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, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________________to_____________________
Commission File Number 1-10581
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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
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(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 May 4,
2000 was 13,647,532.
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
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INDEX
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Part I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations and of Comprehensive Loss
(unaudited) for the three months ended March 31, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 2000 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 20
2
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands) MARCH 31, DECEMBER 31,
--------- ------------
2000 1999
---- ----
ASSETS
- ------
Current Assets:
Cash and cash equivalents $6,131 $4,422
Marketable securities 575 1,893
Receivables, net 4,015 4,016
Inventories, net 1,599 965
Prepaid expenses and other 522 393
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Total current assets 12,842 11,689
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Fixed assets, net 3,565 3,684
Drug licenses and related costs, net 6,171 5,807
Receivables from related parties 440 -
Other non-current assets, net 507 1,057
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$23,525 $22,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $2,991 $2,702
Accrued expenses 1,356 1,538
Short term borrowings 1,030 952
Current portion of long term debt 5 5
Debentures called for redemption - 5,362
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Total current liabilities 5,382 10,559
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Long-term debt, net 1,876 -
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Other non-current liabilities 135 104
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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, 12,691 and 10,230 shares 254 204
Stock purchase warrants (to purchase 4,296 and 4,806
shares of common stock) 633 799
Additional paid-in capital 92,855 87,858
Accumulated deficit (74,907) (74,948)
Accumulated other comprehensive loss (2,703) (2,339)
------- -------
16,132 11,574
------- -------
$23,525 $22,237
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The accompanying 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 LOSS
(UNAUDITED)
(in thousands, except per share data) For the Three
Months Ended
March 31,
------------------------------------------
2000 1999
---- ----
Sales $5,085 $4,358
Cost of sales 1,958 2,015
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Gross margin 3,127 2,343
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Operating expenses:
Selling, general and administrative 2,438 2,442
Research and development 77 45
Depreciation and amortization 144 95
------ ------
Total operating expenses 2,659 2,582
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Income (loss) from operations 468 (239)
Other (income) expenses:
Interest expense 266 278
Interest income (92) (68)
Other (income) expense, net - (2)
------ ------
Income (loss) before income taxes 294 (447)
Provision for income taxes:
Domestic - -
Foreign 253 100
------ ------
Net income (loss) 41 (547)
Other comprehensive loss:
Foreign currency translation losses 364 499
------ ------
Comprehensive loss ($323) ($1,046)
======= ========
Basic net income (loss) per common share $0.004 ($0.065)
======= ========
Diluted net income (loss) per common share $0.003 ($0.065)
======= ========
Weighted average common shares outstanding 10,783 8,443
======= ========
The accompanying 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, 1999 10,230 $204 $87,858 ($74,948) ($2,339) $799 $11,574
Exercise of Class B Redeemable Warrants 60 1 300 - - (1) 300
Conversion of Debentures 1,951 39 3,146 - - - 3,185
Exercise of stock warrants 450 10 1,554 - - (414) 1,150
Exercise of underwriter warrants - - (3) - - 249 246
Foreign currency translation adjustment - - - - (364) - (364)
Net income - - - 41 - - 41
------ ------- ------- -------- ------- ------- -------
Balance at March 31, 2000 12,691 $254 $92,855 ($74,907) ($2,703) $633 $16,132
====== ======= ======= ======== ======= ======= =======
The accompanying 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) 2000 1999
---- ----
Cash flows from operating activities:
Net income (loss) $41 ($547)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 144 95
Other non-cash items (83) 297
(Increase) decrease in assets and
increase (decrease) in liabilities:
Receivables (212) 4
Inventories (719) 26
Prepaid expenses and other current assets (171) 48
Other assets (81) 111
Accounts payable and accrued expenses 523 (345)
Other liabilities 2 5
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Net cash used in operating activities (556) (306)
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Cash flows from investing activities:
Acquisition of drug licenses (554) (1,242)
Additions to fixed assets (169) (336)
Loans to related parties (440) -
Proceeds from sale of investments 3,838 -
Purchase of investments (2,515) -
-------- --------
Net cash provided by (used in) investing activities 160 (1,578)
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(Continued on following page)
The accompanying 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,
----------------------------
2000 1999
---- ----
Cash flows from financing activities:
Net increase in short term borrowings $133 $601
Proceeds from exercise of stock warrants 2,002 -
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Net cash provided by financing activities 2,135 601
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Effect of exchange rate changes on cash (30) (1)
----- -----
Net increase (decrease) in cash and cash equivalents 1,709 (1,284)
Cash and cash equivalents at beginning of period 4,422 6,703
----- -----
Cash and cash equivalents at end of period $6,131 $5,419
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (in thousands):
Interest $238 $233
====== ======
Taxes - -
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SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Registrant has issued or is obligated to issue Common Stock in exchange for
services and purchase of drug delivery technology as follows (in thousands):
Number of shares 3 735
====== ======
Amount $29 $1,000
====== ======
During the three months ended March 31, 2000, 4,878 Debentures with principal
amount of $4,878,000, net of discount of $1,085,000 (and applicable unamortized
debt issuance costs totaling $608,000) were converted into approximately
1,951,000 shares of Common Stock.
The Registrant issued Warrants to purchase 450,000 shares of Common Stock as
partial consideration for the purchase of drug delivery technology, during the
three months ended March 31, 1999.
The accompanying 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 "Registrant") 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, which also has a commercial presence in Europe, where it
manufactures, markets and distributes branded and generic pharmaceutical
products. The Registrant owns rights to certain U.S. and international patents
and related technology covering methods to enhance the absorption of drugs
delivered to biological tissues. The Registrant is developing this technology
and is targeting U.S., European and other international markets for the new
product applications. The Registrant is in negotiations with larger
pharmaceutical companies with the objective of collaborations in the development
and marketing of various product applications, including the treatment of
onychomycosis, delivery of insulin, hormone replacement therapies, vaccines and
peptides. In Spain, the Registrant develops and registers late stage products,
and manufactures, packages and distributes both its own and other companies'
pharmaceutical products.
The strategic focus of the Registrant has shifted in response to the evolution
of the global health care environment. The Registrant 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, which will require limited development expenditures while providing
a multitude of opportunities for strategic partnerships and/or alliances, which
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
Registrant as CPE-215, although there are a number of other related compounds
under the same patents that have equally impressive enhancing characteristics.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at March 31, 2000 and
1999 included herein, have been prepared by the Registrant, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures
8
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with the
summary of significant accounting policies and the audited consolidated
financial statements and notes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999.
The consolidated financial statements include the accounts of the Registrant and
its wholly-owned subsidiaries: Pharma de Espana, Inc. and its wholly-owned
subsidiary, Laboratorios Belmac S.A.; Bentley Healthcare Corporation and its
wholly-owned subsidiary, Belmac Hygiene, Inc.; Belmac Health Corporation; Belmac
Holdings, Inc. and its wholly-owned subsidiary, Belmac A.I., Inc.; B.O.G.
International Finance, Inc.; and Belmac Jamaica, Ltd. All significant
intercompany balances have been eliminated in consolidation. The financial
position and results of operations of the Registrant's foreign subsidiaries are
measured using local currency as the functional currency. Assets and liabilities
of foreign subsidiaries are translated at the rate of exchange in effect at the
end of the period. Revenues and expenses are translated at the average exchange
rate for the period. Foreign currency translation gains and losses not impacting
cash flows are credited to or charged against Accumulated other comprehensive
loss in the Stockholders' Equity section of the Consolidated Balance Sheets.
Foreign currency translation gains and losses arising from cash transactions are
credited to or charged against current earnings.
In the opinion of management, the accompanying unaudited consolidated financial
statements for the period ended March 31, 2000 and 1999 are presented on a basis
consistent with the audited consolidated financial statements for the year ended
December 31, 1999 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of March 31, 2000 and the results of its operations and its cash
flows for the three months ended March 31, 2000 and 1999. The results of
operations for the three months ended March 31, 2000 should not be considered
indicative of the results to be expected for the year.
CASH AND CASH EQUIVALENTS:
The Registrant considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents for purposes of
the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows.
Investments in securities that do not meet the definition of cash equivalents
are classified as marketable securities available-for-sale in the Consolidated
Balance Sheets.
MARKETABLE SECURITIES:
The Company has classified its marketable securities as "available-for-sale"
and, accordingly, carries such securities at aggregate fair value. Fair value
has been determined based on quoted
9
market prices. Marketable securities at March 31, 2000 included $575,000 of
Spanish government Treasury Bills, which mature in May 2000.
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, 2000 December 31, 1999
-------------- -----------------
Raw materials $710 $436
Finished goods 953 599
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1,663 1,035
Less allowance for slow moving inventory (64) (70)
------ -----
$1,599 $965
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DRUG LICENSES AND RELATED COSTS:
Drug licenses and related costs incurred in connection with acquiring licenses,
patents, and other proprietary rights related to the Registrant's commercially
developed products are capitalized. Capitalized drug licenses and related costs
are being amortized on a straight-line basis over fifteen years from the dates
of acquisition. Carrying values of such assets are reviewed annually by the
Registrant and are adjusted for any diminution in value.
RECEIVABLES FROM RELATED PARTIES:
The Registrant provided loans to each of Messrs. Murphy, Price and Gyurik, who
are Executive Officers of the Registrant, in the amounts of $250,000, $50,000
and $140,000, respectively, in March 2000, which Messrs. Murphy, Price and
Gyurik used to pay the income taxes on equity-based compensation received in the
prior year. The loans, which bear interest at 6.59% annually, mature in March
2003 and are secured by 28,000, 6,000 and 16,000 shares of the Registrant's
Common Stock owned by Messrs. Murphy, Price and Gyurik, respectively. Interest
on the loans is payable quarterly.
DEBT:
During the three months ended March 31, 2000, holders of the Registrant's 12%
Debentures, which were classified as current liabilities at December 31, 1999,
converted 4,878 of such Debentures, with a net carrying value of approximately
$3,793,000 into approximately 1,951,000 shares of Common Stock. At March 31,
2000, there remained outstanding 2,376 Debentures, with a net carrying value of
approximately $1,876,000. All 2,376 Debentures outstanding at
10
March 31, 2000 were converted into an aggregate of approximately 950,000 shares
of Common Stock subsequent to March 31, 2000 as a result of the Registrant's
notice that it would redeem all Debentures that remained outstanding on April
12, 2000. Debentures outstanding at March 31, 2000 were classified as
non-current liabilities as a result of their conversion into shares of Common
Stock in April 2000.
STOCKHOLDERS' EQUITY:
During the three months ended March 31, 2000, holders of the Registrant's Class
B Redeemable Warrants exercised approximately 120,000 of such warrants,
resulting in the issuance of approximately 60,000 shares of Common Stock, the
Underwriters of the Registrant's 1996 Public Offering exercised 460
Underwriter's Warrants, resulting in the issuance of 460 Debentures and 460,000
Class A Redeemable Warrants and other warrant holders exercised an aggregate of
450,000 stock purchase warrants, resulting in the issuance of 450,000 shares of
Common Stock. The Registrant received aggregate net proceeds from such exercises
of approximately $2,002,000.
PROVISION FOR INCOME TAXES:
The Registrant accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities relating to the expected
future tax consequences of events that have been recognized in the Registrant's
consolidated financial statements and tax returns.
The Registrant recorded a provision for income taxes totaling $253,000 for the
three months ended March 31, 2000 as a result of its taxable income in Spain.
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 increase 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 net income (loss) per common share is presented in accordance with SFAS
No. 128, "Earnings per Share".
Basic net income (loss) per common share is based on the weighted average number
of shares of common stock outstanding during each period adjusted for actual
shares issued during the period. Diluted income per common share is presented
for the three months ended March 31, 2000. Diluted loss per common share for the
three months ended March 31, 1999 is the same as the basic loss per common share
as a result of antidilution. The effect of the Registrant's outstanding
11
stock options, stock warrants and convertible debentures were considered in the
diluted income (loss) per share calculation.
The following is a reconciliation between basic and diluted net income per share
for the three months ended March 31, 2000. Dilutive securities issuable include
approximately 1,227,000 shares issuable as a result of Class B Warrants and
approximately 2,090,000 shares issuable as a result of various stock options and
warrants outstanding. Basic and diluted net loss per common share for the three
months ended March 31, 1999 are the same.
(in thousands, except per share data)
Effect of
Basic Dilutive Diluted
EPS Securities EPS
------- ---------- ---------
Net Income $ 41 --- $ 41
Number of Shares 10,783 3,317 14,100
Per Share $ .004 --- $ .003
12
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 2000 versus Three Months Ended March 31, 1999
- --------------------------------------------------------------------------
The Registrant reported revenues of $5,085,000 and net income of $41,000 or
$.004 per basic common share ($.003 per diluted common share) for the three
months ended March 31, 2000 compared to revenues of $4,358,000 and a net loss of
$547,000 or $.065 per basic and diluted common share for the same period in the
prior year.
The 17% increase in revenues is primarily attributable to increased sales by the
Registrant's Spanish subsidiary, Laboratorios Belmac S.A., which reported an
increase in revenues of 32% in local currency for the three months ended March
31, 2000 compared to the same period of the prior year; however, fluctuations in
foreign currency exchange rates negatively impacted revenues by $675,000,
resulting in revenues of $5,085,000 when expressed in U.S. dollars.
Gross margins for the three months ended March 31, 2000 increased to 61%
compared to gross margins of 54% in the same period of the prior year, primarily
as a result of manufacturing efficiencies associated with higher levels of
production during the three months ended March 31, 2000 compared to the same
period of the prior year. 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 were taxed on their growth as a
vehicle for funding rising health care costs in Spain. This agreement has
expired and, as of this date, has not been renewed nor has the Registrant
received any indication that it will be renewed or if it is renewed that the
effective date will be retroactive to the beginning of the year. Consequently,
the Registrant has not accrued any such taxes for the three months ended March
31, 2000. Such taxes would have approximated $136,000 for the three months ended
March 31, 2000 if the agreement had continued beyond December 31, 1999.
Selling, general and administrative expenses decreased by $4,000, to $2,438,000
for the three months ended March 31, 2000 compared to $2,442,000 for the same
period of the prior year. Selling, general and administrative expenses, as a
percentage of revenues, were reduced from 56% of first quarter 1999 revenues to
48% of first quarter 2000 revenues as a result of the Registrant's 17% increase
in revenues and its efforts to control general and administrative expenses. A
significant portion (63% or $1,545,000) of these expenses are marketing and
selling expenses, which are necessary for the Registrant's growth in sales and
market share in Spain. Selling and marketing expenses increased by $130,000, or
9% over the same period of the prior year, however, as a percent of revenues,
decreased from 32% in the first quarter of 1999 to 30% in the first quarter of
2000. General and administrative expenses decreased by 13% from $1,027,000 in
the first quarter of 1999 to $893,000 in the first quarter of 2000, and
decreased from 24% of first quarter 1999 revenues to 18% of first quarter 2000
revenues. To the extent
13
practical, the Registrant intends to continue its efforts to control general and
administrative expenses in its effort to maintain profitability.
The Registrant reported research and development expenses of $77,000 for the
three months ended March 31, 2000 compared to $45,000 for the same period of the
prior year. Amounts charged to research and development totaled $238,000 for the
three months ended March 31, 2000 and 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 Registrant's costs for research and
development is primarily the result of costs associated with the laboratory in
the Registrant's U.S. headquarters, located in New Hampshire. This laboratory is
being used by the Registrant to develop potential product applications using its
permeation enhancement technology. The limited expenditures in research and
development reflect the Registrant's continued de-emphasis of basic research and
redirection of its resources to developmental expenses necessary for expansion
of its portfolio of marketed products. The Registrant intends to continue to
carefully manage its research and development expenditures in order to ensure
that its development programs are efficient and cost effective.
Depreciation and amortization expenses totaled $144,000 for the three months
ended March 31, 2000, compared to $95,000 for the same period of the prior year.
The increase was primarily due to higher depreciation charges with respect to
renovations and improvements at the Registrant's manufacturing facility and its
U.S. laboratory and higher amortization charges with respect to recently
acquired drug licenses and technologies.
Interest expense, which primarily reflects interest on the Registrant's
Debentures, totaled $266,000 for the three months ended March 31, 2000 compared
to $278,000 for the same period of the prior year as a result of lower
outstanding principal amount of the Registrant's Debentures, which resulted from
conversions by the holders thereof into shares of the Registrant's Common Stock
during the three months ended March 31, 2000, partially offset by higher average
outstanding short term debt balances used for operating purposes in Spain. The
Registrant incurred first quarter interest expense related to the Debentures of
approximately $233,000, which will be reduced to zero beginning with the second
quarter of 2000, as a result of the conversion of all Debentures into shares of
Common Stock.
Interest income was $92,000 for the three months ended March 31, 2000 compared
to $68,000 for the same period of the prior year primarily as a result of higher
short-term interest bearing investment balances during the three months ended
March 31, 2000 than in the same period of 1999.
The Registrant recorded a provision for foreign income taxes totaling $253,000
for the three months ended March 31, 2000 as a result of taxable income earned
in Spain compared to $100,000 in the same period of the prior year.
The Registrant reported income from operations of $468,000 for the three months
ended March 31, 2000 compared to a loss of $239,000 in the same period of the
prior year. The effect of
14
combining non-operating items, primarily interest expense of $266,000, interest
income of $92,000 and provision for income taxes of $253,000 resulted in net
income of $41,000, or $.004 per basic common share ($.003 per diluted common
share) for the three months ended March 31, 2000, compared to the net loss in
the same period of the prior year, of $547,000, or $.065 per basic and diluted
common share.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Total assets increased from $22,237,000 at December 31, 1999 to $23,525,000 at
March 31, 2000, while Stockholders' Equity increased from $11,574,000 at
December 31, 1999 to $16,132,000 at March 31, 2000. The increase in
Stockholders' Equity reflects primarily the exercise of 120,000 Class B
Redeemable Warrants and the resulting issuance of 60,000 shares of Common Stock,
the exercise of 460 Underwriter's Warrants resulting in the issuance of 460
Debentures and 460,000 Class A Redeemable Warrants, the conversion of 4,878 of
the Registrant's 12% Convertible Debentures into approximately 1,951,000 shares
of Common Stock and the exercise of stock purchase warrants to purchase an
aggregate of 450,000 shares of Common Stock and net income of $41,000 for the
three months ended March 31, 2000, partially offset by the negative impact of
the fluctuation of the Spanish peseta (and related euro) exchange rate on the
foreign currency translation.
The Registrant's working capital increased from $1,130,000 at December 31, 1999
to $7,460,000 at March 31, 2000, primarily as a result of conversion of 4,878 of
the Registrant's 12% Debentures into shares of Common Stock and the
classification of the 2,376 Debentures with a carrying value of $1,876,000 which
remained outstanding at March 31, 2000 as long-term debt, net, which Debentures
had been classified as current liabilities as of December 31, 1999 and cash
proceeds of approximately $2,002,000 received from the exercise of 120,000 Class
B Warrants, 460 Underwriter's Warrants and 450,000 other stock purchase warrants
during the first quarter of 2000.
Cash and cash equivalents increased from $4,422,000 at December 31, 1999 to
$6,131,000 at March 31, 2000, primarily as a result of cash proceeds of
approximately $2,002,000 received from the exercise of 120,000 Class B Warrants,
460 Underwriter's Warrants and 450,000 other stock purchase warrants and as a
result of the maturities of approximately $1,288,000 of marketable securities,
partially offset by use of cash for working capital purposes and investing
activities. Included in cash and cash equivalents at March 31, 2000 are
approximately $5,469,000 of short-term investments considered to be cash
equivalents. There are also approximately $575,000 of marketable securities
(six-month maturities maturing in May 2000) classified as available-for-sale at
March 31, 2000.
Accounts receivable decreased from $4,016,000 at December 31, 1999 to $4,015,000
at March 31, 2000 and the Registrant has not experienced any material delinquent
accounts on its trade receivables. Inventories increased to $1,599,000 at March
31, 2000 compared to $965,000 at December 31, 1999 primarily as a result of raw
materials purchases and production of finished
15
goods in anticipation of higher levels of sales, partially offset by fluctuation
in foreign currency exchange rates.
Prepaid expenses and other current assets increased from $393,000 at December
31, 1999 to $522,000 at March 31, 2000, primarily as a result of prepaid
expenses which are being amortized over the applicable periods to be benefited,
partially offset by recurring amortization charges and the effect of
fluctuations in foreign currency exchange rates.
The combined total of accounts payable and accrued expenses increased from
$4,240,000 at December 31, 1999 to $4,347,000 at March 31, 2000, primarily as a
result of inventory purchases, partially offset by fluctuations in foreign
currency exchange rates. Short-term borrowings increased from $952,000 at
December 31, 1999 to $1,030,000 at March 31, 2000, as a result of higher
outstanding balances on lines of credit used for operating purposes in Spain,
partially offset by the effect of fluctuations in foreign currency exchange
rates.
Current portion of long-term debt of $5,362,000 at December 31, 1999 was reduced
to $1,876,000 at March 31, 2000 as a result of the conversion of 4,878
Debentures into approximately 1,951,000 shares of Common Stock, partially offset
by accretion recorded on the Debentures. The 2,376 Debentures that remained
outstanding at March 31, 2000, with a carrying value of $1,876,000, have been
classified as long-term debt, net as a result of the conversion of such
Debentures into shares of Common Stock subsequent to March 31, 2000.
Fixed assets, net decreased from $3,684,000 at December 31, 1999 to $3,565,000
at March 31, 2000, due primarily to recurring depreciation charges and the
effect of fluctuations in foreign currency exchange rates, partially offset by
additions to machinery and equipment and renovations at the Spanish
manufacturing facility.
Drug licenses and related costs, net increased from $5,807,000 at December 31,
1999 to $6,171,000 at March 31, 2000, primarily due to the acquisition of drug
licenses in Spain, partially offset by the effect of fluctuations in foreign
currency exchange rates and recurring amortization charges.
Receivables from related parties represent loans totaling $440,000 made to
Executive Officers of the Registrant in March 2000. Proceeds from the loans were
used to pay the income taxes on equity-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. Interest on the promissory notes, which
mature in March 2003, is payable quarterly.
Other non-current assets decreased from $1,057,000 at December 31, 1999 to
$507,000 at March 31, 2000, primarily due to the conversion of 4,878 of the
Registrant's 12% Debentures into approximately 1,951,000 shares of Common Stock.
Unamortized debt issuance costs totaling $608,000 were credited to the
Stockholders' Equity as a result of such conversions. Other non-current assets
were also reduced as a result of the effect of fluctuations in foreign currency
16
exchange rates and recurring amortization charges.
Other non-current liabilities increased from $104,000 at December 31, 1999 to
$135,000 at March 31, 2000, primarily as a result of recording a liability to
recognize the Registrant's obligation to issue Common Stock to employees' 401(k)
retirement plan accounts in conjunction with the Registrant's 401(k) matching
program.
Investing activities, primarily proceeds received from the sale of investments
in the U.S., partially offset by purchases of drug licenses in Spain, additions
to machinery and equipment and capital improvements to the manufacturing
facility in Spain and loans made to Executive Officers of the Registrant, the
proceed of which were used to pay income taxes on equity-based compensation,
provided net cash of $160,000 during the three months ended March 31, 2000.
Financing activities, primarily the exercise of 120,000 Class B Warrants, the
exercise of 460 Underwriter's Warrants and the exercise of other stock purchase
warrants to purchase an aggregate of 450,000 shares of Common Stock and proceeds
from short term borrowings for working capital purposes in Spain during the
three months ended March 31, 2000, provided net cash of $2,135,000 and operating
activities for the three months ended March 31, 2000 used net cash of $556,000.
Seasonality. In the past, the Registrant has experienced a positive fluctuation
in the fourth quarter due to seasonality. As the Registrant 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 Registrant's net sales or income from operations for
the periods presented.
Given the Registrant's current liquidity and cash balances and considering its
future strategic plans (including its year 2000 budgeted capital improvements
and planned equipment purchases of approximately $1,400,000), the Registrant
should have sufficient liquidity to fund operations for the year 2000 and into
the year 2001, which should be a sufficient time frame for the Registrant to
advance its strategic objectives and generate sufficient revenues and cash flow
to support the Registrant's operating cash flow needs. There can be no
assurance, however, that changes in the Registrant's research and development
plans or other events affecting the Registrant's revenues or operating expenses
will not result in the earlier depletion of the Registrant's funds. The
Registrant, however, continues to explore alternative sources for financing its
business activities. In appropriate situations, that will be strategically
determined, the Registrant may seek financial assistance from other sources,
including contribution by others to joint ventures and other collaborative or
licensing arrangements for the development, testing, manufacturing and marketing
of products under development.
DERIVATIVE INSTRUMENTS AND HEDGING
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998 and
establishes
17
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. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, and is not intended to be applied retroactively.
The Registrant plans to adopt SFAS No. 133 on January 1, 2001. Management does
not believe that the adoption of SFAS No. 133 will have a significant impact on
the Registrant's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Foreign Currency. A substantial amount of the Registrant's business is conducted
in Europe and is therefore influenced by the extent to which there are
fluctuations in the dollar's value against other currencies, specifically the
euro and the peseta. On January 1, 1999, the euro became the official currency
of 11 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 those of the four 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 can be used by consumers, retailers, companies and public
administrations after 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 March 31, 2000 and December 31, 1999 was 173.98 and 165.23
pesetas per U.S. dollar, respectively. The weighted average exchange rate for
the three months ended March 31, 2000 and 1999 was 171.56 and 148.30 pesetas per
U.S. dollar, respectively. The effect of foreign currency fluctuations on long
lived assets for the three months ended March 31, 2000 was an decrease of
$364,000 and the cumulative historical effect was a decrease of $2,703,000, as
reflected in the Registrant's Consolidated Balance Sheets in the "Liabilities
and Stockholders' Equity" section. Although exchange rates fluctuated
significantly in recent years, and in particular, the continuing weakening of
the euro in relation to the U.S. dollar in 1999 and year to date 2000, the
Registrant does not believe that the effect of foreign currency fluctuation is
material to the Registrant's results of operations as the expenses related to
much of the Registrant's foreign currency revenues are in the same currency as
such revenues. However, the carrying value of assets and reported values can be
materially impacted by foreign currency translation, as can the translated
amounts of revenues and expenses. Nonetheless, the Registrant does not plan to
modify its business practices. The Registrant has relied primarily upon
financing activities to fund the operations of the Registrant in the United
States. In the event that the Registrant is required to fund United States
operations or cash needs with funds generated in Spain, currency rate
fluctuations in the future could have a significant impact on the Registrant.
However, at the present time, the Registrant does not anticipate altering its
business plans and practices to compensate for future currency fluctuations.
18
Interest Rates. The weighted average interest rate on the Registrant's
short-term borrowings is 5.5% and the balance outstanding is $1,030,000 as of
March 31, 2000. The effect of an increase in the interest rate of one hundred
basis points (to 6.5%) would have the effect of increasing interest expense by
approximately $10,000 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
the 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 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 third parties for commercialization in the
United States; that as a producer of "Orphan Drugs" we may be required to
continue producing the product regardless of its potential; that we depend on
key personnel and must continue to attract and retain key employees; that we
face product liability risks; that we face risks when doing business outside of
the United States; that our computer systems may fail which may disrupt our
business; 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 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, 1999.
19
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)Exhibits:
27.1 Financial Data Schedule (Filed herewith.)
(b)Reports on Form 8-K filed during the quarter ended March 31, 2000:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
March 31, 2000.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended March 31, 2000.
20
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
May 4, 2000 By: /s/ James R. Murphy
--------------------------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
May 4, 2000 By: /s/ Michael D. Price
--------------------------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)