UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-10581
BENTLEY PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA No. 59-1513162
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4830 W. Kennedy Blvd., Suite 548, Tampa, FL 33609
- ------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 286-4401
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
The number of shares of the Registrant's common stock outstanding as of November
11, 1996 was 3,345,095.
BENTLEY PHARMACEUTICALS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the three months ended September
30, 1996 and 1995, and the nine months
ended September 30, 1996 and 1995 4
Consolidated Statement of Changes in Common
Stockholders' Equity (unaudited) for the
nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. OTHER INFORMATION 19
2
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except per share data) September 30, December 31,
1996 1995
-------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 661 $ 1,120
Investments available for sale 4,747 161
Receivables 3,566 6,836
Inventories 787 1,054
Prepaid expenses and other 459 596
-------- --------
Total current assets 10,220 9,767
-------- --------
Fixed assets, net 3,596 4,084
Drug licenses and related costs, net 974 1,120
Other non-current assets, net 2,096 1,319
-------- --------
$ 16,886 $ 16,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,730 $ 3,883
Accrued expenses 1,716 1,572
Short term borrowings 1,239 1,197
Current portion of long term debt 5 2
-------- --------
Total current liabilities 4,690 6,654
-------- --------
Long term debt, net 5,117 1,354
-------- --------
Other non-current liabilities 574 898
-------- --------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value, authorized 2,000 shares:
Series A, issued and outstanding, 60 shares 2,170 2,068
-------- --------
Common Stockholders' Equity:
Common stock, $.02 par value, authorized 35,000 shares,
issued and outstanding, 3,345 and 3,330 shares 67 66
Stock purchase warrants (to purchase 8,309 and 547
shares of common stock) 457 150
Paid-in capital in excess of par value 71,269 70,047
Stock subscriptions receivable (105) (105)
Accumulated deficit (66,333) (64,248)
Cumulative foreign currency translation adjustment (1,020) (594)
-------- --------
4,335 5,316
-------- --------
$ 16,886 $ 16,290
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
3
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data) For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Sales $ 4,049 $ 8,169 $ 18,425 $ 24,368
Cost of sales 2,349 7,029 12,879 19,985
-------- -------- -------- --------
Gross margin 1,700 1,140 5,546 4,383
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 1,976 1,667 5,871 5,516
Research and development 2 94 28 341
Depreciation and amortization 133 140 386 408
-------- -------- -------- --------
Total operating expenses 2,111 1,901 6,285 6,265
-------- -------- -------- --------
Loss from operations (411) (761) (739) (1,882)
Other (income) expenses:
Interest expense 331 89 1,343 215
Interest income (34) -- (79) (1)
Other (income) expense, net 2 (720) 82 (577)
-------- -------- -------- --------
Net loss ($ 710) ($ 130) ($ 2,085) ($ 1,519)
======== ======== ======== ========
($ 0.22) ($ 0.06) ($ 0.66) ($ 0.55)
======== ======== ======== ========
Net loss per common share
Weighted average common shares outstanding 3,332 2,978 3,331 2,978
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(unaudited)
(In thousands, except per share data)
$.02 Par Value
Common Stock Additional Other
------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit Transactions Total
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 3,330 $ 66 $ 70,047 ($64,248) ($ 549) $ 5,316
Public offering of units -- -- 1,274 -- 307 1,581
Common stock issued as compensation
for services rendered 15 1 50 -- -- 51
Accrual of dividends-preferred stock -- -- (102) -- -- (102)
Foreign currency translation adjustment -- -- -- -- (426) (426)
Net loss -- -- -- (2,085) -- (2,085)
-------- -------- -------- -------- -------- --------
Balance at September 30, 1996 3,345 $ 67 $ 71,269 ($66,333) ($ 668) $ 4,335
======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
5
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine
Months Ended
September 30,
------------------
1996 1995
------- -------
Cash flows from operating activities:
Net loss ($2,085) ($1,519)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 386 408
Gain on sale of Belmacina(R) -- (380)
Cancellation of stock subscription receivable -- 533
Loss on disposal of fixed assets 79 --
Other non-cash items 838 117
(Increase) decrease in assets and
Increase (decrease) in liabilities:
Receivables 3,087 (1,007)
Inventories 213 199
Prepaid expenses and other current assets (46) (44)
Other assets 3 66
Accounts payable and accrued expenses (1,879) (795)
Other liabilities (261) 154
------- -------
Net cash provided by (used in) operating activities 335 (2,268)
------- -------
Cash flows from investing activities:
Proceeds from sale of investments 3,115 214
Purchase of investments (7,853) --
Net change in fixed assets (80) (507)
Proceeds from sale of Belmacina(R) -- 922
Investment in partnership -- (13)
------- -------
Net cash (used in) provided by investing activities (4,818) 616
------- -------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
6
BENTLEY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(unaudited)
For the Nine
Months Ended
September 30,
1996 1995
------- -------
Cash flows from financing activities:
Net increase in short term borrowings $ 107 $ 444
Proceeds from public offering of units 6,900 --
Offering costs (1,163) (56)
Collection of stock subscription receivable, net -- 562
Repayment of long term debt (1,784) --
Payments on capital leases (27) (25)
------- -------
Net cash provided by financing activities 4,033 925
------- -------
Effect of exchange rate changes on cash (9) (14)
------- -------
Net decrease in cash and cash equivalents (459) (741)
Cash and cash equivalents at beginning of period 1,120 1,321
------- -------
Cash and cash equivalents at end of period $ 661 $ 580
======= =======
Supplemental Disclosures of Cash Flow Information
The Registrant paid cash during the period for (in thousands):
Interest $ 660 $ 220
======= =======
Taxes -- --
======= =======
Supplemental Schedule of Non-Cash Financing Activities
The Registrant has issued Common Stock
in exchange for services as follows (in thousands):
Shares issued 15 1
======= =======
Amount $ 51 $ 3
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
7
BENTLEY PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of Bentley Pharmaceuticals, Inc. (the
"Registrant"), at September 30, 1996 and 1995 included herein, have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. 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, 1995.
The consolidated financial statements include the accounts of the Registrant and
its wholly owned subsidiaries: Belmac Healthcare Corporation and its wholly
owned subsidiary - Belmac Hygiene, Inc., Belmac Health Corp., B.O.G.
International Finance, Inc., Belmac Jamaica, Ltd., Chimos/LBF S.A. and its
wholly owned subsidiary - Laboratorios Belmac S.A., and Belmac Holdings, Inc.
and its wholly owned subsidiary - Belmac A.I., Inc. 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 Common Stockholders' Equity. 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 at September 30, 1996 and 1995 are presented on a basis consistent
with the audited consolidated financial statements for the year ended December
31, 1995 and contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the Registrant's financial position as
of September 30, 1996, the results of its operations and its cash flows for the
nine months ended September 30, 1996 and 1995. The results of operations for the
nine months ended September 30, 1996 should not be considered indicative of the
results to be expected for the year.
8
CASH AND CASH EQUIVALENTS/INVESTMENTS AVAILABLE FOR SALE:
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 which do not meet the definition of cash equivalents
are classified as investments available for sale in the Consolidated Balance
Sheets. Investments available for sale of $4,747,000 at September 30, 1996 are
reported at approximate market value.
INVENTORIES:
Inventories are stated at the lower of cost or market, cost being determined on
the first in, first out ("FIFO") method and are comprised of the following (in
thousands):
September 30, December 31,
1996 1995
------- -------
Raw materials $ 354 $ 374
Work in process -- 1
Finished goods 1,265 1,498
------- -------
1,619 1,873
Less: Allowance for slow moving or obsolete inventory (832) (819)
------- -------
$ 787 $ 1,054
======= =======
DEBT:
The Registrant completed a public offering (the "Public Offering") of its
securities in February 1996, whereby it sold 6,900 Units. Each Unit ("Unit")
consisted of a One Thousand Dollars ($1,000) Principal Amount 12% Convertible
Senior Subordinated Debenture due February 13, 2006 ("Debenture") and 1,000
Class A Redeemable Warrants, each to purchase one share of Common Stock and one
Class B Redeemable Warrant. Two Class B Redeemable Warrants entitle a holder to
purchase one share of Common Stock. Interest on the Debentures is payable
quarterly.
9
On May 29, 1996, the Debentures and Class A Redeemable Warrants began trading
separately. The characteristics of the Debentures and the Class A Redeemable
Warrants are consistent with their description as components of the Units.
The Debentures are convertible prior to maturity, unless previously redeemed, at
any time commencing February 14, 1997 (the "Anniversary Date") into shares of
Common Stock at a conversion price per share of the lesser of $2.50 or 80% of
the average closing price of the Common Stock on the American Stock Exchange for
the 20 consecutive trading days immediately preceding the Anniversary Date.
Gross and net proceeds (after deducting underwriting commissions and the other
expenses of the offering), were approximately $6,900,000 and $5,700,000,
respectively, a portion of which were used to retire $1,770,000 principal
balance of debt incurred in the October 1995 private placements.
Of the Unit purchase price of $1,000, for financial reporting purposes, the
consideration allocated to the Debenture was $722, to the conversion discount
feature of the Debenture was $224 and to the 1,000 Class A Warrants was $54.
None of the Unit purchase price was allocated to the Class B Warrants. Such
allocation was based upon the relative fair values of each security on the date
of issuance. Such allocation resulted in recording a discount on the Debentures
of $1,918,000.
The original issue discount and the costs related to the issuance of the
Debentures are being amortized to interest expense using the effective interest
method over the lives of the related Debentures. The effective interest rate on
the Debentures is 18.1%.
NET LOSS PER COMMON SHARE:
Primary loss per common share is computed by dividing the net loss (adjusted for
accrued dividends on redeemable preferred stock) by the weighted average number
of shares of Common Stock outstanding during each period. Common Stock
equivalents were not included in the calculation of primary loss per share as
they were determined to be antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("FAS 121") effective for fiscal years beginning after December 15, 1995. FAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
10
The Registrant adopted FAS 121 effective January 1, 1996. The adoption of FAS
121 did not have a material impact on the financial condition or the results of
operations of the Company.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
effective for transactions entered into after December 15, 1995. FAS 123
provides alternatives for the methods used by entities to record compensation
expense associated with its stock-based compensation plans. Additionally, FAS
123 provides further guidance on the disclosure requirements relating to
stock-based compensation plans. The Registrant adopted FAS 123 effective January
1, 1996. The adoption of FAS 123 did not have a material impact on the financial
condition or the results of operations of the Company.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the current
period's presentation format. These reclassifications are not material to the
consolidated financial statements.
11
BENTLEY PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three Months Ended September 30, 1996 versus Three Months Ended September 30,
1995
The Registrant reported revenues of $4,049,000 and a net loss of $710,000 or
$.22 per common share for the three months ended September 30, 1996 compared to
revenues of $8,169,000 and a net loss of $130,000 or $.06 per common share for
the same period in the prior year.
The 50% decrease in revenues is primarily attributable to an 85% decrease in
sales by the Registrant's French subsidiary, Chimos/LBF S.A., to $997,000, which
was partially offset by a 76% increase in sales by the Registrant's Spanish
subsidiary, Laboratorios Belmac S.A., to $2,999,000. As previously reported,
revenues declined beginning in the second quarter of 1996, due to the March 31,
1996 expiration of its distribution agreement for the product Ceredase, which
accounted for approximately 60% of the Registrant's revenues in 1995 and
approximately 54% of its revenues in the quarter ended March 31, 1996. Ceredase
gross margins, as a percent of sales, were approximately 5% during the quarter
ended March 31, 1996; therefore, the impact on operating profits is not
considered to be material. Overall gross margins for the quarter ended September
30, 1996 improved to 42%, compared to 14% in the comparable period of the prior
year, primarily as a result of the more rapid rate of growth in sales at
Laboratorios Belmac, whose sales generate significantly higher gross margins
than those of Chimos/LBF, as well as the loss of low-margin Ceredase sales. The
Registrant's distribution operations in France, Chimos/LBF, generate relatively
low gross margins (approximately 18% for the quarter ended September 30, 1996)
compared to the Registrant's Spanish subsidiary, Laboratorios Belmac, which is
experiencing substantially higher margins (approximately 50% for the quarter
ended September 30, 1996).
Selling, general and administrative expenses were $1,976,000, or 49% of sales,
for the three months ended September 30, 1996 compared to $1,667,000, or 20% of
sales, for the same period in the prior year. As a direct result of the decline
in revenues, selling, general and administrative expenses as a percent of
revenues increased during the quarter ended September 30, 1996, as compared to
the same period in the prior year. A significant portion of these expenses are
marketing and selling costs, which are necessary for the Registrant's plans to
increase sales and market share in Spain. To the extent practical, however, the
Registrant intends to continue its efforts to control general and administrative
expenses as part of its austerity program in its effort to reach and maintain
profitability.
Research and development expenses were $2,000 for the quarter ended September
30, 1996 compared to $94,000 for the same period of the prior year. The 98%
decrease reflects the
12
Registrant's elimination of basic research and redirection of its resources to
expand its portfolio of marketed products. During this period, the Registrant
did not commence any new research and development programs. The Registrant
intends to continue to carefully manage its research and development
expenditures in the future in view of its limited resources.
Depreciation and amortization expenses decreased by 5% to $133,000 for the three
months ended September 30, 1996, compared to $140,000 for the same period of the
prior year, primarily due to the disposal of certain fixed assets during the
quarters ended June 30 and September 30, 1996 as a result of the Registrant's
move to smaller, more cost effective office space.
Interest expense was $331,000 for the three months ended September 30, 1996
compared to $89,000 for the same period of the prior year. The $242,000 increase
reflects interest expense arising primarily from the Debentures sold in the
February 1996 Public Offering. Interest income was $34,000 for the three months
ended September 30, 1996, compared to no such income for the same period of the
prior year. The increase was with respect to interest earned on the proceeds of
the Public Offering which have been temporarily invested in short-term interest
bearing investments.
Other (income) expense, net was $2,000 for the three months ended September 30,
1996 and is substantially lower than other (income)expense, net of ($720,000)
for the same period of the prior year. The prior year's other income expense,
net was primarily comprised of ($360,000) related to settlement of litigation
and the effect of a reversal of an overaccrual of a liability related to the
proposed sale of Biolid(R), which did not occur, in the amount of ($368,000).
Although the Registrant reported a 50% decrease in sales, the improved gross
margins of 42% and controlled spending with respect to operating expenses in the
quarter ended September 30, 1996, resulted in a $350,000 improvement in its loss
from operations from $761,000 in the same period of the prior year to $411,000
for the current quarter. This improvement, however was offset by a $930,000
increase in other (income) expenses, resulting in a net loss of $710,000, or
$.22 per common share for the quarter ended September 30, 1996, compared to a
net loss of $130,000, or $.06 per common share for the same period in the prior
year.
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30, 1995
The Registrant reported revenues of $18,425,000 and a net loss of $2,085,000 or
$.66 per common share for the nine months ended September 30, 1996 compared to
revenues of $24,368,000 and a net loss of $1,519,000 or $.55 per common share
for the same period in the prior year.
The 24% decrease in revenues is primarily attributable to a 50% decrease in
sales by the Registrant's French subsidiary, Chimos/LBF, to $9,706,000, which
was partially offset by a 74% increase in sales by the Registrant's Spanish
subsidiary, Laboratorios Belmac, to $8,562,000, for the nine months ended
September 30, 1996. As previously reported, revenues declined beginning
13
in the second quarter of 1996, due to the March 31, 1996 expiration of its
distribution agreement for the product Ceredase, which accounted for
approximately 60% of the Registrant's revenues in the year ended December 31,
1995. Ceredase gross margins, as a percent of sales, were approximately 5%;
therefore, the impact on operating profits is not considered to be material.
Gross margins for the nine months ended September 30, 1996 improved to 30% when
compared to gross margins of 18% in the comparable period of the prior year,
primarily as a result of the more rapid rate of growth in sales at Laboratorios
Belmac, whose sales generate significantly higher gross margins than those of
Chimos/LBF, as well as the loss of low-margin Ceredase sales. The Registrant's
distribution operations in France, Chimos/LBF, generate relatively low gross
margins (approximately 11% for the nine months ended September 30, 1996) as
opposed to the Registrant's Spanish subsidiary, Laboratorios Belmac, which is
experiencing substantially higher margins (approximately 52% for the nine months
ended September 30, 1996).
Selling, general and administrative expenses were $5,871,000 for the nine months
ended September 30, 1996 compared to $5,516,000 for the same period in the prior
year. Overall, selling, general and administrative expenses increased and the
composition changed as a result of increased selling expenses incurred by the
Spanish subsidiary, which are necessary in order to sustain the increase in
sales volume that the Spanish sales force has generated in the nine months ended
September 30, 1996. This increase was offset by a decrease in selling, general
and administrative expenses by Chimos/LBF, primarily due to the loss of Ceredase
sales, during the nine months ended September 30, 1996. The Registrant intends
to continue its efforts to control general and administrative expenses as part
of its austerity program in its effort to reach and maintain profitability.
Research and development expenses were $28,000 for the nine months ended
September 30, 1996 compared to $341,000 for the same period of the prior year.
The 92% decrease reflects the results of a thorough review of all research and
development activities and the establishment of priorities based upon both
technical and commercial criteria. During this period, the Registrant did not
commence any new research and development programs. The Registrant intends to
continue to carefully manage its research and development expenditures in the
future in view of its limited resources.
Depreciation and amortization expenses decreased by 5% to $386,000 for the nine
months ended September 30, 1996, compared to $408,000 for the same period of the
prior year, primarily due to the disposal of certain fixed assets during the
quarters ended June 30 and September 30, 1996 as a result of the Registrant's
move to smaller, more cost effective office space.
Interest expense was $1,343,000 for the nine months ended September 30, 1996
compared to $215,000 for the same period of the prior year. The $1,128,000
increase reflects interest expense arising primarily from (i) the Notes sold by
the Registrant in its October 1995 private placements (including $446,000 of
unamortized discount and issuance costs at the date of repayment), which Notes
were paid with the proceeds of the Public Offering completed in February 1996,
(ii) the Debentures sold in the February 1996 Public Offering, and (iii) to a
lesser degree, higher outstanding balances on short term borrowings which are
used to finance working capital needs. Interest income was $79,000 for the nine
months ended September 30, 1996 compared to $1,000
14
for the same period of the prior year. The increase was with respect to interest
earned on the proceeds of the Public Offering which have been temporarily
invested in short-term interest bearing investments.
Other (income) expense, net of $82,000 for the nine months ended September 30,
1996 is substantially lower than other (income) expense, net of ($577,000) for
the same period of the prior year, which is primarily comprised of ($360,000)
related to settlement of litigation, a ($380,000) gain recognized upon the sale
of the Registrant's Belmacina trademark in Spain and the effect of a reversal of
an overaccrual of a liability related to the proposed sale of Biolid(R), which
did not occur, in the amount of ($368,000), offset by a charge for cancellation
of the stock subscription receivable and related interest from a former officer
of the Registrant.
Although the Registrant reported a 24% decrease in sales, the improved gross
margins of 30% and controlled spending with respect to operating expenses in the
nine months ended September 30, 1996, resulted in a $1,143,000 improvement in
its loss from operations from $1,882,000 in the same period of the prior year to
$739,000 for the nine months ended September 30, 1996. This improvement was
offset by interest expense associated with (i) the Notes sold by the Registrant
in its October 1995 private placements (ii) the Debentures sold in the February
1996 Public Offering, and (iii) to a lesser degree, higher outstanding balances
on short term borrowings which are used to finance working capital needs,
resulting in a net loss of $2,085,000, or $.66 per common share for the nine
months ended September 30, 1996, compared to a net loss of $1,519,000, or $.55
per common share for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Total assets increased from $16,290,000 at December 31, 1995 to $16,886,000 at
September 30, 1996, while Common Stockholders' Equity decreased from $5,316,000
at December 31, 1995 to $4,335,000 at September 30, 1996. The decrease in Common
Stockholders' Equity reflects primarily the February 1996 Public Offering of
Units, offset by a fluctuation in the exchange rates of European currencies
compared to the U.S. Dollar and the loss incurred by the Registrant for the nine
months ended September 30, 1996.
The Registrant's working capital increased from $3,113,000 at December 31, 1995
to $5,530,000 at September 30, 1996. The increase in working capital is
primarily attributable to the proceeds from the February 1996 Public Offering of
Units.
Cash and cash equivalents decreased from $1,120,000 at December 31, 1995 to
$661,000 at September 30, 1996; however, the Registrant invested cash of
$4,738,000 in short term investments, resulting in a balance of $4,747,000 which
is reflected on the Registrant's Consolidated Balance Sheets as investments
available for sale at September 30, 1996.
Receivables decreased from $6,836,000 at December 31, 1995 to $3,566,000 at
September 30, 1996, primarily as the result of the decline in sales by the
French subsidiary as a result of the
15
expiration of the Ceredase distribution contract as of March 31, 1996. The
Registrant reduced its receivables by $5,605,000 since that date primarily by
collecting receivables for sales of Ceredase, which were utilized to reduce
accounts payable balances by $2,501,000 and to reduce the amount of short-term
borrowings by $319,000 during the six months ended September 30, 1996. A
significant portion of the Registrant's trade receivables arise from sales of
pharmaceutical and health care products to the French government. Payment terms
for such sales are typically 90 to 100 days. The Registrant has not experienced
any material delinquent accounts. Inventories also decreased to $787,000 at
September 30, 1996 compared to $1,054,000 at December 31, 1995, primarily due to
the decline in sales by the French subsidiary and the corresponding reduction in
inventory levels. Prepaid expenses and other current assets decreased from
$596,000 at December 31, 1995 to $459,000 at September 30, 1996.
Although the combined total of accounts payable and accrued expenses decreased
from $5,455,000 at December 31, 1995 to $3,446,000 at September 30, 1996 and
short term borrowings increased slightly from $1,197,000 at December 31, 1995 to
$1,239,000 at September 30, 1996, as discussed above, such balances are
significantly reduced below their March 31, 1996 balances, as a result of
application of cash collected from receivables during the six months ended
September 30, 1996.
Fixed assets, net decreased from $4,084,000 at December 31, 1995 to $3,596,000
at September 30, 1996, partly due to a fluctuation in foreign currency exchange
rates and partly due to the disposal of certain unnecessary fixed assets and
write-off of leasehold improvements by the Registrant associated with its
relocation to smaller, more cost effective, office space in April 1996.
Other non-current assets increased 59% from $1,319,000 at December 31, 1995 to
$2,096,000 at September 30, 1996 and long term debt increased 278% from
$1,354,000 at December 31, 1995 to $5,117,000 at September 30, 1996, as a result
of the Public Offering of Units in February 1996.
Investing activities, including the purchase of investments available for sale
of $7,853,000, used net cash of $4,818,000 during the nine months ended
September 30, 1996. These purchases of investments were consummated in order to
maximize the return on cash collected by the French subsidiary on Ceredase
accounts receivable and cash received in the February 1996 Public Offering.
Financing activities (primarily the sale of Units in a Public Offering in
February 1996 and proceeds from borrowings on lines of credit) provided net
proceeds of $4,033,000, after repayment of $1,784,000 of long term debt, for the
nine months ended September 30, 1996. Operating activities for the nine months
ended September 30, 1996 provided net cash of $335,000. The loss on the disposal
of fixed assets and write-off of leasehold improvements associated with the
Registrant's relocation to smaller, more cost effective office space in April
1996 was $79,000.
A substantial amount of the Registrant's business is conducted in France and
Spain and is therefore influenced by the extent to which there are fluctuations
in the dollar's value against such countries' currencies. The effect of foreign
currency fluctuations on long lived assets for the nine months ended September
30, 1996 was a decrease of $426,000 and the cumulative historical effect was
16
a decrease of $1,020,000, as reflected in the Registrant's Consolidated Balance
Sheets in the "Liabilities and Stockholders' Equity" section. Although exchange
rates fluctuated significantly in recent years, the Registrant does not believe
that the effect of foreign currency fluctuation is material to the Registrant's
results of operations as the expenses related to much of the Registrant's
foreign currency revenues are in the same currency as such revenues. The
Registrant relies primarily upon financing activities to fund the operations of
the Registrant in the United States and has not transferred significant amounts
into or out of the United States in the recent past. In the event that the
Registrant is required to fund United States operations with funds generated in
France or 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.
To finance its operations, in October 1995 the Registrant conducted two private
placements of its securities. In the first placement, the Registrant sold to
certain purchasers for an aggregate purchase price of $720,000, 120,000 shares
of the Registrant's Common Stock and 12% promissory notes in the aggregate
principal amount of $720,000 which became payable in full upon the earlier of
July 31, 1996 or the closing of a public offering of the Registrant's
securities. In the second placement, the Registrant sold to certain purchasers
for an aggregate purchase price of $1,050,000, 131,250 shares of Common Stock
and 12% promissory notes in the aggregate principal amount of $1,050,000 which
became payable in full upon the earlier of September 30, 1996 or the completion
of a public offering. A Public Offering was completed in February 1996 and all
of such notes were repaid at that time or converted into Units.
An aggregate of 6,900 Units (the "Units") were sold in the February 1996 Public
Offering. Each Unit consisted of a One Thousand Dollars ($1,000) Principal
Amount 12% Convertible Senior Subordinated Debenture due February 13, 2006 and
1,000 Class A Redeemable Warrants, each to purchase one share of Common Stock
and one Class B Redeemable Warrant. Two Class B Redeemable Warrants entitle a
holder to purchase one share of Common Stock. The Debentures and Class A
Redeemable Warrants initially traded only as a Unit but began trading separately
on May 29, 1996. Interest on the Debentures is payable quarterly. The Debentures
are convertible prior to maturity, unless previously redeemed, at any time
commencing February 14, 1997 (the "Anniversary Date") into shares of Common
Stock at a conversion price per share of the lesser of $2.50 or 80% of the
average closing price of the Common Stock on the American Stock Exchange for the
20 consecutive trading days immediately preceding the Anniversary Date. Gross
and net proceeds (after deducting underwriting commissions and the other
expenses of the offering), were approximately $6,900,000 and $5,700,000,
respectively, a portion of which were used to retire $1,770,000 principal
balance of debt incurred in the private placements discussed above.
Of the Unit purchase price of $1,000, for financial reporting purposes, the
consideration allocated to the Debenture was $722, to the conversion discount
feature of the Debenture was $224 and to the 1,000 Class A Warrants was $54.
None of the Unit purchase price was allocated to the Class B Warrants. Such
allocation was based upon the relative fair values of each security on the date
of issuance. Such allocation resulted in recording a discount on the Debentures
of $1,918,000. The effective interest rate on the Debentures is 18.1%.
17
As discussed above, the Registrant completed private placements of its
securities totaling $1,770,000 during October 1995 in order to fund its
operations and completed a public offering of its securities totaling $6,900,000
in February 1996 to provide further liquidity. Management expects that as a
result of completing its recent financings, by carefully prioritizing research
and development activities and continuing its austerity program, the Registrant
should have sufficient liquidity to fund operations through 1997. The
Registrant, however, continues to explore alternative sources for financing its
business. In appropriate situations, that will be strategically determined, the
Registrant may seek financial assistance from other sources, including
contribution by others to joint ventures and other collaborative or licensing
arrangements for the development, testing, manufacturing and marketing of
products under development and the sale of certain of the assets of, or one or
more of its, subsidiaries.
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 the Registrant, the occurrence of which
involve certain risks and uncertainties that could cause the Registrant's actual
results to differ materially from those expected by the Registrant, including
the history of operating losses; uncertainty of future financial results;
possible negative cash flow from operating activities; additional financing
requirements; no assurance of successful and timely development of new products;
risks inherent in pharmaceutical development; dependance on regulatory
approvals; uncertainty of pharmaceutical pricing or profitability;
unpredictability of patent protection; rapid technological change; competition,
and other uncertainties detailed in the Registrant's Registration Statement on
Form S-1 (SEC Commission file No. 33-65125) declared effective by the Securities
and Exchange Commission on February 14, 1996.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Belmac Hygiene, Inc. ("Hygiene"), a subsidiary of the Registrant, filed an
action on December 9, 1994 in the United States District Court for the Southern
District of New York against Medstar, Inc. ("Medstar"), Maximed, Inc.
("Maximed") and Robert S. Cohen. The defendants are Hygiene's partners (or such
partner's control persons) in the Registrant's partnership with Maximed (the
"Partnership"), which was formed for the development and ultimate sale of
Maximed's intra-vaginal controlled release products. The action sought (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's representatives, and (ii) to recover damages as a result of
defendants' misrepresentations and breach of warranty in the Partnership
agreement. The defendants filed a counterclaim against Hygiene. Medstar also
filed a separate action on May 4, 1995 in the United States District Court for
the Southern District of New York against the Registrant alleging that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Registrant
pursuant to its guaranty of Hygiene's obligations. The issues were tried,
without a jury, on August 21 through 23, 1995. Thereafter, post-trial briefs and
proposed findings of fact and conclusions of law were submitted, and argument
was heard on October 25, 1995. On January 12, 1996, the Court ruled that the
Registrant's reliance on defendants' misrepresentation was not justified and
that the Registrant had performed its obligations under the Partnership
agreement. Accordingly, the Court rendered its decision dismissing all claims
and counter-claims asserted by the parties. On September 25, 1996, the
Registrant filed an appeal in the United States Court of Appeals for the Second
Circuit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1996:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
September 30, 1996.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended September 30, 1996.
19
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
November 12, 1996 By: /s/ James R. Murphy
------------------------
James R. Murphy
Chairman, President and Chief Executive Officer
(principal executive officer)
November 12, 1996 By: /s/ Michael D. Price
------------------------
Michael D. Price
Vice President, Chief Financial Officer,
Treasurer and Secretary (principal financial
and accounting officer)