**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM10-Q**

**(Mark One)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended****March 31, 2005**

 

**or**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from              to              **

 

**CommissionFile Number****  1-10581**

 

**BENTLEYPHARMACEUTICALS, INC.**

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**                                                          | ** ** | **No. 59-1513162**                   |
|-----------------------------------------------------------------------|------------|--------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S.  EmployerIdentification No.) |

 

**Bentley Park, 2 Holland Way, Exeter, New Hampshire 03833**

(CurrentAddress of Principal Executive Offices)

 

Registrant’stelephone number, including area code: **(603) 658-6100**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.      YES  ý    NO  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in rule 12b-2 of the Exchange Act).YES  ý     NO  o

 

The number of shares of the registrant’s commonstock outstanding as of May 9, 2005 was 21,321,731.

 

 

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Form 10-Q for the Quarter Ended March 31, 2005**

 

**Index**

 

 
| **Part I.**  | ** ** | **Unaudited Financial Information** | **Page**                                                                                                   |
|--------------|------------|-------------------------------------|------------------------------------------------------------------------------------------------------------|
|         |       |                                |                                                                                                       |   |
|         |       | Item 1.                             | Condensed Consolidated  Financial Statements:                                                              |   |
|         |       |                                |                                                                                                       |   |
|         |       |                                | Consolidated  Balance Sheets as of March 31, 2005 and December 31, 2004                                    | 3 |
|         |       |                                |                                                                                                       |   |
|         |       |                                | Consolidated  Income Statements for the three months ended March 31, 2005 and 2004                         | 4 |
|         |       |                                |                                                                                                       |   |
|         |       |                                | Consolidated  Statement of Changes in Stockholders’ Equity for the three months ended March  31, 2005 | 5 |
|         |       |                                |                                                                                                       |   |
|         |       |                                | Consolidated Statements of Cash Flows for  the three months ended March 31, 2005 and 2004                  | 6 |
|         |       |                                |                                                                                                       |   |
|         |       |                                | Notes to Consolidated Financial Statements                                                                 | 8 |
|         |       |                                |                                                                                                       |   |
|         |       | Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                | 14 |
|         |       |                                |                                                                                                       |   |
|         |       | Item 3.                             | Quantitative and Qualitative Disclosures About  Market Risk                                                | 23 |
|         |       |                                |                                                                                                       |   |
|         |       | Item 4.                             | Controls and Procedures                                                                                    | 24 |
|         |       |                                |                                                                                                       |   |
| **Part II.** |       | **Other Information**               |                                                                                                       |
|         |       |                                |                                                                                                       |   |
|         |       | Item 6.                             | Exhibits                                                                                                   | 24 |

 

2

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

 
| **(in thousands, except per share data)**                                                                   | ** ** | **March 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
|                                                                                                        |       |                 |       |                    |       |
| **Assets**                                                                                                  |       |                 |       |                    |       |
|                                                                                                        |       |                 |       |                    |       |
| Current assets:                                                                                             |       |                 |       |                    |       |
| Cash and cash  equivalents                                                                                  |       | $                    | 35,756     |                    | $          | 34,230 |   |
| Marketable  securities                                                                                      |       | 500                  |       | 528                     |       |
| Receivables, net                                                                                            |       | 29,113               |       | 27,860                  |       |
| Inventories, net                                                                                            |       | 9,613                |       | 10,258                  |       |
| Deferred taxes                                                                                              |       | 499                  |       | 479                     |       |
| Prepaid expenses  and other                                                                                 |       | 1,499                |       | 1,355                   |       |
| Total current  assets                                                                                       |       | 76,980               |       | 74,710                  |       |
|                                                                                                        |       |                 |       |                    |       |
| Non-current assets:                                                                                         |       |                 |       |                    |       |
| Fixed assets,  net                                                                                          |       | 30,087               |       | 30,849                  |       |
| Drug licenses  and related costs, net                                                                       |       | 14,599               |       | 14,863                  |       |
| Restricted cash                                                                                             |       | 1,000                |       | 1,000                   |       |
| Other                                                                                                       |       | 504                  |       | 508                     |       |
| Total  non-current assets                                                                                   |       | 46,190               |       | 47,220                  |       |
|                                                                                                        |       | $                    | 123,170    |                    | $          | 121,930 |   |
|                                                                                                        |       |                 |       |                    |       |
| **Liabilities  and Stockholders’ Equity**                                                              |       |                 |       |                    |       |
|                                                                                                        |       |                 |       |                    |       |
| Current  liabilities:                                                                                       |       |                 |       |                    |       |
| Accounts payable                                                                                            |       | $                    | 15,575     |                    | $          | 17,048 |   |
| Accrued expenses                                                                                            |       | 9,078                |       | 6,169                   |       |
| Short-term  borrowings                                                                                      |       | 2,470                |       | 2,754                   |       |
| Current portion  of long-term debt                                                                          |       | 29                   |       | 31                      |       |
| Deferred income                                                                                             |       | 2,355                |       | 1,594                   |       |
| Total current  liabilities                                                                                  |       | 29,507               |       | 27,596                  |       |
|                                                                                                        |       |                 |       |                    |       |
| Non-current  liabilities:                                                                                   |       |                 |       |                    |       |
| Deferred taxes                                                                                              |       | 2,196                |       | 2,319                   |       |
| Long-term debt                                                                                              |       | 331                  |       | 349                     |       |
| Deferred income                                                                                             |       | 2,374                |       | 1,944                   |       |
| Other                                                                                                       |       | 61                   |       | 65                      |       |
| Total  non-current liabilities                                                                              |       | 4,962                |       | 4,677                   |       |
|                                                                                                        |       |                 |       |                    |       |
| Commitments and  contingencies                                                                              |       |                 |       |                    |       |
|                                                                                                        |       |                 |       |                    |       |
| Stockholders’  equity:                                                                                 |       |                 |       |                    |       |
| Preferred stock,  $1.00 par value, authorized 2,000 shares, issued and outstanding, none                    |       | —               |       | —                  |       |
| Common stock,  $.02 par value, authorized 100,000 shares, issued and outstanding, 21,320 and  21,312 shares |       | 426                  |       | 426                     |       |
| Additional  paid-in capital                                                                                 |       | 140,477              |       | 140,418                 |       |
| Accumulated  deficit                                                                                        |       | (58,739              | )          | (60,909                 | )          |
| Accumulated  other comprehensive income                                                                     |       | 6,537                |       | 9,722                   |       |
| Total  stockholders’ equity                                                                            |       | 88,701               |       | 89,657                  |       |
|                                                                                                        |       | $                    | 123,170    |                    | $          | 121,930 |   |

* *

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

3

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Income Statements**

 
| **(in thousands, except per share data)**    | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Revenues:                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net product  sales                           |       | $                                          | 23,279     |   | $ | 16,606 |   |
| Licensing and  collaboration revenues        |       | 965                                        |       | 696 |   |
| Total revenues                               |       | 24,244                                     |       | 17,302 |   |
|                                         |       |                                       |       |   |   |
| Cost of net  product sales                   |       | 11,452                                     |       | 8,255 |   |
|                                         |       |                                       |       |   |   |
| Gross profit                                 |       | 12,792                                     |       | 9,047 |   |
|                                         |       |                                       |       |   |   |
| Operating  expenses:                         |       |                                       |       |   |   |
| Selling and  marketing                       |       | 4,392                                      |       | 3,870 |   |
| General and  administrative                  |       | 3,018                                      |       | 2,162 |   |
| Research and  development                    |       | 1,351                                      |       | 995 |   |
| Depreciation and  amortization               |       | 384                                        |       | 347 |   |
| Total operating  expenses                    |       | 9,145                                      |       | 7,374 |   |
|                                         |       |                                       |       |   |   |
| Income from  operations                      |       | 3,647                                      |       | 1,673 |   |
|                                         |       |                                       |       |   |   |
| Other income  (expenses):                    |       |                                       |       |   |   |
| Interest income                              |       | 161                                        |       | 110 |   |
| Interest expense                             |       | (48                                        | )          | (53 | ) |
|                                         |       |                                       |       |   |   |
| Income before income  taxes                  |       | 3,760                                      |       | 1,730 |   |
|                                         |       |                                       |       |   |   |
| Provision for  income taxes                  |       | 1,590                                      |       | 921 |   |
|                                         |       |                                       |       |   |   |
| Net income                                   |       | $                                          | 2,170      |   | $ | 809 |   |
|                                         |       |                                       |       |   |   |
| Net income per  common share:                |       |                                       |       |   |   |
| Basic                                        |       | $                                          | 0.10       |   | $ | 0.04 |   |
| Diluted                                      |       | $                                          | 0.10       |   | $ | 0.04 |   |
|                                         |       |                                       |       |   |   |
| Weighted average  common shares outstanding: |       |                                       |       |   |   |
| Basic                                        |       | 21,316                                     |       | 20,597 |   |
| Diluted                                      |       | 22,531                                     |       | 22,784 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

4

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Statement of Changesin Stockholders’ Equity**

 
| ** **                               | ** ** | **$ .02 Par Value   Common Stock** | ** ** | **Additional Paid-In** | ** ** | **Accumulated** | ** ** | **Accumulated   Other   Comprehensive** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------|------------|
| **(in thousands)**                       | ** ** | **Shares**                              | ** ** | **Amount**             | ** ** | **Capital**     | ** ** | **Deficit**                             | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2004            |       | 21,312                                  |       | $                      | 426        |            | $          | 140,418                                 |       | $          | (60,909    | ) | $ | 9,722 |   | $ | 89,657 |   |
| Comprehensive  income (loss):            |       |                                    |       |                   |       |            |       |                                    |       |       |       |   |   |
| Net income                               |       | —                                  |       | —                 |       | —          |       | 2,170                                   |       | —     |       | 2,170 |   |
| Other  comprehensive loss:               |       |                                    |       |                   |       |            |       |                                    |       |       |       |   |   |
| Foreign currency  translation adjustment |       | —                                  |       | —                 |       | —          |       | —                                  |       | (3,185     | )          | (3,185 | ) |
| Comprehensive  loss                      |       |                                    |       |                   |       |            |       |                                    |       |       |       | $ | (1,015 | ) |
|                                     |       |                                    |       |                   |       |            |       |                                    |       |       |       |   |   |
| Equity-based  compensation               |       | 8                                       |       | —                 |       | 59              |       | —                                  |       | —     |       | 59 |   |
| Balance at March  31, 2005               |       | 21,320                                  |       | $                      | 426        |            | $          | 140,477                                 |       | $          | (58,739    | ) | $ | 6,537 |   | $ | 88,701 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

5

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

** **
| ** **                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                                               |       |                                      |       |   |   |
| Cash flows from  operating activities:                                             |       |                                      |       |   |   |
| Net income                                                                         |       | $                                         | 2,170      |   | $ | 809 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation and  amortization                                                     |       | 1,194                                     |       | 829 |   |
| Equity-based  compensation expense                                                 |       | 59                                        |       | 60 |   |
| Other non-cash  items                                                              |       | 11                                        |       | (55 | ) |
| (Increase)  decrease in assets and increase (decrease) in liabilities:             |       |                                      |       |   |   |
| Receivables                                                                        |       | (2,778                                    | )          | (1,438 | ) |
| Inventories                                                                        |       | 103                                       |       | (565 | ) |
| Deferred income  taxes                                                             |       | (36                                       | )          | — |   |
| Prepaid expenses  and other current assets                                         |       | (200                                      | )          | (809 | ) |
| Other assets                                                                       |       | (16                                       | )          | 6 |   |
| Accounts payable  and accrued expenses                                             |       | 2,756                                     |       | 2,387 |   |
| Deferred income                                                                    |       | 1,259                                     |       | 318 |   |
| Other  liabilities                                                                 |       | (4                                        | )          | (100 | ) |
| Net cash  provided by operating activities                                         |       | 4,518                                     |       | 1,442 |   |
|                                                                               |       |                                      |       |   |   |
| Cash flows from  investing activities:                                             |       |                                      |       |   |   |
| Proceeds from  sale of investments                                                 |       | —                                    |       | 80,450 |   |
| Purchase of  investments                                                           |       | —                                    |       | (80,395 | ) |
| Additions to  fixed assets                                                         |       | (1,702                                    | )          | (2,096 | ) |
| Additions to  drug licenses and related costs                                      |       | (597                                      | )          | (268 | ) |
| Net cash used in  investing activities                                             |       | (2,299                                    | )          | (2,309 | ) |
|                                                                                    |            |                                           |            |  |  |  |  |

 

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

6

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| ** **                                                                                                       | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Cash flows from  financing activities:                                                                           |       |                                       |       |   |   |
| Proceeds from  borrowings                                                                                        |       | $                                          | 185        |   | $ | 84 |   |
| Repayment of  borrowings                                                                                         |       | (330                                       | )          | (594 | ) |
| Proceeds from exercise  of stock options                                                                         |       | —                                     |       | 122 |   |
| Net cash used in  financing activities                                                                           |       | (145                                       | )          | (388 | ) |
|                                                                                                             |       |                                       |       |   |   |
| Effect of  exchange rate changes on cash                                                                         |       | (548                                       | )          | (326 | ) |
|                                                                                                             |       |                                       |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                            |       | 1,526                                      |       | (1,581 | ) |
|                                                                                                             |       |                                       |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                |       | 34,230                                     |       | 39,393 |   |
|                                                                                                             |       |                                       |       |   |   |
| Cash and cash  equivalents at end of period                                                                      |       | $                                          | 35,756     |   | $ | 37,812 |   |
|                                                                                                             |       |                                       |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information**                                                           |       |                                       |       |   |   |
| The Company paid  cash during the period for:                                                                    |       |                                       |       |   |   |
| Interest                                                                                                         |       | $                                          | 49         |   | $ | 46 |   |
|                                                                                                             |       |                                       |       |   |   |
| **Supplemental  Disclosures of Non-Cash Financing and Investing Activities**                                     |       |                                       |       |   |   |
| The Company has  issued Common Stock as equity-based compensation  in lieu of cash during the period as follows: |       |                                       |       |   |   |
| Shares                                                                                                           |       | 8                                          |       | 7 |   |
| Amount                                                                                                           |       | $                                          | 69         |   | $ | 101 |   |
|                                                                                                             |       |                                       |       |   |   |
| Amounts included  in accounts payable at end of period for  fixed asset and drug license purchases               |       | $                                          | 1,307      |   | $ | 1,619 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

7

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Notesto****CondensedConsolidated Financial Statements**

 

 

**History andOperations**

 

BentleyPharmaceuticals, Inc. and Subsidiaries (which may be referred to as BentleyPharmaceuticals, Bentley, or the Company), headquartered in the U.S., is aninternational specialty pharmaceutical company, incorporated in the State ofDelaware, focused on:

 

•                  development, licensing and sales of generic andbranded pharmaceutical products and active pharmaceutical ingredients (API) andthe manufacturing of pharmaceuticals for others; and

 

•                  research, development andlicensing/commercialization of advanced drug delivery technologies andpharmaceutical products.

 

Bentley’spharmaceutical product sales and licensing activities are based primarily inSpain, where it has a significant commercial presence and manufactures andmarkets approximately 120 pharmaceutical products through three wholly-ownedSpanish subsidiaries; Laboratorios Belmac, Laboratorios Davur and LaboratoriosRimafar. Bentley’s products include various dosage strengths and productformulations of more than 30 chemical entities in four primary therapeuticareas: cardiovascular, gastrointestinal, neurological and infectious diseases.The Company continually adds to its product portfolio in response to increasingmarket demand for generic and branded therapeutic agents and, when appropriate,divests portfolio products considered to be redundant or that have becomenon-strategic.  Although most of theCompany’s sales of these products are currently in the Spanish market, it hasrecently focused on increasing sales in other European countries and othergeographic regions through strategic alliances with companies in theseterritories.  In April 2004, the Companypurchased a manufacturing facility located in Zaragoza, Spain that specializesin the manufacture of active pharmaceutical ingredients. The facility has beenapproved by the U.S. Food and Drug Administration for the manufacture of oneingredient for marketing and sale in the U.S. The Company manufactures andmarkets these products through its subsidiary, Bentley API.

 

TheCompany has U.S. and international patents and other proprietary rights totechnologies that facilitate the absorption of drugs. Bentley is developingproducts that incorporate its drug delivery technologies and has licensedapplications of its proprietary CPE-215® drug delivery technology to AuxiliumPharmaceuticals, Inc., which launched Testim® in the U.S. market, in February2003.  Testim, which incorporates Bentley’sCPE-215 drug delivery technology, is a gel indicated for testosteronereplacement therapy. Bentley continues to seek other pharmaceutical andbiotechnology companies to form additional strategic alliances to facilitatethe development and commercialization of other products using its drug deliverytechnologies, including product formulations that deliver insulin to diabeticpatients intranasally and that treat nail fungus infections topically.

 

**Basis of CondensedConsolidated Financial Statements**

 

The condensed consolidated financial statements of BentleyPharmaceuticals as of March 31, 2005 and for the three months ended March 31,2005 and 2004, included herein, have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted insofar as such information wasdisclosed in the Company’s consolidated financial statements for the year endedDecember 31, 2004.  These condensedconsolidated financial statements should be read in conjunction with thesummary of significant accounting policies and the audited consolidatedfinancial statements and notes thereto included in Bentley’s Annual Report onForm 10-K for the year ended December 31, 2004.

 

8

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In the opinion of management, the accompanying unaudited condensedconsolidated financial statements as of March 31, 2005 and for the three monthsended March 31, 2005 and 2004 are presented on a basis consistent with theaudited consolidated financial statements for the year ended December 31, 2004and contain all adjustments, consisting only of normal recurring adjustments,necessary to present fairly Bentley’s financial position as of March 31, 2005and the results of its operations and cash flows for the three months endedMarch 31, 2005 and 2004.  The results ofoperations for the three months ended March 31, 2005 should not necessarily beconsidered indicative of the results to be expected for the full year endingDecember 31, 2005.

 

**Cash and cash equivalents**

 

The Company considers allhighly liquid investments with remaining maturities of three months or lesswhen purchased to be cash equivalents for purposes of classification in theConsolidated Balance Sheets and the Consolidated Statements of Cash Flows.Investments in securities that do not meet the definition of cash equivalentsare classified as *marketable securities*in the Consolidated Balance Sheets.

 

Included in *cash and cash equivalents* at March 31, 2005 and December 31,2004 are approximately $5,023,000 and $3,684,000 respectively, of short-terminvestments considered to be cash equivalents, as the original maturity datesof such investments were three months or less when purchased.

 

**Marketable securities**

 

The Company hasinvestments in securities, with maturities of greater than three months whenpurchased, which are classified as available-for-sale, totaling $500,000 as ofMarch 31, 2005, compared to $528,000 as of December 31, 2004. The Company’s investments are carried atamortized cost which approximates fair value due to the short-term nature ofthese investments.  Accordingly, nounrealized gains or losses have been recognized on these investments. Shouldthe fair values differ significantly from the amortized costs, unrealized gainsor losses would be included as a component of *othercomprehensive income (loss)*.

 

**Receivables**

 

Receivables consist of the following (in thousands):

 
| ** **                                                                                                                              | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Trade  receivables (of which $2,470 and $2,754, respectively, collateralize  short-term borrowings with Spanish financial institutions) |       | $                  | 24,879     |                  | $          | 23,586 |   |
| VAT receivable                                                                                                                          |       | 2,526              |       | 2,428                 |       |
| Royalties  receivable                                                                                                                   |       | 1,799              |       | 1,882                 |       |
| Other                                                                                                                                   |       | 305                |       | 339                   |       |
|                                                                                                                                    |       | 29,509             |       | 28,235                |       |
| Less-allowance  for doubtful accounts                                                                                                   |       | (396               | )          | (375                  | )          |
|                                                                                                                                    |       | $                  | 29,113     |                  | $          | 27,860 |   |

 

**Inventories**

 

Inventories are stated atthe lower of cost or market, cost being determined on the first in, first out (“FIFO”)method. Reserves for slow moving and obsolete inventories are provided based onhistorical experience and current product demand.

 

9

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Balances are comprised ofthe following (in thousands):

 
| ** **                                | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Raw materials                             |       | $                  | 5,345      |                  | $          | 5,953 |   |
| Finished goods                            |       | 4,339              |       | 4,380                 |       |
|                                      |       | 9,684              |       | 10,333                |       |
| Less allowance  for slow moving inventory |       | (71                | )          | (75                   | )          |
|                                      |       | $                  | 9,613      |                  | $          | 10,258 |   |

 

**Fixed assets**

 

Fixedassets consist of the following (in thousands):

 
| ** **                     | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| Land                           |       | $                  | 2,839      |                  | $          | 2,573 |   |
| Buildings and  improvements    |       | 17,558             |       | 16,076                |       |
| Equipment                      |       | 16,203             |       | 18,448                |       |
| Furniture and  fixtures        |       | 2,007              |       | 1,850                 |       |
| Other                          |       | 107                |       | 102                   |       |
|                           |       | 38,714             |       | 39,049                |       |
| Less accumulated  depreciation |       | (8,627             | )          | (8,200                | )          |
|                           |       | $                  | 30,087     |                  | $          | 30,849 |   |

 

Inorder to support the Company’s growth in Europe, management is addingadditional capacity to its pharmaceutical products manufacturing facilitythrough a series of improvements. The Company invested approximately $1,702,000in capital additions during the three months ended March 31, 2005.

 

Depreciation expense ofapproximately $84,000 and $70,000 has been charged to operations as a componentof *depreciation and amortization expense*in the Consolidated Income Statements for the three months ended March 31, 2005and 2004, respectively. Depreciation totaling approximately $810,000 and$482,000 has been included in *cost of netproduct sales* during the three months ended March 31, 2005 and 2004,respectively.

 

**Stockholders’ equity**

 

Asubstantial amount of the Company’s business is conducted in Europe and istherefore influenced by fluctuations in the U.S. Dollar’s value in relation to othercurrencies, specifically the Euro. The exchange rates at March 31, 2005and December 31, 2004 were .77 Euros and .73 Euros per U.S. Dollar, respectively.The weighted average exchange rates for the three months ended March 31,2005 and 2004 were .76 Euros and .81 Euros per U.S. Dollar, respectively. Thenet effect of foreign currency translation on the Company’s CondensedConsolidated Financial Statements for the three months ended March 31,2005 was a net decrease of $3,185,000 and the cumulative historical effect asof March 31, 2005 left a balance of $6,537,000, as reflected in theConsolidated Balance Sheets as *accumulatedother**comprehensive income*.The carrying value of assets and liabilities can be materially affected byforeign currency translation, as can the translated amounts of revenues andexpenses. Nonetheless, management does not plan to modify its businesspractices.

 

Duringthe three months ended March 31, 2005, the Company issued approximately8,000 shares of Common Stock as equity-based compensation in lieu of cashcontributions to the Company-sponsored 401(k) retirement savings plan.  Employees were granted stock options topurchase 370,000 shares of Common Stock in the same period.

 

10

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**Revenue recognition**

 

Revenue on productsales is recognized when persuasive evidence of an arrangement exists, theprice is fixed and final, delivery has occurred and there is a reasonableassurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customersfor a specified amount of product at a specified price and considers deliveryto have occurred when the customer takes possession of the product.  The Company provides its customers with alimited right to return.  Revenue isrecognized upon delivery and a reserve for sales returns is recorded whenconsidered appropriate.  The Company hasdemonstrated the ability to make reasonable and reliable estimates of productreturns in accordance with Statement of Financial Accounting Standards (SFAS)No. 48, *Revenue Recognition When Right of Return Exists*,and of allowances for doubtful accounts based on significant historicalexperience.

 

Revenuefrom service, research and development, and licensing and supply agreements isrecognized when the service procedures have been completed or as revenuerecognition criteria have been met for each separate unit of accounting asdefined in Emerging Issues Task Force (EITF) Issue No. 00-21, *Accounting for Revenue Arrangements with MultipleDeliverables*.  The Company hasdeferred the recognition of approximately $2,628,000 and $2,147,000 oflicensing revenues as of March 31, 2005 and December 31, 2004, respectively,for which the revenue recognition requirements had not yet been met.

 

Royaltyrevenues on Testim product sales are currently recognized based on an estimateof Auxilium’s sell-through of the Testim product based on prescriptions filled.For the three months ended March 31, 2005 and 2004, the Company recognizedroyalty revenues of $870,000 and $554,000, respectively. Under SFASNo. 48, the Company cannot recognize its royalty revenues earned onproduct shipments of Testim until product returns related to those shipmentscan be reasonably estimated. At such time the Company expects to record aone-time increase in *licensing andcollaboration revenues* related to the recognition of previouslydeferred royalty revenues. As of March 31, 2005 and December 31, 2004, deferredincome from Testim royalties totaled $1,333,000 and $1,233,000, respectively.

 

# **Provisionfor income taxes**

 

As a result of reportingtaxable income in Spain, the Company recorded a provision for foreign incometaxes totaling $1,590,000 and $921,000 for the three months ended March 31,2005 and 2004, respectively. These amounts represent 34% and 37% of the pre-taxincome reported in Spain of $4,678,000 and $2,482,000 for the three monthsended March 31, 2005 and 2004, respectively.

 

As future domestic operating profitscannot be reasonably assured, no tax benefit has been recorded for U.S. losses,which totaled $918,000 and $752,000 for the three months ended March 31, 2005and 2004, respectively. Accordingly, the Company has established a valuationallowance equal to the full amount of the U.S. deferred tax assets. Theprovisions for income taxes differ from the amounts computed by applying theU.S. federal income tax rate of 34% to pre-tax income, primarily as a result ofthe increase in the valuation allowance to offset U.S. deferred tax assets,certain nondeductible expenses in Spain and the higher statutory income taxrate of 35% in Spain.

 

Should the Company determine that it ismore likely than not that it will realize certain of its deferred tax assetsfor which it had previously provided a valuation allowance, an adjustment wouldbe required to reduce the existing valuation allowance.

 

# **Basicand diluted net income per common share**

 

Basic and diluted net income per common share is based on the weightedaverage number of shares of common stock outstanding during each period. Thedilutive effect of outstanding stock options and stock purchase warrants, ascalculated using the treasury stock method, were considered in the net incomeper share calculations for the three months ended March 31, 2005 and 2004.

 

The following is a reconciliation between basic and diluted net incomeper common share for the three months ended March 31, 2005 and 2004.  Dilutive securities issuable for the threemonths ended March 31, 2005 include approximately 1,215,000 dilutiveincremental shares issuable as a result of various stock options that areoutstanding. Dilutive securities issuable for the three months ended March 31,2004 included approximately 2,187,000 dilutive incremental shares issuable as aresult of various stock options and warrants that were outstanding.

 

11

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For the Three Months Ended March 31, 2005 (in thousands, exceptper share data):

 
| ** **                                  | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive   Securities** | ** ** | **Diluted EPS** | ** ** |
|---------------------------------------------|------------|---------------|------------|-------------------------------------|------------|-----------------|------------|
| Net Income                                  |       | $             | 2,170      | * *                            | $          | *—*        |       | $ | 2,170 |   |
| Weighted Average  Common Shares Outstanding |       | 21,316        |       | 1,215                               |       | 22,531          |       |
| Net Income Per  Common Share                |       | $             | 0.10       | * *                            | $          | *—*        |       | $ | 0.10 |   |

 

For the Three Months Ended March 31, 2004 (in thousands, exceptper share data):

 
| ** **                                  | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive   Securities** | ** ** | **Diluted EPS** | ** ** |
|---------------------------------------------|------------|---------------|------------|-------------------------------------|------------|-----------------|------------|
| Net Income                                  |       | $             | 809        | * *                            | $          | *—*        |       | $ | 809 |   |
| Weighted Average  Common Shares Outstanding |       | 20,597        |       | 2,187                               |       | 22,784          |       |
| Net Income Per  Common Share                |       | $             | 0.04       | * *                            | $          | *—*        |       | $ | 0.04 |   |

 

Excluded from the diluted EPS presentation, becausetheir exercise prices were greater than the average fair value of the CommonStock in the respective periods, were options to purchase an aggregate ofapproximately 1,558,000 and 642,000 shares of Common Stock, for the threemonths ended March 31, 2005 and 2004, respectively.

 

**Equity-based compensation**

 

The Company hasequity-based employee compensation plans that are described more fully in Note11 of the Notes to ConsolidatedFinancial Statements included in the Annual Report on Form 10-K for the yearended December 31, 2004.  TheCompany currently accounts for these plans under the recognition andmeasurement principles of Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations.  However, the Company isrequired to adopt SFAS No. 123 (Revised), *Share-BasedPayment* as of January 1, 2006, which will change the method theCompany uses to account for its equity-based compensation. Stock optionsgranted under these plans have exercise prices equal to or greater than themarket value of the underlying common stock on the dates of grant, which isgenerally the date on which compensation is measured. In addition to theseplans, the Company also sponsors a 401(k) Plan for eligible employees andmatches eligible contributions with shares of the Company’s Common Stock.

 

Generaland administrative expenses for the three months ended March 31, 2005 and2004 include approximately $13,000 and $32,000, respectively, of non-cashequity-based compensation. Research and development expenses for the threemonths ended March 31, 2005 and 2004 include approximately $46,000 and$28,000, respectively, of non-cash equity-based compensation.

 

12

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The following table illustrates the effect on netincome per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, *Accounting for Stock-BasedCompensation*, to equity-based employee compensation (in thousands, except per share data):

 
| ** **                                                                                                   | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                                                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Net income, as  reported                                                                                     |       | $                                        | 2,170      |   | $ | 809 |   |
| Add:  Equity-based employee compensation expense included in reported net income                             |       | 59                                       |       | 60 |   |
| Deduct: Total  equity-based employee compensation expense determined under fair value method  for all awards |       | (569                                     | )          | (601 | ) |
| Pro forma net  income                                                                                        |       | $                                        | 1,660      |   | $ | 268 |   |
|                                                                                                         |       |                                     |       |   |   |
| Net income per  common share:                                                                                |       |                                     |       |   |   |
| Basic - as  reported                                                                                         |       | $                                        | 0.10       |   | $ | 0.04 |   |
| Basic - pro  forma                                                                                           |       | $                                        | 0.08       |   | $ | 0.01 |   |
|                                                                                                         |       |                                     |       |   |   |
| Diluted - as  reported                                                                                       |       | $                                        | 0.10       |   | $ | 0.04 |   |
| Diluted - pro  forma                                                                                         |       | $                                        | 0.07       |   | $ | 0.01 |   |

 

The preceding pro forma results were calculatedusing the Black-Scholes option pricing model with the following weighted averageassumptions (results may vary depending on the assumptions applied within themodel): 

 
| ** **                     | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                           |       |                                     |       |   |   |
| Risk-free  interest rate       |       | 4.0%                                     |       | 3.2% |   |
| Dividend yield                 |       | 0.0%                                     |       | 0.0% |   |
| Expected life                  |       | 5 years                                  |       | 5 years |   |
| Volatility                     |       | 45.4%                                    |       | 49.3% |   |
| Fair value of  options granted |       | $3.38                                    |       | $5.51 |   |

 

**Reclassifications**

 

Certain prior period depreciation amounts have beenreclassified from *operating**expenses*to *cost of net product sales* to conformwith the current period’s presentation. Such reclassifications are not material to the Condensed ConsolidatedFinancial Statements.

 

**New Accounting Pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123 (Revised), *Share-BasedPayment*. This Statement is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees*, and its related implementation guidance.  SFAS No. 123 (Revised) focuses primarilyon accounting for transactions in which an entity obtains employee services inshare-based payment transactions. The Statement requires entities to recognizestock compensation expense for awards of equity instruments to employees basedon the grant-date fair value of those awards (with limited exceptions). OnApril 14, 2005, the Securities and Exchange Commission delayed the effectivedate of SFAS No. 123 (Revised) to the beginning of the first fiscal yearafter June 15, 2005. As a result, the Company anticipates adopting SFASNo. 123 (Revised) on January 1, 2006. Management is evaluating the twomethods of adoption allowed by SFAS No. 123 (Revised), the modified-prospectivetransition method and the modified-retrospective transition method, and therelated impact on its Consolidated Financial Statements.

 

 

13

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# **Item 2. **      Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

You should readthe following discussion and analysis together with all financial andnon-financial information appearing elsewhere in this report and with ourconsolidated financial statements and related notes included in our AnnualReport on Form 10-K for the year ended December 31, 2004, which has beenpreviously filed with the SEC. In addition to historical information, thefollowing discussion and other parts of this report contain forward-lookinginformation that involves risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated by such forward-looking information due to competitivefactors and other risks discussed below under the caption “Important FactorsThat May Affect Future Results”.

 

**Overview**

 

We are a specialty pharmaceutical company focused on:

 

•                  development,licensing and sales of generic and branded pharmaceutical products and activepharmaceutical ingredients and the manufacturing of pharmaceuticals forourselves and others in Spain, other parts of Europe and international markets,including the U.S. market; and

 

•                  research,development and licensing/commercialization of advanced proprietary drugdelivery technologies for new and existing pharmaceutical products.

 

*Branded and Generic Pharmaceuticals*

 

Our pharmaceutical product sales activities are based in Spain, wherewe have a significant commercial presence and we manufacture and marketapproximately 120 pharmaceutical products. Our products include various dosage strengths and product formulationsof more than 30 chemical entities in four primary therapeutic areas:cardiovascular, gastrointestinal, neurological and infectious diseases. In 2004approximately 30% of our product revenues were derived from two of our productlines. We market our branded and generic products to physicians and pharmaciststhrough our three separate sales and marketing organizations based in Spain:Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar.  As prices for prescription pharmaceuticalshave been lowered in Spain by action of the Ministry of Health, which hasauthority to approve pharmaceutical prices, we are working to improve theefficiency of our manufacturing operations to reduce our costs, while alsoincreasing sales.  We have recentlyfocused on increasing our sales in other European countries and other geographicregions through strategic alliances with other generic companies anddistributors in these territories.  Wealso target markets that offer compatible regulatory approval regimes andattractive product margins.

 

We also expect to grow our business by acquiring or licensingadditional products to sell through our organization and our strategicalliances. We continually acquire rights to new products in response toincreasing market demand for generic and branded therapeutic products and, whenappropriate, we divest products that we consider to be redundant or that havebecome non-strategic.  For example, inNovember 2004, we entered into a multi-product collaboration agreement withPerrigo Company, the largest U.S. manufacturer of over-the-counter pharmaceuticaland nutritional products for the store brand market, to co-develop and marketin the U.S. and potentially other markets selected generic pharmaceuticalproducts that we produce in Spain.

 

We also manufacture pharmaceuticals for other drug companies.  In April 2004, we purchased a manufacturingfacility located in Spain that specializes in the manufacture of activepharmaceutical ingredients. The facility has been approved by the FDA for themanufacture of one ingredient for marketing and sale in the U.S. We aremanufacturing and marketing these ingredients through our subsidiary, BentleyAPI.  In addition, our Spanishpharmaceutical product manufacturing facility produces pharmaceutical productsthat are marketed by other pharmaceutical companies both in Spain and in otherinternational markets.

 

14

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*Proprietary Drug Delivery Technologies and Products*

 

We develop products that incorporate our drug delivery technologiesthat we have developed in the United States. We have licensed applications of our proprietary CPE-215 drug deliverytechnology to Auxilium Pharmaceuticals, Inc., which launched Testim, the firstproduct incorporating our CPE-215 drug delivery technology, in the UnitedStates in February 2003.  Testim is a gelindicated for low testosterone levels. Testim was launched in Germany inJanuary 2005 and in the United Kingdom in April 2005. On April 25, 2005, weannounced that we had entered into a license agreement with Dong Sung Pharm.Co. Ltd. for the development of an intranasal spray formulation of insulin forthe South Korean market and possibly additional territories. On May 2, 2005 weannounced the discovery and synthesis of a thermodynamically stable,biodegradable NanocapletTM technology for the delivery ofmacromolecule therapeutics as a result of a four-year research collaborationwith the University of New Hampshire.  Weare also in discussions with other pharmaceutical and biotechnology companiesto form additional strategic alliances to facilitate the development andcommercialization of other products using our drug delivery technologies,including product formulations to treat nail fungus infections topically.

 

 

**RESULTSOF OPERATIONS:**

 

**Three Months Ended March 31, 2005 versus Three MonthsEnded March 31, 2004**

 

*Revenues*

 
| ** **                              | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**                      | ** ** | **2005**                                 | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Revenues*                              | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net  product sales*                    | * *   | *$*                                      | *23,279*   | * *   | *96*       | *%* | *$* | *16,606* | * * | *96* | *%* | *$* | *6,673* | * * | *40* | *%* |
| *Licensing  and collaboration revenues* | * *   | *965*                                    | * *   | *4*        | *%*        | *696* | * * | *4* | *%* | *269* | * * | *39* | *%* |
| *Total  revenues*                       | * *   | *$*                                      | *24,244*   | * *   | *100*      | *%* | *$* | *17,302* | * * | *100* | *%* | *$* | *6,942* | * * | *40* | *%* |

 

Total revenues for the three months ended March 31, 2005 increased 40%from the same period in the prior year, or 34% when expressed in constant currency.An increase in the weighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of increasing first quarter 2005 revenues by approximately$1,081,000 compared to the first quarter of 2004. In addition to the favorableimpact of currency, our current period growth was driven by increased sales tolicensees and others, strong sales of omeprazole and simvastatin and sales ofactive pharmaceutical ingredients (API) from our API manufacturing facilitythat we purchased in April 2004. Our growing royalty stream from sales ofTestim, the first marketed product incorporating our CPE-215 drug deliverytechnology, contributed approximately $870,000 to our revenues in the threemonths ended March 31, 2005, compared to $554,000 in the first quarter of theprior year.

 

Our revenues are generated through our primary saleschannels of branded pharmaceuticals, generic pharmaceuticals, sales tolicensees and others and licensing and collaboration revenues. The following isa summary of our revenues by sales channel and top-selling product lines:

 

15

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For the three monthsended March 31, 2005:

 
| **(in  thousands)**              | ** ** | **Revenues Within Spain** | ** ** | ** **            | ** ** | ** ** | ** ** | ** **            | ** ** |
|----------------------------------|------------|---------------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                       | ** ** | ** **                | ** ** | **Revenues**          | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Product Line**                 | ** ** | **Branded  Products**     | ** ** | **Generic  Products** | ** ** | **Other**  | ** ** | **Outside of  Spain** | ** ** | **Total** | ** ** | **% of Total  Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                       | *716*      | * *              | *$*        | *4,120*    | * *   | *$*                   | *—*   | * * | *$* | *—* | * * | *$* | *4,836* | * * | *20* | *%* |
| *Simvastatin*                    | * *   | *448*                     | * *   | *1,240*               | * *   | *—*   | * *   | *—*              | * *   | *1,688* | * * | *7* | *%* |
| *Codeisan*                       | * *   | *1,369*                   | * *   | *—*              | * *   | *—*   | * *   | *—*              | * *   | *1,369* | * * | *6* | *%* |
| *Enalapril*                      | * *   | *925*                     | * *   | *465*                 | * *   | *—*   | * *   | *—*              | * *   | *1,390* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *364*                     | * *   | *836*                 | * *   | *—*   | * *   | *—*              | * *   | *1,200* | * * | *5* | *%* |
| *All  other products*            | * *   | *2,628*                   | * *   | *2,639*               | * *   | *112*      | * *   | *576*                 | * *   | *5,955* | * * | *24* | *%* |
| *Sales  to licensees and others* | * *   | *—*                  | * *   | *—*              | * *   | *3,678*    | * *   | *3,163*               | * *   | *6,841* | * * | *28* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                  | * *   | *—*              | * *   | *95*       | * *   | *870*                 | * *   | *965* | * * | *4* | *%* |
| *Total Revenues*                 | * *   | *$*                       | *6,450*    | * *              | *$*        | *9,300*    | * *   | *$*                   | *3,885*    | * * | *$* | *4,609* | * * | *$* | *24,244* | * * | *100* | *%* |
| *% of  Q-1 2005 Revenues*        | * *   | *27*                      | *%*        | *38*                  | *%*        | *16*       | *%*        | *19*                  | *%*        | *100* | *%* | * * | * * |

 

For the three months ended March 31, 2004:

 
| **(in  thousands)**              | ** ** | **Revenues Within Spain** | ** ** | ** **            | ** ** | ** ** | ** ** | ** **            | ** ** |
|----------------------------------|------------|---------------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                       | ** ** | ** **                | ** ** | **Revenues**          | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Product Line**                 | ** ** | **Branded  Products**     | ** ** | **Generic  Products** | ** ** | **Other**  | ** ** | **Outside of  Spain** | ** ** | **Total** | ** ** | **% of Total  Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                       | *533*      | * *              | *$*        | *3,288*    | * *   | *$*                   | *—*   | * * | *$* | *—* | * * | *$* | *3,821* | * * | *22* | *%* |
| *Simvastatin*                    | * *   | *239*                     | * *   | *773*                 | * *   | *—*   | * *   | *—*              | * *   | *1,012* | * * | *6* | *%* |
| *Codeisan*                       | * *   | *903*                     | * *   | *—*              | * *   | *—*   | * *   | *—*              | * *   | *903* | * * | *5* | *%* |
| *Enalapril*                      | * *   | *662*                     | * *   | *209*                 | * *   | *—*   | * *   | *—*              | * *   | *871* | * * | *5* | *%* |
| *Paroxetine*                     | * *   | *250*                     | * *   | *820*                 | * *   | *—*   | * *   | *—*              | * *   | *1,070* | * * | *6* | *%* |
| *All  other products*            | * *   | *1,704*                   | * *   | *1,693*               | * *   | *—*   | * *   | *—*              | * *   | *3,397* | * * | *20* | *%* |
| *Sales  to licensees and others* | * *   | *—*                  | * *   | *—*              | * *   | *2,534*    | * *   | *2,998*               | * *   | *5,532* | * * | *32* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                  | * *   | *—*              | * *   | *142*      | * *   | *554*                 | * *   | *696* | * * | *4* | *%* |
| *Total  Revenues*                | * *   | *$*                       | *4,291*    | * *              | *$*        | *6,783*    | * *   | *$*                   | *2,676*    | * * | *$* | *3,552* | * * | *$* | *17,302* | * * | *100* | *%* |
| *% of  Q-1 2004 Revenues*        | * *   | *25*                      | *%*        | *39*                  | *%*        | *15*       | *%*        | *21*                  | *%*        | *100* | *%* | * * | * * |

 

*SpanishOperations.*    The coreof our Spanish operations has been the efficient manufacturing and in-countrymarketing of branded and generic pharmaceutical products.  Historically, our pharmaceutical productswere sold only within Spain.  However,the execution of our long-term strategic plan over the past several years hascreated an opportunity for our Spanish operations to expand beyond the bordersof Spain into other European countries and other countries outside of Europe.The increase in first quarter 2005 product sales is due primarily to: (1) anincrease in sales of our two top selling product lines (omeprazole andsimvastatin) totaling $1,691,000; (2)an increase in sales to licensees and others totaling $1,309,000; (3) anincrease in the weighted average value of the Euro, in relation to the U.S. Dollar totaling $1,073,000; and (4)sales of active pharmaceutical ingredients (included in “*All otherproducts*” above) totaling $688,000.

 

*Branded Pharmaceutical Products*

 
| ** **                    | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**            | ** ** | **2005**                                 | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Branded  Product Sales:*     | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Codeisan*                    | * *   | *$*                                      | *1,369*    | * *   | *21*       | *%* | *$* | *903* | * * | *21* | *%* | *$* | *466* | * * | *52* | *%* |
| *Enalapril*                   | * *   | *925*                                    | * *   | *14*       | *%*        | *662* | * * | *15* | *%* | *263* | * * | *40* | *%* |
| *Omeprazole*                  | * *   | *716*                                    | * *   | *11*       | *%*        | *533* | * * | *12* | *%* | *183* | * * | *34* | *%* |
| *Lansoprazole*                | * *   | *461*                                    | * *   | *7*        | *%*        | *—* | * * | * * | ** * | *461* | * * | * * | *** |
| *Simvastatin*                 | * *   | *448*                                    | * *   | *7*        | *%*        | *239* | * * | *6* | *%* | *209* | * * | *87* | *%* |
| *All  other branded products* | * *   | *2,531*                                  | * *   | *40*       | *%*        | *1,954* | * * | *46* | *%* | *577* | * * | *30* | *%* |
| *Total  branded sales*        | * *   | *$*                                      | *6,450*    | * *   | *100*      | *%* | *$* | *4,291* | * * | *100* | *%* | *$* | *2,159* | * * | *50* | *%* |

 

----

** Notmeaningful*

 

16

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Sales of our branded pharmaceutical products increasedby 50% during the three months ended March 31, 2005 compared to the threemonths ended March 31, 2004.  An increasein the weighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of increasing branded product sales by approximately $291,000 inthe first quarter of 2005. Sales of Codeisan, which grew by 52%, accounted for21% of our branded pharmaceutical revenues in the first three months of both2005 and 2004.  Sales of our brandedlansoprazole, which was launched in November 2004, added approximately $461,000to our branded sales in the three months ended March 31, 2005, or 21% of ourincrease in branded pharmaceutical sales. We also experienced increased salesof our branded enalapril, omeprazole and simvastatin product lines, whichtogether accounted for 30% of the increase in our branded sales in the threemonths ended March 31, 2005. While we expect to continue to develop, acquire,launch and support new and existing branded products, our focus on generics andsales outside of Spain are expected to increase those revenues at asignificantly higher pace than that of our branded products.

 

*Generic Pharmaceutical Products*

 
| ** **                    | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**            | ** ** | **2005**                                 | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic  Product Sales:*     | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                  | * *   | *$*                                      | *4,120*    | * *   | *44*       | *%* | *$* | *3,288* | * * | *49* | *%* | *$* | *832* | * * | *25* | *%* |
| *Simvastatin*                 | * *   | *1,240*                                  | * *   | *13*       | *%*        | *773* | * * | *11* | *%* | *467* | * * | *60* | *%* |
| *Paroxetine*                  | * *   | *836*                                    | * *   | *9*        | *%*        | *820* | * * | *12* | *%* | *16* | * * | *2* | *%* |
| *Pentoxifylline*              | * *   | *633*                                    | * *   | *7*        | *%*        | *691* | * * | *10* | *%* | *-58* | * * | *-8* | *%* |
| *Trimetazidine*               | * *   | *611*                                    | * *   | *7*        | *%*        | *486* | * * | *7* | *%* | *125* | * * | *26* | *%* |
| *All  other generic products* | * *   | *1,860*                                  | * *   | *20*       | *%*        | *725* | * * | *11* | *%* | *1,135* | * * | *157* | *%* |
| *Total  generic sales*        | * *   | *$*                                      | *9,300*    | * *   | *100*      | *%* | *$* | *6,783* | * * | *100* | *%* | *$* | *2,517* | * * | *37* | *%* |

 

Sales of our generic pharmaceutical products increasedby 37% during the three months ended March 31, 2005, compared to the threemonths ended March 31, 2004.  An increasein the weighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of increasing generic product sales by approximately $432,000 inthe first quarter of 2005. Strong sales of our generic omeprazole accounted for33% of our increase in generic pharmaceutical sales in the first quarter of2005. Strong sales of our generic simvastatin, which grew by 60%, accounted for19% of our increase in generic pharmaceutical product sales.  We expect to continue to increase our genericdrug portfolio and increase our generic drug sales in Spain as products comeoff patent in the future.

 

The Spanish Ministry of Health has recently proposed aplan for nationwide expansion of a regional practice of filling prescriptionsthat do not specify a brand name or laboratory name with one of thelowest-priced generics then available. This proposal, if enacted, will not require government-mandated pricereductions as in the past.  We constantlymonitor the market, prices and our competitors’ activities, and occasionallyadjust prices for competitive purposes.  Wedo not anticipate that this proposal will materially affect our 2005 revenuesor profits because we expect that any voluntary downward adjustment in ourselling prices will be offset by increases in volume and the benefits of otherstrategies we have adopted.

 

*Sales to Licensees and Others*

 
| ** **                       | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**               | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                         | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * |
| *Sales  to licensees and others* | * *   | *$*                                      | *6,841*    | * *   | *$*        | *5,532* | * * | *$* | *1,309* | * * | *24* | *%* |
|                                  |            |                                          |            |            |            |  |  |  |  |  |  |  |

 

In addition to manufacturing and selling our own branded and genericproducts, we license the rights to market products to others within and outsideof Spain.  These license agreements areusually 

 

17

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accompanied bylong-term exclusive supply agreements, whereby our licensees purchase thelicensed products from our manufacturing facility.  Our Spanish subsidiaries have executed atotal of 129 license agreements. While 62 of these agreements are pendingregulatory approvals (four within Spain and 58 outside of Spain), 67 of theseagreements (14 within Spain and 53 outside of Spain) cover actively marketedproducts that are generating revenues. Additionally, we have 15 contractmanufacturing agreements in effect in Spain and 6 contract manufacturingagreements in effect for international customers.  Our clients market these products under theirown names and with their own labeling. Many of the products we manufacture for others use the same activeingredients that are used in our own marketed products.  Sales under our license agreements in thethree months ended March 31, 2005 increased 24% when compared to the prior yearperiod, or 18% in constant currency.  Anincrease in the weighted average value of the Euro over the past year, inrelation to the U.S. Dollar, had the effect of increasing our revenues fromsales to licensees and others by approximately $325,000.

 

*Licensing and Collaboration Revenues.*     Licensing and collaboration revenuesaccounted for 4% of total revenues in each of the three month periods endedMarch 31, 2005 and 2004. These revenues include royalties of approximately$870,000 in the three months ended March 31, 2005 (compared to $554,000 in thefirst quarter of the prior year) from the commercialization and continuingsales of Testim. Testim is currently reported to capture approximately 13% ofall new testosterone gel replacement prescriptions in the U.S. market.

 

*Gross Profit.*     Gross profit increased by approximately$3,745,000, or 41%, in the three months ended March 31, 2005, when compared tothe three months ended March 31, 2004. Gross margins on net product sales improved from 50% in the three monthsended March 31, 2004 to 51% in the three months ended March 31, 2005 (53% grossmargins on sales of pharmaceutical products, excluding sales of activepharmaceutical ingredients).

 

*Selling and Marketing Expenses*

 
| ** **               | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|--------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**       | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                 | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * |
| *Selling  and marketing* | * *   | *$*                                      | *4,392*    | * *   | *$*        | *3,870* | * * | *$* | *522* | * * | *13* | *%* |
|                          |            |                                          |            |            |            |  |  |  |  |  |  |  |

 

Selling and marketing expenses for the three monthsended March 31, 2005 increased by $522,000 or 13% from the same period in theprior year when expressed in U.S. Dollars; however, the increase in the weighted average value of the Euro over the past year,in relation to the U.S. Dollar, had the effect of increasing selling andmarketing expenses by approximately $209,000 in the three months endedMarch 31, 2005. Increased sales force costs, primarily sales commissionsresulting from our growing product sales, account for the remaining 60%increase in selling and marketing expenses. As a percentage of net productsales, selling and marketing expenses decreased from 23% in the three monthsended March 31, 2004, to 19% in the three months ended March 31, 2005.

 

*General and Administrative Expenses*

 
| ** **                    | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**            | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                      | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * |
| *General  and administrative* | * *   | *$*                                      | *3,018*    | * *   | *$*        | *2,162* | * * | *$* | *856* | * * | *40* | *%* |
|                               |            |                                          |            |            |            |  |  |  |  |  |  |  |

 

General and administrative expenses for the threemonths ended March 31, 2005 increased 40% over the same period in the prioryear.  The $856,000 increase was theresult of increased general and administrative activities required to supportour continued growth and prepare for our anticipated future growth. Theseexpenditures include increased costs in the current year for additionalemployees, outside services, insurance and other costs to support the growth ofour organization, as well as costs associated with maintaining our compliancewith the provisions of the Sarbanes-Oxley Act of 2002. General and 

 

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administrative expensesas a percent of total revenues remained relatively consistent (approximately12.4% in the three months ended March 31, 2005, compared to approximately 12.5%of total revenues in the three months ended March 31, 2004).  General and administrative expenses wouldhave been approximately $77,000 lower, absent the increase in the weightedaverage value of the Euro, in relation to the U.S. Dollar over the past year.We expect that our future expenditures for general and administrative expenseswill continue to increase as we grow.

 

*Research and Development Expenses*

 
| ** **                  | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|------------|------------|
| **(in thousands)**          | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                    | * *   | * *                                 | * *   | * *   | * *   | * * | * * | * * | * * |
| *Research  and development* | * *   | *$*                                      | *1,351*    | * *   | *$*        | *995* | * * | *$* | *356* | * * | *36* | *%* |
|                             |            |                                          |            |            |            |  |  |  |  |  |  |  |

 

In the first quarter of 2004, we completed andreported the results of a Phase I intranasal insulin trial. Our Phase I trialdemonstrated the effective delivery of insulin intranasally in healthy humansubjects. In April 2005 we announced that we completed the data analysis stageof our Phase II study for the intranasal delivery of insulin which we concludedin December 2004. We are scheduled to report the results of that trial in anabstract titled “Intranasal Insulin Administration in Type I Diabetic PatientsUtilizing CPE-215 Technology” at the American Diabetes Association 65thScientific Sessions, June 10-14, 2005, in San Diego, California. Additionally,we are continuing our clinical programs to support our strategy for theeventual distribution of certain of our Spanish generic pharmaceutical productsin other countries, including the U.S. In order to further our strategy, weentered into a multi-product collaboration agreement with Perrigo Company toco-develop and market certain generic pharmaceutical products in the U.S. andpotentially other markets. We expect to continue to incur costs to conductclinical trials and support the required regulatory submissions for ourclinical programs. We also expect to incur increased costs related topre-clinical programs for product formulation and testing efforts beingperformed in the laboratory in our U.S. headquarters and at our facilities inSpain.  The expenditures in research anddevelopment reflect our focus on projects that are necessary for expansion ofour portfolio of marketed products and clinical trials involving our drugdelivery technologies. Although some of our cost estimates are preliminary, andthe specific timing is subject to change, we project that our research anddevelopment expenses in 2005 could be approximately $1,500,000 higher than in2004.

 

*Provision for Income Taxes*

 
| ** **                              | ** ** | **For the Three Months Ended March 31, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **Spain**                                     | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| * *                                | * *   | * *                                      | * *   | * * | * * | * * | * * |
| *Income  (loss) before income taxes*    | * *   | *$*                                           | *4,678*    | * * | *$* | *(918* | *)* | *$* | *3,760* | * * |
| * *                                | * *   | * *                                      | * *   | * * | * * | * * | * * |
| *Provision  (benefit) for income taxes* | * *   | *1,590*                                       | * *   | *(312* | *)* | *1,278* | * * |
| *Valuation  allowance*                  | * *   | *—*                                      | * *   | *312* | * * | *312* | * * |
| * *                                | * *   | * *                                      | * *   | * * | * * | * * | * * |
| *Net  provision for income taxes*       | * *   | *1,590*                                       | * *   | *—* | * * | *1,590* | * * |
| * *                                | * *   | * *                                      | * *   | * * | * * | * * | * * |
| *Net  income (loss)*                    | * *   | *$*                                           | *3,088*    | * * | *$* | *(918* | *)* | *$* | *2,170* | * * |
| * *                                | * *   | * *                                      | * *   | * * | * * | * * | * * |
| *Effective  tax rate*                   | * *   | *34*                                          | *%*        | *0* | *%* | *42* | *%* |

 

As a result of reporting taxable income in Spain, werecorded a provision for foreign income taxes totaling $1,590,000 and $921,000for the three months ended March 31, 2005 and 2004, respectively.  The effective tax rate in Spain for the threemonths ended March 31, 2005 is 34% compared to 37% in the prior year firstquarter. The provision for foreign income taxes would have been approximately$67,000 lower than reported, absent the increase in the weighted average valueof the Euro over the past year, in relation to the U.S. Dollar.

 

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We generated additional U.S. federal net operatingloss carry-forwards in the three months ended March 31, 2005 and 2004 as aresult of U.S. pretax losses of $918,000 and $752,000, respectively. Althoughwe expect to achieve profitable U.S. operations in the future, future domesticoperating profits cannot be reasonably assured; consequently, no tax benefithas been recorded for U.S. losses. Accordingly, we have established a valuationallowance equal to the full amount of the U.S. deferred tax assets.

 

Should we determine that it is more likely than notthat we will realize certain of our net deferred tax assets for which we havepreviously provided a valuation allowance, an adjustment would be required toreduce the existing valuation allowance. In addition, we operate withinmultiple taxing jurisdictions and are subject to audit in those jurisdictions.These audits can involve complex issues, which may require an extended periodof time for resolution. No potential tax contingencies were considered probableand reasonably estimable by Bentley at March 31, 2005; however, there is thepossibility that the ultimate resolution of any such potential contingenciescould have an adverse effect on our results of operations.

 

*Net Income*

 
| ** **                                     | ** ** | **For the Three Months   Ended March 31,** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands, except per share data)**      | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                       | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Net  income*                                  | * *   | *$*                                        | *2,170*    | * *   | *$*        | *809* | * * | *$* | *1,361* | * * | *168* | *%* |
| * *                                       | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Net  income per common share:*                | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *$*                                        | *0.10*     | * *   | *$*        | *0.04* | * * | *$* | *0.06* | * * | *150* | *%* |
| *Diluted*                                      | * *   | *$*                                        | *0.10*     | * *   | *$*        | *0.04* | * * | *$* | *0.06* | * * | *150* | *%* |
| * *                                       | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Weighted  average common shares outstanding:* | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *21,316*                                   | * *   | *20,597*   | * *   | *719* | * * | *3* | *%* |
| *Diluted*                                      | * *   | *22,531*                                   | * *   | *22,784*   | * *   | *-253* | * * | *-1* | *%* |

 

We reported incomefrom operations of $3,647,000 in the three months ended March 31, 2005 comparedto $1,673,000 in the three months ended March 31, 2004. The combination ofincome from operations of $3,647,000 and the non-operating items, primarily theprovision for income taxes of $1,590,000, resulted in net income of $2,170,000,or $0.10 per basic common share ($0.10 per diluted common share) on 21,316,000weighted average basic common shares outstanding (22,531,000 weighted averagediluted common shares outstanding) in the three months ended March 31, 2005,compared to net income of $809,000, or $0.04 per basic common share ($0.04 perdiluted common share) on 20,597,000 weighted average basic common sharesoutstanding (22,784,000 weighted average diluted common shares outstanding) inthe same period of the prior year.

 

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**LIQUIDITYAND CAPITAL RESOURCES:**

 

Total assets increased from $121,930,000 at December 31, 2004 to$123,170,000 at March 31, 2005, while stockholders’ equity decreased from$89,657,000 at December 31, 2004 to $88,701,000 at March 31, 2005.The decrease in stockholders’ equity during the three months ended March 31,2005 primarily reflects the effect of fluctuations in the Euro/U.S. Dollarexchange rate, which resulted in a net reduction of $3,185,000 in our balancesheet, that was partially offset by net income of $2,170,000 during thequarter.

 

Cash and cash equivalents increased by approximately 4% or $1,526,000from $34,230,000 at December 31, 2004 to $35,756,000 at March 31,2005, primarily as a result of cash flows from operations that included netincome of $2,170,000 and an increase in deferred income of $1,259,000,partially offset by additions to fixed assets totaling $1,702,000, additions todrug licenses totaling $597,000 and the effect of foreign currency exchangerates that decreased cash by approximately $548,000. Cash and cash equivalentsat March 31, 2005 include approximately $5,023,000 of short-term liquidinvestments considered to be cash equivalents.

 

Receivables increased by approximately 4% from $27,860,000 atDecember 31, 2004 to $29,113,000 at March 31, 2005. Receivablesincreased by approximately $2,778,000 in local currency, but fluctuations inforeign currency exchange rates decreased receivables reported in U.S. dollarsby approximately $1,525,000. Trade receivables increased approximately $1,293,000during the quarter; however, the average number of days of sales outstanding inuncollected trade and royalties receivable decreased from 125 days at December31, 2004 to 99 days at March 31, 2005. Furthermore, receivables from oneinternational customer totaled $3,982,000 at March 31, 2005. We owe the samecustomer approximately $3,848,000 for co-marketing expenses at March 31, 2005.We have not experienced any material delinquencies on any of our receivablesthat have had a material effect on our financial position, results ofoperations or cash flows.

 

Inventories decreased by approximately $645,000 from $10,258,000 atDecember 31, 2004 to $9,613,000 at March 31, 2005, primarily as a resultof fluctuations in foreign currency exchange rates approximating $542,000.

 

The combined total of accounts payable and accrued expenses increasedfrom $23,217,000 at December 31, 2004 to $24,653,000 at March 31,2005.  The $1,436,000 increase was primarilyattributed to increases in inventory purchases (approximately $576,000) andtaxes payable (approximately $2,077,000), while fluctuations in foreigncurrency exchange rates decreased accounts payable and accrued expensesreported in U.S. dollars by approximately $1,276,000.

 

Short-term borrowings and current portion of long-term debt decreasedfrom $2,785,000 at December 31, 2004 to $2,499,000 at March 31, 2005,primarily as a result of net repayment of short-term borrowings and the effectof fluctuations in foreign currency exchange rates. The weighted averageinterest rate on our short-term borrowings at March 31, 2005 was 5.0%.

 

Operating activities for the three months ended March 31, 2005 providednet cash of $4,518,000 compared to $1,442,000 in the three months ended March31, 2004.  Net income, which increased$1,361,000 to $2,170,000 during the three months ended March 31, 2005 and anincrease in deferred income of $941,000 accounted for the majority of theincrease in cash flows from operations.

 

Investing activities,primarily capital expenditures to upgrade the capacity of our manufacturingfacility in Spain and to increase our manufacturing and packaging capabilitieswith new high speed equipment, along with additions to drug licenses and relatedcosts, used net cash of $2,299,000 during the three months ended March 31,2005.

 

Financing activities during the three months endedMarch 31, 2005 required cash totaling $145,000, and represented net repaymentsof short-term borrowings.

 

21

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Ourroyalty revenues on Testim product sales by Auxilium Pharmaceuticals, Inc., ourlicensee, are recognized based on an estimate of Auxilium’s sell-through of theTestim product based on prescriptions filled. For the three months ended March31, 2005 and 2004, we recognized royalty revenues of approximately $870,000 and$554,000, respectively, based on an estimate of prescriptions filled.  The difference between the total amountearned from Auxilium under the royalty arrangement and the amount recognized asa component of *licensing and collaboration revenues*is recorded as a component of current *deferred income*in the Consolidated Balance Sheets.  Asof March 31, 2005 and December 31, 2004, deferred income from Testim royaltieswas approximately $1,333,000 and $1,233,000, respectively.  We will continue to use available marketinformation to determine the amount and timing of royalty revenue recognitionuntil such time that returns from wholesalers and pharmacies can be reasonablyestimated.

 

*Seasonality.*  In the past, we have experienced lower salesin the third calendar quarter and higher sales in the fourth calendar quarterdue to seasonality.  As we market morepharmaceutical products whose sales are seasonal, seasonality of sales maybecome more significant.

 

*Effect ofInflation and Changing Prices.*  Neither inflation nor changing prices hasmaterially impacted our net product sales or income from operations for theperiods presented.

 

*Liquidity*.  Our 2005 capital expenditure plan totals$19.2 million and we invested approximately $1,702,000 in equipment andimprovements during the three months ended March 31, 2005. The remainingcapital expenditures planned for 2005 will be funded from a combination of cashflows from operations and borrowings. As mentioned above, we have cash, cashequivalents and short-term liquid investments totaling approximately$36,256,000 as of March 31, 2005, which is sufficient to fund our operationsfor the foreseeable future. Although the Company is generating positive cashflow from operations, (approximately $4,518,000 in the three months ended March31, 2005), there can be no assurance that changes in our research anddevelopment plans, capital expenditures and/or acquisitions, or other eventsaffecting our net product sales or operating expenses will not result in theearlier depletion of our funds.  However,we continue to explore alternative sources for financing our businessactivities. In appropriate situations, which will be strategically determined,we may seek financial assistance from other sources, including contribution byothers to joint ventures and other collaborative or licensing arrangements forthe development, testing, manufacturing and marketing of products under development.

 

 

**Critical Accounting Policies and Estimates**

 

Our significant accounting policies are more fullydescribed in Note 2 to our consolidated financial statements in our AnnualReport on Form 10-K for the year ended December 31, 2004. Certain of our accountingpolicies are particularly important to the portrayal of our financial position,results of operations and cash flows and require the application of significantjudgment by our management; as a result they are subject to an inherent degreeof uncertainty. In applying those policies, our management uses its judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical experience,terms of existing contracts, our observation of trends in the industry,information provided by our customers and information available from otheroutside sources, as appropriate. For a more detailed discussion of our criticalaccounting policies and estimates, we refer the reader to the completediscussion included in our Annual Report on Form 10-K for the year endedDecember 31, 2004.

 

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**Important Factors That May Affect Future Results**

 

This Quarterly Report on Form 10-Q containsforward-looking statements. These forward-looking statements appear principallyin the section entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” Forward-looking statements may appear inother sections of this report, as well. Generally, the forward-lookingstatements in this report include such words as “expect,” “believe,”“continue,” “anticipate,” “estimate,” “may,” “will,” “could,” “opportunity,”“future,” “project,” and similar expressions.

 

The forward-looking statements include statementsabout our:

•                  Strategicplans;

•                  Salesgrowth;

•                  Anticipatedsources of future revenues;

•                  Anticipated2005 expenses, margins and operating performance;

•                  Expectedlaunch of new products;

•                  Anticipatedexpenses and spending;

•                  Commencingand continuing clinical trials;

•                  Anticipatedregulatory changes and approvals; and

•                  Thesufficiency of capital resources to fund our operations.

 

These forward-looking statements are based on ourcurrent expectations, beliefs, assumptions, estimates, forecasts andprojections for our business and the industry and markets in which we compete.These statements are not guarantees of future performance and involve certainrisks, uncertainties and assumptions that are difficult to predict. Therefore,actual outcomes and results may differ materially from what is expressed insuch forward-looking statements. We caution investors not to place unduereliance on the forward-looking statements contained in this report. Thesestatements speak only as of the date of this report, and we do not undertakeany obligation to update or revise them, except as required by law.  The following factors, among others, createrisks and uncertainties that could affect our future or other performance:  expanding generic and branded drugoperations, efficacy and safety of our products, changes in third-partyreimbursement and government mandates which impact pharmaceutical pricing,development and commercialization of our products, relationships with ourstrategic partners, uncertainty of clinical trial results, regulatory approvalprocess, unpredictability of patent protection, technological changes, theeffects of economic conditions, risks associated with international operations,competition from other manufacturers of generic and proprietarypharmaceuticals, and difficulties in managing our growth and the other riskfactors contained in the section entitled “Risk Factors” in our Annual Reporton Form 10-K filed for the year ended December 31, 2004.  As a result of these and other factors, wemay experience material fluctuations in our future operating results, whichcould materially affect our business, financial position, and stock price.

# ** **

# **Item 3.**        Quantitativeand Qualitative Disclosures About Market Risk

 

*Foreign Currency.*  A substantial amount of our business isconducted in Europe and is therefore influenced to the extent to which thereare fluctuations in the U.S. Dollar’s value in relation to other currencies,specifically the Euro. The exchange rates at March 31, 2005 and December31, 2004 were .77 Euros and .73 Euros per U.S. Dollar, respectively. Theweighted average exchange rate for the three months ended March 31, 2005and 2004 was .76 Euros and .81 Euros per U.S. Dollar, respectively. The neteffect of foreign currency translation on our Condensed Consolidated FinancialStatements for the three months ended March 31, 2005 was a net decrease of$3,185,000 and the cumulative historical effect as of March 31, 2005 was anincrease of $6,537,000, as reflected in our Consolidated Balance Sheets as *accumulated other**comprehensive income*. The carrying valueof assets and liabilities can be materially impacted by foreign currencytranslation, as can the translated amounts of revenues and expenses.Nonetheless, we do not plan to modify our business practices.

 

23

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We have relied primarily upon financing activities to fund ouroperations in the U.S. In the event that we are required to fund U.S.operations or cash needs with funds generated in Europe or cash requirements inEurope with U.S. funds, currency rate fluctuations in the future could have asignificant impact on us. However, at the present time, we do not anticipatealtering our business plans and practices to compensate for future currencyfluctuations.

 

*Interest Rates.*  The weighted average interest rate on ourshort-term borrowings is 5.0% and the amount of borrowings outstanding is$2,499,000 as of March 31, 2005. Our long-term borrowings are non-interestbearing and the balance outstanding on these borrowings at March 31, 2005is $421,000 including imputed interest (ranging from 5.2% to 6.0%) of $61,000.The weighted average interest rate on our long-term borrowings is 5.7%. Theeffect of an increase in interest rates of one percentage point (one hundredbasis points) to an average of 6.0% on short-term borrowings and to an averageof 6.7% on long-term borrowings would have the effect of increasing interestexpense by approximately $29,000 annually.

# ** **

# **Item 4.**        Controlsand Procedures

 

BentleyPharmaceuticals maintains disclosure controls and procedures that are designedto ensure that information required to be disclosed in Bentley’s reports thatare filed with the Securities and Exchange Commission is recorded, processed,summarized and reported within the time periods required for each report andthat such information is reported to Bentley’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

As of March 31,2005, Bentley carried out an evaluation, under the supervision of, and with theparticipation of Bentley’s management, including Bentley’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of Bentley’s disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15(d)-15(e)). Based on that evaluation,Bentley’s Chief Executive Officer and Chief Financial Officer concluded thatBentley’s disclosure controls and procedures are effective in timely alertingthem to material information relating to Bentley (including its consolidatedsubsidiaries), which is required to be included in its publicly filed reportsor submitted under the Exchange Act, and in ensuring that such information isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Although Bentley’s management continually evaluatesthe internal control structure and strengthens Bentley’s control procedures,particularly in connection with the requirements of Section 404 of theSarbanes-Oxley Act of 2002, there have been no changes during the quarter endedMarch 31, 2005 that have materially affected, or are reasonably likely tomaterially affect Bentley’s internal controls over financial reporting.

 

 

**PART II.****                OTHERINFORMATION**

 

# **Item 6.       **Exhibits

 

The Exhibits filed as part of this report are listedon the Exhibit Index immediately preceding the exhibits, which Exhibit Index isincorporated herein by reference.

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|        |   | BENTLEY PHARMACEUTICALS, INC.                                             |   |
|-------------|--------|---------------------------------------------------------------------------|--------|
|        |   | Registrant                                                                |
|        |   |                                                                      |
|        |   |                                                                      |
| May 9, 2005 | By:    | /s/ James R. Murphy                                                       |   |
|        |   | James R. Murphy                                                           |
|        |   | Chairman of the Board of Directors  President and Chief Executive Officer |
|        |   | (Principal Executive Officer)                                             |
|        |   |                                                                      |
|        |   |                                                                      |
| May 9, 2005 | By:    | /s/ Michael D. Price                                                      |   |
|        |   | Michael D. Price                                                          |
|        |   | Vice President, Chief Financial Officer,                                  |
|        |   | Treasurer and Secretary (Principal Financial                              |
|        |   | and Accounting Officer)                                                   |

 

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# **Exhibit Index**

 
| **Exhibit   Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                 |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                       |
| *10.1                |       | 2005 base salaries,  target bonuses and annual stock option awards for Bentley’s executive  officers. (Reference is made to Exhibit 10.1 to the Registrant’s Current  Report on Form 8-K dated March 30, 2005, Commission File No.  1-10581, which exhibit is incorporated herein by reference.) |
|                 |       |                                                                                                                                                                                                                                                                                                       |
| 31.1                 |       | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                       |
| 31.2                 |       | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                       |
| 32.1                 |       | 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. Filed herewith.                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                       |
| 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. Filed herewith.                                                                                                                                    |

 

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*                 Indicates a compensatoryplan or arrangement or management contract in which an executive officer of theCompany participates.

 

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