UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2006

or

 

o         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)

 

Bentley Park, 2 Holland Way, Exeter, New Hampshire  03833

(Current Address of Principal Executive Offices)

Registrant’s telephone number, including area code:  (603) 658-6100

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  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      YES  o     NO  x

The number of shares of the registrant’s common stock outstanding as of November 8, 2006 was 22,223,463.

Bentley Pharmaceuticals, Inc. and Subsidiaries

Form 10-Q for the Quarter Ended September 30, 2006

Index

				Page
Part I.	Unaudited Financial Information
	Item 1.	Condensed Consolidated Financial Statements:
		Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		3
		Consolidated Income Statements for the three months ended September 30, 2006 and 2005, and the nine months ended September 30, 2006 and 2005		4
		Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2006		5
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005		6
		Notes to Condensed Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41
	Item 4.	Controls and Procedures		42
Part II.	Other Information
	Item 1. Legal Proceedings			42
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
	Item 6. Exhibits			43

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)		September 30, 2006			December 31, 2005
Assets
Current assets:
Cash and cash equivalents		$	18,200		$	32,384
Marketable securities		3,066			462
Receivables, net		32,568			26,916
Inventories, net		15,273			12,147
Deferred taxes		1,919			1,099
Prepaid expenses and other		1,905			2,069
Total current assets		72,931			75,077
Non-current assets:
Fixed assets, net		45,033			33,366
Drug licenses and related costs, net		15,302			13,858
Restricted cash		1,000			1,000
Other		824			919
Total non-current assets		62,159			49,143
		$	135,090		$	124,220
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	16,534		$	15,462
Accrued expenses		11,417			9,428
Short-term borrowings		—			2,608
Current portion of long-term debt		380			387
Deferred income		1,288			795
Other current liabilities		4,000			—
Total current liabilities		33,619			28,680
Non-current liabilities:
Deferred taxes		1,782			1,665
Deferred income		3,425			2,286
Other liabilities		3,546			—
Total non-current liabilities		8,753			3,951
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 2,000 shares, issued and outstanding, none		—			—
Common stock, $0.02 par value, authorized 100,000 shares, issued and outstanding, 22,217 and 21,923 shares		444			438
Additional paid-in capital		139,252			139,381
Accumulated deficit		(53,430		)	(49,990		)
Accumulated other comprehensive income		6,452			1,760
Total stockholders’ equity		92,718			91,589
		$	135,090		$	124,220

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Consolidated Income Statements

(in thousands, except per share data)		For the Three Months Ended  September 30,						For the Nine Months Ended  September 30,
		2006			2005			2006			2005
Revenues:
Net product sales		$	22,873		$	22,057		$	75,900		$	68,769
Licensing and collaboration revenues		2,283			1,455			6,517			3,751
Total revenues		25,156			23,512			82,417			72,520
Cost of net product sales		11,778			11,104			37,182			33,923
Gross profit		13,378			12,408			45,235			38,597
Operating expenses:
Selling and marketing		3,495			3,503			11,876			12,118
General and administrative		3,751			2,948			11,320			8,692
Research and development		2,447			1,775			7,850			4,734
Litigation settlement		8,932			88			10,269			380
Depreciation and amortization		460			416			1,341			1,359
Total operating expenses		19,085			8,730			42,656			27,283
Income (loss) from operations		(5,707		)	3,678			2,579			11,314
Other income (expenses):
Interest income		223			238			661			610
Interest expense		(15		)	(53		)	(109		)	(163		)
Other, net		—			(1		)	36			23
Income (loss) before income taxes		(5,499		)	3,862			3,167			11,784
Provision for income taxes		1,730			1,377			6,607			4,521
Net income (loss)		$	(7,229	)	$	2,485		$	(3,440	)	$	7,263
Net income (loss) per common share:
Basic		$	(0.33	)	$	0.11		$	(0.16	)	$	0.34
Diluted		$	(0.33	)	$	0.11		$	(0.16	)	$	0.32
Weighted average common shares outstanding:
Basic		22,194			21,652			22,107			21,455
Diluted		22,194			22,970			22,107			22,700

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)		$0.02 Par Value Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive
		Shares		Amount			Capital			Deficit			Income			Total
Balance at December 31, 2005		21,923		$	438		$	139,381		$	(49,990	)	$	1,760		$	91,589
Comprehensive income (loss):
Net loss		—		—			—			(3,440		)	—			(3,440		)
Other comprehensive loss:
Foreign currency translation adjustment		—		—			—			—			4,692			4,692
Comprehensive income																$	1,252
Exercise of stock options		679		14			3,451			—			—			3,465
Purchase of treasury shares		(399	)	(8		)	(5,213		)	—			—			(5,221		)
Equity-based compensation		14		—			1,633			—			—			1,633
Balance at September 30, 2006		22,217		$	444		$	139,252		$	(53,430	)	$	6,452		$	92,718

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)		For the Nine Months Ended September 30,
		2006			2005
Cash flows from operating activities:
Net (loss) income		$	(3,440	)	$	7,263
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,038			3,872
Equity-based compensation expense		1,633			179
Loss on disposal of assets		50			190
Other non-cash items		8			32
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables		(3,805		)	(2,175		)
Inventories		(2,118		)	(4,193		)
Deferred income taxes		(694		)	(192		)
Prepaid expenses and other current assets		229			(357		)
Other assets		(6		)	(564		)
Accounts payable and accrued expenses		1,331			4,423
Deferred income		1,351			1,880
Other liabilities		7,546			(14		)
Net cash provided by operating activities		6,123			10,344
Cash flows from investing activities:
Additions to fixed assets		(12,070		)	(6,673		)
Additions to drug licenses and related costs		(1,803		)	(1,477		)
Proceeds from maturity of investments		—			158
Purchase of investments		(2,402		)	(158		)
Net cash used in investing activities		(16,275		)	(8,150		)

(Continued on following page)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Concluded)

(in thousands)		For the Nine Months Ended September 30,
		2006			2005
Cash flows from financing activities:
Proceeds from the exercise of stock options		$	150		$	1,800
Remittance of employee tax liabilities in exchange for common stock tendered to the Company		(1,907		)	(1,082		)
Purchases of treasury stock		—			(305		)
Proceeds from borrowings		1,404			1,338
Repayment of borrowings		(3,700		)	(1,684		)
Net cash (used in) provided by financing activities		(4,053		)	67
Effect of exchange rate changes on cash		21			(678		)
Net (decrease) increase in cash and cash equivalents		(14,184		)	1,583
Cash and cash equivalents at beginning of period		32,384			34,230
Cash and cash equivalents at end of period		$	18,200		$	35,813
Supplemental Disclosures of Cash Flow Information
The Company paid cash during the period for:
Interest		$	110		$	153
Foreign income taxes		$	4,372		$	3,209
Supplemental Disclosures of Non-Cash Financing and Investing Activities
The Company has issued Common Stock as equity-based compensation in lieu of cash during the period as follows:
Shares		14			16
Amount		$	182		$	161
Amounts included in accounts payable at end of period for fixed asset and drug license purchases		$	3,796		$	1,836

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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Bentley Pharmaceuticals, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

History and Operations

Bentley Pharmaceuticals, Inc. and Subsidiaries (which may be referred to as Bentley or the Company), headquartered in the U.S., is an international specialty pharmaceutical company, incorporated in the State of Delaware, focused on:

·                  Specialty Generics: development, licensing and sales of generic and branded generic pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing of pharmaceuticals for others; and

·                  Drug Delivery: research, development and licensing/commercialization of advanced drug delivery technologies and pharmaceutical products.

Bentley’s pharmaceutical product sales and licensing activities are based primarily in Spain, where it has a significant commercial presence and manufactures and markets approximately 110 products of various dosages and strengths through three wholly-owned Spanish subsidiaries: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Bentley’s products include approximately 160 product presentations in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Although most of the sales of these products are currently in the Spanish market, the Company has experienced increasing sales in other European countries and other geographic regions through strategic alliances with companies in these territories.  The Company continually adds to its product portfolio in response to increasing market demand for generic and branded generic therapeutic agents and, when appropriate, divests portfolio products considered to be redundant or that have become non-strategic.  The Company also owns a manufacturing facility in Spain that specializes in the manufacturing of several API. This facility has been approved by the U.S. Food and Drug Administration (“FDA”) for the manufacture of one ingredient for marketing and sale in the U.S. The Company markets its API products through its Spanish subsidiary, Bentley A.P.I.  The Company also has an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, which received its first marketing approval by the Irish Medicines Board in 2005 and expects to fill its first product sales order in the fourth quarter of 2006.

The Company has U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Bentley is developing products that incorporate its drug delivery technologies and has licensed applications of its proprietary CPE-215® drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim® in the U.S. market in February 2003.  Testim, which incorporates Bentley’s CPE-215 drug delivery technology, is a gel used for testosterone replacement therapy. Bentley continues to seek other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using its drug delivery technologies.

Basis of Condensed Consolidated Financial Statements

The Condensed Consolidated Financial Statements of Bentley as of September 30, 2006 and for the three and nine months ended September 30, 2006 and 2005, included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted insofar as such information was disclosed in the Company’s consolidated financial statements for the year ended December 31, 2005.  These Condensed Consolidated Financial Statements should be read in conjunction with the summary of significant accounting policies and the audited consolidated financial statements and notes thereto included in Bentley’s Annual Report on Form 10-K for the year ended December 31, 2005.

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In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2006, and for the three and nine months ended September 30, 2006 and 2005, are presented on a basis consistent with the audited consolidated financial statements for the year ended December 31, 2005 (with the exception of equity-based compensation expense discussed in the “Equity-based compensation — required change in accounting principle” note below and royalty revenues on Auxilium’s sales of Testim discussed in the “Revenue recognition” note below) and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Bentley’s financial position as of September 30, 2006, the results of its operations for the three and nine months ended September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005.  The results of operations for the nine months ended September 30, 2006 should not necessarily be considered indicative of the results to be expected for the full year ending December 31, 2006.

Cash and cash equivalents

The Company considers all highly liquid investments with remaining maturities of three months or less when purchased to be cash equivalents for purposes of classification in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. Investments in securities that do not meet the definition of cash equivalents are classified as marketable securities in the Consolidated Balance Sheets.

Included in cash and cash equivalents at September 30, 2006 and December 31, 2005 are approximately $5,892,000 and $11,513,000 respectively, of short-term investments considered to be cash equivalents, as the original maturity dates of such investments were three months or less when purchased.

Marketable securities

The Company has investments in securities, with maturities of greater than three months when purchased, which are classified as available-for-sale, totaling $3,066,000 as of September 30, 2006, compared to $462,000 as of December 31, 2005. The Company’s investments are carried at amortized cost which approximates fair value due to the short-term nature of these investments.  Accordingly, no unrealized gains or losses have been recognized on these investments. Should the fair values differ significantly from the amortized costs, unrealized gains or losses would be included as a component of other comprehensive income (loss).

Receivables

Receivables consist of the following (in thousands):

		September 30, 2006			December 31, 2005
Trade receivables (of which $0 and $2,595, respectively, collateralize short-term borrowings with Spanish financial institutions)		$	25,924		$	21,293
VAT receivable		2,535			2,270
Royalties receivable		4,054			2,861
Other		395			694
		32,908			27,118
Less-allowance for doubtful accounts		(340		)	(202		)
		$	32,568		$	26,916

Inventories

Inventories are stated at the lower of cost or market, cost being determined on the first in, first out (“FIFO”) method. Reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand.

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Inventory balances are comprised of the following (in thousands):

		September 30, 2006			December 31, 2005
Raw materials		$	7,919		$	6,414
Finished goods		7,424			5,869
		15,343			12,283
Less allowance for slow moving inventory		(70		)	(136		)
		$	15,273		$	12,147

Fixed assets

Fixed assets consist of the following (in thousands):

		September 30, 2006			December 31, 2005
Land		$	2,807		$	2,673
Buildings and improvements		16,858			14,151
Equipment		19,000			16,742
Furniture and fixtures		2,045			1,974
Other		393			148
		41,103			35,688
Capital in-progress		17,626			7,748
		58,729			43,436
Less accumulated depreciation		(13,696		)	(10,070		)
		$	45,033		$	33,366

 

In order to support the Company’s growth in Europe and prepare for prescription sales in the U.S., management is adding additional capacity to its manufacturing facilities through a series of improvements. The Company invested approximately $12,070,000 in capital additions during the nine months ended September 30, 2006, primarily for buildings and improvements.

Depreciation expense of approximately $234,000 and $235,000 has been charged to operations as a component of depreciation and amortization expense in the Consolidated Income Statements for the three months ended September 30, 2006 and 2005, respectively. Depreciation totaling approximately $2,697,000 and $2,513,000 has been included in cost of net product sales during the nine months ended September 30, 2006 and 2005, respectively.

Other liabilities

Litigation

The Company and its subsidiary, Laboratorios Belmac, have reached substantial agreement with Ethypharm S.A. Spain and Ethypharm S.A. France on terms to settle all outstanding litigation. The Ethypharm claims were in reference to the manufacture and sale by Laboratorios Belmac of omeprazole and other pharmaceutical products which allegedly used Ethypharm’s proprietary pellet technology or infringed Ethypharm’s patents. In accordance with Statement of Financial Accounting Standard No. 5, Accounting for Contingencies, the Company recorded a $7,546,000 charge in the third quarter of 2006 representing the present value of $4,000,000 expected to be paid in the fourth quarter of 2006 and four payments of $1,000,000 to be paid on the first four anniversaries of the first payment, discounted at a rate of 4.72%. Because no definitive settlement agreement has yet been concluded, there can be no assurance as to whether, or on what additional terms, this litigation will ultimately be settled. The Company has incurred approximately $2,723,000 in related litigation defense costs in the nine months ended September 30, 2006, of which approximately $1,386,000 was incurred in the three months ended September 30, 2006.  The litigation and related charges incurred in the three and nine months ended September 30, 2006 reduced the Company’s net income by approximately $8,855,000 and $10,098,000, respectively or $0.40

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and $.046 per share, respectively. The litigation related charges are recorded in litigation settlement expenses on the Company’s Condensed Consolidated Income Statement.

Stockholders’ equity

A substantial amount of the Company’s business is conducted in Europe and is therefore influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, especially the Euro. The exchange rates at September 30, 2006 and December 31, 2005 were .79 Euros and .84 Euros per U.S. Dollar, respectively. The weighted average exchange rates for the three month periods ended September 30, 2006 and 2005 were .78 Euros and .82 Euros per U.S. Dollar, respectively. The weighted average exchange rates for the nine month periods ended September 30, 2006 and 2005 were .80 Euros and .79 Euros per U.S. Dollar, respectively. The net effect of foreign currency translation on our Condensed Consolidated Financial Statements for the nine months ended September 30, 2006 was a net increase of $4,692,000, and the cumulative historical effect as of September 30, 2006 was an increase of $6,452,000, as reflected in our Consolidated Balance Sheets as accumulated other comprehensive income.  The carrying value of assets and liabilities can be materially affected by foreign currency translation, as can the translated amounts of revenues and expenses. Management is considering the use of derivates to limit foreign currency risks.

Supplemental disclosures related to Consolidated Statements of Cash Flows

During the nine months ended September 30, 2006, the Chief Executive Officer (“CEO”), the Chief Medical Officer (“CMO”) and the former Chief Financial Officer (“Former CFO”) of the Company exercised stock options to purchase an aggregate of 650,400 shares of the Company’s Common Stock. In satisfaction of the option exercise prices, the Company received an aggregate of approximately 254,300 shares of previously acquired Bentley Common Stock, with a fair market value of approximately $3,314,000. The Company also withheld a total of approximately 144,400 shares of Common Stock with a fair market value of approximately $1,900,000 from the shares to be issued to these executives in connection with their exercises, in order to satisfy minimum federal and statutory tax withholding requirements. The shares of Common Stock acquired by the Company in connection with these stock option exercises were recorded at fair market value and are held by the Company as treasury shares.  In addition, in accordance with the separation agreement with the Former CFO, an additional 1,604 shares of Common Stock associated with a grant of restricted stock units became vested and issuable to the Former CFO on September 30, 2006.  The Company withheld a total of 584 shares of Common Stock with a fair market value of approximately $7,000 from the issuance of those shares in order to satisfy minimum federal and statutory tax withholding requirements. As of September 30, 2006 and December 31, 2005, the Company has recorded approximately 830,100 and 430,800 shares, respectively, as treasury stock, with an historical cost of $10,536,200 and $5,321,000, respectively, which has been accounted for as a reduction of common stock and additional paid in capital.

As of September 30, 2006, 10,000 shares of the Company’s Common Stock are contingently issuable to the Company’s non-employee Directors upon termination of their service as a member of the Board in accordance with restricted stock unit awards granted to them.  The Company has included the contingently issuable shares in its computation of basic earnings per share in the three and nine months ended September 30, 2006.

During the nine months ended September 30, 2005, the CEO, the Former CFO and the CMO of the Company exercised stock options to purchase an aggregate of 801,300 shares of the Company’s Common Stock. In satisfaction of the option exercise prices, the Company received approximately $1,218,000 in cash proceeds and an aggregate of approximately 127,000 shares of previously acquired Bentley Common Stock, with a fair market value of approximately $1,400,000. The Company also received a total of approximately 147,800 shares of Common Stock, with a fair market value of approximately $1,668,000, from the three employees in order to satisfy minimum federal and statutory tax withholding requirements. Approximately $1,082,000 of the withholding taxes on these option exercises were remitted by the Company during the nine months ended September 30, 2005 and the remaining

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$586,000 were remitted subsequent to September 30, 2005. Additionally, the Company repurchased approximately 90,600 shares of Common Stock with a fair market value of approximately $1,041,000 from the CEO and CMO, of which approximately $736,000, representing the repurchase of approximately 62,800 shares, was recorded as a related party payable to the CEO at September 30, 2005 and subsequently paid. The shares of Common Stock acquired by the Company in connection with these stock option exercises were recorded at fair market value and are held by the Company as treasury shares.

Revenue recognition

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price and considers delivery to have occurred when the customer takes possession of the product. The Company provides its customers with a limited right of return. Revenue is recognized upon delivery and a reserve for sales returns is recorded when considered appropriate. The Company has demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists, (SFAS No. 48) and of allowances for doubtful accounts based on significant historical experience.

Revenue from service, research and development, and licensing agreements is recognized when the service procedures have been completed or as revenue recognition criteria have been met for each separate unit of accounting as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.  The Company has deferred the recognition of approximately $3,843,000 and $2,594,000 of licensing revenues as of September 30, 2006 and December 31, 2005, respectively, for which the earnings process has not been completed.

The Company earns royalty revenues on Auxilium’s sales of Testim, which incorporates the Company’s CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased product prior to the units being dispensed through patient prescriptions. Historically, customer returns were not able to be reasonably estimated. Therefore, in accordance with SFAS No. 48, the Company deferred the recognition of royalty revenues on product shipments of Testim until the units were dispensed through patient prescriptions. During the quarter ended June 30, 2006, the Company recorded a one-time increase in royalty revenues of approximately $479,000, or $0.02 per share, due to a change in estimate which, based on historical experience, allowed it to reasonably estimate future product returns on sales of Testim. As a result of the change in estimate, there were no deferred Testim royalties as of September 30, 2006. Deferred income from Testim royalties totaled $348,000 as of December 31, 2005.

Provision for income taxes

As a result of reporting taxable income in Spain, the Company recorded provisions for foreign income taxes totaling $6,607,000 and $4,521,000 for the nine months ended September 30, 2006 and 2005, respectively.  The provisions represented 57% and 33% of the pre-tax income reported in Spain of $11,640,000 and $13,603,000 for the nine months ended September 30, 2006 and 2005, respectively. The Company is evaluating the tax deductibility of the litigation settlement charges recorded in the period (see “Other liabilities” footnote) and expects to conclude on such determination in the fourth quarter of 2006. Effective October 2005, the Company executed intercompany agreements between Bentley Pharmaceuticals, Inc. and Bentley Pharmaceuticals Ireland Limited to license non-U.S. rights of certain technologies owned by Bentley Pharmaceuticals, Inc. and provide for cost-sharing of subsequent development efforts on those technologies.  These arrangements are intercompany in nature, and the resulting income and expenses between the entities are eliminated in consolidation. As future operating profits in the U.S. and Ireland cannot be reasonably assured, no tax benefit has been recorded for the related losses, which totaled approximately $8,474,000 and $1,819,000 for the nine months ended September 30, 2006 and 2005, respectively. Accordingly, the Company has established valuation allowances equal to the full amount of the U.S. and Irish deferred tax assets. As a result of the litigation settlement charges recorded in Spain for which no tax benefit has been recorded in the period and the full valuation allowances in the U.S. and Ireland, the

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provisions represented 209% and 38% of consolidated pre-tax income for the nine months ended September 30, 2006 and 2005, respectively.

Should the Company determine that it is more likely than not that it will realize certain of its net deferred tax assets for which it has previously provided valuation allowances, an adjustment would be required to reduce the existing valuation allowances. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in those jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. No additional potential tax contingencies were considered to be probable and reasonably estimable as of September 30, 2006. However, there is the possibility that the ultimate resolution of such potential contingencies could have an adverse effect on the Company’s Consolidated Financial Statements in the future.

Basic and diluted net income per common share

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during each period. The Company included the dilutive effect of outstanding stock options, as calculated using the treasury stock method and restricted stock units, when determining the diluted net income per common share for the three and nine months ended September 30, 2006 and 2005.

The following is a reconciliation between basic and diluted net income per common share for the three and nine months ended September 30, 2005. There is no dilutive effect of equity securities on the Company’s earnings per share for the three and nine months ended September 30, 2006 due to the net losses reported in those periods. Dilutive securities issuable for the three and nine months ended September 30, 2005 included approximately 1,318,000 and 1,245,000 dilutive incremental shares, respectively, issuable as a result of various stock options and unvested restricted stock units that were outstanding. See the discussion of stock options and restricted stock units in the section below entitled “Equity-based compensation — required change in accounting principle”.

For the three months ended September 30, 2005 (in thousands, except per share data):

		Basic EPS			Effect of Dilutive  Securities			Diluted EPS
Net Income		$	2,485		$	—		$	2,485
Weighted Average Common Shares Outstanding		21,652			1,318			22,970
Net Income Per Common Share		$	0.11		$	—		$	0.11

For the nine months ended September 30, 2005 (in thousands, except per share data):

		Basic EPS			Effect of Dilutive  Securities			Diluted EPS
Net Income		$	7,263		$	—		$	7,263
Weighted Average Common Shares Outstanding		21,455			1,245			22,700
Net Income Per Common Share		$	0.34		$	(0.02	)	$	0.32

Excluded from the diluted EPS presentation for the three and nine months ended September 30, 2006 were approximately 3,699,000 shares underlying outstanding stock options and 111,000 shares underlying outstanding restricted stock units as the incremental effect of those shares would be anti-dilutive in those periods.

Excluded from the diluted EPS presentation for each of the three and nine months ended September 30, 2005 were options to purchase an aggregate of approximately 702,000 and 1,135,000 shares of Common

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Stock, respectively, at exercise prices greater than the average fair value of the Common Stock for the three and nine months ended September 30, 2005.

Equity-based compensation — required change in accounting principle

In December 2004, the Financial Accounting Standards Board (“the FASB”) issued SFAS No. 123 (Revised), Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.  SFAS No. 123 (Revised) focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for equity-based payment transactions and requires that the cost resulting from those transactions be recognized in the financial statements.  The Company has equity-based employee compensation plans that are described more fully in Note 11 of the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2005.  The Company adopted SFAS No. 123 (Revised) effective January 1, 2006 using the modified-prospective transition method. The Company uses the accelerated expense attribution method pursuant to FASB Interpretation No. (“FIN”) 28 for all options previously accounted for under APB Opinion No 25. Equity-based compensation attributable to equity awards granted subsequent to December 31, 2005 will be recognized using the straight-line method pursuant to SFAS No. 123 (Revised).  During the nine months ended September 30, 2006, the Company awarded approximately 480,800 stock options and approximately 129,000 restricted stock units.

The Company has in effect stock option and equity incentive plans (the “Plans”), pursuant to which directors, officers, employees and consultants of the Company have been awarded grants of options to purchase the Company’s Common Stock and restricted stock units. The Company’s shareholders voted to increase the number of shares of Common Stock authorized for issuance pursuant to the Company’s Amended and Restated 2005 Equity and Incentive Plan by 750,000 shares in May 2006.  As of September 30, 2006, approximately 4,560,300 shares of Common Stock have been reserved for issuance under the Plans, of which approximately 348,200 are outstanding that were issued under the 1991 Stock Option Plan and approximately 2,500,500 are outstanding that were issued under the 2001 Employee and Director Plans.  Approximately 961,900 shares are outstanding that were issued under the Amended and Restated 2005 Equity and Incentive Plan, excluding 10,000 shares underlying restricted stock units, contingently issuable to non-employee directors, that will be issued when the directors cease to serve as directors of the Company. The balance of approximately 749,700 shares is available for future issuance under the Amended and Restated 2005 Equity and Incentive Plan, which is now the successor to all the other Plans.  Of the shares available for future issuance, approximately 289,400 are available for future stock options only and the remainder are available for any type of award allowed under the plan.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model.  Options are granted for terms not exceeding ten years from the date of grant. Options shall not be granted at an exercise price that is less than 100% of the fair market value of the Company’s Common Stock on the date the options are granted, which is equal to the average of the high and low trading prices of the Company’s Common Stock on the New York Stock Exchange on the date of the award. Options granted under the Plans generally vest over one to three years, commensurate with the related requisite service periods.

The fair value of each restricted stock unit award is estimated on the date of grant using the Company’s closing stock price on the New York Stock Exchange on the date of the award. Restricted stock units granted to employees vest annually over four years, which is the requisite service period.  Shares of Common Stock underlying vested units become issuable to each employee on each annual vesting date.  Restricted stock units granted to non-employee directors vest quarterly over one year, which is the related requisite service period.  Shares of Common Stock underlying vested units become issuable to each non-employee director upon termination of service as a member of the Board of Directors.

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The adoption of SFAS No. 123 (Revised) in 2006 resulted in incremental equity-based compensation expense of approximately $1,424,000, or $0.06 per basic and diluted share, for the nine months ended September 30, 2006, of which approximately $19,000 is included in cost of sales, approximately $10,000 is included in selling and marketing expenses, approximately $913,000 (including approximately $97,000 of equity-based compensation expense recorded in the third quarter in accordance with the provisions of the Former CFO’s separation agreement) is included in general and administrative expenses and approximately $482,000 is included in research and development expenses. The incremental equity-based compensation expense resulted in a reduction in net income of $598,000 for the three months ended September 30, 2006, or $0.03 per basic and diluted share, of which approximately $4,000 is included in cost of sales, approximately 2,000 is included in selling and marketing expenses, approximately $392,000 (including approximately $97,000 recorded in accordance with the provisions of the Former CFO’s separation agreement) is included in general and administrative expenses and approximately $200,000 is included in research and development expenses. No related compensation expense was capitalized as the cost of an asset and there was no impact on net cash provided by operating activities or net cash used in financing activities as a result of these transactions.

At the discretion of the Compensation Committee of the Board of Directors, the Company may grant shares of its Common Stock to employees in lieu of cash compensation. The Company also sponsors a 401(k) Plan for eligible employees and matches eligible contributions with shares of the Company’s Common Stock. The Company issued approximately 5,100 and 4,200 shares of Common Stock to its 401(k) Plan as matching contributions during the three months ended September 30, 2006 and 2005, respectively, and approximately 13,900 shares and 16,000 shares during the nine months ended September 30, 2006 and 2005, respectively.  These shares are recorded at their fair value on the last day of each payroll period in which they are earned.  All Company matching contributions vest 25% each year for the first four years of each employee’s employment in which the employee works for the Company at least 1,000 hours.

Equity-based compensation expense attributable to the Company’s 401(k) Plan matching contributions and non-employee options represents the remainder of the Company’s SFAS No. 123 (Revised) equity-based compensation. General and administrative expenses include approximately $27,000 and $30,000 of such non-cash equity-based compensation for the three months ended September 30, 2006 and 2005, respectively, and approximately $87,000 and $74,000 of such compensation for the nine months ended September 30, 2006 and 2005, respectively. Research and development expenses include approximately $50,000 and $35,000 of such non-cash equity-based compensation for the three months ended September 30, 2006 and 2005, respectively, and approximately $120,000 and $105,000 of such compensation for the nine months ended September 30, 2006 and 2005, respectively.

As the Company previously adopted only the pro forma disclosure provisions of SFAS No. 123, compensation cost relating to the unvested portion of equity-based awards granted prior to the date of adoption will continue to be recognized using the same estimate of the grant-date fair value and the same accelerated attribution method used to determine the pro forma disclosures under SFAS No. 123, except that the unamortized compensation expense related to those awards will be reduced for estimated forfeitures, as required by SFAS No. 123 (Revised).

The following table details the reported effect that equity-based compensation expense had on net income and earnings per share for the three and nine months ended September 30, 2006 and the pro forma effect that equity-based compensation expense would have had on net income and earnings per share for the three and nine months ended September 30, 2005.  The reported net income and earnings per share for the three and nine months ended September 30, 2006 in the table below includes the equity-based compensation expense actually recorded in the three and nine months ended September 30, 2006 under the provisions of SFAS No. 123 (Revised). The amounts for the three and nine months ended September 30, 2006 are included in the table below only to provide a comparative presentation to the prior year required disclosure (in thousands, except per share data), which was prepared in accordance with SFAS No. 123, as originally issued.

15

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		For the Three Months Ended  September 30,						For the Nine Months Ended September 30,
		2006			2005			2006			2005
Net income, as reported		$	(7,229	)	$	2,485		$	(3,440	)	$	7,263
Add: Equity-based employee compensation expense included in reported net income		675			65			1,633			179
Deduct: Total equity-based employee compensation expense determined under fair value method for all awards		(675		)	(1,232		)	(1,633		)	(2,565		)
Net income / pro forma net income		$	(7,229	)	$	1,318		$	(3,440	)	$	4,877
Net income per common share:
Basic — as reported		$	(0.33	)	$	0.11		$	(0.16	)	$	0.34
Basic — pro forma					$	0.06					$	0.23
Diluted — as reported		$	(0.33	)	$	0.11		$	(0.16	)	$	0.32
Diluted — pro forma					$	0.06					$	0.22

A summary of stock option award activity under the Plans as of September 30, 2006 and changes during the nine month period then ended are presented below (shares and aggregate intrinsic values in thousands):

		For the Nine Months Ended September 30, 2006
		Number  of  Options		Weighted  Average  Exercise  Price			Weighted  Average  Remaining  Contractual  Term (Years)		Aggregate  Intrinsic  Value
Options outstanding, December 31, 2005		3,916		$	8.72
Granted		481		11.80
Exercised		(677	)	5.11
Forfeited and Expired		(21	)	10.01
Options outstanding, September 30, 2006		3,699		$	9.77		6.70		$	8,885
Options exercisable, September 30, 2006		2,875		$	9.61		5.99		$	7,508

The Company entered into a separation agreement with its former CFO, pursuant to which certain equity awards were modified during the quarter to allow for the acceleration of vesting and extension of post employment exercise period. These modifications resulted in the recognition of approximately $97,000 of equity-based compensation which has been recorded in general and administrative expenses in the three and nine months ended September 30, 2006.

During the first nine months of 2006, the Company granted 89,000 restricted stock units to employees with a weighted average grant date fair value of $11.63 and 40,000 restricted stock units to non-employee directors with a weighted average grant date fair value of $11.78, all of which were granted in the second quarter.

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A summary of restricted stock units award activity under the Amended and Restated 2005 Equity and Incentive Plan as of September 30, 2006 and changes during the nine month period then ended are presented below (shares and aggregate intrinsic values in thousands):

		For the Nine Months Ended September 30, 2006
		Number  of  Restricted  Stock  Units		Weighted  Average  Grant Date  Fair Value			Weighted  Average  Remaining Contractual Term (Years)		Aggregate  Intrinsic  Value
Restricted stock units outstanding December 31, 2005		—		$	—
Granted		129		11.67
Vested		(12	)	11.78
Forfeited		(6	)	11.78
Restricted stock units outstanding, September 30, 2006		111		$	11.66		1.67		$	1,335

As of September 30, 2006, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $1,184,000 and is expected to be recognized over a weighted average period of approximately 2.2 years.  All of the Company’s outstanding restricted stock units were unvested as of September 30, 2006.

Included in the approximately 12,000 units that vested during the year are 10,000 shares contingently issuable to non-employee directors that, pursuant to the terms and conditions of the restricted stock unit agreements, will be issued when the directors cease to serve as directors of the Company.  Shares of common stock were issued in the third quarter for the balance of units that vested in 2006.  The intrinsic value of these shares when they vested was approximately $20,000.  As future operating profits in the U.S. cannot be reasonably assured, the Company has not recorded any tax benefit resulting from the settlement of U.S. awards.

The table below summarizes options outstanding and exercisable at September 30, 2006 (number of options in thousands):

		Options Outstanding.							Options Currently Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Life (Years)		Number Exercisable		Weighted Average Exercise Price
$2.00 - $3.00		58		$	2.72		2.4		58		$	2.72
5.70 -5.88		142		5.84			3.7		142		5.84
6.00 -6.33		283		6.01			4.6		283		6.01
7.10 -7.39		182		7.31			6.6		114		7.26
7.50		345		7.50			8.0		131		7.50
8.00 -8.93		310		8.28			6.0		310		8.28
9.00 -9.80		469		9.69			5.1		469		9.69
10.04		273		10.04			6.6		273		10.04
10.38 -10.79		200		10.76			8.0		195		10.77
11.00 -11.78		818		11.57			8.4		351		11.28
12.01 -12.55		203		12.30			8.4		133		12.44
13.30		373		13.30			6.3		373		13.30
13.48 -15.83		43		14.07			7.2		43		14.07
$2.00 - $15.83		3,699		$	9.77		6.7		2,875		$	9.61

 

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The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model.  Assumptions and the resulting fair value for option awards granted during the three and nine months ended September 30, 2006 and 2005 are provided below (results may vary depending on the assumptions applied within the model):

		For the Three Months Ended  September 30,						For the Nine Months Ended September 30,
		2006			2005			2006			2005
Risk-free interest rate		4.77%			4.09%			4.95%			3.97%
Dividend yield		0.00%			0.00%			0.00%			0.00%
Expected life		5 years			5 years			5 years			5 years
Volatility		45.75%			46.28%			46.24%			45.44%
Fair value of options granted		$	5.57		$	5.02		$	5.54		$	3.87

The expected life (estimated period of time outstanding) of options granted is estimated to be five years and is based on historical exercise behaviors.  The volatility of the Company’s stock is calculated on the grant date of each equity award using daily price observations over a period of time commensurate with the related requisite service period.  The risk-free interest rate is based on the yield curve of U.S. Treasury securities in effect at the date of the grant, having a duration commensurate with the estimated life of the award.

A summary of the activity for nonvested share awards as of September 30, 2006 and 2005 is provided below with changes during the nine month periods ended September 30, 2006 and 2005 (shares in thousands):

		For the Nine Months Ended September 30,
		2006					2005
		Number  of  Options		Weighted  Average  Grant Date Fair Value			Number  of  Options		Weighted  Average  Grant Date Fair Value
Nonvested options outstanding, beginning of the period		840		$	4.35		748		$	5.58
Granted		481		5.54			820		4.00
Vested		(477	)	(4.81		)	(663	)	(5.07		)
Forfeited		(20	)	(4.62		)	(15	)	4.24
Nonvested options outstanding, end of the period		824		$	4.77		890		$	4.37

 

As of September 30, 2006, unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $2,814,000 and is expected to be recognized over a weighted average period of approximately 2.3 years.

Options to purchase approximately 677,000 and 876,000 shares of Common Stock were exercised during the nine months ended September 30, 2006 and 2005, respectively.  Net cash proceeds to the Company from the 2006 and 2005 exercises totaled approximately $150,000 and $1,800,000, respectively, while the total intrinsic value (the excess of the market price over the exercise price) of those option exercises was approximately $5,384,000 and $6,742,000, respectively. As future operating profits in the U.S. cannot be reasonably assured, no tax benefit resulting from the settlement of U.S. awards has been recorded. The total fair value of stock options that vested during the nine months ended September 30, 2006 and 2005 was approximately $2,294,000 and $3,361,000, respectively.

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The Company generally issues previously unissued shares for the exercise of stock options and to match eligible 401(k) Plan contributions; however, the Company may reissue previously acquired treasury shares to satisfy these issuances in the future. The Company does not have a policy of repurchasing shares on the open market to satisfy option exercises and matching contributions to the 401(k) Plan.

Business segment information

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, defines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company’s operating segments. Bentley is headquartered in the U.S. and operates in two business segments, specialty generics and drug delivery, and two geographical locations (Europe and the U.S.).

The Company’s specialty generics segment is based in Europe and manufactures a growing portfolio of generic and branded generic pharmaceuticals in Europe for the treatment of cardiovascular, gastrointestinal, infectious and central nervous system diseases through its subsidiary, Laboratorios Belmac, and markets these pharmaceutical products through its subsidiaries, Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Bentley Pharmaceuticals Ireland Limited has received its first product sales order and expects to launch the first product in the fourth quarter of this year.

The Company’s drug delivery segment is based in both the U.S. and Europe and is focused on the advancement of proprietary drug delivery technologies that enhance or facilitate the absorption of pharmaceutical compounds across various membranes.  The drug delivery activities consist primarily of licensing, product research and development, business development, corporate management and administration.

Set forth in the tables below is certain financial information with respect to the Company’s business and geographical segments for the three and nine months ended September 30, 2006 and 2005 and as of September 30, 2006 and December 31, 2005. The segment information has been prepared using the same accounting policies as those described in the summary of significant accounting policies in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

For the three months ended September 30, 2006 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Net product sales		$	22,834		$	39		$	—		$	—		$	22,873
Licensing and collaboration revenues		170			—			—			2,113			2,283
Total revenue		23,004			39			—			2,113			25,156
Cost of net product sales		11,739			39			—			—			11,778
Gross Profit		11,265			—			—			2,113			13,378
Selling and marketing expense		3,495			—			—			—			3,495
General and administrative expense		1,901			—			1			1,849			3,751
Research and development expense		421			—			1,013			1,013			2,447
Depreciation and amortization expense		270			21			—			169			460
Litigation settlement		7,764			1,168			—			—			8,932
(Loss) from operations		(2,586		)	(1,189		)	(1,014		)	(918		)	(5,707		)
Interest income		55			—			—			168			223
Interest expense		(15		)	—			—			—			(15		)
Other income (expense), net		—			—			—			—			—
(Loss) before income taxes		(2,546		)	(1,189		)	(1,014		)	(750		)	(5,499		)
Provision for income taxes		1,730			—			—			—			1,730
Net (loss)		(4,276		)	(1,189		)	(1,014		)	(750		)	(7,229		)
Expenditures for fixed assets		4,597			—			—			157			4,754
Expenditures for drug licenses		572			—			—			360			932

 

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For the three months ended September 30, 2005 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Net product sales		$	22,057		$	—		$	—		$	—		$	22,057
Licensing and collaboration revenues		57			—			—			1,398			1,455
Total revenues		22,114			—			—			1,398			23,512
Cost of net product sales		11,104			—			—			—			11,104
Gross profit		11,010			—			—			1,398			12,408
Selling and marketing expense		3,503			—			—			—			3,503
General and administrative expense		2,763			—			—			185			2,948
Research and development expense		315			—			—			1,460			1,775
Depreciation and amortization expense		237			21			—			158			416
Litigation settlement		60			28			—			—			88
Income(loss) from operations		4,132			(49		)	—			(405		)	3,678
Interest income		35			—			—			203			238
Interest expense		(53		)	—			—			—			(53		)
Other income (expense), net		1			—			—			(2		)	(1		)
Income (loss) before income taxes		4,115			(49		)	—			(204		)	3,862
Provision for income taxes		1,377			—			—			—			1,377
Net income (loss)		2,738			(49		)	—			(204		)	2,485
Expenditures for fixed assets		2,674			—			—			17			2,691
Expenditures for drug licenses		666			—			—			241			907

For the nine months ended September 30, 2006 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Net product sales		$	75,861		$	39		$	—		$	—		$	75,900
Licensing and collaboration revenues		409			—			—			6,108			6,517
Total revenues		76,270			39			—			6,108			82,417
Cost of net product sales		37,143			39			—			—			37,182
Gross profit		39,127			—			—			6,108			45,235
Selling and marketing expense		11,876			—			—			—			11,876
General and administrative expense		5,507			—			68			5,745			11,320
Research and development expense		1,374			—			3,238			3,238			7,850
Depreciation and amortization expense		784			63			—			494			1,341
Litigation settlement		8,034			2,235			—			—			10,269
Income (loss) from operations		11,552			(2,298		)	(3,306		)	(3,369		)	2,579
Interest income		110			—			—			551			661
Interest expense		(109		)	—			—			—			(109		)
Other income (expense), net		36			—			—			—			36
Income (loss) before income taxes		11,589			(2,298		)	(3,306		)	(2,818		)	3,167
Provision for income taxes		6,607			—			—			—			6,607
Net income (loss)		4,982			(2,298		)	(3,306		)	(2,818		)	(3,440		)
Expenditures for fixed assets		11,734			—			—			336			12,070
Expenditures for drug licenses		1,128			—			—			675			1,803

 

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For the nine months ended September 30, 2005 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Net product sales		$	68,769		$	—		$	—		$	—		$	68,769
Licensing and collaboration revenues		227			—			—			3,524			3,751
Total revenues		68,996			—			—			3,524			72,520
Cost of net product sales		33,923			—			—			—			33,923
Gross profit		35,073			—			—			3,524			38,597
Selling and marketing expense		12,118			—			—			—			12,118
General and administrative expense		6,787			—			—			1,905			8,692
Research and development expense		1,453			—			—			3,281			4,734
Depreciation and amortization expense		836			63			—			460			1,359
Litigation settlement		217			163			—			—			380
Income from operations		13,662			(226		)	—			(2,122		)	11,314
Interest income		79			—			—			531			610
Interest expense		(163		)	—			—			—			(163		)
Other income (expense), net		25			—			—			(2		)	23
Income before income taxes		13,603			(226		)	—			(1,593		)	11,784
Provision for income taxes		4,521			—			—			—			4,521
Net income (loss)		9,082			(226		)	—			(1,593		)	7,263
Expenditures for fixed assets		6,548			—			—			125			6,673
Expenditures for drug licenses		722			—			—			755			1,477

As of September 30, 2006 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Receivables, net		$	28,083		$	285		$	—		$	4,200		$	32,568
Other current assets		29,264			—			—			11,099			40,363
Fixed assets		42,651			—			—			2,382			45,033
Drug licenses and related costs		10,061			1,737			—			3,504			15,302
Other non-current assets		632			—			—			1,192			1,824
Total assets		110,691			2,022			—			22,377			135,090
Current liabilities		30,484			—			32			3,103			33,619
Non-current liabilities		8,753			—			—			—			8,753
Total liabilities		39,237			—			32			3,103			42,372

As of December 31, 2005 (in thousands):

		Specialty Generics						Drug Delivery
		Europe			U.S.			Europe			U.S.			Consolidated
Receivables, net		$	23,469		$	—		$	—		$	3,447		$	26,916
Other current assets		25,443			—			—			22,718			48,161
Fixed assets		31,189			—			—			2,177			33,366
Drug licenses and related costs		8,931			1,581			—			3,346			13,858
Other non-current assets		1,615			—			—			304			1,919
Total assets		90,647			1,581			—			31,992			124,220
Current liabilities		25,639			97			—			2,944			28,680
Non-current liabilities		3,943			—			—			8			3,951
Total liabilities		29,582			97			—			2,952			32,631

 

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New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board issued Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” which will become effective January 1, 2007. The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with SFAS 109, “Accounting for Income Taxes” by requiring the application of a “more likely than not” threshold for the recognition and derecognition of tax positions. The Company is currently assessing what impact, if any, the adoption of this interpretation will have on its consolidated financial statements.

On September 13, 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the adoption of SAB No. 108 to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance for measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements. SFAS 157 indicates that fair value should  be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The Company is currently assessing what impact, if any, the adoption of SFAS 157 will have on its consolidated financial statements.

Reclassifications

Certain costs incurred in prior periods associated with litigation claims the Company has substantially agreed to settle in the current quarter have been reclassified from general and administrative expenses to litigation settlement to conform with the current period’s presentation.  Such reclassifications do not have any net effect on the Company’s financial position, results of operations or cash flows for the prior periods presented.

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