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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the fiscal year ended December 31, 2006
 OR
 o
    
    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.
  Delaware
    
    No. 59-1513162(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Bentley Park2 Holland WayExeter, New Hampshire
    
    03833(Address of principal executive offices)
    
    (Zip Code)
 (603) 658-6100
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.02 par value
    
    New York Stock ExchangePreferred Stock Purchase Rights
    
    New York Stock Exchange
 None
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
  Title of Class
    
    Aggregate Market Value *
    
    As of Close of Business onCommon Stock, $0.02 par value
    
    $193,688,276
    
    June 30, 2006
  Title of ClassCommon Stock, $0.02 par value
    
    Shares Outstanding22,268,358
    
    As of Close of Business onMarch 9, 2007
  Proxy Statement for the 2007 Annual Meeting of Stockholders  Incorporated by
Reference into Part III of this Annual Report on Form 10-K
 *
    
    Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock
outstanding at June 30, 2006. This calculation does not reflect a
determination that such persons are affiliates for any other purposes.
Calculation assumes no changes in ownership positions of institutional
holders with ownership positions greater than 5% from positions
reported on their Schedule 13 filings for the year ended December 31,
2005.




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TABLE OF CONTENTS  Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPart IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers of the Registrant and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesEXHIBIT INDEXSIGNATURESEx-10.29 Settlement Term Sheet AgreementEx-21.1 Subsidiaries of the RegistrantEx-23.1 Consent of Independent Registered Public Accounting firmEx-31.1 Section 302 Certification of the Chief Executive OfficerEx-31.2 Section 302 Certification of the Chief Financial OfficerEx-32.1 Section 906 Certification of the Chief Executive OfficerEx-32.2 Section 906 Certification of the Chief Financial Officer    Table of Contents  
 Part I
 
 Item 1. Business
 Overview
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients, or API, and the
manufacturing of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
  ® ® TM
 NYSE) BNT
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Industry Overview
 Pharmaceutical Industry in Europe
       3




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Drug Delivery Industry
     4




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Our Strategy
  
    
    development, licensing and sale of a broad range of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients in Spain, other parts of
Europe, and other international markets, including the U.S. market; and
    
    advanced drug delivery and formulation technologies to improve the delivery of new
and existing pharmaceuticals.
  Increase our product sales in Spain through targeted promotion and expansion of our product
portfolio and increase international sales
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Focus on commercializing our CPE-215 ® permeation platform technology and developing proprietary
products based on our other technologies
    
    
    improving efficacy as compared to oral administration, which subjects the drug to
the effects of first-pass metabolism;
    
    improving utilization of costly and/or scarce drugs and active ingredients;
    
    expanding the market to patients less suitable for injection, especially children
and the elderly;
    
    improving patient convenience and compliance, and lowering costs relative to a
doctors office visit for an injection;
    
    extending the period of market exclusivity for a branded compound based on the
grant of a patent that incorporates new drug delivery methods; and
    
    allowing branded and generic drug companies to differentiate their products from
those of competitors.
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
    
    increased solubility in water for administration to patients who have difficulty
swallowing pills;
    
    faster relief of pain and inflammation; and
    
    better taste.
   Our Proprietary Drug Technologies
 Proprietary Drug Manufacturing Technologies
  CPE-215 Permeation Platform Technology
  7




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
    
    broad applicability - works with a wide range of pharmaceutical
compounds, including water soluble, oil soluble and insoluble compounds as well
as high and low molecular weight compounds, including peptides and proteins;
    
    format independence - can be formulated into creams, ointments, gels,
solutions, lotions and patches;
    
    biological membrane independence  works across the biological membranes of
the skin, mouth, nose, and eye; and
    
    well tolerated - approved by the FDA for long-term topical use in
Testim.
  Solubility Enhancement Technology
  Oral Formulation Technologies
  8




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Nanocaplet Technology
  Licensed Product
 Topical Testosterone Gel
    Manufactured and Marketed Products
  9




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Branded Generic Pharmaceutical Products
   Our Branded GenericProduct Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatBelmalipâ
    
    simvastatin
    
    Zocorâ  (Merck)
    
    elevated cholesterolBelmazolâ
    
    omeprazole
    
    PrilosecÒ (AstraZeneca)
    
    gastroesophageal
reflux
diseaseCimascal D Forteâ
    
    calcium carbonate
and vitamin D3
    
    Calcite-Dâ  (Riva)
    
    osteoporosisCodeisanâ
    
    codeine
    
    Tricodeinâ  (Solco)
    
    cough and bronchitisEnalapril Belmacâ
    
    enalapril maleate
    
    Vasotecâ (Merck)
    
    cardiovascular disease
and hypertensionIbumacÒ
    
    ibuprofen
    
    Motrinâ  (McNeil)
    
    rheumatoid arthritisLanzol®
    
    lansoprazole
    
    Prevacidâ (Tap)
    
    gastroesophageal
reflux
diseaseMio RelaxÒ
    
    carisoprodol
    
    Somaâ  (MedPointe)
    
    muscle spasms
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Our Branded GenericProduct Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatPentoxifilina Belmacâ
    
    pentoxifylline
    
    Trentalâ (Aventis)
    
    peripheral arterial
diseaseSenioralâ
    
    oxymetazoline and
chlorpheniramine
    
    Denoralâ (Aventis)
    
    cold and sinus
congestionXetinÒ
    
    paroxetine
    
    Paxilâ (GlaxoSmithKline)
    
    depression
 Generic Pharmaceutical Products
    Our Generic Product Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatAmlodapino Davurâ
Amlodapino Rimafarâ
    
    amlodapine
    
    Norvasc® (Pfizer)
    
    arterial hypertensionAmoxicilina Davurâ
Amoxicilina Belmacâ
    
    amoxicillin
trihydrate
    
    Amoxilâ (GlaxoSmithKline)
    
    infectionsAmox/Clavulanico Davurâ
    
    amoxicillin/clavulanate
potassium
    
    Augmentinâ (GlaxoSmithKline)
    
    infectionsAzitromicina Davurâ
    
    azithromycin
    
    Zithromaxâ (Pfizer)
    
    infectionsCardidopa/Levodopa Davurâ
    
    cardidopa/levodopa
    
    Sinemet® (Bristol-Myers Squibb)
    
    Parkinsons diseaseCiprofloxacino Davurâ
    
    ciprofloxacin
hydrochloride
    
    Ciproâ  (Bayer)
    
    microbial infections,
including anthrax
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##### Table of Contents



Our Generic Product Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatEbastina Davurâ
    
    ebastine
    
    Ebastel®, Ebastle Forte® (Almirall)
    
    seasonal allergic
rhinitisEnalapril Davurâ
    
    enalapril maleate
    
    Vasotecâ  (Merck)
    
    cardiovascular disease
and hypertensionFinasterida Davurâ
    
    finasteride
    
    Proscar® (Merk)
    
    enlarged prostateFluoxetina Davurâ
Fluoxetina Rimafarâ
Fluoxetina Belmacâ
    
    fluoxetine
hydrochloride
    
    Prozacâ  (Eli Lilly)
    
    depressionIbuprofeno Davurâ
    
    ibuprofen
    
    Motrinâ (McNeil)
    
    pain, feverLansoprazol Davurâ
Lansoprazol Rimafarâ
    
    lanoprazole
    
    Prevacidâ (TAP)
    
    gastroesophageal
reflux diseaseMirtazapina Davurâ
    
    mirtazapine
    
    Remeronâ (Organon)
    
    depressionOmeprazol Davur â
Omeprazol Rimafarâ
    
    omeprazole
    
    Prilosecâ (AstraZeneca)
    
    gastroesophageal
reflux diseaseParoxetina Davurâ
Paroxetina Rimafarâ
    
    paroxetine
    
    Paxilâ (GlaxoSmithKline)
    
    depressionPentoxifilina Davurâ
    
    pentoxifylline
    
    Trentalâ (Aventis)
    
    peripheral arterial
diseasePravastatina Davurâ
Pravastatina Rimafarâ
    
    pravastatin
    
    Pravachol® (Bristol-Myers Squibb)
    
    elevated cholesterolSelegilina Davurâ
    
    selegiline
hydrochloride
    
    Eldeprylâ (Somerset)
    
    Parkinsons diseaseSertralina Davurâ
    
    sertraline
hydrochloride
    
    Zoloftâ (Pfizer)
    
    DepressionSimvastatina Davurâ
Simvastatina Rimafarâ
    
    simvastatin
    
    Zocorâ(Merck)
    
    elevated cholesterolTrimetazidina Davurâ
    
    trimetazedine
    
    Idaptanâ (Servier)
    
    coronary therapy
 Sales to Licensees and Others
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Strategic Alliance with Perrigo Company
  Alliance with Teva
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Manufacturing
    Products in Development
  Product Candidate
    
    Technology
    
    Used to Treat
    
    StatusGeneric products
    
    Various
    
    Various
    
    Bioequivalence
and/or submitted
for approval in the
U.S., Spain, Europe
and other
countries.Intranasal insulin
    
    CPE-215
    
    Diabetes
    
    Phase I/IIOral peptide delivery
    
    Nanocaplet
    
    Various
    
    Preclinical
 Generic Products
  14




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Nasulin TM (Intranasal Insulin)
    15




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Products Available for Licensing
 Antifungal Nail Lacquer
  Topical Hormonal Therapy
  Intranasal Pain Management
    16




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Intellectual Property
     Research and Development
 TM
 17




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Competition
   Customers
    Financial Information About Geographic Areas
  18




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Seasonality
  Employees
  Regulation
  United States
  
    
    Preclinical testing;
    
    Submission and review by the FDA of an Investigational New Drug Exemption (IND)
Application;
    
    Clinical trials;
    
    Preparation and submission of the NDA; and
    
    FDAs review and approval/disapproval of the NDA.
    
    
    Phase I involves the initial introduction of the pharmaceutical compound into
patients or healthy human volunteers; the emphasis is on testing for dosage tolerance,
metabolism, excretion, clinical pharmacology, safety (adverse effects) and possibly
early evidence of effectiveness.
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
    
    Phase II involves the first controlled clinical trial involving patients who have
the targeted disease or condition and consists of safety and efficacy studies. The
studies may be divided into early Phase II (or II A), during which studies are
performed to determine initial efficacy and late Phase II (or II B) which may consist
of placebo-controlled trials in a larger number of patients.
    
    Phase III involves large scale, long-term, well controlled efficacy and safety
studies within an expanded patient population, frequently at multiple clinical study
sites.
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Europe
      21




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Trends in Healthcare Regulation
      Other Regulations
  22




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Available Information
 www.bentleypharm.com www.sec.gov
 
 Item 1A. Risk Factors
  Our growth depends on identifying drugs suitable for our drug delivery technologies and expanding
our generic and branded generic drug operations.
   23




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Products using our technologies are in various stages of development and may not achieve commercial
success.
  
    
    any or all of the proposed products will be found to be ineffective;
    
    the proposed products will have adverse side effects or will otherwise fail to
receive necessary regulatory approvals;
    
    the proposed products may be effective but uneconomical to market; or
    
    other pharmaceutical companies may market equivalent or superior products.
 If medical doctors do not prescribe our products or the medical profession does not accept our
products, our ability to grow our revenues will be limited.
  
    
    perceived efficacy of our products;
    
    convenience and ease of administration;
    
    prevalence and severity of adverse side effects in both clinical trials and commercial use;
    
    availability of alternative treatments;
    
    cost effectiveness;
    
    effectiveness of our marketing strategy and the pricing of our products;
    
    publicity concerning our products or competing products; and
    
    our ability to obtain third-party coverage or reimbursement.
  
    
    the effectiveness of our sales force;
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
    
    the effectiveness of our production, distribution and marketing capabilities;
    
    the success of competing products; and
    
    the availability and extent of reimbursement from third-party payors.
  We will rely on strategic partners to conduct clinical trials and commercialize products that use
our drug delivery technologies.
    If we are unable to meet our responsibilities under any of our agreements, we may lose potential
business and be subject to penalties and other damages.
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A significant portion of our revenues are generated by the sale of products formulated from one
active ingredient.
  Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are
uncertain and may adversely affect us.
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If our clinical trials fail, we will be unable to market products.
  
    
    slow or insufficient patient enrollment;
    
    slow recruitment and completion of necessary institutional approvals at clinical sites;
    
    longer treatment time required to demonstrate efficacy;
    
    lack of sufficient supplies of the product candidate;
    
    adverse medical reactions or side effects in treated patients;
    
    lack of effectiveness of the product candidate being tested;
    
    regulatory requests for additional clinical trials; and
    
    instability of the pharmaceutical formulations.
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Our patent positions and intended proprietary or similar protections are uncertain.
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Regulatory approvals must be obtained and maintained for products incorporating our technologies
and, if approvals are delayed or withdrawn, we will be unable to commercialize these products.
  Our business will suffer if we fail to continue to comply with federal regulations and rules of the
Securities and Exchange Commission and New York Stock Exchange relating to corporate governance
reform.
  Sustained compliance with the requirements of the Sarbanes-Oxley Act of 2002 may require a
reallocation of resources that would otherwise be dedicated to operating our business.
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Implementation of new information systems could cause business interruptions and negatively affect
our profitability and cash flows.
  If we are unable to obtain marketing approvals to sell our products in countries other than Spain,
we may not be able to obtain additional revenues from sales in those countries.
  We must comply with Good Manufacturing Practices in the production of pharmaceutical products.
  We are dependent on only one manufacturing facility that can be used to manufacture our
pharmaceutical products and only one manufacturing facility that can be used to manufacture active
pharmaceutical ingredients.
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We operate a significant portion of our business in, and plan to expand further into, markets
outside the United States, which subjects us to additional business risks.
  
    
    unexpected delays or changes in regulatory requirements;
    
    difficulties and costs related to complying with a wide variety of complex foreign
laws and treaties;
    
    delays and expenses associated with tariffs and other trade barriers;
    
    restrictions on and impediments to repatriation of our funds and our customers
ability to make payments to us;
    
    political and economic instability;
    
    acts of terrorism or war;
    
    difficulties and costs associated with staffing and managing international
operations and implementing, maintaining and improving financial controls;
    
    dependence upon independent sales representatives and other indirect resellers who
may not be as effective and reliable as our employees;
    
    inadequate or uncertain protection of intellectual property in foreign countries;
    
    increased difficulty in collecting accounts receivable and longer accounts
receivable cycles in certain foreign countries;
    
    adverse tax consequences or overlapping tax structures; and
    
    limitations on the remittance of dividends by foreign subsidiaries.
 Currency fluctuations could have a material adverse impact on our business.
  
    
    fluctuations in currency exchange rates;
    
    limitations on the conversion of foreign currency; and
    
    fluctuations of the carrying value of long lived assets.
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If we cannot keep pace with rapid technological change and meet the intense competition in our
industry, we may not succeed.
    We may be unable to meet increasing expenses and demands on our resources from future growth, if
any, or to effectively pursue additional business opportunities.
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Our operations could be adversely affected if we are unable to raise or obtain needed funding.
   If we undertake an acquisition, we will incur a variety of costs, and we may never realize the
anticipated benefits of the acquisition.
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If we do not successfully manage our growth, our business goals may not be achieved.
  If we cannot attract and retain key personnel, we may not be able to execute our business plan as
anticipated.
   We may incur substantial liabilities and may be required to limit commercialization of our products
in response to product liability claims.
  
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Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to
meet investor expectations, which may cause the price of our common stock to decline.
  
    
    demand and pricing for our products, including changes in wholesaler purchasing;
    
    government or private healthcare reimbursement policies;
    
    physician, pharmacy and patient acceptance of any of our current or future products;
    
    patterns or cost structures for our products;
    
    introduction of competing products, including generics;
    
    any interruption in the manufacturing or distribution of Testim or any of our future
products;
    
    our operating expenses which fluctuate due to growth of our business;
    
    timing and size of any new product or technology acquisitions we may complete; and
    
    variations in our rates of product returns and allowances.
  Your percentage of ownership and voting power and the price of our common stock may decrease as a
result of events that increase the number of our outstanding shares.
  No. of SharesCommon stock outstanding
    
    
    22,262,413Common stock issuable upon:Exercise of options which are outstanding
    
    
    3,636,979Vesting of restricted stock units which are outstanding
    
    
    118,399Contingently issuable shares
    
    
    20,000Exercise/vesting of options and restricted stock units
which are available for grant
    
    
    736,274Total common stock outstanding assuming exercise of
all of the above
    
    
    26,774,065
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Our stock price is volatile.
  
    
    progress of our relationships with strategic partners;
    
    results of clinical studies and regulatory reviews;
    
    technological innovations by us or our competitors;
    
    market conditions in the pharmaceutical, drug delivery and biotechnology industries;
    
    effect of regulatory authorities on pricing of products;
    
    competitive products;
    
    financings;
    
    sales or the possibility of sales of our common stock;
    
    our results of operations and financial condition;
    
    proprietary rights and related litigation;
    
    public concern as to the safety or commercial value of our products; and
    
    general economic conditions.
  Delaware law and provisions in our certificate of incorporation, bylaws and stockholder rights plan
may prevent or discourage third parties or stockholders from attempting to replace the management
of the Company.
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
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Item 3. Legal Proceedings
 Ethypharm
S.A. France & Ethypharm S.A. Spain v. Bentley Pharmaceuticals, Inc.
    
 Item 4.
Submission of Matters to a Vote of Security Holders
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Part II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  High
    
    LowFiscal Year Ended December 31, 2005First Quarter
    
    $
    10.94
    
    
    $
    7.25Second Quarter
    
    
    12.10
    
    
    
    6.50Third Quarter
    
    
    12.95
    
    
    
    10.63Fourth Quarter
    
    
    20.80
    
    
    
    11.27Fiscal Year Ended December 31, 2006First Quarter
    
    
    22.90
    
    
    
    12.78Second Quarter
    
    
    14.19
    
    
    
    9.43Third Quarter
    
    
    13.07
    
    
    
    8.78Fourth Quarter
    
    
    12.90
    
    
    
    8.82Fiscal Year Ending December 31, 2007First Quarter (through March 9, 2007)
    
    
    10.34
    
    
    
    7.52
  Dividends
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Issuer Purchases of Equity Securities
 (d)Maximum(c)
    
    NumberTotal Number
    
    (or approximate(b)
    
    of Shares
    
    dollar value)Average
    
    (or Units)
    
    of Shares (orPrice
    
    Purchased as
    
    Units) that(a)
    
    Paid
    
    Part of
    
    may yet beTotal Number
    
    per
    
    Publicly
    
    Purchasedof Shares
    
    Share
    
    Announced
    
    under the Plans(or Units)
    
    (or
    
    Plans or
    
    orPurchased (1)
    
    Unit)(2)
    
    Programs
    
    ProgramsOctober 1, 2006 through October 31, 2006
    
    
    19,015
    
    
    $
    12.035
    
    
    
    
    
    
    
    November 1, 2006 through November 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1, 2006 through December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    19,015
    
    
    $
    12.035
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents shares tendered to the Company at fair market value from option
holders using mature stock to exercise vested stock options and satisfy minimum
tax withholding liabilities.(2)
    
    Weighted average of the high and low prices on the NYSE on the date of exercise. 
 Item 6. Selected Financial Data
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##### Table of Contents



Consolidated Income Statement Data
 For the Year Ended December 31,(in thousands, except per share data)
    
    2002
    
    
    2003
    
    
    2004(a)
    
    
    2005(b)
    
    
    2006(c)(d)Total revenues
    
    $
    39,136
    
    
    $
    64,676
    
    
    $
    73,393
    
    
    $
    97,730
    
    
    $
    109,471Cost of net product sales
    
    
    16,477
    
    
    
    26,399
    
    
    
    34,893
    
    
    
    46,161
    
    
    
    49,850Gross profit
    
    
    22,659
    
    
    
    38,277
    
    
    
    38,500
    
    
    
    51,569
    
    
    
    59,621Operating expenses
    
    
    19,277
    
    
    
    26,848
    
    
    
    29,805
    
    
    
    35,903
    
    
    
    54,222Gain on sale of drug licenses
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Other income (expenses)
    
    
    138
    
    
    
    91
    
    
    
    1,800
    
    
    
    729
    
    
    
    619Income before income taxes
    
    
    4,170
    
    
    
    11,520
    
    
    
    10,495
    
    
    
    16,395
    
    
    
    6,056Provision for income taxes
    
    
    2,534
    
    
    
    5,423
    
    
    
    4,805
    
    
    
    5,476
    
    
    
    5,082Net income
    
    $
    1,636
    
    
    $
    6,097
    
    
    $
    5,690
    
    
    $
    10,919
    
    
    $
    974Net income per common share  basic
    
    $
    0.10
    
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.51
    
    
    $
    0.04Net income per common share  diluted
    
    $
    0.08
    
    
    $
    0.28
    
    
    $
    0.25
    
    
    $
    0.48
    
    
    $
    0.04Weighted average common shares
outstanding  basic
    
    
    16,569
    
    
    
    17,997
    
    
    
    20,901
    
    
    
    21,558
    
    
    
    22,141Weighted average common shares
outstanding  diluted
    
    
    19,798
    
    
    
    21,637
    
    
    
    22,627
    
    
    
    22,929
    
    
    
    23,068
 
 (a)
    
    Other income (expenses)for the year ended December 31, 2004 includes the reversal of
previously accrued tax assessments totaling $1,467,000. These assessments had been accrued to
be paid to the Spanish government as a vehicle to help reduce the impact of the rising health
care costs in Spain. Due to changes in the pharmaceutical industry in Spain and a change in
the Spanish political environment, these liabilities no longer exist. Accordingly, these
accruals were reversed during the second quarter of 2004. Additionally, a reclassification
of approximately $342,000 has been made between Depreciation and amortizationand Cost of net
product salesfor depreciation on certain fixed assets to conform with the 2005 presentation
format.(b)
    
    Total revenuesfor the year ended December 31, 2005 include a change in estimate of royalty
revenues earned of approximately $1,092,000 recorded in the fourth quarter of 2005. This
change in estimate of royalty revenues earned is based upon publicly available data
determined to be more accurate than the source of data previously relied upon by management
in estimating the sell-through of prescriptions dispensed.(c)
    
    Total revenuesfor the year ended December 31, 2006 include an increase in royalty revenues
of approximately $479,000 recorded in the second quarter of 2006. This change in estimate
was due to the Companys ability to reasonably estimate future product returns on sales of
Testim based on actual historical data.(d)
    
    Operating expensesfor the year ended December 31, 2006 include litigation settlement
charges of approximately $7,546,000 recorded in the third
quarter of 2006 associated with the probable settlement of outstanding litigation claims.
The Company recorded a tax benefit of $2,746,000 in provision for income taxesupon
finalization of the settlement in the fourth quarter of 2006. The Company also incurred
related legal defense costs of approximately $3,368,000 during the year ended December 31,
2006. 41




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##### Table of Contents



Consolidated Balance Sheet Data
 December 31,(in thousands)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(a)Working capital
    
    $
    30,703
    
    
    $
    46,181
    
    
    $
    47,114
    
    
    $
    46,397
    
    
    $
    40,303Current assets
    
    $
    43,972
    
    
    $
    66,899
    
    
    $
    74,710
    
    
    $
    75,077
    
    
    $
    67,690Non-current assets
    
    
    20,720
    
    
    
    33,564
    
    
    
    47,220
    
    
    
    49,143
    
    
    
    66,666Total assets
    
    $
    64,692
    
    
    $
    100,463
    
    
    $
    121,930
    
    
    $
    124,220
    
    
    $
    134,356Current liabilities
    
    $
    13,269
    
    
    $
    20,718
    
    
    $
    27,596
    
    
    $
    28,680
    
    
    $
    27,387Long-term debt
    
    
    345
    
    
    
    369
    
    
    
    349
    
    
    
    
    
    
    
    Other non-current liabilities
    
    
    2,327
    
    
    
    3,211
    
    
    
    4,328
    
    
    
    3,951
    
    
    
    6,638Total liabilities
    
    $
    15,941
    
    
    $
    24,298
    
    
    $
    32,273
    
    
    $
    32,631
    
    
    $
    34,025Redeemable preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Stockholders equity
    
    $
    48,751
    
    
    $
    76,165
    
    
    $
    89,657
    
    
    $
    91,589
    
    
    $
    100,331
 
 (a)
    
    In the fourth quarter of the year ended December 31, 2006, the Company reclassified certain
of its deferred tax items on its balance sheet to be consistent with the underlying
transactions to which they relate. The reclassifications resulted in a $1,244,000
decrease of its current deferred tax assets, an increase of $240,000 to its non-current
deferred tax assets, a $238,000 increase in income taxes payable (included in accrued
expenseson the Consolidated Balance Sheet) and a decrease of $1,260,000 in its non-current
deferred tax liabilities. 42




---



##### Table of Contents



Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Change in Estimate
 Licensing and collaboration revenues
 Litigation Settlement
 litigation
settlement
 43




---



##### Table of Contents



Adoption of New Accounting Standard
  Overview
  
    
    development, licensing and sales of generic and branded generic pharmaceutical
products and active pharmaceutical ingredients and the manufacturing of pharmaceuticals
for others in Spain, other parts of Europe and international markets, including the
U.S. market; and
    
    research, development and licensing/commercialization of advanced proprietary drug
delivery technologies for new and existing pharmaceutical products.
 Specialty Generic Pharmaceuticals
   44




---



##### Table of Contents



Drug Delivery Technologies and Products
  Research and Development Focus
 Diabetes Technology & Therapeutics
 Effect of Foreign Currency Fluctuations
  45




---



##### Table of Contents



Consolidated Results of Operations
 Fiscal Year Ended December 31, 2006 Compared To Fiscal Year Ended December 31, 2005
 Revenues
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2006
    
    %
    
    2005
    
    %
    
    $
    
    %Specialty GenericsNet product sales
    
    $
    100,590
    
    
    
    92
    %
    
    $
    91,308
    
    
    
    93
    %
    
    $
    9,282
    
    
    
    10
    %Licensing and collaboration
revenues
    
    
    515
    
    
    
    *
    
    
    
    273
    
    
    
    *
    
    
    
    242
    
    
    
    89
    %101,105
    
    
    
    92
    %
    
    
    91,581
    
    
    
    93
    %
    
    
    9,524
    
    
    
    10
    %Drug DeliveryLicensing and collaboration revenues
    
    
    8,366
    
    
    
    8
    %
    
    
    6,149
    
    
    
    7
    %
    
    
    2,217
    
    
    
    36
    %Total revenues
    
    $
    109,471
    
    
    
    100
    %
    
    $
    97,730
    
    
    
    100
    %
    
    $
    11,741
    
    
    
    12
    %
 
 *
    
    Less than 1%    (in thousands)
    
    Revenues Within SpainRevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,679
    
    
    $
    16,451
    
    
    $
    
    
    
    $
    
    
    
    $
    19,130
    
    
    
    18
    %Simvastatin
    
    
    1,851
    
    
    
    5,620
    
    
    
    
    
    
    
    
    
    
    
    7,471
    
    
    
    7
    %Enalapril
    
    
    4,826
    
    
    
    1,824
    
    
    
    
    
    
    
    
    
    
    
    6,650
    
    
    
    6
    %Paroxetine
    
    
    1,449
    
    
    
    3,045
    
    
    
    
    
    
    
    
    
    
    
    4,494
    
    
    
    4
    %Lansoprazole
    
    
    2,689
    
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    3,541
    
    
    
    3
    %All other products
    
    
    10,628
    
    
    
    11,263
    
    
    
    795
    
    
    
    1,763
    
    
    
    24,449
    
    
    
    22
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    12,741
    
    
    
    22,114
    
    
    
    34,855
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    515
    
    
    
    8,366
    
    
    
    8,881
    
    
    
    8
    %Total Revenues
    
    $
    24,122
    
    
    $
    39,055
    
    
    $
    14,051
    
    
    $
    32,243
    
    
    $
    109,471
    
    
    
    100
    %% of 2006 Revenues
    
    
    22
    %
    
    
    36
    %
    
    
    13
    %
    
    
    29
    %
    
    
    100
    %
 46




---



##### Table of Contents



(in thousands)
    
    Revenues Within SpainRevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,779
    
    
    $
    15,394
    
    
    $
    
    
    
    $
    
    
    
    $
    18,173
    
    
    
    18
    %Simvastatin
    
    
    1,666
    
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    6,746
    
    
    
    7
    %Enalapril
    
    
    4,153
    
    
    
    1,706
    
    
    
    
    
    
    
    
    
    
    
    5,859
    
    
    
    6
    %Paroxetine
    
    
    1,337
    
    
    
    3,118
    
    
    
    
    
    
    
    
    
    
    
    4,455
    
    
    
    5
    %Lansoprazole
    
    
    1,856
    
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    2,386
    
    
    
    2
    %All other products
    
    
    10,810
    
    
    
    9,282
    
    
    
    271
    
    
    
    1,512
    
    
    
    21,875
    
    
    
    23
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    11,589
    
    
    
    20,225
    
    
    
    31,814
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    6,148
    
    
    
    6,422
    
    
    
    7
    %Total Revenues
    
    $
    22,601
    
    
    $
    35,110
    
    
    $
    12,134
    
    
    $
    27,885
    
    
    $
    97,730
    
    
    
    100
    %% of 2005 Revenues
    
    
    23
    %
    
    
    36
    %
    
    
    12
    %
    
    
    29
    %
    
    
    100
    %
 Spanish Operations.
 Branded Generic Pharmaceutical Products
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2006
    
    %
    
    2005
    
    %
    
    $
    
    %Branded Generic Product Sales:Enalapril
    
    $
    4,826
    
    
    
    20
    %
    
    $
    4,153
    
    
    
    18
    %
    
    $
    673
    
    
    
    16
    %Codeisan
    
    
    3,001
    
    
    
    12
    %
    
    
    3,441
    
    
    
    16
    %
    
    
    (440
    )
    
    
    -13
    %Lansoprazole
    
    
    2,689
    
    
    
    11
    %
    
    
    1,856
    
    
    
    8
    %
    
    
    833
    
    
    
    45
    %Omeprazole
    
    
    2,679
    
    
    
    11
    %
    
    
    2,779
    
    
    
    12
    %
    
    
    (100
    )
    
    
    -4
    %Simvastatin
    
    
    1,851
    
    
    
    8
    %
    
    
    1,666
    
    
    
    7
    %
    
    
    185
    
    
    
    11
    %All other branded products
    
    
    9,076
    
    
    
    38
    %
    
    
    8,706
    
    
    
    39
    %
    
    
    370
    
    
    
    4
    %Total branded generic sales
    
    $
    24,122
    
    
    
    100
    %
    
    $
    22,601
    
    
    
    100
    %
    
    $
    1,521
    
    
    
    7
    %
 
 *
    
    Not meaningful  Generic Pharmaceutical Products
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2006
    
    %
    
    2005
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    16,451
    
    
    
    42
    %
    
    $
    15,394
    
    
    
    44
    %
    
    $
    1,057
    
    
    
    7
    %Simvastatin
    
    
    5,620
    
    
    
    14
    %
    
    
    5,080
    
    
    
    14
    %
    
    
    540
    
    
    
    11
    %Paroxetine
    
    
    3,045
    
    
    
    8
    %
    
    
    3,118
    
    
    
    9
    %
    
    
    (73
    )
    
    
    -2
    %Pentoxifylline
    
    
    2,571
    
    
    
    7
    %
    
    
    2,540
    
    
    
    7
    %
    
    
    31
    
    
    
    1
    %Trimetazidine
    
    
    2,253
    
    
    
    6
    %
    
    
    2,214
    
    
    
    6
    %
    
    
    39
    
    
    
    2
    %All other generic products
    
    
    9,115
    
    
    
    23
    %
    
    
    6,764
    
    
    
    20
    %
    
    
    2,351
    
    
    
    35
    %Total generic sales
    
    $
    39,055
    
    
    
    100
    %
    
    $
    35,110
    
    
    
    100
    %
    
    $
    3,945
    
    
    
    11
    %
 47




---



##### Table of Contents



All other generic
products
 Sales to Licensees and Others
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    2005
    
    $
    
    %Specialty
generics
    
    $
    34,855
    
    
    $
    31,814
    
    
    $
    3,041
    
    
    
    10
    %
  Licensing and Collaboration Revenues
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    515
    
    
    $
    273
    
    
    $
    242
    
    
    
    89
    %Drug delivery
    
    
    8,366
    
    
    
    6,149
    
    
    
    2,217
    
    
    
    36
    %Total
    
    $
    8,881
    
    
    $
    6,422
    
    
    $
    2,459
    
    
    
    38
    %
 Licensing and collaboration revenues licensing and
collaboration revenues
 Gross Profit
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    51,255
    
    
    $
    45,420
    
    
    $
    5,835
    
    
    
    13
    %Drug delivery
    
    
    8,366
    
    
    
    6,149
    
    
    
    2,217
    
    
    
    36
    %Total
    
    $
    59,621
    
    
    $
    51,569
    
    
    $
    8,052
    
    
    
    16
    %
  48




---



##### Table of Contents



Selling and Marketing Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    16,153
    
    
    $
    16,347
    
    
    $
    (194
    )
    
    
    -1
    %Drug delivery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    16,153
    
    
    $
    16,347
    
    
    $
    (194
    )
    
    
    -1
    %
  General and Administrative Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    7,391
    
    
    $
    8,930
    
    
    $
    (1,539
    )
    
    
    -17
    %Drug delivery
    
    
    7,410
    
    
    
    2,475
    
    
    
    4,935
    
    
    
    199
    %Total
    
    $
    14,801
    
    
    $
    11,405
    
    
    $
    3,396
    
    
    
    30
    %
  Research and Development Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    1,777
    
    
    $
    1,378
    
    
    $
    399
    
    
    
    29
    %Drug delivery
    
    
    8,682
    
    
    
    4,422
    
    
    
    4,260
    
    
    
    96
    %Total
    
    $
    10,459
    
    
    $
    5,800
    
    
    $
    4,659
    
    
    
    80
    %
 TM
 49




---



##### Table of Contents



Litigation Settlement Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    2005
    
    $
    
    %Specialty generics
    
    $
    10,914
    
    
    $
    593
    
    
    $
    10,321
    
    
    
    *
 
 *
    
    Not meaningful general and administrative expenses litigation settlement expenses
 Other Income (Expenses)
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    (64
    )
    
    $
    (15
    )
    
    $
    (49
    )
    
    
    -327
    %Drug delivery
    
    
    683
    
    
    
    744
    
    
    
    (61
    )
    
    
    -8
    %Total
    
    $
    619
    
    
    $
    729
    
    
    $
    (110
    )
    
    
    -15
    %
  Provision for Income Taxes
 (in thousands)Spain
    
    
    Ireland
    
    
    U.S.
    
    
    ConsolidatedIncome (loss) before income taxesSpecialty generics
    
    $
    16,239
    
    
    $
    29
    
    
    $
    (2,482
    )
    
    $
    13,786Drug delivery
    
    
    
    
    
    
    (10,447
    )
    
    
    2,717
    
    
    
    (7,730
    )Total income (loss) before income
taxes
    
    
    16,239
    
    
    
    (10,418
    )
    
    
    235
    
    
    
    6,056Provision (benefit) for income taxes
    
    
    5,082
    
    
    
    (1,315
    )
    
    
    1,982
    
    
    
    5,749Valuation allowance
    
    
    
    
    
    
    1,315
    
    
    
    (1,982
    )
    
    
    (667
    )Net provision for income taxes
    
    
    5,082
    
    
    
    
    
    
    
    
    
    
    
    5,082Net income (loss)
    
    $
    11,157
    
    
    $
    (10,418
    )
    
    $
    235
    
    
    $
    974Effective tax rate
    
    
    31
    %
    
    
    0
    %
    
    
    0
    %
    
    
    84
    %
  50




---



##### Table of Contents



Net Income
 (in thousands, except per share data)
    
    December 31,
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %Specialty Generics
    
    $
    8,696
    
    
    $
    11,532
    
    
    $
    (2,836
    )
    
    
    -25
    %Drug Delivery
    
    
    (7,722
    )
    
    
    (613
    )
    
    
    (7,109
    )
    
    
    -1160
    %Total net income
    
    $
    974
    
    
    $
    10,919
    
    
    $
    (9,945
    )
    
    
    -91
    %Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.51
    
    
    $
    (0.47
    )
    
    
    -92
    %Diluted
    
    $
    0.04
    
    
    $
    0.48
    
    
    $
    (0.44
    )
    
    
    -92
    %Weighted average common shares outstanding:Basic
    
    
    22,141
    
    
    
    21,558
    
    
    
    583
    
    
    
    3
    %Diluted
    
    
    23,068
    
    
    
    22,929
    
    
    
    139
    
    
    
    1
    %
  51




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##### Table of Contents



Fiscal Year Ended December 31, 2005 Compared To Fiscal Year Ended December 31, 2004
 Revenues
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    %
    
    2004
    
    %
    
    $
    
    %Specialty GenericsNet product sales
    
    $
    91,308
    
    
    
    93
    %
    
    $
    69,942
    
    
    
    95
    %
    
    $
    21,366
    
    
    
    31
    %Licensing and collaboration
revenues
    
    
    273
    
    
    
    *
    
    
    
    607
    
    
    
    1
    %
    
    
    (334
    )
    
    
    -55
    %91,581
    
    
    
    93
    %
    
    
    70,549
    
    
    
    96
    %
    
    
    21,032
    
    
    
    30
    %Drug DeliveryLicensing and collaboration revenues
    
    
    6,149
    
    
    
    7
    %
    
    
    2,844
    
    
    
    4
    %
    
    
    3,305
    
    
    
    116
    %Total revenues
    
    $
    97,730
    
    
    
    100
    %
    
    $
    73,393
    
    
    
    100
    %
    
    $
    24,337
    
    
    
    33
    %
 
 *
    
    Less than 1%    (in thousands)
    
    Revenues Within SpainRevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,779
    
    
    $
    15,394
    
    
    $
    
    
    
    $
    
    
    
    $
    18,173
    
    
    
    18
    %Simvastatin
    
    
    1,666
    
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    6,746
    
    
    
    7
    %Enalapril
    
    
    4,153
    
    
    
    1,706
    
    
    
    
    
    
    
    
    
    
    
    5,859
    
    
    
    6
    %Paroxetine
    
    
    1,337
    
    
    
    3,118
    
    
    
    
    
    
    
    
    
    
    
    4,455
    
    
    
    5
    %Codeisan
    
    
    3,441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,441
    
    
    
    4
    %All other products
    
    
    9,225
    
    
    
    9,812
    
    
    
    271
    
    
    
    1,512
    
    
    
    20,820
    
    
    
    21
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    11,589
    
    
    
    20,225
    
    
    
    31,814
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    6,148
    
    
    
    6,422
    
    
    
    7
    %Total Revenues
    
    $
    22,601
    
    
    $
    35,110
    
    
    $
    12,134
    
    
    $
    27,885
    
    
    $
    97,730
    
    
    
    100
    %% of 2005 Revenues
    
    
    23
    %
    
    
    36
    %
    
    
    12
    %
    
    
    29
    %
    
    
    100
    %
 52




---



##### Table of Contents



(in thousands)
    
    Revenues Within SpainRevenuesBranded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,721
    
    
    $
    13,520
    
    
    $
    
    
    
    $
    
    
    
    $
    16,241
    
    
    
    22
    %Simvastatin
    
    
    1,392
    
    
    
    3,638
    
    
    
    
    
    
    
    
    
    
    
    5,030
    
    
    
    7
    %Enalapril
    
    
    3,192
    
    
    
    1,243
    
    
    
    
    
    
    
    
    
    
    
    4,435
    
    
    
    6
    %Paroxetine
    
    
    1,045
    
    
    
    2,928
    
    
    
    
    
    
    
    
    
    
    
    3,973
    
    
    
    5
    %Codeisan
    
    
    3,131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,131
    
    
    
    4
    %All other products
    
    
    6,910
    
    
    
    7,690
    
    
    
    576
    
    
    
    1,166
    
    
    
    16,342
    
    
    
    23
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    10,502
    
    
    
    10,288
    
    
    
    20,790
    
    
    
    28
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    607
    
    
    
    2,844
    
    
    
    3,451
    
    
    
    5
    %Total Revenues
    
    $
    18,391
    
    
    $
    29,019
    
    
    $
    11,685
    
    
    $
    14,298
    
    
    $
    73,393
    
    
    
    100
    %% of 2004 Revenues
    
    
    25
    %
    
    
    40
    %
    
    
    16
    %
    
    
    19
    %
    
    
    100
    %
 Spanish Operations.
 Branded Generic Pharmaceutical Products
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    %
    
    2004
    
    %
    
    $
    
    %Branded Generic Product Sales:Enalapril
    
    $
    4,153
    
    
    
    18
    %
    
    $
    3,192
    
    
    
    17
    %
    
    $
    961
    
    
    
    30
    %Codeisan
    
    
    3,441
    
    
    
    16
    %
    
    
    3,131
    
    
    
    17
    %
    
    
    310
    
    
    
    10
    %Omeprazole
    
    
    2,779
    
    
    
    12
    %
    
    
    2,721
    
    
    
    15
    %
    
    
    58
    
    
    
    2
    %Simvastatin
    
    
    1,666
    
    
    
    7
    %
    
    
    1,39
    
    
    
    2                   8
    %
    
    
    274
    
    
    
    20
    %Lansoprazole
    
    
    1,856
    
    
    
    8
    %
    
    
    31
    
    
    
    0
    %
    
    
    1,825
    
    
    
    *All other branded products
    
    
    8,706
    
    
    
    39
    %
    
    
    7,924
    
    
    
    43
    %
    
    
    782
    
    
    
    10
    %Total branded generic sales
    
    $
    22,601
    
    
    
    100
    %
    
    $
    18,391
    
    
    
    100
    %
    
    $
    4,210
    
    
    
    23
    %
 
 *
    
    Not meaningful  53




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##### Table of Contents



Generic Pharmaceutical Products
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    %
    
    2004
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    15,394
    
    
    
    44
    %
    
    $
    13,520
    
    
    
    47
    %
    
    $
    1,874
    
    
    
    14
    %Simvastatin
    
    
    5,080
    
    
    
    14
    %
    
    
    3,638
    
    
    
    12
    %
    
    
    1,442
    
    
    
    40
    %Paroxetine
    
    
    3,118
    
    
    
    9
    %
    
    
    2,928
    
    
    
    10
    %
    
    
    190
    
    
    
    6
    %Pentoxifylline
    
    
    2,540
    
    
    
    7
    %
    
    
    2,622
    
    
    
    9
    %
    
    
    (82
    )
    
    
    -3
    %Trimetazidine
    
    
    2,214
    
    
    
    6
    %
    
    
    1,983
    
    
    
    7
    %
    
    
    231
    
    
    
    12
    %All other generic products
    
    
    6,764
    
    
    
    20
    %
    
    
    4,328
    
    
    
    15
    %
    
    
    2,436
    
    
    
    56
    %Total generic sales
    
    $
    35,110
    
    
    
    100
    %
    
    $
    29,019
    
    
    
    100
    %
    
    $
    6,091
    
    
    
    21
    %
 All other generic
products
 Sales to Licensees and Others
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Sales to licensees and
others
    
    $
    31,814
    
    
    $
    20,790
    
    
    $
    11,024
    
    
    
    53
    %
  Licensing and Collaboration Revenues
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    273
    
    
    $
    607
    
    
    $
    (334
    )
    
    
    -55
    %Drug delivery
    
    
    6,149
    
    
    
    2,844
    
    
    
    3,305
    
    
    
    116
    %Total
    
    $
    6,422
    
    
    $
    3,451
    
    
    $
    2,971
    
    
    
    86
    %
 Licensing and collaboration revenues licensing and collaboration
revenues
 54




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##### Table of Contents



Gross Profit
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    45,420
    
    
    $
    35,656
    
    
    $
    9,764
    
    
    
    27
    %Drug delivery
    
    
    6,149
    
    
    
    2,844
    
    
    
    3,305
    
    
    
    116
    %Total
    
    $
    51,569
    
    
    $
    38,500
    
    
    $
    13,069
    
    
    
    34
    %
  Selling and Marketing Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    16,347
    
    
    $
    14,808
    
    
    $
    1,539
    
    
    
    10
    %Drug delivery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    16,347
    
    
    $
    14,808
    
    
    $
    1,539
    
    
    
    10
    %
  General and Administrative Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    8,930
    
    
    $
    6,706
    
    
    $
    2,224
    
    
    
    33
    %Drug delivery
    
    
    2,475
    
    
    
    2,179
    
    
    
    296
    
    
    
    14
    %Total
    
    $
    11,405
    
    
    $
    8,885
    
    
    $
    2,520
    
    
    
    28
    %
 litigation
settlement
 Research and Development Expenses
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    1,378
    
    
    $
    1,249
    
    
    $
    129
    
    
    
    10
    %Drug delivery
    
    
    4,422
    
    
    
    3,170
    
    
    
    1,252
    
    
    
    39
    %Total
    
    $
    5,800
    
    
    $
    4,419
    
    
    $
    1,381
    
    
    
    31
    %
 55




---



##### Table of Contents



Other Income (Expenses)
 (in thousands)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty generics
    
    $
    (15
    )
    
    $
    1,372
    
    
    $
    (1,387
    )
    
    
    -101
    %Drug delivery
    
    
    744
    
    
    
    428
    
    
    
    316
    
    
    
    74
    %Total
    
    $
    729
    
    
    $
    1,800
    
    
    $
    (1,071
    )
    
    
    -60
    %
  Provision for Income Taxes
 (in thousands)
    
    2005Spain
    
    
    Ireland
    
    
    U.S.
    
    
    ConsolidatedIncome (loss) before income taxesSpecialty generics
    
    $
    17,433
    
    
    $
    (19
    )
    
    $
    (406
    )
    
    $
    17,008Drug delivery
    
    
    
    
    
    
    (2,061
    )
    
    
    1,448
    
    
    
    (613
    )Total income ( loss) before income
taxes
    
    
    17,433
    
    
    
    (2,080
    )
    
    
    1,042
    
    
    
    16,395Provision (Benefit) for income taxes
    
    
    5,476
    
    
    
    (260
    )
    
    
    198
    
    
    
    5,414Valuation allowance
    
    
    
    
    
    
    260
    
    
    
    (198
    )
    
    
    62Net provision for income taxes
    
    
    5,476
    
    
    
    
    
    
    
    
    
    
    
    5,476Net income (loss)
    
    $
    11,957
    
    
    $
    (2,080
    )
    
    $
    1,042
    
    
    $
    10,919Effective tax rate
    
    
    31
    %
    
    
    0
    %
    
    
    0
    %
    
    
    33
    %
   56




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##### Table of Contents



Net Income
 (in thousands, except per share data)
    
    
    
    
    
    
    
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Specialty Generics
    
    $
    11,532
    
    
    $
    8,292
    
    
    $
    3,240
    
    
    
    39
    %Drug Delivery
    
    
    (613
    )
    
    
    (2,602
    )
    
    
    1,989
    
    
    
    76
    %Total net income
    
    $
    10,919
    
    
    $
    5,690
    
    
    $
    5,229
    
    
    
    92
    %Net income per common share:Basic
    
    $
    0.51
    
    
    $
    0.27
    
    
    $
    0.24
    
    
    
    89
    %Diluted
    
    $
    0.48
    
    
    $
    0.25
    
    
    $
    0.23
    
    
    
    92
    %Weighted average common shares outstanding:Basic
    
    
    21,558
    
    
    
    20,901
    
    
    
    657
    
    
    
    3
    %Diluted
    
    
    22,929
    
    
    
    22,627
    
    
    
    302
    
    
    
    1
    %
  57




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##### Table of Contents



Selected Quarterly Financial Data
  Fiscal 2005
    
    
    Fiscal 2006Three Months Ended (Unaudited)3/31/05
    
    
    6/30/05
    
    
    9/30/05
    
    
    12/31/05(a)
    
    
    3/31/06
    
    
    6/30/06
    
    
    9/30/06(b)(c)
    
    
    12/31/06(c)(in thousands, except per share data)Total revenues
    
    $
    24,244
    
    
    $
    24,764
    
    
    $
    23,512
    
    
    $
    25,210
    
    
    
    28,278
    
    
    
    28,983
    
    
    
    25,156
    
    
    
    27,054Cost of net product sales
    
    
    11,452
    
    
    
    11,367
    
    
    
    11,104
    
    
    
    12,238
    
    
    
    12,933
    
    
    
    12,471
    
    
    
    11,778
    
    
    
    12,668Gross profit
    
    
    12,792
    
    
    
    13,397
    
    
    
    12,408
    
    
    
    12,972
    
    
    
    15,345
    
    
    
    16,512
    
    
    
    13,378
    
    
    
    14,386Operating expenses
    
    
    9,145
    
    
    
    9,408
    
    
    
    8,730
    
    
    
    8,620
    
    
    
    11,991
    
    
    
    11,580
    
    
    
    19,085
    
    
    
    11,566Gain on sale of license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Income (loss) from
operations
    
    
    3,647
    
    
    
    3,989
    
    
    
    3,678
    
    
    
    4,352
    
    
    
    3,354
    
    
    
    4,932
    
    
    
    (5,707
    )
    
    
    2,858Other income (expenses)
    
    
    113
    
    
    
    173
    
    
    
    184
    
    
    
    259
    
    
    
    193
    
    
    
    187
    
    
    
    208
    
    
    
    31Provision (benefit) for
income taxes
    
    
    1,590
    
    
    
    1,554
    
    
    
    1,377
    
    
    
    955
    
    
    
    2,393
    
    
    
    2,484
    
    
    
    1,730
    
    
    
    (1,525
    )Net income(loss)
    
    $
    2,170
    
    
    $
    2,608
    
    
    $
    2,485
    
    
    $
    3,656
    
    
    
    1,154
    
    
    
    2,635
    
    
    
    (7,229
    )
    
    
    4,414Net income(loss) per
common share:Basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.20Diluted
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.19Weighted average common
shares outstanding:Basic
    
    
    21,316
    
    
    
    21,395
    
    
    
    21,652
    
    
    
    21,862
    
    
    
    21,954
    
    
    
    22,170
    
    
    
    22,194
    
    
    
    22,242Diluted
    
    
    22,531
    
    
    
    22,603
    
    
    
    22,970
    
    
    
    23,564
    
    
    
    23,807
    
    
    
    22,876
    
    
    
    22,194
    
    
    
    22,735
 
 (a)
    
    Total revenuesfor the year ended December 31, 2005 included a change in estimate of
royalty revenues earned of approximately $1,092,000 recorded in the fourth quarter of 2005.
This change in estimate of royalty revenues earned is based upon publicly available data
determined to be more accurate than the source of data previously relied upon by management
in estimating the sell-through of prescriptions dispensed.(b)
    
    Total revenuesfor the year ended December 31, 2006 include an increase in royalty
revenues of approximately $479,000 recorded in the second quarter of 2006. This change in
estimate was due to the Companys ability to reasonably estimate future product returns on
sales of Testim based on actual historical data.(c)
    
    Operating expensesfor the year ended December 31, 2006 include litigation settlement
charges of approximately $7,546,000 recorded in the third
quarter of 2006 associated with the probable settlement of outstanding litigation
claims. The Company recorded a tax benefit of $2,746,000 in provision for
incomes taxesupon finalization of the settlement in the fourth
quarter of 2006. Operating expensesalso include related legal defense costs of
$604,000, $733,000, $1,386,000 and $645,000 in first, second, third and fourth quarters of
2006, respectively. 58




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##### Table of Contents



Liquidity and Capital Resources
          59




---



##### Table of Contents



Contractual Obligations
  Payments Due By Period(in thousands)
    
    
    
    
    
    Less than 1
    
    
    1  3
    
    
    3  5
    
    
    More than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsLongterm debt
    
    $
    307
    
    
    $
    307
    
    
    $
    
    
    
    $
    
    
    
    $
    Short-term borrowings
    
    
    247
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    Capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    2,052
    
    
    
    1,177
    
    
    
    841
    
    
    
    34
    
    
    
    Purchase obligations (1)
    
    
    6,570
    
    
    
    6,570
    
    
    
    
    
    
    
    
    
    
    
    Other current liabilities (2)
    
    
    1,518
    
    
    
    1,518
    
    
    
    
    
    
    
    
    
    
    
    Other longterm liabilities (2)
    
    
    2,739
    
    
    
    
    
    
    
    1,860
    
    
    
    879
    
    
    
    Total contractual cash obligations (3)(4)
    
    $
    13,433
    
    
    $
    9,819
    
    
    $
    2,701
    
    
    $
    913
    
    
    $
    
 
 (1)
    
    Included in purchase obligations are contractual obligations for the purchase of
machinery, construction and engineering services and a new inventory management software
application. The construction and engineering services and new inventory management
software application are associated with the expansion of our manufacturing facilities in
Zaragoza, Spain. Purchase orders or contracts for the purchase of raw materials and other
goods and services are not included in the table above as our purchase orders represent
authorizations to purchase rather than binding agreements. For the purposes of this table,
contractual obligations for purchase of goods or services are defined as agreements that
are enforceable and legally binding and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors within short time frame. We
do not have agreements for the purchase of raw materials or other goods specifying minimum
quantities. We also enter into contracts for outsourced services including payroll,
information technology and maintenance; however, the obligations under these contracts are
not significant and the contracts contain clauses allowing for cancellation at will,
without significant penalty.(2)
    
    Included in other liabilities at December 31, 2006 are the present value of four
annual payments of $1,000,000 to be paid in connection with the settlement of litigation
in 2006 and the value of a 60




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hedging instrument obtained to reduce the currency risk on the settlement obligation, of
which $2,739,000 is classified as long-term. There were no other contractual obligations
included in other long-term liabilities in our Consolidated Balance Sheet as of December
31, 2006.(3)
    
    Not included in the chart above are key executive compensation agreements that
have been renewed whereby we are currently obligated to pay approximately $2,247,000 to
our key executives in 2007. Such agreements renew annually unless terminated by any of
the parties or amended by the Compensation Committee of the Board of Directors.(4)
    
    Also not included in the chart above is an aggregate of $1,362,0000 of deferred
taxes due to be paid to the Spanish Ministry of Taxes over the next four years which
resulted from the sale of certain drug licenses in prior years. These non-current
deferred tax liabilities are netted against the Companys non-current deferred tax assets
on the 2006 Consolidated Balance Sheet.
    Seasonality, Effect of Inflation and Liquidity.
 Off-Balance Sheet Arrangements
  61




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Critical Accounting Policies and Estimates
  
    
    Revenue recognition and accounts receivable.
 O
    
    Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and final, delivery has occurred and there
is a reasonable assurance of collection of the sales proceeds. We generally obtain
purchase authorizations from our customers for a specified amount of product at a
specified price and consider delivery to have occurred when the customer takes
possession of the products and/or risk of loss has passed to the customer. We
provide our customers with a limited right of return. Revenue is generally
recognized upon delivery of products, at which time a reserve for sales returns is
recorded. We have demonstrated the ability to make reasonable and reliable
estimates of product returns in accordance with SFAS No. 48, Revenue Recognition
When Right of Return Exists, and of allowances for doubtful accounts based on
significant historical experience.O
    
    Revenue from service, research and development, and licensing and
supply agreements is recognized when the service procedures have been completed or
as revenue recognition criteria have been met for each separate unit of accounting
(as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables).O
    
    We earn royalties from Auxilium sales of Testim, which incorporates our
CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to
pharmaceutical wholesalers and chain drug stores, which have the right to return
purchased product prior to the units being dispensed through patient prescriptions.
Historically, customer returns were not able to be reasonably estimated. Therefore,
in accordance with SFAS No. 48, we deferred the recognition of royalty revenues on
product shipments of Testim, until the units were dispensed through patient
prescriptions. During the quarter ended June 30, 2006, we recorded an increase in
royalty revenues of approximately $479,000, or $0.02 per share, due to a change in
estimate which, based on historical experience, allowed us to reasonably estimate
future product returns on sales of Testim.O
    
    Accounts receivable are recorded at their net realizable value,
generally as products are shipped or services are performed. Receivable balances
are reported net of an estimated allowance for uncollectible accounts. Estimated
uncollectible receivables are based on the amount and status of past due accounts,
contractual terms with customers, the credit worthiness of customers and the
history of our uncollectible accounts.
 
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
    
    Inventories.Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and obsolete
inventories are provided based on historical experience and current product demand. We
evaluate the adequacy of these reserves quarterly.
 
    
    Drug licenses and related costs.Drug licenses and related costs incurred in connection
with acquiring licenses, patents and other proprietary rights related to our commercially
developed products are capitalized. Capitalized drug licenses and related costs are being
amortized on a straight-line basis for periods not exceeding 15 years from the dates of
acquisition. Carrying values of such assets are reviewed at least annually by comparing the
carrying amounts to their estimated undiscounted cash flows and adjustments are made for
any diminution in value.
 
    
    Share-based compensation.Commencing January 1, 2006, we began accounting for
share-based compensation in accordance with the fair value recognition provisions of SFAS
No. 123 (Revised). Under the fair value recognition provisions of SFAS No. 123 (Revised),
share-based compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period. Determining the fair
value of equity awards at the grant date requires judgment. We estimate the grant date fair
value of stock options using the Black-Scholes option valuation model. This option
valuation model requires the input of subjective assumptions including: (1) Expected life -
the expected life (estimated period of time outstanding) of options granted is estimated
based on historical exercise behaviors; (2) Volatility  the volatility of the Companys
stock is calculated on the grant date of each equity award using daily price observations
over a period of time commensurate with the related requisite service period; (3) Risk-free
rate  the risk-free interest rate is based on the yield curve of U.S. Treasury securities
in effect at the date of the grant, having a duration commensurate with the estimated life
of the award; and (4) Dividends  as we have not declared dividends, and we do not expect
to declare dividends in the future, we include an annual dividend rate of 0% when
calculating the grant date fair value of equity awards. Because share-based compensation
expense is based on awards ultimately expected to vest, it is reduced for estimated
forfeitures. SFAS No. 123 (Revised) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures are estimated based on historical experience. While we
recognize share-based compensation under the accelerated expense attribution method
pursuant to FASB Interpretation No. 28 for all options previously accounted for under APB
Opinion No. 25, we have elected to recognize share-based compensation attributable to
equity awards granted subsequent to December 31, 2005 under the straight-line method which
is an alternative allowed for under SFAS No. 123 (Revised). Had we elected to recognize
compensation expense for new equity awards under the accelerated expense attribution
method, recognition of the related compensation expense would be front-loaded in the
requisite service period as opposed to being recognized evenly over the period.SFAS No. 123 (Revised) requires a company to calculate the pool of excess tax benefits, or
APIC Pool, available to absorb tax deficiencies recognized subsequent to adopting the
accounting standard, as if the company had adopted SFAS No. 123, as originally issued, at
its effective date in 1995. There are two allowable methods to calculate the hypothetical
APIC Pool: (1) the long form method as set forth in SFAS No. 123 (Revised) or (2) the
short form method as set forth in FASB Staff Position No. 123(R)-3. We have elected to use
the long form method under which we track each award grant on an employee-by-employee basis
and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such
award. We then compared the fair value expense to the tax deduction received for each grant
and aggregated the benefits and deficiencies to establish its hypothetical APIC Pool.
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Due to the adoption of SFAS No. 123 (Revised), some exercises result in tax deductions in
excess of previously recorded benefits based on the option value at the time of grant, or
windfalls. We recognize windfall tax benefits associated with the exercise of stock options
directly to stockholders equity only when realized. Accordingly, deferred tax assets are
not recognized for net operating loss carryforwards resulting from windfall tax benefits
occurring from January 1, 2006 onward. A windfall tax benefit occurs when the actual tax
benefit realized by the company upon an employees disposition of a share-based award
exceeds the deferred tax asset, if any, associated with the award that the company had
recorded.
    
    Provision for income taxes.We have provided for current and deferred U.S. federal,
state and foreign income taxes for the current and all prior periods presented. Current
and deferred income taxes have been provided with respect to jurisdictions where certain of
our subsidiaries produce taxable income. We have provided a valuation allowance with
respect to the remainder of our deferred income taxes, consisting primarily of net
operating loss carryforwards in the U.S. and Ireland, because of uncertainty regarding
their realization.Should we determine that it is more likely than not that we will realize certain of our net
deferred tax assets for which we have previously provided a valuation allowance, an
adjustment would be required to reduce the existing valuation allowance. In addition, we
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. These audits can involve complex issues, which may require an extended
period of time for resolution. Although we believe that adequate consideration has been
made for such issues, there is the possibility that the ultimate resolution of such issues
could have an adverse effect on our financial position, results of operations or cash
flows.
    
    Foreign currency translation. The financial position, results of operations and cash
flows of our foreign subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of each foreign subsidiary are translated at the rate of
exchange in effect at the end of the period. Revenues and expenses are translated at the
average exchange rate for the period. Foreign currency translation gains and losses are
credited to or charged against other comprehensive income in the Consolidated Balance
Sheets. Foreign currency gains and losses arising from cash transactions are credited to or
charged against current earnings.
 New Accounting Standards
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements
 64




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Fair Value Measurements
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency.
 U.S.
Dollars per Euro
    
    2006
    
    2005
    
    2004Weighted average exchange rate
    
    
    1.26
    
    
    
    1.24
    
    
    
    1.24Exchange rate
    
    
    1.31
    
    
    
    1.19
    
    
    
    1.36
 accumulated other
comprehensive income
  Interest Rates.
 
 Item 8. Financial Statements and Supplementary Data
  65




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Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 .
 
 Item 9A. Controls and Procedures
 Disclosure Controls and Procedures
   Internal Control over Financial Reporting
 Managements Annual Report on Internal Control over Financial Reporting
 Internal
ControlIntegrated Framework Internal
ControlIntegrated Framework
 Attestation Report of the Independent Registered Public Accounting Firm
  Changes in Internal Control Over Financial Reporting
  66




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal Control Integrated Framework
 67




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Internal ControlIntegrated Framework
 Share-Based Payment
 
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Item 9B. Other Information
 .
 69




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Part III
 
 Item 10. Directors and Executive Officers of the Registrant and Corporate Governance
 Name
    
    Age
    
    PositionJames R. Murphy
    
    
    57
    
    
    Chairman, Chief Executive Officer and DirectorMichael McGovern
    
    
    63
    
    
    Vice Chairman and DirectorJohn A. Sedor
    
    
    62
    
    
    PresidentRichard P. Lindsay
    
    
    45
    
    
    Vice President, Chief Financial Officer, Treasurer and SecretaryAdolfo Herrera
    
    
    47
    
    
    Managing Director of European SubsidiariesMiguel Fernandez
    
    
    76
    
    
    DirectorF. Ross Johnson
    
    
    75
    
    
    DirectorEdward J. Robinson
    
    
    66
    
    
    DirectorJohn W. Spiegel
    
    
    66
    
    
    Lead Director
 James R. Murphy -
 Michael McGovern
 John A. Sedor
 70




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Richard P. Lindsay
 Adolfo Herrera
 Miguel Fernandez
 F. Ross Johnson
 Edward J. Robinson
 71




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John W. Spiegel
 Audit Committee
  Section 16(a) Beneficial Ownership Reporting Compliance
  Other Information
   www.bentleypharm.com www.sec.gov
 72




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Code of Business Conduct and Ethics
 www.bentleypharm.com
 
 Item 11. Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  73




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Part IV
 
 Item 15. Exhibits, Financial Statement Schedules
 Page Herein(a)
    
    The following documents are filed as a part of this report:(1
    )
    
    Financial Statements:Consolidated Financial Statements of Bentley Pharmaceuticals, Inc.
and Subsidiaries
    
    F-1 to F-36(2
    )
    
    Financial Statement Schedules:None(3
    )
    
    Exhibits  See index beginning on page 75(b)     The exhibits filed as a part of this annual report on Form 10-K are listed on the Exhibit Index
immediately preceding the signature page. The Exhibit Index is incorporated herein by reference.
 74




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EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of the Registrant, as amended and restated. (Reference is
made to Appendix B to the Registrants Definitive Proxy Statement for the Annual
Meeting of Stockholders filed on May 18, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)3.2
    
    Amendment of Restated Articles of Incorporation of the Registrant. (Reference is made
to Exhibit 3.1 to the Registrants Form 10-Q for the quarter ended June 30, 2004,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)3.3
    
    Bylaws of the Registrant, as amended and restated. (Reference is made to Exhibit 3.1
to the Registrants Form 10-Q for the quarter ended March 31, 2004, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)4.1
    
    Renewed Rights Agreement dated as of December 21, 2004 between Bentley
Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including the form of Rights certificate as Exhibit B thereto and the Summary of
Rights to Purchase Series A Junior Participating Preferred Stock as Exhibit C thereto.
(Reference is made to Exhibit 4.1 to the Registrants Form 8-K, filed on December 21,
2004, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.1*
    
    Registrants Amended and Restated 1991 Stock Option Plan. (Reference is made to
Appendix D to the Registrants Definitive Proxy Statement for the Annual Meeting of
Stockholders filed on May 18, 1999, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.2*
    
    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 for the
year ended June 30, 1992, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.3*
    
    Registrants 2001 Employee Stock Option Plan. (Reference is made to Appendix B to
the Registrants Definitive Proxy Statement for the Annual Meeting of Stockholders
filed on April 9, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.4*
    
    Registrants 2001 Directors Stock Option Plan. (Reference is made to Appendix C to
the Registrants Definitive Proxy Statement for the Annual Meeting of Stockholders
filed on April 9, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
 75




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ExhibitNumber
    
    Description10.5*
    
    Form of Stock Option contract under the Registrants 2001 Employee Stock Option
Plan. (Reference is made to Exhibit 4.8 to the Registrants Form 10-K for the year
ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.6*
    
    Form of Stock Option contract under the Registrants 2001 Directors Stock Option
Plan. (Reference is made to Exhibit 4.9 to the Registrants Form 10-K for the year
ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.7*
    
    Amendment No. 1 to the Registrants 2001 Employee Stock Option Plan. (Reference is
made to Exhibit 4.10 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.8*
    
    Amendment No. 2 to the Registrants 2001 Employee Stock Option Plan. (Reference is
made to Exhibit 4.11 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.9*
    
    Amendment No. 1 to the Registrants 2001 Directors Stock Option Plan. (Reference is
made to Exhibit 4.12 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.10*
    
    Amendment No. 2 to the Registrants 2001 Directors Stock Option Plan. (Reference is
made to Exhibit 4.13 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.11*
    
    Form of Incentive Stock Option Certificate under the Registrants Amended and
Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.2 to the
Registrants Form 10-Q for the quarter ended June 30, 2005, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.12*
    
    Form of Non-Statutory Stock Option Certificate under the Registrants Amended and
Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.3 to the
Registrants Form 10-Q for the quarter ended June 30, 2005, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.13
    
    Bentley Pharmaceuticals, Inc. Amended and Restated 2005 Equity and Incentive Plan.
(Reference is made to Exhibit 10.1 of the Registrants Current Report on Form 8-K
dated May 23, 2006, Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)10.14
    
    Form of Restricted Stock Unit Certificate (Non-employee Directors) under the
Registrants Amended and Restated 2005 Equity and Incentive Plan. (Reference is made
to Exhibit 10.2 of the Registrants Form 10-Q for the quarter ended June 30, 2006,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)
 76




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ExhibitNumber
    
    Description10.15
    
    Form of Restricted Stock Unit Certificate (Employees) under the Registrants Amended
and Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.3 of
the Registrants Form 10-Q for the quarter ended June 30, 2006, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.16*
    
    Ordinary Labor Contract dated as of February 12, 1998 between the Registrants
wholly-owned subsidiary, Laboratorios Belmac, S.A. and Adolfo Herrera. (Reference is
made to Exhibit 10.26 to the Registrants Form 10-K for the year ended December 31,
2005, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.17*
    
    Employment Agreement dated as of January 1, 2002 between the Registrant and James R.
Murphy. (Reference is made to Exhibit 10.1 to Amendment No. 1 to the Registrants
Form 10-K for the year ended December 31, 2001, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.18*
    
    Employment Agreement dated as of August 27, 2005 between the Registrant and John A.
Sedor. (Reference is made to Exhibit 10.1 to the Registrants Form 10-Q for the
quarter ended September 30, 2005, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.19*
    
    Employment Agreement dated as of September 11, 2006 by and between the Registrant
and Richard P. Lindsay. (Reference is made to Exhibit 10.1 of the Registrants Current
Report on Form 8-K dated September 11, 2006, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.20*
    
    Separation Agreement dated as of September 15, 2006 by and between the Registrant
and Michael D. Price. (Reference is made to Exhibit 10.2 of the Registrants Current
Report on Form 8-K dated September 11, 2006, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.21*
    
    Information on remuneration of non-employee members of the Board of Directors.
(Reference is made to Item 1.01 of the Registrants Current Report on Form 8-K dated
May 23, 2006, Commission File No. 1-10581, which item is incorporated herein by
reference.)10.22
    
    Asset Purchase Agreement between the Registrant and Yungtai Hsu dated February 1,
1999, effective as of December 31, 1998. (Reference is made to Exhibit 7.1 to the
Registrants Form 8-K filed on February 26, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.23
    
    License Agreement between the Registrant and Auxilium A2, Inc. dated May
31, 2000, including Amendment No. 1 thereto dated October 2000 and Amendment No. 2
dated May 31, 2001. (Reference is made to Exhibit 10.10 to Amendment No. 2 to the
Registrants Form 10-K for the year ended December 31, 2001, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)
 77




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ExhibitNumber
    
    Description10.24
    
    Supply Agreement, License Agreement and Rights Agreement between Laboratorios
Belmac, S.A., Laboratorios Davur, S.L. and Teva Pharmaceutical Industries Ltd. dated
July 18, 2000. (Reference is made to Exhibit 10.12 to Amendment No. 2 to the
Registrants Form 10-K for the year ended December 31, 2001, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.25
    
    Amendment No. 3 dated September 6, 2002 to License Agreement between the Registrant
and Auxilium Pharmaceuticals, Inc. dated May 31, 2000. (Reference is made to Exhibit
10.10 to the Registrants Form 10-K for the year ended December 31, 2002, Commission
File No. 1-10581, which exhibit is incorporated herein by reference.)10.26
    
    Amendment No. 4 dated March 25, 2004 to License Agreement between the Registrant and
Auxilium Pharmaceuticals, Inc. dated May 31, 2000. (Reference is made to Exhibit 10.26
to the Registrants Form 10-K for the year ended December 31, 2005, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)10.27
    
    License Agreement between the Registrant and Auxilium Pharmaceuticals, Inc. dated
May 31, 2001 relating to products using Dihydrotestosterone. (Reference is made to
Exhibit 10.12 to the Registrants Form 10-K for the year ended December 31, 2002,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.28
    
    Amendment No. 1 dated September 6, 2002 to License Agreement between the Registrant
and Auxilium Pharmaceuticals, Inc. dated May 31, 2001 related to products using
Dihydrotestosterone. (Reference is made to Exhibit 10.13 to the Registrants Form 10-K
for the year ended December 31, 2002, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.29
    
    Settlement Term Sheet Agreement, dated September 29, 2006, between Ethypharm S.A.
France, Ethypharm S.A. Spain, the Registrant and Laboratorios Belmac S. A.21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 78




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ExhibitNumber
    
    Description32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement.
    
    Filed herewith. 79




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SIGNATURES
  BENTLEY PHARMACEUTICALS, INC.By:
    
    /s/ James R. MurphyJames R. MurphyChairman and ChiefExecutive OfficerDate: March 15, 2007
  Signature
    
    Title
    
    Date/s/ James R. Murphy
    
    Chairman, Chief
    
    March 15, 2007James R. Murphy
    
    Executive Officerand Director (principalexecutive officer)/s/ Michael McGovern
    
    Vice Chairman and Director
    
    March 15, 2007Michael McGovern/s/ Richard P. Lindsay
    
    Vice-President,
    
    March 15, 2007Richard P. Lindsay
    
    Chief Financial Officer,Treasurer and Secretary(principal financial officer)/s/ Robert P. Hebert
    
    Controller, Assistant Treasurer
    
    March 15, 2007Robert P. Hebert
    
    and Assistant Secretary(principal accounting officer)/s/ Miguel Fernandez
    
    Director
    
    March 15, 2007Miguel Fernandez/s/ F. Ross Johnson
    
    Director
    
    March 15, 2007F. Ross Johnson/s/ Edward J. Robinson
    
    Director
    
    March 15, 2007Edward J. Robinson/s/ John W. Spiegel
    
    Lead Director
    
    March 15, 2007John W. Spiegel




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Index to Consolidated Financial Statements of
Bentley Pharmaceuticals, Inc. and Subsidiaries
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-3Consolidated Income Statements for the years ended December 31, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payment
 Internal ControlIntegrated Framework
  
 F-2




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Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 (in thousands, except per share data)
    
    December 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    12,424
    
    
    $
    32,384Marketable securities
    
    
    3,177
    
    
    
    462Receivables, net
    
    
    32,963
    
    
    
    26,916Inventories
    
    
    16,279
    
    
    
    12,147Deferred taxes
    
    
    1,049
    
    
    
    1,099Prepaid expenses and other
    
    
    1,798
    
    
    
    2,069Total current assets
    
    
    67,690
    
    
    
    75,077Non-current assets:Fixed assets, net
    
    
    48,556
    
    
    
    33,366Drug licenses and related costs, net
    
    
    16,026
    
    
    
    13,858Restricted cash
    
    
    1,000
    
    
    
    1,000Deferred taxes
    
    
    240
    
    
    
    Other
    
    
    844
    
    
    
    919Total non-current assets
    
    
    66,666
    
    
    
    49,143$
    134,356
    
    
    $
    124,220Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    14,566
    
    
    $
    15,462Accrued expenses
    
    
    9,704
    
    
    
    9,428Short-term borrowings
    
    
    247
    
    
    
    2,608Current portion of long-term debt
    
    
    307
    
    
    
    387Deferred income
    
    
    1,045
    
    
    
    795Other current liabilities
    
    
    1,518
    
    
    
    Total current liabilities
    
    
    27,387
    
    
    
    28,680Non-current liabilities:Deferred taxes
    
    
    
    
    
    
    1,665Deferred income
    
    
    3,899
    
    
    
    2,286Other
    
    
    2,739
    
    
    
    Total non-current liabilities
    
    
    6,638
    
    
    
    3,951Commitments and contingencies (Note 15)Stockholders equity:Preferred stock, $1.00 par value, authorized 2,000 shares,
issued and outstanding, none
    
    
    
    
    
    
    Common stock, $0.02 par value, authorized 100,000 shares,
issued and outstanding, 22,262 and 21,923 shares
    
    
    445
    
    
    
    438Additional paid-in capital
    
    
    140,030
    
    
    
    139,381Accumulated deficit
    
    
    (49,016
    )
    
    
    (49,990
    )Accumulated other comprehensive income
    
    
    8,872
    
    
    
    1,760Total stockholders equity
    
    
    100,331
    
    
    
    91,589$
    134,356
    
    
    $
    124,220
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-3




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Consolidated Income Statements
 (in thousands, except per share data)
    
    For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Net product sales
    
    $
    100,590
    
    
    $
    91,308
    
    
    $
    69,942Licensing and collaboration revenues
    
    
    8,881
    
    
    
    6,422
    
    
    
    3,451Total revenues
    
    
    109,471
    
    
    
    97,730
    
    
    
    73,393Cost of net product sales
    
    
    49,850
    
    
    
    46,161
    
    
    
    34,893Gross profit
    
    
    59,621
    
    
    
    51,569
    
    
    
    38,500Operating expenses:Selling and marketing
    
    
    16,153
    
    
    
    16,347
    
    
    
    14,808General and administrative
    
    
    14,801
    
    
    
    11,405
    
    
    
    8,885Research and development
    
    
    10,459
    
    
    
    5,800
    
    
    
    4,419Litigation settlement
    
    
    10,914
    
    
    
    593
    
    
    
    241Depreciation and amortization
    
    
    1,895
    
    
    
    1,758
    
    
    
    1,452Total operating expenses
    
    
    54,222
    
    
    
    35,903
    
    
    
    29,805Gain on sale of drug license
    
    
    38
    
    
    
    
    
    
    
    Income from operations
    
    
    5,437
    
    
    
    15,666
    
    
    
    8,695Other income (expenses):Interest income
    
    
    820
    
    
    
    928
    
    
    
    548Interest expense
    
    
    (158
    )
    
    
    (211
    )
    
    
    (226
    )Other, net
    
    
    (43
    )
    
    
    12
    
    
    
    1,478Income before income taxes
    
    
    6,056
    
    
    
    16,395
    
    
    
    10,495Provision for income taxes
    
    
    5,082
    
    
    
    5,476
    
    
    
    4,805Net income
    
    $
    974
    
    
    $
    10,919
    
    
    $
    5,690Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.51
    
    
    $
    0.27Diluted
    
    $
    0.04
    
    
    $
    0.48
    
    
    $
    0.25Weighted average common shares
outstanding:Basic
    
    
    22,141
    
    
    
    21,558
    
    
    
    20,901Diluted
    
    
    23,068
    
    
    
    22,929
    
    
    
    22,627
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-4




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Stockholders Equity
 Accumulated(in thousands, except per share data)
    
    $0.02 Par Value
    
    
    Stock
    
    
    Additional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Purchase
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Warrants
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance at January
1, 2004
    
    
    20,573
    
    
    $
    412
    
    
    $
    333
    
    
    $
    136,850
    
    
    $
    (66,599
    )
    
    $
    5,169
    
    
    $
    76,165Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,690
    
    
    
    
    
    
    
    5,690Other
comprehensive
income:Foreign
currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,553
    
    
    
    4,553Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,243Exercise of stock
options/warrants
    
    
    725
    
    
    
    14
    
    
    
    (333
    )
    
    
    3,393
    
    
    
    
    
    
    
    
    
    
    
    3,074Equity-based
compensation
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Balance at December
31, 2004
    
    
    21,312
    
    
    
    426
    
    
    
    
    
    
    
    140,418
    
    
    
    (60,909
    )
    
    
    9,722
    
    
    
    89,657Comprehensive
income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,919
    
    
    
    
    
    
    
    10,919Other
comprehensive
loss:Foreign
currency
translation
Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,962
    )
    
    
    (7,962
    )Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,957Exercise of stock options
    
    
    1,021
    
    
    
    20
    
    
    
    
    
    
    
    4,055
    
    
    
    
    
    
    
    
    
    
    
    4,075Purchase of
treasury shares
    
    
    (430
    )
    
    
    (8
    )
    
    
    
    
    
    
    (5,313
    )
    
    
    
    
    
    
    
    
    
    
    (5,321
    )Equity-based
compensation
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    221Balance at December
31, 2005
    
    
    21,923
    
    
    
    438
    
    
    
    
    
    
    
    139,381
    
    
    
    (49,990
    )
    
    
    1,760
    
    
    
    91,589Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    974
    
    
    
    
    
    
    
    974Other
comprehensive
income:Foreign
currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,112
    
    
    
    7,112Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,086Exercise of stock
options
    
    
    741
    
    
    
    15
    
    
    
    
    
    
    
    3,937
    
    
    
    
    
    
    
    
    
    
    
    3,952Purchase of
treasury shares
    
    
    (418
    )
    
    
    (8
    )
    
    
    
    
    
    
    (5,442
    )
    
    
    
    
    
    
    
    
    
    
    (5,450
    )Equity-based
compensation
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    2,154
    
    
    
    
    
    
    
    
    
    
    
    2,154Balance at December
31, 2006
    
    
    22,262
    
    
    $
    445
    
    
    $
    
    
    
    $
    140,030
    
    
    $
    (49,016
    )
    
    $
    8,872
    
    
    $
    100,331
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-5




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (in thousands)
    
    For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    974
    
    
    $
    10,919
    
    
    $
    5,690Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    5,570
    
    
    
    5,096
    
    
    
    3,918Foreign currency gains
    
    
    (133
    )
    
    
    
    
    
    
    Gain on sale of drug license
    
    
    (38
    )Equity-based compensation expense
    
    
    2,154
    
    
    
    280
    
    
    
    195Change in fair value of derivative
instrument
    
    
    186
    
    
    
    
    
    
    
    Loss on disposal of assets
    
    
    208
    
    
    
    481
    
    
    
    Other non-cash items
    
    
    12
    
    
    
    38
    
    
    
    (103
    )(Increase) decrease in assets and
increase (decrease) in liabilities:Receivables
    
    
    (3,129
    )
    
    
    (2,529
    )
    
    
    (7,715
    )Inventories
    
    
    (2,691
    )
    
    
    (3,701
    )
    
    
    (2,083
    )Deferred income taxes
    
    
    (1,731
    )
    
    
    (1,160
    )
    
    
    (271
    )Prepaid expenses and other current assets
    
    
    343
    
    
    
    (809
    )
    
    
    (398
    )Other assets
    
    
    (31
    )
    
    
    (681
    )
    
    
    (153
    )Accounts payable and accrued expenses
    
    
    (2,663
    )
    
    
    4,900
    
    
    
    4,022Deferred income
    
    
    1,401
    
    
    
    (173
    )
    
    
    1,305Other liabilities
    
    
    4,070
    
    
    
    (65
    )
    
    
    (174
    )Net cash provided by operating
activities
    
    
    4,502
    
    
    
    12,596
    
    
    
    4,233Cash flows from investing activities:Additions to fixed assets
    
    
    (15,313
    )
    
    
    (11,018
    )
    
    
    (10,049
    )Additions to drug licenses and related costs
    
    
    (2,772
    )
    
    
    (2,045
    )
    
    
    (1,204
    )Proceeds from maturity of investments
    
    
    
    
    
    
    461
    
    
    
    150,352Purchase of investments
    
    
    (2,409
    )
    
    
    (461
    )
    
    
    (149,477
    )Purchase of API manufacturing assets
    
    
    
    
    
    
    
    
    
    
    (3,309
    )Net cash used in investing activities
    
    
    (20,494
    )
    
    
    (13,063
    )
    
    
    (13,687
    )
  The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-6




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Concluded)
 (in thousands)
    
    For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from financing activities:Proceeds from the exercise of stock options/warrants
    
    $
    450
    
    
    $
    2,028
    
    
    $
    3,083Remittance of employee tax liabilities in exchange for
common stock tendered to the Company
    
    
    (1,948
    )
    
    
    (2,292
    )
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (1,041
    )
    
    
    Proceeds from borrowings
    
    
    1,643
    
    
    
    1,938
    
    
    
    5,759Repayment of borrowings
    
    
    (4,281
    )
    
    
    (1,659
    )
    
    
    (5,164
    )Net cash (used in) provided by financing activities
    
    
    (4,136
    )
    
    
    (1,026
    )
    
    
    3,678Effect of exchange rate changes on cash
    
    
    168
    
    
    
    (353
    )
    
    
    613Net decrease in cash and cash equivalents
    
    
    (19,960
    )
    
    
    (1,846
    )
    
    
    (5,163
    )Cash and cash equivalents at beginning of year
    
    
    32,384
    
    
    
    34,230
    
    
    
    39,393Cash and cash equivalents at end of year
    
    $
    12,424
    
    
    $
    32,384
    
    
    $
    34,230Supplemental Disclosures of Cash Flow InformationThe Company paid cash during the year for:Interest
    
    $
    118
    
    
    $
    204
    
    
    $
    339Foreign income taxes
    
    $
    4,555
    
    
    $
    4,231
    
    
    $
    4,283Supplemental Disclosures of Non-Cash Financing and Investing ActivitiesThe Company has issued Common Stock as equity-based compensation in
lieu of cash during the year as follows:Shares
    
    
    16
    
    
    
    20
    
    
    
    14Amount
    
    $
    208
    
    
    $
    221
    
    
    $
    175Amounts included in accounts payable at end of year for fixed asset
and drug license purchases
    
    $
    1,869
    
    
    $
    2,675
    
    
    $
    3,986
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-7




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
 NOTE 1  HISTORY AND OPERATIONS
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing
of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
  ® ® TM
 F-8




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation and foreign currency translation
  U.S. Dollars per Euro
    
    2006
    
    2005
    
    2004Weighted average exchange rate
    
    
    1.26
    
    
    
    1.24
    
    
    
    1.24Exchange rate
    
    
    1.31
    
    
    
    1.19
    
    
    
    1.36
 other comprehensive income. accumulated other
comprehensive income
 Use of estimates
  Cash and cash equivalents and restricted cash
 marketable securities
  F-9




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 restricted cash
 Marketable securities
 other
comprehensive income
 Accounts receivable and allowances for doubtful accounts
  Inventories
 FIFO
 Fixed assets
  YearsBuildings and improvements
    
    
    30Equipment
    
    
    3-7Furniture and fixtures
    
    
    5-7Other
    
    
    5
  Drug licenses and related costs
  F-10




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Goodwill and Other Intangible Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
 Other liabilities
 litigation settlement
 Derivative Instruments and Hedging Activity
 Accounting
for Derivative Instruments and Certain Hedging Activities Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133 Amendment of Statement 133 on Derivative Instruments and Hedging Activities
 other income (expenses)
 F-11




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Fair value of financial instruments
  Revenue recognition
 Revenue Recognition When Right of
Return Exists,
 Accounting for Revenue Arrangements with Multiple Deliverables
  Research and development
  Income taxes
 Accounting for Income
Taxes Accounting for Income
 F-12




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Taxes  Special Areas
 Basic and diluted net income per common share
 Earnings per
Share
  Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2006
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    974
    
    
    $
    
    
    
    $
    974Weighted average common shares outstanding
    
    
    22,141
    
    
    
    927
    
    
    
    23,068Net income per common share
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.04Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2005
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    10,919
    
    
    $
    
    
    
    $
    10,919Weighted average common shares outstanding
    
    
    21,558
    
    
    
    1,371
    
    
    
    22,929Net income per common share
    
    $
    0.51
    
    
    $
    (0.03
    )
    
    $
    0.48Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2004
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    5,690
    
    
    $
    
    
    
    $
    5,690Weighted average common shares outstanding
    
    
    20,901
    
    
    
    1,726
    
    
    
    22,627Net income per common share
    
    $
    0.27
    
    
    $
    (0.02
    )
    
    $
    0.25
  F-13




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Comprehensive income
 Reporting Comprehensive Income other comprehensive income
 Share-based compensation plans
 Share-Based Payment. Accounting for
Stock-Based Compensation Accounting for Stock Issued to
Employees
 Segments of an enterprise and related information
 Disclosures About Segments of an Enterprise and Related Information,
 Recently issued accounting pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
 F-14




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Fair Value Measurements
 Reclassifications
 general and administrative expenses general and administrative
expenses litigation settlement
 NOTE 3 RECEIVABLES
  December 31,2006
    
    
    2005(In Thousands)Trade receivables (of which $247 and $2,595, respectively,
collateralize short-term borrowings with Spanish financial institutions)
    
    $
    27,880
    
    
    $
    21,293VAT, income and social security taxes receivable
    
    
    3,151
    
    
    
    2,270Royalties receivable
    
    
    2,261
    
    
    
    2,861Other
    
    
    82
    
    
    
    69433,374
    
    
    
    27,118Less-allowance for doubtful accounts
    
    
    (411
    )
    
    
    (202
    )$
    32,963
    
    
    $
    26,916
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Balance at beginning of year
    
    $
    202
    
    
    $
    375
    
    
    $
    160Net provisions charged to expenses
    
    
    191
    
    
    
    (122
    )
    
    
    184Write-offs reducing allowance
    
    
    (10
    )
    
    
    (9
    )
    
    
    (1
    )Effect of foreign currency
    
    
    28
    
    
    
    (42
    )
    
    
    32Balance at end of year
    
    $
    411
    
    
    $
    202
    
    
    $
    375
 F-15




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 4 INVENTORIES
  December 31,2006
    
    
    2005(In Thousands)Raw materials
    
    $
    8,669
    
    
    $
    6,414Finished goods
    
    
    7,621
    
    
    
    5,86916,290
    
    
    
    12,283Less-allowance for slow moving inventory
    
    
    (11
    )
    
    
    (136
    )$
    16,279
    
    
    $
    12,147
 other current liabilities
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Balance at beginning of year
    
    $
    136
    
    
    $
    75
    
    
    $
    74Provisions charged to costs and expenses
    
    
    11
    
    
    
    70
    
    
    
    Write-offs reducing allowance
    
    
    (144
    )
    
    
    
    
    
    
    (5
    )Effect of foreign currency
    
    
    8
    
    
    
    (9
    )
    
    
    6Balance at end of year
    
    $
    11
    
    
    $
    136
    
    
    $
    75
 NOTE 5 FIXED ASSETS
  December 31,2006
    
    
    2005(In Thousands)Land
    
    $
    2,875
    
    
    $
    2,673Buildings and improvements
    
    
    17,538
    
    
    
    14,151Equipment
    
    
    20,591
    
    
    
    16,742Furniture and fixtures
    
    
    2,138
    
    
    
    1,974Other
    
    
    394
    
    
    
    14843,536
    
    
    
    35,688Capital in-progress
    
    
    20,213
    
    
    
    7,74863,749
    
    
    
    43,436Less-accumulated depreciation
    
    
    (15,193
    )
    
    
    (10,070
    )$
    48,556
    
    
    $
    33,366
  F-16




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
   depreciation and amortization expense cost of net
product sales
 NOTE 6 DRUG LICENSES AND RELATED COSTS
  December 31,2006
    
    
    2005(In Thousands)Drug licenses and related costs
    
    $
    23,069
    
    
    $
    19,443Less-accumulated amortization
    
    
    (7,043
    )
    
    
    (5,585
    )$
    16,026
    
    
    $
    13,858
 depreciation and amortization expense
  Year Ending December 31,
    
    Future Amortization Expense(In Thousands)2007
    
    
    1,5552008
    
    
    1,5332009
    
    
    1,7872010
    
    
    1,5432011
    
    
    1,5162012 and beyond
    
    
    8,092
 NOTE 7 RELATED PARTY AND SUPPLEMENTAL CASH FLOW DISCLOSURES
  F-17




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  common stock additional paid in capital
  NOTE 8 ACCRUED EXPENSES
  December 31,2006
    
    
    2005(In Thousands)Foreign income taxes payable
    
    $
    2,463
    
    
    $
    2,107Allowance for sales returns
    
    
    784
    
    
    
    887Accrued payroll and related taxes
    
    
    3,288
    
    
    
    2,268Spanish pharmaceutical taxes payable
    
    
    1,035
    
    
    
    1,471Other accrued expenses
    
    
    2,134
    
    
    
    2,695$
    9,704
    
    
    $
    9,428
 F-18




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Balance at beginning of year
    
    $
    887
    
    
    $
    597
    
    
    $
    446Provisions charged to costs and expenses (a)
    
    
    1,939
    
    
    
    898
    
    
    
    721Write-offs reducing allowance (a)
    
    
    (2,138
    )
    
    
    (652
    )
    
    
    (618
    )Effect of foreign currency
    
    
    96
    
    
    
    44
    
    
    
    48Balance at end of year
    
    $
    784
    
    
    $
    887
    
    
    $
    597
 
 (a)
    
    The Company experienced an unforeseen level of product returns in 2004 as a result of
government imposed price reductions in Spain. The product returns exceeded the Companys
allowance for estimated sales returns, and were accounted for as a reduction in revenues of
approximately $2,705,000 in the year ended December 31, 2004. NOTE 9 DEBT
  December 31,2006
    
    
    2005(In Thousands)Trade receivables discounted with
Spanish financial institutions, with
recourse, effective interest rate is 3.7%
and 3.3%, respectively
    
    $
    247
    
    
    $
    2,595Revolving line of credit facilities payable
to Spanish financial institutions, weighted
average interest rate is 3.2%
    
    
    
    
    
    
    13$
    247
    
    
    $
    2,608
    December 31,2006
    
    
    2005(In Thousands)Loans payable to Spanish government
    
    $
    307
    
    
    $
    387Less-current portion of long-term debt
    
    
    (307
    )
    
    
    (387
    )Total long-term debt
    
    $
    
    
    
    $
    
  F-19




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  NOTE 10 PREFERRED STOCK
  NOTE 11 EQUITY AND SHARE-BASED COMPENSATION
  Common Shares(In Thousands)For exercise of outstanding stock options and restricted stock units
    
    
    3,755For future stock option and restricted stock unit grants
    
    
    7374,492
 Common stock and restricted stock unit transactions
     F-20




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Share-based compensation plans
   For Year Ended December 31, 2006WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOptions outstanding, December 31, 2003
    
    
    3,920
    
    
    $
    6.75
    
    
    
    5.74Granted
    
    
    612
    
    
    
    12.60Exercised
    
    
    (326
    )
    
    
    7.66Forfeited and expired
    
    
    (119
    )
    
    
    10.80Options outstanding, December 31, 2004
    
    
    4,087
    
    
    
    7.44
    
    
    
    5.26Granted
    
    
    870
    
    
    
    9.11Exercised
    
    
    (1,021
    )
    
    
    3.93Forfeited and expired
    
    
    (20
    )
    
    
    8.87Options outstanding, December 31, 2005
    
    
    3,916
    
    
    
    8.72
    
    
    
    6.28Granted
    
    
    481
    
    
    
    11.80Exercised
    
    
    (739
    )
    
    
    5.34Forfeited and expired
    
    
    (21
    )
    
    
    10.01Options outstanding, December 31, 2006
    
    
    3,637
    
    
    $
    9.80
    
    
    
    6.56
    
    
    $
    4,372Vested or expected to vest, December 31, 2006
    
    
    3,611
    
    
    $
    9.80
    
    
    
    6.54
    
    
    $
    4,342Options exercisable, December 31, 2006
    
    
    2,835
    
    
    $
    9.66
    
    
    
    5.87
    
    
    $
    3,613
 F-21




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Options Outstanding
    
    
    Options Currently ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Number
    
    
    Exercise
    
    
    Remaining Life
    
    
    Number
    
    
    ExercisePrices
    
    
    Outstanding
    
    
    Price
    
    
    (Years)
    
    
    Exercisable
    
    
    Price$
    
    
    2.00
    
    
    
    
    
    
    $
    3.00
    
    
    
    58
    
    
    $
    2.72
    
    
    
    2.15
    
    
    
    58
    
    
    $
    2.725.70
    
    
    
    
    
    
    
    5.88
    
    
    
    142
    
    
    
    5.84
    
    
    
    3.39
    
    
    
    142
    
    
    
    5.846.00
    
    
    
    
    
    
    
    6.33
    
    
    
    267
    
    
    
    6.01
    
    
    
    4.36
    
    
    
    266
    
    
    
    6.017.10
    
    
    
    
    
    
    
    7.39
    
    
    
    182
    
    
    
    7.31
    
    
    
    6.32
    
    
    
    114
    
    
    
    7.267.50
    
    
    
    320
    
    
    
    7.50
    
    
    
    8.25
    
    
    
    107
    
    
    
    7.508.00
    
    
    
    
    
    
    
    8.93
    
    
    
    310
    
    
    
    8.28
    
    
    
    5.79
    
    
    
    310
    
    
    
    8.289.00
    
    
    
    
    
    
    
    9.80
    
    
    
    448
    
    
    
    9.68
    
    
    
    5.04
    
    
    
    448
    
    
    
    9.6810.04
    
    
    
    273
    
    
    
    10.04
    
    
    
    6.39
    
    
    
    273
    
    
    
    10.0410.38
    
    
    
    
    
    
    
    10.79
    
    
    
    200
    
    
    
    10.76
    
    
    
    7.74
    
    
    
    200
    
    
    
    10.7611.00
    
    
    
    
    
    
    
    11.78
    
    
    
    818
    
    
    
    11.57
    
    
    
    8.18
    
    
    
    368
    
    
    
    11.3112.01
    
    
    
    
    
    
    
    12.55
    
    
    
    203
    
    
    
    12.30
    
    
    
    8.14
    
    
    
    133
    
    
    
    12.4413.30
    
    
    
    373
    
    
    
    13.30
    
    
    
    6.17
    
    
    
    373
    
    
    
    13.3013.48
    
    
    
    
    
    
    
    15.83
    
    
    
    43
    
    
    
    14.07
    
    
    
    6.90
    
    
    
    43
    
    
    
    14.07$
    
    
    2.00
    
    
    
    
    
    
    $
    15.83
    
    
    
    3,637
    
    
    $
    9.80
    
    
    
    6.56
    
    
    
    2,835
    
    
    $
    9.66
  For Year Ended December 31,2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Grant
    
    
    Number
    
    
    Grant
    
    
    
    
    
    
    Grantof
    
    
    Date Fair
    
    
    of
    
    
    Date Fair
    
    
    Number of
    
    
    Date FairOptions
    
    
    Value
    
    
    Options
    
    
    Value
    
    
    Options
    
    
    ValueNonvested options
outstanding,
beginning of the
period
    
    
    840
    
    
    $
    4.35
    
    
    
    748
    
    
    $
    5.58
    
    
    
    1,081
    
    
    $
    4.85Granted
    
    
    481
    
    
    
    5.54
    
    
    
    870
    
    
    
    4.07
    
    
    
    612
    
    
    
    5.77Vested
    
    
    (499
    )
    
    
    (4.82
    )
    
    
    (763
    )
    
    
    (4.41
    )
    
    
    (868
    )
    
    
    (5.01
    )Forfeited
    
    
    (20
    )
    
    
    (4.62
    )
    
    
    (15
    )
    
    
    (4.24
    )
    
    
    (77
    )
    
    
    (4.94
    )Nonvested options
outstanding, end of
the period
    
    
    802
    
    
    $
    4.76
    
    
    
    840
    
    
    $
    4.35
    
    
    
    748
    
    
    $
    5.58
   F-22




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
    For the Year Ended December 31, 2006Number
    
    
    
    
    
    
    Weightedof
    
    
    Weighted
    
    
    AverageRestricted
    
    
    Average
    
    
    Remaining
    
    
    AggregateStock
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicUnits
    
    
    Fair Value
    
    
    Term (Years)
    
    
    ValueRestricted stock units outstanding, December
31, 2005
    
    
    
    
    
    $
    Granted
    
    
    146
    
    
    
    11.47Vested
    
    
    (22
    )
    
    
    11.78Forfeited
    
    
    (6
    )
    
    
    11.78Restricted stock units outstanding, December
31, 2006
    
    
    118
    
    
    $
    11.39
    
    
    
    1.69
    
    
    $
    1,204Vested and expected to vest, December 31, 2006
    
    
    114
    
    
    $
    11.41
    
    
    
    1.69
    
    
    $
    1,155
    F-23




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Share-based compensation
 cost of sales selling and marketing
expenses general and administrative expenses research and development expenses research and development expenses
  General and administrative expenses Research and development expenses
 general and
administrative expenses
   F-24




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands, Except Per Share Data)Net income, as reported
    
    $
    974
    
    
    $
    10,919
    
    
    $
    5,690Add: Stock-based employee
compensation expense
included in reported net
income
    
    
    2,154
    
    
    
    280
    
    
    
    195Deduct: Total stock-based
employee compensation
expense determined under
fair value method for all
awards
    
    
    (2,154
    )
    
    
    (3,452
    )
    
    
    (2,978
    )Pro forma net income
    
    $
    974
    
    
    $
    7,747
    
    
    $
    2,907Net income per share:Basic  as reported
    
    $
    0.04
    
    
    $
    0.51
    
    
    $
    0.27Basic  pro forma
    
    $
    0.04
    
    
    $
    0.36
    
    
    $
    0.14Diluted  as reported
    
    $
    0.04
    
    
    $
    0.48
    
    
    $
    0.25Diluted  pro forma
    
    $
    0.04
    
    
    $
    0.34
    
    
    $
    0.13
  Year Ended December 31,2006
    
    2005
    
    2004Risk free interest rate
    
    
    4.95
    %
    
    
    3.90
    %
    
    
    2.94
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    5 years
    
    5 years
    
    5 yearsVolatility
    
    
    46.24
    %
    
    
    45.28
    %
    
    
    48.63
    %Fair value of options granted
    
    $
    5.54
    
    
    $
    4.04
    
    
    $
    5.77
   F-25




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Stock purchase warrants
  Stockholder Rights Plan
   F-26




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 12 PROVISION FOR INCOME TAXES
 income before income taxes provision for income taxes
 Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Current:Foreign
    
    $
    6,254
    
    
    $
    6,515
    
    
    $
    5,466Deferred:State
    
    
    (96
    )
    
    
    120
    
    
    
    (60
    )Federal
    
    
    2,134
    
    
    
    134
    
    
    
    (251
    )Foreign
    
    
    (1,171
    )
    
    
    (1,039
    )
    
    
    (661
    )Tax effect of operating loss carryforwards:State
    
    
    (56
    )
    
    
    (56
    )
    
    
    2,169Federal
    
    
    
    
    
    
    
    
    
    
    (1,041
    )Foreign
    
    
    (1,303
    )
    
    
    (260
    )
    
    
    Change in valuation allowance
    
    
    (680
    )
    
    
    62
    
    
    
    (817
    )Total provision for income taxes
    
    $
    5,082
    
    
    $
    5,476
    
    
    $
    4,805
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In Thousands)Statutory federal income taxes
    
    $
    4,555
    
    
    $
    6,198
    
    
    $
    3,695Permanent differences from foreign subsidiary
    
    
    346
    
    
    
    311
    
    
    
    492Foreign tax audit settlement
    
    
    
    
    
    
    
    
    
    
    604State income taxes
    
    
    (152
    )
    
    
    63
    
    
    
    (90
    )Expiration/Reduction of loss carryforwards
    
    
    2,119
    
    
    
    
    
    
    
    2,199Impact of foreign tax rate changes
    
    
    (33
    )
    
    
    
    
    
    
    Tax credits
    
    
    (1,044
    )
    
    
    (1,124
    )
    
    
    (971
    )Other
    
    
    (29
    )
    
    
    (34
    )
    
    
    (307
    )Change in valuation allowance
    
    
    (680
    )
    
    
    62
    
    
    
    (817
    )$
    5,082
    
    
    $
    5,476
    
    
    $
    4,805
 provision
for income taxes
 F-27




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  December 31,2006
    
    
    2005(In Thousands)Deferred tax assets:NOL carryforwards
    
    $
    20,010
    
    
    $
    18,665Disposition of subsidiary
    
    
    6,909
    
    
    
    6,848Foreign tax on deferred income
    
    
    1,767
    
    
    
    1,099Tax credit carryforwards
    
    
    1,303
    
    
    
    744Other, net
    
    
    1,166
    
    
    
    956Total deferred tax assets
    
    
    31,155
    
    
    
    28,312Foreign deferred tax liability
    
    
    (2,074
    )
    
    
    (1,665
    )Other deferred tax liabilities
    
    
    (217
    )
    
    
    (215
    )Valuation allowance
    
    
    (27,575
    )
    
    
    (26,998
    )Deferred tax asset (liability), net
    
    $
    1,289
    
    
    $
    (566
    )
   provision for income taxes
   F-28




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
   NOTE 13 SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
  F-29




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 For the Three Months Ended3/31/06(b)
    
    
    6/30/06(a)(b)
    
    
    9/30/06(b)
    
    
    12/31/06(b)(In Thousands, Except Per Share Data)Total revenues
    
    $
    28,278
    
    
    $
    28,983
    
    
    $
    25,156
    
    
    $
    27,054Cost of net product sales
    
    
    12,933
    
    
    
    12,471
    
    
    
    11,778
    
    
    
    12,668Gross profit
    
    
    15,345
    
    
    
    16,512
    
    
    
    13,378
    
    
    
    14,386Operating expenses
    
    
    11,991
    
    
    
    11,580
    
    
    
    19,085
    
    
    
    11,566Gain on sale of license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Income from operations
    
    
    3,354
    
    
    
    4,932
    
    
    
    (5,707
    )
    
    
    2,858Other income (expenses)
    
    
    193
    
    
    
    187
    
    
    
    208
    
    
    
    31Provision for income taxes
    
    
    2,393
    
    
    
    2,484
    
    
    
    1,730
    
    
    
    (1,525
    )Net income
    
    $
    1,154
    
    
    $
    2,635
    
    
    $
    (7,229
    )
    
    $
    4,414Net income per common share:Basic
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.20Diluted
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.19Weighted average common
shares outstanding:Basic
    
    
    21,954
    
    
    
    22,170
    
    
    
    22,194
    
    
    
    22,242Diluted
    
    
    23,807
    
    
    
    22,876
    
    
    
    22,194
    
    
    
    22,735
 For the Three Months Ended3/31/05
    
    
    6/30/05
    
    
    9/30/05
    
    
    12/31/05(c)(In Thousands, Except Per Share Data)Total revenues
    
    $
    24,244
    
    
    $
    24,764
    
    
    $
    23,512
    
    
    $
    25,210Cost of net product sales
    
    
    11,452
    
    
    
    11,367
    
    
    
    11,104
    
    
    
    12,238Gross profit
    
    
    12,792
    
    
    
    13,397
    
    
    
    12,408
    
    
    
    12,972Operating expenses
    
    
    9,145
    
    
    
    9,408
    
    
    
    8,730
    
    
    
    8,620Income from operations
    
    
    3,647
    
    
    
    3,989
    
    
    
    3,678
    
    
    
    4,352Other income (expenses)
    
    
    113
    
    
    
    173
    
    
    
    184
    
    
    
    259Provision for income taxes
    
    
    1,590
    
    
    
    1,554
    
    
    
    1,377
    
    
    
    955Net income
    
    $
    2,170
    
    
    $
    2,608
    
    
    $
    2,485
    
    
    $
    3,656Net income per common share:Basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.17Diluted
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.16Weighted average common
shares outstanding:Basic
    
    
    21,316
    
    
    
    21,395
    
    
    
    21,652
    
    
    
    21,862Diluted
    
    
    22,531
    
    
    
    22,603
    
    
    
    22,970
    
    
    
    23,564
 F-30




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 For the Three Months Ended3/31/04
    
    
    6/30/04(d)
    
    
    9/30/04
    
    
    12/31/04(In Thousands, Except Per Share Data)Total revenues
    
    $
    17,302
    
    
    $
    18,470
    
    
    $
    18,103
    
    
    $
    19,518Cost of net product sales
    
    
    8,255
    
    
    
    8,465
    
    
    
    8,662
    
    
    
    9,511Gross profit
    
    
    9,047
    
    
    
    10,005
    
    
    
    9,441
    
    
    
    10,007Operating expenses
    
    
    7,374
    
    
    
    7,422
    
    
    
    6,922
    
    
    
    8,087Income from operations
    
    
    1,673
    
    
    
    2,583
    
    
    
    2,519
    
    
    
    1,920Other income (expenses)
    
    
    57
    
    
    
    1,348
    
    
    
    238
    
    
    
    157Provision for income taxes
    
    
    921
    
    
    
    2,441
    
    
    
    1,344
    
    
    
    99Net income
    
    $
    809
    
    
    $
    1,490
    
    
    $
    1,413
    
    
    $
    1,978Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.09Diluted
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.09Weighted average common
shares outstanding:Basic
    
    
    20,597
    
    
    
    20,644
    
    
    
    21,049
    
    
    
    21,308Diluted
    
    
    22,784
    
    
    
    22,800
    
    
    
    22,746
    
    
    
    22,487
 
 (a)
    
    Total revenuesfor the quarter ended June 30, 2006 includes an increase in royalty
revenues of approximately $479,000. This change in estimate was due to the Companys
ability to reasonably estimate future product returns on sales of Testim based on actual
historical data.(b)
    
    Operating expensesfor the quarter ended September 30, 2006 includes litigation
settlement charges of approximately $7,546,000. Provision
for income taxesfor the quarter ended December 31, 2006 includes a tax benefit of
$2,746,000 from the finalization of the related legal settlement. Operating expensesalso
include related legal defense costs of $604,000, $733,000, $1,386,000 and $645,000 in
first, second, third and fourth quarters of 2006, respectively.(c)
    
    Total revenuesfor the quarter ended December 31, 2005 includes a change in
estimate of royalty revenues earned of approximately $1,092,000 recorded in the fourth
quarter of 2005. This change in estimate of royalty revenues earned is based upon publicly
available data determined to be more accurate than the source of data previously relied
upon by management in estimating the sell-through of prescriptions dispensed.(d)
    
    Other income (expenses)for the quarter ended June 30, 2004 includes the reversal
of previously accrued tax assessments totaling $1,467,000. These assessments had been
accrued to be paid to the Spanish government as a vehicle to help reduce the impact of the
rising health care costs in Spain. Due to changes in the pharmaceutical industry in Spain
and a change in the Spanish political environment, these liabilities no longer exist.
Accordingly, these accruals were reversed during the second quarter of 2004. accrued expenses
 F-31




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 14 BUSINESS SEGMENT INFORMATION
      Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    100,546
    
    
    $
    44
    
    
    $
    
    
    
    $
    
    
    
    $
    100,590Licensing and collaboration
revenues
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    8,366
    
    
    
    8,881Total revenues
    
    
    101,061
    
    
    
    44
    
    
    
    
    
    
    
    8,366
    
    
    
    109,471Cost of net product sales
    
    
    49,766
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    49,850Gross profit
    
    
    51,295
    
    
    
    (40
    )
    
    
    
    
    
    
    8,366
    
    
    
    59,621Selling and marketing expense
    
    
    16,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,153General and administrative expense
    
    
    7,391
    
    
    
    
    
    
    
    71
    
    
    
    7,339
    
    
    
    14,801Research and development expense
    
    
    1,777
    
    
    
    
    
    
    
    4,341
    
    
    
    4,341
    
    
    
    10,459Depreciation and amortization
expense
    
    
    1,129
    
    
    
    87
    
    
    
    
    
    
    
    679
    
    
    
    1,895Litigation settlement
    
    
    8,543
    
    
    
    2,371
    
    
    
    
    
    
    
    
    
    
    
    10,914Gain on sale of license
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Income from operations
    
    
    16,340
    
    
    
    (2,498
    )
    
    
    (4,412
    )
    
    
    (3,993
    )
    
    
    5,437Interest income
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    681
    
    
    
    820Interest expense
    
    
    (158
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )Other income (expense), net
    
    
    (61
    )
    
    
    16
    
    
    
    
    
    
    
    2
    
    
    
    (43
    )Income before income taxes
    
    
    16,260
    
    
    
    (2,482
    )
    
    
    (4,412
    )
    
    
    (3,310
    )
    
    
    6,056Provision for income taxes
    
    
    5,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,082Net income (loss)
    
    
    11,178
    
    
    
    (2,482
    )
    
    
    (4,412
    )
    
    
    (3,310
    )
    
    
    974Expenditures for fixed assets
    
    
    14,487
    
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    15,313Expenditures for drug licenses
    
    
    1,856
    
    
    
    
    
    
    
    
    
    
    
    916
    
    
    
    2,772
 F-32




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    30,558
    
    
    $
    39
    
    
    $
    
    
    
    $
    2,366
    
    
    $
    32,963Other current assets
    
    
    21,758
    
    
    
    1,338
    
    
    
    
    
    
    
    11,631
    
    
    
    34,727Fixed assets
    
    
    45,738
    
    
    
    
    
    
    
    
    
    
    
    2,818
    
    
    
    48,556Drug licenses and related costs
    
    
    10,697
    
    
    
    1,833
    
    
    
    
    
    
    
    3,496
    
    
    
    16,026Other non-current assets
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    1,199
    
    
    
    2,084Total assets
    
    
    109,636
    
    
    
    3,210
    
    
    
    
    
    
    
    21,510
    
    
    
    134,356Current liabilities
    
    
    24,651
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    27,387Non-current liabilities
    
    
    6,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,638Total liabilities
    
    
    31,289
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    34,025
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    91,308
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    91,308Licensing and collaboration revenues
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    6,422Total revenues
    
    
    91,581
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    97,730Cost of net product sales
    
    
    46,161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,161Gross profit
    
    
    45,420
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    51,569Selling and marketing expense
    
    
    16,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,347General and administrative expense
    
    
    8,930
    
    
    
    
    
    
    
    17
    
    
    
    2,458
    
    
    
    11,405Research and development expense
    
    
    1,378
    
    
    
    
    
    
    
    2,044
    
    
    
    2,378
    
    
    
    5,800Depreciation and amortization
expense
    
    
    1,068
    
    
    
    81
    
    
    
    
    
    
    
    609
    
    
    
    1,758Litigation settlement
    
    
    268
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    593Income from operations
    
    
    17,429
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    704
    
    
    
    15,666Interest income
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    928Interest expense
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )Other income (expense), net
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    12Income before income taxes
    
    
    17,414
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    1,448
    
    
    
    16,395Provision for income taxes
    
    
    5,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,476Net income (loss)
    
    
    11,938
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    1,448
    
    
    
    10,919Expenditures for fixed assets
    
    
    10,821
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    11,018Expenditures for drug licenses
    
    
    945
    
    
    
    
    
    
    
    
    
    
    
    1,100
    
    
    
    2,045
 F-33




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    23,469
    
    
    $
    
    
    
    $
    
    
    
    $
    3,447
    
    
    $
    26,916Other current assets
    
    
    26,443
    
    
    
    
    
    
    
    
    
    
    
    21,718
    
    
    
    48,161Fixed assets
    
    
    31,189
    
    
    
    
    
    
    
    
    
    
    
    2,177
    
    
    
    33,366Drug licenses and related costs
    
    
    8,931
    
    
    
    1,581
    
    
    
    
    
    
    
    3,346
    
    
    
    13,858Other non-current assets
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    1,304
    
    
    
    1,919Total assets
    
    
    90,647
    
    
    
    1,581
    
    
    
    
    
    
    
    31,992
    
    
    
    124,220Current liabilities
    
    
    25,639
    
    
    
    97
    
    
    
    
    
    
    
    2,944
    
    
    
    28,680Non-current liabilities
    
    
    3,944
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    3,951Total liabilities
    
    
    29,583
    
    
    
    97
    
    
    
    
    
    
    
    2,951
    
    
    
    32,631
   NOTE 15 COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
   provision for
income taxes
  F-34




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
    Year Ending December 31,
    
    Future Minimum Lease Payments2007
    
    
    1,1772008
    
    
    7472009
    
    
    942010
    
    
    272011
    
    
    72012 and beyond
    
    
    0
  Ethypharm S.A. France & Ethypharm S.A. Spain v. Bentley Pharmaceuticals, Inc.
 nd
 F-35




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  rd
  F-36