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 March 31, 2002
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to___________________
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE No. 59-1513162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
(Current Address of Principal Executive Offices)
Registrant's telephone number, including area code: (603) 964-8006
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
The number of shares of the registrant's common stock outstanding as of April
30, 2002 was 17,229,670.
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations and of
Comprehensive Income (Loss) for the three months
ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 2002 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 20
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements (unaudited)
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data) March 31, December 31,
2002 2001
--------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 4,172 $ 5,736
Receivables, net 8,237 6,937
Inventories, net 3,047 2,563
Deferred taxes 138 141
Prepaid expenses and other 1,055 462
-------- --------
Total current assets 16,649 15,839
-------- --------
Non-current assets:
Fixed assets, net 6,172 5,595
Drug licenses and related costs, net 10,084 10,276
Other 307 409
-------- --------
Total non-current assets 16,563 16,280
-------- --------
$ 33,212 $ 32,119
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,727 $ 4,820
Accrued expenses 3,170 2,490
Short-term borrowings 193 1,757
Current portion of long-term debt 117 --
Deferred income 848 496
-------- --------
Total current liabilities 10,055 9,563
-------- --------
Non-current liabilities:
Taxes payable 1,773 1,827
Long-term debt 245 142
Other 163 163
-------- --------
Total non-current liabilities 2,181 2,132
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 2,000
shares, issued and outstanding, zero shares -- --
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 14,719 and 14,585 shares 295 292
Stock purchase warrants (to purchase 3,423 and 3,424
shares of common stock) 433 433
Additional paid-in capital 98,174 97,501
Accumulated deficit (74,197) (74,332)
Accumulated other comprehensive loss (3,729) (3,470)
-------- --------
Total stockholders' equity 20,976 20,424
-------- --------
$ 33,212 $ 32,119
======== ========
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 Ended March 31,
------------------------------------
2002 2001
-------- --------
Revenues:
Net product sales $ 9,306 $ 5,814
Research and development collaboration 117 -
-------- --------
Total Revenues 9,423 5,814
Cost of net product sales 4,025 2,449
-------- --------
Gross profit 5,398 3,365
-------- --------
Operating expenses:
Selling and marketing 2,610 2,190
General and administrative 1,094 880
Research and development 764 421
Depreciation and amortization 247 239
-------- --------
Total operating expenses 4,715 3,730
-------- --------
Gain on sale of drug licenses 72 4,977
-------- --------
Income from operations 755 4,612
-------- --------
Other income (expenses):
Interest income 8 58
Interest expense (43) (71)
Other 12 2
-------- --------
Income before income taxes 732 4,601
Provision for foreign income taxes 597 1,959
-------- --------
Net income $ 135 $ 2,642
======== ========
Net income per common share:
Basic $ 0.01 $ 0.19
======== ========
Diluted $ 0.01 $ 0.17
======== ========
Weighted average common shares outstanding:
Basic 14,634 13,915
======== ========
Diluted 17,922 15,882
======== ========
Net income $ 135 $ 2,642
Other comprehensive (loss) income:
Foreign currency translation losses (259) (978)
-------- --------
Comprehensive (loss) income $ (124) $ 1,664
======== ========
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)
$.02 Par Value Accumulated
Common Stock Stock Additional Other
------------------ Purchase Paid-In Accumulated Comprehensive
(in thousands) Shares Amount Warrants Capital Deficit Loss Total
------ ------ -------- ---------- ----------- ------------- -----
Balance at December 31, 2001 14,585 $292 $433 $97,501 $(74,332) $(3,470) $20,424
Exercise of stock options/warrants 122 3 -- 555 -- -- 558
Equity based compensation 12 -- -- 118 -- -- 118
Foreign currency translation
adjustments, net -- -- -- -- -- (259) (259)
Net income -- -- -- -- 135 -- 135
------ ---- ---- ------- -------- ------- -------
Balance at March 31, 2002 14,719 $295 $433 $98,174 $(74,197) $(3,729) $20,976
====== ==== ==== ======= ======== ======= =======
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 Three Months
Ended March 31,
----------------------
(in thousands) 2002 2001
---- ----
Cash flows from operating activities:
Net income $ 135 $ 2,642
Adjustments to reconcile net income to
net cash used in operating activities:
Gain on sale of drug licenses (72) (4,977)
Depreciation and amortization 247 239
Equity-based compensation expense 118 104
Other non-cash items 502 118
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (1,024) (391)
Inventories (549) (54)
Prepaid expenses and other current assets (688) 24
Other assets 99 (35)
Accounts payable and accrued expenses 609 731
Deferred income 159 1,575
Other liabilities -- (41)
-------- --------
Net cash used in operating activities (464) (65)
-------- --------
Cash flows from investing activities:
Proceeds from sale of drug licenses 338 2,582
Proceeds from sale of investments 5,740 10,200
Purchase of investments (5,734) (10,162)
Additions to fixed assets (458) (297)
Additions to drug licenses and related costs (213) --
-------- --------
Net cash (used in) provided by investing activities (327) 2,323
-------- --------
(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)
(in thousands) For the Three Months
Ended March 31,
--------------------
2002 2001
------- ------
Cash flows from financing activities:
Proceeds from exercise of stock options/warrants $ 558 $ 21
Repayment of borrowings (1,952) (1,873)
Proceeds from borrowings 619 --
------- -------
Net cash used in financing activities (775) (1,852)
------- -------
Effect of exchange rate changes on cash 2 (62)
------- -------
Net (decrease) increase in cash and cash equivalents (1,564) 344
Cash and cash equivalents at beginning of period 5,736 4,816
------- -------
Cash and cash equivalents at end of period $ 4,172 $ 5,160
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid cash during the period for (in thousands):
Interest $ 41 $ 70
======= =======
Income taxes $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common Stock in exchange for services as follows
(in thousands):
Shares 12 20
======= =======
Amount $ 118 $ 104
======= =======
Fixed asset and drug license purchases included in accounts payable $ 577 $ 103
======= =======
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
HISTORY AND OPERATIONS:
Bentley Pharmaceuticals, Inc. and its Subsidiaries is a U.S.-based
international specialty pharmaceutical company focused on advanced drug delivery
technologies and pharmaceutical products. We own U.S. and international patent
and other proprietary rights to technologies that enhance or facilitate the
absorption of drugs across biological membranes. We are developing products
incorporating these technologies and seek to form strategic alliances with major
pharmaceutical and biotechnology companies to facilitate the development and
commercialization of our products. We currently have strategic alliances with
Pfizer Inc and Auxilium Pharmaceuticals, Inc. and are in preliminary discussions
with a number of large pharmaceutical companies to form additional alliances.
Bentley Pharmaceuticals is incorporated in the State of Delaware.
We also have a commercial presence in Spain, where we manufacture and
market branded and generic pharmaceutical products within four therapeutic
areas: cardiovascular, gastrointestinal, neurological and infectious diseases.
We anticipated the opportunities that the emerging generic drug market in
Spain presented and began taking measures over three years ago to enter the
Spanish generic drug market. We created Laboratorios Davur, a wholly-owned
subsidiary of our Spanish entity, Laboratorios Belmac, to register, market and
distribute generic pharmaceutical products in Spain and began aligning our
business model to be competitive in this arena, including hiring and training a
new generic sales force, submission of generic-equivalent products to the
Spanish Ministry of Health for approval and a marketing campaign designed to
position our Spanish generic subsidiary as a leader in the Spanish generic drug
market. In July 2000, we entered into a strategic alliance with Teva
Pharmaceutical Industries, Ltd. ("Teva"), whereby we have received the right to
register and market in Spain more than 75 of Teva's products. Teva also entered
into a supply agreement with us pursuant to which Teva will manufacture the
products and supply them to us for marketing and sale in Spain. Teva was also
granted a right of first refusal to acquire Laboratorios Davur in the event that
we decide to sell that subsidiary or its direct parent, Laboratorios Belmac. We
also granted Teva the right to bid for Laboratorios Belmac in the event we
decide to sell that subsidiary.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of Bentley Pharmaceuticals, at March
31, 2002 and 2001 included herein, have been prepared by us, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Accounting Principles Generally Accepted
in the United States of America have been condensed or omitted in so far as such
information was disclosed in our consolidated financial statements for the year
ended December 31, 2001. These consolidated financial statements should be read
in conjunction with the summary of significant accounting policies and the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2001.
-8-
In the opinion of management, the accompanying unaudited consolidated
financial statements for the period ended March 31, 2002 and 2001 are presented
on a basis consistent with the audited consolidated financial statements for the
year ended December 31, 2001 and contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly Bentley's financial
position as of March 31, 2002 and the results of our operations and our cash
flows for the three months ended March 31, 2002 and 2001. The results of
operations for the three months ended March 31, 2002 should not necessarily be
considered indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
Included in cash and cash equivalents at March 31, 2002 and December 31,
2001 are approximately $2,428,000 and $4,560,000, respectively, of short-term
investments considered to be cash equivalents, as the original maturity dates of
such investments were three months or less when purchased.
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):
March 31, 2002 December 31, 2001
' -------------- -----------------
Raw materials $ 2,159 $ 1,387
Finished goods 940 1,230
------- -------
3,099 2,617
Less allowance for slow moving inventory (52) (54)
------- -------
$ 3,047 $ 2,563
======= =======
SALE OF LACTOLIOFIL(R):
In November 2001, we agreed to sell the trademark, registration rights and
dossier for our pharmaceutical product, Lactoliofil(R), to a third party for
162,000 Euros (approximately $145,000). We received a deposit of 81,000 Euros
(approximately $72,500) from the purchaser in November 2001, which was reflected
as deferred income in the Consolidated Balance Sheet as of December 31, 2001. We
received a second payment of 81,000 Euros (approximately $72,500) upon approval
of the transfer of the rights to the purchaser by the Spanish Ministry of
Health, which occurred during the quarter ended March 31, 2002. As a result, we
recognized a pre-tax gain of approximately $72,000 during the first quarter of
2002 on this sale.
SALE OF BIOLID(R):
In February 2002, we agreed to sell the trademark, registration rights and
dossier for our pharmaceutical product, Biolid(R), to a third party for 601,000
Euros (approximately $526,000). We received a deposit of 303,000 Euros
(approximately $265,000) from the purchaser in February 2002, which was
reflected as deferred income in the Consolidated Balance Sheet as of March 31,
2002. We expect to receive the balance of 298,000 Euros (approximately $261,000)
upon approval of the transfer of the rights to the purchaser by the Spanish
Ministry of Health, which we expect to occur during the quarter ending June 30,
2002, which should result in a pre-tax gain of approximately $520,000.
-9-
PROVISION FOR INCOME TAXES:
We recorded a provision for foreign income taxes totaling $597,000 for the
three months ended March 31, 2002 as a result of reporting taxable income for
tax purposes in Spain, including the capital gains tax arising from the sale of
Lactoliofil(R). This amount represents 38% of pre-tax income reported in Spain.
No benefit has been recorded for U.S. losses, which totaled $824,000. The
provision for income taxes differs from the amount computed by applying the U.S.
federal income tax rate of 34% to pretax income primarily as a result of the
change in the valuation allowance to offset domestic deferred tax assets and
certain nondeductible expenses in Spain.
BASIC AND DILUTED INCOME PER COMMON SHARE:
Basic and diluted net income per common share is presented in accordance
with SFAS No. 128, "Earnings per Share".
Basic and diluted net income per common share is based on the weighted
average number of shares of common stock outstanding during each period. The
effect of our outstanding stock options and stock purchase warrants were
considered in the diluted income per share calculations for the three months
ended March 31, 2002 and 2001.
The following is a reconciliation between basic and diluted net income per
common share for the three months ended March 31, 2002 and 2001. Dilutive
securities issuable for the three months ended March 31, 2002 include
approximately 1,358,000 shares issuable as a result of exercisable Class B
Warrants and approximately 1,930,000 shares issuable as a result of various
stock options and other warrants that are outstanding and exercisable. Dilutive
securities issuable for the three months ended March 31, 2001 include
approximately 515,000 shares issuable as a result of exercisable Class B
Warrants and approximately 1,452,000 shares issuable as a result of various
stock options and other warrants that are outstanding and exercisable.
(in thousands, except per share data)
For the Quarter Ended March 31, 2002:
Effect of
Basic Dilutive Diluted
EPS Securities EPS
------- ---------- --------
Net Income $ 135 --- $ 135
Number of Common Shares 14,634 3,288 17,922
Net Income Per Common Share $ .01 ($.00) $ .01
For the Quarter Ended March 31, 2001:
Effect of
Basic Dilutive Diluted
EPS Securities EPS
------- ---------- --------
Net Income $ 2,642 --- $ 2,642
Number of Common Shares 13,915 1,967 15,882
Net Income Per Common Share $ .19 ($.02) $ .17
-10-
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the
current period's presentation. Such reclassifications are not material to the
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 supersedes APB No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for by a single method -
the purchase method. SFAS No. 141 also provides guidance on the recognition of
intangible assets identified in a business combination and requires enhanced
financial statement disclosures. SFAS No. 142 adopts a more aggregate view of
goodwill and bases the accounting for goodwill on the units of the combined
entity into which an acquired entity is integrated. In addition, SFAS No. 142
concludes that goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 is
required for fiscal years beginning after December 15, 2001 (the year 2002 for
Bentley), except for the non-amortization and amortization provisions which are
required for goodwill and intangible assets acquired after June 30, 2001. The
adoption of SFAS No. 141 and SFAS No. 142 did not have a material impact on our
financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes previous guidelines for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to be
disposed of. We believe that the adoption of SFAS No. 144, on January 1, 2002,
did not have a material impact on our financial position or results of
operations.
-11-
SUBSEQUENT EVENT:
On April 17, 2002, we completed an equity offering of 2,500,000 shares of
our Common Stock at $9.80 per share, and received net proceeds of approximately
$22,300,000, after deduction of estimated offering costs.
-12-
Item 2. BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
----------------------------
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements in our Annual Report of Form 10-K for the
year ended December 31, 2001. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result they are subject to an inherent degree of uncertainty.
In applying those policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources, as appropriate.
Our significant accounting policies include:
o Inventories. Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow
moving and obsolete inventories are provided based on historical experience
and current product demand. We evaluate the adequacy of these reserves
quarterly.
o Revenue recognition and accounts receivable. Revenue on product sales is
recognized when persuasive evidence of an arrangement exists, the price is
fixed and final, delivery has occurred and there is a reasonable assurance
of collection of the sales proceeds. We generally obtain oral or written
purchase authorizations from our customers for a specified amount of
product at a specified price and consider delivery to have occurred at the
time of shipment. We provide our customers with a limited right of return.
Revenue is recognized at shipment and a reserve for sales returns is
recorded. We have demonstrated the ability to make reasonable and reliable
estimates of product returns in accordance with SFAS No. 48 and of
allowances for doubtful accounts based on significant historical
experience. Revenue from service sales is recognized when the service
procedures have been completed or applicable milestones have been achieved.
Revenue from research and development contracts is recognized over
applicable contractual periods or as defined milestones are attained, as
specified by each contract and as costs related to the contracts are
incurred.
o Foreign currency translation. The financial position and results of
operations of our foreign subsidiaries are measured using local currency as
the functional currency. Assets and liabilities of each foreign subsidiary
are translated at the rate of exchange in effect at the end of the period.
Revenues and expenses are translated at the average exchange rate for the
period. Foreign currency translation gains and losses not impacting cash
flows are credited to or charged against other comprehensive income (loss).
Foreign currency translation gains and losses arising from cash
transactions are credited to or charged against current earnings.
o Drug licenses and related costs. Drug licenses and related costs incurred
in connection with acquiring licenses, patents and other proprietary rights
related to our commercially developed products are capitalized. Capitalized
drug licenses and related costs are being amortized on a
-13-
straight-line basis over fifteen years from the dates of acquisition.
Carrying values of such assets are reviewed quarterly and are adjusted for
any diminution in value.
RESULTS OF OPERATIONS:
----------------------
Three Months Ended March 31, 2002 versus Three Months Ended March 31, 2001
--------------------------------------------------------------------------
Net Product Sales. Net product sales increased by 60% from $5,814,000 in
the three months ended March 31, 2001 to $9,306,000 in the three months ended
March 31, 2002. The $3,492,000 increase was primarily the result of our
continuing efforts to increase sales in the generic drug market in Spain. We
anticipated the opportunities in the emerging generic drug market in Spain and
began taking measures over three years ago to enter the Spanish generic drug
market. We began to register, manufacture and market generic pharmaceutical
products in Spain and began aligning our business model to be competitive in
this arena, including hiring and training a new generic products sales force,
submission of generic-equivalent products to the Spanish Ministry of Health for
approval and a marketing campaign designed to position ourselves as a leader in
the Spanish generic drug market. Although in Spain we reported an increase in
net sales of 67% in local currency in the first quarter of 2002 compared to the
same quarter of the prior year, a 3% decline in the value of the Euro negatively
impacted revenues by approximately $392,000.
Research and Development Collaboration Revenues. Research and development
collaboration revenues totaled $117,000 in the three months ended March 31,
2002. We entered into a research collaboration, whereby our collaborator agreed
to fund a research and development program to combine Bentley's patented CPE-215
drug delivery technologies with certain proprietary compounds. Our collaborator
advanced to us $250,000 during the fourth quarter of 2001, which we recorded as
deferred income as of December 31, 2001, and we will recognize as revenue when
the related costs are incurred. The remaining $133,000 continues to be reflected
on the Consolidated Balance Sheet as deferred income as of March 31, 2002.
Gross Profit. Gross profit increased by 60% from $3,365,000 in the three
months ended March 31, 2001 to $5,398,000 in the three months ended March 31,
2002. The $2,033,000 increase was the direct result of the growth in our net
product sales during the period. Our gross margins on net product sales for the
first quarter of 2002 remained constant at 58% when compared to the same quarter
of the prior year. Sales of generic products accounted for approximately 43% of
our net product sales during the quarter ended March 31, 2002, compared to 19%
in the first quarter of the prior year. Although we expect to continue to
benefit from economies of scale in the future as we grow, gross margins may
decrease as sales of generic product become more significant in the future.
Additionally, the Ministry of Health in Spain levies on pharmaceutical companies
a tax for the purposes of funding rising healthcare costs in Spain. In the first
quarter of 2002, this tax had the effect of reducing gross profit by
approximately $136,000, or one percentage point.
Selling and Marketing Expenses. Selling and marketing expenses increased by
19% from $2,190,000 in the first quarter of 2001 to $2,610,000 in the first
quarter of 2002. The $420,000 increase was the result of our sales and marketing
programs designed to introduce and support the launches of new generic drug
products. Selling and marketing expenses as a percentage of net product sales,
however, declined to 28% in the first quarter of 2002 compared to 38% in the
first quarter of 2001. The 3% decline in the value of the Euro, in relation to
the U.S. Dollar, during the
-14-
period, had the effect of reducing selling and marketing expenses by $92,000 in
the first quarter of 2002.
General and Administrative Expenses. General and administrative expenses
increased by 24% from $880,000 in the first quarter of 2001 to $1,094,000 in the
first quarter of 2002. The $214,000 increase was the result of increased general
and administrative activities required to support our revenue growth in the
first quarter of 2002. General and administrative expenses as a percent of total
revenues declined to 12% in the first quarter of 2002 compared to 15% in the
first quarter of 2001. The 3% decline in the value of the Euro, in relation to
the U.S. Dollar, during the period, had the effect of reducing general and
administrative expenses by $19,000 in the first quarter of 2002.
Research and Development Expenses. Research and development expenses
increased by 81% from $421,000 in the first quarter of 2001 to $764,000 in the
first quarter of 2002. The $343,000 increase was the result of an increase in
our costs associated with our research and development collaboration as well as
our Phase I/II Clinical Studies (treatment of nail fungal infections),
pre-clinical programs underway in collaboration with universities and with
product formulation and testing efforts being performed in the laboratory in our
U.S. headquarters and at our facility in Zaragoza, Spain. We are using our U.S.
laboratory to develop potential product applications using our drug delivery
technologies. The expenditures in research and development reflect our focus on
projects that are necessary for expansion of our portfolio of marketed products
and clinical trials involving our drug delivery technologies. We expect that our
future expenditures for research and development activities will continue to
increase as a result of programs that are necessary to advance new applications
of our technologies.
Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in the first quarter of 2002. However, since we
are not assured of future profitable domestic operations, we have recorded a
valuation allowance for any future tax benefit of such losses in the U.S.
Therefore, no benefit has been recognized with respect to U.S. losses reported
in the first quarter of 2002. We recorded a provision for foreign income taxes
totaling $597,000 (38% of Spanish pre-tax income) for the first quarter of 2002
compared to a provision for foreign income taxes of $1,959,000 in the prior
year. The first quarter 2002 provision for income taxes included approximately
$569,000 as a result of reporting taxable income from operations in Spain and
approximately $28,000 as a result of capital gains taxes arising from the sale
of Lactoliofil, whereas the provision for income taxes in the first quarter of
the prior year included approximately $138,000 as a result of reporting taxable
income from operations in Spain and approximately $1,821,000 as a result of
capital gains taxes arising from the sale of drug licenses. The provision for
foreign income taxes would have been $21,000 higher than reported, absent the 3%
decline in the value of the Euro in relation to the U.S. Dollar during the
period.
Net Income. Including the $72,000 pre-tax gain on sale of the Lactoliofil
drug license, we reported income from operations of $755,000 for the first
quarter of 2002 compared to income from operations of $4,612,000 (including
$4,977,000 of pre-tax gain on sale of the Controlvas drug license) in the first
quarter of the prior year. Excluding the $72,000 pre-tax gain from the sale of
the Lactoliofil(R) drug license, the income from operations for the quarter
ended March 31, 2002 totaled $683,000. The combination of income from operations
of $755,000 and the non-operating items, primarily the provision for foreign
income taxes of $597,000, resulted in net income of $135,000, or $.01 per basic
and diluted common share on 14,634,000 weighted average basic common shares
outstanding (17,922,000 weighted average diluted common shares outstanding) for
the first quarter
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of 2002, compared to net income in the first quarter of the prior year of
$2,642,000, or $.19 per basic share ($.17 per diluted common share) on
13,915,000 weighted average basic common shares outstanding (15,882,000 weighted
average diluted common shares outstanding).
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
Total assets increased from $32,119,000 at December 31, 2001 to $33,212,000
at March 31, 2002, while Stockholders' Equity increased from $20,424,000 at
December 31, 2001 to $20,976,000 at March 31, 2002. The increase in
Stockholders' Equity reflects primarily net income of $135,000 and net proceeds
from the exercise of stock options and warrants totaling $558,000 received in
the first quarter of 2002, partially offset by the impact of the fluctuation of
the Euro/US dollar exchange rate which totaled $259,000 in the first quarter of
2002.
Working capital increased from $6,276,000 at December 31, 2001 to
$6,594,000 at March 31, 2002, primarily as a result of proceeds from exercises
of stock options and warrants, partially offset by additions to fixed assets and
drug licenses.
Cash and cash equivalents decreased from $5,736,000 at December 31, 2001 to
$4,172,000 at March 31, 2002, primarily as a result of reducing borrowings by
$1,333,000 net, additions to fixed assets totaling 458,000, and the use of cash
for operating activities totaling $464,000, partially offset by proceeds
received from exercises of stock options and warrants totaling $558,000 during
the first quarter of 2002. Included in cash and cash equivalents at March 31,
2002 are approximately $2,428,000 of short-term investments considered to be
cash equivalents.
Receivables increased from $6,937,000 at December 31, 2001 to $8,237,000 at
March 31, 2002 as a direct result of the increase in net product sales.
Receivables increased by approximately $1,475,000 in local currency, but
fluctuations in foreign currency exchange rates offset the increase by
approximately $175,000. We have not experienced any material delinquent accounts
on our receivables. Inventories increased from $2,563,000 at December 31, 2001
to $3,047,000 at March 31, 2002 as a result of raw materials purchases in
anticipation of continuing demand for our generic products.
The combined total of accounts payable and accrued expenses increased from
$7,310,000 at December 31, 2001 to $8,897,000 at March 31, 2002, primarily due
to accruals for taxes payable (approximately $790,000), as well as for inventory
purchases (approximately $580,000), additions to fixed assets and drug licenses
(approximately $64,000) and reserves for potential sales returns (approximately
$49,000), partially offset by the effect of fluctuations in foreign currency
exchange rates (approximately $52,000).
Short-term borrowings and current portion of long-term debt decreased from
$1,757,000 at December 31, 2001 to $310,000 at March 31, 2002, as a result of a
reduction in the amount of discounted trade receivables, combined with the
effect of fluctuations in foreign currency exchange rates. The weighted average
interest rate on our short-term borrowings is 4.1%.
Long-term debt, which totaled $142,000 at December 31, 2001, increased to
$245,000 during the three months ended March 31, 2002 as a result of long term
equipment financing. The weighted average interest rate (including imputed
interest) on our long-term debt is 5.0%.
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Operating activities for the three months ended March 31, 2002 used net
cash of $464,000. Investing activities, primarily additions to machinery and
equipment and capital improvements to the manufacturing facility in Spain and
additions to drug licenses used net cash of $327,000 during the three months
ended March 31, 2002. Financing activities, primarily repayments of borrowings,
partially offset by proceeds from borrowings and from the exercise of stock
options and warrants used net cash of $775,000 during the three months ended
March 31, 2002.
Seasonality. In the past, we have experienced lower sales in the third
calendar quarter and higher sales in the fourth calendar quarter due to
seasonality. As we market more pharmaceutical products whose sales are seasonal,
seasonality of sales may become more significant.
Effect of Inflation and Changing Prices. Neither inflation nor changing
prices has materially impacted our net product sales or income from operations
for the periods presented.
Liquidity. Given our current liquidity and cash balances, and considering
our future strategic plans (including our budgeted capital improvements and
planned equipment purchases), we should have sufficient liquidity to fund
operations for at least the next twenty-four months, which should be a
sufficient time frame for us to advance our strategic objectives and generate
sufficient net product sales and cash flow to support our operating cash flow
needs. As mentioned above, we have cash and cash equivalents of approximately
$4,172,000 as of March 31, 2002. These resources, combined with net proceeds of
approximately $22,300,000 of the equity offering completed in April 2002 and
available lines of credit, should be adequate to satisfy our capital and
operating requirements during at least the next twenty-four months. We also have
outstanding at March 31, 2002 warrants, including our publicly traded Class B
Warrants, to purchase approximately 3,423,000 shares of Common Stock. There can
be no assurance that any of the warrants will be exercised prior to expiration;
however, if all warrants that are currently outstanding are exercised, we would
receive aggregate cash proceeds of approximately $16,000,000. The Class B
Warrants are scheduled to expire on December 31, 2002. Two Class B Redeemable
Warrants, together, entitle a holder, until December 31, 2002, to purchase one
share of Common Stock at a price of $5.00 per share. There can be no assurance,
however, that changes in our research and development plans or other events
affecting our net product sales or operating expenses will not result in the
earlier depletion of our funds. We continue to explore alternative sources for
financing our business activities. In appropriate situations, that will be
strategically determined, we may seek financial assistance from other sources,
including contribution by others to joint ventures and other collaborative or
licensing arrangements for the development, testing, manufacturing and marketing
of products under development.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 supersedes APB No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for by a single method -
the purchase method. SFAS No. 141 also provides guidance on the recognition of
intangible assets identified in a business combination and requires enhanced
financial statement disclosures. SFAS No. 142 adopts a more aggregate view of
goodwill and bases the accounting for goodwill on the units of the combined
entity into
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which an acquired entity is integrated. In addition, SFAS No. 142 concludes that
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their useful
lives. SFAS No. 141 is effective for all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 142 is required for fiscal years
beginning after December 15, 2001 (the year 2002 for Bentley), except for the
non-amortization and amortization provisions which are required for goodwill and
intangible assets acquired after June 30, 2001. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a material impact on our financial position, results
of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes previous guidelines for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to be
disposed of. We believe that the adoption of SFAS No. 144, on January 1, 2002,
did not have a material impact on our financial position or results of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Foreign Currency. A substantial amount of our business is conducted in
Europe and is therefore influenced by the extent to which there are fluctuations
in the dollar's value against other currencies, specifically the Euro. The
exchange rate at March 31, 2002 and December 31, 2001 was 1.15 euros and 1.12
Euros per U.S. dollar, respectively. The weighted average exchange rate for the
three months ended March 31, 2002 and 2001 was 1.12 Euros and 1.08 Euros per
U.S. dollar, respectively. The effect of foreign currency fluctuations on long
lived assets for the three months ended March 31, 2002 was a decrease of
$259,000 and the cumulative historical effect was a decrease of $3,729,000, as
reflected in our Consolidated Balance Sheets as accumulated other comprehensive
loss. 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 in the first six months of 2001, we do not believe that the effect of
foreign currency fluctuation is material to our results of operations as the
expenses related to much of our foreign currency revenues are in the same
currency as such revenues. However, the carrying value of assets and reported
values can be materially impacted by foreign currency translation, as can the
translated amounts of net product sales and expenses. Nonetheless, we do not
plan to modify our business practices.
We have relied primarily upon financing activities to fund our operations
in the United States. In the event that we are required to fund United States
operations or cash needs with funds generated in Spain, currency rate
fluctuations in the future could have a significant impact on us. However, at
the present time, we do not anticipate altering our business plans and practices
to compensate for future currency fluctuations.
Interest Rates. The weighted average interest rate on our short-term
borrowings and current portion of long-term debt is 4.1% and the balance
outstanding is $310,000 as of March 31, 2002. A portion of our long-term
borrowings are non-interest bearing and the balance outstanding on these
borrowings at March 31, 2002 is $214,000 including imputed interest (at 6.0%) of
$72,000. The balance of our long-term borrowings of $103,000 bears interest at
the rate of 2.9%. Consequently,
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the weighted average interest rate on our long-term borrowings is 5.0%. The
effect of an increase in the interest rate of one hundred basis points (to 5.1%
on short-term borrowings and to 6.0% on long-term borrowings) would have the
effect of increasing interest expense by approximately $6,000 annually.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
------------------------------------------------
The statements contained in this Quarterly Report on Form 10-Q, which are
not historical facts contain forward looking information with respect to plans,
projections or future performance of Bentley Pharmaceuticals, Inc. ("Bentley"),
the occurrence of which involve certain risks and uncertainties that could cause
our actual results to differ materially from those expected by Bentley,
including but not limited to risks associated with identifying suitable drugs
for combination with our drug delivery technologies, expanding generic and
branded drug operations, development and commercialization of our products,
relationships with our strategic partners, uncertainty of clinical trials
results, regulatory approval process, product sales concentration,
unpredictability of patent protection, technological changes, the effect of
economic conditions, and other uncertainties detailed in Bentley's Annual Report
on Form 10-K (SEC File No. 1-10581) for the year ended December 31, 2001.
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PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
On February 4, 2002, we were notified that a legal proceeding had been
commenced against us by Merck & Co. Inc. and its Spanish subsidiary, Merck Sharp
& Dohme de Espana, S.A., which alleged that we violated their patents in our
production of the product simvastatin and requested an injunction ordering us
not to manufacture or market the product. The case was brought against our
Spanish subsidiaries in the 39th First Instance Court of the City of Madrid.
After a hearing on February 18, 2002, the court refused to grant the requested
injunction and dismissed the case on February 25, 2002, awarding us court and
legal fees. Merck did not appeal the decision, but has appealed the award of
fees. Under Spanish law, although Merck did not appeal the decision, it has the
right to reinstitute its claim against us in another proceeding. We launched our
Simvastatin product in late January 2002.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended March 31, 2002.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTLEY PHARMACEUTICALS, INC.
------------------------------------
Registrant
April 30, 2002 By: /s/ James R. Murphy
------------------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
April 30, 2002 By: /s/ Michael D. Price
------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)
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