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, 2001
------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________________to_____________________
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE No. 59-1513162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (603) 964-8006
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
The number of shares of the registrant's common stock outstanding as of November
1, 2001 was 14,584,360.
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 3
Consolidated Statements of Operations and of
Comprehensive Income (Loss) (unaudited) for the
three months ended September 30, 2001 and 2000,
and the nine months ended September 30, 2001 and
2000 4
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) for the nine months ended
September 30, 2001 5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2001 and
2000 6
Notes to Consolidated Financial Statements
(unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $4,689 $4,816
Receivables, net 5,882 5,135
Inventories, net 2,504 1,827
Deferred taxes - 851
Prepaid expenses and other 685 475
------ ------
Total current assets 13,760 13,104
------ ------
Non-current assets:
Fixed assets, net 4,969 4,139
Drug licenses and related costs, net 10,526 10,979
Receivables from related parties 484 463
Other non-current assets, net 145 192
------ ------
Total non-current assets 16,124 15,773
------ ------
$29,884 $28,877
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $3,105 $2,645
Accrued expenses 1,471 968
Short-term borrowings 2,047 2,447
Current portion of long-term debt - 738
Deferred income 50 2,564
------ ------
Total current liabilities 6,673 9,362
------ ------
Non-current liabilities:
Taxes payable 1,821 908
Long-term debt - 623
Other non-current liabilities 98 168
------ ------
Total non-current liabilities 1,919 1,699
------ ------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 2,000
shares, issued and outstanding, zero shares - -
Common stock, $.02 par value, authorized 35,000 shares, issued
and outstanding, 14,584 and 13,914 shares 292 278
Stock purchase warrants (to purchase 3,424 and 4,038
shares of common stock) 433 632
Additional paid-in capital 97,465 95,227
Accumulated deficit (73,769) (75,693)
Accumulated other comprehensive loss (3,129) (2,628)
------ ------
Total stockholders' equity 21,292 17,816
------ ------
$29,884 $28,877
======= =======
The accompanying unaudited Notes to Consolidated Financial Statements are an integral part of these financial statements.
3
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share data) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $6,316 $3,626 $18,255 $13,305
Cost of sales 2,708 1,483 7,844 5,177
------- ------- ------- -------
Gross profit 3,608 2,143 10,411 8,128
------- ------- ------- -------
Operating expenses:
Selling, general and administrative 2,910 2,243 9,215 7,209
Research and development 468 233 1,352 608
Depreciation and amortization 223 143 670 420
------- ------- ------- -------
Total operating expenses 3,601 2,619 11,237 8,237
------- ------- ------- -------
Gain on sale of drug licenses 113 - 5,090 -
------- ------- ------- -------
Income (loss) from operations 120 (476) 4,264 (109)
------- ------- ------- -------
Other income (expenses):
Interest income 30 85 121 269
Interest expense (61) (46) (184) (342)
Other income (expense), net 7 - 21 -
------- ------- ------- -------
Income (loss) before income taxes 96 (437) 4,222 (182)
Provision (benefit) for foreign income taxes 245 (18) 2,298 378
------- ------- ------- -------
Net income (loss) ($149) ($419) $1,924 ($560)
======= ======= ======= =======
Net income (loss) per common share:
Basic ($0.01) ($0.03) $0.14 ($0.04)
======= ======= ======= =======
Diluted ($0.01) ($0.03) $0.12 ($0.04)
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 14,308 13,662 14,064 12,672
======= ======= ======= =======
Diluted 14,308 13,662 15,594 12,672
======= ======= ======= =======
Net income (loss) ($149) ($419) $1,924 ($560)
Other comprehensive income (loss):
Foreign currency translation gains (losses) 978 (599) (501) (960)
------- ------- ------- -------
Comprehensive income (loss) $829 ($1,018) $1,423 ($1,520)
======= ======= ======= =======
The accompanying unaudited Notes to Consolidated Financial Statements are an integral part of these financial statements.
4
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
$.02 Par Value
Common Stock Additional Accumu- Accumulated Other
------------------ Paid-In lated Other Compre- Equity
Shares Amount Capital Deficit hensive Loss Transactions Total
------ ------ ------- ------- ------------ ------------ -----
Balance at December 31, 2000 13,914 $278 $95,227 ($75,693) ($2,628) $632 $17,816
Exercise of stock options/warrants 171 4 443 - - - 447
Exercise of underwriter's warrants 460 9 1,570 - - (199) 1,380
Common Stock issued as compensation 39 1 225 - - - 226
Foreign currency translation adjustments, net - - - - (501) - (501)
Net income - - - 1,924 - - 1,924
------ ------ ------- -------- ------- ------ -------
Balance at September 30, 2001 14,584 $292 $97,465 ($73,769) ($3,129) $433 $21,292
====== ====== ======= ======== ======= ====== =======
The accompanying unaudited Notes to Consolidated Financial Statements are an integral part of these financial statements.
5
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months
Ended September 30,
-------------------
(in thousands) 2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $1,924 ($560)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 670 420
Equity-based compensation expense 226 -
Other non-cash items 7 42
Deferred income and taxes (820) -
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables (831) (277)
Inventories (741) (676)
Prepaid expenses and other current assets (227) (343)
Other assets (10) (126)
Accounts payable and accrued expenses 1,140 (483)
Other liabilities (71) 6
------- ------
Net cash provided by (used in) operating activities 1,267 (1,997)
------- ------
Cash flows from investing activities:
Additions to fixed assets (1,196) (680)
Additions to drug licenses and related costs (416) (5,375)
Deferred income 50 -
Proceeds from sale of investments 23,295 10,843
Purchase of investments (23,226) (8,858)
VAT receivable - (716)
Receivables from related parties - (440)
------- ------
Net cash used in investing activities (1,493) (5,226)
------- ------
(Continued on following page)
The accompanying unaudited Notes to Consolidated Financial Statements are an integral part of these financial statements.
6
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(unaudited)
For the Nine Months
Ended September 30,
-------------------
(in thousands) 2001 2000
---- ----
Cash flows from financing activities:
Proceeds from exercise of stock options/warrants $1,827 $2,169
Proceeds from borrowings 1,784 6,751
Repayments of borrowings (3,447) (1,727)
Payments on capital leases - (4)
------ ------
Net cash provided by financing activities 164 7,189
------ ------
Effect of exchange rate changes on cash (65) (39)
------ ------
Net decrease in cash and cash equivalents (127) (73)
Cash and cash equivalents at beginning of period 4,816 4,422
------ ------
Cash and cash equivalents at end of period $4,689 $4,349
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the period for (in thousands):
Interest $185 $299
====== ======
Income taxes $88 $346
====== ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued or is obligated to issue Common Stock in exchange for
services as follows (in thousands):
Number of shares 39 8
====== ======
Amount $226 $67
====== ======
During the nine months ended September 30, 2000, 7,254 debentures with principal
amount of $7,254,000, net of discount of $1,585,000 (and applicable unamortized
debt issuance costs totaling $929,000) were converted into approximately
2,901,000 shares of Common Stock.
The accompanying unaudited Notes to Consolidated Financial Statements are an integral part of these financial statements.
7
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Company") is a
U.S.-based international pharmaceutical and drug delivery company specializing
in the development of products based upon innovative and proprietary drug
delivery systems. The Company also has a commercial presence in Europe, where it
manufactures, markets and distributes branded and generic pharmaceutical
products. The Company owns rights to certain U.S. and international patents and
related technology covering methods to enhance the absorption of drugs delivered
through biological tissues. The Company is developing this technology and is
targeting U.S., European and other international markets for the new product
applications. The Company is in negotiations with larger pharmaceutical
companies with the objective of entering into collaborations for the development
and marketing of various product applications, including: for the treatment of
onychomycosis, delivery of insulin, hormone replacement therapies, vaccines and
peptides. In Spain, the Company develops and registers late stage products, and
manufactures, packages and distributes both its own and other companies'
pharmaceutical products.
The strategic focus of the Company has shifted in response to the evolution of
the global health care environment. The Company emphasizes product distribution
in Spain, strategic alliances and product acquisitions. Its overall strategy has
been expanded due to the 1999 acquisition of permeation enhancement technology,
with the objective of entering into strategic partnerships and/or alliances that
are anticipated to lead to milestone payments and royalty arrangements, with the
strategic partners bearing the majority of development costs. Since this
technology is based on a series of GRAS (Generally Recognized As Safe)
compounds, products may be developed in a quicker and less costly fashion. The
technology facilitates the permeation of drugs administered through skin, across
mucosa or through the cornea in a variety of independent pharmaceutical formats.
The excipient most advanced in facilitating absorption is referred to by the
Company as CPE-215(R), although there are a number of other related compounds
under the same patents that also have enhancing characteristics.
The Company began taking measures over three years ago to enter the Spanish
generic drug market. The Company created a wholly-owned subsidiary to register,
market and distribute generic pharmaceutical products in Spain and began
aligning its business model to be competitive in this arena. In July 2000, the
Company also entered into a strategic alliance with Teva Pharmaceutical
Industries, Ltd., whereby the Company will initially receive licenses to more
than 75 of Teva's products for registration and marketing in Spain. Teva will
supply the pharmaceutical products to the Company and the Company's Spanish
subsidiaries, Laboratorios Belmac and Laboratorios Davur, will market the
products in Spain. Teva was also granted a right of first refusal to acquire
Laboratorios Davur in the event that the Company decides to divest that
subsidiary.
8
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Company, at September 30, 2001 and
2000 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 in so far as such
information was disclosed in the Company's consolidated financial statements for
the year ended December 31, 2000. These consolidated financial statements should
be read in conjunction with the summary of significant accounting policies and
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended September 30, 2001 and 2000 are presented on a
basis consistent with the audited consolidated financial statements for the year
ended December 31, 2000 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of September 30, 2001 and the results of its operations and its cash
flows for the nine months ended September 30, 2001 and 2000. The results of
operations for the nine months ended September 30, 2001 should not necessarily
be considered indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
Included in cash and cash equivalents at September 30, 2001 and December 31,
2000 are approximately $3,610,000 and $4,126,000, 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.
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being determined on
the first in, first out ("FIFO") method, and are comprised of the following (in
thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $1,382 $692
Finished goods 1,178 1,196
----- -----
2,560 1,888
Less allowance for slow moving inventory (56) (61)
------ ------
$2,504 $1,827
====== ======
9
SALE OF CONTROLVAS(R):
Laboratorios Belmac, S.A., a subsidiary of the Company, sold the trademark,
registration rights and dossier for its branded pharmaceutical product,
Controlvas(R), for approximately $5,148,000 during the nine months ended
September 30, 2001. The Company entered into an agreement to sell Controlvas(R)
and received a 50% deposit from the purchaser in November 2000, which was
reflected as Deferred income in the Consolidated Balance Sheet as of December
31, 2000. The resulting gain of approximately $4,977,000 has been recognized in
the Consolidated Statement of Operations for the nine months ended September 30,
2001.
SALE OF AMANTADINE(R):
In June 2001, Laboratorios Belmac, S.A., a subsidiary of the Company, agreed to
sell the trademark, registration rights and dossier for its pharmaceutical
product, Amantadine(R), to a third party for 30 million Spanish pesetas
(approximately $153,000). The Company received a deposit of 11 million Spanish
pesetas (approximately $56,000) from the purchaser in June 2001, which was
reflected as Deferred income in the Consolidated Balance Sheet as of June 30,
2001. The Company received a second payment of 11 million Spanish pesetas upon
approval of the transfer of the rights to the purchaser by the Spanish Ministry
of Health, which occurred during the quarter ended September 30, 2001, resulting
in a recognized gain of approximately $113,000. The remaining 8 million Spanish
pesetas (approximately $41,000) is payable over the next five years, in the form
of a royalty arrangement.
LICENSING ACTIVITIES:
During the second quarter of 2001, the Company entered into agreements with
Auxilium A2, Inc. regarding a new non-oral delivery formulation of a narcotic
for pain management and a new topical product for hormone replacement therapy,
both in combination with the Company's CPE-215(R) technology. The Company
received $50,000 upon entering into such agreements, which has been reflected as
Deferred income in the Consolidated Balance Sheets as of September 30, 2001. The
Company expects to receive additional payments based upon completion of specific
milestones and scaled royalties on net sales.
STOCKHOLDERS' EQUITY:
As a result of the continuing uncertainties in the stock markets and unfavorable
capital market conditions, on March 30, 2001 the Company's board of directors
extended the expiration date of all of the Company's outstanding Class B
Warrants from August 14, 2001 to December 31, 2002. Two Class B Warrants,
together, entitle the holder to purchase one share of the Company's Common Stock
at a price of $5.00 per share. The Class B Warrants are redeemable by the
Company for $.05 each upon 30 day's written notice, after the closing price of
the Company's Common Stock equals or exceeds $6.50 for the preceding twenty
consecutive trading days. These Class B Warrants were included as a component of
a Unit offering in February 1996. This extension was considered to be a
modification of the terms of the 1996 offering; however, because such warrants
are investor warrants and could only be settled in cash, there was no impact on
the Company's consolidated financial statements as a result of the modification.
10
PROVISION FOR INCOME TAXES:
The Company recorded a provision for foreign income taxes totaling $245,000 and
$2,298,000 for the three and nine months ended September 30, 2001, respectively,
as a result of reporting taxable income for tax purposes in Spain, including the
capital gains tax arising from the sale of Controlvas(R) and Amantadine(R). This
amount differs from the amount computed by applying the U.S. federal income tax
rate of 34% to pretax income primarily as a result of the change in the
valuation allowance to offset domestic deferred tax assets and certain
nondeductible expenses in Spain.
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Basic and diluted net income (loss) per common share is presented in accordance
with SFAS No. 128, "Earnings per Share".
Basic and diluted net income (loss) per common share is based on the weighted
average number of shares of common stock outstanding during each period. The
effect of the Company's outstanding stock options and stock purchase warrants
were considered in the diluted income per share calculation for the nine months
ended September 30, 2001. The effect of outstanding stock options and stock
purchase warrants were not considered for the three months ended September 30,
2001 and 2000, and the nine months ended September 30, 2000 because the results
would have been anti-dilutive.
The following is a reconciliation between basic and diluted net income per
common share for the nine months ended September 30, 2001. Dilutive securities
issuable for the nine months ended September 30, 2001 include approximately
439,000 shares issuable as a result of Class B Warrants and approximately
1,091,000 shares issuable as a result of various stock options and warrants
outstanding.
(in thousands, except per share data)
For the Nine Months Ended September 30, 2001:
Effect of
Basic Dilutive Diluted
EPS Securities EPS .
------- ---------- ----------
Net Income $1,924 --- $1,924
Number of Common Shares 14,064 1,530 15,594
Net Income Per Common Share $ .14 ($ .02) $ .12
11
COMMITMENTS AND CONTINGENCIES:
On January 22, 2001, the Company settled a legal dispute, by paying $140,000 to
Creative Technologies, Inc. and Creative Technologies, Inc. agreed to the
dismissal of the related suit with prejudice. Creative Technologies had asserted
that it was due a brokerage or finder's fee with respect to the Company's 1999
acquisition of permeation enhancement technology. The Company included the
accrual for the $140,000 charge in the Consolidated Balance Sheet as of December
31, 2000 and included the $140,000 charge and related legal costs of
approximately $55,000 in operating expenses in the Consolidated Statements of
Operations for the year ended December 31, 2000.
The Company was awarded a judgment of approximately $2,130,000 during the year
ended December 31, 1998, relating to the Company's claims of civil theft and
breach of employment agreement filed against its former President and Chief
Executive Officer, Michael M. Harshbarger, in 1993. The judgment included treble
damages totaling $418,000 related to its civil theft claim and $1,712,000
related to its breach of employment agreement claim. In addition to establishing
a receivable on its books, the Company has established a reserve equal to the
receivable. Harshbarger filed a Motion for Relief From Judgment in September
1999, alleging among other things that he was not provided notice of the August
24, 1998 jury trial. Discovery is ongoing and a hearing has been set for
November 27, 2001 to determine the merits of Harshbarger's claims. In the
opinion of management, the outcome is expected to have no adverse material
effect on the consolidated financial statements of the Company.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the current
year's presentation format. Such reclassifications are not material to the
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The Company adopted SFAS No. 133, as amended, on
January 1, 2001. The adoption of SFAS No. 133 did not have any impact on the
Company's consolidated financial statements.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The Company
implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not
have any impact on the Company's consolidated financial statements.
12
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial statements.
13
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
----------------------
Three Months Ended September 30, 2001 versus Three Months Ended September 30,
------------------------------------------------------------------------------
2000
----
The Company reported net sales of $6,316,000 and a net loss of $149,000 or $.01
per basic and diluted common share for the three months ended September 30, 2001
compared to net sales of $3,626,000 and a net loss of $419,000 or $.03 per basic
and diluted common share for the same period in the prior year.
The Company's Spanish subsidiaries, Laboratorios Belmac S.A. and Laboratorios
Davur S.L., reported an increase in net sales of 79% in local currency for the
three months ended September 30, 2001 compared to the same period of the prior
year; however, a 2% decline in the value of the Spanish Peseta and related Euro
negatively impacted net sales by $92,000, resulting in net sales generated in
Spain of $6,316,000, or an increase of 76% over the prior year, when expressed
in U.S. dollars. The Company anticipated the opportunities that the emerging
generic drug market in Spain present and began taking measures over three years
ago to enter the Spanish generic drug market. The Company, through its
wholly-owned subsidiaries, began to register, market and distribute generic
pharmaceutical products in Spain and began aligning its business model to be
competitive in this arena, including hiring and training a new generic products
sales force, submission of generic-equivalent products to the Spanish Ministry
of Health for approval and a marketing campaign designed to position the Company
as a leader in the Spanish generic drug market. The increase in net sales is
primarily attributable to this effort. Sales of the product, Controlvas(R),
which accounted for approximately $513,000 of third quarter 2000 net sales, were
eliminated in the third quarter of 2001 as a result of the Company's divestiture
of the related drug license during the first quarter of 2001. Net sales for the
three months ended September 30, 2000 included $40,000 related to research and
formulation activities performed in the United States.
Gross margins for the three months ended September 30, 2001 decreased to 57%
compared to gross margins of 59% in the same period of the prior year, primarily
as a result of the mix of products sold as well as higher depreciation charges
resulting from the Company's recent renovations and improvements at its
manufacturing facility. Approximately 35% of the Company's net sales during the
three months ended September 30, 2001 were generic product sales, which
typically have lower sales prices and gross margins than branded products. In
comparison, the Company sold no generic drug products during the third quarter
of the prior year. As generic product sales become more significant in the
future, gross margins may continue to decrease. The Ministry of Health and the
Pharma Industry in Spain had entered into a two-year agreement that expired in
December 1999 whereby pharmaceutical companies in Spain, including the Company's
Spanish subsidiaries, were taxed on their growth as a vehicle for funding rising
health care costs in Spain. A new agreement was reached in March 2001, which
also had the effect of reducing gross margins by approximately $45,000, or one
percentage point, for the three months ended September 30, 2001.
14
The Company entered into a strategic alliance with Teva Pharmaceutical
Industries, Ltd. in July 2000, whereby the Company, through its Spanish
subsidiaries, has received the right to register and market in Spain more than
75 of Teva's products. The products are comprised of both branded and generic
forms. Sales from the products are expected to begin gradually, but will
progress over the next two to three years. An investment in additional sales
representatives will be required, along with an increase in regulatory
activities, both of which may create a short term decrease in the Company's
earnings. The Company, through its subsidiary Laboratorios Davur, has also
submitted registrations to the Spanish Ministry of Health for generic versions
of various products, in response to growing interest in generic drug products in
Spain. The Company believes that resulting gross margins may be lower on sales
of such products. The Company's decision to enter the generic drug market was
based on its objectives to remain competitive, grow sales and market share, and
ultimately achieve profitability.
Selling, general and administrative expenses increased by $667,000 or 30%, to
$2,910,000 for the three months ended September 30, 2001 compared to $2,243,000
for the same period of the prior year. Selling, general and administrative
expenses, as a percentage of net sales, decreased from 62% of third quarter 2000
net sales to 46% of third quarter 2001 net sales. A significant portion (70% or
$2,030,000) of these third quarter 2001 expenses are selling and marketing
expenses, which are necessary for the Company to maintain and grow sales and
market share in Spain. Selling and marketing expenses increased by $534,000, or
36%, over the same period of the prior year, and as a percent of net sales,
decreased from 41% in the third quarter of 2000 to 32% in the third quarter of
2001, primarily as a result of sales and marketing programs designed to
introduce the Company's new generic drug products and support the launches of
such products in an attempt to promote product awareness and market share. The
2% decline in the value of the Spanish peseta and related Euro, in relation to
the U.S. dollar, during the period, had the effect of reducing selling and
marketing expenses by $30,000 for the three months ended September 30, 2001.
General and administrative expenses increased by 18% from $747,000 in the third
quarter of 2000 to $880,000 in the third quarter of 2001, decreasing from 21% of
third quarter 2000 net sales to 14% of third quarter 2001 net sales. The 2%
decline in the value of the Spanish peseta and related Euro, in relation to the
U.S. dollar, during the period, had the effect of reducing general and
administrative expenses by $7,000 for the quarter ended September 30, 2001. The
Company intends to continue its efforts to carefully manage general and
administrative expenses.
The Company reported research and development expenses of $468,000 for the three
months ended September 30, 2001, which are slightly more than double the
research and development expenses of $233,000 for the same period of the prior
year. The increase in the Company's costs for research and development is
primarily the result of costs associated with ongoing Phase I Clinical Studies
(treatment of nail fungal infections), pre-clinical programs underway in
collaboration with universities and with product formulation and testing efforts
being performed in the laboratory in the Company's U.S. headquarters, located in
New Hampshire, and at the Company's facility in Zaragoza, Spain. The U.S.
laboratory is being used by the Company to develop potential product
applications using its permeation enhancement technology. The limited
expenditures in research and development reflect the Company's direction of its
resources toward projects that are necessary for expansion of its portfolio of
marketed products and clinical trials involving its drug delivery technology,
the results of which should assist
15
potential collaborators in the evaluation process. The Company intends to
continue to carefully manage its research and development expenditures in order
to ensure that its development programs are efficient and cost effective and
seeks funding of certain of its research and development by collaborative
partners, however, the Company does expect that its future expenditures for
research and development activities will continue to increase as a result of
research and development programs that are necessary to advance its technology
in an effort to achieve commercial viability.
Depreciation and amortization expenses totaled $223,000 for the quarter ended
September 30, 2001, compared to $143,000 for the same period of the prior year.
The 56% increase was primarily due to higher amortization charges with respect
to recently acquired drug licenses and technologies, including Codeisan(R), and
to a lesser extent, higher depreciation charges with respect to recent asset
additions, partially offset by the effect of fluctuations in foreign currency
exchange rates. Depreciation and amortization charges are expected to continue
to be higher than in the prior year as a result of these acquisitions.
Laboratorios Belmac S.A., a subsidiary of the Company, completed the sale of the
trademark, registration rights and dossier for its branded pharmaceutical
product, Amantadine(R), to a third party during the quarter ended September 30,
2001, for 30 million Spanish pesetas (approximately $153,000). The Company
received a deposit of 11 million Spanish pesetas (approximately $56,000) from
the purchaser in June 2001, which was reflected as Deferred income in the
Consolidated Balance Sheets as of June 30, 2001. The Company received a second
payment of 11 million Spanish pesetas upon approval of the transfer of the
rights to the purchaser by the Spanish Ministry of Health, which occurred during
the quarter ended September 30, 2001. The resulting gain of approximately
$113,000 has been recognized in the Consolidated Statement of Operations for the
quarter ended September 30, 2001. The remaining 8 million Spanish pesetas
(approximately $41,000) is payable over the next five years, in the form of a
royalty arrangement.
Interest income totaled $30,000 for the three months ended September 30, 2001
compared to $85,000 for the same period of the prior year primarily as a result
of lower short-term interest bearing investment balances and lower interest
rates on the investment balances during the three months ended September 30,
2001 compared to the same period of 2000.
Interest expense totaled $61,000 for the three months ended September 30, 2001
compared to $46,000 for the same period of the prior year. Interest expense
incurred during the third quarter of 2001 resulted primarily from the
outstanding balances on lines of credit used for operating purposes and lines of
credit and borrowings used to finance the purchase of the product Codeisan(R)
and capital equipment and improvements, in Spain.
The Company recorded a provision for foreign income taxes totaling $245,000 for
the three months ended September 30, 2001 as a result of reporting taxable
income for tax purposes in Spain, compared to the benefit for foreign income
taxes of $18,000 as a result of reporting a loss for tax purposes in Spain in
the same period of the prior year. The provision for foreign income taxes would
have been $3,000 higher than reported, absent the 2% decline in the value of the
Spanish peseta and related Euro in relation to the U.S. dollar during the
period. The Company generated additional U.S. federal net
16
operating loss carry-forwards during the quarter ended September 30, 2001.
However, since the Company has not yet achieved profitable domestic operations,
it has recorded a valuation allowance for any future benefit of such losses.
Including the $113,000 gain on sale of the Amantadine(R) drug license, the
Company reported income from operations of $120,000 for the three months ended
September 30, 2001 compared to a loss from operations of $476,000 in the same
period of the prior year. The impact of income from operations and the
non-operating items, primarily the provision for income taxes of $245,000,
resulted in a net loss of $149,000, or $.01 per basic and diluted common share
on 14,308,000 weighted average common shares outstanding for the three months
ended September 30, 2001, compared to a net loss in the same period of the prior
year of $419,000, or $.03 per basic and diluted common share on 13,662,000
weighted average common shares outstanding.
Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------
The Company reported net sales of $18,255,000 and recognized gains of $5,090,000
from the sale of its Controlvas(R) and Amantadine(R) drug licenses which,
together, resulted in net income of $1,924,000 or $.14 per basic common share
($.12 per diluted common share) for the nine months ended September 30, 2001
compared to net sales of $13,305,000 and a net loss of $560,000 or $.04 per
basic and diluted common share for the same nine month period in the prior year.
The Company's Spanish subsidiaries, Laboratorios Belmac S.A. and Laboratorios
Davur S.L., reported an increase in net sales of 46% in local currency for the
nine months ended September 30, 2001 compared to the same period of the prior
year; however, a 5% decline in the value of the Spanish Peseta and related Euro
negatively impacted net sales by $813,000, resulting in net sales generated in
Spain of $18,255,000, or an increase of 38% over the same nine month period of
the prior year, when expressed in U.S. dollars. The Company anticipated the
opportunities that the emerging generic drug market in Spain present and began
taking measures over three years ago to enter the Spanish generic drug market.
The Company, through its wholly-owned subsidiaries, began to register, market
and distribute generic pharmaceutical products in Spain and began aligning its
business model to be competitive in this arena, including hiring and training a
new generic products sales force, submission of generic-equivalent products to
the Spanish Ministry of Health for approval and a marketing campaign designed to
position the Company as a leader in the Spanish generic drug market. The
increase in net sales is partially attributable to this effort. Sales of the
product Controlvas(R), which accounted for approximately $1,708,000 of net sales
in the first nine months of 2000, were reduced to approximately $60,000 in the
first nine months of 2001 as a result of the Company's divestiture of the
related drug license during the first quarter of 2001. Also negatively impacting
net sales was a decision by the Spanish Ministry of Health to suspend from
commercialization a class of drugs that included Finedal, a product previously
marketed by the Company. The Company's net sales for the nine months ended
September 30, 2000 included sales of Finedal totaling approximately $200,000,
while net sales for the nine months ended September 30, 2001 included no sales
of Finedal. The Company does not anticipate any future sales of this product nor
does it anticipate incurring any future costs with respect to this product. Net
sales for the nine months ended September 30, 2000 included $65,000 related to
17
research and licensing agreements and fees from research and product formulation
activities performed in the United States.
Gross margins for the nine months ended September 30, 2001 decreased to 57%
compared to gross margins of 61% in the same period of the prior year, primarily
as a result of the mix of products sold as well as higher depreciation charges
resulting from the Company's recent renovations and improvements at its
manufacturing facility. Approximately 27% of the Company's net sales during the
nine months ended September 30, 2001 were generic product sales, which typically
have lower sales prices and gross margins than branded products. In comparison,
the Company sold no generic drug products during the first three quarters of the
prior year. As generic product sales become more significant in the future,
gross margins may continue to decrease. The Ministry of Health and the Pharma
Industry in Spain had entered into a two-year agreement that expired in December
1999 whereby pharmaceutical companies in Spain, including the Company's Spanish
subsidiaries, were taxed on their growth as a vehicle for funding rising health
care costs in Spain. A new agreement was reached in March 2001, which also had
the effect of reducing gross margins by approximately $166,000, or one
percentage point, for the nine months ended September 30, 2001.
The Company entered into a strategic alliance with Teva Pharmaceutical
Industries, Ltd. in July 2000, whereby the Company, through its Spanish
subsidiaries, has received the right to register and market in Spain more than
75 of Teva's products. The products are comprised of both branded and generic
forms. Sales from the products are expected to begin gradually, but will
progress over the next two to three years. An investment in additional sales
representatives will be required, along with an increase in regulatory
activities, both of which may create a short term decrease in the Company's
earnings. The Company, through its subsidiary Laboratorios Davur, has also
submitted registrations to the Spanish Ministry of Health for generic versions
of various products, in response to growing interest in generic drug products in
Spain. The Company believes that resulting gross margins may be lower on sales
of such products. The Company's decision to enter the generic drug market was
based on its objectives to remain competitive, grow sales and market share, and
ultimately achieve profitability.
Selling, general and administrative expenses increased by $2,006,000 or 28%, to
$9,215,000 for the nine months ended September 30, 2001 compared to $7,209,000
for the same period of the prior year. Selling, general and administrative
expenses, as a percentage of net sales, decreased from 54% of net sales during
the first nine months of 2000 to 50% of net sales during the first nine months
of 2001. A significant portion (70% or $6,472,000) of these expenses in the
first three quarters of 2001 are selling and marketing expenses, which are
necessary for the Company to maintain and grow sales and market share in Spain.
Selling and marketing expenses increased by $1,838,000, or 40%, over the same
period of the prior year, and as a percent of net sales, remained constant at
35% in the first nine months of 2001 compared to the first nine months of 2000,
primarily as a result of sales and marketing programs designed to introduce the
Company's new generic drug products and support the launches of such products in
an attempt to promote product awareness and market share. The 5% decline in the
value of the Spanish peseta and related Euro, in relation to the U.S. dollar,
during the period, had the effect of reducing selling and marketing expenses by
$297,000 for the nine months ended September 30, 2001. General and
administrative expenses increased 7% to $2,743,000 during the first nine months
of 2001 compared to $2,575,000 during the first nine months of 2000, decreasing
from 19% of net sales
18
during the first nine months of 2000 to 15% of net sales during the first nine
months of 2001. The 5% decline in the value of the Spanish peseta and related
Euro, in relation to the U.S. dollar, during the period, had the effect of
reducing general and administrative expenses by $58,000 for the nine months
ended September 30, 2001. The Company intends to continue its efforts to
carefully manage general and administrative expenses.
The Company reported research and development expenses of $1,352,000 for the
nine months ended September 30, 2001, which more than doubled when compared to
$608,000 for the same period of the prior year. However, prior year first
quarter research and development expenses of $238,000 were offset by $161,000 as
a result of a negotiated reduction in an amount previously accrued for research
and development expenses. The increase in the Company's costs for research and
development is primarily the result of costs associated with Phase I Clinical
Studies (treatment of nail fungal infections), pre-clinical programs underway in
collaboration with universities and with product formulation and testing efforts
being performed in the laboratory in the Company's U.S. headquarters, located in
New Hampshire, and at the Company's facility in Zaragoza, Spain. The U.S.
laboratory is being used by the Company to develop potential product
applications using its permeation enhancement technology. The limited
expenditures in research and development reflect the Company's direction of its
resources toward projects that are necessary for expansion of its portfolio of
marketed products and clinical trials involving its drug delivery technology,
the results of which should assist potential collaborators in the evaluation
process. The Company intends to continue to carefully manage its research and
development expenditures in order to ensure that its development programs are
efficient and cost effective and seeks funding of certain of its research and
development by collaborative partners, however, the Company does expect that its
future expenditures for research and development activities will continue to
increase as a result of research and development programs that are necessary to
advance its technology in an effort to achieve commercial viability.
Depreciation and amortization expenses totaled $670,000 for the nine months
ended September 30, 2001, compared to $420,000 for the same period of the prior
year. The 60% increase was primarily due to higher amortization charges with
respect to recently acquired drug licenses and technologies, including
Codeisan(R), and to a lesser extent, higher depreciation charges with respect to
recent asset additions, partially offset by the effect of fluctuations in
foreign currency exchange rates. Depreciation and amortization charges are
expected to continue to be higher than in the prior year as a result of these
acquisitions.
Laboratorios Belmac, S.A., a subsidiary of the Company, sold the trademark,
registration rights and dossier for its branded pharmaceutical product,
Controlvas(R), for approximately $5,148,000 during the nine months ended
September 30, 2001. The Company entered into an agreement to sell Controlvas(R)
and received a 50% deposit from the purchaser in November 2000, which was
reflected as Deferred income in the Consolidated Balance Sheet as of December
31, 2000. The resulting gain of approximately $4,977,000 has been recognized in
the Consolidated Statement of Operations for the nine months ended September 30,
2001.
Laboratorios Belmac S.A., a subsidiary of the Company, completed the sale of the
trademark, registration rights and dossier for its branded pharmaceutical
product, Amantadine(R), to a third party
19
during the quarter ended September 30, 2001, for 30 million Spanish pesetas
(approximately $153,000). The Company received a deposit of 11 million Spanish
pesetas (approximately $56,000) from the purchaser in June 2001, which was
reflected as Deferred income in the Consolidated Balance Sheets as of June 30,
2001. The Company received a second payment of 11 million Spanish pesetas upon
approval of the transfer of the rights to the purchaser by the Spanish Ministry
of Health, which occurred during the quarter ended September 30, 2001. The
resulting gain of approximately $113,000 has been recognized in the Consolidated
Statement of Operations for the nine months ended September 30, 2001. The
remaining 8 million Spanish pesetas (approximately $41,000) is payable over the
next five years, in the form of a royalty arrangement.
Interest income totaled $121,000 for the nine months ended September 30, 2001
compared to $269,000 for the same period of the prior year primarily as a result
of lower short-term interest bearing investment balances and lower interest
rates on the investment balances during the nine months ended September 30, 2001
compared to the same period of 2000.
Interest expense totaled $184,000 for the nine months ended September 30, 2001
compared to $342,000 for the same period of the prior year. The Company incurred
first quarter 2000 interest expense of approximately $233,000 related to its
Debentures, which was eliminated beginning with the second quarter of 2000 as a
result of the conversion of all outstanding Debentures into shares of Common
Stock. Interest expense incurred during the first three quarters of 2001
resulted primarily from the outstanding balances on lines of credit used for
operating purposes and lines of credit and borrowings used to finance the
purchase of the product Codeisan(R) and capital equipment and improvements, in
Spain.
The Company recorded a provision for foreign income taxes totaling $2,298,000
for the nine months ended September 30, 2001 as a result of reporting taxable
income for tax purposes in Spain and for capital gains tax arising from the sale
of Controlvas(R) and Amantadine(R), compared to the provision for foreign income
taxes of $378,000 in the same period of the prior year, as a result of taxable
income earned in Spain. The provision for foreign income taxes would have been
$113,000 higher than reported, absent the 5% decline in the value of the Spanish
peseta and related Euro in relation to the U.S. dollar during the period. The
Company generated additional U.S. federal net operating loss carry-forwards
during the nine months ended September 30, 2001. However, since the Company has
not yet achieved profitable domestic operations, it has recorded a valuation
allowance for any future benefit of such losses.
Including the $5,090,000 gain on sale of drug licenses, the Company reported
income from operations of $4,264,000 for the nine months ended September 30,
2001 compared to a loss from operations of $109,000 in the same period of the
prior year. Excluding the $5,090,000 pre-tax gain from the sale of the
Controlvas(R) and Amantadine(R) drug licenses, the loss from operations for the
first nine months of 2001 would have totaled $826,000. The combination of income
from operations and the non-operating items, primarily the provision for income
taxes of $2,298,000, resulted in net income of $1,924,000, or $.14 per basic
common share ($.12 per diluted common share) on 14,064,000 weighted average
basic common shares outstanding (15,594,000 weighted average diluted common
shares outstanding) for the nine months ended September 30, 2001, compared to a
net loss in the same period of the prior year of $560,000, or $.04 per basic and
diluted common share on 12,672,000 weighted average common shares outstanding.
20
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
Total assets increased from $28,877,000 at December 31, 2000 to $29,884,000 at
September 30, 2001, while Stockholders' Equity increased from $17,816,000 at
December 31, 2000 to $21,292,000 at September 30, 2001. The increase in
Stockholders' Equity reflects primarily the net income of $1,924,000 for the
nine months ended September 30, 2001, and net proceeds from the exercise of
stock options and warrants totaling $1,827,000, partially offset by the negative
impact of the fluctuation of the Spanish peseta (and related Euro) exchange rate
of $500,000 for the nine months ended September 30, 2001.
The Company's working capital increased from $3,742,000 at December 31, 2000 to
$7,087,000 at September 30, 2001, primarily as a result of collection of the
remainder of the cash due upon the sale of the product Controlvas(R)
(approximately $2,676,000), most of which was used to reduce short-term and
long-term borrowings, the recognition of deferred income of approximately
$2,564,000 related to the sale of Controlvas(R), and net proceeds received from
the exercise of stock options and warrants totaling $1,827,000 during the nine
months ended September 30, 2001.
Cash and cash equivalents decreased from $4,816,000 at December 31, 2000 to
$4,689,000 at September 30, 2001, primarily as a result of using cash to repay
net borrowings (approximately $3,447,000) and additions to fixed assets of
approximately $1,196,000 during the nine month period, partially offset by cash
generated by operating activities of $1,267,000, which included the sale of the
Controlvas(R) drug license and proceeds from the exercise of stock options and
warrants (approximately $1,827,000). Included in cash and cash equivalents at
September 30, 2001 are approximately $3,610,000 of short-term investments
considered to be cash equivalents.
Accounts receivable increased from $5,135,000 at December 31, 2000 to $5,882,000
at September 30, 2001 as a result of sales growth. Trade receivables increased
by approximately $901,000 in local currency, but fluctuations in foreign
currency exchange rates offset the increase by approximately $75,000. The
Company has not experienced any material delinquent accounts on its trade
receivables. Inventories increased from $1,827,000 at December 31, 2000 to
$2,504,000 at September 30, 2001 primarily as a result of raw materials
purchases in anticipation of demand for the Company's generic products.
The combined total of accounts payable and accrued expenses increased from
$3,613,000 at December 31, 2000 to $4,576,000 at September 30, 2001, primarily
due to accruals for social security taxes payable, salaries payable and taxes
payable, as well as for inventory purchases, partially offset by the effect of
fluctuations in foreign currency exchange rates.
Short-term borrowings and current portion of long-term debt decreased from
$3,185,000 at December 31, 2000 to $2,047,000 at September 30, 2001, as a result
of utilizing proceeds from the sale of the
21
product, Controlvas(R), to reduce balances outstanding, combined with the effect
of fluctuations in foreign currency exchange rates, partially offset by
additional borrowings during the quarter ended September 30, 2001 to finance
capital expenditures at the Company's manufacturing plant in Spain. The weighted
average interest rate on the Company's short-term borrowings is 5.8%.
Receivables from related parties represent loans totaling $440,000 made to
executive officers of the Company in March 2000. Proceeds from the loans were
used to pay the income taxes on stock-based compensation provided to such
officers in the prior year. The loans, in the form of promissory notes, are
secured by an aggregate of 50,000 shares of Common Stock owned by the officers
and bear interest at 6.59% annually. Accrued interest payable totaling $44,000
is included in the amounts receivable at September 30, 2001.
Long-term debt, which totaled $623,000 at December 31, 2000, was reduced to zero
at September 30, 2001, using proceeds from the sale of Controlvas(R).
Investing activities, primarily the proceeds from the sale of investments,
offset by additions to machinery and equipment and capital improvements to the
manufacturing facility in Spain and the U.S. and the purchase of investments
used net cash of $1,493,000 during the nine months ended September 30, 2001.
Financing activities, primarily proceeds from borrowings and from the exercise
of stock options and warrants, offset by repayments of borrowings provided net
cash of $164,000. Operating activities for the nine months ended September 30,
2001 provided net cash of $1,267,000.
Seasonality. In the past, the Company has experienced lower sales in the third
calendar quarter and higher sales in the fourth calendar quarter due to
seasonality. As the Company markets more pharmaceutical products whose sales are
seasonal, seasonality of sales may become more significant.
Effect of Inflation and Changing Prices. Neither inflation nor changing prices
has materially impacted the Company's net sales or income from operations for
the periods presented.
Given the Company's current liquidity and cash balances and considering its
future strategic plans (including its budgeted capital improvements and planned
equipment purchases), the Company should have sufficient liquidity to fund
operations for the next twelve months, which should be a sufficient time frame
for the Company to advance its strategic objectives and generate sufficient
revenues and cash flow to support the Company's operating cash flow needs. As
mentioned above, the Company has cash and cash equivalents of approximately
$4,689,000 as of September 30, 2001. These resources, combined with available
lines of credit, should be adequate to satisfy the Company's capital and
operating requirements, as stated above. The Company also has stock purchase
warrants, including its publicly traded Class B Warrants, outstanding at
September 30, 2001, to purchase approximately 3,424,000 shares of Common Stock.
There can be no assurance that any of the warrants will be exercised prior to
expiration; however, if all warrants that are currently outstanding are
exercised, the Company would receive aggregate cash proceeds of approximately
$16,018,000. The expiration date of the Class B Warrants has been extended to
December 31, 2002. Two Class B Redeemable Warrants, together, entitle a holder,
until December 31, 2002, to purchase one share of
22
Common Stock at a price of $5.00 per share. There can be no assurance, however,
that changes in the Company's research and development plans or other events
affecting the Company's revenues or operating expenses will not result in the
earlier depletion of the Company's funds. The Company continues to explore
alternative sources for financing its business activities. In appropriate
situations, that will be strategically determined, the Company 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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure these instruments at fair
value. The accounting for changes in the fair value of a derivative (that is,
gains and losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The Company adopted SFAS No. 133, as amended, on
January 1, 2001. The adoption of SFAS No. 133 did not have any impact on the
Company's consolidated financial statements.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The Company
implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not
have any impact on the Company's consolidated financial statements.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Foreign Currency. A substantial amount of the Company's business is conducted in
Europe and is therefore influenced by the extent to which there are fluctuations
in the dollar's value against other currencies, specifically the euro and the
peseta. On January 1, 1999, the euro became the official currency of European
Union (EU) member states with a fixed conversion rate against their national
currencies. The value of the euro against the dollar and all other currencies,
including the EU member states that are not participating in the euro zone, will
fluctuate according to market conditions. Although euro notes and coins will not
appear until January 1, 2002, the new currency has been used by consumers,
retailers, companies and public administrations since January 1, 1999, in the
form of "written money," i.e. by means of checks, traveler's checks, bank
transfers, credit card transactions, etc. The permanent value of one euro in
Spain is fixed at 166.39 pesetas. The exchange rate at September 30, 2001 and
December 31, 2000 was 182.54 and 178.02 pesetas per U.S. dollar, respectively.
The weighted average exchange rate for the three months ended September 30, 2001
and 2000 was 186.84 and 184.16 pesetas per U.S. dollar, respectively; the
weighted average exchange rate for the nine months ended September 30, 2001 and
2000 was 185.93 and 177.05 pesetas per U.S. dollar, respectively. The effect of
foreign currency fluctuations on long lived assets for the nine months ended
September 30, 2001 was a decrease of $501,000 and the cumulative historical
effect was a decrease of $3,129,000, as reflected in the Company's Consolidated
Balance Sheets in the "Liabilities and Stockholders' Equity" section. Although
exchange rates fluctuated significantly in recent years, and in particular, the
weakening of the euro in relation to the U.S. dollar in 1999, 2000 and the first
six months of 2001, the Company does not believe that the effect of foreign
currency fluctuation is material to the Company's results of operations as the
expenses related to much of the Company's foreign currency revenues are in the
same currency as such revenues. However, the carrying value of assets and
reported values can be materially impacted by foreign currency translation, as
can the translated amounts of revenues and expenses. Nonetheless, the Company
does not plan to modify its business practices. The Company has relied primarily
upon financing activities to fund the operations of the Company in the United
States. In the event that the Company 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 Company.
However, at the present time, the Company does not anticipate altering its
business plans and practices to compensate for future currency fluctuations.
Interest Rates. The weighted average interest rate on the Company's short-term
borrowings is 5.8% and the balance outstanding is $2,047,000 as of September 30,
2001. The effect of an increase in the interest rate of one hundred basis
points, to 6.8%, would have the effect of increasing interest expense by
approximately $20,000 annually.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
------------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
------------------------------------------------
The statements contained in this Quarterly Report on Form 10-Q, which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of Bentley Pharmaceuticals, Inc. ("Bentley"),
the occurrence of which involve certain risks and uncertainties that could cause
Bentley's actual results to differ materially from those expected by Bentley,
including the risk that we could be required to cut back or stop operations if
we are unable to raise or obtain needed funding; that we have a history of
losses and if we do not achieve profitability we may not be able to continue our
business in the future; that we may be restricted from using our net operating
loss carry forwards due to a change in equity ownership and a change in our tax
year; that successful development of current and future products is uncertain;
that clinical trial results may result in failure to obtain regulatory approval
and inability to sell products; that we will rely on third parties to
commercialize our products in the United States; that our products are early
stage and may not be
24
successful; that we could be materially harmed if our agreements were
terminated; that our failure to develop additional product candidates will
impair our ability to grow; that our patent position is uncertain and our
success depends on our proprietary rights; that we may have to lower prices or
spend more money to effectively compete against companies with greater resources
than us, which could result in lower revenues and/or profits; that rapid
technological change may result in our products becoming obsolete before we
recoup a significant portion of related costs; that pharmaceutical pricing is
uncertain and may result in a negative effect on our profitability; that we
depend on key personnel and must continue to attract and retain key employees;
that we face product liability risks; that we may be affected by changes in
pharmaceutical pricing and reimbursement; that we face risks when doing business
outside of the United States; that your percentage of ownership, voting power
and price of Bentley common stock may decrease as a result of events which
increase the number of shares of our outstanding common stock; that our stock is
volatile; that obligations in connection with warrants and options may hinder
our ability to obtain future financing; that your interest in Bentley may be
diluted by the issuance of preferred stock with greater rights than the common
stock, which we can sell or issue at any time; that we have not paid dividends
on our common stock and do not intend to pay dividends in the foreseeable
future; that certain laws and provisions in our certificate of incorporation and
by laws make it more difficult or discourage third parties from attempting to
control Bentley, and other uncertainties detailed in Bentley's Annual Report on
Form 10-K (SEC File No. 1-10581) for the year ended December 31, 2000.
25
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
-----------------
On January 22, 2001, the Company settled a legal dispute, by paying $140,000 to
Creative Technologies, Inc. and Creative Technologies, Inc. agreed to the
dismissal of the related suit with prejudice. Creative Technologies had asserted
that it was due a brokerage or finder's fee with respect to the Company's 1999
acquisition of permeation enhancement technology. The Company included the
accrual for the $140,000 charge in the Consolidated Balance Sheet as of December
31, 2000 and included the $140,000 charge and related legal costs of
approximately $55,000 in operating expenses in the Consolidated Statements of
Operations for the year ended December 31, 2000.
The Company was awarded a judgment of approximately $2,130,000 in the Circuit
Court of the Thirteenth Judicial Circuit, State of Florida, Hillsborough County
Civil Division during the year ended December 31, 1998, relating to the
Company's claims of civil theft and breach of employment agreement filed against
its former President and Chief Executive Officer, Michael M. Harshbarger. The
judgment included treble damages totaling $418,000 related to its civil theft
claim and $1,712,000 related to its breach of employment agreement claim.
Harshbarger originally filed suit against the Company in November 1993, alleging
wrongful termination, seeking monetary damages in excess of $1,400,000. In
addition to establishing a receivable on its books, the Company has established
a reserve equal to the receivable, as the Company is of the opinion that
Harshbarger does not have the financial resources to satisfy the judgment.
Harshbarger filed a Motion for Relief From Judgment in September 1999, alleging
among other things that he was not provided notice of the August 24, 1998 jury
trial. Discovery is ongoing and a hearing has been set for November 27, 2001 to
determine the merits of Harshbarger's claims. In the opinion of management, the
outcome is expected to have no material effect on the financial position,
results of operations or cash flows of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2001:
None.
The Company has not filed any reports on Form 8-K subsequent to September 30,
2001.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 2001.
26
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
-------------------------------------------
Registrant
November 1, 2001 By: /s/ James R. Murphy
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James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
November 1, 2001 By: /s/ Michael D. Price
-------------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)