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 June 30, 1999
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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
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Commission File Number 1-10581
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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.)
65 Lafayette Road, 3rd Floor, North Hampton, NH 03862
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(Current Address of Principal Executive Offices)
4890 W. Kennedy Blvd., Suite 400, Tampa, FL 33609
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(Former 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
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The number of shares of the Registrant's common stock outstanding as of August
4, 1999 was 9,248,973.
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
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INDEX
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Part I. FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Operations and of Comprehensive
Loss (unaudited) for the three months ended June 30, 1999
and 1998, and the six months ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Common Stockholders'
Equity (unaudited) for the six months ended June 30, 1999 5
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
June 30, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $4,019 $6,703
Receivables 3,945 3,730
Inventories 1,472 1,208
Prepaid expenses and other 739 820
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Total current assets 10,175 12,461
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Fixed assets, net 3,547 3,551
Drug licenses and related costs, net 4,705 2,433
Other non-current assets, net 1,671 1,873
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$20,098 $20,318
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $2,861 $2,835
Accrued expenses 1,620 1,563
Short term borrowings 1,289 1,223
Current portion of long term debt 5 5
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Total current liabilities 5,775 5,626
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Long term debt, net 5,462 5,410
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Other non-current liabilities 1,285 290
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Commitments and contingencies
Common Stockholders' Equity:
Common stock, $.02 par value,
authorized 35,000 shares,
issued and outstanding, 8,448 and
8,443 shares 169 168
Stock purchase warrants
(to purchase 6,343 and 5,928
shares of common stock) 875 556
Additional paid-in capital 83,742 83,728
Accumulated deficit (74,857) (73,858)
Accumulated other comprehensive loss (2,353) (1,602)
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7,576 8,992
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$20,098 $20,318
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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 For the Six
Months Ended Months Ended
June 30, June 30,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $4,750 $3,358 $9,108 $6,858
Cost of sales 1,993 1,385 4,008 2,895
----- ----- ----- -----
Gross margin 2,757 1,973 5,100 3,963
----- ----- ----- -----
Operating expenses:
Selling, general and administrative 2,469 2,171 4,911 4,095
Research and development 256 32 301 65
Depreciation and amortization 90 66 185 126
Nonrecurring charge - 1,176 - 1,176
----- ----- ----- -----
Total operating expenses 2,815 3,445 5,397 5,462
----- ----- ----- -----
Loss from operations (58) (1,472) (297) (1,499)
Other (income) expenses:
Interest expense 291 265 569 535
Interest income (54) (134) (122) (282)
Other (income) expense, net 2 - - -
----- ----- ----- -----
Loss before income taxes (297) (1,603) (744) (1,752)
Provision for income taxes 155 218 255 452
----- ----- ----- -----
Net loss (452) (1,821) (999) (2,204)
Other comprehensive (income) loss:
Foreign currency translation (gains) losses 252 (92) 751 24
----- ----- ----- -----
Comprehensive loss ($704) ($1,729) ($1,750) ($2,228)
====== ====== ====== ======
Basic net loss per common share ($0.05) ($0.22) ($0.12) ($0.27)
====== ====== ====== ======
Weighted average common shares outstanding 8,444 8,428 8,444 8,428
====== ====== ====== ======
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 COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$.02 Par Value Additional Accumu- Accumulated Other
Common Stock Paid-In lated Other Compre- Equity
----------- Capital Deficit hensive Loss Transactions Total
---------- ------- ------------- ------------ -----
Shares Amount
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Balance at December 31, 1998 8,443 $168 $83,728 ($73,858) ($1,602) $556 $8,992
Issuance of stock options/warrants - - - - - 319 319
Exercise of Class A Redeemable Warrants 5 1 14 - - - 15
Foreign currency translation adjustment - - - - (751) - (751)
Net loss - - - (999) - - (999)
----- ---- ------- -------- ------- ----- ------
Balance at June 30, 1999 8,448 $169 $83,742 ($74,857) ($2,353) $875 $7,576
===== ==== ======= ======== ======= ===== ======
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 Six
Months Ended
June 30,
(IN THOUSANDS) 1999 1998
---- ----
Cash flows from operating activities:
Net loss ($999) ($2,204)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 185 126
Nonrecurring charges - 158
Other non-cash items 451 211
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables (702) 199
Inventories (460) (48)
Prepaid expenses and other current assets (213) (368)
Other assets 107 105
Accounts payable and accrued expenses 510 474
Other liabilities 7 77
Capitalized acquisition costs - 448
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Net cash used in operating activities (1,114) (822)
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Cash flows from investing activities:
Acquisition of drug delivery technology/drug licenses (1,423) (138)
Additions to fixed assets, net (478) (24)
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Net cash used in investing activities (1,901) (162)
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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 Six
Months Ended
June 30,
------------
Cash flows from financing activities:
Net increase (decrease) in short term borrowings $238 ($641)
Proceeds from exercise of stock options/warrants, net 15 8
Payments on capital leases (3) (2)
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Net cash provided by (used in) financing activities 250 (635)
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Effect of exchange rate changes on cash 81 (27)
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Net decrease in cash and cash equivalents (2,684) (1,646)
Cash and cash equivalents at beginning of period 6,703 11,117
Cash and cash equivalents at end of period $4,019 $9,471
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Registrant paid cash during the period for (IN THOUSANDS):
Interest $477 $460
====== ======
Taxes $47 $406
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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):
Shares 735 -
====== ======
Amount $1,000 -
====== ======
During the six months ended June 30, 1999, the Registrant issued Warrants to
purchase 450,000 shares of Common Stock as partial consideration for the
purchase of drug delivery technology.
During the six months ended June 30, 1998, the Registrant issued Warrants to
purchase 425,000 shares of Common Stock in exchange for services.
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 an
international pharmaceutical and health care company engaged primarily in the
manufacturing, marketing and distribution of pharmaceutical products 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 has moved from a research
and development-oriented pharmaceutical company, developing products from the
chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one year or
currently marketed products. As a result of this transition, the Registrant has
decreased its research and development expenses dramatically over the past few
years as well as implemented cost-cutting measures throughout the Registrant's
operations. However, with the February 1999 acquisition of permeation
enhancement technology, limited development expenditures will be required prior
to entering into formal collaboration with other companies.
In February 1999, the Registrant acquired rights to certain U.S. and
international patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological tissues. The acquisition
price included a cash payment of approximately $1.1 million, an obligation to
issue 225,807 shares of Common Stock and ten-year warrants to purchase 450,000
shares of common stock. In addition, the Registrant obligated itself to issue
359,282 shares of Common Stock to Conrex Pharmaceutical Corporation. The total
value of all consideration paid for the Assets was approximately $2.5 million.
Furthermore, terms of this transaction provide for certain royalty payments upon
commercialization of products using the technologies purchased.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Registrant, at June 30, 1999 and
1998 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 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, 1998.
8
The consolidated financial statements include the accounts of the Registrant and
its wholly-owned subsidiaries: 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.; Bentley Pharma, Inc.; Pharma de
Espana, Inc.; and Belmac Jamaica, Ltd. Belmac Hygiene, Inc. entered into a 50/50
partnership with Maximed Corporation of New York in March 1994. Belmac Hygiene's
participation in the partnership is accounted for using the equity method. All
significant intercompany balances have been eliminated in consolidation. The
financial position and results of operations of the Company'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 for the period ended June 30, 1999 and 1998 are presented on a basis
consistent with the audited consolidated financial statements for the year ended
December 31, 1998 and contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Registrant's financial
position as of June 30, 1999 and the results of its operations and its cash
flows for the six months ended June 30, 1999 and 1998. The results of operations
for the six months ended June 30, 1999 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.
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):
June 30, 1999 December 31, 1998
------------ ----------------
Raw Materials $543 $505
Finished goods 929 703
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$1,472 $1,208
====== ======
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
9
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.
As discussed above, the Registrant acquired rights to certain U.S. and
international patents and related technology in February 1999. The purchase
price, which included cash, shares of Common Stock and warrants to purchase
Common Stock, of approximately $2.5 million has been capitalized as drug
licenses and related costs, net on the Consolidated Balance Sheets.
PROVISION FOR INCOME TAXES:
The Registrant recorded a provision for income taxes totaling $255,000 for the
six months ended June 30, 1999 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 loss primarily as a result of the increase in the
valuation allowance to offset domestic deferred tax assets and certain
nondeductible expenses in Spain.
BASIC NET LOSS PER COMMON SHARE:
Basic net loss per common share is presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Basic net 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 loss per common share is not presented, as it
is antidilutive. The effect of the Registrant's outstanding stock options, stock
warrants and convertible debentures were considered in the diluted loss per
share calculation.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with the current
period's presentation format.
10
BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 1999 versus Three Months Ended June 30, 1998
- ------------------------------------------------------------------------
The Registrant reported revenues of $4,750,000 and a net loss of $452,000 or
$.05 per common share for the three months ended June 30, 1999 compared to
revenues of $3,358,000 and a net loss of $1,821,000 or $.22 per common share for
the same period in the prior year. Excluding the effect of the 1998 nonrecurring
charge of $1,176,000, representing the write-off of previously capitalized
acquisition costs, the Registrant's net loss for the three months ended June 30,
1998 would have been $645,000 or $.08 per common share.
The 41% 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 49% in local currency; however, fluctuations in foreign
currency exchange rates resulted in revenues of $4,750,000 in U.S. dollars for
the quarter ended June 30, 1999.
Gross margins for the quarter ended June 30, 1999 decreased slightly to 58%
compared to 59% in the comparable period of the prior year, primarily as a
result of a change in the mix of products sold during the quarter ended June 30,
1999 compared to the quarter ended June 30, 1998.
Selling, general and administrative expenses increased 14% or $298,000, to
$2,469,000 for the three months ended June 30, 1999 compared to $2,171,000 for
the same period in the prior year. Selling, general and administrative expenses
as a percentage of revenues, however, have improved, decreasing to 52% for the
quarter ended June 30, 1999 from 65% in the comparable period of the prior year.
A significant portion of these expenses are marketing and selling costs, which
are necessary for the Registrant's growth in sales and market share in Spain. To
the extent practical, however, the Registrant intends to continue its efforts to
control general and administrative expenses in its effort to reach and maintain
profitability.
Research and development expenses totaled $256,000 for the quarter ended June
30, 1999 compared to $32,000 for the same period of the prior year. The increase
in research and development expenses is primarily the result of establishing a
laboratory in the Registrant's new U.S. headquarters, located in New Hampshire.
This laboratory will be used by the Registrant to develop its recently acquired
permeation enhancement technology. The minimal 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; however, future
expenditures will be greater than in recent periods due to planned limited
development expenditures related to recently acquired permeation enhancement
technology.
11
Depreciation and amortization expenses totaled $90,000 for the three
months ended June 30, 1999, compared to $66,000 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
higher amortization charges with respect to recently acquired drug licenses and
technologies.
Interest expense totaled $291,000 for the three months ended June 30, 1999
compared to $265,000 for the same period of the prior year. Interest income
totaled $54,000 for the three months ended June 30, 1999, compared to $134,000
for the same period of the prior year. The decrease was due to interest earned
on lower short-term interest bearing investment balances during the second
quarter of 1999.
The Registrant recorded a provision for income taxes totaling $155,000 for the
three months ended June 30, 1999 as a result of taxable income earned in Spain.
The Registrant reported a loss from operations of $58,000 for the quarter ended
June 30, 1999 compared to a loss from operations of $1,472,000 in the same
period of the prior year. Excluding the effect of the 1998 nonrecurring charge,
the Registrant's loss from operations for the three months ended June 30, 1998
would have been $296,000. The effect of combining non-operating items, primarily
interest expense of $291,000, interest income of $54,000 and an income tax
provision of $155,000 resulted in a net loss of $452,000, or $.05 per common
share for the quarter ended June 30, 1999, compared to the net loss in the
comparable period of the prior year, of $1,821,000, or $.22 per common share.
Excluding the 1998 nonrecurring charge, the net loss for the three months ended
June 30, 1998 would have been $645,000 or $.08 per common share.
Six Months Ended June 30, 1999 versus Six Months Ended June 30, 1998
- --------------------------------------------------------------------
The Registrant reported revenues of $9,108,000 and a net loss of $999,000 or
$.12 per common share for the six months ended June 30, 1999 compared to
revenues of $6,858,000 and a net loss of $2,204,000 or $.27 per common share for
the same period in the prior year. Excluding the effect of the 1998 nonrecurring
charge of $1,176,000, representing the write-off of previously capitalized
acquisition costs, the Registrant's net loss for the six months ended June 30,
1998 would have been $1,028,000 or $.13 per common share.
The 33% 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 35% in local currency in the six months ended June 30,
1999 compared to the same period in the prior year; however, fluctuations in
foreign currency exchange rates resulted in revenues of $9,108,000 when
expressed in U.S. dollars.
Gross margins for the six months ended June 30, 1999 declined slightly to 56%
compared to gross margins of 58% in the comparable period of the prior year,
primarily as a result of a change in mix of products sold during the six months
ended June 30, 1999 compared to the six months ended June 30, 1998.
12
Selling, general and administrative expenses increased by $816,000 to
$4,911,000 (54% of revenues) for the six months ended June 30, 1999 compared to
$4,095,000 (60% of revenues) for 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 growth in sales and market share in Spain. In
addition, certain nonrecurring compensation charges were recorded during the six
months ended June 30, 1999, which represent bonuses in the form of Common Stock,
in lieu of cash, issuable to executive officers of the Registrant. 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 $301,000 for the six months ended June
30, 1999 compared to $65,000 for the same period of the prior year. The increase
in research and development expenses is primarily the result of establishing a
laboratory in the Registrant's new U.S. headquarters, located in New Hampshire.
This laboratory will be used by the Registrant to develop its recently acquired
permeation enhancement technology. The minimal 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.
Depreciation and amortization expenses totaled $185,000 for the six months ended
June 30, 1999, compared to $126,000 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
higher amortization charges with respect to recently acquired drug licenses and
technologies.
Included in operating expenses for the six months ended June 30, 1998 is a
nonrecurring charge of $1,176,000, which represents the previously capitalized
costs specific to the abandoned Schwarz Pharma and other related acquisitions.
These costs were written off during the second quarter of 1998 after
negotiations ended during May 1998.
Interest expense totaled $569,000 for the six months ended June 30, 1999
compared to $535,000 for the same period of the prior year. Interest income was
$122,000 for the six months ended June 30, 1999 compared to $282,000 for the
same period of the prior year. The decrease was due to interest earned on lower
short-term interest bearing investment balances during the six months ended June
30, 1999.
The Registrant recorded a provision for income taxes totaling $255,000 for the
six months ended June 30, 1999 as a result of taxable income earned in Spain.
The Registrant reported a loss from operations of $297,000 for the six months
ended June 30, 1999 compared to $1,499,000 in the same period of the prior year.
Excluding the effect of the nonrecurring charge, the Registrant's loss from
operations for the six months ended June 30, 1998 would have been $323,000. The
effect of combining non-operating items, primarily interest
13
expense of $569,000, interest income of $122,000 and provision for income taxes
of $255,000 resulted in a net loss of $999,000, or $.12 per common share for the
six months ended June 30, 1999, compared to the net loss in the comparable
period of the prior year, of $2,204,000, or $.27 per common share. Excluding the
1998 nonrecurring charge, the net loss for the six months ended June 30, 1998
would have been $1,028,000 or $.13 per common share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total assets decreased from $20,318,000 at December 31, 1998 to $20,098,000 at
June 30, 1999, while Common Stockholders' Equity decreased from $8,992,000 at
December 31, 1998 to $7,576,000 at June 30, 1999. The decrease in Common
Stockholders' Equity reflects primarily the loss incurred by the Registrant for
the six months ended June 30, 1999 and the negative impact of the Spanish peseta
(and related euro) exchange rate on the foreign currency translation, offset by
the increase resulting from the Registrant's issuance of stock purchase warrants
as a result of the February 1999 acquisition of permeation enhancement
technology.
The Registrant's working capital decreased from $6,835,000 at December 31, 1998
to $4,400,000 at June 30, 1999, primarily as a result of the loss from
operations incurred by the Registrant during the period and use of cash for the
acquisition of permeation enhancement technology in the U.S. and for
manufacturing facility renovations in Spain.
Cash and cash equivalents decreased from $6,703,000 at December 31, 1998 to
$4,019,000 at June 30, 1999, primarily as a result of using cash for operating
activities, purchase of permeation enhancement technology, renovation of the
manufacturing facility in Spain and establishing a laboratory in the U.S.
Included in cash and cash equivalents at June 30, 1999 are approximately
$3,652,000 of short term investments considered to be cash equivalents.
Accounts receivable increased from $3,730,000 at December 31, 1998 to $3,945,000
at June 30, 1999 primarily as a result of increased sales during the six months
ended June 30, 1999 offset by fluctuations in foreign currency exchange rates.
The Registrant has not experienced any material delinquent accounts. Inventories
increased to $1,472,000 at June 30, 1999 compared to $1,208,000 at December 31,
1998 in order to accommodate the increase in sales volume, to avoid inventory
shortages and resulting backlogs in the summer holiday season, offset in part by
fluctuation in foreign currency exchange rates. Prepaid expenses and other
current assets decreased from $820,000 at December 31, 1998 to $739,000 at June
30, 1999, primarily as the result of recurring amortization charges, other
recurring business activities during the quarter ended June 30, 1999 and the
effect of fluctuation in foreign currency exchange rates.
The combined total of accounts payable and accrued expenses increased from
$4,398,000 at December 31, 1998 to $4,481,000 at June 30, 1999, primarily as a
result of purchasing additional inventory to accommodate the increase in sales
volume, to avoid inventory shortages and resulting backlogs in the summer
holiday season, and an increase in the accrual for income taxes payable, offset
by fluctuations in foreign currency exchange rates. Short term borrowings
increased from $1,223,000 at December 31, 1998 to $1,289,000 at June 30, 1999,
as a result of higher outstanding
14
balances on lines of credit used for operating purposes in Spain, offset by the
effect of fluctuation in foreign currency exchange rates.
Fixed assets, net decreased from $3,551,000 at December 31, 1998 to $3,547,000
at June 30, 1999, due primarily to renovations at the Spanish manufacturing
facility and establishing a laboratory in the U.S., offset by recurring
depreciation charges and the effect of fluctuations in foreign currency exchange
rates.
Drug licenses and related costs, net increased from $2,433,000 at December 31,
1998 to $4,705,000 at June 30, 1999, primarily due to the February 1999
acquisition of permeation enhancement technology, which was purchased for a
combination of cash, shares of the Registrant's Common Stock and issuance of
stock purchase warrants and other drug licenses, offset by the effect of
fluctuations in foreign currency exchange rates and recurring amortization
charges.
Other non-current assets decreased from $1,873,000 at December 31, 1998 to
$1,671,000 at June 30, 1999, primarily due to the effect of fluctuations in
foreign currency exchange rates and recurring amortization charges.
Long term debt increased from $5,410,000 at December 31, 1998 to $5,462,000 at
June 30, 1999, due primarily to accretion recorded on the Debentures issued in
the Registrant's February 1996 public offering. Other non-current liabilities
increased from $290,000 at December 31, 1998 to $1,285,000 at June 30, 1999,
primarily as a result of recording an obligation to issue approximately 585,000
shares of Common Stock and 450,000 stock purchase warrants as the result of the
February 1999 acquisition of permeation enhancement technology and an obligation
to issue 150,000 shares of Common Stock to executive officers of the Registrant,
which shares represent bonuses in lieu of cash. Such shares of Common Stock were
issued in July 1999.
Investing activities, primarily the acquisition of drug delivery technology and
capital improvements to the manufacturing facility in Spain and establishing a
laboratory in the U.S., used net cash of $1,901,000 during the six months ended
June 30, 1999. Financing activities, primarily short term borrowings and the
exercise of 4,700 Class A Redeemable Warrants, for the six months ended June 30,
1999, provided net cash of $250,000 and operating activities for the six months
ended June 30, 1999 used net cash of $1,114,000.
Given the Registrant's current liquidity and cash balances and considering its
future strategic plans, the Registrant should have sufficient liquidity to fund
operations into the year 2000, which should be a sufficient time frame for the
Registrant to advance its strategic objectives and generate revenues and cash
flow to support the Registrant's cash requirements. 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 and the sale of certain of the assets of, or its subsidiaries.
15
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
The Year 2000 Issue has arisen because many existing computer programs use only
the last two digits of any particular year, rather than all four digits, to
identify that year. These computer programs cannot properly distinguish between
the years 1900 and 2000 or 1901 and 2001, for example. If not corrected, many
computer applications could fail or create erroneous results. The Year 2000
Issue can affect information technology ("IT") as well as non-IT systems. In
fact, many non-IT systems typically include imbedded technology such as
microcontrollers. These types of systems are more difficult to assess and repair
than IT systems. It may even be necessary to replace non-IT systems if they
cannot be modified. The extent of the potential impact of the Year 2000 Issue is
not yet known, and if not timely corrected, could affect the global economy.
The Registrant has recognized the need to ensure that its business operations
will not be adversely impacted by the Year 2000 Issue and is aware of the time
sensitive nature of the problem. As a result, the Registrant has completed an
assessment of how it may be impacted by the Year 2000 Issue. The Registrant
engaged information system consultants to evaluate its systems and technology.
The Registrant's assessment process included a review of its IT as well as
non-IT systems. The Registrant has also considered the potential impact on its
operations and business model in the event that third parties with whom it has
material relationships fail to resolve their own Year 2000 issues.
The Registrant has completed its assessment phase of the Year 2000 Issue. As a
result, it was determined that certain IT systems (hardware and software) needed
upgrading or replacing. The Registrant has completed the remediation project of
upgrading and/or replacing its IT systems where appropriate. In addition, the
Registrant is in the process of installing a new IT system at its operating
subsidiary in Spain, at a total approximate cost of $80,000, approximately
eighty-five percent of which has been incurred and capitalized to date. This
project was not accelerated nor precipitated by the Year 2000 Issue; however, it
is anticipated that all aspects of the new system are Year 2000 compliant. Such
expenditures have been budgeted and are being funded from operations. It is
anticipated that the new system will be completely installed and tested before
the end of the third quarter of 1999. Management of the Registrant has also
conducted a review of its non-IT systems and has concluded that it is not
materially exposed to non-IT system risks.
The Registrant has polled its significant suppliers, service providers and other
third parties with whom it has material relationships to determine the extent to
which it is vulnerable to a failure of any such third party to adequately
address its own Year 2000 Issue. The Registrant has received responses from
approximately 91% of such parties, and is following up on those who have not
responded. No additional risks have been identified as a result of the responses
received to date.
External consultants have tested the Registrant's systems, other than the new IT
system in Spain, and have determined that its existing upgraded/replaced IT
systems are now Year 2000 compliant. Upon completion of the installation of the
new IT system in Spain, it too will be tested for Year 2000 compliance.
16
In the view of management of the Registrant, not only is it possible that
management may not have access to vital information, which is used to make
management decisions, but the manufacturing process could even be interrupted,
due to unavailability of raw materials or inoperable equipment and/or systems if
the Registrant's assessment and remediation program is not successful.
The Registrant's total Year 2000 project cost and estimates to complete the
project include the estimated costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Registrant's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Registrant's systems, would not have a material adverse effect on the
Registrant. The Registrant has determined it has no exposure to contingencies
related to the Year 2000 Issue for the products it has sold or anticipates
selling in the future.
Although the Registrant cannot determine the severity with which the Year 2000
issue will affect, either directly or indirectly, the Registrant's operations
and financial condition, the Registrant believes the most reasonably likely
worst case scenario in the event the Registrant or its significant customers,
vendors, or service providers fail to resolve the Year 2000 issue would be
inability on the part of the Registrant to manufacture, market, and distribute
its products and receive revenues from the sale of such products for a
substantial period of time following the commencement of the Year 2000. Factors
that could cause material differences in results, many of which are outside the
control of the Registrant, include, but are not limited to, the Registrant's
ability to identify and correct all relevant computer software, the accuracy of
representations by manufacturers of the Registrant's systems that their products
are Year 2000 compliant, the ability of the Registrant's customers, vendors and
service providers to identify and resolve their own Year 2000 issues and the
Registrant's ability to respond to and dedicate adequate resources to resolve
unforeseen complications arising as a result of the Year 2000 issue.
Although the Registrant continues to focus on the Year 2000 issue and expects to
be Year 2000 compliant in a timely manner, the Registrant is in the process of
developing a contingency plan intended to mitigate the possible disruption in
business operations that may result from the Year 2000 issue. Contingency plans
to address the most reasonably likely worst case scenario described above may
include the purchase of alternative hardware and software and other appropriate
measures. Such plans will not, however, guarantee that no material adverse
effects will occur.
The Registrant plans to complete its Year 2000 project by September 30, 1999 at
a total cost of approximately $85,000 excluding the new IT system in Spain. The
total remaining cost of the Year 2000 project is estimated at $10,000, excluding
the new IT system installation in Spain, discussed above. Of the total project
cost, approximately $35,000 is attributable to the purchase of new hardware and
software, which has been capitalized. To date, the Registrant has incurred and
expensed approximately $50,000 related to the assessment of, remediation and
testing for compliance with its Year 2000 project.
The costs of the Year 2000 project and the date on which the Registrant plans to
complete the Year
17
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Because of the importance of addressing the Year 2000 Issue, the Registrant is
developing contingency plans to address any issues that may not be corrected by
implementation of the Registrant's Year 2000 project in a timely manner. Such
contingency plans may include considerations such as stock piling of raw
materials, production of greater than normal quantities of finished goods, and
implementation of manual back-up systems where appropriate.
DERIVATIVE INSTRUMENTS AND HEDGING
- ----------------------------------
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends upon the intended use of the derivative and resulting
designation if used as a hedge. The FASB has delayed the date for mandatory
adoption and implementation of SFAS 133. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and is not intended to
be applied retroactively. Management does not believe that the adoption of SFAS
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
eurozone, 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 from 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 is
fixed at 166.39 pesetas. The exchange rate at June 30, 1999 and December 31,
1998 was 160.88 and 141.97 pesetas per U.S. dollar, respectively. The weighted
average exchange rate for the six months ended June 30, 1999 and 1998 was 152.86
and 154.27 pesetas per U.S. dollar, respectively.
18
The euro has reached new lows recently, almost reaching parity with the dollar.
Economic news in each of the eleven EU States utilizing the euro impacts its
value. Specifically, negative German economic news and a sharp slide in the
Swiss Franc recently have combined to further erode the value of the euro.
The effect of foreign currency fluctuations on long lived assets for the six
months ended June 30, 1999 was a decrease of $751,000 and the cumulative
historical effect was a decrease of $2,353,000, as reflected in the Registrant's
Consolidated Balance Sheets in the "Liabilities and Stockholders' Equity"
section. Although exchange rates recently fluctuated significantly, 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. 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.
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
that it could be required to cut back or stop operations if it is unable to
raise or obtain needed funding; a history of losses; 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 its patent position is uncertain and its success depends on its proprietary
rights; that it may have to lower prices or spend more money to effectively
compete against companies with greater resources, which could result in lower
revenues and/or profits; that rapid technological change may result in product
obsolescence before a significant portion of the related costs are recouped;
product liability; doing business outside of the United States; that its
computer system may not recognize the Year 2000, which may affect computer
systems and disrupt its business; and other uncertainties detailed in the
Registrant's Registration Statement on Form S-3 (SEC Commission file No.
333-80729) declared effective by the Securities and Exchange Commission on July
22, 1999 and any amendments thereto.
19
PART II. OTHER INFORMATION
-----------------
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------
The Annual Meeting of Stockholders of the Registrant was held on June 30, 1999
for the purpose of electing five directors and voting on proposals to change the
Registrant's state of incorporation from Florida to Delaware and adopt a
Certificate of Incorporation and Bylaws which conform to Delaware law and adopt
various "anti-takeover" provisions and to amend the Registrant's 1991 Stock
Option Plan (the "1991 Plan") to increase the number of shares of Common Stock
for which options maybe granted. Proxies for the meeting were solicited pursuant
to Regulation 14D of the Securities Exchange Act of 1934, as amended, and there
was no solicitation in opposition. The following members were elected to the
Registrant's Board of Directors.
Nominee Term Expiring Shares Voted For Shares Voted Against
- ------- ------------- ---------------- --------------------
Miguel Fernandez 2002 7,927,139 140,257
James R. Murphy 2002 7,929,334 138,062
Robert M. Stote 2002 7,929,234 138,162
William Packer 2001 7,927,139 140,257
Russell Cleveland 2000 7,929,619 137,777
Directors whose terms of office continued after the meeting are as follows:
Name Term Expiring
- ---- -------------
Charles L. Bolling 2001
Robert J. Gyurik 2001
Michael McGovern 2000
Michael D. Price 2000
The proposal to change the Registrant's state of incorporation from Florida to
Delaware and adopt a Certificate of Incorporation and Bylaws which conform to
Delaware law and adopt "anti-takeover" provisions was approved by the following
vote:
Shares Voted For Shares Voted Against Broker Non-Votes and Shares Abstaining
---------------- -------------------- --------------------------------------
4,676,646 130,362 3,260,388
The proposal to amend the 1991 Plan to increase the number of shares of Common
Stock for which options may be granted under the 1991 Plan from 500,000 to
1,000,000 shares was approved by the following vote:
Shares Voted For Shares Voted Against Broker Non-Votes and Shares Abstaining
---------------- ------------------- --------------------------------------
4,226,825 395,457 3,445,114
20
OTHER INFORMATION
- -----------------
The Registrant has relocated its corporate headquarters to New
Hampshire. All future correspondence should be addressed to:
Bentley Pharmaceuticals, Inc.
65 Lafayette Road, 3rd Floor
North Hampton, NH 03862
Telephone: 603.964.8006
Facsimile: 603.964.6889
www.bentleypharm.com
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 June 30, 1999:
None.
The Registrant has not filed any reports on Form 8-K subsequent to
June 30, 1999.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 1999.
21
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
August 11, 1999 By: /s/ James R. Murphy
----------------------------------
James R. Murphy
Chairman, President and Chief
Executive Officer
(principal executive officer)
August 11, 1999 By: /s/ Michael D. Price
----------------------------------
Michael D. Price
Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -----------
27.1 Financial Data Schedule