**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-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 June 30, 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                                        **

 

**Commission File Number  1-10581**

 

**B****ENTLEY****P****HARMACEUTICALS,****I****NC.**

(Exact name of registrant as specified in itscharter)

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

 

**Bentley Park, 2 Holland Way, Exeter, NewHampshire  03833**

(Current Address of Principal ExecutiveOffices)

 

Registrant’s telephone number, including areacode: **(603) 658-6100**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat 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 registrant is an accelerated filer(as defined in rule 12b-2 of the ExchangeAct).      YES  ý    NO  o

 

The number of shares of the registrant’s common stock outstanding as ofAugust 8, 2005 was 21,598,881.

 

 

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Form 10-Q for the Quarter Ended June 30, 2005**

 

**Index**

 
| **Part I.**  | **Unaudited  Financial Information** | **Page**                                                                                                                                      |
|-------------------|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** **                           | ** **                                                                                                                                    |
|              | Item  1.                             | Condensed  Consolidated Financial Statements:                                                                                                 |   |
|              |                                 |                                                                                                                                          |   |
|              |                                 | Consolidated Balance Sheets as of  June 30, 2005 and  December 31, 2004                                                        |  3 |
|              |                                 |                                                                                                                                          |   |
|              |                                 | Consolidated  Income Statements for the three months ended June 30, 2005 and 2004, and  the six months ended June 30, 2005 and 2004 |  4 |
|              |                                 |                                                                                                                                          |   |
|              |                                 | Consolidated Statement of Changes in Stockholders’ Equity for the six  months ended June 30, 2005                                   |  5 |
|              |                                 |                                                                                                                                          |   |
|              |                                 | Consolidated Statements of  Cash Flows for the six months ended June 30, 2005 and 2004                                                   |  6 |
|              |                                 |                                                                                                                                          |   |
|              |                                 | Notes to Condensed  Consolidated Financial Statements                                                                                         |  8 |
|              |                                 |                                                                                                                                          |   |
|              | Item 2.                              | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                   | 16 |
|              |                                 |                                                                                                                                          |   |
|              | Item 3.                              | Quantitative  and Qualitative Disclosures About Market Risk                                                                                   | 30 |
|              |                                 |                                                                                                                                          |   |
|              | Item 4.                              | Controls and  Procedures                                                                                                                      | 31 |
|              |                                 |                                                                                                                                          |   |
| **Part II.** | **Other Information**                |                                                                                                                                          |
|              |                                 |                                                                                                                                          |   |
|              | Item 1.                              | Legal Proceedings                                                                                                                             | 31 |
|              |                                 |                                                                                                                                          |   |
|              | Item 2.                              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                  | 32 |
|              |                                 |                                                                                                                                          |   |
|              | Item 4.                              | Submission  of Matters to a Vote of Security Holders                                                                                          | 32 |
|              |                                 |                                                                                                                                          |   |
|              | Item 5.                              | Other Information                                                                                                                             | 33 |
|              |                                 |                                                                                                                                          |   |
|              | Item 6.                              | Exhibits                                                                                                                                      | 34 |

 

2

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

 
| **(in thousands, except per share  data)**                                                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                 |       |                    |       |                        |       |
|                                                                                                       |       |                    |       |                        |       |
| Current assets:                                                                                            |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                  |       | $                       | 36,544     |                        | $          | 34,230 |   |
| Marketable securities                                                                                      |       | 469                     |       | 528                         |       |
| Receivables, net                                                                                           |       | 27,429                  |       | 27,860                      |       |
| Inventories, net                                                                                           |       | 11,669                  |       | 10,258                      |       |
| Deferred taxes                                                                                             |       | 552                     |       | 479                         |       |
| Prepaid expenses and other                                                                                 |       | 1,701                   |       | 1,355                       |       |
| Total current assets                                                                                       |       | 78,364                  |       | 74,710                      |       |
|                                                                                                       |       |                    |       |                        |       |
| Non-current assets:                                                                                        |       |                    |       |                        |       |
| Fixed assets, net                                                                                          |       | 29,125                  |       | 30,849                      |       |
| Drug licenses and related costs, net                                                                       |       | 13,880                  |       | 14,863                      |       |
| Restricted cash                                                                                            |       | 1,000                   |       | 1,000                       |       |
| Other                                                                                                      |       | 496                     |       | 508                         |       |
| Total non-current assets                                                                                   |       | 44,501                  |       | 47,220                      |       |
|                                                                                                       |       | $                       | 122,865    |                        | $          | 121,930 |   |
|                                                                                                       |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                             |       |                    |       |                        |       |
|                                                                                                       |       |                    |       |                        |       |
| Current liabilities:                                                                                       |       |                    |       |                        |       |
| Accounts payable                                                                                           |       | $                       | 17,237     |                        | $          | 17,048 |   |
| Accrued expenses                                                                                           |       | 9,417                   |       | 6,169                       |       |
| Short-term borrowings                                                                                      |       | 2,514                   |       | 2,754                       |       |
| Current portion of long-term debt                                                                          |       | 27                      |       | 31                          |       |
| Deferred income                                                                                            |       | 2,274                   |       | 1,594                       |       |
| Total current liabilities                                                                                  |       | 31,469                  |       | 27,596                      |       |
|                                                                                                       |       |                    |       |                        |       |
| Non-current liabilities:                                                                                   |       |                    |       |                        |       |
| Deferred taxes                                                                                             |       | 2,051                   |       | 2,319                       |       |
| Long-term debt                                                                                             |       | 309                     |       | 349                         |       |
| Deferred income                                                                                            |       | 2,470                   |       | 1,944                       |       |
| Other                                                                                                      |       | 57                      |       | 65                          |       |
| Total non-current liabilities                                                                              |       | 4,887                   |       | 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, 21,581 and 21,312 shares |       | 431                     |       | 426                         |       |
| Additional paid-in capital                                                                                 |       | 139,612                 |       | 140,418                     |       |
| Accumulated deficit                                                                                        |       | (56,131                 | )          | (60,909                     | )          |
| Accumulated other comprehensive income                                                                     |       | 2,597                   |       | 9,722                       |       |
| Total stockholders’ equity                                                                            |       | 86,509                  |       | 89,657                      |       |
|                                                                                                       |       | $                       | 122,865    |                        | $          | 121,930 |   |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

 

3

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Income Statements**

 
| ** **                                  | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share  data)**  | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                   | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net product sales                           |       | $                                             | 23,433     |                                        | $          | 17,407 |   | $ | 46,712 |   | $ | 34,013 |   |
| Licensing and collaboration revenues        |       | 1,331                                         |       | 1,063                                       |       | 2,296 |   | 1,759 |   |
| Total revenues                              |       | 24,764                                        |       | 18,470                                      |       | 49,008 |   | 35,772 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Cost of net product sales                   |       | 11,367                                        |       | 8,465                                       |       | 22,819 |   | 16,720 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Gross profit                                |       | 13,397                                        |       | 10,005                                      |       | 26,189 |   | 19,052 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Operating expenses:                         |       |                                          |       |                                        |       |   |   |   |   |
| Selling and marketing                       |       | 4,223                                         |       | 3,851                                       |       | 8,615 |   | 7,721 |   |
| General and administrative                  |       | 3,018                                         |       | 2,287                                       |       | 6,036 |   | 4,451 |   |
| Research and development                    |       | 1,608                                         |       | 946                                         |       | 2,959 |   | 1,941 |   |
| Depreciation and amortization               |       | 559                                           |       | 338                                         |       | 943 |   | 685 |   |
| Total operating expenses                    |       | 9,408                                         |       | 7,422                                       |       | 18,553 |   | 14,798 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Income from operations                      |       | 3,989                                         |       | 2,583                                       |       | 7,636 |   | 4,254 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Other income (expenses):                    |       |                                          |       |                                        |       |   |   |   |   |
| Interest income                             |       | 211                                           |       | 132                                         |       | 372 |   | 242 |   |
| Interest expense                            |       | (62                                           | )          | (58                                         | )          | (110 | ) | (111 | ) |
| Other, net                                  |       | 24                                            |       | 1,274                                       |       | 24 |   | 1,274 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Income before income taxes                  |       | 4,162                                         |       | 3,931                                       |       | 7,922 |   | 5,659 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Provision for income taxes                  |       | 1,554                                         |       | 2,441                                       |       | 3,144 |   | 3,361 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Net income                                  |       | $                                             | 2,608      |                                        | $          | 1,490 |   | $ | 4,778 |   | $ | 2,298 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Net income per common share:                |       |                                          |       |                                        |       |   |   |   |   |
| Basic                                       |       | $                                             | 0.12       |                                        | $          | 0.07 |   | $ | 0.22 |   | $ | 0.11 |   |
| Diluted                                     |       | $                                             | 0.12       |                                        | $          | 0.07 |   | $ | 0.21 |   | $ | 0.10 |   |
|                                        |       |                                          |       |                                        |       |   |   |   |   |
| Weighted average common shares outstanding: |       |                                          |       |                                        |       |   |   |   |   |
| Basic                                       |       | 21,395                                        |       | 20,644                                      |       | 21,356 |   | 20,620 |   |
| Diluted                                     |       | 22,603                                        |       | 22,800                                      |       | 22,568 |   | 22,787 |   |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

 

4

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Statement of Changes inStockholders’ 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                              |       | —                           |       | —                  |       | —          |       | 4,778                                 |       | —     |       | 4,778 |   |
| Other comprehensive loss:               |       |                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Foreign currency translation adjustment |       | —                           |       | —                  |       | —          |       | —                                |       | (7,125     | )          | (7,125 | ) |
| Comprehensive loss                      |       |                             |       |                    |       |            |       |                                  |       |       |       | $ | (2,347 | ) |
|                                    |       |                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Exercise of stock options               |       | 476                              |       | 9                       |       | 1,494           |       | —                                |       | —     |       | 1,503 |   |
| Purchase of treasury shares             |       | (219                             | )          | (4                      | )          | (2,414          | )          | —                                |       | —     |       | (2,418 | ) |
| Equity-based compensation               |       | 12                               |       | —                  |       | 114             |       | —                                |       | —     |       | 114 |   |
|                                    |       |                             |       |                    |       |            |       |                                  |       |       |       |   |   |   |   |   |   |   |
| Balance at June 30, 2005           |       | 21,581                           |       | $                       | 431        |            | $          | 139,612                               |       | $          | (56,131    | ) | $ | 2,597 |   | $ | 86,509 |   |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

 

5

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|                                                                               |       |                                        |       |   |   |
| Cash flows from operating activities:                                              |       |                                        |       |   |   |
| Net income                                                                         |       | $                                           | 4,778      |   | $ | 2,298 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                        |       |   |   |
| Depreciation and amortization                                                      |       | 2,592                                       |       | 1,696 |   |
| Equity-based compensation expense                                                  |       | 114                                         |       | 129 |   |
| Loss on disposal of assets                                                         |       | 124                                         |       | — |   |
| Other non-cash items                                                               |       | 17                                          |       | (87 | ) |
| (Increase) decrease in assets and increase  (decrease) in liabilities:             |       |                                        |       |   |   |
| Receivables                                                                        |       | (2,836                                      | )          | (6,583 | ) |
| Inventories                                                                        |       | (2,938                                      | )          | (2,620 | ) |
| Deferred income taxes                                                              |       | (121                                        | )          | — |   |
| Prepaid expenses and other current assets                                          |       | (502                                        | )          | (1,119 | ) |
| Other assets                                                                       |       | (33                                         | )          | 9 |   |
| Accounts payable and accrued expenses                                              |       | 6,663                                       |       | 6,753 |   |
| Deferred income                                                                    |       | 1,523                                       |       | 1,347 |   |
| Other liabilities                                                                  |       | (5                                          | )          | (256 | ) |
| Net cash provided by operating activities                                          |       | 9,376                                       |       | 1,567 |   |
|                                                                               |       |                                        |       |   |   |
| Cash flows from investing activities:                                              |       |                                        |       |   |   |
| Additions to fixed assets                                                          |       | (3,745                                      | )          | (3,476 | ) |
| Additions to drug licenses and related  costs                                      |       | (1,017                                      | )          | (549 | ) |
| Proceeds from maturity of investments                                              |       | —                                      |       | 149,100 |   |
| Purchase of investments                                                            |       | —                                      |       | (148,219 | ) |
| Purchase of API manufacturing assets                                               |       | —                                      |       | (3,309 | ) |
| Net cash used in investing activities                                              |       | (4,762                                      | )          | (6,453 | ) |
|                                                                                    |            |                                             |            |  |  |  |  |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

 

6

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| ** **                                                                                                       | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                                                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Cash flows from financing activities:                                                                            |       |                                        |       |   |   |
| Proceeds from the exercise of stock options                                                                      |       | $                                           | 145        |   | $ | 1,603 |   |
| Remittance of employee tax liabilities in  exchange for common  stock tendered to the Company                    |       | (1,060                                      | )          | — |   |
| Proceeds from borrowings                                                                                         |       | 919                                         |       | 2,500 |   |
| Repayment of borrowings                                                                                          |       | (834                                        | )          | (2,550 | ) |
| Net cash (used in) provided by financing  activities                                                             |       | (830                                        | )          | 1,553 |   |
|                                                                                                             |       |                                        |       |   |   |
| Effect of exchange rate changes on cash                                                                          |       | (1,470                                      | )          | (317 | ) |
|                                                                                                             |       |                                        |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                            |       | 2,314                                       |       | (3,650 | ) |
|                                                                                                             |       |                                        |       |   |   |
| Cash and cash equivalents at beginning of  period                                                                |       | 34,230                                      |       | 39,393 |   |
|                                                                                                             |       |                                        |       |   |   |
| Cash and cash equivalents at end of period                                                                       |       | $                                           | 36,544     |   | $ | 35,743 |   |
|                                                                                                             |       |                                        |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information**                                                           |       |                                        |       |   |   |
| The Company paid cash during the period  for:                                                                    |       |                                        |       |   |   |
| Interest                                                                                                         |       | $                                           | 98         |   | $ | 106 |   |
| Foreign income taxes                                                                                             |       | $                                           | 1,260      |   | $ | 638 |   |
|                                                                                                             |       |                                        |       |   |   |
| **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                                                                                                           |       | 12                                          |       | 10 |   |
| Amount                                                                                                           |       | $                                           | 111        |   | $ | 129 |   |
|                                                                                                             |       |                                        |       |   |   |
| Amounts included in accounts payable at end  of period for fixed asset  and drug license purchases               |       | $                                           | 1,982      |   | $ | 1,539 |   |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

 

7

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements**

 

**History and Operations**

 

BentleyPharmaceuticals, Inc. and Subsidiaries (which may be referred to individually andcollectively asBentley Pharmaceuticals, Bentley, or the Company), headquartered in the U.S.,is an international specialty pharmaceutical company, incorporated in the Stateof Delaware, 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 135 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 35 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, theCompany purchased a manufacturing facility located in Zaragoza, Spain thatspecializes in the manufacture of active pharmaceutical ingredients. Thefacility has been approved by the U.S. Food and Drug Administration for themanufacture of one ingredient for marketing and sale in the U.S. The Companymanufactures and markets 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 February 2003.Testim, which incorporates Bentley’s CPE-215 drug delivery technology, is a gelindicated for low testosterone levels. Bentley continues to seek otherpharmaceutical and biotechnology companies to form additional strategicalliances to facilitate the development and commercialization of other productsusing its drug delivery technologies, including product formulations thatdeliver insulin to diabetic patients intranasally and that treat nail fungusinfections topically.

 

**Basisof Condensed Consolidated Financial Statements**

 

Thecondensed consolidated financial statements of Bentley Pharmaceuticals as of June 30,2005 and for the three and six months ended June 30, 2005 and 2004,included herein, have been prepared by the Company, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted insofar as such information was disclosed in theCompany’s consolidated financial statements for the year ended December 31,2004.  These condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto, including the summary ofsignificant accounting policies, included in Bentley’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

8

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Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements as of June 30, 2005 and for the three and six monthsended June 30, 2005 and 2004 are presented on a basis consistent with theaudited consolidated financial statements for the year ended December 31,2004 and contain all adjustments, consisting only of normal recurringadjustments, necessary to present fairly Bentley’s financial position as of June 30,2005 and the results of its operations and cash flows for the three and sixmonths ended June 30, 2005 and 2004. The results of operations for the three and six months ended June 30,2005 should not necessarily be considered indicative of the results to beexpected for the full year ending December 31, 2005 or any otherinterim period.

 

**Cashand 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 June 30, 2005 and December 31,2004 are approximately $10,759,000 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 $469,000 as of June 30,2005, 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 thefollowing (in thousands):

 
| ** **                                                                                                                              | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Trade receivables (of which $2,514 and  $2,754, respectively, collateralize short-term borrowings with Spanish  financial institutions) |       | $                      | 22,282     |                       | $          | 23,586 |   |
| VAT receivable                                                                                                                          |       | 2,885                  |       | 2,428                      |       |
| Royalties receivable                                                                                                                    |       | 2,405                  |       | 1,882                      |       |
| Other                                                                                                                                   |       | 272                    |       | 339                        |       |
|                                                                                                                                    |       | 27,844                 |       | 28,235                     |       |
| Less allowance for doubtful accounts                                                                                                    |       | (415                   | )          | (375                       | )          |
|                                                                                                                                    |       | $                      | 27,429     |                       | $          | 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 providedbased on historical experience and current product demand.

 

9

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Inventory balances arecomprised of the following (in thousands):

 
| ** **                               | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Raw materials                            |       | $                      | 6,846      |                       | $          | 5,953 |   |
| Finished goods                           |       | 4,889                  |       | 4,380                      |       |
|                                     |       | 11,735                 |       | 10,333                     |       |
| Less allowance for slow moving inventory |       | (66                    | )          | (75                        | )          |
|                                     |       | $                      | 11,669     |                       | $          | 10,258 |   |

 

**Fixed assets**

 

Fixedassets consist of the following (in thousands):

 
| ** **                    | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------|------------|------------------------|------------|----------------------------|------------|
| Land                          |       | $                      | 2,704      |                       | $          | 2,573 |   |
| Buildings and improvements    |       | 17,491                 |       | 16,076                     |       |
| Equipment                     |       | 15,551                 |       | 18,448                     |       |
| Furniture and fixtures        |       | 1,789                  |       | 1,850                      |       |
| Other                         |       | 107                    |       | 102                        |       |
|                          |       | 37,642                 |       | 39,049                     |       |
| Less accumulated depreciation |       | (8,517                 | )          | (8,200                     | )          |
|                          |       | $                      | 29,125     |                       | $          | 30,849 |   |

 

Inorder to support the Company’s growth in Europe, management is expanding thecapacity of its manufacturing facilities through a series of capitalinvestments. The Company invested approximately $3,745,000 in capitaladditions, including $367,000 for the purchase of land, during the six monthsended June 30, 2005.

 

Depreciation expense ofapproximately $172,000 and $147,000 has been charged to operations as acomponent of *depreciation and amortizationexpense* in the Consolidated Income Statements for the six monthsended June 30, 2005 and 2004, respectively. Depreciation totalingapproximately $1,649,000 and $1,011,000 has been included in *cost of net product sales* during the sixmonths ended June 30, 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 toother currencies, specifically the Euro. The exchange rates at June 30,2005 and December 31, 2004 were .83 Euros and .73 Euros per U.S. Dollar,respectively. The weighted average exchange rates for the three months ended June 30,2005 and 2004 were .79 Euros and .83 Euros per U.S. Dollar, respectively. Theweighted average exchange rates for the six months ended June 30, 2005 and2004 were .78 Euros and .82 Euros per U.S. Dollar, respectively. The net effectof foreign currency translation on the Company’s Condensed ConsolidatedFinancial Statements for the six months ended June 30, 2005 was a netdecrease of $7,125,000 and the cumulative historical effect as of June 30,2005 was $2,597,000, as reflected in the Consolidated Balance Sheets as *accumulated other**comprehensive income*. The carrying valueof assets and liabilities can be materially affected by foreign currencytranslation, as can the translated amounts of revenues and expenses.Nonetheless, management does not plan to modify its business practices.

 

During the six monthsended June 30, 2005, the Company issued approximately 12,000 shares ofCommon Stock as equity-based compensation in lieu of cash contributions to theCompany-sponsored 401(k) retirement savings plan. Certain employees and anindependent consultant were granted stock options to purchase an aggregate of669,500 shares of Common Stock in the six months ended June 30, 2005 atexercise prices ranging from $7.39 to $12.01 per share, which resulted in aweighted average exercise price of $8.47 per share.

 

10

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**Supplemental disclosures related to Consolidated Statements of CashFlows**

 

During the three months ended June 30, 2005,the Chief Executive Officer ("CEO"), the Chief Financial Officer("CFO") and the Chief Medical Officer ("CMO") of theCompany exercised stock options to purchase an aggregate of 476,000 shares ofthe Company's Common Stock. In satisfaction of the option exercise prices, theCompany received approximately $145,000 in cash proceeds and an aggregate ofapproximately 123,000 shares of previously acquired Bentley Common Stock, witha fair market value of approximately $1,359,000. The Company also received atotal of approximately 96,000 shares of Common Stock, with a fair market valueof approximately $1,060,000, from the three employees in order to satisfyminimum federal and statutory tax withholding requirements, which taxes werepaid by the Company during the quarter ended June 30, 2005. The shares ofCommon Stock acquired by the Company in connection with these stock optionexercises were recorded at fair market value and are held by the Company astreasury shares.

 

**Revenue recognition**

 

Revenue on product salesis recognized when persuasive evidence of an arrangement exists, the price isfixed and final, delivery has occurred and there is a reasonable assurance ofcollection of the sales proceeds. The Company generally obtains purchaseauthorizations from its customers for a specified amount of product at aspecified price and considers delivery to have occurred when the customer takespossession of the product. The Company provides its customers with a limitedright of return. Revenue is recognized upon delivery and a reserve for salesreturns is recorded when considered appropriate. The Company has demonstratedthe ability to make reasonable and reliable estimates of product returns inaccordance 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.

 

Revenue from service, researchand development, and licensing agreements is recognized when the serviceprocedures have been completed or as revenue recognition criteria have been metfor each separate unit of accounting as defined in Emerging Issues Task Force(EITF) Issue No. 00-21, *Accounting forRevenue Arrangements with Multiple Deliverables*.  The Company has deferred the recognition ofapproximately $2,755,000 and $2,147,000 of licensing revenues as of June 30,2005 and December 31, 2004, respectively, for which the earnings processhas not been completed.

 

Royaltyrevenues on Testim product sales are currently recognized based on an estimateof Auxilium’s sell-through of the Testim product based on prescriptionsdispensed. For the three and six months ended June 30, 2005, the Companyrecognized royalty revenues of $1,251,000 and $2,121,000, respectively,compared to $644,000 and $1,198,000 in the three and six months ended June 30,2004, respectively. Under SFAS No. 48, the Company cannot recognize itsroyalty revenues earned on product shipments of Testim until product returnsrelated to those shipments can be reasonably estimated. At such time theCompany expects to record a one-time increase in *licensingand collaboration revenues* related to the recognition of previouslydeferred royalty revenues. As of June 30, 2005 and December 31, 2004,deferred income from Testim royalties totaled $1,516,000 and $1,233,000,respectively.

 

# **Provisionfor income taxes**

# ** **

Spanishtax authorities completed a tax review of the Company’s Spanish subsidiary,Laboratorios Belmac S.A., during the second quarter of 2004 for the tax years1998, 1999 and 2000. As a result of this audit, the subsidiary was assessed anadditional tax liability of approximately $604,000, which was recorded as acomponent of *provision for income taxes*forthe three and six months ended June 30, 2004, and approximately $193,000for related interest and penalties, which was recorded as components of *other income (expenses)*, in the consolidated incomestatements for the three and six months ended June 30, 2004.

 

11

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Asa result of reporting taxable income in Spain, the Company recorded a provisionfor foreign income taxes totaling $1,554,000 and $2,441,000 ($1,837,000 incometax expense on operations plus $604,000 recorded as a result of the tax auditof the Company’s Spanish subsidiary) for the three months ended June 30,2005 and 2004, respectively. We have recorded provisions for foreign incometaxes totaling $3,144,000 and $3,361,000 ($2,757,000 when excluding the$604,000 tax audit settlement) for the six months ended June 30, 2005 and2004, respectively. The effective tax rate in Spain for the six months ended June 30,2005 and 2004 is 33% and 47% (39% when excluding the $604,000 tax auditsettlement), respectively.

 

As future domestic operating profits cannotbe reasonably assured, no tax benefit has been recorded for U.S. losses, whichtotaled $650,000 and $727,000 for the three months ended June 30, 2005 and2004, respectively, and $1,568,000 and $1,481,000 for the six months ended June 30,2005 and 2004, respectively. Accordingly, the Company has established avaluation allowance equal to the full amount of the U.S. deferred tax assets.The provisions for income taxes differ from the amounts computed by applyingthe U.S. federal income tax rate of 34% to pre-tax income, primarily as aresult of the increase in the valuation allowance to offset U.S. deferred taxassets, certain nondeductible expenses in Spain and the higher statutory incometax rate of 35% in Spain.

 

Should the Company determine that it is morelikely than not that it will realize certain of its deferred tax assets forwhich it had previously provided a valuation allowance, an adjustment would berequired to reduce the existing valuation allowance.

 

# **Basic anddiluted net income per common share**

# ** **

Basicand diluted net income per common share is based on the weighted average numberof shares of common stock outstanding during each period. The dilutive effectof outstanding stock options and stock purchase warrants, as calculated usingthe treasury stock method, were considered in the net income per sharecalculations for the three and six months ended June 30, 2005 and 2004.

 

Thefollowing is a reconciliation between basic and diluted net income per commonshare for the three and six months ended June 30, 2005 and 2004.  Dilutive securities issuable for the threeand six months ended June 30, 2005 include approximately 1,208,000 and1,212,000 dilutive incremental shares, respectively, issuable as a result ofvarious stock options that are outstanding. Dilutive securities issuable forthe three and six months ended June 30, 2004 included approximately2,156,000 and 2,167,000 dilutive incremental shares, respectively, issuable asa result of various stock options and warrants that were outstanding.

 

Forthe Three Months Ended June 30, 2005 (in thousands, except per sharedata):

 
| ** **                                 | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------------|------------|
| Net Income                                 |       | $             | 2,608      | * *                           | $          | *—*        |       | $ | 2,608 |   |
| Weighted Average Common Shares Outstanding |       | 21,395        |       | 1,208                              |       | 22,603          |       |
| Net Income Per Common Share                |       | $             | 0.12       | * *                           | $          | *—*        |       | $ | 0.12 |   |

 

Forthe Three Months Ended June 30, 2004 (in thousands, except per sharedata):

 
| ** **                                 | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------------|------------|
| Net Income                                 |       | $             | 1,490      | * *                           | *$*        | *—*        |       | $ | 1,490 |   |
| Weighted Average Common Shares Outstanding |       | 20,644        |       | 2,156                              |       | 22,800          |       |
| Net Income Per Common Share                |       | $             | 0.07       | * *                           | *$*        | *—*        |       | $ | 0.07 |   |

 

12

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Forthe Six Months Ended June 30, 2005 (in thousands, except per share data):

 
| ** **                                 | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------------|------------|
| Net Income                                 |       | $             | 4,778      | * *                           | $          | *—*        |       | $ | 4,778 |   |
| Weighted Average Common Shares Outstanding |       | 21,356        |       | 1,212                              |       | 22,568          |       |
| Net Income Per Common Share                |       | $             | 0.22       | * *                           | $          | (0.01           | )          | $ | 0.21 |   |

 

Forthe Six Months Ended June 30, 2004 (in thousands, except per share data):

 
| ** **                                 | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------------|------------|
| Net Income                                 |       | $             | 2,298      | * *                           | *$*        | *—*        |       | $ | 2,298 |   |
| Weighted Average Common Shares Outstanding |       | 20,620        |       | 2,167                              |       | 22,787          |       |
| Net Income Per Common Share                |       | $             | 0.11       |                               | $          | (0.01           | )          | $ | 0.10 |   |

 

Excluded from the dilutedearnings per share presentation, because their exercise prices were greaterthan the average fair value of the Common Stock in the respective periods, wereoptions to purchase an aggregate of approximately 1,741,000 shares of CommonStock, for the three and six months ended June 30, 2005, respectively, andoptions and warrants to purchase an aggregate of 468,000 shares of CommonStock, for the three and six months ended June 30, 2004.

 

**Equity-based compensation**

 

TheCompany has equity-based employee compensation plans that are described morefully in Note 11 of the Notes to Consolidated Financial Statements included inthe Annual Report on Form 10-K for the year ended December 31,2004.  The Company currently accounts forthese plans under the recognition and measurement principles of AccountingPrinciples Board (APB) Opinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations.  However, the Company is required to adoptSFAS No. 123 (Revised), *Share-Based Payment*as of January 1, 2006, which will change the method the Company uses toaccount for its equity-based compensation. Stock options granted under theseplans have exercise prices equal to or greater than the market value of theunderlying common stock on the dates of grant, which is generally the date onwhich compensation is measured. In addition to these plans, the Company alsosponsors a 401(k) Plan for eligible employees and matches eligiblecontributions with shares of the Company’s Common Stock.

 

Aspreviously disclosed, the Company acquired shares of Common Stock from certainemployees in connection with stock option exercises during the three monthsended June 30, 2005. In accordance with APB Opinion No. 25 and FASBInterpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation*, no compensation expensewas recorded as a result of these transactions. Although the ultimatedisposition of these treasury shares has not yet been determined, the Companyhas elected to follow the accounting treatment prescribed for the retirement ofstock, which has resulted in a reduction of *additional paid-in capital*in the Consolidated Balance Sheet as of June 30, 2005 for the$2,418,000 fair market value of the common stock shares acquired.

 

13

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Generaland administrative expenses for the three and six months ended June 30,2005 include approximately $32,000 and $44,000, respectively, of non-cashequity-based compensation. General and administrative expenses for the threeand six months ended June 30, 2004 include approximately $15,000 and$47,000, respectively, of non-cash equity-based compensation. Research anddevelopment expenses for the three and six months ended June 30, 2005include approximately $23,000 and $70,000, respectively, of non-cashequity-based compensation. Research and development expenses for the three andsix months ended June 30, 2004 include approximately $41,000 and $82,000,respectively, of non-cash equity-based compensation. Included in equity basedcompensation in the six months ended June 30, 2005 is approximately$111,000, representing approximately 12,000 shares of Common Stock issued tothe Company-sponsored 401(k) retirement savings plan in lieu of cashcontributions.

 

The following tableillustrates the effect on net income per share if the Company had applied thefair value recognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to equity-based employee compensation(in thousands, except per share data):

 
| ** **                                                                                                  | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                     |       | $                                             | 2,608      |                                        | $          | 1,490 |   | $ | 4,778 |   | $ | 2,298 |   |
| Add: Equity-based employee compensation  expense included in reported net income                            |       | 55                                            |       | 56                                          |       | 114 |   | 129 |   |
| Deduct: Total equity-based employee  compensation expense determined under fair value method for all awards |       | (763                                          | )          | (596                                        | )          | (1,333 | ) | (1,720 | ) |
| Pro forma net income                                                                                        |       | $                                             | 1,900      |                                        | $          | 950 |   | $ | 3,559 |   | $ | 707 |   |
|                                                                                                        |       |                                          |       |                                        |       |   |   |   |   |
| Net income per common share:                                                                                |       |                                          |       |                                        |       |   |   |   |   |
|                                                                                                        |       |                                          |       |                                        |       |   |   |   |   |
| Basic - as reported                                                                                         |       | $                                             | 0.12       |                                        | $          | 0.07 |   | $ | 0.22 |   | $ | 0.11 |   |
| Basic - pro forma                                                                                           |       | $                                             | 0.09       |                                        | $          | 0.05 |   | $ | 0.17 |   | $ | 0.03 |   |
|                                                                                                        |       |                                          |       |                                        |       |   |   |   |   |
| Diluted - as reported                                                                                       |       | $                                             | 0.12       |                                        | $          | 0.07 |   | $ | 0.21 |   | $ | 0.10 |   |
| Diluted - pro forma                                                                                         |       | $                                             | 0.08       |                                        | $          | 0.04 |   | $ | 0.16 |   | $ | 0.03 |   |

 

The preceding pro formaresults were calculated using the Black-Scholes option pricing model with thefollowing weighted average assumptions (results may vary depending on theassumptions applied within the model):

 
| ** **                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                          |       |                                        |       |   |   |   |   |
| Risk-free interest rate       |       | 3.56%                                         |       | 2.10%                                       |       | 3.82% |   | 2.97% |   |
| Dividend yield                |       | 0.00%                                         |       | 0.00%                                       |       | 0.00% |   | 0.00% |   |
| Expected life                 |       | 5 years                                       |       | 5 years                                     |       | 5 years |   | 5 years |   |
| Volatility                    |       | 45.02%                                        |       | 50.49%                                      |       | 45.25% |   | 49.28% |   |
| Fair value of options granted |       | $4.17                                         |       | $5.70                                       |       | $3.73 |   | $6.03 |   |

 

**Reclassifications**

 

Certain prior perioddepreciation amounts have been reclassified from *operatingexpenses* to *cost of net product sales*to conform with the current period’s presentation.  Such reclassifications are not material tothe Condensed Consolidated Financial Statements.

 

14

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**New Accounting Pronouncements**

 

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised),*Share-Based Payment*. This Statement is arevision of SFAS No. 123, *Accounting for Stock-BasedCompensation*, and will supersede APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and its relatedimplementation guidance.  SFAS No. 123(Revised) focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. The Statementwill require entities to recognize stock compensation expense for awards ofequity instruments to employees based on the grant-date fair value of thoseawards (with limited exceptions). On April 14, 2005, the Securities andExchange Commission delayed the effective date of SFAS No. 123 (Revised)to the beginning of the first fiscal year after June 15, 2005. As aresult, the Company anticipates adopting SFAS No. 123 (Revised) on January 1,2006. Management is evaluating the two methods of adoption allowed by SFAS No. 123(Revised), the modified-prospective transition method and themodified-retrospective transition method, and the related impact on itsConsolidated Financial Statements. Adoption of this Statement will havea significant impact on the Company’s results of operations, although it willnot have any material impact on the Company’s overall financial position orcash flows.

 

15

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# **Item 2.**                     Management’s Discussion and Analysis of Financial Condition and Results ofOperations

# ** **

Youshould read the following discussion and analysis together with all financialand non-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 hasbeen previously 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**

 

Weare 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.

 

*Brandedand Generic Pharmaceuticals*

 

Ourpharmaceutical product sales activities are based in Spain, where we have asignificant commercial presence and we manufacture and market approximately 135pharmaceutical products.  Our productsinclude various dosage strengths and product formulations of more than 35chemical entities in four primary therapeutic areas: cardiovascular,gastrointestinal, neurological and infectious diseases. In 2004 approximately30% of our product revenues were derived from two of our product lines. Wemarket our branded and generic products to physicians and pharmacists throughour 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 othergeographic regions through strategic alliances with other generic companies anddistributors in these territories.  Wealso target markets that offer compatible regulatory approval regimes andattractive product margins.

 

Wealso expect to grow our business by acquiring or licensing additional productsto sell through our organization and our strategic alliances. We continuallyacquire rights to new products in response to increasing market demand forgeneric and branded therapeutic products and, when appropriate, we divestproducts that we consider to be redundant or that have becomenon-strategic.  For example, in November 2004,we entered into a collaboration agreement with Perrigo Company, the largestU.S. manufacturer of over-the-counter pharmaceutical and nutritional productsfor the store brand market, to co-develop and market in the U.S. andpotentially other markets selected generic pharmaceutical products that weproduce in Spain.

 

Wealso manufacture pharmaceuticals for other drug companies.  In April 2004, we purchased amanufacturing facility located in Spain that specializes in the manufacture ofactive pharmaceutical ingredients. The facility has been approved by the FDAfor the manufacture of one ingredient for marketing and sale in the U.S. We aremanufacturing and marketing these ingredients through our subsidiary, BentleyAPI.  In addition, our Spanish pharmaceuticalproduct manufacturing facility produces pharmaceutical products that aremarketed by other pharmaceutical companies both in Spain and in otherinternational markets.

 

16

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*ProprietaryDrug Delivery Technologies and Products*

 

Wedevelop products that incorporate our drug delivery technologies that we havedeveloped in the United States.  We havelicensed applications of our proprietary CPE-215 drug delivery technology toAuxilium Pharmaceuticals, Inc., which launched Testim, the first productincorporating our CPE-215 drug delivery technology, in the United States in February 2003.  Testim is a gel indicated for lowtestosterone levels.  Testim was launchedin Germany in January 2005 and in the United Kingdom in April 2005.On April 25, 2005, we announced that we had entered into a licenseagreement with Dong Sung Pharm. Co. Ltd. for the development of an intranasalspray formulation of insulin for the South Korean market and possiblyadditional territories. On May 2, 2005 we announced the discovery andsynthesis of a thermodynamically stable, biodegradable NanocapletTMtechnology for the delivery of macromolecule therapeutics as a result of afour-year sponsored research collaboration with the University of NewHampshire.  We are also in discussionswith other pharmaceutical and biotechnology companies to form additionalstrategic alliances to facilitate the development and commercialization ofother products using our drug delivery technologies, including productformulations to treat nail fungus infections topically.

 

**RESULTS OF OPERATIONS:**

 

**Three Months Ended June 30, 2005 versus ThreeMonths Ended June 30, 2004**

 

*Revenues*

 
| ** **                              | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**                      | ** ** | **2005**                                     | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net  product sales*                    | * *   | *$*                                          | *23,433*   | * *   | *95*       | *%* | *$* | *17,407* | * * | *94* | *%* | *$* | *6,026* | * * | *35* | *%* |
| *Licensing  and collaboration revenues* | * *   | *1,331*                                      | * *   | *5*        | *%*        | *1,063* | * * | *6* | *%* | *268* | * * | *25* | *%* |
| *Total  revenues*                       | * *   | *$*                                          | *24,764*   | * *   | *100*      | *%* | *$* | *18,470* | * * | *100* | *%* | *$* | *6,294* | * * | *34* | *%* |

 

Totalrevenues for the three months ended June 30, 2005 increased 34% from thesame period in the prior year, or 29% when expressed in constant currency. Anincrease in the weighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of increasing second quarter 2005 revenues by approximately$998,000 compared to the second quarter of 2004. In addition to the favorableimpact of currency, our current period growth was driven primarily by increasedsales to licensees and others, strong sales of omeprazole and simvastatin andsales of active pharmaceutical ingredients (API) from our API manufacturingfacility that we purchased in April 2004 (included in “*All other Products”* in the table below). Our growing royaltystream from sales of Testim, the first marketed product incorporating our CPE-215drug delivery technology, contributed approximately $1,251,000 to our licensingand collaboration revenues inthe three months ended June 30, 2005, compared to $644,000 in the secondquarter of the prior year.

 

Ourrevenues are generated through our primary sales channels of brandedpharmaceuticals, generic pharmaceuticals, sales to licensees and others andlicensing and collaboration revenues. The following is a summary of ourrevenues by sales channel and top-selling product lines:

 

17

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Forthe three months ended June 30, 2005:

 
| **(in thousands)**               | ** ** | **Revenues Within Spain** | ** ** | **Revenues** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------|------------|---------------------------|------------|--------------|------------|------------|------------|----------------|------------|
| ** **                       | ** ** | **Branded**               | ** ** | **Generic**  | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**                 | ** ** | **Products**              | ** ** | **Products** | ** ** | **Other**  | ** ** | **Spain**      | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                       | *734*      | * *     | *$*        | *4,134*    | * *   | *$*            | *—*   | * * | *$* | *—* | * * | *$* | *4,868* | * * | *19* | *%* |
| *Simvastatin*                    | * *   | *425*                     | * *   | *1,345*      | * *   | *—*   | * *   | *—*       | * *   | *1,770* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *1,226*                   | * *   | *447*        | * *   | *—*   | * *   | *—*       | * *   | *1,673* | * * | *7* | *%* |
| *Paroxetine*                     | * *   | *353*                     | * *   | *812*        | * *   | *—*   | * *   | *—*       | * *   | *1,165* | * * | *5* | *%* |
| *Pentoxifylline*                 | * *   | *—*                  | * *   | *707*        | * *   | *—*   | * *   | *—*       | * *   | *707* | * * | *3* | *%* |
| *All other  products*            | * *   | *2,886*                   | * *   | *1,713*      | * *   | *73*       | * *   | *439*          | * *   | *5,111* | * * | *21* | *%* |
| *Sales to  licensees and others* | * *   | *—*                  | * *   | *—*     | * *   | *3,563*    | * *   | *4,576*        | * *   | *8,139* | * * | *33* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                  | * *   | *—*     | * *   | *75*       | * *   | *1,256*        | * *   | *1,331* | * * | *5* | *%* |
| *Total  Revenues*                | * *   | *$*                       | *5,624*    | * *     | *$*        | *9,158*    | * *   | *$*            | *3,711*    | * * | *$* | *6,271* | * * | *$* | *24,764* | * * | *100* | *%* |
| *% of Q-2  2005 Revenues*        | * *   | *23*                      | *%*        | *37*         | *%*        | *15*       | *%*        | *25*           | *%*        | *100* | *%* | * * | * * |

 

Forthe three months ended June 30, 2004:

 
| **(in thousands)**               | ** ** | **Revenues Within Spain** | ** ** | **Revenues** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------|------------|---------------------------|------------|--------------|------------|------------|------------|----------------|------------|
| ** **                       | ** ** | **Branded**               | ** ** | **Generic**  | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**                 | ** ** | **Products**              | ** ** | **Products** | ** ** | **Other**  | ** ** | **Spain**      | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                       | *647*      | * *     | *$*        | *3,204*    | * *   | *$*            | *—*   | * * | *$* | *—* | * * | *$* | *3,851* | * * | *21* | *%* |
| *Simvastatin*                    | * *   | *354*                     | * *   | *868*        | * *   | *—*   | * *   | *—*       | * *   | *1,222* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *893*                     | * *   | *327*        | * *   | *—*   | * *   | *—*       | * *   | *1,220* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *228*                     | * *   | *765*        | * *   | *—*   | * *   | *—*       | * *   | *993* | * * | *5* | *%* |
| *Pentoxifylline*                 | * *   | *—*                  | * *   | *587*        | * *   | *—*   | * *   | *—*       | * *   | *587* | * * | *3* | *%* |
| *All other  products*            | * *   | *2,143*                   | * *   | *1,058*      | * *   | *88*       | * *   | *177*          | * *   | *3,466* | * * | *19* | *%* |
| *Sales to  licensees and others* | * *   | *—*                  | * *   | *—*     | * *   | *2,304*    | * *   | *3,764*        | * *   | *6,068* | * * | *33* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                  | * *   | *—*     | * *   | *419*      | * *   | *644*          | * *   | *1,063* | * * | *6* | *%* |
| *Total  Revenues*                | * *   | *$*                       | *4,265*    | * *     | *$*        | *6,809*    | * *   | *$*            | *2,811*    | * * | *$* | *4,585* | * * | *$* | *18,470* | * * | *100* | *%* |
| *% of Q-2  2004 Revenues*        | * *   | *23*                      | *%*        | *37*         | *%*        | *15*       | *%*        | *25*           | *%*        | *100* | *%* | * * | * * |

 

*Spanish Operations.*    The core of our Spanishoperations has been the efficient manufacturing and in-country marketing ofbranded and generic pharmaceutical products. Historically, our pharmaceutical products were sold only withinSpain.  However, the execution of ourlong-term strategic plan over the past several years has created an opportunityfor our Spanish operations to expand beyond the borders of Spain into otherEuropean countries and other countries outside of Europe. The increase insecond quarter 2005 product sales is due primarily to: (1) an increase insales to licensees and others totaling $2,071,000; (2) an increase insales of our three top selling product lines (omeprazole, simvastatin andenalapril) totaling $2,018,000; and (3) an increase in the weightedaverage value of the Euro, in relationto the U.S. Dollar totaling $995,000.

 

*Branded Pharmaceutical Products*

 
| ** **                    | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**            | ** ** | **2005**                                     | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Branded  Product Sales:*     | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Enalapril*                   | * *   | *$*                                          | *1,226*    | * *   | *22*       | *%* | *$* | *893* | * * | *21* | *%* | *$* | *333* | * * | *37* | *%* |
| *Omeprazole*                  | * *   | *734*                                        | * *   | *13*       | *%*        | *647* | * * | *15* | *%* | *87* | * * | *13* | *%* |
| *Codeisan*                    | * *   | *628*                                        | * *   | *11*       | *%*        | *608* | * * | *14* | *%* | *20* | * * | *3* | *%* |
| *Lansoprazole*                | * *   | *486*                                        | * *   | *9*        | *%*        | *—* | * * | *0* | *%* | *486* | * * | * * | *** |
| *Simvastatin*                 | * *   | *425*                                        | * *   | *7*        | *%*        | *354* | * * | *8* | *%* | *71* | * * | *20* | *%* |
| *All other  branded products* | * *   | *2,125*                                      | * *   | *38*       | *%*        | *1,763* | * * | *42* | *%* | *362* | * * | *21* | *%* |
| *Total  branded sales*        | * *   | *$*                                          | *5,624*    | * *   | *100*      | *%* | *$* | *4,265* | * * | *100* | *%* | *$* | *1,359* | * * | *32* | *%* |

 

----

** Not meaningful*

 

18

----

 

 

 

Salesof our branded pharmaceutical products increased by 32% during the three monthsended June 30, 2005 compared to the three months ended June 30,2004.  An increase in the weightedaverage value of the Euro over the past year, in relation to the U.S. Dollar, had the effect of increasingbranded product sales by approximately $254,000 in the second quarter of2005.  Sales of lansoprazole, which waslaunched in December 2004, accounted for 9% of our branded pharmaceuticalrevenues during the three months ended June 30, 2005 and 36% of theincrease in our branded sales. We also experienced increased sales of ourbranded enalapril and omeprazole, which together accounted for 31% of theincrease in our branded sales in the three months ended June 30, 2005. Whilewe expect to continue to develop, acquire, launch and support new and existingbranded products, our focus on generics and sales outside of Spain are expectedto increase those revenues at a significantly higher pace than that of ourbranded products.

 

*Generic Pharmaceutical Products*

 
| ** **                   | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**           | ** ** | **2005**                                     | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic Product Sales:*     | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                 | * *   | *$*                                          | *4,134*    | * *   | *45*       | *%* | *$* | *3,204* | * * | *47* | *%* | *$* | *930* | * * | *29* | *%* |
| *Simvastatin*                | * *   | *1,345*                                      | * *   | *15*       | *%*        | *868* | * * | *13* | *%* | *477* | * * | *55* | *%* |
| *Paroxetine*                 | * *   | *812*                                        | * *   | *9*        | *%*        | *765* | * * | *11* | *%* | *47* | * * | *6* | *%* |
| *Pentoxifylline*             | * *   | *707*                                        | * *   | *8*        | *%*        | *587* | * * | *9* | *%* | *120* | * * | *20* | *%* |
| *Trimetazidine*              | * *   | *595*                                        | * *   | *6*        | *%*        | *441* | * * | *6* | *%* | *154* | * * | *35* | *%* |
| *All other generic products* | * *   | *1,565*                                      | * *   | *17*       | *%*        | *944* | * * | *14* | *%* | *621* | * * | *66* | *%* |
| *Total generic sales*        | * *   | *$*                                          | *9,158*    | * *   | *100*      | *%* | *$* | *6,809* | * * | *100* | *%* | *$* | *2,349* | * * | *34* | *%* |

 

Salesof our generic pharmaceutical products increased by 34% during the three monthsended June 30, 2005, compared to the three months ended June 30,2004.  An increase in the weightedaverage value of the Euro over the past year, in relation to the U.S. Dollar, had the effect of increasinggeneric product sales by approximately $399,000 in the second quarter of 2005.Strong sales of our generic omeprazole accounted for 40% of our increase ingeneric pharmaceutical sales in the second quarter of 2005. Strong sales of ourgeneric simvastatin, which grew by 55%, accounted for 20% of our increase ingeneric pharmaceutical product sales.  Weexpect to continue to increase our generic drug portfolio and increase ourgeneric drug sales in Spain as products come off patent in the future.

 

TheSpanish Ministry of Health has proposed a plan for nationwide expansion of aregional practice of filling prescriptions with one of the lowest-pricedgenerics then available if a prescription does not specify a brand nameor laboratory name.  This proposal, if enacted, will not requiregovernment-mandated price reductions as in the past.  We constantly monitor the market, prices andour competitors’ activities, and occasionally adjust prices for competitivepurposes. We do not anticipate that this proposal will materially affect our2005 revenues or profits because we expect that any voluntary downwardadjustment in our selling prices will be offset by increases in volume and thebenefits of other strategies we have adopted.

 

*Sales to Licensees and Others*

 
| ** **                      | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**              | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                        | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * |
| *Sales to licensees and others* | * *   | *$*                                          | *8,139*    | * *   | *$*        | *6,068* | * * | *$* | *2,071* | * * | *34* | *%* |
|                                 |            |                                              |            |            |            |  |  |  |  |  |  |  |

 

Inaddition to manufacturing and selling our own branded and generic products, welicense the right to market products to others within and outside ofSpain.  These license agreements areusually accompanied by long-term exclusive supply agreements, whereby ourlicensees purchase the licensed products from our manufacturing facility (whichare recorded as *net product sales* in theConsolidated Income Statements).  OurSpanish subsidiaries have executed a total of 141 license agreements. While 62of these agreements

 

19

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arepending regulatory approvals (two within Spain and 60 outside of Spain), 79 ofthese agreements (17 within Spain and 62 outside of Spain) cover activelymarketed products that are generating revenues. Additionally, we have 16contract manufacturing agreements in effect in Spain and 6 contractmanufacturing agreements in effect for international customers. Our licenseesmarket these products under their own names and with their own labeling.  Many of the products we manufacture forothers use the same active ingredients that are used in our own marketedproducts.  Sales to licensees and othersin the three months ended June 30, 2005 increased 34% when compared to theprior year period, or 29% in constant currency. An increase in the weighted average value of the Euro over the pastyear, in relation to the U.S. Dollar, had the effect of increasing our revenuesfrom sales to licensees and others by approximately $313,000.

 

*Licensing and Collaboration Revenues.*    Licensing and collaboration revenues increased by 25% and accounted for5% of total revenues for the three month period ended June 30, 2005 and 6%for the three month period ended June 30, 2004.  These revenues include royalties ofapproximately $1,251,000 in the three months ended June 30, 2005 (comparedto $644,000 in the second quarter of the prior year) from the commercializationand continuing sales of Testim.

 

*Gross Profit.*    Grossprofit increased by approximately $3,392,000, or 34%, in the three months endedJune 30, 2005, when compared to the three months ended June 30,2004.  Gross margins on net product saleswere 51.5% in the three months ended June 30, 2005 compared to 51.4% inthe three months ended June 30, 2004. A charge of approximately $415,000 has been accrued as a result of a newpharmaceutical tax that was enacted in the first quarter of 2005 and isincluded in gross profit in the three months ended June 30, 2005.

 

*Selling and Marketing Expenses*

 
| ** **              | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * |
| *Selling and marketing* | * *   | *$*                                          | *4,223*    | * *   | *$*        | *3,851* | * * | *$* | *372* | * * | *10* | *%* |
|                         |            |                                              |            |            |            |  |  |  |  |  |  |  |

 

Sellingand marketing expenses for the three months ended June 30, 2005 increasedby $372,000 or 10% from the same period in the prior year when expressed inU.S. Dollars; however, 49% of the increase is a result of the increase in the weighted average value ofthe Euro over the past year, in relation to the U.S. Dollar, which had theeffect of increasing selling and marketing expenses by approximately $184,000in the three months ended June 30, 2005. Increased sales force costs,primarily sales commissions resulting from our growing product sales, accountfor the remaining increase in selling and marketing expenses. As a percentageof net product sales, selling and marketing expenses decreased from 22% in thethree months ended June 30, 2004, to 18% in the three months ended June 30,2005.

 

*General and Administrative Expenses*

 
| ** **                   | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**           | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                     | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * |
| *General and administrative* | * *   | *$*                                          | *3,018*    | * *   | *$*        | *2,287* | * * | *$* | *731* | * * | *32* | *%* |
|                              |            |                                              |            |            |            |  |  |  |  |  |  |  |

 

Generaland administrative expenses for the three months ended June 30, 2005increased 32% over the same period in the prior year.  The $731,000 increase was the result ofincreased general and administrative activities required to support ourcontinued growth and prepare for our anticipated future growth. Theseexpenditures include increased costs in the current year for additionalemployees, insurance and other costs to support the growth of our organization,as well as costs associated with maintaining compliance with the provisions ofthe Sarbanes-Oxley Act of 2002 and other corporate governance regulationsincluding legal, accounting and other outside service fees. General andadministrative expenses as a percent of total revenues remained relativelyconsistent at approximately 12.2% for the three months ended June 30,2005, compared to approximately 12.4% of total revenues in the three monthsended June 30, 2004.  General andadministrative expenses would have been approximately $66,000 lower, absent the

 

20

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increasein the weighted average value of the Euro, in relation to the U.S. Dollar overthe past year. We expect that our future expenditures for general andadministrative expenses will continue to increase as we grow our business.

 

*Research and Development Expenses*

 
| ** **                 | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**         | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                   | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * |
| *Research and development* | * *   | *$*                                          | *1,608*    | * *   | *$*        | *946* | * * | *$* | *662* | * * | *70* | *%* |
|                            |            |                                              |            |            |            |  |  |  |  |  |  |  |

 

Researchand development expenses have increased 70% in the three months ended June 30,2005 to $1,608,000 when compared to the second quarter of 2004.  The increase is directly attributed to theadvancement of our research and development programs. In the first quarter of2004, we completed and reported the results of a Phase I intranasal insulintrial. Our Phase I trial demonstrated the effective delivery of insulinintranasally in healthy human subjects. In April 2005 we announced that wecompleted the data analysis stage of our Phase II study for the intranasaldelivery of insulin which we had concluded in December 2004. We reported the results of that trialin an abstract titled “Intranasal Insulin Administration in Type I DiabeticPatients Utilizing CPE-215 Technology” at the American Diabetes Association65th Scientific Sessions, June 10-14, 2005, in San Diego, California.Additionally, we are continuing our clinical programs to support our strategyfor the eventual distribution of certain of our Spanish generic pharmaceuticalproducts in other countries, including the U.S. In order to further ourstrategy, we entered into a 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 in both thechemistry, manufacturing and controls (CMC) and nonclinical animal studies. Wealso expect to incur costs associated with the acquisition and/or developmentof new or improved drug delivery technologies as evidenced by our May 2,2005 announcement of the discovery and synthesis of a thermodynamically stable,biodegradable NanocapletTM technology for the delivery ofmacromolecule therapeutics. The expenditures in research and developmentreflect our focus on projects that are necessary for expansion of our portfolioof marketed products and clinical trials involving our drug deliverytechnologies. Although some of our cost estimates are preliminary, and thespecific timing is subject to change, we project that our research anddevelopment expenses in 2005 could be approximately $1,500,000 higher than in2004.

 

*Other Income (Expenses)*

 
| ** **                | ** ** | **For the Three Months Ended June 30,** | ** ** | **Change** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|------------|------------|
| **(in thousands)**        | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                  | * *   | * *                                     | * *   | * *   | * *   | * * | * * | * * | * * |
| *Other income (expenses)* | * *   | *$*                                          | *173*      | * *   | *$*        | *1,348* | * * | *$* | *(1,175* | *)* | *-87* | *%* |
|                           |            |                                              |            |            |            |  |  |  |  |  |  |  |

 

Otherincome (expenses) for the three months ended June 30, 2005 decreased by$1,175,000 from the same period in the prior year. In the second quarter of theprior year, we reversed previously accrued tax assessments totaling $1,467,000,partially offset by interest and penalties totaling $193,000 associated withthe settlement of the tax audit of our Spanish subsidiary. As a result, werecorded a pre-tax benefit totaling $1,467,000 ($954,000 after taxes) as acomponent of other income and expenses in the second quarter of the prior year.

 

21

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*Provision for Income Taxes*  

 
| ** **                             | ** ** | **For the Three Months Ended June 30, 2005** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **Spain**                                         | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| * *                               | * *   | * *                                          | * *   | * * | * * | * * | * * |
| *Income (loss) before income taxes*    | * *   | *$*                                               | *4,812*    | * * | *$* | *(650* | *)* | *$* | *4,162* | * * |
| * *                               | * *   | * *                                          | * *   | * * | * * | * * | * * |
| *Provision (benefit) for income taxes* | * *   | *1,554*                                           | * *   | *(332* | *)* | *1,222* | * * |
| *Valuation allowance*                  | * *   | *—*                                          | * *   | *332* | * * | *332* | * * |
| * *                               | * *   | * *                                          | * *   | * * | * * | * * | * * |
| *Net provision for income taxes*       | * *   | *1,554*                                           | * *   | *—* | * * | *1,554* | * * |
| * *                               | * *   | * *                                          | * *   | * * | * * | * * | * * |
| *Net income (loss)*                    | * *   | *$*                                               | *3,258*    | * * | *$* | *(650* | *)* | *$* | *2,608* | * * |
| * *                               | * *   | * *                                          | * *   | * * | * * | * * | * * |
| *Effective tax rate*                   | * *   | *32*                                              | *%*        | *0* | *%* | *37* | *%* |

 

Asa result of reporting taxable income in Spain, we recorded a provision forforeign income taxes totaling $1,554,000 and $2,441,000 ($1,837,000 income taxexpense on operations plus $604,000 recorded as a result of the tax audit ofour Spanish subsidiary) for the three months ended June 30, 2005 and 2004,respectively.  The effective tax rate inSpain for the three months ended June 30, 2005 is 32% compared to 52% inthe prior year second quarter (39% excluding the $604,000 tax auditsettlement). The provision for foreign income taxes would have beenapproximately $74,000 lower than reported, absent the increase in the weightedaverage value of the Euro over the past year, in relation to the U.S. Dollar.

 

Wegenerated additional U.S. federal net operating loss carry-forwards in thethree months ended June 30, 2005 and 2004 as a result of U.S. pretaxlosses of $650,000 and $727,000, respectively. Although we expect to achieveprofitable U.S. operations in the future, any future domestic operating profitscannot be reasonably assured; consequently, no tax benefit has been recordedfor U.S. losses. Accordingly, we have established a valuation allowance equalto the full amount of the U.S. deferred tax assets.

 

*Net Income*

 
| ** **                                    | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **(in thousands, except per share  data)**    | ** ** | **2005**                                      | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                      | * *   | * *                                      | * *   | * *   |       | * * | * * | * * | * * |
| *Net income*                                  | * *   | *$*                                           | *2,608*    | * *   | *$*        | *1,490* |   | *$* | *1,118* | * * | *75* | *%* |
| * *                                      | * *   | * *                                      | * *   | * *   |       | * * | * * | * * | * * |
| *Net income per common share:*                | * *   | * *                                      | * *   | * *   |       | * * | * * | * * | * * |
| *Basic*                                       | * *   | *$*                                           | *0.12*     | * *   | *$*        | *0.07* |   | *$* | *0.05* | * * | *71* | *%* |
| *Diluted*                                     | * *   | *$*                                           | *0.12*     | * *   | *$*        | *0.07* |   | *$* | *0.05* | * * | *71* | *%* |
| * *                                      | * *   | * *                                      | * *   | * *   |       | * * | * * | * * | * * |
| *Weighted average common shares outstanding:* | * *   | * *                                      | * *   | * *   |       | * * | * * | * * | * * |
| *Basic*                                       | * *   | *21,395*                                      | * *   | *20,644*   |       | *751* | * * | *4* | *%* |
| *Diluted*                                     | * *   | *22,603*                                      | * *   | *22,800*   |       | *(197* | *)* | *-1* | *%* |

 

We reported incomefrom operations of $3,989,000 in the three months ended June 30, 2005 comparedto $2,583,000 in the three months ended June 30, 2004, which is an increase of54%. The combination of income from operations of $3,989,000 and thenon-operating items, primarily the provision for income taxes of $1,554,000,resulted in net income of $2,608,000, or $0.12 per basic common share ($0.12per diluted common share) on 21,395,000 weighted average basic common sharesoutstanding (22,603,000 weighted average diluted common shares outstanding) inthe three months ended June 30, 2005, compared to net income of $1,490,000, or$0.07 per basic common share ($0.07 per diluted common share) on 20,644,000weighted average basic common shares outstanding (22,800,000 weighted averagediluted common shares outstanding) in the same period of the prior year.

 

22

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**SixMonths Ended June 30, 2005 versus Six Months Ended June 30, 2004**

 

*Revenues*

 
| ** **                             | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**                     | ** ** | **2005**                                   | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| * *                               | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net product sales*                    | * *   | *$*                                        | *46,712*   | * *   | *95*       | *%* | *$* | *34,013* | * * | *95* | *%* | *$* | *12,699* | * * | *37* | *%* |
| *Licensing and collaboration revenues* | * *   | *2,296*                                    | * *   | *5*        | *%*        | *1,759* | * * | *5* | *%* | *537* | * * | *31* | *%* |
| *Total revenues*                       | * *   | *$*                                        | *49,008*   | * *   | *100*      | *%* | *$* | *35,772* | * * | *100* | *%* | *$* | *13,236* | * * | *37* | *%* |

 

Totalrevenues for the six months ended June 30, 2005 increased 37% from thesame period in the prior year, or 31% when expressed in constant currency. Anincrease in the weighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of increasing year-to-date 2005 revenues by approximately$2,079,000 compared to the same six month period of 2004. Our growing royaltystream from sales of Testim, the first marketed product incorporating our CPE-215drug delivery technology, contributed approximately $2,121,000 to our revenuesin the six months ended June 30, 2005, compared to $1,198,000 in the firstsix months of the prior year. Sales of active pharmaceutical ingredients fromour new manufacturing facility (included in “*All otherProducts”* in the table below) added approximately $1,200,000 to ourconsolidated revenues for the six months ended June 30, 2005.

 

Setforth below is a summary of our revenues by sales channel and top-sellingproduct lines:

 

Forthe six months ended June 30, 2005:

 
| **(in thousands)**              | ** ** | **Revenues Within Spain** | ** ** | **Revenues** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|---------------------------|------------|--------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **Branded**               | ** ** | **Generic**  | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**                | ** ** | **Products**              | ** ** | **Products** | ** ** | **Other**  | ** ** | **Spain**      | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                    | * *   | *$*                       | *1,450*    | * *     | *$*        | *8,254*    | * *   | *$*            | *—*   | * * | *$* | *—* | * * | *$* | *9,704* | * * | *20* | *%* |
| *Simvastatin*                   | * *   | *873*                     | * *   | *2,585*      | * *   | *—*   | * *   | *—*       | * *   | *3,458* | * * | *7* | *%* |
| *Enalapril*                     | * *   | *2,151*                   | * *   | *912*        | * *   | *—*   | * *   | *—*       | * *   | *3,063* | * * | *6* | *%* |
| *Paroxetine*                    | * *   | *718*                     | * *   | *1,647*      | * *   | *—*   | * *   | *—*       | * *   | *2,365* | * * | *5* | *%* |
| *Codeisan*                      | * *   | *1,997*                   | * *   | *—*     | * *   | *—*   | * *   | *—*       | * *   | *1,997* | * * | *4* | *%* |
| *All other products*            | * *   | *4,886*                   | * *   | *5,059*      | * *   | *185*      | * *   | *1,015*        | * *   | *11,145* | * * | *23* | *%* |
| *Sales to licensees and others* | * *   | *—*                  | * *   | *—*     | * *   | *7,241*    | * *   | *7,739*        | * *   | *14,980* | * * | *30* | *%* |
| *Licensing and collaborations*  | * *   | *—*                  | * *   | *—*     | * *   | *170*      | * *   | *2,126*        | * *   | *2,296* | * * | *5* | *%* |
| *Total Revenues*                | * *   | *$*                       | *12,075*   | * *     | *$*        | *18,457*   | * *   | *$*            | *7,596*    | * * | *$* | *10,880* | * * | *$* | *49,008* | * * | *100* | *%* |
| *% of YTD 2005 Revenues*        | * *   | *25*                      | *%*        | *38*         | *%*        | *15*       | *%*        | *22*           | *%*        | *100* | *%* | * * | * * |

 

Forthe six months ended June 30, 2004:

 
| **(in thousands)**              | ** ** | **Revenues Within Spain** | ** ** | **Revenues** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|---------------------------|------------|--------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **Branded**               | ** ** | **Generic**  | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**                | ** ** | **Products**              | ** ** | **Products** | ** ** | **Other**  | ** ** | **Spain**      | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                    | * *   | *$*                       | *1,180*    | * *     | *$*        | *6,492*    | * *   | *$*            | *—*   | * * | *$* | *—* | * * | *$* | *7,672* | * * | *21* | *%* |
| *Simvastatin*                   | * *   | *593*                     | * *   | *1,641*      | * *   | *—*   | * *   | *—*       | * *   | *2,234* | * * | *6* | *%* |
| *Enalapril*                     | * *   | *1,555*                   | * *   | *535*        | * *   | *—*   | * *   | *—*       | * *   | *2,090* | * * | *6* | *%* |
| *Paroxetine*                    | * *   | *478*                     | * *   | *1,584*      | * *   | *—*   | * *   | *—*       | * *   | *2,062* | * * | *6* | *%* |
| *Codeisan*                      | * *   | *1,511*                   | * *   | *—*     | * *   | *—*   | * *   | *—*       | * *   | *1,511* | * * | *4* | *%* |
| *All other products*            | * *   | *3,244*                   | * *   | *3,336*      | * *   | *88*       | * *   | *177*          | * *   | *6,845* | * * | *19* | *%* |
| *Sales to licensees and others* | * *   | *—*                  | * *   | *—*     | * *   | *4,837*    | * *   | *6,762*        | * *   | *11,599* | * * | *33* | *%* |
| *Licensing and collaborations*  | * *   | *—*                  | * *   | *—*     | * *   | *561*      | * *   | *1,198*        | * *   | *1,759* | * * | *5* | *%* |
| *Total Revenues*                | * *   | *$*                       | *8,561*    | * *     | *$*        | *13,588*   | * *   | *$*            | *5,486*    | * * | *$* | *8,137* | * * | *$* | *35,772* | * * | *100* | *%* |
| *% of YTD 2004 Revenues*        | * *   | *24*                      | *%*        | *38*         | *%*        | *15*       | *%*        | *23*           | *%*        | *100* | *%* | * * | * * |

 

23

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*Spanish Operations.*     The increase in the netproduct sales for the first half of 2005 compared to the first half of 2004 isdue primarily to: (1) an increase in sales of our three top sellingproduct lines (omeprazole, simvastatin and enalapril) totaling $4,229,000; (2) anincrease in sales to licensees and others totaling $3,381,000; and (3) anincrease in the weighted average value of the Euro, in relation to the U.S. Dollar totaling $2,079,000.

 

*Branded Pharmaceutical Products*   

 
| ** **                   | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**           | ** ** | **2005**                                   | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Branded Product Sales:*     | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Enalapril*                  | * *   | *$*                                        | *2,151*    | * *   | *18*       | *%* | *$* | *1,555* | * * | *18* | *%* | *$* | *596* | * * | *38* | *%* |
| *Codeisan*                   | * *   | *1,997*                                    | * *   | *16*       | *%*        | *1,511* | * * | *18* | *%* | *486* | * * | *32* | *%* |
| *Omeprazole*                 | * *   | *1,450*                                    | * *   | *12*       | *%*        | *1,180* | * * | *14* | *%* | *270* | * * | *23* | *%* |
| *Lansoprazole*               | * *   | *947*                                      | * *   | *8*        | *%*        | *—* | * * | *0* | *%* | *947* | * * | * * | *** |
| *Simvastatin*                | * *   | *873*                                      | * *   | *7*        | *%*        | *593* | * * | *7* | *%* | *280* | * * | *47* | *%* |
| *All other branded products* | * *   | *4,657*                                    | * *   | *39*       | *%*        | *3,722* | * * | *43* | *%* | *935* | * * | *25* | *%* |
| *Total branded sales*        | * *   | *$*                                        | *12,075*   | * *   | *100*      | *%* | *$* | *8,561* | * * | *100* | *%* | *$* | *3,514* | * * | *41* | *%* |

 

----

** Notmeaningful*

 

Salesof our branded pharmaceutical products increased by 41% during the six monthsended June 30, 2005 compared to the six months ended June 30,2004.  Sales of enalapril and codeisan,which grew by 38% and 32%, respectively, accounted for 18% and 16% of ourbranded pharmaceutical revenues in the six months ended June 30, 2005,respectively. Sales of lansoprazole, which was launched in December 2004,accounted for 8% of our branded pharmaceutical revenues during the six monthsended June 30, 2005 and 27% of the increase in our branded sales. We alsoexperienced increased sales of our branded omeprazole and simvastatin productlines, which together accounted for 16% of the increase in our branded sales inthe six months ended June 30, 2005. An increase in the weighted averagevalue of the Euro over the past year,in relation to the U.S. Dollar, had the effect of increasing brandedproduct sales by approximately $544,000 in the first half of 2005. While weexpect to continue to develop, acquire, launch and support new and existingbranded products, our focus on generics and sales outside of Spain are expectedto increase those revenues at a significantly higher pace than that of ourbranded products.

 

*Generic Pharmaceutical Products*

 
| ** **                   | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**           | ** ** | **2005**                                   | ** ** | **%**      | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic Product Sales:*     | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                 | * *   | *$*                                        | *8,254*    | * *   | *45*       | *%* | *$* | *6,492* | * * | *48* | *%* | *$* | *1,762* | * * | *27* | *%* |
| *Simvastatin*                | * *   | *2,585*                                    | * *   | *14*       | *%*        | *1,641* | * * | *12* | *%* | *944* | * * | *58* | *%* |
| *Paroxetine*                 | * *   | *1,647*                                    | * *   | *9*        | *%*        | *1,584* | * * | *12* | *%* | *63* | * * | *4* | *%* |
| *Pentoxifylline*             | * *   | *1,340*                                    | * *   | *7*        | *%*        | *1,278* | * * | *9* | *%* | *62* | * * | *5* | *%* |
| *Trimetazidine*              | * *   | *1,206*                                    | * *   | *6*        | *%*        | *927* | * * | *7* | *%* | *279* | * * | *30* | *%* |
| *All other generic products* | * *   | *3,425*                                    | * *   | *19*       | *%*        | *1,666* | * * | *12* | *%* | *1,759* | * * | *106* | *%* |
| *Total generic sales*        | * *   | *$*                                        | *18,457*   | * *   | *100*      | *%* | *$* | *13,588* | * * | *100* | *%* | *$* | *4,869* | * * | *36* | *%* |

 

Salesof our generic pharmaceutical products increased by 36% during the six monthsended June 30, 2005 compared to the six months ended June 30,2004.  Increased demand for our genericomeprazole and simvastatin products accounted for 56% of our genericpharmaceutical revenue growth in the six months ended June 30, 2005.Paroxetine, pentoxifylline and trimetazidine continue to be major contributorsto our generic pharmaceutical sales. An increase in the weighted average valueof the Euro, in relation to the U.S.Dollar, had the effect of increasing generic product sales byapproximately $831,000 in the first half of 2005.  We expect to continue to increase our genericdrug portfolio and increase our generic drug sales in Spain as products comeoff patent in the future.

 

24

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*Sales to Licensees and Others*

 
| ** **                      | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in  thousands)**             | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                        | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Sales to licensees and others* | * *   | *$*                                        | *14,980*   | * *   | *$*        | *11,599* | * * | *$* | *3,381* | * * | *29* | *%* |
|                                 |            |                                            |            |            |            |  |  |  |  |  |  |  |

 

Salesto licensees and others in the six months ended June 30, 2005 increased29% when compared to the same six month period of the prior year, or 24% inconstant currency.  An increase in theweighted average value of the Euro over the past year, in relation to the U.S.Dollar, had the effect of increasing our revenues from sales to licensees andothers by approximately $638,000.

 

*Licensing and Collaboration Revenues.*    Licensing and collaboration revenues accounted for 5% of total revenuesin the six months ended June 30, 2005 and totaled $2,296,000. Theserevenues include royalties of approximately $2,121,000 in the six months ended June 30,2005 (compared to $1,198,000 in the six months ended June 30, 2004) fromthe commercialization and continuing sales of Testim. Testim is currentlyreported to capture more than 14% of all testosterone gel replacementprescriptions in the U.S. market.

 

*Gross Profit.*     Gross profit increased by approximately$7,137,000, or 37%, in the six months ended June 30, 2005, when comparedto the six months ended June 30, 2004. Gross margins on net product sales were 51% in the six months ended June 30,2005 consistent with the six months ended June 30, 2004. A charge ofapproximately $867,000 has been accrued as a result of a new pharmaceutical taxthat was enacted in the first quarter of 2005 and is included in gross profitin the six months ended June 30, 2005.

 

*Selling and Marketing Expenses*  

 
| ** **              | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Selling and marketing* | * *   | *$*                                        | *8,615*    | * *   | *$*        | *7,721* | * * | *$* | *894* | * * | *12* | *%* |
|                         |            |                                            |            |            |            |  |  |  |  |  |  |  |

 

Sellingand marketing expenses for the six months ended June 30, 2005 increased12% from the same period in the prior year. The weighted average value of the Euro, in relation to the U.S. Dollar,had the effect of increasing selling and marketing expenses by approximately$392,000 in the six months ended June 30, 2005, accounting for 44%of the increase. Selling and marketing expenses as a percentage of net productsales decreased from 23% in the six months ended June 30, 2004 to 18% inthe six months ended June 30, 2005.

 

*General and Administrative Expenses*    

 
| ** **                   | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**           | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                     | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *General and administrative* | * *   | *$*                                        | *6,036*    | * *   | *$*        | *4,451* | * * | *$* | *1,585* | * * | *36* | *%* |
|                              |            |                                            |            |            |            |  |  |  |  |  |  |  |

 

Generaland administrative expenses for the six months ended June 30, 2005increased 36% from the same period in the prior year.  The $1,585,000 increase was the result ofincreased general and administrative activities required to support ourcontinued 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. General and administrative expenses as a percent of totalrevenues remained relatively consistent at approximately 12.3% for the six monthsended June 30, 2005, compared to approximately 12.4% of total revenues inthe six months ended June 30, 2004. General and administrative expenses would have been approximately$143,000 lower, absent the increase in the weighted average value of the Euro,in relation to the U.S. Dollar, over the past year.

 

25

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*Research and Development Expenses*

 
| ** **                 | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**         | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                   | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Research and development* | * *   | *$*                                        | *2,959*    | * *   | *$*        | *1,941* | * * | *$* | *1,018* | * * | *52* | *%* |
|                            |            |                                            |            |            |            |  |  |  |  |  |  |  |

 

Research and development expenses for the six months ended June 30, 2005increased 52% from the same period in the prior year. The increase is directlyattributed to the advancement of our research and development programs. See theexplanation under *Research and Development Expenses*for the three months ended June 30, 2005. We expect to continue to incurincreased costs to support our clinical programs in the remainder of the year.

 

*Other Income (Expenses)*

 
| ** **                | ** ** | **For the Six Months Ended June 30,** | ** ** | **Change** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|------------|------------|
| **(in thousands)**        | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                  | * *   | * *                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Other income (expenses)* | * *   | *$*                                        | *286*      | * *   | *$*        | *1,405* | * * | *$* | *(1,119* | *)* | *-80* | *%* |
|                           |            |                                            |            |            |            |  |  |  |  |  |  |  |

 

Otherincome (expenses) for the six months ended June 30, 2005 decreased by$1,119,000 from the same period in the prior year. See the explanation under *Other Income (Expenses)* for the three months ended June 30,2005.

 

*Provision for Income Taxes*  

 
| ** **                             | ** ** | **For the Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **Spain**                                       | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| * *                               | * *   | * *                                        | * *   | * * | * * | * * | * * |
| *Income (loss) before income taxes*    | * *   | *$*                                             | *9,490*    | * * | *$* | *(1,568* | *)* | *$* | *7,922* | * * |
| * *                               | * *   | * *                                        | * *   | * * | * * | * * | * * |
| *Provision (benefit) for income taxes* | * *   | *3,144*                                         | * *   | *(742* | *)* | *2,402* | * * |
| *Valuation allowance*                  | * *   | *—*                                        | * *   | *742* | * * | *742* | * * |
| * *                               | * *   | * *                                        | * *   | * * | * * | * * | * * |
| *Net provision for income taxes*       | * *   | *3,144*                                         | * *   | *—* | * * | *3,144* | * * |
| * *                               | * *   | * *                                        | * *   | * * | * * | * * | * * |
| *Net income (loss)*                    | * *   | *$*                                             | *6,346*    | * * | *$* | *(1,568* | *)* | *$* | *4,778* | * * |
| * *                               | * *   | * *                                        | * *   | * * | * * | * * | * * |
| *Effective tax rate*                   | * *   | *33*                                            | *%*        | *0* | *%* | *40* | *%* |

 

Wehave recorded provisions for foreign income taxes totaling $3,144,000 and$3,361,000 ($2,757,000 net of the $604,000 tax audit settlement) for the sixmonths ended June 30, 2005 and 2004, respectively. The effective tax ratein Spain for the six months ended June 30, 2005 is 33% compared to 47%(39% excluding the $604,000 tax audit settlement) in the six months ended June 30,2004.  The provision for foreign income taxeswould have been approximately $141,000 lower than reported, absent the increasein the weighted average value of the Euro, in relation to the U.S. Dollar, overthe past year.

 

Wegenerated additional U.S. federal net operating loss carry-forwards in the sixmonths ended June 30, 2005 and 2004 as a result of U.S. pre-tax losses of$1,568,000 and $1,481,000, respectively. As future domestic operating profitscannot be reasonably assured, no tax benefit has been recorded for U.S. losses.Accordingly, we have established a valuation allowance equal to the full amountof the U.S. deferred tax assets.

 

Should we determine that it is more likelythan not that we will realize certain of our net deferred tax assets for whichwe have previously provided a valuation allowance, an adjustment would berequired to reduce the existing valuation allowance. In addition, we operatewithin multiple taxing jurisdictions and are subject to audit in thosejurisdictions. These audits can involve complex issues, which may require anextended period of time for resolution.

 

26

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*Net Income*
| ** **                                    | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| **(in thousands, except per share  data)**    | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                      | * *   | * *                                    | * *   | * *   |       | * * | * * | * * | * * |
| *Net income*                                  | * *   | *$*                                         | *4,778*    | * *   | *$*        | *2,298* | * * | *$* | *2,568* | * * | *112* | *%* |
| * *                                      | * *   | * *                                    | * *   | * *   | * *   | * * | * * | * * | * * |
| *Net income per common share:*                | * *   | * *                                    | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                       | * *   | *$*                                         | *0.22*     | * *   | *$*        | *0.11* | * * | *$* | *0.11* | * * | *100* | *%* |
| *Diluted*                                     | * *   | *$*                                         | *0.21*     | * *   | *$*        | *0.10* | * * | *$* | *0.11* | * * | *110* | *%* |
| * *                                      | * *   | * *                                    | * *   | * *   | * *   | * * | * * | * * | * * |
| *Weighted average common shares outstanding:* | * *   | * *                                    | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                       | * *   | *21,356*                                    | * *   | *20,620*   | * *   | *736* | * * | *4* | *%* |
| *Diluted*                                     | * *   | *22,568*                                    | * *   | *22,787*   | * *   | *(219* | *)* | *-1* | *%* |

 

We reported netincome of $4,778,000 in the six months ended June 30, 2005 compared to$2,298,000 in the six months ended June 30, 2004. The combination of incomefrom operations of $7,636,000 and the non-operating items, primarily theprovision for income taxes of $3,144,000 and the net of other income andexpenses totaling $286,000 resulted in net income of $4,778,000, or $0.22 perbasic common share ($0.21 per diluted common share) on 21,356,000 weightedaverage basic common shares outstanding (22,568,000 weighted average dilutedcommon shares outstanding) in the first half of 2005, compared to net income of$2,298,000, or $0.11 per basic common share ($0.10 per diluted common share) on20,620,000 weighted average basic common shares outstanding (22,787,000weighted average diluted common shares outstanding) in the first half of 2004.

 

27

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**LIQUIDITYAND CAPITAL RESOURCES****:**

 

Totalassets increased from $121,930,000 at December 31, 2004 to $122,865,000 atJune 30, 2005, while stockholders’ equity decreased from $89,657,000 at December 31,2004 to $86,509,000 at June 30, 2005. The decrease in stockholders’ equityduring the six months ended June 30, 2005 primarily reflects the effect offluctuations in the Euro/U.S. Dollar exchange rate, which resulted in a netreduction of $7,125,000 in our balance sheet, that was partially offset by netincome of $4,778,000 in the six months ended June 30, 2005.  Also contributing to the decrease instockholders’ equity, was the acquisition of approximately 219,000 sharesof Common Stock, with a fair market value of approximately $2,418,000, whichwere tendered to the Company by certain employees as consideration for the exerciseof stock options and to satisfy minimum federal and statutory tax withholdingrequirements.

 

Cashand cash equivalents increased by approximately 7% or $2,314,000 from$34,230,000 at December 31, 2004 to $36,544,000 at June 30, 2005,primarily as a result of increased cash flows from operations that included netincome of $4,778,000 and an increase in deferred income of $1,206,000,partially offset by additions to fixed assets totaling $3,745,000, additions todrug licenses totaling $1,017,000, the effect of foreign currency exchangerates that decreased cash by approximately $1,470,000 and the net use of cashtotaling $915,000 related to equity transactions. Cash and cash equivalents at June 30,2005 include approximately $10,759,000 of short-term liquid investmentsconsidered to be cash equivalents.

 

Receivablesdecreased by approximately 2% from $27,860,000 at December 31, 2004 to$27,429,000 at June 30, 2005. Total receivables increased by approximately$2,836,000 in constant currency, but fluctuations in foreign currency exchangerates decreased receivables reported in U.S. dollars by approximately$3,267,000. Trade receivables increased by approximately $1,703,000 in constantcurrency, but fluctuations in foreign currency exchange rates decreased tradereceivables reported in U.S. dollars by approximately $3,007,000; however, theaverage number of days of sales outstanding in uncollected trade and royaltiesreceivable decreased from 125 days at December 31, 2004 to 91 days at June 30,2005. Receivables from one international customer totaled $3,173,000 at June 30,2005; however, we owe the same customer approximately $2,364,000 forco-marketing expenses at June 30, 2005. Revenues from this customer arerecorded net of the related co-marketing costs in the Consolidated IncomeStatements. We have not experienced any material delinquencies on any of ourreceivables that have had a material effect on our financial position, resultsof operations or cash flows.

 

Inventoriesincreased by approximately $1,411,000 from $10,258,000 at December 31,2004 to $11,669,000 at June 30, 2005, primarily as a result of increasesin raw material and finished goods inventories totaling $2,938,000 in constantcurrency required to meet third quarter demand, partially offset byfluctuations in foreign currency exchange rates approximating $1,527,000.

 

Thecombined total of accounts payable and accrued expenses increased from$23,217,000 at December 31, 2004 to $26,654,000 at June 30,2005.  The $3,437,000 increase wasprimarily attributed to increases in payables related to inventory purchases(approximately $3,012,000), and increases in taxes payable of approximately$2,976,000, including $813,000 attributable to a new pharmaceutical tax,partially offset by fluctuations in foreign currency exchange rates thatdecreased accounts payable and accrued expenses reported in U.S. dollars byapproximately $3,226,000.

 

Short-termborrowings and current portion of long-term debt decreased from $2,785,000 at December 31,2004 to $2,541,000 at June 30, 2005, primarily as a result of the effectof fluctuations in foreign currency exchange rates totaling $336,000, offset bynet borrowings totaling $85,000. The weighted average interest rate on ourshort-term borrowings at June 30, 2005 was 3.2%.

 

Operatingactivities for the six months ended June 30, 2005 provided net cash of$9,376,000 compared to $1,567,000 during the six months ended June 30,2004.  Net income which increased to$4,778,000 during the six months ended June 30, 2005 and changes inworking capital accounted for the majority of the increase in cash flows fromoperations.

 

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Investingactivities, primarily capital expenditures in Spain for land, improvements andequipment to upgrade the capacity of our manufacturing facility in Spain and toincrease our manufacturing and packaging capabilities with new high speedequipment, along with additions to drug licenses and related costs, used netcash of $4,762,000 during the six months ended June 30, 2005.

 

Financingactivities during the six months ended June 30, 2005 required cashtotaling $830,000, and primarily represented the acquisition of approximately96,000 shares of Common Stock, with a fair market value of approximately $1,060,000,which were tendered to the Company by certain employees in order to satisfyminimum federal and statutory tax withholding requirements, partially offset bycash proceeds of approximately $145,000 received from the exercise of stockoptions.

 

Our royalty revenues onTestim product sales by Auxilium Pharmaceuticals, Inc., our licensee, arerecognized based on an estimate of Auxilium’s sell-through of the Testimproduct based on prescriptions dispensed. For the six months ended June 30,2005 and 2004, we recognized royalty revenues of approximately $2,121,000 and$1,198,000, respectively, based on an estimate of prescriptions dispensed.  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 June 30, 2005 and December 31, 2004, deferred income from Testimroyalties was approximately $1,516,000 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 of Inflation and Changing Prices.* Neither inflation nor changing prices has materially impacted our netproduct sales or income from operations for the periods presented.

 

*Liquidity*. We expect to invest approximately $14.7 million over the balance of2005 and early 2006 for capital expenditures related to expansion of ourmanufacturing facilities to accommodate future anticipated growth. Thesecapital expenditures will be funded from a combination of cash flows fromoperations and borrowings. As mentioned above, we have cash and cashequivalents totaling approximately $36,544,000 as of June 30, 2005, whichwe believe is sufficient to fund our operations and cash requirements for the foreseeable future. Although theCompany is generating positive cash flow from operations, (approximately$9,376,000 in the six months ended June 30, 2005), there can be noassurance that changes in our research and development plans, capitalexpenditures and/or acquisitions, or other events affecting our net product salesor operating expenses will not result in the earlier depletion of ourfunds.  However, we continue to explorealternative sources for financing our business activities. In appropriatesituations, which will be strategically determined, we may seek financialassistance from other sources, including contribution by others to jointventures and other collaborative or licensing arrangements for the development,testing, manufacturing and marketing of products under development.

 

**CriticalAccounting Policies and Estimates**

 

Oursignificant accounting policies are more fully described in Note 2 to ourconsolidated financial statements in our Annual Report on Form 10-K forthe year ended December 31, 2004. Certain of our accounting policies areparticularly important to the portrayal of our financial position, results ofoperations and cash flows and require the application of significant judgmentby our management; as a result they are subject to an inherent degree ofuncertainty. 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, informationprovided by our customers and information available from other outside sources,as appropriate. For a more detailed discussion of our critical accountingpolicies and estimates, we refer the reader to the complete discussion includedin our Annual Report on Form 10-K for the year ended December 31,2004.

 

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**ImportantFactors That May Affect Future Results**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements. Theseforward-looking statements appear principally in the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”Forward-looking statements may appear in other sections of this report, aswell. Generally, the forward-looking statements in this report include suchwords as “expect,” “believe,” “continue,” “anticipate,” “estimate,” “may,” “will,”“could,” “opportunity,” “future,” “project,” and similar expressions.

 

Theforward-looking statements include statements about our:

 

•                  Strategic plans;

•                  Sales growth;

•                  Anticipated sources of future revenues;

•                  Anticipated 2005 expenses, margins andoperating performance;

•                  Expected launch of new products;

•                  Anticipated expenses and spending;

•                  Commencing and continuing clinical trials;

•                  Anticipated regulatory changes and approvals;and

•                  The sufficiency of capital resources to fundour operations.

 

These forward-lookingstatements are based on our current expectations, beliefs, assumptions,estimates, forecasts and projections for our business and the industry andmarkets in which we compete. These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions that aredifficult to predict. Therefore, actual outcomes and results may differ materiallyfrom what is expressed in such forward-looking statements. We caution investorsnot to place undue reliance on the forward-looking statements contained in thisreport. These statements speak only as of the date of this report, and we donot undertake any obligation to update or revise them, except as required bylaw.  The following factors, amongothers, create risks and uncertainties that could affect our future or otherperformance:  the timing and nature ofregulatory approvals, expanding generic and branded drug operations, changes inthird-party reimbursement and government mandates which impact pharmaceuticalpricing, development and commercialization of our proprietary products andformulations, competition from other manufacturers of generic and proprietarypharmaceuticals, intellectual property litigation, our relationships with ourstrategic partners, the efficacy and safety of our products, theunpredictability of patent protection, the uncertainty of clinical trialresults, technological changes, the effects of economic conditions, risksassociated with international operations, and difficulties in managing ourgrowth and the other risk factors contained in the section entitled “RiskFactors” in our Annual Report on Form 10-K filed for the year ended December 31,2004.  As a result of these and otherfactors, we may experience material fluctuations in our future operatingresults, which could materially affect our business, financial position, andstock price.

 

# **Item 3. Quantitative and QualitativeDisclosures About Market Risk**

# ** **

*Foreign Currency.*  A substantial amount of ourbusiness is conducted in Europe and is therefore influenced to the extent towhich there are fluctuations in the U.S. Dollar’s value in relation to othercurrencies, specifically the Euro. The exchange rates at June 30, 2005 andDecember 31, 2004 were .83 Euros and .73 Euros per U.S. Dollar,respectively. The weighted average exchange rates for the three months ended June 30,2005 and 2004 were .79 Euros and .83 Euros per U.S. Dollar, respectively. Theweighted average exchange rate for the six months ended June 30, 2005 and2004 was .78 Euros and .82 Euros per U.S. Dollar, respectively. The net effectof foreign currency translation on our Condensed Consolidated FinancialStatements for the six months ended June 30, 2005 was a net decrease of$7,125,000 and the cumulative historical effect as of June 30, 2005 was anincrease of $2,597,000, 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.

 

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Wehave relied primarily upon financing activities to fund our operations in theU.S. In the event that we are required to fund U.S. operations or cash needswith funds generated in Europe or cash requirements in Europe with U.S. funds,currency rate fluctuations in the future could have a significant impact on us.However, at the present time, we do not anticipate altering our business plansand practices to compensate for future currency fluctuations.

 

*Interest Rates.*  The weighted average interest rate on ourshort-term borrowings is 3.2% and the amount of borrowings outstanding is$2,541,000 as of June 30, 2005. Our long-term borrowings are non-interestbearing and the balance outstanding on these borrowings at June 30, 2005is $366,000 including imputed interest (ranging from 5.2% to 6.0%) of $57,000.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 4.2% 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. Controls and 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 June 30, 2005,Bentley’s management carried out an evaluation, with the participation ofBentley’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of Bentley’s disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15(d)-15(e)). Based on thatevaluation, Bentley’s Chief Executive Officer and Chief Financial Officerconcluded that Bentley’s disclosure controls and procedures are effective anddesigned to ensure that the information relating to Bentley (including itsconsolidated subsidiaries), which is required to be included in its publiclyfiled reports or submitted under the Exchange Act, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. Although Bentley’s management continuallyevaluates the internal control structure and strengthens Bentley’s controlprocedures, particularly in connection with the requirements of Section 404of the Sarbanes-Oxley Act of 2002, there have been no changes during thequarter ended June 30, 2005 that have materially affected, or arereasonably likely to materially affect Bentley’s internal controls overfinancial reporting.

 

**PART II.****                                               ****OTHER INFORMATION**

 

# **Item 1. Legal Proceedings**

# ** **

OnSeptember 27, 2004, the Company was served with a complaint in an actioncaptioned Ethypharm S.A. France & Ethypharm S.A. Spain v. BentleyPharmaceuticals, Inc., U.S. District Court for the District ofDelaware, Civil Action No. 04-1300 (SLR). In this action, Ethypharm S.A., a French-based drug delivery company,and its Spanish affiliate (collectively, “Ethypharm”), allege that since March 2002the Company and its Spanish subsidiary Laboratorios Belmac, S.A. (“Belmac”)misappropriated unspecified Ethypharm trade secrets and confidential informationand used that information in the manufacture of omeprazole, one of Belmac’spharmaceutical products.  Based onEthypharm’s primary allegation of misappropriation of trade secrets, thecomplaint also asserts counts of fraud, unjust enrichment, and intentionalinterference with actual and prospective business relationships.  Ethypharm’scomplaint seeks injunctive relief as well as damages. The Companyintends to contest the case vigorously and has moved to dismiss thecomplaint.  No hearing on the motion todismiss has been set.

 

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OnApril 11, 2005, Ethypharm’s Spanish affiliate, Ethypharm S.A., filed suitagainst Belmac S.A. in the Commercial Court No. 5 of Madrid, Spain.  The complaint alleges that Belmac refused torenew its contract with Ethypharm for the manufacture of omeprazole whichexpired on March 22, 2002, and that after that date Belmac’s continuedmanufacture of omeprazole pursuant to its own patented technology has infringedEthypharm’s Spanish Patent No. ES9301319. In its complaint,Ethypharm seeks an order from the court declaring Belmac to be inviolation of Ethypharm’s patent, preventing further sales of omeprazole byBelmac, and awarding monetary damages.****Belmacintends to contest the case vigorously. On July 5, 2005, Belmac filed an answer and counterclaim whichdenies Ethypharm’s material allegations and seeks a declaration that Ethypharm’spatent is invalid.  No trial date hasbeen set.  The Company intends tovigorously defend against the complaint.

 

# **Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

# ** **

IssuerRepurchases

 
| ** **                                      | ** ** | **(a)  Total Number  of Shares  (or Units)  Purchased (1)** | ** ** | **(b)  Average  Price  Paid per  Share(2)** | ** ** | **(c)  Total Number  of Shares  (or Units)  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d)  Maximum  Number  (or approximate  dollar value)  of Shares (or  Units) that  may yet be  Purchased  under the Plans  or  Programs** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                                  | ** ** | ** **                                  | ** ** | ** **                                                                                                       | ** ** | ** **                                                                                                                                 | ** ** |
| April 1,  2005 through April 30, 2005 |       | —                                                      |       | $                                           | —     |                                                                                                             | —     |                                                                                                                                       | —     |   |
| May 1,  2005 through May 31, 2005     |       | —                                                      |       | —                                      |       | —                                                                                                           |       | —                                                                                                                                     |       |
| June 1,  2005 through June 30, 2005   |       | 219,597                                                     |       | $                                           | 11.013     |                                                                                                             | —     |                                                                                                                                       | —     |   |
|                                            |       |                                                        |       |                                        |       |                                                                                                             |       |                                                                                                                                       |       |
| Total                                           |       | 219,597                                                     |       | $                                           | 11.013     |                                                                                                             | —     |                                                                                                                                       | —     |   |

 

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**(1)****        **Represents shares tendered to the Company byoption holders using mature stock to pay the exercise price for their vestedstock options and shares tendered to the Company by option holders to satisfyminimum tax withholding liabilities. 

**(2)****        **Average of the high and low prices on the NYSEon the dates of exercise.

 

# **Item 4. Submission of Matters toa Vote of Security Holders**

# ** **

OurAnnual Meeting of Stockholders was held on May 24, 2005 for the purpose ofelecting two directors and consideration of a proposal to approve theconsolidation of all shares that were, or may thereafter become available underthe Company’s existing stock and option plans and other outstanding optionsinto a new 2005 Equity and Incentive Plan. Proxies for the meeting weresolicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, asamended, and there was no solicitation in opposition.

 

Thefollowing members were elected to our Board of Directors by a pluralityof votes cast:

 
| **Nominee**      | ** ** | **Term  Expiring** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|
|             |       |               |       |          |       |               |       |
| Miguel Fernandez |       | 2008               |       | 17,420,814    |       | 2,474,738          |       |
| James R. Murphy  |       | 2008               |       | 17,457,713    |       | 2,437,839          |       |

 

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Thesecond matter considered was a proposal to approve the 2005 Equity andIncentive Plan.  This proposal requiredthe affirmative vote of 6,956,127 shares (a majority of the shares representedin person or by proxy at the annual meeting and entitled to vote on thisproposal). This proposal was approved by the following vote:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstaining** | ** ** |
|---------------|------------|-------------------|------------|----------------------|------------|
| 12,115,647    |       | 1,772,759         |       | 23,846               |       |

 

# **Item 5. Other Information**

# ** **

Bentley’sCorporate Governance Guidelines, Code of Business Conduct and Ethics, AuditCommittee Procedures for Handling Complaints, Nominating and GovernanceCommittee Charter, Audit Committee Charter and Compensation Committee Charterare available on its website at www.bentleypharm.com. The information is alsoavailable in print to any shareholder who requests it.  Additionally, copies of reports filedpursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Qand Current Reports on Form 8-K may be accessed from the Company’swebsite, free of charge, as soon as reasonably practicable after the Companyelectronically files such reports with, or furnishes such reports to, theSecurities and Exchange Commission. Alternatively, these reports can be accessed through a query at thewebsite of the Securities and Exchange Commission at www.sec.gov.

 

Bentley’s Board of Directors consists of sixdirectors, four of whom (Messrs. John W. Spiegel, Miguel Fernandez, F. RossJohnson and Edward J. Robinson) are considered to be “independent” inaccordance with the listing standards of the New York Stock Exchange and Rule10A-3 under the Securities Exchange Act of 1934, as amended.  All four of the independent directors serveon Bentley’s AuditCommittee.  Since his retirement in 2004as the Chief Financial Officer of SunTrust Banks, Inc., John W. Spiegel hasagreed to serve on a fourth public company audit committee, in addition to hisservice for Bentley and two others.  TheBoard of Directors has determined that in Mr. Spiegel’s current circumstances this simultaneous service does notimpair his ability to serve on the Audit Committee of Bentley.

 

JohnW. Spiegel has been selected as the Lead Director (or Presiding Director) ofthe Company’s Board of Directors.  Mr. Spiegelpresides at executive sessions of meetings of our non-management andindependent directors. Interested parties who wish to send communications onany topic to Mr. Spiegel, the presiding director and the Chairperson ofthe Nominating and Governance Committee, should address such communications tothe Chairman of the Nominating and Governance Committee, c/o the CorporateSecretary, Bentley Pharmaceuticals, Inc., Bentley Park, 2 Holland Way,Exeter, New Hampshire, 03833.

 

Asrequired by Section 303A.12(a) of the New York Stock Exchange ListedCompany Manual, on October 8, 2004, the Company’s Chief Executive Officersubmitted the Annual CEO Certification to the New York Stock Exchange,certifying, without qualification, that he was not aware of any violation bythe Company of the New York Stock Exchange’s corporate governance listingstandards.

 

TheCompany filed with the SEC as exhibits to its Annual Report on Form 10-Kfor the year ended December 31, 2004 (which exhibits were identified as Exhibit 31.1and Exhibit 31.2) certifications by the Company’s Chief Executive Officerand Chief Financial Officer regarding the quality of the Company’s publicdisclosures in accordance with Section 302 of the Sarbanes-Oxley Act of2002.

 

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# **Item 6. Exhibits**

# ** **

TheExhibits filed as part of this report are listed on the Exhibit Indeximmediately following the signature page, 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                                    |   |
|                |   |                                          |   |
|                |   |                                          |   |
| August 9, 2005 | By:    | /s/ James R. Murphy                           |   |
|                |   | James R. Murphy                               |   |
|                |   | Chairman of the Board  of Directors,          |   |
|                |   | President and Chief  Executive Officer        |   |
|                |   | (Principal Executive  Officer)                |   |
|                |   |                                          |   |
|                |   |                                          |   |
| August 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                |       | Bentley  Pharmaceuticals, Inc. 2005 Equity and Incentive Plan. (Reference is made  to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K  dated May 24, 2005, Commission File No. 1-10581, which exhibit is  incorporated herein by reference.) |
|                |       |                                                                                                                                                                                                                                                                                   |
| 10.2                |       | Form of  Incentive Stock Option Certificate under the Registrant’s 2005 Equity and  Incentive Plan. Filed herewith.                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                   |
| 10.3                |       | Form of  Non-Statutory Stock Option Certificate under the Registrant’s 2005 Equity and  Incentive Plan. Filed herewith.                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                   |
| 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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