-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrlAdMhAQ2hgZaKegsk0gxAx5MkadJu5q52M1Eui2dHde0EY80r2sh4qeUnR4Ike dIKn/xVegP9sRaxvVrkV+g== 0000910680-98-000161.txt : 19980401 0000910680-98-000161.hdr.sgml : 19980401 ACCESSION NUMBER: 0000910680-98-000161 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENTLEY PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000821616 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 591513162 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10581 FILM NUMBER: 98584131 BUSINESS ADDRESS: STREET 1: 4830 WEST KENNEDY BLVD STREET 2: SUITE 548 CITY: TAMPA STATE: FL ZIP: 33609 BUSINESS PHONE: 8132864401 MAIL ADDRESS: STREET 1: 4830 WEST KENNEDY BLVD STREET 2: SUITE 548 CITY: TAMPA STATE: FL ZIP: 33609 FORMER COMPANY: FORMER CONFORMED NAME: BELMAC CORP /FL/ DATE OF NAME CHANGE: 19920703 10-K 1 FOR FYE DECEMBER 31, 1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1997 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 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.02 par value American Stock Exchange and Pacific Exchange, Inc. 12% Convertible Senior American Stock Exchange and Subordinated Debentures Pacific Exchange, Inc. Class A Redeemable Warrants American Stock Exchange and Pacific Exchange, Inc. Class B Redeemable Warrants Applications Pending Securities registered pursuant to section 12(g) of the Act: None 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. Title of Class Aggregate Market Value As of Close of Business on -------------- ---------------------- -------------------------- Common Stock, $.02 $24,900,000 March 26, 1998 par value Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title of Class Shares Outstanding As of Close of Business on -------------- ------------------ -------------------------- Common Stock, $.02 8,427,699 March 26, 1998 par value DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 1998 Annual Meeting of Stockholders - Incorporated by Reference into Part III of this Form 10-K PART I ITEM 1. BUSINESS GENERAL Bentley Pharmaceuticals, Inc. (the "Registrant") is an international pharmaceutical and health care company engaged in the manufacturing, marketing and distribution of pharmaceutical products in Spain, with limited distribution of health care products in the United States. The Registrant was organized under the laws of the State of Florida in February 1974. In Spain, the Registrant acquires, licenses or develops and registers late stage products, and manufactures, packages and distributes its own products and products under contract for other pharmaceutical companies. The Registrant divested its french subsidiary, Chimos/LBF S.A. (referred to herein as Chimos/LBF) in June 1997 which, until such time, consisted of the low margin brokerage of fine chemicals, sourcing of raw materials and pharmaceutical intermediaries and the distribution of biotechnology or orphan drugs (See "--Pharmaceutical Marketing and Sales in France"). In the United States, the Registrant markets disposable linens, which are manufactured under contract, to emergency health care services. The percentage of the Registrant's total revenues for the year ended December 31, 1997 attributable to its operations in Spain, France and the United States are approximately 84%, 14% and 2%, respectively. The Registrant's pharmaceutical operations in Spain are a result of its 1992 acquisition of Rimafar S.A. (subsequently renamed and referred to herein as Laboratorios Belmac S.A.). 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, which required 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. The Registrant emphasizes product distribution in Spain, strategic alliances and product acquisitions, which management of the Registrant expects will move the Registrant closer to profitability in the near future. The Registrant has entered into a negotiated letter of intent to purchase domestic and international rights to a portfolio of branded drugs, with an emphasis in gastrointestinal products, and a manufacturing facility located in Mequon, Wisconsin, from Schwarz Pharma, Inc. The letter of intent, dated July 21, 1997, was recently amended to take into consideration the possible transfer of control of the Registrant's Spanish subsidiary, Laboratorios Belmac, to Schwarz Pharma, Inc. and will serve as the basis for negotiations for the definitive agreements. The proposed transaction is subject to completion of due diligence, the execution of such definitive agreements and approval of the Registrant's stockholders and debenture holders. Upon execution of the letter of intent, the Registrant was required to remit a non-refundable deposit in the amount of $100,000. 2 The Registrant's sales by its primary product lines are as follows (In Thousands): For the Year Ended December 31, 1997 1996 1995 ------- ------- ------- Pharmaceutical and Consumer Health Care Products $14,520 $22,924 $31,188 Disposable Linen Products 382 209 249 ------- ------- ------- Total $14,902 $23,133 $31,437 ======= ======= ======= PRODUCT LINES The Registrant currently manufactures, markets and sells pharmaceutical products in Spain, and markets and sells disposable linens in the United States. PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN Laboratorios Belmac S.A., the Registrant's subsidiary in Spain ("Laboratorios Belmac"), manufactures and markets pharmaceutical products within four primary therapeutic categories of cardiovascular, gastrointestinal, neurological, and infectious diseases. The Registrant manufactures or distributes approximately 40 dosage forms of various pharmaceuticals in its manufacturing facility in Zaragoza, Spain both for its own sales and under contract for others. The manufacturing facility was recently renovated and brought into full compliance with European Union Good Manufacturing Practices (GMPs) for solid and liquid dosage forms. Among the products Laboratorios Belmac manufactures and/or distributes, each of which is registered with Spain's Ministry of Health, are: Belmazol(R). Belmazol, whose generic name is omeprazole, is used primarily for hyperacidity problems related to ulcers and, secondarily, for the treatment of gastroesophageal reflux disease. Omeprazole is a proton pump inhibitor, which inhibits the hydrogen/potassium ATPase enzyme system at the secretory surface of gastric parietal cells. Because this enzyme system is regarded as an acid pump within the gastric mucosa, it has been characterized as a gastric acid pump inhibitor in that it blocks the final step of acid production. This compound has been used in combination with antibiotics for the treatment of ulcers when it is suspected that Helicobacter pylori, a bacteria, is the etiologic agent. Omeprazole is marketed in the United States by Astra-Merck. Controlvas(R). Controlvas, whose generic name is enalapril, is an angiotensin converting enzyme inhibitor useful in the treatment of hypertension and congestive heart failure. Enalapril is marketed in the United States by Merck & Company. Belmalax(R). Belmalax, whose generic name is lactulose, is used primarily for treating constipation in the elderly and, secondly, for the treatment of hepatic encephalopathy, a central nervous system impairment. The degradation of lactulose in the intestine acidifies the colon contents. Ammonia, which is a cause of encephalopathy, will migrate into the colon, be transformed into the ammoniumion and eliminated from the body. 3 EZ Detect Home Test(TM). The EZ Detect Home Test detects minute traces of blood in the stool. The presence of blood in the stool may indicate bleeding problems such as cancer of the colon or rectum, ulcers, hemorrhoids, polyps, colitis, diverticulitis and other intestinal disorders. The test is more safe and sanitary and easier to use than other test kits on the market. The test is manufactured by Biomerica, Inc. in Newport Beach, California and distributed by Laboratorios Belmac. EZ-H.P.(TM). EZ-H.P. is a rapid version of the original H. pylori Test GAP that was the first test of its kind to be commercialized. The H. pylori Test GAP was developed to detect the presence of Helicobacter pylori, the bacterium responsible for up to 90% of all ulcers. The EZ-H.P. can be used in doctors' offices and requires very few steps to perform compared to other products. The test is manufactured by Biomerica, Inc. in Newport Beach, California and distributed by Laboratorios Belmac. Finedal(R). Finedal is an anti-obesity agent of the amphetamine class, chlorbenzorex, for the treatment of obesity in conjunction with dietary control but with reduced adverse effects common to that class of compounds. Loperamida(R). Loperamida, whose generic name is loperamide hydrochloride, a product launched by the Registrant in Spain in March 1995, is a compound that inhibits gastrointestinal motility and is useful in the treatment of diarrheal conditions and colitis. Loperamide hydrochloride is marketed in the United States by several drug companies, including McNeil, Proctor & Gamble, Novo Pharm and Geneva. Lactoliofil(R). Lactoliofil is an anti-diarrheal agent whose mechanism of action is the restoration of gastrointestinal flora. Ergodavur(R), Neurodavur(R) and Neurodavur Plus(R). Ergodavur, Neurodavur and Neurodavur Plus are vitamin B compounds used for the enhancement of activity in the central and peripheral nervous systems. Diflamil(R). Diflamil is an anti-inflammatory analgesic used in the treatment of arthritis. Resorborina(R). Resorborina is a compound that has local anesthetic and anti-inflammatory properties for the treatment of pharyngitis and mouth afflictions. Onico-Fitex(R) and Fitex E(R). Onico-Fitex and Fitex E are compounds used to treat local fungal infections, especially around the nail beds. Otogen(R). Otogen is a product used for the treatment of ear infections and ear pain. Spirometon(R). Spirometon is a combination of spironolactone and bendroflumethazide useful in the treatment of congestive heart failure, hypertension and edema. (Spirometon diuretics preserve the body's supply of potassium). 4 Anacalcit(R). Anacalcit is a calcium-binding product used for the treatment of kidney stones. The Spanish government has specifically requested that Laboratorios Belmac continue to manufacture this product as Laboratorios Belmac is the only supplier of this type of product in Spain. Rofanten(R). Rofanten is the Registrant's formulation of naproxen sodium, an anti-inflammatory/analgesic. Relaxibys(R). Relaxibys is a combination of an analgesic (paracetamol) and a muscle relaxant (carisoprodol) purchased from Econature. Generic Antibiotics. Laboratorios Belmac sells various other types of generic antibiotics for which patent protection no longer exists, such as amoxicillin, ampicillin (Bactosone Retard(R)) and injectable forms of penicillin. Controlvas and Belmazol, together, represent approximately 55% of the sales of Laboratorios Belmac. As the Spanish government did not recognize international conventions for patent protection for pharmaceutical products until 1992, the Registrant, while owning the right to manufacture the drugs described above as well as other pharmaceuticals, will often be one of several companies which has the right to manufacture and sell products which are patent protected in other parts of the world. The Spanish regulatory authorities specify the amounts each company can charge for its products. Therefore, the Registrant's competitors may sell similar products at the same, higher or lower prices. Many of these competitors are larger, better capitalized and have larger sales networks than the Registrant. The Registrant maintains an internal marketing and sales staff of approximately 67, including 58 employees and 9 independent sales representatives working on commission in Spain to market the pharmaceuticals it produces. The Registrant's sales force competes by emphasizing highly individualized customer service in all major cities, provinces and territorial islands of Spain. In 1995, the Registrant commenced the export of pharmaceuticals manufactured by Laboratorios Belmac outside Spain through local distributors and brokers, particularly in Eastern Europe, Northern Africa, China, the Middle East, Central and South America. Contract Manufacturing. Since Laboratorios Belmac currently utilizes less than 100% of its plant capacity to manufacture its own products, Laboratorios Belmac has engaged in contract manufacturing of pharmaceuticals owned by other companies such as Rhone-Poulenc's subsidiary Natterman S.A., Italpharmaco, Ratiopharm, Juste, Wasserman-Chiese, Vir, Laboratorios Juventus, S.A. and Ethypharm. Other contracts are contemplated in the future. The Registrant manufactures these pharmaceuticals to its customers' specifications, and packages them with the customers' labels. Occasionally, to assure product uniformity and quality, employees of these customers will work at the Registrant's manufacturing facility. As a result of Spain's entry into the European Union, Spain implemented new pharmaceutical 5 manufacturing standards and the Registrant was required to modify its facility to comply with these regulations. Laboratorios Belmac accomplished such renovations without interruption of sales or distribution. After an inspection, in July 1995 the operating areas of the facility were determined to be in compliance with European GMPs by Spain's Ministry of Health. PHARMACEUTICAL MARKETING AND SALES IN FRANCE Until its divestiture in June 1997, the Registrant's operations in France consisted of the import and distribution of specialty pharmaceutical products to hospitals and others in France as well as the concentration of the sales of "orphan drugs" (drugs used for the treatment of rare diseases) and biotechnology products. The Registrant had marketed throughout France over 26 pharmaceutical products from Europe and the United States. The primary customer of Chimos/LBF was Pharmacie Centrale des Hopitaux. Chimos/LBF marketed Ceredase; a drug used in the treatment of Gaucher's Disease, in France until the distribution agreement between Genzyme Corporation and Chimos/LBF expired on March 31, 1996. Consequently, the Registrant's sales in France declined significantly beginning in the second quarter of 1996 as a result of the expiration of the distribution agreement. The Registrant completed the sale of Chimos/LBF, for approximately $3,650,000 on June 26, 1997. The Registrant has since received approximately $3,300,000, including approximately $2,600,000 of cash and cash equivalents which resided on Chimos/LBF's books prior to its disposition, of which approximately $500,000 was used to repay indebtedness to the former subsidiary. An escrow fund in the amount of approximately $350,000, representing the balance due the Registrant, has been established for certain contingent obligations or liabilities. In the opinion of management, the resolution of those contingencies will have no material effect on the Registrant's financial position or results of operation. The Registrant recorded a loss of $591,000 related to this divestiture, including realized exchange loss of $386,000 due to fluctuations in the currency exchange rates used to translate the foreign currency financial statements. MARKETING AND DISTRIBUTION OF DISPOSABLE LINENS IN THE UNITED STATES The Registrant markets and distributes disposable linen products to the emergency health care industry in the United States through Bentley Healthcare Corporation, one of the Registrant's U.S. subsidiaries ("Healthcare"). These disposable linens include products such as blankets, sheets and pillowcases and are distributed to entities engaged in the provision of emergency health care services, such as emergency rooms and ambulance services, located primarily in the southwestern region of the United States. Healthcare receives orders for these products at the Registrant's headquarters in Tampa, Florida and subcontracts the manufacturing of the disposable linens in accordance with Healthcare's specifications. The raw materials for these products are provided by Healthcare and stored with one of the manufacturers until needed. Once produced, the products are shipped directly to the customers from the manufacturer or held in inventory in anticipation of customer demand. The supply of disposable linens to health care providers in the United States is a highly competitive business that includes many large companies. The Registrant concentrates its marketing on the emergency services segment of the health care market, where Bentley Healthcare believes it can compete based upon specialized specifications and individual attention. 6 The manufacture and sale of disposable linens is subject to regulation by the FDA, which monitors the composition and labeling of health care products. PRODUCTS TO WHICH THE REGISTRANT OWNS RIGHTS Although the Registrant significantly reduced its research and development activities when it implemented its austerity program in 1993, the Registrant has maintained its rights to selected products. There can be no assurance that the Registrant will have the resources to bring any of these products to market or, if such resources are available, that the products can be successfully developed, manufactured or marketed. Due to the expense and time commitment required to bring a pharmaceutical product to market, the Registrant is seeking co-marketing, licensing and promotional arrangements and other collaborations with other international or national pharmaceutical companies. Generally, management believes that the Registrant can compete more effectively in certain markets through collaborative arrangements with companies that have an established presence in a particular geographic area and greater resources than those of the Registrant. The Registrant owns the rights to Biolid(R) , a non-crystalline form of erythromycin with a potential for enhanced bioavailability (quantity absorbed in blood over time compared to dose received); Alphanon(R) , designed for the systemic treatment of hemorrhoids, initially as a liquid formulation for intra-navel transdermal application; and a phenantramine analogue, which is a pre-clinical stage antimalarial that has shown effectiveness against Plasmodium falciparum. The Registrant is not currently marketing any of these products nor is the Registrant planning additional in-house research and development activity at this time with respect to these compounds unless in a licensing or other collaboration. PARTNERSHIP VENTURE In March 1994 the Registrant formed a partnership, through Healthcare's wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of Maximed Corporation, which is headquartered in New York, and planned to market, through this partnership, a range of hydrogel based feminine health care products, including a contraceptive, an antiseptic, an antifungal and an antibacterial. In December 1994, the Registrant commenced litigation against its partner claiming interference in the management of the partnership and misrepresentation under the partnership agreement. (See Item 3. Legal Proceedings.) Pending resolution of this dispute, the partnership is not actively engaged in the development of any products. SOURCES AND AVAILABILITY OF RAW MATERIALS The Registrant purchases, in the ordinary course of business, necessary raw materials and supplies essential to the Registrant's operations from numerous suppliers. There have been no availability problems or supply shortages nor are any anticipated. 7 PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS Few of the products currently being sold by the Registrant are protected by patents owned by the Registrant. However, where possible, patents and trademarks will be sought and obtained in the United States and in all countries of principal marketing interest to the Registrant. The Registrant has filed or has rights to patent applications. However, there can be no assurance that its rights will afford adequate protection to the Registrant. In addition, the Registrant also relies on unpatented proprietary technology in the development and commercialization of its products. There is no assurance that others may not independently develop the same or similar technology. The Registrant also relies upon trade secrets, unpatented proprietary know-how and continuing technological innovations to develop its competitive position. However, there can be no assurance that others may not acquire or independently develop similar technology or, if patents in all major countries are not issued with respect to the Registrant's products, that the Registrant will be able to maintain information pertinent to such research as proprietary technology or trade secrets. Laboratorios Belmac owns approximately 50 trademarks for pharmaceutical products and one patent, which were granted by Spain's Bureau of Patents, and Trademarks. In Spain, patents expire after 20 years and trademarks expire after 10 years, but can be renewed. All prescription pharmaceutical products marketed by Laboratorios Belmac in Spain have been registered with and approved by Spain's Ministry of Health. To register a pharmaceutical with the Ministry requires the submission of a registration dossier which includes all pre-clinical, clinical and manufacturing information. The registration process generally takes approximately two years or more. There can be no assurance that a competitor has not or will not submit additional registrations for products substantially similar to those marketed by Laboratorios Belmac. COMPETITION All of the Registrant's current and future products face competition both from existing drugs and products and from new drugs and products being developed by others. This competition potentially includes national and multi-national pharmaceutical and health care companies of all sizes. Many of these other pharmaceutical and health care concerns have greater financial resources, technical staffs and manufacturing and marketing capabilities than the Registrant. Acceptance by hospitals, physicians and patients is crucial to the success of a pharmaceutical or health care product. The Registrant competes primarily in Spain, which is a large, developed population center in Europe. Since Spain is a member of the European Union, the Registrant expects to be able to target the European Union's larger population as harmonization eliminates the barriers between countries. Laboratorios Belmac competes with both large multinational companies and national Spanish companies, which produce most of the same products Laboratorios Belmac manufactures. For example, there are 8 currently many companies, such as Schering-Plough, S.A., which market and sell omeprazole. Similarly, many companies currently sell enalapril, with Merck, Sharp & Dome de Espana, S.A. being the product leader. Others of the products sold by Laboratorios Belmac, such as Onico-Fitex, are more unusual and have fewer competitors. The contract manufacturing performed by Laboratorios Belmac has a number of competitors, including Tadec Meiji Farma, Bama Geve, ReigJofre, Aristegui, and Esteve, S.A. CUSTOMERS The incidence of certain infectious diseases, which occur at various times in different areas of the world, affects the demand for the Registrant's antibiotic products when they are marketed in each area. Orders for the Registrant's products are generally filled on a current basis, and no order backlog existed at December 31, 1997. No material portion of the Registrant's business is subject to renegotiation of profits or termination of contracts at the election of any governmental authority. There were no customers during the year ended December 31, 1997, which accounted for at least 10% of the Registrant's consolidated revenues. However, sales of approximately $2,200,000 and $7,300,000 to Pharmacie Centrale des Hopitaux accounted for approximately 10% and 23% of the Registrant's sales for the years ended December 31, 1996 and 1995, respectively. Due to the March 31, 1996 expiration of the Registrant's distribution agreement with Genzyme Corporation, for the distribution of Ceredase, the Registrant experienced a significant decrease in sales to this customer during 1996 (see "- - Pharmaceutical Marketing and Sales in France"). RESEARCH AND DEVELOPMENT The Registrant's management has shifted the focus from research and development to a more cost-effective strategy of acquiring late-stage development compounds that can be marketed within one year or currently marketed products. As a result of this shift in operations, the Registrant has decreased its research and development spending over the past few years. Research and development activities have been performed, under contract, by various universities and consulting research laboratories. The Registrant spent $324,000, $29,000 and $444,000 in the years ended December 31, 1997, 1996 and 1995, respectively, on research and development to develop new products and processes and to improve existing products and processes. Expenditures in 1997 were primarily incurred in Spain and were concentrated in the development of late stage products. The Registrant intends to continue to carefully review research and development activities with the establishment of priorities based on both technical and commercial criteria and to carefully manage such expenditures in view of its limited resources. Laboratorios Belmac is engaged in limited research of drug delivery systems ("DDS"), such as sustained release and time release formulations, through a collaborative venture with a customer. REGULATION The development, manufacture, sale, and distribution of the Registrant's products are subject to comprehensive government regulation, and the general trend is toward more stringent regulation. 9 Government regulation, which includes detailed inspection and control over research laboratory procedures, clinical investigations, manufacturing, marketing, and distribution practices by various federal, state, and local agencies, substantially increases the time, difficulty and cost incurred in obtaining and maintaining the approval to market newly developed and existing products. United States. The steps required before a pharmaceutical agent may be marketed in the United States include (i) preclinical laboratory and animal tests, (ii) the submission to the FDA of an Investgational New Drug Application ("IND"), which must become effective before human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (iv) the submission of a New Drug Application ("NDA") to the FDA, and (v) the FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug-manufacturing establishment must be registered with the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current GMPs for drugs. To supply products for use in the United States, foreign manufacturing establishments must comply with GMPs and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Clinical trials are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effects and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate clinical efficacy further and to further test for safety within an expanded patient population at multiple clinical study sites. The FDA reviews both the clinical plans and the results of the trials and may discontinue the trials at any time if there are significant safety issues. The results of the preclinical and clinical trials are submitted to the FDA in the form of a NDA for marketing approval. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indications, further clinical trials would be necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing to monitor for adverse effects, which can involve significant expense. Under the Orphan Drug Act, the FDA may designate a product or products as having Orphan Drug status to treat a "rare disease or condition," which is a disease or condition that affects populations of less than 200,000 individuals in the United States or, if victims of a disease number more than 200,000, the sponsor establishes that it does not realistically anticipate its product sales will be sufficient to recover its costs. If a product is designated an Orphan Drug, then the sponsor is entitled to recover its costs and the sponsor is entitled to receive certain incentives to undertake the development and marketing of the product, including limited tax credits and high-priority FDA review of a NDA. In addition, the sponsor 10 that obtains the first marketing approval for a designated Orphan Drug for a given indication is eligible to receive marketing exclusivity for a period of seven years. Spain. As a manufacturer in Spain, which is a member of the European Union, Laboratorios Belmac is subject to the regulations enacted by the European Union. Prior to Spain's entry into the European Union in 1993, the pharmaceutical regulations in Spain were less stringent and Laboratorios Belmac, along with all Spanish companies, have had to modify their procedures to adapt to the new regulations, which are similar to the regulations promulgated by the United States Food & Drug Administration discussed above. In general, these regulations are essentially consistent with the FDA and require a manufacturer of a proposed pharmaceutical to show efficacy and safety. The development process in Spain goes through the same phases (i.e. I, II, III) as in the United States to assure their safety and efficacy. A dossier on each pharmaceutical is prepared, which takes approximately two years or more for review by the Ministry of Health. The pharmaceutical can then only be sold to the public with a prescription from a medical doctor. General. Continuing reviews of the utilization, safety, and efficacy of health care products and their components are being conducted by industry, government agencies, and others. Such studies, which employ increasingly sophisticated methods and techniques, can call into question the utilization, safety, and efficacy of previously marketed products and in some cases have resulted, and may in the future result, in the discontinuance of such products and give rise to claims for damages from persons who believe they have been injured as a result of their use. The Registrant has product liability insurance for such potential claims; however, no such claims have ever been asserted against the Registrant. The cost of human health care continues to be a subject of investigation and action by governmental agencies, legislative bodies, and private organizations. In the United States, most states have enacted generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a different manufacturer's version of a drug for the one prescribed. Federal and state governments continue their efforts to reduce costs of subsidized heath care programs, including restrictions on amounts agencies will reimburse for the use of products. Efforts to reduce health care costs are also being made in the private sector. Health care providers have responded by instituting various cost reduction and containment measures of their own. It is not possible to predict the extent to which the Registrant or the health care industry in general might be affected by the matters discussed above. Many countries, directly or indirectly through reimbursement limitations, control the selling price of certain health care products. Furthermore, many developing countries limit the importation of raw materials and finished products. In Western Europe, efforts are under way by the European Union to harmonize technical standards for many products, including drugs and medical devices, and to make more uniform the requirements for marketing approval from the various regulatory agencies. The Registrant is subject to reimbursement status of prescription products in Spain and periodically products are identified as non-reimbursable by the social security system. Although these products can continue to be marketed, the non-reimbursable status could reduce the market size of such products. 11 Although the Registrant markets disposable linen products in the United States, the majority of the Registrant's sales are in Spain. International operations are subject to certain additional risks inherent in conducting business outside the United States, including price and currency exchange controls, changes in currency exchange rates, limitations on foreign participation in local enterprise, expropriation, nationalization, and other governmental action. To the best of its knowledge, the Registrant is presently in substantial compliance with all existing applicable environmental laws and does not anticipate that such compliance will have a material effect on its future capital expenditures, earnings or competitive position with respect to any of its operations. EMPLOYEES The Registrant and its subsidiaries employ approximately 122 people, 5 of whom are employed in the United States and 117 in Spain as of March 26, 1998. Of such employees, approximately 40 are principally engaged in manufacturing activities, 67 in sales and marketing, including 9 independent sales representatives, and 15 in management and administration. In general, the Registrant considers its relations with its employees to be good. FINANCIAL INFORMATION RELATING TO GEOGRAPHIC AREAS AND FOREIGN OPERATIONS For information regarding the Registrant's foreign operations, see Note 12 of Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES UNITED STATES The Registrant's corporate headquarters are located at One Urban Centre, Suite 548, 4830 West Kennedy Boulevard, Tampa, Florida 33609 and presently include 4,900 square feet which are occupied in accordance with a lease agreement which expires in October 1998. The Registrant expects to be able to locate suitable office space prior to expiration of the lease agreement. SPAIN Manufacturing is performed at the Registrant's facilities in Zaragoza, Spain. These facilities were renovated in 1995 to comply with the requirements for European GMPs. The facilities, which are owned by the Registrant, consist of approximately 55,000 square feet located in a prime industrial park and seated on sufficient acreage that would allow for future expansion. The manufacturing facility is capable of producing tablets, capsules, suppositories, creams, ointments, lotions, liquids and sachets, as well as microgranulated and microencapsulated products. The facility also includes analytical chemistry, quality control and quality assurance laboratories. The GMPs certification allows the Registrant to undertake contract manufacturing for a number of international pharmaceutical companies either engaged in or contemplating emergence into the Spanish market or for export. The Registrant's administrative offices 12 in Spain are located in Madrid in approximately 5,000 square feet of renovated, leased offices, which leases expire in April 1998. Such leases have been renewed for one additional year and are renewable under the same terms for an additional two years. The Registrant's facilities are deemed suitable and provide adequate productive capacity for the foreseeable future. In the event the Registrant considers it necessary or appropriate, the Registrant is of the opinion that comparable facilities can be located. ITEM 3. LEGAL PROCEEDINGS Michael M. Harshbarger, a former member of the Registrant's Board of Directors and its former President and Chief Executive Officer filed a suit against the Registrant in November 1993, in the Circuit Court of the Thirteenth Judicial Circuit, State of Florida, Hillsborough County Civil Division, alleging wrongful termination. The plaintiff is seeking monetary damages in excess of $1,400,000. The Registrant views his claim as meritless and intends to vigorously oppose it. The Registrant has filed a counterclaim against Harshbarger for wrongful conversion and civil theft, fraud and deceit, and breach of contract, seeking the return of corporate assets removed by Harshbarger and for restitution related to expenses of a personal nature that he charged to the Registrant's accounts. The Registrant amended its counterclaim to include breach of fiduciary duty. The Registrant is seeking damages from Harshbarger, relating to its counterclaim, in excess of $1,000,000. Harshbarger attempted to use the Americans with Disabilities Act (the "ADA") as a defense to the Registrant's counterclaim; however, the judge ruled in favor of the Registrant's motion to strike Harshbarger's ADA defense. The Registrant has recently filed a motion to set this matter for trial and attempted to secure a trial date. However, since mediation was attempted more than one year ago, the judge ordered another mediation conference before setting this matter for trial. Harshbarger failed to appear at his deposition set in January 1998; consequently, discovery in this matter is still outstanding. On two separate occasions, Harshbarger's counsel has withdrawn from the case, citing irreconcilable differences. As a result, Harshbarger is now representing himself in this matter. In March 1994 the Registrant formed a partnership, through Healthcare's wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of Maximed Corporation, which is headquartered in New York, and planned to market, through this partnership, a range of hydrogel based feminine health care products, including a contraceptive, an antiseptic, an antifungal and an antibacterial. In December 1994, the Registrant commenced litigation against its partner claiming interference in the management of the partnership and misrepresentation under the partnership agreement. On January 12, 1996 the Court ruled that the Registrant's reliance on its partner's misrepresentation was not justified and that the Registrant had performed its obligations under the agreement with its partner. Accordingly, the Registrant's claims as well as the counterclaims of its partner were dismissed. On September 25, 1996, the Registrant filed an appeal in the United States Court of Appeals for the Second Circuit. On August 27, 1997, the United States Court of Appeals for the Second Circuit affirmed in part and vacated and remanded in part the judgment of the United States District Court for the Southern District of New York. The appeals court order vacated that portion of the district court judgment that dismissed the Registrant's claim of fraud and remanded the claim to the district court for further proceedings. 13 Those portions of the district court judgment which dismissed the Registrant's contract claim for breach of warranty, the defendants' counterclaim for fraud and breach of contract and Medstar, Inc.'s action for breach of an alleged guaranty were affirmed. On December 17, 1997, the United States District Court for the Southern District of New York awarded the Registrant a judgment of $7,686,000 relating to its claim of fraud that the Registrant filed against defendants Medstar Inc., Maximed Inc., and Robert S. Cohen, both jointly and severally. On January 16, 1998, the defendants filed a notice of appeal from the judgment. The defendants have not obtained a stay of execution pending appeal, and therefore, efforts to collect the judgment are proceeding. These efforts include a motion that has been filed by the Registrant, for the court to order a sale of Medstar's interest in the partnership. On March 16, 1998, defendants filed their appellate brief and the Registrant's brief is due to be filed on April 16, 1998. Oral argument is scheduled for May 1998. Pending resolution of this dispute, the partnership is not actively engaged in the development of any products. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On July 31, 1990 and March 27, 1996, the Registrant's Common Stock began trading on the American Stock Exchange and the Pacific Exchange, Inc., respectively, under the symbol BNT. The following table sets forth the high and low sales prices for the Common Stock as reported on the American Stock Exchange for the periods indicated. Quarter Ended High Sales Price Low Sales Price - ------------- ---------------- --------------- March 31, 1996 $2.88 $2.06 June 30, 1996 4.13 2.13 September 30, 1996 3.94 2.38 December 31, 1996 3.75 2.50 March 31, 1997 $4.25 $2.56 June 30, 1997 3.69 2.75 September 30, 1997 3.63 2.56 December 31, 1997 3.25 2.13 As of March 26, 1998 there were 2,015 holders of record of the Registrant's Common Stock, excluding shares held in street name. No dividends have ever been declared or paid on the Registrant's Common Stock and the Registrant does not anticipate paying any dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Registrant and its subsidiaries has been derived from the Registrant's consolidated financial statements. The selected financial data should be read in conjunction with the Registrant's consolidated financial statements and the notes thereto, which should be read in their entirety and are included elsewhere in this Annual Report on Form 10-K. All per share information prior to July 25, 1995 has been adjusted to give retroactive effect to a one-for-ten reverse stock split of the Registrant's Common Stock effected on that date. (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.) 15 SUMMARY OF OPERATIONS
Fiscal Year Ended December 31, -------------------------------------------------------------------- (In thousands, except per share data) 1997(1) 1996(2) 1995(3) 1994(3) 1993(4) -------- -------- -------- -------- -------- Sales $ 14,902 $ 23,133 $ 31,437 $ 27,010 19,849 Cost of sales 8,010 15,638 25,586 21,931 15,100 -------- -------- -------- -------- -------- Gross margin 6,892 7,495 5,851 5,079 4,749 Operating expenses 8,438 8,794 8,198 9,050 14,722 -------- -------- -------- -------- -------- Other (income) expense 2,269 1,174 (21) (393) 263 -------- -------- -------- -------- -------- Loss before extraordinary item (3,815) (2,473) (2,326) (3,578) (10,236) -------- -------- -------- -------- -------- Net loss $ (3,815) $ (2,919) $ (2,326) $ (3,578) $(10,236) ======== ======== ======== ======== ======== Loss per Common Share before extraordinary item $ (.97) $ (.79) $ (.83) $ (1.56) $ (6.32) ======== ======== ======== ======== ======== Basic net loss per Common Share $ (.97) $ (.92) $ (.83) $ (1.56) $ (6.32) ======== ======== ======== ======== ======== Weighted average number of Common Shares outstanding 4,072 3,334 2,999 2,395 1,655 ======== ======== ======== ======== ========
BALANCE SHEET INFORMATION At December 31, ----------------------------------------------------------- (In thousands) 1997(1) 1996(2) 1995(3) 1994(3) 1993(4) ------- ------- ------- ------- ------- Working capital $10,648 $ 4,265 $ 3,113 $ 1,928 $ 2,043 Non-current assets 6,034 6,746 6,523 5,644 5,937 Total assets 21,043 16,558 16,290 16,332 16,160 Non-current liabilities 5,439 5,513 2,252 336 2,821 Redeemable Preferred Stock 2,338 2,203 2,068 2,256 2,218 Common Stockholders' Equity 8,905 3,295 5,316 4,980 2,941 See explanations on the following page.
16 (1) Revenues declined during 1997 due to the Registrant's divestiture of Chimos/LBF on June 26, 1997. Other (income) expense for the year ended December 31, 1997 includes interest expense of $1,086,000 and a provision for loss on disposition of subsidiary, which totals $591,000, including realized exchange loss of $386,000 due to fluctuations in the currency exchange rates used to translate the foreign currency financial statements and a loss of $205,000 recognized upon the sale of Chimos/LBF. The Regisrant also recorded a provision for income taxes during 1997 totaling $621,000. During the fourth quarter of 1997, the Registrant received proceeds of approximately $9,800,000 from the exercise of approximately 4,900,000 Class A Warrants. See Notes 1, 8, 10 and 11 of Notes to Consolidated Financial Statements. (2) Revenues in France declined beginning in the second quarter of 1996, due to the March 31, 1996 expiration of the 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. The Registrant completed a public offering in February 1996, whereby it issued $6,900,000 of 12% convertible subordinated debentures and warrants. Consequently, the Registrant incurred interest expense totaling $1,227,000 in 1996. The Registrant incurred an extraordinary charge of $446,000, representing the unamortized discount and issuance costs at the date of repayment of Notes from its October 1995 private placements. Operating expenses for the year ended December 31, 1996 include approximately $340,000, representing a provision for goodwill impairment related to Chimos/LBF. See Notes 1, 8, 10, 13 and 14 of Notes to Consolidated Financial Statements. (3) The Registrant sold its Spanish marketing rights to its ciprofloxacin antibiotic, Belmacina(R), in 1994 and included the gain thereon (approximately $884,000) in Other (Income) Expense in the year ended December 31, 1994 and recorded the anticipated gain on sale of the related trademark of $380,000 as deferred revenue as of December 31, 1994, which was recognized as revenue in the year ended December 31, 1995. Other (Income) Expense for the year ended December 31, 1995 also includes the recognition of income of $360,000 from the commercialization of a certain drug provided by the Registrant's former Chairman and Chief Executive Officer, $533,000 of expense related to the settlement of litigation with the Registrant's former Chief Financial Officer and income of $375,000 due to the reversal of an over-accrual for a liability. See Notes 6, 10 and 13 of Notes to Consolidated Financial Statements. (4) The year ended December 31, 1993 includes the effects of writing off capitalized costs with respect to the sachet formulation of Biolid(R), its noncrystalline form of erythromycin and a charge to earnings for the settlement of class action litigation. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Registrant is presently an international pharmaceutical and health care company with its primary focus on the manufacturing, marketing and distribution of pharmaceutical and health care products. Historically, substantially all of its revenues have come from its operations in Europe. The Registrant also markets disposable linens to emergency health care services in the United States. In an effort to increase its presence in the United States, the Registrant has entered into a letter of intent to purchase domestic and international rights to a portfolio of branded drugs and a manufacturing facility in Wisconsin from Schwarz Pharma Inc. Although no definitive agreements have been finalized, the letter of intent was recently amended to take into consideration the possible transfer of control of the Registrant's Spanish subsidiary, Laboratorios Belmac, to Schwarz Pharma. The proposal transaction is subject to completion of due diligence, the execution of definitive agreements and approval of the Registrant's Stockholders and Debenture holders. The Registrant incurred a net loss of $3,815,000 for the year ended December 31, 1997. The Registrant intends to continue to focus its efforts on business activities which management believes should result in operating profits in the future, of which there can be no assurance. To improve its results, the Registrant's management will focus on increasing higher margin pharmaceutical and health care product sales, controlling expenses through its austerity program, careful prioritization of research and development projects resulting in continued low overall research and development expenditures, and potentially acquiring marketable products or profitable companies in the United States or Europe that are compatible with the Registrant's strategy for growth. (See "--Liquidity and Capital Resources"). The Company sold its French subsidiary, Chimos/LBF in June 1997. Sales generated by Chimos/LBF began to decline in the second quarter of 1996 due to the expiration of a distribution agreement for the product Ceredase. For business segment information on the Registrant's operations outside the United States, see Note 12 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996 The Registrant reported revenues of $14,902,000 and a net loss of $3,815,000 or $.97 per common share for the year ended December 31, 1997 compared to revenues of $23,133,000 and a net loss of $2,919,000 or $.92 per common share for the same period in the prior year. Sales and Cost of Sales. The 36% decrease in revenues is primarily attributable to an 83% decrease in sales by the Registrant's French subsidiary, Chimos/LBF, to $2,029,000. The decrease in Chimos/LBF's revenues is due to its divestiture on June 26, 1997, combined with a decrease in its sales prior to the divestiture. This decrease was partially offset by a 28% increase in sales (calculated in local currency) by the Registrant's Spanish subsidiary, Laboratorios Belmac. However, fluctuation in foreign currency exchange rates reduced the increase in sales to 11%, when reported in U.S. dollars, to $12,491,000. The Registrant's revenues began to decline 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 its revenues in the year ended December 31, 1995. Ceredase gross margins, as a percent of sales, were approximately 5%. Gross margins for the year ended December 31, 1997 improved to 46% when compared to gross margins of 32% in the prior year, primarily as a result of the higher proportion of sales from Laboratorios Belmac, whose sales generate significantly higher gross 18 margins than those of Chimos/LBF, as well as the loss of low-margin Ceredase sales. Chimos/LBF generated relatively low gross margins (approximately 21% for the year ended December 31, 1997) compared to Laboratorios Belmac, which experienced substantially higher margins (approximately 51% for the year ended December 31, 1997). Operating Expenses. Selling, general and administrative expenses were $7,819,000 for the year ended December 31, 1997 compared to $7,923,000 for the same period in the prior year. Chimos/LBF's divestiture in June 1997 resulted in lower selling, general and administrative expenses in France; however, this decrease was partially offset by increased selling expenses incurred by the Spanish subsidiary to support the increase in sales volume generated during the year ended December 31, 1997. 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 $324,000 for the year ended December 31, 1997 compared to $29,000 for the prior year. The research and development expenditures for the year ended December 31, 1997 were primarily related to bio-equivalency studies, which are necessary in order to obtain approval to export products from Spain to other countries. The modest expenditures in research and development reflect the Registrant's continued de-emphasis of basic research and redirection of its resources to developmental expenses necessary for expansion of its portfolio of marketed products. The Registrant intends to continue to carefully manage its research and development expenditures in view of its limited resources. Depreciation and amortization expenses were $295,000 for the year ended December 31, 1997, compared to $502,000 for the same period of the prior year. The decrease is primarily due to (i) the divestiture of Chimos/LBF; and (ii) the disposal of certain fixed assets during 1996 as a result of the Registrant's move to smaller, more cost effective office space. Other Income/Expense. Interest expense was $1,086,000 for the year ended December 31, 1997 compared to $1,227,000 for the same period of the prior year. The decrease reflects primarily the effect of retiring high-yield promissory notes in February 1996, using proceeds from the Public Offering, thereby lowering the effective interest rate on outstanding debt, offset by higher outstanding balances on short term borrowings, which are used to finance working capital needs. Interest income was $123,000 for the year ended December 31, 1997 compared to $103,000 for the same period of the prior year. The slight increase is due to interest earned on higher short-term interest bearing investment balances in the current year, which resulted from the proceeds of the exercise of approximately 4,900,000 Class A Warrants during the fourth quarter of 1997. Other (income) expenses for the year ended December 31, 1997 includes a provision for loss on disposition of subsidiary, which totals $591,000, including realized exchange loss of $386,000, due to fluctuations in the currency exchange rates used to translate the foreign currency financial statements and a loss of $205,000 recognized upon the sale of Chimos/LBF. Other (income) expenses in 1996 are 19 primarily comprised of the loss of approximately $71,000 recognized upon the disposition of certain unnecessary fixed assets and leasehold improvements associated with the Registrant's relocation to smaller, more cost effective, office space in April 1996. The Registrant recorded a provision for income taxes totaling $621,000 for the year ended December 31, 1997. The income tax expense was $280,000 (domestic) and $341,000 (foreign) and resulted from U.S. alternative minimum taxes and certain nondeductible expenses in Spain. The Registrant reported a loss from operations for the year ended December 31, 1997 of $1,546,000 compared to a loss from operations of $1,299,000 in the prior year, which was the combined result of lower sales, partially offset by higher gross margins and lower operating expenses. The effect of combining non-operating items, primarily (i) interest expense of $1,086,000, and (ii) the loss of $591,000 upon the disposition of the Registrant's French subsidiary, and (iii) income tax expenses of $621,000, resulted in a net loss of $3,815,000, or $.97 per common share for the year ended December 31, 1997. Non-operating items in the comparable period of the prior year included primarily (i) interest expense of $1,227,000, and (ii) a loss recognized upon the extinguishment of debt of approximately $446,000, which, when combined with the loss from operations, resulted in a net loss of $2,919,000, or $.92 per common share for the prior year. The Registrant utilizes software and related technologies throughout its business that will be affected by the "Year 2000 problem" which is common to most businesses, and concerns the inability of information systems, primarily computer software programs, to recognize and process date sensitive information properly as the year 2000 approaches. An internal study is currently under way to determine the full scope and related costs of the Year 2000 problem to ensure that the Registrant's systems continue to meet its internal needs and those of its customers. The Registrant currently believes it will be able to modify or replace its affected systems in time to minimize any detrimental effects on operations. While it is not possible, at present, to give an accurate estimate of the cost of this project, the Registrant expects that such costs could possibly be material to its results of operations in one or more fiscal quarters or years, but will not have a material adverse impact on the long-term results of operations, liquidity or consolidated financial position of the Registrant. System maintenance or software modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995 The Registrant reported revenues of $23,133,000 and a net loss of $2,919,000 or $.92 per common share for the year ended December 31, 1996 compared to revenues of $31,437,000 and a net loss of $2,326,000 or $.83 per common share for the prior year. Sales and Cost of Sales. The 26% decrease in revenues was primarily attributable to a 52% decrease in sales by the Registrant's French subsidiary, Chimos/LBF, to $11,625,000, which was partially offset by a 68% increase in sales by the Registrant's Spanish subsidiary, Laboratorios Belmac, to $11,299,000, for the year ended December 31, 1996. 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 20 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%. Gross margins for the year ended December 31, 1996 improved to 32% when compared to gross margins of 19% in the prior year, primarily as a result of the more rapid rate of growth in sales at Laboratorios Belmac, whose sales generated 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, generated relatively low gross margins (approximately 12% for the year ended December 31, 1996) as opposed to the Registrant's Spanish subsidiary, Laboratorios Belmac, which experienced substantially higher margins (approximately 53% for the year ended December 31, 1996). Operating Expenses. Selling, general and administrative expenses were $7,923,000 for the year ended December 31, 1996 compared to $7,204,000 for 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 were necessary in order to sustain the increase in sales volume that the Spanish sales force had generated in the year ended December 31, 1996. This increase was offset in part by a decrease in selling, general and administrative expenses by Chimos/LBF, primarily due to the loss of Ceredase sales, during the year ended December 31, 1996. Research and development expenses were $29,000 for the year ended December 31, 1996 compared to $444,000 for the prior year. The Registrant's management has shifted the focus from research and development to a more cost-effective strategy of acquiring late-stage development compounds that can be marketed within one year as well as currently marketed products. As a result of this shift in operations, the Registrant has decreased its research and development spending over the past few years. Research and development activities have been performed, under contract, by various universities and consulting research laboratories. Depreciation and amortization expenses decreased by 9% to $502,000 for the year ended December 31, 1996, compared to $550,000 for 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. As a result of estimating the proceeds from the proposed sale of Chimos, the Registrant reviewed, for impairment, the recoverable value of the carrying amount of long-lived assets and intangibles. Based upon this review, the Registrant charged to operations, a provision for goodwill impairment, representing the remaining unamortized Chimos goodwill of approximately $340,000 at December 31, 1996. Other Income/Expense. Interest expense was $1,227,000 for the year ended December 31, 1996 compared to $563,000 for the prior year. The $664,000 increase reflected interest expense arising primarily from (i) the Notes sold by the Registrant in its October 1995 private placements, which Notes were paid with the proceeds of the Public Offering completed in February 1996 and (ii) the Debentures sold in the February 1996 Public Offering. The Registrant incurred an extraordinary charge of $446,000, representing the unamortized discount and issuance costs at the date of repayment of the 21 Notes from its October 1995 private placements. Interest income was $103,000 for the year ended December 31, 1996 compared to $3,000 for the prior year. The increase was with respect to interest earned on the proceeds of the Public Offering and cash collected from Ceredase receivables which were temporarily invested in short-term interest bearing investments included in cash and cash equivalents in the Balance Sheet. Other (income) expense, net of $50,000 for the year ended December 31, 1996, was substantially lower than other (income) expense, net of ($581,000) for the prior year, which was 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 over-accrual of a liability related to the proposed sale of Biolid(R), which did not occur, in the amount of ($375,000), offset by a charge of $533,000 for cancellation of the stock subscription receivable and related interest from a former officer of the Registrant. Although the Registrant reported a 26% decrease in sales, the improved gross margins of 32% and controlled spending with respect to operating expenses in the year ended December 31, 1996, resulted in a $1,048,000 improvement in its loss from operations from $2,347,000 in the prior year to $1,299,000 for the year ended December 31, 1996. The 1996 loss from operations included a charge of $340,000 for a provision for goodwill impairment related to the proposed Chimos disposition. This improvement was offset by interest expense associated with (i) the Notes sold by the Registrant in its October 1995 private placements, and (ii) the Debentures sold in the February 1996 Public Offering, resulting in a net loss of $2,919,000, or $.92 per common share for the year ended December 31, 1996, compared to a net loss of $2,326,000, or $.83 per common share for the prior year. LIQUIDITY AND CAPITAL RESOURCES: - -------------------------------- Total assets increased from $16,558,000 at December 31, 1996 to $21,043,000 at December 31, 1997, while Common Stockholders' Equity increased from $3,295,000 at December 31, 1996 to $8,905,000 at December 31, 1997. The increase in Common Stockholders' Equity reflects primarily the exercise of approximately 4,900,000 Class A Warrants during the fourth quarter of 1997, partially offset by the fluctuation in the exchange rates of European currencies compared to the U.S. Dollar and the loss incurred by the Registrant for the year ended December 31, 1997. The Registrant's working capital increased from $4,265,000 at December 31, 1996 to $10,648,000 at December 31, 1997. The increase in working capital is primarily attributable to the fourth quarter exercise of approximately 4,900,000 Class A Warrants, partially offset by the fluctuation of foreign currency exchange rates and the net cash used by the Registrant's operating activities. Cash and cash equivalents increased from $4,425,000 at December 31, 1996 to $11,117,000 at December 31, 1997, primarily as the combined result of proceeds from the exercise, during the fourth quarter of 1997, of approximately 4,900,000 Class A Warrants and proceeds from short-term borrowings and stock options/warrants exercises, offset by cash used for operational purposes and, the 22 effect of foreign exchange rate changes on cash balances. Included in cash and cash equivalents are approximately $10,860,000 of short-term investments considered to be cash equivalents. Accounts receivable decreased from $3,632,000 at December 31, 1996 to $2,428,000 at December 31, 1997 due to a combination of the disposition of the Registrant's French subsidiary and foreign currency exchange rate fluctuations, which were offset by higher receivables resulting from increased sales in Spain. The Registrant has not experienced any material delinquent accounts. Inventories decreased to $714,000 at December 31, 1997 compared to $945,000 at December 31, 1996, due to the disposition of the Registrant's French subsidiary and the fluctuation of foreign currency exchange rates, which were partially offset by an increase in inventory levels in Spain to accommodate the increase in sales volume. Prepaid expenses and other current assets increased from $644,000 at December 31, 1996 to $750,000 at December 31, 1997 due to a combination of the disposition of the Registrant's French subsidiary and the effect of foreign currency exchange rate fluctuations, which were offset by a combination of (i) expenditures for marketing and promotional items which will be utilized by the Registrant's Spanish subsidiary during 1998 and (ii) pre-payment for certain bio-equivalency studies which are scheduled to take place during 1998. Accounts payable and accrued expenses decreased from $4,528,000 at December 31, 1996 to $3,216,000 at December 31, 1997 due to the combined effect of (i) the disposition of the Registrant's French subsidiary; (ii) the effect of foreign currency exchange rate fluctuations; and (iii) the reversal of an amount owed for a drug license in Spain, for which the proposed purchase by the Registrant was canceled, partially offset by income taxes payable totaling $608,000. Fixed assets, net decreased from $3,544,000 at December 31, 1996 to $2,918,000 at December 31, 1997, due to recurring depreciation charges and a fluctuation in foreign currency exchange rates. Drug licenses and related costs, net decreased from $1,475,000 at December 31, 1996 to $691,000 at December 31, 1997, due to a combination of recurring amortization charges, the effect of foreign currency exchange rate fluctuations and the cancellation of the proposed purchase of a drug license in Spain. Other non-current assets increased from $1,727,000 at December 31, 1996 to $2,425,000 at December 31, 1997 primarily due to capitalization of approximately $546,000 of pre-acquisition costs, including a non-refundable $100,000 deposit paid for the proposed acquisition of certain assets owned by Schwarz Pharma, Inc. and other possible acquisitions, offset by amortization costs related to the 1996 Public Offering. Long term debt increased from $5,164,000 at December 31, 1996 to $5,329,000 at December 31, 1997, due primarily to accretion recorded on the 23 Debentures issued in the February 1996 Public Offering. Investing activities provided net cash of $396,000 during the year ended December 31, 1997. Financing activities for the year ended December 31, 1997 provided net cash of $10,711,000 and operating activities for the year ended December 31, 1997 used net cash of $3,982,000. Seasonality. In the past, the Registrant has experienced lower sales in certain calendar quarters of each year, although the Registrant has not experienced fluctuations due to seasonality during the year ended December 31, 1997 and does not currently expect fluctuations due to seasonality. Should the Registrant begin large sales of a pharmaceutical product whose sales are seasonal, seasonality of sales may become more significant. 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. The effect of foreign currency fluctuations on long lived assets for the year ended December 31, 1997 was a decrease of $774,000 and the cumulative historical effect was a decrease of $1,855,000, 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. 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 relies 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. Financings. An aggregate of 6,900 Units (the "Units") were sold in a 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 (the "Debentures") 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 $2.50. 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 previous private placements. 24 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 approximately $1,900,000. The effective interest rate on the Debentures is 18.1%. In order to generate working capital necessary to sustain the Registrant's long range strategic objectives, the Registrant temporarily lowered the exercise price on its Class A and Class B redeemable warrants. Effective September 16, 1997, the exercise price of the Class A warrants was lowered by $1.00, to $2.00 each. This exercise period at the reduced price expired on December 5, 1997. After this date, the Class A warrants reverted back to the original exercise price of $3.00 per share until their expiration on February 14, 1999. Holders of the Registrant's Class A warrants exercised approximately 70% of the outstanding Class A redeemable warrants (approximately 4,900,000 Class A warrants), which generated approximately $9,800,000 in proceeds to the Registrant. The exercise of the Class A warrants resulted in issuance of approximately 4,900,000 shares of Common Stock and approximately 4,900,000 Class B warrants. The exercise price of the Registrant's Class B redeemable warrants was also temporarily lowered by $2.00, to $3.00 as to each two Class B warrants effective September 16, 1997 through January 13, 1998. After January 13, 1998, the warrants reverted back to the original exercise price of $5.00 per share until their expiration on February 14, 2001. Given the Registrant's current liquidity and significant cash balances and considering its future strategic plans, the Registrant should have sufficient liquidity to fund operations and further its strategic objectives. 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 its subsidiary. As discussed previously, the Registrant has entered into a letter of intent to acquire pharmaceutical products and a manufacturing facility in the United States. The Registrant must finance the acquisition of these assets and is exploring various options intended to secure such financing. The Registrant has amended its letter of intent to take into consideration the possible transfer of control of its Spanish subsidiary to Schwarz Pharma, Inc. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in or incorporated by reference into this Annual Report on Form 10-K 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 25 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; dependence 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-3 (SEC File No. 333-28593) declared effective by the Securities and Exchange Commission on June 10, 1997 and any amendments thereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 26 Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The following information is furnished with respect to each director and executive officer of the Registrant. Position of the Year First Registrant Class of Became Name Age Presently Held Director Director - ---- --- -------------- -------- -------- James R. Murphy 48 Chairman, President, III 1993 Chief Executive Officer and Director Robert M. Stote 58 Senior Vice President, III 1993 Chief Operating Officer and Director Michael D. Price 40 Vice President, I 1995 Chief Financial Officer, Treasurer, Secretary and Director Randolph W. Arnegger 54 Director II 1994 Charles L. Bolling 74 Director II 1991 Michael McGovern 54 Director * 1997 * Indicates that person named was appointed to the Board of Directors to serve until the next Annual Meeting of Stockholders. James R. Murphy became President and Chief Operating Officer of the Registrant in September 1994, was named Chief Executive Officer effective January 1995 and became Chairman of the Board in June 1995. Prior to rejoining the Registrant, Mr. Murphy served as Vice President of Business Development at MacroChem Corporation, a publicly owned pharmaceutical company, from March 1993 through September 1994. From September 1992 until March 1993, Mr. Murphy served as a Consultant to the pharmaceutical industry with his primary efforts directed toward product licensing. Prior thereto, Mr. Murphy served as Director - Worldwide Business Development and Strategic Planning of the Registrant from December 1991 to September 1992. Mr. Murphy previously spent 14 years in basic pharmaceutical research and product development with SmithKline Corporation and in international business development with contract research laboratories. Mr. Murphy received a B.A. in Biology from Millersville University and attended the Massachusetts School of Law in 1993 and 1994. 27 Robert M. Stote, M.D. became Senior Vice President and Chief Science Officer of the Registrant in March 1992 and was named Chief Operating Officer in March 1998. Prior to joining the Registrant, Dr. Stote was employed for 20 years by Smith Kline Beecham Corporation serving as Senior Vice President and Medical Director, Worldwide Medical Affairs from 1989 to 1992, and Vice President-Clinical Pharmacology-Worldwide from 1987 to 1989. From 1984 to 1987, Dr. Stote was Vice President-Phase I Clinical Research, North America. Dr. Stote was Chief of Nephrology at Presbyterian Medical Center of Philadelphia from 1972 to 1989 and was Clinical Professor of Medicine at the University of Pennsylvania. Dr. Stote serves as a Director of Collaborative Research, Inc. Dr. Stote received a B.S. in Pharmacy from the Albany College of Pharmacy, an M.D. from Albany Medical College and is Board Certified in Internal Medicine and Nephrology. He was a Fellow in Nephrology and Internal Medicine at the Mayo Clinic and is currently a Fellow of the American College of Physicians. Michael D. Price became Chief Financial Officer, Vice President/Treasurer and Secretary of the Registrant in October 1993, April 1993 and November 1992, respectively. He has served the Registrant in other capacities since March 1992. Prior to joining the Registrant, he was employed as a financial and management consultant with Carr Financial Group in Tampa, Florida from March 1990 to March 1992. Prior thereto, he was employed as Vice President of Finance with Premiere Group, Inc., a real estate developer in Tampa, Florida from June 1988 to February 1990. Prior thereto, Mr. Price was employed by Price Waterhouse in Tampa, Florida from January 1982 to June 1988 where his last position with that firm was as an Audit Manager. Mr. Price received a B.S. in Business Administration with a concentration in Accounting from Auburn University and an M.B.A. from Florida State University. Mr. Price is a Certified Public Accountant in the State of Florida. Randolph W. Arnegger is the President of Targeted Marketing, a developer and producer of continuing medical education programs, medically oriented direct mail programs and medical convention programs, a position he has held since 1986. Prior thereto, Mr. Arnegger served as Vice President of Account Services for Curtin & Pease/Peneco, a national direct mail firm, and Vice President for Pro Clinica, a medical advertising agency in New York. Charles L. Bolling served from 1968 to 1973 as Vice President of Product Management and Promotion (U.S.), from 1973 to 1977 as Vice President of Commercial Development and from 1977 to 1986 as Director of Business Development (International) at SmithKline & French Laboratories. Mr. Bolling has been retired since 1986. Michael McGovern serves as President of McGovern Enterprises, a provider of corporate and financial consulting services, which he founded in 1975. Mr. McGovern is Chairman of the Board of Specialty Surgicenters, Inc., and is a Director on the corporate boards of North Fulton Bancshares, Suburban Lodges of America Inc., Career Publishing Network, L.L.C., Training Solutions Interactive Inc., and the Reynolds Development Company. Mr. McGovern received a B.S. and M.S. in accounting and his Juris Doctor from the University of Illinois. Mr. McGovern is a Certified Public Accountant and a member of the State Bar of Georgia and the American Bar Association. 28 The Registrant is currently in arrears on four annual dividend payments on its Series A Preferred Stock and, therefore, the holders of the Series A Preferred Stock have the right, as a class, to elect two additional members of the Registrant's Board of Directors. As of the date hereof, the holders have not exercised such right. The Registrant's Articles of Incorporation and By-Laws provide for a classified Board of Directors. The Board is divided into three classes, designated Class I, Class II and Class III. The directors included in Class II above and the director designated with * will hold office until the 1998 Annual Meeting of Stockholders. The directors included in Class III above will hold office until the 1999 Annual Meeting of Stockholders. The director included in Class I above will hold office until the 2000 Annual Meeting of Stockholders. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Registrant's executive officers and directors, and any persons who own more than 10% of any class of the Registrant's equity securities, to file certain reports relating to their ownership of such securities and changes in such ownership with the Securities and Exchange Commission and the American Stock Exchange and to furnish the Registrant with copies of such reports. To the Registrant's knowledge during the year ended December 31, 1997, all Section 16(a) filing requirements have been satisfied. ITEM 11. EXECUTIVE COMPENSATION The information called for by this item is incorporated by reference to the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated by reference to the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated by reference to the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. 29 Part IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page Herein ----------- (a) The following documents are filed as a part of this report: (1) Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-3 Consolidated Statements of Changes in Common Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-5 to F-6 Notes to Consolidated Financial Statements F-7 to F-27 (2) Financial Statement Schedule: Independent Auditors' Report on Financial Statement Schedule F-28 Schedule II - Valuation and qualifying accounts and reserves F-29 All other schedules have been omitted because they are inapplicable or are not required, or the information is included elsewhere in the consolidated financial statements or notes thereto. 30 EXHIBIT INDEX (3) Exhibits filed as part of this report: Exhibit Number Description - ------- -------------------------------------------------------------------- 3.1 Articles of Incorporation of the Registrant, as amended and restated. (Reference is made to Exhibit 3.1 to the Registrant's Amendment No. 1 on Form S-3 to its Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 3.2* Bylaws of the Registrant, as amended and restated. 4.1 Form of Subscription Agreement between the Registrant and each purchaser in connection with the Registrant's October 1991 sales of its $2.25 Convertible Exchangeable Preferred Shares, Series A. (Reference is made to Exhibit 4.1 to the Registrant's Form 8-K filed October 17, 1991, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 4.2 Indenture relating to the Registrant's 9% Convertible Subordinated Debentures due 2016 (with the Form of Debenture attached thereto as Exhibit A.) (Reference is made to Exhibit 4.2 to the Registrant's Form 8-K filed October 17, 1991, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 4.3 Specimen Certificate of the Registrant's $2.25 Convertible Exchangeable Preferred Shares, Series A. (Reference is made to Exhibit 4.3 to the Registrant's Form 8-K filed October 17, 1991, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 4.4* Registrant's Amended and Restated 1991 Stock Option Plan. 4.5 Form of Non-qualified Stock Option Agreement under the Registrant's 1991 Stock Option Plan. (Reference is made to Exhibit 4.25 to the Registrant's Form 10-K dated June 30, 1992, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 4.6 Subscription Agreement between the Registrant and Bodel Inc. dated November 23, 1993. (Reference is made to Exhibit 4.20 to the Registrant's Form 10-K filed December 31, 1993, Commission File No. 1-10581, which Exhibit is incorporated herein by reference.) 31 Exhibit Number Description - ------- -------------------------------------------------------------------- 4.7 Warrants issued by the Registrant to Grant Harshbarger, dated November 11, 1993 and November 17, 1993, respectively. (Reference is made to Exhibit 4.8 to the Registrant's Registration Statement on Form S-3, Commission File No. 33-69946, which exhibit is incorporated herein by reference.) 4.8 Warrants issued by the Registrant to Healthcare Capital Investments, Inc., dated November 11, 1993 and November 17, 1993, respectively. (Reference is made to Exhibit 4.9 to the Registrant's Registration Statement on Form S-3, Commission File No. 33-69946, which exhibit is incorporated herein by reference.) 4.9 Form of Indenture relating to the Registrant's $1,000 Principal Amount 12% Senior Convertible Subordinated Debentures due February 13, 2006 (with the Form of Debenture attached thereto as Exhibit A.) (Reference is made to Exhibit 4.28 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 4.10 Form of Warrant Agreement, including form of Class A and Class B Warrant. (Reference is made to Exhibit 4.29 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 4.11 Form of Underwriter Warrant. (Reference is made to Exhibit 4.30 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 4.12 Form of Unit Certificate. (Reference is made to Exhibit 4.31 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 4.13 Agreement between the Registrant and Marsing & Co. Ltd., A.S. dated June 26, 1997. (Reference is made to Exhibit 2.1 to the Registrant's Form 8-K filed July 10, 1997, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 10.1 Employment Agreement dated as of June 12, 1995 between the Registrant and James R. Murphy. (Reference is made to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 10.2 Employment Agreement dated as of June 12, 1995 between the Registrant and Robert M. Stote, M.D. (Reference is made to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 32 Exhibit Number Description - ------- -------------------------------------------------------------------- 10.3 Employment Agreement dated as of June 12, 1995 between the Registrant and Michael D. Price. (Reference is made to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, Commission File No. 33-65125, which exhibit is incorporated herein by reference.) 10.4 Partnership Agreement dated March 11, 1994 of Belmac/Maximed Partnership. (Reference is made to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1994, Commission File No. 1-10581, which exhibit is incorporated herein by reference.) 21.1* Subsidiaries of the Registrant. 23.1* Consent of Deloitte & Touche LLP. 27.1* Financial Data Schedule. - --------------- * Filed herewith. (b) Reports on Form 8-K filed during the fiscal quarter ended December 31, 1997: None. Subsequent to December 31, 1997, the Registrant filed the following Reports on Form 8-K: None. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ James R. Murphy ---------------------------- James R. Murphy Chairman, President and Chief Executive Officer Date: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ James R. Murphy Chairman, President, March 30, 1998 - ------------------------ Chief Executive Officer James R. Murphy and Director (principal executive officer) /s/ Robert M. Stote Senior Vice President, March 30, 1998 - ------------------------ Chief Science Officer Robert M. Stote, M.D. and Director ) /s/ Michael D. Price Vice President, March 30, 1998 - ------------------------ Chief Financial Officer Michael D. Price Treasurer, Secretary, and Director (principal financial and accounting officer) /s/ Randolph W. Arnegger Director March 30, 1998 - ------------------------ Randolph W. Arnegger /s/ Charles L. Bolling Director March 30, 1998 - ------------------------ Charles L. Bolling /s/ Michael McGovern Director March 30, 1998 - ------------------------ Michael McGovern INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Bentley Pharmaceuticals, Inc. Tampa, Florida We have audited the accompanying consolidated balance sheets of Bentley Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Tampa, Florida March 27, 1998 F-1 BENTLEY PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) December 31, -------------------- 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 11,117 $ 4,425 Investments -- 166 Receivables 2,428 3,632 Inventories 714 945 Prepaid expenses and other 750 644 -------- -------- Total current assets 15,009 9,812 -------- -------- Fixed assets, net 2,918 3,544 Drug licenses and related costs, net 691 1,475 Other non-current assets, net 2,425 1,727 -------- -------- $ 21,043 $ 16,558 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,493 $ 2,998 Accrued expenses 1,723 1,530 Short term borrowings 1,140 1,014 Current portion of long term debt 5 5 -------- -------- Total current liabilities 4,361 5,547 -------- -------- Long term debt, net 5,329 5,164 -------- -------- Other non-current liabilities 110 349 -------- -------- Commitments and contingencies Redeemable preferred stock, $1.00 par value, authorized 2,000 shares: Series A, issued and outstanding, 60 shares 2,338 2,203 -------- -------- Common Stockholders' Equity: Common stock, $.02 par value, authorized 35,000 shares, issued and outstanding, 8,426 and 3,345 shares 168 67 Stock purchase warrants (to purchase 6,122 and 8,304 shares of common stock) 192 435 Paid-in capital in excess of par value 81,382 71,146 Stock subscriptions receivable -- (105) Accumulated deficit (70,982) (67,167) Cumulative foreign currency translation adjustment (1,855) (1,081) -------- -------- 8,905 3,295 -------- -------- $ 21,043 $ 16,558 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-2 BENTLEY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) For the Year Ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Sales $ 14,902 $ 23,133 $ 31,437 Cost of sales 8,010 15,638 25,586 -------- -------- -------- Gross margin 6,892 7,495 5,851 Operating expenses: Selling, general and administrative 7,819 7,923 7,204 Research and development 324 29 444 Depreciation and amortization 295 502 550 Provision for goodwill impairment -- 340 -- -------- -------- -------- Total operating expenses 8,438 8,794 8,198 -------- -------- -------- Loss from operations (1,546) (1,299) (2,347) Other (income) expenses: Interest expense 1,086 1,227 563 Interest income (123) (103) (3) Loss on disposition of subsidiary 591 -- -- Other (income) expense, net 94 50 (581) -------- -------- -------- Loss before income taxes and extraordinary item (3,194) (2,473) (2,326) Provision for income taxes 621 -- -- -------- -------- -------- Loss before extraordinary item (3,815) (2,473) (2,326) Extraordinary item-extinguishment of debt -- 446 -- -------- -------- -------- Net loss ($ 3,815) ($ 2,919) ($ 2,326) ======== ======== ======== Loss per common share before extraordinary item ($ 0.97) ($ 0.79) ($ 0.83) Extraordinary item - extinguishment of debt -- (0.13) -- -------- -------- -------- Basic net loss per common share ($ 0.97) ($ 0.92) ($ 0.83) ======== ======== ======== Weighted average common shares outstanding 4,072 3,334 2,999 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-3 BENTLEY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(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, 1994 2,977 $ 60 $ 69,493 ($61,922) ($ 2,651) $ 4,980 Private placements of common stock, net 251 5 465 -- -- 470 Stock subscriptions received -- -- -- -- 562 562 Stock subscriptions revaluation/cancellation -- -- (351) -- 883 532 Conversion of redeemable preferred stock 3 -- 340 -- -- 340 Issuance of stock purchase warrants -- -- -- -- 150 150 Conversion of stock purchase warrants 90 2 212 -- -- 214 Common stock issued as compensation 9 -- 58 -- -- 58 Miscellaneous -- (1) (18) -- -- (19) Accrual of dividends - preferred stock -- -- (152) -- -- (152) Foreign currency translation adjustment -- -- -- -- 507 507 Net loss -- -- -- (2,326) -- (2,326) -------- -------- -------- -------- -------- -------- Balance at December 31, 1995 3,330 66 70,047 (64,248) (549) 5,316 Public offering of units, net -- -- 1,184 -- 285 1,469 Common stock issued as compensation 15 1 50 -- -- 51 Accrual of dividends-preferred stock -- -- (135) -- -- (135) Foreign currency translation adjustment -- -- -- -- (487) (487) Net loss -- -- -- (2,919) -- (2,919) -------- -------- -------- -------- -------- -------- Balance at December 31, 1996 3,345 67 71,146 (67,167) (751) 3,295 Exercise of Class A Redeemable Warrants 4,899 98 9,902 -- (202) 9,798 Exercise of other stock options/warrants 172 3 570 -- (150) 423 Exercise of underwriter warrants -- -- 30 -- 7 37 Conversion of Debentures 9 -- 23 -- -- 23 Issuance of stock options/warrants -- -- (51) -- 102 51 Common stock issued as compensation 1 -- 2 -- -- 2 Accrual of dividends-preferred stock -- -- (135) -- -- (135) Stock subscription receivable cancellation -- -- (105) -- 105 -- Foreign currency translation adjustment -- -- -- -- (774) (774) Net loss -- -- -- (3,815) -- (3,815) -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 8,426 $ 168 $ 81,382 ($70,982) ($ 1,663) $ 8,905 ======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-4 BENTLEY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, ----------------------------- (In thousands) 1997 1996 1995 ------- ------- ------- Cash flows from operating activities: Loss before extraordinary item ($3,815) ($2,473) ($2,326) Adjustments to reconcile loss before extraordinary item to net cash used in operating activities: Depreciation and amortization 295 502 550 Loss on disposition of subsidiary 591 -- -- Extraordinary item-extinguishment of debt -- (446) -- Provision for goodwill impairment -- 340 -- Loss on disposal of fixed assets -- 79 -- Gain on sale of Belmacina(R) -- -- (380) Cancellation of stock subscription receivable -- -- 532 Other non-cash items 267 468 610 (Increase) decrease in assets and increase (decrease) in liabilities: Receivables (137) 2,991 150 Inventories (229) 43 (297) Prepaid expenses and other current assets (340) (272) (270) Other assets (649) (93) (160) Accounts payable and accrued expenses 257 (716) (2,246) Other liabilities (222) (496) 500 ------- ------- ------- Net cash used in operating activities (3,982) (73) (3,337) ------- ------- ------- Cash flows from investing activities: Proceeds from sale of investments 166 161 214 Purchase of investments -- (166) (147) Net proceeds from disposition of subsidiary 378 -- -- Additions to fixed assets (108) (170) (603) Acquisition of Spanish drug license (40) -- (156) Proceeds from sale of Belmacina(R) -- -- 1,140 Investment in partnership -- -- (13) ------- ------- ------- Net cash provided by (used in)investing activities 396 (175) 435 ------- ------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-5 BENTLEY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In thousands) For the Year Ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from financing activities: Net increase (decrease) in short term borrowings $ 363 ($ 120) $ 533 Proceeds from exercise of Class A warrants, net 9,798 -- -- Proceeds from exercise of other options/warrants, net 423 -- 214 Proceeds from exercise of underwriter warrants, net 132 -- -- Proceeds from public offering of units -- 6,900 -- Proceeds from private placements: Common stock -- -- 544 Promissory notes -- -- 1,226 Offering costs -- (1,275) (187) Collection of stock subscription receivable, net -- -- 506 Repayments of long term debt -- (1,770) (59) Payments on capital leases (5) (28) (33) -------- -------- -------- Net cash provided by financing activities 10,711 3,707 2,744 -------- -------- -------- Effect of exchange rate changes on cash (433) (154) (43) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 6,692 3,305 (201) Cash and cash equivalents at beginning of period 4,425 1,120 1,321 -------- -------- -------- Cash and cash equivalents at end of period $ 11,117 $ 4,425 $ 1,120 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The Company paid cash during the period for (in thousands): Interest $ 965 $ 907 $ 222 ======== ======== ======== Taxes $ 12 -- -- ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES The Company has issued Common Stock in exchange for services as follows (in thousands): Shares issued 1 15 9 ======== ======== ======== Amount $ 2 $ 51 $ 58 ======== ======== ======== In 1996, the Company acquired a drug license in Spain, assuming approximately $477,000 in liabilities therefore.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-6 BENTLEY PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--HISTORY AND OPERATIONS Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical and health care company engaged primarily in the manufacturing, marketing and distribution of pharmaceutical products in Spain, with limited distribution of health care products in the United States. In Spain, the Company develops and registers late stage products, and manufactures, packages and distributes both its own and other companies' pharmaceutical products. In the United States, the Company markets disposable linens, which are manufactured under contract, to emergency health services. The Company divested its French subsidiary, Chimos/LBF S.A. (referred to herein as Chimos/LBF), in June 1997 for approximately $3,650,000. The Company's operations in France consisted of the low margin brokerage of fine chemicals, sourcing of raw materials and pharmaceutical intermediaries and the distribution of biotechnology or orphan drugs. (See Note 13). The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, the Company has incurred net losses as well as negative operating cash flows for all periods presented. The Company has entered into a negotiated letter of intent to purchase domestic and international rights to a portfolio of branded drugs, with an emphasis in gastrointestinal products, and a manufacturing facility located in Mequon, Wisconsin, from Schwarz Pharma, Inc. The letter of intent, dated July 21, 1997, was recently amended to take into consideration the posible transfer of control of the Company's Spanish subsidiary, Laboratorios Belmac, to Schwarz Pharma and will serve as the basis for negotiations for the definitive agreements. The proposed transaction is subject to completion of due diligence, the execution of such definitive agreements and approval of the Registrant's stockholders and Debenture holders. Upon execution of the letter of intent, the Registrant was required to remit a non-refundable deposit in the amount of $100,000. In order to fund operations, the Company primarily has issued Common Stock and other securities. In February 1996, the Company completed a public offering of its securities, which generated net proceeds of approximately $5,700,000, a portion of which was used to retire $1,770,000 principal balance of debt incurred in previous private placements (see Notes 8 and 14). The balance of the net proceeds were used for working capital needs, limited research and development activities, and search for possible acquisitions of complementary products, technologies and/or businesses. During the year ended December 31, 1997, the Company temporarily lowered the exercise price on its Class A and Class B redeemable warrants. Approximately 70% of the outstanding Class A warrants (approximately 4,900,000 Class A warrants) were exercised during this period, which generated approximately $9,800,000 in proceeds to the Company. The exercise of the Class A warrants resulted in issuance of approximately 4,900,000 shares of common stock and 4,900,000 Class B warrants. The exercise price of the Company's Class B warrants was also temporarily lowered; however, no Class B warrants were exercised during 1997. The proceeds from the Class A warrant exercises are being used for working capital needs. Given the Company's current liquidity and significant cash balances and considering its future strategic plans, management believes that it now has sufficient resources to fund operations and further its strategic objectives. F-7 The strategic focus of the Company has shifted in response to the evolution of the global health care environment. The Company has moved from a research and development-oriented pharmaceutical company, which required 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 Company has decreased its research and development expenses dramatically over the past few years as well as implemented cost-cutting measures throughout the Company's' operations. The Company emphasizes product distribution in Spain, strategic alliances and product acquisitions, which management of the Company expects will move the Company closer to profitability in the near future. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Laboratorios Belmac S.A. and until it's divestiture in June 1997, Chimos/LBF S.A.; Bentley Healthcare Corporation and its wholly owned subsidiary, Belmac Hygiene, Inc.; Belmac Holdings, Inc. and its wholly owned subsidiary, Belmac A.I., Inc., B.O.G. International Finance, 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 each foreign subsidiary are translated at the rate of exchange in effect at the end of the period. Revenues and expenses are translated at the average exchange rate for the period. Foreign currency translation gains and losses not impacting cash flows are credited to or charged against Common Stockholders' Equity. Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings. CASH AND CASH EQUIVALENTS The Company 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 Investments available for sale are reported at approximate market value and at December 31, 1996 were comprised of restricted Certificates of Deposit, collateralizing Letters of Credit, which the Company redeemed in June 1997. F-8 INVENTORIES Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out ("FIFO") method. FIXED ASSETS Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the following estimated economic lives of the assets: Years ----- Buildings 30 Equipment 5 - 7 Furniture and fixtures 5 - 7 Other 5 Leasehold improvements are depreciated over the life of the respective lease. Expenditures for replacements and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for maintenance and repairs are charged against operations as incurred. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized currently. DRUG LICENSES AND RELATED COSTS Drug licenses and related costs incurred in connection with acquiring licenses, patents, and other proprietary rights related to the Company's commercially developed products are capitalized. Capitalized drug licenses and related costs are being amortized on a straight-line basis over fifteen years from the dates of acquisition. Costs of acquiring pharmaceuticals requiring further development are expensed as purchased research and development. Carrying values of such assets are reviewed annually by the Company and are adjusted for any diminution in value. INVESTMENT IN PARTNERSHIP Belmac Hygiene, Inc., a wholly-owned subsidiary of the Company entered into a 50/50 partnership in March 1994 with Maximed Corporation ("Maximed") to develop and market feminine health care products. Maximed contributed the hydrogel-based technology and the Company, through its subsidiary, is responsible for providing financing and funding of the partnership's activities. The investment in the partnership is accounted for using the equity method. (See Note 13.) RESEARCH AND DEVELOPMENT Research and development costs are expensed when incurred. F-9 USES OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated. ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS Original issue discount related to the issuance of debt is amortized to interest expense using the effective interest method over the lives of the related debt. The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. AMORTIZATION OF GOODWILL Costs of investments in purchased companies in excess of the underlying fair value of net identifiable assets at date of acquisition are recorded as goodwill and included in other non-current assets which are amortized over fifteen years on a straight-line basis. Carrying values of such assets are reviewed annually by the Company and are adjusted for any diminution in value. During the year ended December 31, 1996, as a result of estimating the expected net proceeds from the then pending proposed sale of Chimos, the Company reviewed, for impairment, the recoverable value of the carrying amount of long-lived assets and intangibles. Based upon this review, the Company fully reserved the remaining unamortized goodwill of approximately $340,000, at December 31, 1996. Goodwill amortization expense, excluding the 1996 provision for impairment, for each of the years ended December 31, 1996 and 1995 was $38,000. There was no goodwill amortization for the year ended December 31, 1997 (see Note 13). FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" (FAS 107) requires disclosure of the estimated fair values of certain financial instruments. The estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies that require considerable judgment in interpreting market data and developing estimates. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Long-term debt is estimated to have a fair value of approximately $9,432,000 as of December 31, 1997 (based upon market price on December 31, 1997). The carrying amount of other financial instruments approximate their estimated fair values. F-10 The fair value information presented herein is based on information available to management as of December 31, 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore the current estimates of fair value may differ significantly from the amounts presented herein. STOCK-BASED COMPENSATION PLANS The Company applies APB 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock-based compensation plans. REVENUE RECOGNITION Sales of products are recognized by the Company when the products are shipped to customers. The Company allows sales returns in certain situations, but does not reserve for returns and allowances based upon the Company's favorable historical experience. INCOME TAXES The Company applies Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (FAS 109) which mandates the liability method in accounting for the effects of income taxes for financial reporting purposes. 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" (FAS 128). FAS 128 provides for new accounting principles used in the calculation of earnings per share and is effective for financial statements for both interim and annual periods ended after December 15, 1997. The Company has recalculated the basic net loss per common share for all periods presented to give effect to FAS 128. Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share is not presented as it is antidilutive. Stock options, stock warrants and convertible debentures are the only securities issued which would have been included in the diluted loss per share calculation. The Company effected a one-for-ten reverse split of its Common Stock on July 25, 1995 as a result of an amendment to its Articles of Incorporation which was approved by the stockholders at the Company's Annual Stockholders' Meeting held on June 9, 1995. All information with respect to F-11 per share data and number of common shares has been retroactively adjusted to give effect to the reverse stock split. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS 130) was issued in June 1997 and requires businesses to disclose comprehensive income and its components in their financial statements. FAS 130 is effective for fiscal years beginning after December 15, 1997, and is applicable to interim periods. Had the Company adopted FAS 130 in 1997, comprehensive income (loss) would have been ($4,589,000). The difference between net loss as reported and comprehensive loss is the effect of foreign currency translation losses totaling $774,000. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (FAS 131) was issued in June 1997 and redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. FAS 131 is effective for the Company beginning January 1, 1998. The statement is not expected to materially affect the results of operations or financial position of the Company. NOTE 3--RECEIVABLES Receivables consist of the following (In Thousands): December 31, ---------------------- 1997 1996 ------- ------- Trade receivables $ 2,129 $ 3,529 Other (Note 13) 358 129 ------- ------- 2,487 3,658 Less-allowance for doubtful accounts (59) (26) ------- ------- $ 2,428 $ 3,632 ======= ======= F-12 NOTE 4--INVENTORIES Inventories consist of the following (In Thousands): December 31, ---------------------- 1997 1996 ------- ------- Raw materials $ 338 $ 515 Finished goods 501 1,257 ------- ------- 839 1,772 Less allowance for slow-moving inventory (125) (827) ------- ------- $ 714 $ 945 ======= ======= NOTE 5--FIXED ASSETS Fixed assets consist of the following (In Thousands): December 31, ------------------------ 1997 1996 ------- ------- Land $ 967 $ 1,138 Buildings 2,329 2,673 Equipment 430 828 Furniture and fixtures 435 501 Leasehold improvements 92 117 Equipment under capital lease 27 27 ------- ------- 4,280 5,284 Less-accumulated depreciation (1,362) (1,740) ------- ------- $ 2,918 $ 3,544 ======= ======= Depreciation expense was $185,000, $345,000 and $424,000 for the years ended December 31, 1997, 1996 and 1995, respectively. F-13 NOTE 6--DRUG LICENSES AND RELATED COSTS, NET Drug licenses and related costs consist of the following (In Thousands): December 31, ------------ 1997 1996 ------- ------- Drug licenses and related costs $ 1,219 $ 1,972 Less-accumulated amortization (528) (497) ------- ------- $ 691 $ 1,475 ======= ======= In September 1992, the Company, through its Spanish subsidiary Laboratorios Belmac, acquired the Spanish license and product rights to Belmacina(R), a ciprofloxacin antibiotic, for approximately $577,000. The Company sold its Spanish license and product rights to Belmacina(R) in 1994 for approximately $1,556,000 and sold the related trademark for approximately $380,000 in 1995. The Company received approximately $651,000 in cash in 1994, net of transaction costs and a receivable of approximately $1,140,000, which included amounts related to the sale of the trademark. The gain on sale of the license and product rights of approximately $884,000 was included in Other income/expense, net for the year ended December 31, 1994 and the gain on the sale of the related trademark was recorded as a receivable and as deferred revenue as of December 31, 1994. The Company recognized the gain on the sale of the related trademark upon the transfer of the trademark to the buyer in 1995. The Company owns all rights, title and interest to Alphanon(R), a camphor based anti-hemorrhoidal drug. In connection with the acquisition of Alphanon(R), the Company agreed to pay for the longer of fifteen years from the first marketing of Alphanon(R) in each country or the life of an Alphanon(R) patent in each country, a royalty fee of 5% of the gross profit from the manufacture and sale of the product and 5% of the net royalty payments received from any licensing agreements of the product. Although the Company owns rights to Alphanon(R), it has determined that it will not attempt to further develop this product nor commercialize it without a collaborative partner. Amortization expense for drug licenses and related costs was approximately $110,000, $119,000 and $88,000 for the years ended December 31, 1997, 1996 and 1995, respectively. F-14 NOTE 7--ACCRUED EXPENSES Accrued expenses consist of the following (In Thousands): December 31, ------------ 1997 1996 ------ ------ Accrued expenses $ 924 $1,247 Income taxes payable 608 -- Accrued payroll 191 283 ------ ------ $1,723 $1,530 ====== ====== NOTE 8--DEBT Short term borrowings consist of the following (In Thousands): December 31, ------------ 1997 1996 ------ ------ Trade receivables discounted (with a Spanish financial institution), with recourse, effective interest rate on the note is 6.5% and 11.6%, respectively $1,036 $ 804 Revolving line of credit (with a Spanish financial institution), interest rate 7.5% and 8.5% respectively 104 154 Other -- 56 ------ ------ Total short term borrowings $1,140 $1,014 ====== ====== F-15 Long-term debt consists the following (In Thousands): December 31, ------------ 1997 1996 ------- ------- Debentures, maturing February 13, 2006, stated rate of interest 12% (net of $1,670 and $1,753 discount, respectively) $ 5,317 $ 5,147 ------- ------- Capitalized lease obligations, relating to various equipment used by the Company 17 22 ------- ------- 5,334 5,169 Less current portion (5) (5) ------- ------- Total long term debt $ 5,329 $ 5,164 ======= ======= The weighted average stated interest rate on short-term borrowings outstanding at December 31, 1997 and 1996 was 6.6% and 11.7%, respectively. The Company has $722,000 of available revolving lines of credit with Spanish financial institutions. At December 31, 1997, advances outstanding under one of the lines of credit was approximately $104,000. The interest rate at December 31, 1997 was 7.5% and interest is payable quarterly. In February 1996, the Company completed a Public Offering of its securities, whereby an aggregate of 6,900 Units were sold at a price of $1,000 per Unit. Each Unit consisted of 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. Interest on the Debentures is payable quarterly. 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. Approximately $1,770,000 of the net proceeds were used to retire the principal balance of debt incurred in 1995 private placements (See Note 14). The balance of the net proceeds, approximately $4,000,000, was used for working capital needs, limited research and development activities, and search for possible acquistions of complementary products, technologies and/or businesses. On May 29, 1996, the Debentures and Class A Redeemable Warrants began trading separately. The characteristics of the Debentures and Class A Redeemable Warrants are consistent with their description as components of the Units. 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 F-16 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 approximately $1,900,000. 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%. The Debentures are convertible prior to maturity, unless previously redeemed, at any time into shares of Common Stock at a conversion price per share of $2.50. NOTE 9--REDEEMABLE PREFERRED STOCK During 1991, the Company issued 290,000 shares of $1 par value Series A Convertible Exchangeable Preferred Stock (the "Series A Preferred Stock") and 340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock (the "Series B Preferred Stock") at $25 per share. The issuance of these shares provided aggregate proceeds to the Company of $15,750,000. Since the Preferred Stock meets the definition of Mandatorily Redeemable Preferred Stock, it has been excluded from the Common Stockholders' Equity section of the Consolidated Balance Sheets. As of December 31, 1997 and 1996, 230,000 of the Series A Preferred Stock had been converted into 51,200 shares of Common Stock and all 340,000 shares of the Series B Preferred Stock had been converted into 56,100 shares of Common Stock. F-17 The dividend payment date for Series A Preferred Stock is October 15. The Series A Preferred Stock has a liquidation preference equal to $25.00 per share, plus accrued and unpaid dividends up to the liquidation date. The Series A Preferred Stock is redeemable for cash at the option of the Company. The Series A Preferred Stock is also redeemable for cash at the option of the holder upon certain major stock acquisitions or business combinations at $25.00 per share, plus accrued and unpaid dividends through the redemption dates. The holders of Preferred Stock have no voting rights except as required by applicable law and except that if the equivalent of two full annual cash dividends shall be accrued and unpaid, the holders of the Series A Preferred Stock shall have the right, as a class, to elect two additional members of the Company's Board of Directors. As of the date hereof, the holders of the Series A Preferred Stock have not exercised their right to elect such directors. The Series A Preferred Stock has been exchangeable in whole, but not in part, at the option of the Company on any dividend payment date since October 15, 1993, for 9% Convertible Subordinated Debentures of the Company due 2016. Holders of Series A Preferred Stock will be entitled to $25 principal amount of Debentures for each share of Series A Preferred Stock. The Series A Preferred Stock is recorded at redemption value, which is $25.00 per share plus cumulative dividends of 9% per annum. The following table summarizes activity of the Series A Preferred Stock (In Thousands): Series A -------- Shares Amount ------ ------ Balance at December 31, 1995 60 $2,068 Accrual of 9% dividends -- 135 ------ ------ Balance at December 31, 1996 60 2,203 Accrual of 9% dividends -- 135 ------ ------ Balance at December 31, 1997 60 $2,338 ====== ====== F-18 NOTE 10--COMMON STOCKHOLDERS' EQUITY At December 31, 1997 the Company had the following Common Stock reserved for issuances under various plans and agreements (In Thousands): Common Shares For exercise of stock purchase warrants 7,407 For conversion of debentures 2,979 For exercise of stock options 2,091 For other 93 ------ 12,570 ====== The Company has never paid any dividends on its Common Stock. The current policy of the Board of Directors is to retain earnings to finance the operation of the Company's business. Accordingly, it is anticipated that no cash dividends will be paid to the holders of the Common Stock in the foreseeable future. Under the terms of the Series A Preferred Stock, the Company is restricted from paying dividends on its Common Stock so long as there are arrearages on dividend payments on the Series A Preferred Stock. There currently are such arrearages. STOCK PURCHASE WARRANTS At December 31, 1997, stock purchase warrants to purchase an aggregate of 6,122,000 shares of Common Stock were outstanding, which were exercisable at prices ranging from $2.50 to $24.60 per share, of which 787,000 warrants have an exercise price of $2.50 per share, 2,571,000 warrants have an exercise price of $3.00 per share and warrants to purchase 2,450,000 shares have an exercise price of $5.00 per share. The warrants expire through December 2004. During the year ended December 31, 1997, the Company issued stock purchase warrants to purchase an aggregate of 2,999,000 shares of the Company's Common Stock (including Class B warrants to purchase approximately 2,450,000 shares, which became outstanding upon exercise of the Class A warrants), all of which were granted at exercise prices which were equal to or greater than the market price of the Company's Common Stock on the dates of grant. During the year ended December 31, 1997, the Company temporarily lowered the exercise price on its Class A and Class B redeemable warrants. Approximately 70% of all outstanding Class A redeemable warrants (approximately 4,900,000 Class A warrants) were exercised during this period which generated approximately $9,800,000 in proceeds to the Company. The exercise of the Class A warrants resulted in issuance of approximately 4,900,000 shares of common stock. The exercise price of the Registrant's Class B redeemable warrants was also temporarily lowered; however, no Class B warrants were exercised during 1997. Additionally, 162,000 stock purchase warrants were converted into shares of the Company's Common Stock, yielding net proceeds of $405,000 to the Company during 1997. Also during 1997, 110 underwriters' warrants were exercised, providing proceeds of $132,000 to the Company, which resulted in the issuance of 110 $1,000 face value 12% Debentures due February 13, 2006 and 110,000 Class A warrants. Such warrants were exercised during 1997 and are included in the 4,900,000 discussed above. The proceeds were allocated between the Debentures, the Class A Warrants and the conversion feature of the Debentures based upon the relative fair values of each on the date of issuance. During the year ended December 31, 1996, no stock purchase warrants were converted into shares of the Company's Common Stock. During the year ended December 31, 1995, stock purchase warrants were converted into 90,000 shares of the Company's Common Stock at $2.50 per share. Such F-19 conversions yielded net proceeds of $214,000 to the Company in the year ended December 31, 1995. In addition, the Company has granted warrants outside of the Plans in connection with private placements of its securities and as consideration for various services. These warrants have been granted for terms not exceeding ten years from the date of grant. The table below summarizes warrant activity for the years ended December 31, 1995, 1996 and 1997. (In thousands except per share data) Number of Price Common Shares Per Share ------------- --------- Outstanding at December 31, 1994 479 -- Granted 176 $2.50-$7.50 Exercised (90) $ 2.50 Canceled (18) $5.00-$20.00 -------- Outstanding at December 31, 1995 547 Granted 7,845 $2.50-$3.00 Canceled (88) $5.00-$120.00 -------- Outstanding at December 31, 1996 8,304 Granted 2,999 $2.50-$5.00 Exercised (5,061) $2.00-$2.50 Canceled (120) $2.50-$116.25 -------- Outstanding at December 31, 1997 6,122 ======== COMMON STOCK TRANSACTIONS During the year ended December 31, 1997, the Company awarded 600 shares of Common Stock to outside Directors as compensation. The Company also issued approximately 4,900,000 shares of Common Stock as a result of the exercise of approximately 4,900,000 Class A warrants. Also, 172,000 shares of Common Stock were issued in connection with the exercise of other stock options/warrants and 9,000 shares of Common Stock were issued as the result of conversion of 23 of the Company's $1,000 face value 12% Debentures due February F-20 13, 2006. During the year ended December 31, 1996, the Company issued 14,000 shares of Common Stock as payment for consulting services and awarded 1,000 shares of Common Stock to outside Directors as compensation. During the year ended December 31, 1995, the Company issued 251,000 shares of Common Stock and 12% promissory notes in the aggregate principal amount of $1,770,000 in private placement transactions, with total net proceeds of $1,583,000, which were allocated between the notes and the Common Stock based upon the relative fair values of each on the dates of issuance. Also 10,000 shares of the Company's Series A Preferred Stock were converted into 3,100 shares of Common Stock at the conversion price of $110.00 per share. The Company also issued 800 shares of Common Stock to outside Directors as compensation during the year ended December 31, 1995. STOCK SUBSCRIPTIONS RECEIVABLE Stock subscriptions receivable at December 31, 1996 relate to a subscription agreement whereby the subscriber had entered into a subscription agreement with the Company and delivered promissory notes for the purchase of the shares. The shares were issued in the name of the individual but were pledged to the Company to secure payment for such shares under the promissory notes. The shares were released from the pledge as they were paid for. Under the terms of the subscription agreement and the related promissory note, the purchase price for the stock was set at the closing price for the Company's Common Stock on the date that the subscriber made the payment for shares to be delivered and payment was made to the Company under the promissory notes. The stock subscription receivable and additional paid in capital were reduced by $351,000 during the year ended December 31, 1995 to reflect the current trading price for the Company's Common Stock. The stock subscription receivable and additional paid in capital were further reduced by $105,000 in 1997, upon the discontinuation of this arrangement. STOCK OPTION PLANS The Company has in effect Stock Option Plans (the "Plans"), pursuant to which directors, officers, and employees of the Company who contribute materially to the success of the Company are eligible to receive grants of options for the Company's Common Stock. An aggregate of 2,091,000 shares of Common Stock have been reserved for issuance under the Plans, of which 241,000 are outstanding under the 1991 and 1994 Plans and 1,500,000 are outstanding under the Executive Plan as of December 31, 1997. Options may be granted for terms not exceeding ten years from the date of grant except for stock options which are granted to persons owning more than 10% of the total combined voting power of all classes of stock of the Company. For these individuals, options may be granted for terms not exceeding five years from the date of grant. Options may not be granted at a price which is less than 100% of the fair market value on the date the options are granted (110% in the case of persons owning more than 10% of the total combined voting power of the Company). During the year ended December 31, 1997, 9,000 stock options were converted into shares of the F-21 Company's Common Stock. Holders of stock options exercised no options during the years ended December 31, 1996 or 1995. Had the compensation cost for the Company's Plans been determined based on the fair value at the grant dates for awards under the Plans, consistent with the method of FAS 123, the Company's net loss and basic net loss per common share on a pro forma basis would have been (In Thousands, except per share data): For the Year Ended December 31, -------------------------- 1997 1996 1995 ------- -------- ------- Net loss $(3,938) $(6,354) $(2,727) Basic net loss per common share $( 1.00) $( 1.95) $ ( .96) The preceding pro forma results were calculated using the Black-Scholes option-pricing model. The following assumptions were used for the years ended December 31, 1997 and 1996, respectively: (1) risk-free interest rates of 6.2% and 6.5%; (2) dividend yield of 0.0% and 0.0%; (3) expected lives of 9.7 and 10 years; and (4) volatility of 73.1% and 88.1%. Results may vary depending on the assumptions applied within the model. The effects of application of FAS 123 are not likely to be representative of the effects on net income or loss for future years because options vest over several years and generally additional awards are made each year. In addition, the Company has granted options outside of the Plans in connection with private placements of its securities and as consideration for various services. These options have been granted for terms not exceeding ten years from the date of grant. The table below summarizes activity in the Company's Plans for the years ended December 31, 1995, 1996 and 1997. F-22 (In thousands except per share data) NUMBER OF WEIGHTED AVERAGE COMMON SHARES EXERCISE PRICE ------------- -------------- Outstanding at December 31, 1994 164 $ 54.71 Granted 123 $ 3.75 Canceled (74) $ 31.94 ------ Outstanding at December 31, 1995 213 $ 33.04 Granted 1,525 $ 3.74 Canceled (20) $ 83.71 ------ Outstanding at December 31, 1996 1,718 $ 6.39 Granted 53 $ 2.93 Exercised (9) $ 2.31 Canceled (21) $ 47.68 ------ Outstanding at December 31, 1997 1,741 $ 5.81 ====== Options and warrants outstanding include 6,122,000 warrants, all of which are exercisable, and 1,741,000 options, of which 679,000 are vested and exercisable at December 31, 1997. NOTE 11--PROVISION FOR INCOME TAXES The Company has recognized a deferred tax asset of approximately $18,900,000 as of December 31, 1997, primarily related to net operating loss carryforwards and basis differences in the stock of its foreign subsidiary; however, the Company has established a valuation allowance equal to the full amount of the deferred tax asset, as future operating profits cannot be assured. At December 31, 1997, the Company has net operating loss (the "NOL") carryforwards of approximately $28,000,000 available to offset future U.S. taxable income. The Company calculates that its use of the NOL may be limited to approximately $1,000,000 each year as a result of stock, option and warrant issuances during current and prior fiscal years resulting in an ownership change of more than 50% of the Company's outstanding equity. Additionally, approximately $1,800,000 of the NOL generated in 1995 available to offset future U.S. taxable income will be limited to approximately $300,000 per year over the next six years due to the change in tax year end during 1995. The Company utilized approximately $14,000,000 of NOLs to offset taxable income during 1997. If not offset against future taxable income, the NOL carryforwards will expire in tax years 1998 through 2012. Total income tax expense was $280,000 (domestic) and $341,000 (foreign) for the year ended December 31, 1997. These amounts differ from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of U.S. alternative minimum taxes and certain nondeductible expenses in Spain. The Company incurred no income tax expense in the years ended December 31, 1996 or 1995. F-23 NOTE 12--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS The following is a summary of the results of operations and identifiable assets of the Company's wholly-owned foreign subsidiaries and its U.S. operations as of and for the years ended December 31, 1997, 1996 and 1995, respectively. (In Thousands) Year Ended December 31, 1997 ------------------------------------------------- France Spain U.S. Consolidated ------ ----- ---- ------------ Revenue $ 2,029 $ 12,491 $ 382 $ 14,902 Net income (loss) $ (20) $ 282 $ (4,077) $ (3,815) Identifiable assets $ 0 $ 6,949 $ 14,094 $ 21,043 (In Thousands) Year Ended December 31, 1996 ------------------------------------------------- France Spain U.S. Consolidated ------ ----- ---- ------------ Revenue $ 11,625 $ 11,299 $ 209 $ 23,133 Net income (loss) $ 178 $ 722 $ (3,819) $ (2,919) Identifiable assets $ 5,322 $ 7,887 $ 3,349 $ 16,558 (In Thousands) Year Ended December 31, 1995 ------------------------------------------------- France Spain U.S. Consolidated ------ ----- ---- ------------ Revenue $ 24,452 $ 6,736 $ 249 $ 31,437 Net income (loss) $ 1,268 $ (313) $ (3,281) $ (2,326) Identifiable assets $ 7,100 $ 6,829 $ 2,361 $ 16,290 Total liabilities attributable to foreign operations were $2,909,000, $4,472,000 and $5,607,000 at December 31, 1997, 1996 and 1995, respectively. There were no dividends from foreign subsidiaries, and net foreign currency gains (losses) reflected in results of operations for the years ended December 31, 1997, 1996 and 1995 were approximately ($24,000), ($1,000) and $3,000, respectively. Sales in France for the years ended December 31, 1996 and 1995 include approximately $2,200,000 and $7,300,000, respectively, to Pharmacie Centrale des Hopitaux. F-24 The Company divested its French subsidiary in June 1997. Therefore, total revenue generated by Chimos/LBF for the year ended December 31, 1997 includes results for six months only. NOTE 13 - COMMITMENTS AND CONTINGENCIES The Company completed the sale of Chimos/LBF, for approximately $3,650,000 in June 1997. The Company has since received approximately $3,300,000, including approximately $2,600,000 of cash and cash equivalents on Chimos/LBF's books prior to its disposition, of which approximately $500,000 was used to repay indebtedness to the former subsidiary. An escrow fund in the amount of approximately $350,000 representing the balance due the Company has been established for certain contingent obligations or liabilities. In the opinion of management, the resolution of these contingencies will have no material effect on the Company's financial position or results of operations. On July 15, 1993, Michael M. Harshbarger, the Company's former President and Chief Executive Officer was discharged for cause from the Company. At the time of his discharge, Harshbarger owed the Company approximately $121,000 as a result of expenses of a personal nature which he charged to the Company's accounts and removal of corporate assets for personal use. Harshbarger has sued the Company for wrongful termination, seeking damages in excess of $1,400,000 and the Company has countersued for wrongful conversion and civil theft, fraud and deceit, and breach of contract, in an effort to recover the amounts owed by Harshbarger. The Company amended its counterclaim against Harshbarger for breach of fiduciary duty and is seeking damages in excess of $1,000,000. Harshbarger attempted to use the Americans with Disabilities Act (the "ADA") as a defense to the Company's counterclaim; however, the judge ruled in favor of the Company's motion to strike Harshbarger's ADA defense. The Company has recently filed a motion to set this matter for trial and attempted to secure a trial date. However, since mediation was attempted more than one year ago, the judge ordered another mediation conference before setting this matter for trial. Harshbarger failed to appear at his deposition set in January 1998; consequently discovery in this matter is still outstanding. On two separate occasions, Harshbarger's counsel has withdrawn from the case, citing irreconcilable differences. As a result, Harshbarger is now representing himself in this matter. In the opinion of current management, the outcome will have no material effect on the financial position or results of operations of the Company. Belmac Hygiene, Inc. ("Hygiene"), a subsidiary of the Company, 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 Corporation ("Maximed") and Robert S. Cohen. The defendants are Hygiene's partners (or such partner's control persons) in the Company'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 Company alleging that Hygiene failed to fund the Partnership and seeking $10,000,000 from the Company pursuant to its guaranty of Hygiene's obligations. The issues were tried, without a jury, on August 21 through 23, 1995. On January 12, 1996, the Court ruled that the Company's reliance on defendants' misrepresentation was not justified and that the Company had performed its F-25 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 Company filed an appeal in the United States Court of Appeals for the Second Circuit. On August 27, 1997, the United States Court of Appeals for the Second Circuit affirmed in part and vacated and remanded in part the judgment of the United States District Court for the Southern District of New York. The appeals court order vacated that portion of the district court judgment that dismissed the Company's claim of fraud and remanded the claim to the district court for further proceedings. Those portions of the district court judgment which dismissed the Company's contract claim for breach of warranty, the defendants' counterclaim for fraud and breach of contract and Medstar, Inc.'s action for breach of an alleged guaranty were affirmed. On December 17, 1997, the United States District Court of the Southern District of New York awarded the Company a judgment of $7,686,000 relating to its claim of fraud that the Company filed against defendants Medstar Inc., Maximed Corporation, and Robert S. Cohen, both jointly and severally. On January 16, 1998, the defendants filed a notice of appeal from the judgment. The defendants have not obtained a stay of execution pending appeal, and therefore, efforts to collect the judgment are proceeding. These efforts include a motion that has been filed by the Company, for the court to order a sale of Medstar's interest in the partnership. On March 16, 1998, defendants filed their appellate brief and the Company's brief is due to be filed on April 16, 1998. Oral argument is scheduled for May 1998. Pending resolution of this dispute, the partnership is not actively engaged in the development of any products. In the opinion of management, the carrying value of its investment in the partnership, accounted for using the equity method, of $553,000 as of December 31, 1997 and 1996, is not impaired and no reserve is considered necessary. The Company is also obligated to pay royalties on sales of the drug Alphanon(R) (See Note 6). An agreement entered into between the Company and Jean-Francois Rossignol, its former Chairman and Chief Executive Officer, in August 1993, entitled the Company to receive aggregate payments of $360,000 upon the commercialization of a certain drug. The Company received $160,000 of such amount in December 1995 and the remaining $200,000 in 1996. The Company recorded the entire $360,000 as other income in the year ended December 31, 1995. On November 30, 1992, Marc S. Ayers resigned as Chief Financial Officer of the Company and effective December 17, 1992, resigned as a member of the Board of Directors. At December 31, 1994 Ayers owed the Company $412,000 plus $121,000 accrued interest under two stock subscription notes receivable, both of which had matured and remained unpaid. Ayers sued the Company alleging breach of contract and the Company countersued Ayers. This matter was tried in 1994 and a jury verdict rendered on August 18, 1994, found in favor of Ayers on one issue and in favor of the Company on another issue. The judge ordered a new trial on all issues and no judgement was entered in the case. After a jury trial in May 1995, the jury found no binding contract was made between the Company and Ayers while awarding Ayers a recovery of approximately $27,000 for consulting services rendered and cancellation of the promissory notes and interest thereon. The cancellation of the promissory notes and related interest has been included in other income/expense, net, for the year ended December 31, 1995. F-26 The Company leases certain of its assets under noncancellable operating leases. Total charges to operations under operating leases were approximately $350,000, $448,000 and $493,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease payments under operating leases are as follows: (In Thousands) Year Ending December 31, ------------------------ 1998 $ 402 1999 321 2000 330 2001 340 2002 andthereafter 350 NOTE 14 - EXTRAORDINARY ITEM - FISCAL YEAR 1996 The Company recorded an extraordinary charge, net of income tax effect of zero, of $446,000, or $.13 per common share, in February 1996 upon the extinguishment of debt that it had incurred in its October 1995 private placements, representing unamortized discount and issuance costs at the date of repayment (see Note 8). F-27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Bentley Pharmaceuticals, Inc. Tampa, Florida We have audited the consolidated financial statements of Bentley Pharmaceuticals, Inc., and subsidiaries (the "Company") as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated March 27, 1998; such consolidated financial statements and report are included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule of the Company listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Tampa, Florida March 27, 1998 F-28 BENTLEY PHARMACEUTICALS, INC. Schedule II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E --------------- ---------- ------------------------------- ---------- ---------- Additions ------------------------------- Balance at Charged to Charged to beginning of costs and other accounts- Deductions- Balance at Description period expenses describe (a) describe end of period ----------- ------ -------- ------------ -------- ------------- Drug licenses and related costs: For the year ended December 31, 1997 $497,000 $110,000 $(79,000) $528,000 For the year ended December 31, 1996 406,000 119,000 (28,000) 497,000 88,000 27,000 For the year ended December 31, 1995 291,000 406,000 Goodwill: For the year ended December 31, 1997 564,000 $564,000(b) -- For the year ended December 31, 1996 186,000 378,000(c) 564,000 For the year ended December 31, 1995 148,000 38,000 186,000 Reserve for inventory obsolescence: For the year ended December 31, 1997 827,000 (24,000) 678,000(d) 125,000 For the year ended December 31, 1996 819,000 136,000 128,000(e) 827,000 For the year ended December 31, 1995 248,000 571,000 819,000
- -------------- (a) Effect of exchange rate fluctuation (b) Represents goodwill related to the Registrant's French subsidiary, which was divested in June 1997. (c) Includes approximately $340,000 of unamoritized goodwill related to the Registrant's French subsidiary that management of the Registrant determined may not be realizable via the sale of its French subsidiary (which sale occurred in June 1997). (d) Includes a disposition of inventory of approximately $547,000, which has been fully reserved and approximately $131,000 related to the Registrant's French subsidiary, which was divested in June 1997. (e) Represents disposition of inventory, which has been fully reserved. F-29 EX-3.(II) 2 EX.3.2 - AMENDED BYLAWS AMENDED AND RESTATED BYLAWS OF BENTLEY PHARMACEUTICALS, INC. ADOPTED MARCH 24, 1998 ARTICLE I. MEETINGS OF StockholderS Section 1. Annual Meeting. The annual meeting of the Stockholders of the Corporation for the election of Directors and the transaction of such other business as may be properly come before the meeting shall be held the second Friday in June of each year, at 10:00 A.M. at a place to be determined by the President or the Board of Directors. If the annual meeting is not held, by oversight or otherwise, a special meeting shall be held as soon as practical, and any business transacted or election held at that meeting shall be as valid as if transacted or held at the annual meeting. Section 2. Special Meetings. Special meetings of the Stockholders for any purpose shall be held when called by the President or the Board of Directors or when requested in writing by the holder or holders of not less than ten percent (10%) of all the shares entitled to vote at the meeting. A meeting requested by Stockholders shall be called for a date not less than ten nor more than sixty days after the request is made, unless the Stockholders requesting the meeting designate a later date. The Secretary shall issue the call for the meeting, unless the President, the Board of Directors, or the Stockholders requesting the meeting designate another person to do so. The Stockholders at a special meeting may transact only business that is related to the purposes stated in the notice of the meeting. Section 3. Place. Meetings of Stockholders may be held within or without the State of Florida and any Stockholder may waive notice thereof either before or after the meeting. Section 4. Notice. A written notice of each meeting of Stockholders, stating the place, day, and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered to each Stockholder of record entitled to vote at the meeting, not less than ten nor more than sixty days before the date set for the meeting, either personally or by first class mail, by or at the direction of the President, the Secretary, or the Officer or other persons calling the meeting. If mailed, the notice is effective when it is deposited in the United States mail, postage prepaid, addressed to the Stockholder at his address as it appears on the records of the Corporation. This notice shall be sufficient for that meeting and any adjournment of the meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and if after the adjournment, the Board does not fix a new record date for the adjourned meeting. If any Stockholder transfers any of his stock after notice is given, it shall not be necessary to notify the transferee. Part (A) all items to be placed on the agenda for vote at an annual stockholders meeting including any director or slate of directors, must be submitted to the company in writing 75 days prior to the day of the meeting to allow the company time to have the item included in the proxy statement mailed to all the stockholders with the notice of said meeting and further, in the case of a nomination of a director or a slate of directors the submission of the required qualifications and background information and acceptance of the nomination in writing of said nominees. Section 5. Waivers of Notice. Whenever any notice is required to be given to any Stockholder of the Corporation under these Bylaws, the Articles of Incorporation, or the Florida General Corporation Act, a written waiver of notice signed at any time by the person entitled to that notice shall be equivalent to giving that notice. Attendance by a Stockholder entitled to vote at a meeting, -2- in person or by proxy, constitutes a waiver of notice of the meeting, except when a Stockholder attends a meeting for the purpose, expressed at the beginning of the meeting, of objecting to the transaction of any business because the meeting is not lawfully called or convened. Section 6. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining Stockholders entitled to payment of any dividend or to receive notice of or to vote at any meeting of Stockholders or any adjournment of any meeting or in order to make a determination of Stockholders for any other purpose, the Board of Directors may provide that the stock transfer books shall be closed for a period not to exceed sixty days. If the stock transfer books are closed for the purpose of determining Stockholders entitled to notice of or to vote at a meeting of Stockholders, they shall be closed at least ten days immediately preceding that meeting. Instead of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for the determination of shareholders but that date shall never be more than sixty days nor, in case of a meeting of Stockholders, less than ten days prior to the date on which the action requiring the determination of Stockholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of Stockholders, the date on which either notice of the meeting is mailed or the resolution of the Board of Directors declaring a dividend or authorizing the action that requires a determination of Stockholders is adopted shall be the record date for the determination of Stockholders. When a determination of Stockholders entitled to vote at any meeting of Stockholders has been made as provided in this section, the determination shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date for the adjourned meeting. Section 7. Voting Record. At least ten days before each meeting of Stockholders, the officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete -3- list of the Stockholders entitled to vote at that meeting or at adjournment of the meeting, stating each Stockholder's address and the number, class, and series of the shares that he holds. This list shall be kept on file fourteen days before the meeting at the Corporation's registered office or principal place of business or at the office of its transfer agent or registrar, and any Stockholder may inspect the list anytime during usual business hours. The list also shall be produced and kept open at the time and place of the meeting, and any Stockholder may inspect it anytime during the meeting. If the requirements of this section have not been substantially complied with, the meeting shall be adjourned upon the demand of any Stockholder, in person or by proxy, until the requirements are complied with. If no demand is made, failure to comply with the requirements of this section does not affect the validity of .any action taken at the meeting. Section 8. Stockholder Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy constitutes a quorum at the meeting of Stockholders. When an item of business must be voted on by a class or series of stock, a majority of the shares of that class or series constitutes a quorum for the transaction of that business by that class or series. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the matter is the act of the Stockholders unless otherwise provided by law or by Article 8 of the Articles of Incorporation. After a quorum has been established at a Stockholders' meeting, a withdrawal of Stockholders that reduces the number of Stockholders entitled to vote at the meeting below the number required for a quorum does not affect the validity of any action taken at or adjournment of the meeting. Section 9. Voting of Shares. Every Stockholder entitled to vote at a meeting of Stockholders is entitled, upon each proposal presented to the meeting, to one vote for each share of voting stock -4- recorded in his name on the books of the Corporation on the record date fixed as provided in Article I, Section 6 of these Bylaws. A Stockholder may vote either in person or by proxy executed in writing by the Stockholder or his duly authorized attorney-in-fact. Treasury shares, shares of stock of this Corporation owned by another corporation the majority of the voting stock of which is owned or controlled by this Corporation, and shares of stock of this Corporation that it holds in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares. The Chairman of the Board, the President, any Vice President, the Secretary, and the Treasurer of a corporate Stockholder, in that order, are presumed to possess authority to vote shares standing in the name of the corporate Stockholder in the absence of a bylaw or other instrument of the corporate Stockholder designating some other officer, agent, or proxy to vote the shares. Proof of that designation shall be made by presentation of a certified copy of the bylaws or other instrument of the corporate Stockholder. Shares held by a personal representative, guardian, or conservator may be voted by him, either in person or by proxy, without a transfer of those shares into his name. A trustee may vote, either in person or by proxy, shares standing in his name, but no trustee may vote any shares that are not, transferred into his name. If he is authorized to do so by an appropriate order of the court by which he was appointed, a receiver may vote shares standing in his name or held by or under his control without a transfer of those shares into his name. A Stockholder whose shares are pledged may vote those shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee or his nominee shall be entitled to vote the .shares transferred, unless the instrument creating the pledge provides otherwise. Section 10. Proxies. A Stockholder entitled to vote at a meeting of the Stockholders or to express -5- consent or dissent without a meeting or a Stockholder's duly authorized attorney-in-fact may authorize one or more persons to act for him by proxy. To be effective, a proxy must be signed by the Stockholder or his attorney-in-fact. A proxy granting authority to vote shares that are registered in the names of multiple owners is effective only if each record owner signs it. A proxy is not valid after eleven months from its date unless it provides otherwise. A proxy is revocable at the pleasure of the Stockholder executing it, except as otherwise provided by law. A proxy holder's authority to act is not revoked by the incompetence or death of the Stockholder who executed the proxy unless, before the authority is exercised, the Corporate Officer responsible for maintaining the list of Stockholders receives written notice of an adjudication of incompetence or death. If a proxy for the same shares confers authority on two or more, persons and does not otherwise indicate how the shares should be voted, a majority of those proxies who are present at the meeting (or a single proxy holder if only one is present) may exercise all the powers conferred by the proxy, but if the proxy holders present at the meeting are equally divided as to the manner of voting in any case, the voting of the shares subject to the proxy shall be prorated. If a proxy expressly provides, the proxy holder may appoint in writing a substitute to act in his place. Section 11. Action by Stockholders Without a Meeting. Any action required by law, these Bylaws, or the Articles of Incorporation of this Corporation to be taken at an annual or special meeting of Stockholders of the Corporation or any action that may be taken at any annual or special meeting of the Stockholders may be taken without a meeting, without prior notice, and without a vote, if a written consent, setting forth the action taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on the matter were present and voted. All -6- Stockholders need not sign the same document. If any class of shares is entitled to vote as a class, written consent required is of both (a) the holders of a majority of the shares of each class of shares entitled to vote as a class, and (b) the total shares entitled to vote on the matter. Within ten days after the Stockholders authorize an action by written consent, written notice shall be given to the Stockholders who did not consent. The notice shall fairly summarize the material features of the authorized action and, if the action is a merger, consolidation, or sale or exchange of assets for which dissenters' rights are provided under the Florida General Corporation Act, the notice shall contain a clear statement of the right of the dissenting Stockholders to be paid the fair value of their shares upon compliance with the other provisions of the Act concerning the rights of dissenting Stockholders. Section 12. Voting Trusts. Any number of Stockholders of this Corporation may create a voting trust in the manner provided by law for the, purpose of conferring upon the trustee or trustees the right to vote or otherwise represent their shares. When the counterpart of a voting trust agreement and a copy of the record of the holders of voting trust certificates are deposited with the Corporation as provided by law, those documents shall be subject to the same right of examination by a Stockholder of the Corporation, in person or by agent or attorney, as are the books and records of the Corporation, and the counterpart and the copy of the records shall be subject to examination by any holder of record of voting trust certificates, either in person or by agent or attorney at any reasonable time for any proper purpose. Section 13. Stockholders Agreement. Two or more Stockholders of this Corporation may enter into an agreement providing for the exercise of voting rights in the manner provided in the agreement or relating to any phase of the affairs of the Corporation, in the manner and to the extent provided -7- by law. The agreement shall not impair the right of this Corporation to treat a Stockholder of record as entitled to vote the shares as standing in his name. ARTICLE II. DIRECTORS Section 1. Function. The business of this Corporation shall be managed and its corporate powers exercised by the Board of Directors. Section 2. Number. The number of members of the Corporation's Board of Directors shall not be less than one nor more than thirteen. All the Directors shall be of full age and at least one shall be a citizen of the United States. The presence of a majority of all Directors shall be necessary at any meeting to constitute a quorum for the transaction of business. Meetings of the Directors may be held within or without the state of Florida. With the exception of the President of this corporation, Directors and officers need not be stockholders of the corporation. Section 3. Qualification. Each Director need not be a resident of Florida. Section 4. Election and Term. There shall be three classes of Directors known as Class 1, Class 2 and Class 3 respectively with each class having as equal a number of Directors as possible. The names and post office addresses of the Directors until the first annual meeting after adoption of this amendment and the class to which each shall belong are as follows: Class 1 December 1987 Name Post Office Address ---- ------------------- Ranald Stewart, Jr. 1501 Sheridan Forest Tampa, Florida 33609 Walter L. Benson 2024 Belleair Road Clearwater, Florida 33546 -8- F. Stuart Clemmons 1924 Michigan Avenue N.E. St. Petersburg, Florida 33703 Class 2 December 1988 Name Post Office Address ---- ------------------- P. Calvin Maybury 4102 Cypress Bayou Drive Tampa, Florida 33624 Kenneth P. Parvin 3559 Manatee Drive S.E. St. Petersburg, Florida 33705 Eldon Post 6604 11th Avenue West Bradenton, Florida 33505 Edmund G. Vimond, Jr. 18 Timothy Lane Bedminster, New Jersey 07921 Class 3 December 1989 Name Post Office Address ---- ------------------- Harold W. Huber 1700 West Bay Drive Largo, Florida 33540 James C. Vesey 8800 Bardmoor Boulevard, 27W Seminole, Florida 33543 John A. Macleod 2858 Sandpiper Place Clearwater, Florida 33520 Arnold J. Winograd 1053 Indian Trail Destin, Florida 32541 The term of office of the Class 1 Directors above named shall expire at the first annual meeting after adoption of this amendment; the term of the Class 2 directors shall expire at the second annual meeting after adoption of this amendment and the term of the Class 3 directors shall expire at the third annual meeting after adoption of this amendment. Upon expiration of the terms of office of the -9- Directors classified above, their successors shall be elected for the term of three years each, so that approximately one-third of the number of directors of the Corporation shall be elected annually. (a) The Stockholders may by affirmative vote of the holders of shares entitling them to exercise 2/3 of the voting power of the corporation fill any vacancy in the office of the Director created by death or resignation. (b) No person, other than a Director retiring at the meeting or a person recommended by the Directors for election,, shall be eligible for election to the office of Director at any general meeting unless not less than seventy-five days before the day appointed for the meeting there shall have been left at the office of the corporation notice in writing signed by a Stockholder duly qualified to attend and vote at such meeting, of his intention to propose such a person for election, and also notice in writing signed by that person of his willingness to be elected. (c) If at any general meeting at which an election of Directors ought to take place, the place of any retiring Director be not filled, such retiring Director shall (unless a resolution for his re-election shall have been put to the meeting and lost) continue in office until the annual general meeting in the next year, and so on from time to time until his place has been filled. (d) A Director may only be removed for cause at a meeting of the Stockholders held for such purposes, by the affirmative vote of the holders of shares entitling them to exercise 2/3 of the voting power of the corporation on such removal, provided that such Director prior to his removal shall have received a copy of the charges against him, delivered to him personally or being mailed to the address appearing upon the records of the corporation at least 10 days prior to such meeting and be given an opportunity to be heard on such charges at such meeting. -10- Each director shall hold office for the term for which he is elected and until his successor has been elected and qualified or until his earlier death, resignation, or removal from office. Section 5. Compensation. The Board of Directors has authority to fix the compensation of the Directors as Directors and as officers. Section 6. Duties of Directors. A Director shall perform his duties as a Director, including his duties as a member of any committee of the Board upon which he serves, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as I an ordinarily prudent person in a similar position would use under similar circumstances. In performing his duties, a Director may rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by the following: (a) one or more Officers or employees of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented; (b) counsel, public accountants, or other persons as to matters that the Director reasonably believes to be within that person's professional or expert competence; or (c) a committee of the Board upon which he does not serve and which he reasonably believes to merit confidence, as to matters within the authority designated to it by the Articles of Incorporation or the Bylaws. A Director shall not be considered as acting in good faith if he has knowledge concerning the matter in question that would cause the reliance described above to be unwarranted. A person who performs his duties in compliance with this section shall have no liability because of his being or having been a Director of the Corporation. Section 7. Presumption of Assent. A Director of the Corporation who is present at a meeting of -11- the Board of Directors at which action on any corporate matter is taken is presumed to have assented to the action unless he votes against it or expressly abstains from voting on it. The Secretary of the meeting shall record each abstention or negative vote in the minutes of the meeting. Section 8. Vacancies. Vacancies shall be filled by the Stockholders, in accordance with Article 6 Part (C) of the Articles of incorporation and Article II Section 4 (A) of these By-Laws. Section 9. Quorum and Voting. A majority of the full Board of Directors constitutes a quorum for the transaction of business. The act of the majority of the Directors present at a meeting at which a quorum is present is the act of the Board of Directors. Section 10. Executive and Other Committees. The Board of Directors by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in the resolution shall have and may exercise all the authority of the Board of Directors, except that no committee shall have the authority to: (a) approve or recommend to Stockholders actions or proposal required by law to be approved by Stockholders, (b) designate candidates for the office of Director, for the purposes of proxy solicitation or otherwise, (c) fill vacancies on the Board of Directors or any committee of the Board, (d) amend the Bylaws, (e) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors, or (f) authorize or approve the issuance or sale of shares or any contract to issue or sell -12- shares or designate the terms of a series or class of shares, except as may be provided by the Florida General Corporation Act. The Board of Directors, by resolution adopted according to this section, may designate one or more Directors as alternate members of any committee, who may act in the place of any absent member at any meeting of that committee. Section 11. Place of Meetings. Regular and special meetings by the Board of Directors may be held within or outside the State of Florida. Section 12. Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than this Bylaw immediately after, and at the same place as, the annual meeting of Stockholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without notice other than this resolution. Section 13. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or any two Directors. All meetings, whether regular or special, shall be held at 9:00 A.M. unless in the case of special meetings the notice states a different time. Section 14. Notice of Meetings. Written notice of the time and place of special meetings of the Board of Directors shall be given to each Director by either personal delivery or first-class United States mail, telegram, or cablegram at least two days before the meeting. Notice of a meeting of the Board of Directors need not be given to any Director who signs a waiver of notice before, during, or after the meeting. Attendance of a Director at a meeting constitutes a waiver of notice of that meeting and waiver of all objections to the time and place of the meeting, and the manner in which it was called or convened, except when the Director attends the meeting solely -13- to object, at the beginning of the meeting, to the transaction of business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of that meeting. A majority of the Directors present, whether or not a quorum exists, may adjourn any meeting of the Board of Directors to another time and place. Notice of any adjourned meeting shall be given to the Directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of the adjournment, to the other Directors. Section 15. Method of Meeting. Members of the Board of Directors may participate in the meeting of the Board by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other at the same time. Participation by such means constitutes presence in person at a meeting. Section 16. Action Without a Meeting. Any action required to be taken at a meeting of the Directors, or any action that may be taken at a meeting of the Directors or a committee of the Directors, may be taken without a meeting if a written consent, setting forth the action to be taken and signed by all the Directors or committee members, is filed in the minutes of the proceedings of the Boa rd or the committee. All Directors need not sign the same document. A unanimous, written consent has the same effect as a unanimous vote. Section 17. Director Conflicts of Interest. No contract or other transaction between this Corporation and one or more of its Directors or any other corporation, firm, association or entity in which one or more of the Directors are directors or officers or are financially interested, shall be either void or voidable because of that relationship or interest or because the Director or Directors -14- are present at the meeting of the Board of Directors or a committee that authorizes, approves or ratifies the contract or transaction or because his or their votes are counted for that purpose, if: (a) the existence of the relationship or interest is disclosed or known to the Board of Directors or committee that authorizes, approves, or ratifies the contract or transaction by a vote or consent sufficient for the purpose, without counting the votes and consents of the interested Directors, or (b) the existence of the relationship or interest is disclosed, or known to the Stockholders entitled to vote and they authorize, approve, or ratify the contract or transaction by vote or written consent, or (c) the contract or transaction is fair and reasonable to the Corporation at the time it is authorized by the Board, a committee, or the Stockholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee that authorizes, approves, or ratifies the contract or transaction. ARTICLE III. OFFICERS Section 1. Officers. The Executive Officers of the Corporation shall consist of a Chief Executive Officer, President, a Secretary, and a Treasurer, and may include one or more Executive and Senior Vice Presidents. The Executive Officers shall be elected initially by the Board of Directors at the organization meeting of Directors and, after that, at the first meeting of the Board following the annual meeting of the Stockholders each year. The Board from time to time may elect or appoint other officers (including Vice Presidents), Assistant Officers, and agent, who shall have the authority -15- and perform such duties as the Board prescribes. Each officer shall hold office until his successor is appointed and has qualified or until his earlier death, resignation, or removal from office. One person may hold any two or more offices. The failure to elect any officer shall not affect the existence of the Corporation. Section 2. President. The President may also be the Chief Executive Officer of the Corporation. Subject to the directions of the Board of Directors, he has general and active management of the business and affairs of the Corporation, and shall preside at all meetings of the Stockholders and Board of Directors. The duties, powers and functions of the CEO and other officers shall be such as is and has been customary for such CEO and officers of the corporation. The duties powers and functions of the CEO may not be changed except at a meeting of the Stockholders held for such purpose by the affirmative vote of the holders of shares entitling them to exercise 2/3 of the voting power of the corporation on such proposal. Section 3. Vice Presidents. The Executive Vice Presidents and Senior Vice Presidents have the powers and shall perform the duties that the Board of Directors or the President prescribes. Unless the Board otherwise provides, if the President is absent or unable to act, the Executive Vice President shall perform all the duties and may exercise all the Powers of the President. If the Executive Vice President is absent or unable to act, the Vice President who has served in the capacity for the longest time and who is present and able to act shall perform all the duties and may exercise all the powers of the Executive Vice President. Unless the Board otherwise provides, any Executive or Senior Vice President may sign bonds, deeds, and contracts for the Corporation and, with the Secretary or Assistant Secretary, may sign certificates for shares of stock of the Corporation. -16- Section 4. Secretary. The Secretary shall (a) keep the minutes of the Proceedings of the Stockholders and the Board of Directors in one or more books provided for that purpose, (b) see that all notices are duly given according to the relevant provisions of these Bylaws or as required by law, (c) maintain custody of the Corporate records and seal, attest the signatures of Officers who execute documents on behalf of the Corporation, and affix the seal to all documents that are executed on behalf of the Corporation under its seal, (d) keep a register of each Stockholder's mailing address that the Stockholder furnishes to the Secretary, (e) sign with the President or a Vice President certificates for shares of stock of the Corporation, the issuance of which has been authorized by resolution of the Board of Directors, (f) h ave general charge of the stock transfer books of the Corporation, and (g) in general perform all duties incident to the office of Secretary and such other duties as the President or the Board of Directors from time to time prescribes. Section 5. Treasurer. The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation, (b) receive and give receipts for all monies due and payable to the Corporation and deposit all monies in the name of the Corporation in the banks, trust companies, or other depositories selected by the Board of Directors, and (c) in general perform all the duties incident to the office of Treasurer and such other duties as the President or the Board of Directors from time to time assigns to him. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such sureties as the Board of Directors determines. Section 6. Removal of Officers. An Officer or agent elected or appointed by the Board of Directors may be removed by the Board or the Chief Executive Officer whenever in the judgement of either, his removal would serve the best interests of the Corporation. Removal shall be without prejudice -17- to any contract rights of the person removed. The mere appointment of any person as an officer, agent, or employee of the Corporation does not create any contract rights. The Board of Directors may fill a vacancy in any office. Section 7. Salaries. The Board of Directors from time to time shall fix the salaries of the Officer, and no Officer shall be prevented from receiving a salary merely because he is also a Director of the Corporation. ARTICLE IV. INDEMNIFICATION Any person, or his heirs or personal representative who is made or threatened to be made a party to any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative, because he or his testator or intestate is or was a Director, officer, employee, or agent of this Corporation or serves or served any other Corporation or enterprise in any capacity at the request of this Corporation, shall be indemnified by this Corporation, and this Corporation may advance his related expenses to the full extent permitted by law. The foregoing right of indemnification or reimbursement shall not be exclusive of other rights to which the person or his heirs, or personal representative may be entitled. The Corporation may, upon the affirmative vote of a majority of its Board of Directors, purchase insurance for the purpose of indemnifying these persons. The insurance may be for the benefit of all Directors, Officers, or employees. ARTICLE V. STOCK CERTIFICATES Section 1. Issuance. Every Stockholder of this Corporation is entitled to have a certificate, evidencing all shares to which he is entitled. No certificate shall be issued for any share until the share is fully paid. -18- Section 2. Form. Certificates evidencing shares in this Corporation shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary and may be sealed with the seal of this Corporation or a facsimile of the seal. The signatures of the foregoing Officers may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Corporation or an employee of the Corporation. If, before the certificate is issued, any office holder who signed or whose facsimile signature has been placed on the certificate ceases to hold that office, the certificate may be issued and will be as effective as if that person were an officer at the date of issuance. Every certificate evidencing shares that are restricted as to the sale, disposition, or other transfer shall (a) bear a legend stating that those shares are restricted as to transfer and (b) the circumstances under which the shares may be transferred. Every certificate evidencing shares shall state on its face (a) the name of the Corporation, (b) that the Corporation is organized under the laws of Florida, (c) the name of the person or persons to whom the shares are issued, (d) the number and class of shares, (e) the designation of the series, if any, that the certificate evidences, and (f) the par value of each share evidenced by the certificate or a statement that the shares have no par value. Section 3. Lost, Stolen, or Destroyed Certificates. The Corporation may issue a new certificate in the place of any certificate previously issued if the holder of record of the Corporation (a) makes proof in affidavit form that it has been lost, destroyed, or wrongfully taken, (b) requests the issuance of a new certificate before the Corporation has notice the certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim, (c) if requested by the Corporation, -19- gives bond in such form as the Corporation directs, to indemnify the Corporation, the transfer agent, and the registrar against any claim that may be made because of the alleged loss, destruction, or theft of a certificate, and (d) satisfies any other reasonable requirements imposed by the Corporation. ARTICLE VI. BOOKS AND RECORDS Section 1. Records Required. This Corporation shall keep correct and complete books and records of account and minutes of the proceedings of its Stockholders, Board of Directors, and committees of Directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its Stockholders, giving the names and addresses of all Stockholders, and the number, class and series, if any, of the shares held by each. Section 2. Form. The Corporation's books, records, and minutes may be written or kept in any other form capable of being converted into writing within a reasonable time. Section 3. Inspection. Upon written demand, stating his purpose, any person who has been a holder of record of either shares or voting trust certificates representing shares of this Corporation for at least six months immediately preceding his demand and who is the holder of record of shares, or the holder of record of voting trust certificates for, at least five percent of the outstanding shares of any class or series of this Corporation may examine, in person or by agent or attorney, at any reasonable time for any proper purpose, its relevant minutes, books and records of accounts, and records of Stockholders and make extracts from them. This right of inspection does not extend to any person who is not acting in good faith or for a proper purpose in making his demand or who, within two years has (a) sold or offered for sale any list of Stockholders or holders of voting trust certificates for shares of this or any other Corporation, (b) aided or abetted any person in obtaining a list of -20- Stockholders or holders of voting trust certificates for that purpose, or (c) improperly used any information secured through any prior examination of the minutes, books and records of account, or record of Stockholders or holders of voting trust certificates for shares of this or any other Corporation. Section 4. Financial Reports. Unless modified by resolution of the Stockholders, not later than four months after the close of each fiscal year, which is July 1 through June 30th, this Corporation shall prepare a balance sheet showing in reasonable detail the financial condition of the Corporation as of the close of its fiscal year and a profit and loss statement showing the results of its operation during its fiscal year. These balance sheets ,and profit and loss statements shall be (a) filed in the registered office of the Corporation in Florida, (b) kept for at least five years, and (c) subject to inspection during business hours by any Stockholder or holder of voting trust certificates, in person or by agent. The Corporation shall mail a copy of the most recent balance sheet and profit and loss statement to any Stockholder or holder of voting trust certificates for shares of the Corporation, upon his written request. ARTICLE VII. DIVIDENDS The Board of Directors from time to time may declare, and the Corporation may pay, dividends on the Corporation's outstanding shares in the manner and upon the terms and conditions provided by law. ARTICLE VIII. SEAL The Corporate seal shall have the name of the Corporation and the word "seal" inscribed on it, and may be a facsimile, engraved, printed, or impression seal. -21- ARTICLE IX. AMENDMENT These Bylaws may be repealed or amended, and additional Bylaws may be adopted, by a majority vote of the Board of Directors, all in accordance and conformity with the Articles of Incorporation, and if any Bylaw is found to be in conflict with the Articles of Incorporation then the Articles of Incorporation shall prevail. -22- EX-4 3 EX.4.4 - STOCK OPTION PLAN BENTLEY PHARMACEUTICALS, INC. AMENDED AND RESTATED 1991 STOCK OPTION PLAN 1. PURPOSES OF THE PLAN AND TYPES OF OPTIONS (a) The purposes of this Stock Option Plan (the "Plan") of Bentley Pharmaceuticals, Inc., a Florida corporation (the "Corporation"), are (i) to make available shares of the Common Stock, par value $.02 per share (the "Common Stock"), of the Corporation for purchase on favorable terms by such employees (including officers) of the Corporation or its subsidiaries as the Board of Directors of the Corporation (the "Board"), or a committee thereof constituted for the purpose, may from time to time determine, and thus to promote the interests of the Corporation by attracting and retaining executive, management and other personnel of outstanding ability by enabling such personnel to participate in the long-term growth and financial success of the Corporation, and (ii) to attract and retain the services of experienced and knowledgeable non-employee directors ("Outside Directors") of the Corporation for the benefit of the Corporation and its Stockholders and to provide additional incentive for such Outside Directors to continue to work for the best interests of the Corporation and its Stockholders through continuing ownership of its Common Stock. (b) Stock options granted under the Plan may be of two types, incentive stock options ("Incentive Stock Options") and non-qualified stock options. It is intended that Incentive Stock Options granted under the Plan shall constitute "incentive stock options" within the meaning of Section 422(b) of the Internal Revenue Code of 1986 as now in effect or as later amended (the "Code") and shall be subject to the tax treatment described in Section 421 of the Code. 2. STOCK SUBJECT TO THE PLAN Subject to the provisions of Article 10, the total number of shares of Common Stock which may be subject to options under the Plan shall not exceed 500,000. Such shares may, in the discretion of the Board of the Corporation, consist of either in whole or in part of authorized but unissued shares, or shares which shall have been purchased or acquired by the Corporation for this or any other purpose. In the event any option granted under the Plan shall expire, be cancelled or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall be available for the purpose of the Plan. 3. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Board which, to the extent it shall determine, may delegate its powers with respect to the administration of the Plan A-1 to a committee (the "Committee") appointed by the Board and composed of not less than two directors (or such greater number as required by law), each of whom shall be a "Non-Employee Director" under Rule 16b-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). References hereinafter to determinations or actions by the Committee shall be deemed to include determinations and actions by the Board. A majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all members without a meeting, shall be the acts of the Committee. (b) The Committee shall determine, within the limits of the express provisions of the Plan, the individuals to whom, and the time or times at which, options shall be granted, the number of shares to be subject to each option, the duration of each option, the option price under each option, and the time or times within which (during the term of the option) all or portions of each option may be exercised. In making such determinations, the Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Corporation's success and such other factors as the Committee in its discretion shall deem relevant. (c) The Committee, in its sole discretion shall determine whether and to what extent options under the Plan shall be designated as Incentive Stock Options. (d) Each individual to whom an option is granted shall enter into a written Agreement with the Corporation, dated the date the option is granted, setting forth the terms and conditions of the option granted to him, which agreement shall contain such terms and conditions, consistent with the Plan, as the Committee shall approve. (e) Subject to the express provisions of the Plan, the Committee may interpret the Plan; correct any defect, supply any omission or reconcile any inconsistency in the Plan; prescribe, amend and rescind rules and regulations relating to the Plan; determine the terms and provisions of the respective option agreements (which need not be identical); and make all other determinations necessary or advisable for the administration of the Plan. (f) The determination of the Committee on the matters referred to in this Article 3 shall be conclusive. 4. ELIGIBILITY (a) Subject to the provisions of paragraph (b) of this Article 4, options may be granted only to persons who are employees (which term shall be deemed to include officers) of the Corporation or of any subsidiary corporation of the Corporation (such subsidiary corporation being hereinafter called a "Subsidiary"). An employee who has been granted an option or options at any time may be granted an additional option or options at a later time or times if the Committee shall so determine. (b) Options may be granted to Outside Directors, subject to the same terms and conditions A-2 as options granted to employees, except that clauses (a) through (c) of Article 9 and Article 11 shall not apply in any event. (c) No Incentive Stock Option may be granted under the Plan if such grant, together with any other applicable grant of Incentive Stock Options under the Plan or any other plan of the Corporation (and any parent or subsidiary corporation within the meaning of Section 424(e) and (f) of the Code) would exceed any applicable maximum established under Section 422 of the Code for incentive stock options. The aggregate fair market value (determined at the time the option is granted) of the shares as to which Incentive Stock Options may be granted under the Plan or any other plan of the Corporation, (and any parent corporation or subsidiary corporation within the meaning of Section 424(e) and (f) of the Code) which are exercisable for the first time by such employee during any calendar year shall not exceed $100.000. If an option granted under the Plan exceeds such limitations, such option, to the extent of such excess, shall be a separate non-qualified option. 5. OPTION PRICE The price at which shares of the Common Stock may be purchased pursuant to options granted under the Plan shall be not less than 100% of the fair market value of the Common Stock on the date an option is granted. If an optionee owns (or is deemed to own under applicable provisions of the Code and rules and regulations promulgated thereunder) more than 10% of the combined voting power of all classes of the stock of the Corporation (or any parent or subsidiary corporation within the meaning of Section 424(e) or (f) of the Code) and an option granted to such optionee is intended to qualify as an Incentive Stock Option, the option price shall be no less than 110% of the fair market value of the Common Stock on the date the option is granted. The fair market value of the Common Stock on any day shall be the mean between the highest and the lowest quoted selling prices of the Common Stock on such day as reported by any national securities exchange that the Common Stock is listed on or the mean between the highest bid and lowest ask prices of the Common Stock on such day as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). If fair market value cannot be calculated on such date on either of the foregoing bases, fair market value will be determined by the Committee. However, with respect to Incentive Stock Options, fair market value may be computed in any manner required or permitted by the Code and the regulations promulgated thereunder. The date on which the Committee approves the granting of an option shall be considered the date on which such option is granted. Notwithstanding the foregoing, no option may be granted at an option price that is less than the book value per share of the Common Stock as determined from the balance sheet of the Corporation as of the end of the quarter immediately preceding the date of grant (unaudited for the first three quarters of the fiscal year and audited for the last quarter). A-3 6. TERM OF EACH OPTION The term of each option shall be for such period as the Committee shall determine, but not more than ten years from the date of the granting thereof, or such shorter period as is prescribed in Articles 9 and 11 hereof, provided that an option intended to qualify as an Incentive Stock Option shall have a term of not more than ten years, and further provided that if an optionee owns (or is deemed to own under applicable provisions of the Code and rules and regulations promulgated thereunder) more than 10% of the combined voting power of all classes of the stock of the Corporation (or any parent or subsidiary corporation within the meaning of Section 424(e) and (f) of the Code) and an option granted to such optionee is intended to qualify as an Incentive Stock Option, the term of such option shall be no more than five years. The term of each option granted to an Outside Director shall be ten years, or such shorter period as is prescribed in Article 9 hereof. 7. EXERCISE OF OPTIONS (a) Subject to the provisions of Article 9, no option granted under the Plan shall be exercisable for one year after the date it is granted. Thereafter, an option shall become exercisable on such terms and at such times as the Committee shall determine. An option holder purchasing less than the number of shares available to him in any year under the option may purchase any such unpurchased shares in any subsequent year of the option term. The option shall not be exercisable at any time in an amount less than 100 shares (or the remaining shares then covered by and purchasable under the option if less than 100 shares). The option may not be exercised in respect of a fraction of a share. (b) The purchase price of the shares as to which an option shall be exercised plus any required Federal income tax or other withholding amount shall be paid in full at the time of exercise by one or more of the following methods, as determined by the Committee: (i) in cash or by certified check, (ii) by transferring to the Corporation previously acquired shares of the Common Stock having an aggregate fair market value equal to the aggregate option exercise price of all options being exercised and/or (iii) by transferring to the Corporation previously acquired shares of the Common Stock having an aggregate fair market value less than the aggregate option exercise price of all options being exercised and cash or certified check for the balance of the aggregate option exercise price of all options being exercised. The fair market value of the shares so transferred to the Corporation shall be determined in accordance with the methods described in Article 5, but as of the date of exercise of the option. The Corporation shall not be required to deliver certificates for such shares until such payment has been made. 8. NON-TRANSFERABILITY OF OPTIONS Except as provided in Article 9, no option may be exercised at any time unless the holder thereof is then an employee of the Corporation or of a Subsidiary, an Outside Director or a Director Emeritus (as that term is defined in paragraph (g) of Article 9), as the case may be. No option granted under the Plan shall be transferable otherwise than by will or by the laws of descent and A-4 distribution, and an option may be exercised, during the lifetime of the holder thereof, only by him or by his guardian or legal representative. 9. TERMINATION OF EMPLOYMENT OR SERVICE ON THE BOARD OF DIRECTORS (a) In the event that the employment of an employee to whom an option has been granted under the Plan shall be terminated (otherwise than by reason of death, disability or retirement), such option may, subject to the provisions of Article 11 hereof, be exercised (to the extent that the employee was entitled to do so at the termination of his employment) at any time within three months after such termination but not thereafter, and in no event after the date on which, except for such termination of employment, the option would otherwise expire; provided, however, that if the Corporation terminates the employee's employment within a three-year period after a change in control of the Corporation (as defined in paragraph (g) of this Article 9), the employee during such three-month period after termination (but not after the date on which the option would otherwise expire) may exercise all or any part of the remaining unexercised portion of the option notwithstanding that the option had not yet become exercisable with respect to all or part of such shares at the date of termination. (b) In the event that the employment of an employee to whom an option has been granted under the Plan shall be terminated by disability or retirement (as those terms are defined in paragraph (g) of this Article 9), the remaining unexercised portion of the option may be exercised by the employee (notwithstanding that the option had not yet become exercisable with respect to all or part of such shares at the date of termination) at any time within twelve months after such termination but not thereafter (except that an optionee holding Incentive Stock Option cannot exercise such option more than three months after termination of his employment unless he was disabled within the meaning of Section 22(e)(3) of the Code), and in no event after the date on which, except for such termination of employment, the option would otherwise expire. (c) If an employee to whom an option has been granted under the Plan shall die while he is employed by the Corporation or a Subsidiary or during the period following termination of employment in which the employee had a right to exercise the option under paragraph (a) or (b) of this Article 9, such option may be exercised (i) in the case of death while employed, as to all or any part of the remaining unexercised portion of the option, notwithstanding that the option had not yet become exercisable with respect to all or a part of such shares at the date of death, or (ii) in the case of death after termination of employment, to the extent that the employee was entitled to do so at the date of his death giving effect to the provisions of paragraphs (a) and (b) of this Article 9, in either case by a legatee or legatees of such option under the employee's last will, or by his personal representatives or distributees, at any time within such period, not exceeding twelve months after his death, as shall be prescribed in the option agreement, but in no event after the date on which, except for such death, the option would otherwise expire. (d) In the event that an Outside Director to whom an option has been granted under the Plan shall cease to serve on the Board, otherwise than by reason of death or disability A-5 (as that term is defined in paragraph (g) of this Article 9), without being designated as a Director Emeritus (as that term is defined in paragraph (g) of this Article 9), or if a Director Emeritus shall cease to retain such status (otherwise than by reason of death or disability), such option may be exercised (to the extent that the Outside Director or the Director Emeritus was entitled to do so at the time of cessation of service or termination of status), at any time within three months after such cessation of service or termination of status but not thereafter, and in no event after the date on which, except for such cessation of service or termination of status, the option would otherwise expire; provided, however, that if the Outside Director's cessation of service is the result of his removal or failure to be nominated for re-election to the Board, or if the termination of the Director Emeritus status occurs, within three years after a change in control of the Corporation (as defined in paragraph (g) of this Article 9), the Outside Director or Director Emeritus during such three month period after cessation of service or termination of status may exercise all or any part of the remaining unexercised portion of the option notwithstanding that the option had not yet become exercisable with respect to all or part of such shares at the date of cessation of service or termination of status. Except hereinabove provided, in the event an Outside Director to whom an option has been granted under the Plan shall cease to serve on the Board but shall have been designated as a Director Emeritus, his option shall continue to be exercisable as though such Director Emeritus continued to serve as an Outside Director. (e) In the event that an Outside Director to whom an option has been granted under the Plan shall cease on the Board by reason of disability or he shall become disabled (as such terms are defined in paragraph (g) of this Article 9) while holding the status of Director Emeritus, the remaining unexercised portion of the option may be exercised by the Outside Director or Director Emeritus (notwithstanding that the option had not yet become exercisable with respect to all or part of such shares at the date of disability) at any time within twelve months after such disability but not thereafter, and in no event after the date on which, except for such disability, the option would otherwise expire. (f) If an Outside Director to whom an option has been granted under the Plan shall die (i) when he is serving on the Board or while holding the status of Director Emeritus, or (ii) within three months after cessation of service on the Board without the status of Director Emeritus or after termination of Director Emeritus status, or (iii) within twelve months after cessation of service on the Board or after termination of Director Emeritus status by reason of disability, such option may be exercise (x) in the case of death while serving on the Board or while holding the status of Director Emeritus, as to all or any part of the remaining unexercised portion of the option, notwithstanding that the option had not yet become exercisable with respect to all or part of such shares at the date of death, or (y) in the case of death after cessation of service on the Board without the status of Director Emeritus or after termination of Director Emeritus status or death after termination of such service or status by reason of disability, to the extent that the Outside Director or Director Emeritus was entitled to do so at the date of his death giving effect to the provisions of paragraphs (d) and (e) of this Article 9, in each case by a legatee or legatees of such option under the Outside Director's or Director Emeritus' last will, or by his personal representatives or distributees, at any time within twelve months after this death, but in A-6 no event after the date on which, except for such death, the option would otherwise expire. (g) For the purpose of this Article 9, "retirement" shall mean retirement no earlier than the normal retirement age pursuant to any pension or retirement plan of the Corporation or a Subsidiary; "disability" or "disabled" shall mean permanent mental or physical disability as determined by the Committee subject, in the case of Incentive Stock Options, to the requirements of Section 22(e)(3) of the Code; "Director Emeritus" shall mean an honorary title granted by majority vote of the members of the Board then serving; and "change in control of the Corporation" shall mean any acquisition by any corporation, person or entity, of the beneficial ownership, directly or indirectly, of voting stock of the Corporation resulting in such corporation, person or entity owning, directly or indirectly, 50% or more of such voting stock. For the purpose of the foregoing definition of change in control of the Corporation, any corporation, person or other entity shall be deemed to be the beneficial owner of any shares of voting stock of the Corporation (i) which it has the right to acquire, hold or vote pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (i) above), by any other corporation, person or entity (A) with which it or its "affiliate" or "associate" (as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on August 24, 1978) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of voting stock of the Corporation, or (B) which is its "affiliate" or "associate". In computing the aforesaid percentage, the outstanding shares of voting stock of the Corporation shall include shares deemed owned through application of clauses (i) and (ii) but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise. (h) Options granted under the Plan to employees shall not be affected by any change of employment so long as the holder continues to be an employee of the Corporation or a Subsidiary. Nothing in the Plan or in any option granted under the Plan shall confer on any individual any right to continue in the employ of the Corporation or a Subsidiary or limit or restrict in any way the right of the Corporation or any Subsidiary to terminate his employment at any time for any reason whatsoever. 10. ADJUSTMENT OF AND CHANGES IN COMMON STOCK Notwithstanding any other provisions of the Plan, the option agreements may contain such provisions as the Board shall determine to be appropriate for the adjustment of the number of shares of Common Stock subject to each outstanding option, the option prices and the number of shares which may be exercised in any one year in the event of changes in the Common Stock by reason of any stock dividend, stock split-up, stock combination, exchange of shares, recapitalization, merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation and the like; and, in the event of any such change in the Common Stock, the aggregate number of shares available under the Plan shall be appropriately adjusted by the Board or the Committee, whose determination shall be conclusive. A-7 11. EMPLOYEE'S AGREEMENT TO SERVE Each employee receiving an option, shall as one of the conditions of receiving such option, and as an inducement to the Corporation to grant such option to him, agree that he will remain in the employ of the Corporation, or a Subsidiary, for a period of at least one year from the date the option is granted to him, and that he will, during such employment, serve the Corporation or such Subsidiary in good faith and use his best efforts at all times to promote its interests. Except as otherwise provided in a written agreement between the Corporation or such Subsidiary and such employee, such employment shall be at the pleasure of the Corporation or such Subsidiary and shall be at such rate of base compensation as the Corporation or such Subsidiary shall determine from time to time. If, during such one-year period, the employee's employment shall be terminated by the Corporation (otherwise than a termination within a three-year period after a change in control of the Corporation as defined in Article 9) or he shall terminate his employment, otherwise than by death, disability, retirement (as these terms are defined in Article 9) or with the consent or approval of the Corporation or such Subsidiary, or shall otherwise violate the provisions of the agreement referred to in this Article 11, the option or options then held by him shall forthwith terminate. The provisions of this Article 11 shall be incorporated in the option agreement to be executed and delivered by the Corporation and the individual to whom an option is to be granted. 12. COMPLIANCE WITH SECURITIES LAWS The Committee may, in their discretion, require as a condition to the exercise of any option that the shares reserved for issue upon the exercise of the option shall have been duly listed, upon official notice of issuance, by the American Stock Exchange or by such other securities exchange upon which such shares are then listed, and either that (a) a Registration Statement under the Securities Act of 1933, as amended, or any succeeding act, with respect to such shares is effective at the time of such exercise or (b) there is an exemption from registration under such Act for the issuance of shares of Common Stock upon such exercise. 13. AMENDMENT AND TERMINATION OF THE PLAN The Board, without further approval of the Company's stockholders, may at any time suspend or terminate the Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable, including, without limitation, to comply with the provisions of Rule 16b-3 promulgated under the Exchange Act and to conform to any change in applicable law or to regulations or rulings of administrative agencies; provided, however, that no amendment shall be effective without the requisite prior or subsequent Stockholder approval which would (a) change the class of eligible participants as described in Article 4 hereof; (b) increase the total number of shares of Common Stock for which options may be granted under the Plan except as provided in Article 10 hereof; (c) extend the term of the Plan or the maximum option period provided under the Plan; (d) decrease the minimum option price provided in Article 5 hereof or (e) materially increase the benefits accruing to participants under the Plan. No options may be granted under the Plan after September 30, 2001, though options outstanding on such date shall not be affected by such termination. A-8 Notwithstanding the foregoing, the Board is expressly authorized to further amend the Plan or any portion thereof and/or to amend or direct the Committee to amend the terms of any option granted under the Plan in order to quality any previously granted option and/or any subsequently granted option as an Incentive Stock Option under Section 422 of the Code. 14. DUTIES OF THE CORPORATION The Corporation shall at all times during the term of each option reserve and keep available for issuance or delivery such number of shares of Common Stock as will be sufficient to satisfy the requirements of all options at the time outstanding, shall pay all original issue taxes or transfer taxes with respect to the issuance or delivery of shares pursuant to the exercise of such options and all other fees and expenses necessarily incurred by the Corporation in connection therewith, except for required Federal income tax or other withholding amount. 15. EFFECTIVE DATE OF PLAN The Plan is subject to approval at the 1991 Annual Meeting of Stockholders of the Corporation by the vote of the holders of a majority of the votes present in person or by proxy at such meeting. If approved, the Plan shall be effective as of September 30, 1991, the date of its adoption by the Board. If the Plan is not so approved, any options granted under the Plan will be void and of no further effect, and the Plan shall terminate. Any other provision of the Plan to the contrary notwithstanding, no options granted under the Plan may be exercised until after such stockholder approval, and if such approval is not obtained, such options shall be null and void. A-9 EX-21.1 4 LIST OF SUBSIDIARIES BENTLEY PHARMACEUTICALS, INC. SUBSIDIARIES AND JURISDICTION OF FORMATION laboratorios Belmac S.A., Madrid, Spain Bentley Healthcare Corporation, Tampa, Florida Belmac Hygiene, Inc., Tampa, Florida Belmac Health Corp., Tampa, Florida Belmac Holdings, Inc., Tampa, Florida Belmac A.I., Inc., Tampa, Florida B.O.G. International Finance, Inc., Tampa, Florida Belmac Jamaica, Ltd., Kingston, Jamaica EX-23 5 EX.23.1 - CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements (Nos. 33-35941, 33-43868, 33-43866, 33-45994, 33-45142, 33-54382, 33-69946, 33-75088 and 333-28593) of Bentley Pharamceuticals, Inc. and subsidiaries (the "Company") on Form S-3 and the Registration Statement No. 33-85154 of the Company on Form S-8 of our reports dated March 27, 1998, appearing in the Annual Report on Form 10-K of the Company for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Tampa, Florida March 27, 1998 EX-27 6 FDS -- FOR FYE 12/31/97
5 0000821616 BENTLEY PHARMACEUTICALS, INC. 1,000 YEAR DEC-31-1998 JAN-01-1997 DEC-31-1997 11,117 0 2,129 (59) 714 15,009 4,280 (1,362) 21,043 4,361 5,329 2,338 2,338 168 8,737 21,043 14,092 15,025 8,010 16,448 94 0 1,086 (3,194) 621 (3,815) 0 0 0 (3,815) (.97) (.97)
-----END PRIVACY-ENHANCED MESSAGE-----