS
The Company has in effect Stock Option Plans (the "Plans"), pursuant to which
directors, officers, and employees of the Company who contribute materially to
the success of the Company are eligible to receive grants of options for the
Company's Common Stock. An aggregate of 2,091,000 shares of Common Stock have
been reserved for issuance under the Plans, of which 241,000 are outstanding
under the 1991 and 1994 Plans and 1,500,000 are outstanding under the Executive
Plan as of December 31, 1997. 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). During the year ended December 31, 1997,
9,000 stock options were converted into shares of the
F-21
Company's Common Stock. 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 basic net loss per common share on
a pro forma basis would have been (In Thousands, except per share data):
For the Year Ended
December 31,
--------------------------
1997 1996 1995
------- -------- -------
Net loss $(3,938) $(6,354) $(2,727)
Basic net loss per common share $( 1.00) $( 1.95) $ ( .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, 1997 and 1996, respectively: (1) risk-free interest rates of 6.2%
and 6.5%; (2) dividend yield of 0.0% and 0.0%; (3) expected lives of 9.7 and 10
years; and (4) volatility of 73.1% and 88.1%. 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, 1995, 1996 and 1997.
F-22
(In thousands except per share data)
NUMBER OF WEIGHTED AVERAGE
COMMON SHARES EXERCISE PRICE
------------- --------------
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
Granted 53 $ 2.93
Exercised (9) $ 2.31
Canceled (21) $ 47.68
------
Outstanding at December 31, 1997 1,741 $ 5.81
======
Options and warrants outstanding include 6,122,000 warrants, all of which are
exercisable, and 1,741,000 options, of which 679,000 are vested and exercisable
at December 31, 1997.
NOTE 11--PROVISION FOR INCOME TAXES
The Company has recognized a deferred tax asset of approximately $18,900,000 as
of December 31, 1997, primarily related to net operating loss carryforwards and
basis differences in the stock of its foreign subsidiary; 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.
At December 31, 1997, the Company has net operating loss (the "NOL")
carryforwards of approximately $28,000,000 available to offset future U.S.
taxable income. The Company calculates that its use of the NOL may be limited to
approximately $1,000,000 each year as a result of stock, option and warrant
issuances during current and 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. The Company
utilized approximately $14,000,000 of NOLs to offset taxable income during 1997.
If not offset against future taxable income, the NOL carryforwards will expire
in tax years 1998 through 2012.
Total income tax expense was $280,000 (domestic) and $341,000 (foreign) for the
year ended December 31, 1997. These amounts differ from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax loss as a result of
U.S. alternative minimum taxes and certain nondeductible expenses in Spain. The
Company incurred no income tax expense in the years ended December 31, 1996 or
1995.
F-23
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 and its U.S. operations as of
and for the years ended December 31, 1997, 1996 and 1995, respectively.
(In Thousands)
Year Ended December 31, 1997
-------------------------------------------------
France Spain U.S. Consolidated
------ ----- ---- ------------
Revenue $ 2,029 $ 12,491 $ 382 $ 14,902
Net income (loss) $ (20) $ 282 $ (4,077) $ (3,815)
Identifiable assets $ 0 $ 6,949 $ 14,094 $ 21,043
(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
Total liabilities attributable to foreign operations were $2,909,000, $4,472,000
and $5,607,000 at December 31, 1997, 1996 and 1995, 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, 1997, 1996
and 1995 were approximately ($24,000), ($1,000) and $3,000, respectively. Sales
in France for the years ended December 31, 1996 and 1995 include approximately
$2,200,000 and $7,300,000, respectively, to Pharmacie Centrale des Hopitaux.
F-24
The Company divested its French subsidiary in June 1997. Therefore, total
revenue generated by Chimos/LBF for the year ended December 31, 1997 includes
results for six months only.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company completed the sale of Chimos/LBF, for approximately $3,650,000 in
June 1997. The Company has since received approximately $3,300,000, including
approximately $2,600,000 of cash and cash equivalents on Chimos/LBF's books
prior to its disposition, of which approximately $500,000 was used to repay
indebtedness to the former subsidiary. An escrow fund in the amount of
approximately $350,000 representing the balance due the Company has been
established for certain contingent obligations or liabilities. In the opinion of
management, the resolution of these contingencies will have no material effect
on the Company's financial position or results of operations.
On July 15, 1993, Michael M. Harshbarger, the Company's former President and
Chief Executive Officer was discharged for cause from the Company. 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
motion to strike Harshbarger's ADA defense. The Company has recently filed a
motion to set this matter for trial and attempted to secure a trial date.
However, since mediation was attempted more than one year ago, the judge ordered
another mediation conference before setting this matter for trial. Harshbarger
failed to appear at his deposition set in January 1998; consequently discovery
in this matter is still outstanding. On two separate occasions, Harshbarger's
counsel has withdrawn from the case, citing irreconcilable differences. As a
result, Harshbarger is now representing himself in this matter. In the opinion
of current management, the outcome 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 Corporation
("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. 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
F-25
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. On August 27, 1997, the United States Court of
Appeals for the Second Circuit affirmed in part and vacated and remanded in part
the judgment of the United States District Court for the Southern District of
New York. The appeals court order vacated that portion of the district court
judgment that dismissed the Company's claim of fraud and remanded the claim to
the district court for further proceedings. Those portions of the district court
judgment which dismissed the Company's contract claim for breach of warranty,
the defendants' counterclaim for fraud and breach of contract and Medstar,
Inc.'s action for breach of an alleged guaranty were affirmed. On December 17,
1997, the United States District Court of the Southern District of New York
awarded the Company a judgment of $7,686,000 relating to its claim of fraud that
the Company filed against defendants Medstar Inc., Maximed Corporation, and
Robert S. Cohen, both jointly and severally. On January 16, 1998, the defendants
filed a notice of appeal from the judgment. The defendants have not obtained a
stay of execution pending appeal, and therefore, efforts to collect the judgment
are proceeding. These efforts include a motion that has been filed by the
Company, for the court to order a sale of Medstar's interest in the partnership.
On March 16, 1998, defendants filed their appellate brief and the Company's
brief is due to be filed on April 16, 1998. Oral argument is scheduled for May
1998. Pending resolution of this dispute, the partnership is not actively
engaged in the development of any products. In the opinion of management, the
carrying value of its investment in the partnership, accounted for using the
equity method, of $553,000 as of December 31, 1997 and 1996, is not impaired
and no reserve is considered necessary.
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-26
The Company leases certain of its assets under noncancellable operating leases.
Total charges to operations under operating leases were approximately $350,000,
$448,000 and $493,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Future minimum lease payments under operating leases are as
follows:
(In Thousands)
Year Ending December 31,
------------------------
1998 $ 402
1999 321
2000 330
2001 340
2002 andthereafter 350
NOTE 14 - EXTRAORDINARY ITEM - FISCAL YEAR 1996
The Company recorded an extraordinary charge, net of income tax effect of zero,
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-27
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, 1997
and 1996, and for each of the three years in the period ended December 31, 1997,
and have issued our report thereon dated March 27, 1998; 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.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 27, 1998
F-28
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, 1997 $497,000 $110,000 $(79,000) $528,000
For the year ended December 31, 1996 406,000 119,000 (28,000) 497,000
88,000 27,000
For the year ended December 31, 1995 291,000 406,000
Goodwill:
For the year ended December 31, 1997 564,000 $564,000(b) --
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
Reserve for inventory obsolescence:
For the year ended December 31, 1997 827,000 (24,000) 678,000(d) 125,000
For the year ended December 31, 1996 819,000 136,000 128,000(e) 827,000
For the year ended December 31, 1995 248,000 571,000 819,000
- --------------
(a) Effect of exchange rate fluctuation
(b) Represents goodwill related to the Registrant's French subsidiary, which
was divested in June 1997.
(c) Includes approximately $340,000 of unamoritized goodwill related to the
Registrant's French subsidiary that management of the Registrant
determined may not be realizable via the sale of its French subsidiary
(which sale occurred in June 1997).
(d) Includes a disposition of inventory of approximately $547,000, which has
been fully reserved and approximately $131,000 related to the Registrant's
French subsidiary, which was divested in June 1997.
(e) Represents disposition of inventory, which has been fully reserved.
F-29