SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year December 31, 1996
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
Commission File Number 33-36120
BRADLEY PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
NEW JERSEY 22-2581418
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
383 Route 46 W., Fairfield, NJ 07004
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): 201-882-1505
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock
No Par Value Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
preceding 12 months (or for a shorter period that the registrant was required to
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-KSB is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information state-
ments incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $12,769,266
The aggregate market value of the Class A voting stock held by nonaffiliates of
the Registrant as of March 18, 1997 was approximately $7,784,000. This amount
does not include any value for the Class B Common Stock, for which there is no
established United States public trading market.
As of March 18, 1997, the number of outstanding shares of each of the regis-
trant's classes of Common Stock were as follows:
Number of shares outstanding
Title of each class as of March 18, 1997
Class A 7,670,767
Class B 431,552
Documents Incorporated by Reference
Part III of the Issuer's Annual Report on Form 10-KSB is hereby incorporated by
reference to the Issuer's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days of the end of
the Issuer's fiscal year ended December 31, 1996.
PART 1
Item 1. Business
General
The Company
Bradley Pharmaceuticals, Inc. (the "Company") manufactures
and markets over-the-counter and prescription pharmaceutical and
health related products. The Company's product line currently
includes dermatological brands (marketed by the Company's wholly
owned subsidiary, Doak Dermatologics, Inc. ("Doak")) and nutritional,
respiratory, personal hygiene and internal medicine brands (marketed
by the Company's Kenwood Laboratories division). Substantially all of
the Company's dermatological product lines are manufactured and
packaged at Doak's Westbury, New York facility. The Company's
other product lines are primarily manufactured and supplied by
independent contractors under the Company's quality control
standards and marketed primarily to wholesalers. The wholesalers, in
turn, distribute the Company's products to retail outlets and
healthcare institutions throughout the United States and to distributors
in selected international markets.
The Company's growth strategy has been to make acquisitions
of established products from major pharmaceutical organizations
which the Company believes require intensified marketing and
promotional attention. The Company believes that significant growth
opportunities exist in this market niche as a result of the divestiture by
major pharmaceutical companies of certain established product lines
that have become less profitable in relation to their other products.
As a result, the Company has acquired, and intends to continue to
acquire, rights to manufacture and market pharmaceutical and health
related products which are effective and for which a demonstrated
market exists, but which are not actively promoted and where the
surrounding competitive environment does not necessarily include
major pharmaceutical companies.
The Company's ability to make further product acquisitions will
depend, among other things, on the availability of appropriate
acquisition opportunities and financing and its ability to consummate
acquisitions on favorable terms. Because there can be no assurance
that the Company will be able to consummate in a timely way
attractive acquisitions on favorable terms, management has and will
also continue to focus on developing and extending its existing
acquired product lines.
The Company's most significant acquisition to date was in
December 1993, when the DECONAMINE(R) cold/flu/allergy product line
was purchased from Berlex Laboratories, Inc., a subsidiary of Schering
AG ("Berlex"). During December 1996, the Company restructured its
remaining payment obligations due to Berlex (the "Berlex
Restructuring"). This Restructuring resulted in the Company's
reducing, from approximately $7.3 million, to approximately $3.5
million, the remaining cash obligation due to Berlex. Of this amount,
$500,000 was paid during December 1996 and an additional $500,000
was paid during the first quarter of the fiscal year ending December 31,
1997 ("Fiscal 1997"). The remaining balance of approximately $2.5
million is payable to Berlex as follows: $700,000 by April 15, 1997,
$1,000,000 during May 1997 and $800,000 in equal monthly installments of
$100,000 beginning in June 1997. In connection with the Berlex Restructuring,
the Company issued to Berlex 1,000,000 shares of Class A Common
Stock, representing approximately 13% of the outstanding shares of
Class A Common Stock of the Company.
The Company is presently in the process of seeking financing to
raise the funds necessary to satisfy its obligations to Berlex. There
can be no assurance, however, that the Company can secure this
financing on a timely basis on acceptable terms. The Company's
failure to satisfy its remaining obligations to Berlex would have a
material adverse affect on the Company's operations. Due to the
uncertainties surrounding the Company's ability to satisfy its
obligations to Berlex, as they become due, and the resulting impact
such failure would have on the Company's future financial condition,
there can be no assurance that the Company can continue as a going
concern. The financial statements of the Company included
elsewhere in this Annual Report have been prepared assuming that the
Company will continue as a going concern and do not include any
adjustments that might result from the Company's failure to satisfy its
obligations to Berlex.
The Company was incorporated under the laws of the State of
New Jersey in January 1985. The Company's principal executive
offices are located at 383 Route 46 West, Fairfield, New Jersey
07004, telephone number (201) 882-1505.
Material Product Acquisitions
The Company commenced operations in January 1985 with the
purchase of certain rights (principally trademarks) to a line of
dermatological products from Alvin Last Co., Inc.
In August 1985, the Company acquired certain trademark rights
to several vitamin and nutritional products and certain other assets
from Kenwood Laboratories.
In September 1988, the Company acquired rights to certain
products from Schering-Plough Corporation, including TYZINE(R), a
nasal decongestant, NITROGLYN(R), nitroglycerin capsules, IRCON(R), an
iron supplement, and IPSATOL(R), a cough medicine.
In August 1991, the Company acquired certain rights, including
the trademark to the over-the-counter cold and allergy medication
DUADACIN(R), from Hoechst Roussel Pharmaceuticals, Inc.
In April 1992, the Company acquired certain rights, including
the trademark, to the over-the-counter laxative NEOLOID(R), from
American Cyanamid Company.
In October 1992, the Company acquired the assets of Ram
Laboratories ("RAM"), a pharmaceutical company. RAM specializes in
marketing healthcare products to the hispanic market in the United
States and Puerto Rico.
In December 1992, the Company acquired certain rights,
including the trademark and patent, to the personal lubricating insert
LUBRIN(R) INSERTS ("LUBRIN(R)"). Concurrently with this acquisition,
the Company and Upsher-Smith Laboratories, Inc. ("Upsher-Smith")
entered into a three-year manufacturing contract, renewable at six-
month intervals after the initial term, whereby Upsher-Smith will
manufacture LUBRIN(R) for the Company and agreed for seven years
not to compete with the Company with respect to LUBRIN(R). In
connection with this acquisition, the Company granted Upsher-Smith a
security interest in LUBRIN(R) and the associated intangible assets to
secure its repayment obligation with respect to certain deferred
amounts incurred.
In March 1993, the Company acquired from Tsumura Medical, a
division of Tsumura International, Inc. ("Tsumura"), all technical,
proprietary and distribution rights to a specialized dermal patch
product, TRANS-VER-SAL(R), currently used in the treatment of warts
and a license to market GLANDOSANE(R), a synthetic saliva aerosol
product used to alleviate dry mouth caused by various treatments and
illnesses. The Company has granted Tsumura a security interest in
the trademarks acquired to secure the Company's payment obligations
to Tsumura for the products acquired.
In December 1993, the Company acquired from Berlex all
technical, proprietary and distribution rights to DECONAMINE(R),
including approximately $400,000 of DECONAMINE(R) inventory. To
secure its payment obligations to Berlex, the Company has agreed,
generally, not to grant any person a security interest in, or create a
lien upon, any of the Company's assets. In addition, the Company
has granted Berlex a security interest covering all of the Company's
accounts receivables. Berlex, however, has agreed to release its
security interest in the Company's accounts receivables 91 days after
the April 1997 payment by the Company.
During February 1994, the Company purchased from The
Upjohn Company ("Upjohn") all United States manufacturing,
packaging and proprietary rights, including all trademarks and
registrations, to two prescription products, ADEFLOR M(R), a vitamin
and mineral tablet with fluoride, and PAMINE(R), a methscopolamine
bromide tablet used in connection with the treatment of peptic ulcers.
In June 1994, the Company acquired from Syntex (U.S.A.) Inc.
all manufacturing, packaging, quality control, stability, drug
experience, file history, customers and marketing rights, titles and
interests, including all U.S. trademarks to CARMOL(R) 10 and
CARMOL(R) 20 (nonprescription total body moisturizers) and CARMOL(R)
HC (a prescription moisturizer containing hydrocortisone)(the "Carmol
Products").
In May, 1996, the Company acquired the trademark rights to
the ACID MANTLE(R) skin treatment line from Sandoz Pharmaceuticals
Corporation ("Sandoz"), and the exclusive ACID MANTLE(R)
manufacturing, marketing and distribution rights for the United States
and Puerto Rico. In consideration, the Company agreed to pay Sandoz
$900,000, $250,000 of which was paid during May 1996. An
additional $250,000 is required to be paid on May 8, 1997, with the
remaining $400,000 payable in equal annual installments of $100,000
commencing May 8, 1998. The Company also purchased Sandoz's
entire inventory of ACID MANTLE(R) saleable products and raw
materials. Based upon information provided to the Company by
Sandoz, Sandoz's 1995 revenues for the ACID MANTLE(R) product line
were approximately $600,000. The Company has not acquired any
other products during Fiscal 1996.
Acquisition of DOAK Subsidiary
During February 1994, the Company acquired, from Doak's
principal stockholders, a controlling interest in Doak. The remaining
capital stock of Doak was acquired by the Company pursuant to a
merger consummated in January 1995. Total consideration paid by
the Company for Doak was approximately $1.4 million.
Products
The following is a list of products, by therapeutic category, that
are marketed and distributed by the Company as of March 18, 1997.
All of the Company's products are available over-the-counter, with the
exception of DECONAMINE(R), PAMINE(R), CARMOL(R) HC, CARMOL(R) 40,
ADEFLOR M(R), NITROGLYN(R), TYZINE(R), and GLUTOFAC(R)-ZX, each of which
is a prescription pharmaceutical.
Dermatological Products Uses
ACID MANTLE(R) Skin acidifier
BURO-SOL(R) Antiseptic Powder (4 oz.) Skin care
CARMOL(R) HC + - 1% Hydrocortisone Acetate + product for a
Cream (1 oz.) variety of
conditions
CARMOL(R)-10 Deep Moisturizing Skin care
Lotion (6 oz.) and CARMOLR-20 Cream (3 oz.)
CARMOL(R) 40 + - 40% + Potent tissue-
(Carbamide Cream) softener
DOAK(R) DERMATOLOGY Products Mostly coal tar
based therapies
FORMULA 405(R) Variety of topical
products for the skin,
hair and nails
FORMULA 405(R) A-H-A Alpha Hydroxy
Acid skin care
OMIDERM Wound and Burn
dressings in
various sizes
SULFOAM(R) Medicated Anti-dandruff Control of dandruff
Shampoo (8 oz.)
SULPHO-LAC(R) Acne Medication Treatment of acne
(1.0 oz. tube and 1.75 oz. jar)
SULPHO-LAC(R) Medicated Soap (3 oz.) Treatment of acne
TERSASEPTIC(R) Skin cleanser
TRANS-VER-SAL(R) Wart Remover Kit Dermal patch
(6mm, 12mm, 20mm sizes) delivery system for
wart removal
Nutritional Products Uses
ADEFLOR M(R) + (100s) Vitamins and
minerals with
sodium fluoride
APATATE(R) Liquid (4 oz. and 8 oz.) B-complex
supplement for nu-
tritional
deficiencies associ-
ated with illness in
adults or children
APATATE(R) Tablets (50s) Same as above
APATATE(R) FORTE Liquid (8 oz.) High-potency
nutritional
supplement
containing eight
essential vitamins
and minerals plus
L-lysine
GLUTOFAC(R) Caplets (90s) Vitamin/mineral
supplement for
replenishing nutri-
ents in patients
with conditions
such as diabetes
mellitus, alco-
holism, psycho-
logical stress, or
chronic illness
GLUTOFAC(R)-ZX Capsules + (60's) Prescription high-
potency multivitamin
and multimineral
supplement including
and folic acid
I-L-X(R) Elixir (8 oz.); Iron supplement for
I-L-X(R) B12 Elixir (8 oz.); nutritional
I-L-X(R) B12 Sugar Free Elixir (8 oz.); and iron deficiency
I-L-X(R) B12 Caplets (100s) anemias
IRCON(R) (100s) Iron supplement
IRCON(R)-FA (100s) Iron supplement
with folic acid
KENWOOD THERAPEUTIC LIQUID(R) (8 oz.) Vitamin/mineral
supplement for
children and adults
with poor diet
NITROGLYN(R) Extended Release Nitroglycerin For the prevention
Capsules + of angina
2.5 mg.; 6.5 mg. pectoris (due to
9.0 mg.; (100s) coronary
artery disease)
PAMINE(R) 2.5 mg. Tablets + (100s) Anticholinergic/antispasmatic
Respiratory Products Uses
DECONAMINE(R) SR Capsules Sustained release
(HCL 120 mg.) + (100s; 500s) antihistamine
decongestant
DECONAMINE(R) Chewable Tablets Pediatric
(HCL 15 mg.) + (100s) antihistamine/decongestant
DECONAMINE(R) Dye-Free Syrup Liquid
(HCL 30 mg.) + (473 ml) antihistamine/decongestant
DECONAMINE(R) Dye-Free Tablets Antihistamine/decongestant
(HCL 60 mg.) + (100s)
DECONAMINE(R) CX Liquid (HCL 5mg.) Liquid
+ (473 ml) antitussive/expectorant
DECONAMINE(R) CX Tablets (HCL 5mg.) Antitussive/expectorant
+ (100s)
DUADACIN(R) Capsules (100s; 1000s; Antipyretic/analgesic/
Dispense-A-Pak [125 unit packs of 8]) decongestant
IPSATOL(R) Cough Formula (4oz) Pediatric
antitussive/expectorant
TYZINE(R) (tetrahydrozoline HCl) Nasal decongestant
Solution + 30 ml; Spray + 15 ml
Pediatric Nasal Drops + 15 ml
Personal Hygiene Products Uses
GLANDOSANE(R) (15 ml) Mouth moisturizer
LUBRIN(R) Inserts (5s, 12s) Personal lubricating
inserts for
use in vaginal
dryness
NEOLOID(R) Castor Oil (4 oz.) Laxative
Product Liability Insurance
The Company maintains $3,000,000 of product liability
insurance on its products. This insurance is in addition to required
product liability insurance maintained by other manufacturers of the
Company's products. The Company believes that this amount of
insurance coverage is adequate and reasonable. To date, no product
liability claim has been made, to the Company's knowledge, against
the Company, and management has no reason to believe that any
claim is pending or threatened.
Manufacturers and Suppliers
The manufacturing processes and operations of manufacturing
facilities for pharmaceutical products are subject to rigorous
regulation, including the need to comply with the United States Food
and Drug Administration's ("FDA") current good manufacturing
practices standards ("cGMP's"). As a result of the Doak acquisition,
the Company, during the fiscal years ended December 31, 1996 and
1995 ("Fiscal 1996" and "Fiscal 1995", respectively) manufactured
and packaged, for its own account, its Doak product line, including
FORMULA 405(R), DOAK(R) DERMATOLOGY, CARMOL(R),
ACID MANTLE(R) products and TRANS-VER-SAL(R) products. These products
represented during Fiscal 1996 and Fiscal 1995 approximately 32% and
40%, respectively, of the Company's net sales. The Company currently
does not manufacture any products outside of its Doak product line.
Further, the Company does not anticipate doing any contract manufacturing
or packaging for unaffiliated third parties.
The Company generally purchases its products from twenty
different vendors on open credit terms, which are generally payable in
30 days. Two companies manufacturing products and two companies
producing packaging products for the Company accounted for
approximately 20%, 12%, 13% and 10%, respectively, of the
Company's cost of goods sold for Fiscal 1995. One company
manufacturing and packaging products for the Company accounted for
approximately 16% of the Company's cost of goods sold for Fiscal
1996. No other vendor, packager or manufacturer accounted for
more than 10% of the Company's cost of goods sold for Fiscal 1996
or Fiscal 1995. Management believes it can promptly obtain
replacement manufacturing and packaging arrangements on
acceptable terms. Consequently, the Company believes that a loss of
any or all of its current vendors, manufacturers or packagers would
not have a material adverse effect on the Company's business
operations.
The Company does not have any licensing, manufacturing or
other supply agreements with its manufacturers or suppliers.
Consequently, any of the Company's manufacturers or suppliers could
terminate their relationship with the Company at any time, without
liability to the Company. Management believes it can promptly
procure replacement manufacturing arrangements on acceptable terms
and, as a precautionary measure, has begun to arrange for alternative
manufacturers for each of the Company's pharmaceutical products.
Marketing and Sales
The Company has acquired established products and product
lines, and developed line extensions for new products. Therefore, the
Company has concentrated its marketing efforts on the continued
promotion of its acquired product lines and line extensions to
established customers and the expansion of distribution to new
customers. The Company's overall marketing philosophy is to
intensify and enhance the promotion of its acquired products and line
extensions throughout the United States and, where feasible, in
selected international markets.
The Company markets and sells its products through full time
sales personnel and a network of distributors and brokers. Non-
prescription products are sold primarily to drug wholesalers, chain and
independent pharmacies, chain and independent food stores, mass
merchandisers, physician supply houses and hospitals. Prescription
products are sold primarily to wholesalers, retail chains and managed
care providers. The Company currently has approximately 1,100
active accounts, of which there are approximately 200 wholesalers,
500 retail chains and stores, 200 doctors and institutional accounts,
100 managed care providers and 100 government entities.
During Fiscal 1995, three wholesale customers accounted for
approximately 16%, 13% and 12%, respectively, of the Company's
net sales. During Fiscal 1996, the same three wholesale customers
accounted for approximately 15%, 12% and 10% of the Company's
net sales. No other single customer accounted for more than 10% of
the Company's net sales for Fiscal 1996 or Fiscal 1995. The loss of
any of these three customers would have a material adverse effect on
the Company's future operations.
The Company's DECONAMINE(R) product line (categorized below
as respiratory products) accounted for approximately 51% and 40%,
respectively, of the Company's Fiscal 1996 and Fiscal 1995 net sales.
The loss of the DECONAMINE(R) product line, consequently, would
have a material adverse effect on the Company's future operations.
Doak's TRANS-VER-SAL(R) products accounted for approximately
10% and 14%, respectively, of the Company's Fiscal 1996 and Fiscal
1995 net sales. ACID MANTLE(R), acquired by Doak during May 1996,
accounted for approximately 4% of the Company's Fiscal 1996 net
sales. Doak's other products, including Formula 405(R), accounted for
approximately 18% and 26%, respectively, of the Company's Fiscal
1996 and Fiscal 1995 net sales. Doak's products are all categorized
below as dermatologic products.
The Company's Fiscal 1996 and Fiscal 1995 net sales volume
percentages by category were as follows:
Fiscal Fiscal
1996 1995
Respiratory 56% 46%
Nutritional 16% 6%
Dermatologic 32% 40%
Internal Medicine 2% 5%
Personal Hygiene 4% 3%
Sales of the Company's DECONAMINE(R) product line and other
cough/cold/flu products are concentrated in the fall and winter
months. Consequently, sales revenues of these products generally
are, and will be, determined by the severity of the cough/cold/flu
season. The Company promotes these products for allergy symptoms
during the spring and summer months to smooth the seasonality of
these sales.
The Company's principal marketing strategy is to furnish
samples of the Company's products and related literature to
physicians to encourage them to recommend the Company's products
to their patients. The Company's marketing department consists of a
Senior Vice President of Marketing and Business Planning, a Group
Product Director, Doak Product Manager, Customer Service Manager,
National Trade Director and Vice President - Managed Care. The sales
department consists of a Vice President of Field Sales, Regional Sales
Director, four district managers, a U.S. Government representative, 19
full time and one part time salespersons located in Alabama, New
Jersey, Georgia, Virginia, Maryland, California, Puerto Rico,
Tennessee, Texas, Illinois, Florida, Pennsylvania and New York. The
Company's sales force also attends medical conventions to increase
physician awareness of the Company's products.
As of March 18, 1997, the Company has contracted with 19
independent contractors to form a Drug Sample Distributor (DSD)
network throughout the United States whose objective is to distribute
samples and literature directly to physicians in areas inaccessible to
full-time sales staff or in key regions where more comprehensive
coverage is appropriate.
The Company has made a strategic decision to concentrate
selling and marketing resources on eight principal products (which
represents 86% of Fiscal 1996 Net Sales) as follows:
Kenwood Brands Specialty
DECONAMINE(R) General
Practitioners, Allergists
Pediatricians, Ear,
Nose and Throat
TYZINE(R) General
Practitioners,
Allergists
Pediatricians, Ear,
Nose and Throat
Specialists
PAMINE(R) Gastroenterologists
GLUTOFAC(R)/GLUTOFAC(R)-ZX General
Practitioners
Doak Brands Specialty
CARMOL(R) Dermatologists,
Podiatrists
TRANS-VER-SAL(R) Dermatologists,
Podiatrists
ACID MANTLE(R) Dermatologists
FORMULA 405(R)/A-H-A Dermatologists
To facilitate sales of the Company's products internationally
(including Puerto Rico), the Company, with an international staff
which includes a President of the Bradley International division, a full-
time sales associate and one consultant, has entered into agreements
with 23 international pharmaceutical distributors to provide for
distribution and promotion of the Company's products. Approximately
11% and 20%, respectively, of the Company's Fiscal 1996 and Fiscal
1995 net sales were from international business. No single
international distributor accounted for greater than 10% of the
Company's Fiscal 1996 or Fiscal 1995 net sales.
The Company has received product registrations and has
applied for additional product registrations to distribute its products in
certain international markets as follows:
THE COMPANY'S INTERNATIONAL MARKETING STATUS
CURRENTLY
MARKETING
Barbados CARMOL(R)
GLUTOFAC(R)
IPSATOL(R)
I-L-X(R)
LUBRIN(R)
KTL(R)
DECONAMINE(R)
TRANS-VER-SAL(R)
Canada LUBRIN(R)
NEOLOID(R)
TRANS-VER-SAL(R)
DOAK LINE
TAR PRODUCTS
FORMULA 405(R)
KTL(R)
Chile TRANS-VER-SAL(R)
Cyprus TYZINE(R)
SULPHO-LAC(R)
IRCON(R)
KTL(R)
A-H-A LINE
IPSATOL(R)
LUBRIN(R)
Denmark TRANS-VER-SAL(R)
Dominican
Republic DUADICIN(R)
IRCON(R)
APATATE(R)
LUBRIN(R)
GLUTOFAC(R)
I-L-X(R)
KTL(R)
Finland LUBRIN(R)
France TRANS-VER-SAL(R)
Hong Kong DOAK LINE
NITROGLYN(R)
GLUTOFAC(R)
A-H-A LINE
DECONAMINE (R)
Iceland TRANS-VER-SAL(R)
FORMULA 405(R)
DOAK LINE
Israel LUBRIN(R)
Italy TRANS-VER-SAL(R)
Jordan FORMULA 405(R)
A-H-A LINE
CARMOL(R)
DOAK TAR
TRANS-VER-SAL(R)
Mexico TRANS-VER-SAL(R)
FORMULA 405(R)
A-H-A LINE
TAR SHAMPOO
Portugal TRANS-VER-SAL(R)
Puerto Rico COMPLETE BRADLEY LINE
Saudi Arabia FORMULA 405(R)
TAR PRODUCTS
SULPHO-LAC(R)
A-H-A LINE
CARMOL(R)
TRANS-VER-SAL(R)
Singapore LUBRIN(R)
A-H-A LINE
Spain TAR DISTILLATE
TRANS-VER-SAL (R)
Sri Lanka TRANS-VER-SAL(R)
DUADICIN(R)
LUBRIN(R)
SULPHO-LAC(R)
TYZINE(R)
Taiwan FORMULA 405(R)
A-H-A LINE
DOAK LINE
United Arab
Emirates FORMULA 405(R)
A-H-A LINE
CARMOL(R)
Vietnam FORMULA 405(R)
A-H-A LINE
THE COMPANY'S INTERNATIONAL MARKETING STATUS
EXPECTING TO MARKET
WITHIN A YEAR*
China NITROGLYN(R)
Dominican Rep. DECONAMINE(R)
TRANS-VER-SAL(R)
CARMOL(R)
France TRANS-VER-SAL(R)
Hong Kong IRCON(R)
IRCON(R) FA
TRANS-VER-SAL(R)
CARMOL 20(R)
Italy LUBRIN(R)
Malaysia LUBRIN(R)
TRANS-VER-SAL(R)
Mexico CARMOL(R) 10 & 20
SULPHO-LAC(R)
Singapore CARMOL(R) 10 & 20
TRANS-VER-SAL(R)
Taiwan SULPHO-LAC(R)
Thailand TRANS-VER-SAL(R)
LUBRIN(R)
Turkey LUBRIN(R)
Zimbabwe TRANS-VER-SAL(R)
WORKING ON
REGISTRATION*
Austria TRANS-VER-SAL(R)
LUBRIN(R)
Bangladesh TRANS-VER-SAL(R)
LUBRIN(R)
Belgium TRANS-VER-SAL(R)
Brunei LUBRIN(R)
TRANS-VER-SAL(R)
China TRANS-VER-SAL(R)
SULPHO-LAC(R)
DECONAMINE(R)
GLUTOFAC(R)
Cyprus GLUTOFAC(R)
APATATE(R)
DECONAMINE(R)
Dominican
Republic FORMULA 405(R)
Egypt DOAK LINE
SULPHO-LAC(R)
TRANS-VER-SAL(R)
Guatemala TRANS-VER-SAL(R)
LUBRIN(R)
FORMULA 405(R)
APATATE(R)
IRCON(R)
DECONAMINE(R)
Greece TRANS-VER-SAL(R)
Hong Kong DUADICIN(R)
SULPHO-LAC(R)
Israel FORMULA 405(R)
CARMOL(R) 10 & 20
TRANS-VER-SAL(R)
Lebanon DOAK LINE
TRANS-VER-SAL(R)
Malaysia CARMOL(R) 10 & 20
Singapore DUADICIN(R)
DOAK TAR PRODUCTS
Taiwan TRANS-VER-SAL(R)
DUADICIN(R)
GLUTOFAC(R)
Thailand CARMOL(R)
FORMULA 405(R)
TRANS-VER-SAL(R)
Turkey TRANS-VER-SAL(R)
DECONAMINE(R)
Competition
The distribution and marketing of pharmaceutical and health
related products is highly competitive. The Company competes
primarily against established pharmaceutical and consumer product
companies which currently market products that are equivalent, or
functionally similar, to those the Company markets. The Company
seeks to compete based on targeted marketing, promotional programs,
lower prices and service. Direct competition is primarily limited
by larger pharmaceutical companies unless "next generation" formulas
are introduced. Most of the Company's competitors possess substantially
greater financial, technical, marketing and other resources than the Company.
In addition, the Company competes for the manufacture of its products
from suppliers who manufacture and supply such products to other
companies, including those competitive with the Company's products.
Government Regulation
All pharmaceutical products are subject to rigorous regulation
by the FDA and by state authorities (and comparable agencies in
foreign countries), primarily under the Federal Food Drug and Cosmetic
Act and the regulations promulgated thereunder (along with
comparable state laws). These laws regulate the manufacture,
shipping, storage, sale and use of such products and product samples,
including current cGMP's, and Standard Operating Procedures (SOP's).
The FDA, Federal Trade Commission and state authorities also
regulate the advertising of prescription and over-the-counter products.
The Company has obtained assurances from its suppliers that all of
the Company's products, (including the products manufactured by the
Company) meet all applicable regulatory standards in all substantial
respects.
Certain of the Company's pharmaceuticals products are sold
over-the-counter. These products are subject to FDA regulations
known as monographs, which specify permissible active ingredients,
labeling and indications. The monographs are subject to change. No
assurance can be given that future FDA enforcement or regulatory
decisions or changes to monographs will not hamper the Company's
marketing efforts or render the Company's products unlawful for
commercial sale, causing the Company to withdraw its products from
the marketplace or spend substantial funds reformulating the products.
Specifically, the Company's DECONAMINE(R) product line, falls
under these monographs. Once a final monograph is issued by the
FDA with respect to a product, the product historically can remain as
a prescription product for up to one additional year. Final monographs
for the Company's DECONAMINE(R) product line are currently
anticipated to be issued by the FDA after April 1997. It is not
possible for the Company to predict how its operations and financial
condition will be affected if the DECONAMINE(R) product line is
converted from prescription status to over-the-counter status.
The Company is required to file an Abbreviated New Drug Application
(ANDA) with the FDA for its DECONAMINE(R) SR product.
The cost of this application is approximately $900,000.
The Company has entered into an agreement to complete the first
phase of these studies at a cost of approximately $100,000, of which
$48,000 was paid during Fiscal 1995 and the balance of $52,000 has
been satisfied utilizing funds previously paid during Fiscal 1995 for
projects cancelled during Fiscal 1996. The project is expected to be
completed and submitted to the FDA during 1998. Completion of the
research and development project is subject, however, to the
Company's either generating sufficient cash flow from operations to
fund the same or obtaining requisite financing from outside sources, of
which there can be no assurance. Therefore, the Company cannot at
this time reasonably anticipate the timing of the expenditure of funds
for these purposes. The inability of the Company to further develop
and/or file the necessary ANDA for DECONAMINE(R) SR would have a
material adverse effect on the Company's business.
The Company currently is the registered holder of one New
Drug Application for PAMINE(R) and two ANDA's for TYZINE(R) and
CARMOL(R) HC. These applications, approved by the FDA, permit
companies to market products either considered by the FDA to be new
drugs or drugs previously approved by the FDA.
U.S. Federal and state governments continue to seek means to
reduce costs of Medicare and Medicaid programs, including placement
of restrictions on reimbursement for, or access to, certain drug
products. Major changes were made in the Medicaid program under
the Omnibus Budget Reconciliation Act of 1990. As a result, the
Company entered into a Medicaid Rebate Agreement ("Rebate
Agreement") with the U.S. Government. Pursuant to the Rebate
Agreement, in order for federal reimbursement to be available for
prescription drugs under state Medicaid plans, the Company must pay
certain statutorily-prescribed rebates on Medicaid purchases
(approximately 11%). In most other developed markets in which the
Company's products are marketed and sold, governments exert
controls over pharmaceutical prices either directly or by controlling
admission to, or levels for, reimbursement by government health
programs. The nature of such controls and their effect on the
pharmaceutical industry varies greatly from country to country.
The statutes and regulations that govern the Company's
business and activities are subject to change, and current political and
public interest in pharmaceutical products may lead to changes in
federal and state law that may affect the Company and the way it
does business. Management cannot anticipate what effect, if any,
such legislation may have on the Company's operations.
Patents and Trademarks
The products currently sold by the Company, with the
exception of LUBRIN(R) and TRANS-VER-SAL(R), are not patented and
the Company does not currently intend to apply for patents for its
products. Products with benefits similar to those marketed by the
Company could easily be developed by other companies. The
LUBRIN(R) and TRANS-VER-SAL(R) United States patents expire on
August 31, 1999 and October 18, 2005, respectively. Patents
maintained by the Company for LUBRIN(R) and TRANS-VER-SAL(R) in
other countries have various expiration dates.
The Company owns all trademarks associated with each of its
products and owns and maintains national and international trademark
registrations, or common law rights, on all of its material products.
No assurance can be given as to the extent or scope of the
trademarks or other proprietary protection secured by the Company on
its products. To the Company's knowledge, none of the trademarks
owned by the Company infringe on any trademarks owned or used by
others.
Human Resources
As of March 18, 1997, the Company employed 89 full and 21
part-time associates. The Company believes that its relationship with
its associates is good.
Scientific Advisors
The Company has formed a group of scientific advisors (the
"Scientific Advisors") having extensive experience in the areas in
which the Company markets its products to advise the Company
concerning long-range planning and development. The following sets
forth information with respect to the Company's Scientific Advisors:
Myren Arlen, M.D. is an oncologist and tumorologist with
offices in Great Neck, New York. Internationally known, Dr. Arlen has
authored over 80 publications and two textbooks in oncology,
tumorology and cancer surgery. Dr. Arlen is a graduate of Down
State Medical School of the State University of New York ("SUNY").
Alan M. Goldberg, Ph.D., is a professor of toxicology, a director
of the Center for Alternatives to Animal Testing and the Associate
Dean for Corporate Affairs at the Johns Hopkins School of Public
Health. Dr. Goldberg's expertise is in the use of non-animal methods
in product safety evaluation. Dr. Goldberg has authored or edited over
100 publications and 15 books. Dr. Goldberg is a graduate of the
Arnold and Marie Schwartz College of Pharmacy and Health Sciences
and received his Ph.D. from the University of Minnesota.
Cory A. Golloub, M.D., is a doctor of internal medicine and
pediatrics currently practicing in Montville, New Jersey. Dr. Golloub
received his B.S. from SUNY Stony Brook and his M.D. from the
University of Medicine, Tampico, Mexico with postgraduate affiliations
with SUNY Downstate - Brookdale Hospital and UMDNJ - New Jersey
Medical School. Dr. Golloub is currently affiliated with UMDNJ-NJMS,
University Hospital and Chilton Memorial Hospital in New Jersey.
Stephen M. Gross, Ed.D., is Dean of the Arnold and Marie
Schwartz College of Pharmacy & Health Sciences, and of the School
of Health Professions, Long Island University. Mr. Gross was awarded
a B.S. degree in pharmacy in 1960, and earned his M.A. and Ed.D.
degrees in college and university administration in 1969 and 1975,
respectively, from Columbia University. Mr. Gross' expertise is in the
area of pharmacy administration, where he has authored numerous
articles on a variety of subjects, including cost-effectiveness of drug
therapy, pharmaceutical advertising, and other educational and
pharmacy practice topics. Mr. Gross is also a member of the New
York State Board of Pharmacy.
Anthony LaVia has held many management positions during his
career and retired as Vice President of the Convatec Division of
Squibb which specialized in the development and sale of ostomy
products. Mr. LaVia was the developer of many of the Squibb
products generally characterized as the beginning of modern
pharmacy. After his retirement Mr. LaVia served as a consultant to
Dr. Albert Fleischner, an officer of the Company, at Roberts
Pharmaceutical, Inc. in the area of pharmaceutical development.
Peter Pugliese, M.D. is internationally recognized for his
expertise in the area of skin care and skin physiology. Dr. Pugliese
maintains offices in Reading, Pennsylvania and has received many
awards for his outstanding work in this field. Dr. Pugliese is the Chief
Executive Officer of Milmark Research, a company devoted to skin
research and contract manufacturing of topical products. Dr. Pugliese
is a graduate of University of Pennsylvania School of Medicine.
Sheldon Rabin, M.D. is an ophthalmologist who specializes in
the treatment of glaucoma. Dr. Rabin maintains offices in New York
City. Dr. Rabin has received numerous awards for these
accomplishments and is currently involved in cancer vaccine research.
Dr. Rabin is a graduate of Northwestern University.
Bhogilal B. Sheth, Ph.D. is a professor in the Department of
Pharmaceutical Sciences, College of Pharmacy, University of
Tennessee at Memphis. Dr. Sheth received his B. Pharm. degree at
Gujerat University and M.S. and Ph.D. degrees at the University of
Michigan. Dr. Sheth currently holds a position as Director, Parenteral
Medications Laboratories, at the University of Tennessee, Memphis.
Mitchell J. Spirt, M.D. is a doctor of internal medicine currently
practicing in California. Dr. Spirt received his B.S. from University
Center of New York at Binghamton and received his M.D. from Mount
Sinai Medical Center in New York.
Gerald N. Wachs, M.D. is a doctor of dermatology currently
practicing in Millburn, New Jersey. Dr. Wachs received his B.S. and
M.D. from the University of Illinois. Dr. Wachs is currently affiliated
with St. Barnabas Hospital and Overlook Hospital in New Jersey and is
a consulting dermatologist for the New Jersey Nets and New Jersey
Devils.
Each of the Company's Scientific Advisors, over time, has been
or will be granted options to purchase shares of the Company's Class
A Common Stock. All options granted to the Scientific Advisors are
exercisable at the fair market value of the Company's Class A
Common Stock as of the date of grant. To date, no options have
been exercised by the Company's Scientific Advisors. Each Scientific
Advisor will be compensated by the Company for his time and
reasonable expenses should he provide services to the Company.
Environmental Matters
On April 8, 1994, the Company was apprised by the New York
State Department of Environmental Conservation ("NYSDEC") that
Doak's current leased manufacturing facility located on adjoining
parcels at 67 Sylvester Street and at 62 Kinkel Street, Westbury, New
York, and former manufacturing facility located at 128 Magnolia
Avenue, Westbury, New York are located in the New Cassel Industrial
Area, which had been designated by the NYSDEC on the Registry of
Inactive Hazardous Waste Sites (the "Registry"). The real property on
which Doak's current manufacturing facility is situated is owned by
and leased to the Company by Dermkraft, Inc., an entity owned by the
former controlling shareholders and officers of Doak. On February 7,
1995, the Company was apprised by the NYSDEC that the current
manufacturing facility will be excluded from the Registry. By letter
dated April 21, 1995, the NYSDEC notified the Company that it
intended to investigate the Company's current manufacturing facility
to determine if hazardous substances had previously been deposited
on that property. By letter dated October 24, 1995, NYSDEC notified
Dermkraft, Inc. that the current manufacturing facility is included in or
near an inactive hazardous waste site described as "Kinkel and
Sylvester Streets" and that NYSDEC intends to conduct a Preliminary
Site Assessment to study the site and immediate vicinity. The
Company has been advised that NYSDEC has made a preliminary
determination to include the 62 Kinkel Street portion of the current
manufacturing facility on the Registry and that the Sylvester Street
portion of the facility will not be included, but those determinations
could be changed before they are finalized. The Company cannot at
this time determine whether the cost associated with the investigation
and required remediation, if any, of the current manufacturing facility
will be material. With respect to the former manufacturing facility on
Magnolia Avenue, which remains designated by the NYSDEC as part
of the Registry, management believes that Doak will not be obligated
to contribute to any remediation costs, if any are required.
Item 2. Properties
The Company leases 9,000 square feet of office and
warehouse space at 383 Route 46 West, Fairfield, New Jersey,
pursuant to a lease expiring on July 31, 1997 with Daniel Glassman,
the Company's Chairman and President, and Iris Glassman, Mr.
Glassman's wife and Treasurer of the Company. This lease is
renewable at the Company's option. The Company currently intends
to renew this lease for an additional two year term (the "Renewal
Term"). Rent expense, including the Company's proportionate share
of real estate taxes, was approximately $176,000 and $173,000 for
Fiscal 1996 and Fiscal 1995, respectively.
In connection with the Doak acquisition, Doak entered into a
three year lease with the former principal stockholders of Doak for the
Doak manufacturing facility (the "Doak Lease"). The Doak
manufacturing facility is located in Westbury, New York and consists
of approximately 11,000 square feet. The Doak Lease runs through
February 1999. Pursuant to the Doak Lease, rent expense is
approximately $60,000 per annum.
During Fiscal 1996 and Fiscal 1995, Doak leased additional
warehouse space in a separate facility in Westbury, New York at a
cost (based upon square footage utilized) of $55,400 and $32,400
per annum, respectively.
During Fiscal 1996 and Fiscal 1995, the Company rented 760
square feet of office space in Chicago, Illinois at cost of $10,000 per
annum.
The Company believes that the aforementioned facilities are
sufficient to meet the Company's current, and presently anticipated,
future needs.
The Company has also entered into a distribution arrangement
with a third party public warehouse located in Tennessee to
warehouse and distribute substantially all of the Company's products.
This arrangement provides that the Company will be billed based on
invoiced sales of the products distributed by such party, plus certain
additional charges.
Item 3. Legal Proceedings
The Company and Doak have been named defendants in a
lawsuit filed in the Supreme Court of the State of New York, County
of Nassau, Index Number 96-32988, Captioned Michael Schiliro,
individually and as the father and natural guardian of Joseph M.
Schiliro, a minor vs. Erick L. Roland, Doak Dermatologics and Bradley
Pharmaceuticals, Inc. This lawsuit was commenced on November 29,
1996. The complaint alleges, among other things, that the Company
and Doak were negligent in their hiring and supervision of one of their
employees. The employee in question, in turn, allegedly committed an
assault against one of the plaintiffs to this litigation. The complaint
seeks $600,000 of compensatory damages from the Company and Doak and
punitive damages of $1,000,000. The Company believes that it has
meritorious defenses to the allegations brought against it.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of the security holders of
the Company during the fourth quarter of Fiscal 1996.
PART II.
Item 5. Market for Common Equity and Related Stockholder
Matters.
The Company's Class A Common Stock, no par value per
share, is quoted on the NASDAQ National Market under the symbol
"BPRX".
The following table sets forth the high and low sales prices for
such securities for the periods indicated, as reported by NASDAQ.
These quotations reflect interdealer prices and do not include retail
markups, markdowns or commissions, and may not necessarily
represent actual transactions.
Class A
Common
High Lo
January 1 - March 31, 1996
2-1/32
1-3/32
April 1 - June 30, 1996
1-3/4
1-3/16
July 1 - September 30, 1996
1-19/32
25/32
October 1 - December 31, 19961-17/32
5/8
January 1 - March 31, 1995
4-23/32
3-5/8
April 1 - June 30, 1995
4-7/32
3-3/8
July 1 - September 30, 1995
4
2-29/32
October 1 - December 31, 1995
3-7/8
15/16
At March 18, 1997, the Company had 246 registered holders
of the Company's Class A Common Stock. The Company believes
there were approximately 2,286 beneficial holders of the Company's
Class A Common Stock at such date.
The Company has not paid any dividends on its Common Stock
since its organization in January 1985. The Company anticipates that
for the foreseeable future, any earnings will be retained for use in its
business and, accordingly, does not anticipate the payment of cash
dividends.
The Company has authorized an aggregate of 900,000 shares
of Class B Common Stock, no par value per share, of which 431,552
shares were issued and outstanding at March 18, 1997. The Class B
Common Stock is not publicly traded. The rights, preferences and
limitations of the Class A and Class B Common Stock are equal and
identical in all respects, except that the holders of the Class B
Common Stock are entitled to elect a majority of the Company's
directors and each share of Class A Common Stock entitles the holder
thereof to one vote upon any and all matters submitted to the
stockholders of the Corporation for a vote, and each share of Class B
Common Stock entitles the holder thereof to five votes upon certain
matters (other than the election of directors) submitted to the
stockholders of the Company for a vote.
At March 18, 1997, there were outstanding 7,670,767 shares (exclusive
of 21,500 shares held in treasury) of Class A Common Stock.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1996, the Company had negative working
capital of ($2,828,800), a positive increase of $2,099,264 over the
December 31, 1995 negative working capital of $(4,928,064). The
Company's working capital position for Fiscal 1996 was positively
affected by a legal settlement with the Company's distributor in
Canada which yielded approximately $1.6 million after expenses.
These settlement proceeds were used by the Company to satisfy, in
part, existing obligations, including accounts payable and current
maturities of long term debt.
During Fiscal 1996, the Company effectively reduced its
accounts payable and accrued expense balances, as compared to its
balance at December
31, 1995, by approximately $3.9 million. This was accomplished
principally by the Company's utilizing a majority of the aforementioned
settlement proceeds and favorably settling outstanding amounts due
to vendors which yielded approximately $400,000 in additional
savings. The Company also instituted cost savings initiatives by
reducing samples, materials and finished goods inventory on hand.
The Company continues to reduce the impact of managed care and
government contracts by cancelling unprofitable contracts and
increasing prices on others.
The Company's Fiscal 1996 working capital position was
further favorably affected by the December 1996 Berlex Restructuring.
This Restructuring resulted in the Company's reducing, from
approximately, $7.3 million, to approximately $3.5 million, the
remaining cash obligation due to Berlex. Of this amount, $500,000
was paid during December 1996 and an additional $500,000 during the
First quarter of Fiscal 1997. The remaining balance of approximately
$2.5 million is payable to Berlex as follows: $700,000 by April 15,
1997, $1,000,000 during May 1997 and $800,000 in equal monthly
installments of $100,000 beginning in June 1997.
In connection with the Berlex Restructuring, the Company issued to
Berlex 1,000,000 shares of Class A Common Stock, representing
approximately 13% of the outstanding shares of Class A Common
Stock of the Company. The Berlex Restructuring further caused the
Company to record a reduction to intangibles in the amount of
$2,413,000.
The Company is presently in the process of seeking financing to
raise the funds necessary to satisfy its obligations to Berlex. There
can be no assurance, however, that the Company can secure this
financing on a timely basis on acceptable terms. The Company's
failure to satisfy its remaining obligations to Berlex would have a
material adverse affect on the Company's operations. Due to the
uncertainties surrounding the Company's ability to satisfy its
obligations to Berlex, as they become due, and the resulting impact
such failure would have on the Company's future financial condition,
there can be no assurance that the Company can continue as a going
concern. The financial statements of the Company included
elsewhere in this Annual Report have been prepared assuming that the
Company will continue as a going concern and do not include any
adjustments that might result from the Company's failure to satisfy its
obligations to Berlex.
To secure its payment obligations to Berlex, the Company has
agreed, generally, not to grant any person a security interest in, or
create a lien upon, any of the Company's assets. In addition, the
Company has granted Berlex a security interest covering all of the
Company's accounts receivables. Berlex, however, has agreed to
release its security interest in the Company's accounts receivables 91
days after the April 15, 1997 payment by the Company.
If the Company cannot obtain sufficient funds to satisfy its
remaining obligations to Berlex, Berlex may declare the Company in
default and seek, among other remedies, the return of the
DECONAMINE(R) trademarks. In such event, the Company would be
forced to cease sales of DECONAMINE(R), the result of which would
have a material adverse effect on the Company's business. The
Company and Doak executed a Confession of Judgment as additional
protection for Berlex against the Company's default in making timely
payments under the Berlex Restructuring. Berlex has agreed to release
this Confession of Judgment 91 days after satisfaction of the
Company's April 15, 1997 payment to it.
Working capital for Fiscal 1996 included an increase in
accounts receivable balances over Fiscal 1995 of approximately
$500,000 and a decrease in the Company's inventory and prepaid
samples and materials of approximately $1.2 million as the Company
reduced its quantities of inventory and prepaid samples and materials
on hand.
It is not currently possible for the Company to predict how its
operations and financial condition will be affected if the
DECONAMINE(R) product line is converted from prescription status to
over-the-counter status (see "Item 1 - Government Regulation").
The Company is required to file an ANDA with the FDA for its
DECONAMINE(R) SR product. The cost of this application is
approximately $900,000. The Company has entered into an
agreement to complete the first phase of these studies at a cost of
approximately $100,000, of which $48,000 was paid during Fiscal
1995 and the balance of $52,000 has been satisfied utilizing funds
previously paid during Fiscal 1995 for projects cancelled during Fiscal
1996. The project is expected to be completed and submitted to the
FDA during 1998. Completion of the research and development
project is subject, however, to the Company's either generating
sufficient cash flow from operations to fund the same or obtaining
requisite financing from outside sources, of which there can be no
assurance. Therefore, the Company cannot at this time reasonably
anticipate the timing of the expenditure of funds for these purposes.
The inability of the Company to further develop and/or file the
necessary ANDA for DECONAMINE(R) SR would have a material
adverse effect on the Company's business.
Provided the Company can successfully raise the capital
necessary to satisfy its obligations to Berlex, its other creditors and to
continue research and development projects with respect to
DECONAMINE(R) SR, the Company believes that it has sufficient cash
flow from operations to support its working capital requirements over
the next twelve months.
Seasonality
Sales of the Company's DECONAMINE(R) product line and other
cough/cold/flu products, which accounted for 56% and 46%,
respectively, of the Company's net sales for Fiscal 1996 and Fiscal
1995, are concentrated in the fall and winter months. Consequently,
sales revenues of these products generally are, and will be,
determined by the severity of the cough/cold/flu season. The
Company promotes these products for allergy symptoms during the
spring and summer months to smooth the seasonality of these sales.
Effective January 1997, the Company implemented a 401(k)
Retirement Plan for employees whereby the Company will match
employee contributions up to 25% of the employee's first 6% of
contributions with shares of the Company's Class A Common Stock.
The Company expects to expense less than $50,000 during Fiscal
1997 based upon current participants in the plan.
In addition, the Company, during January 1997, began a
program to repurchase in open market transactions over the next
twenty-four months, up to 5% of its outstanding Class A Common
Stock. As of March 18, 1997, the Company has repurchased 21,500
shares of Class A Common Stock at a total cost of $29,000. These
shares are held by the Company as treasury shares to be used for
purposes deemed necessary by the Company's Board of Directors,
including funding the Company's 401(k) Retirement Plan matching
contribution.
Effects of Inflation
Management believes that the Company's operations will not be
adversely affected by the future impact of inflation on sales and
results of operations.
RESULTS OF OPERATIONS
Chargebacks and rebates are based on the difference between prices at
which the Company sells its products (principally DECONAMINE(R) SR)
to wholesalers and the sales price ultimately paid by the end-user
(often governmental agencies and managed care buying groups)
pursuant to fixed price contracts. The Company records an estimate
of the amount either to be charged-back to the Company or rebated to
the end-user at the time of sale to the wholesaler.
Chargebacks and rebates received by the Company were re-
evaluated during the third quarter of Fiscal 1995, which resulted in the
Company changing its prior estimates for managed care sales relating
to DECONAMINE(R) SR. Further, during the third quarter of Fiscal
1995, the Company realized a change in its mix of managed care and
government sales as certain large customers who had been purchasing
DECONAMINE(R) SR directly from the Company during the year ended
December 31, 1994 began in Fiscal 1995 to buy indirectly through
wholesalers in larger quantities. As a result, during Fiscal 1995, the
Company recorded a change in estimate for chargebacks relating
principally to government and managed care sales of DECONAMINE(R)
SR made in prior periods. The re-estimate for chargebacks and
rebates in Fiscal 1995 was $1,300,000.
Net Sales for Fiscal 1996 were $12,769,266, representing an
increase of $2,148,205, or approximately 20% from Fiscal 1995.
The increase in net sales for Fiscal 1996 is primarily due to (i) an
increase in the net average selling prices (after trade price adjustments)
of DECONAMINE(R), (ii) the impact of the 1995 sales decrease of
$1,300,000 resulting from a change in estimate, (iii) the impact of the
acquisition of ACID MANTLE(R) in May 1996, which contributed
approximately $500,000 to net sales and (iv) a significant decrease in
chargebacks, rebates and trade promotion discounts.
Net sales of the DECONAMINE(R) product line accounted for
approximately 51% of net sales for Fiscal 1996 versus 40% of net
sales for Fiscal 1995.
DECONAMINE(R) unit sales during Fiscal 1996 decreased by
approximately $2.7 million, or 17%, because the Company cancelled
contracts with managed care organizations, buying groups and the
United States Government which fell below targeted profit
contributions. This decrease, which was planned by the Company,
was offset by renegotiated higher prices on certain managed care and
government contracts, the affect of which the Company has and will
continue to recognize in future periods.
Chargebacks and rebates, principally relating to DECONAMINE(R) SR
and CARMOL(R), were $6.5 million for Fiscal 1996 versus $11.7 million
for Fiscal 1995 (including a change in estimate for prior periods of
$1.3 million). During 1996, the Company received monetary
concessions of approximately $275,000 from managed care vendors
receiving rebates.
During Fiscal 1995, DECONAMINE(R) sales (purchased through
wholesalers to the United States Government and affiliated agencies)
accounted for approximately 25% of the Company's gross sales, but
less than 10% of net sales. During Fiscal 1996, a significant amount
of these contracts were re-negotiated by the Company at higher prices
and DECONAMINE(R) sales to the United States Government and
affiliated agencies, through wholesalers, accounted for approximately
27% of the Company's gross sales and 9% of net sales.
The Company continues to diversify and expand its
dermatological product line with the acquisition of ACID MANTLE(R) and
line extensions for CARMOL(R) and Formula 405(R) A-H-A.
During Fiscal 1996, the managed care system of chargebacks
and rebates gained greater acceptance by the pharmaceutical industry
in general. Managed care organizations increasingly are using these
sales price adjustments (chargebacks and rebates) as a method to
reduce overall costs in drug procurement. Levels of chargebacks and
rebates increased momentum and caused a greater need for more
sophisticated tracking and data gathering to confirm sales at contract
prices to end-users with respect to related Company sales to wholesalers.
The Company believes ithas implemented new procedures, systems and policies
to more closely monitor the managed care and government sales areas of its
business, including higher reserves based upon more conservative estimates.
Cost of Sales for Fiscal 1996 were $3,311,313, representing a
decrease from Fiscal 1995 of $649,024, or approximately 16%. This
decrease was primarily due to the Company's sales product mix. The
Company's gross profit margin for Fiscal 1996 was 74% as compared
to 63% during Fiscal 1995. The increase in the Company's gross
profit margin in Fiscal 1996 was primarily attributed to DECONAMINE(R)
SR sales at higher gross profit margins and the negative impact of the
change in estimate on the Fiscal 1995 gross profit margin.
Selling, General and Administrative Expenses were $6,947,871
for Fiscal 1996, representing a decrease of $5,913,887, or
approximately 46%, from Fiscal 1995. This reduction was the result
of cost saving initiatives implemented by the Company during the
fourth quarter of Fiscal 1995 and throughout Fiscal 1996 which
included reducing payroll, advertising and promotional expenses, as
well as curtailing research and development efforts. In addition, the
Company received monetary concessions of approximately $125,000
from its vendors and suppliers during Fiscal 1996 for immediate
payments from the proceeds of the Company's legal settlement. The
Company will continue to review and institute cost savings in the
future.
Depreciation and Amortization Expenses for Fiscal 1996 were
$1,855,141, representing an increase of $165,154, or approximately
10%, as compared to Fiscal 1995. This increase was principally due
to amortization of intangibles relating to the product acquisition of
ACID MANTLE(R) during Fiscal 1996. The Company also upgraded its
hardware and software computer capability during Fiscal 1996 and
Fiscal 1995 resulting in increased depreciation expense.
Other Income for Fiscal 1996 was $1,645,132, representing
the net payment of $1,645,132 in connection with the settlement of a
lawsuit involving the Company's Canadian distributor.
Interest Expense - Net for Fiscal 1996 increased by $25,322, or
5%, from the corresponding period during Fiscal 1995 due to interest
expense relating to renegotiating outstanding debt with Berlex.
Net Income for Fiscal 1996 was $1,598,507, representing an
increase of $8,519,748 from a net loss of $(6,921,241) for Fiscal
1995. This increase was principally a result of a significant reduction
in chargebacks and rebates realized by the Company during Fiscal
1996. Net income for Fiscal 1996 was also positively impacted by
the Company's recognizing the aforementioned legal settlement
involving the Company's Canadian distributor, net of expenses, of
$1,645,132.
Net income for Fiscal 1996 was also favorably impacted by the
Company's conclusion of renegotiating certain managed care and
United States Government contracts at higher prices, as well as
obtaining monetary concessions from customers, vendors and
suppliers. Increases in earnings were further attributed to the
Company's cost saving initiatives relating to selling, general and
administrative reductions and production cost savings, as well as the
positive impact of cancelling and renegotiating certain contracts.
Net Income Per Common Share for Fiscal 1996 was $.22 per
common share, representing an increase for Fiscal 1996 of $1.16, as
compared with a net loss per common share for Fiscal 1995 of ($.94)
per common share. Computation of net income per common share for
Fiscal 1996 and the computation of net loss per common share for
Fiscal 1995 do not include the effect of stock equivalents because the
inclusion of such stock equivalents would be antidilutive or not
materially dilutive.
Item 7. Financial Statements and Supplementary Data
The financial statements required by Item 7 are appended to
this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BRADLEY PHARMA-
CEUTICALS, INC.
By/s/ Daniel Glassman
(Daniel Glassman)
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Date Signature Title
March 31, 1997 /s/ Daniel Glassman Chairman of
(Daniel Glassman) the Board
President and Chief
Executive Officer
(Principal Executive
Officer)
March 31, 1997 /s/ Alan V. Gallantar Corporate
(Alan V. Gallantar) Vice President
and Chief Financial
Officer
(Principal Financial
and Accounting Officer)
March 31, 1997 /s/ Iris Glassman Treasurer
(Iris Glassman) and Director
(Iris Glassman)
March 31, 1997 /s/ David H. Hillman Secretary
(David H. Hillman) and Director
March 31, 1997 /s/ Frank McKim Director
(Frank McKim)
March 31, 1997 /s/ Philip McGinn Director
(Dr. Philip McGinn)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Bradley Pharmaceuticals, Inc. and Subsidiaries
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at December 31, 1996
and 1995 F-3
Consolidated Statements of Operations for the Two
Years Ended December 31, 1996 and 1995 F-5
Consolidated Statement of Shareholders' Equity for the
Two Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Two
Years Ended December 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8 - F-36
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Bradley Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
Bradley Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Bradley Pharmaceuticals, Inc. and Subsidiaries as of December 31,
1996 and 1995, and the consolidated results of their operations, consolidated
changes in shareholders' equity and their consolidated cash flows for each
of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As described in Note B, the Company has a working capital deficit of
$2,829,000 at December 31, 1996. The Company is obligated to pay
approximately $2.9 million through January 1998, to Berlex
Laboratories, Inc. under a product acquisition agreement (Note C).
These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
GRANT THORNTON LLP
Parsippany, New Jersey
March 13, 1997
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
CURRENT ASSETS
Cash and cash equivalents $ - $ 556,064
Accounts receivable, net of allowance for
doubtful accounts of $71,000 in 1996 and
$114,000 in 1995 2,736,037 2,254,757
Refundable income taxes - 1,764,256
Inventory 1,057,985 1,671,967
Prepaid samples and materials 1,681,199 2,255,597
Prepaid expenses and other 52,984 111,376
Total current assets 5,528,205 8,614,017
PROPERTY AND EQUIPMENT - AT COST, less
accumulated depreciation of $900,000 in
1996 and $682,000 in 1995 343,428 570,195
INTANGIBLE ASSETS, NET 14,831,536 17,715,737
$20,703,169 $26,899,949
The accompanying notes are an integral part of these statements.
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES
Current maturities of long-term debt $3,444,569 $4,949,633
Accounts payable 2,035,448 3,787,112
Accrued expenses 2,683,712 4,805,336
Income taxes payable 193,276 -
Total current liabilities 8,357,005 13,542,081
LONG-TERM DEBT, less current maturities 530,964 4,491,050
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized,
2,000,000 shares; issued - none - -
Common, Class A, no par value; authorized,
26,400,000 shares; issued and outstanding,
7,692,267 shares in 1996 and 6,780,267
shares in 1995 13,970,240 13,185,990
Common, Class B, no par value; authorized,
900,000 shares; issued and outstanding,
431,552 shares in 1996 and 495,443
shares in 1995 845,448 845,448
Investment in ITG Laboratories, Inc. - (565,625)
Accumulated deficit (3,000,488) (4,598,995)
11,815,200 8,866,818
$20,703,169 $26,899,949
The accompanying notes are an integral part of these statements.
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1996 1995
Net sales $12,769,266 $10,621,061
Cost of sales 3,311,313 3,960,337
9,457,953 6,660,724
Selling, general and administrative 6,947,871 12,861,758
expenses
Depreciation and amortization 1,855,141 1,689,987
Other income - litigation settlement, net (1,645,132)
of expenses
Interest expense, net 551,566 526,244
7,709,446 15,077,989
Income (loss) before income taxes 1,748,507 (8,417,265)
Income tax (expense) benefit (150,000) 1,496,024
NET INCOME (LOSS) $ 1,598,507 $(6,921,241)
Weighted average shares outstanding 7,175,348 7,348,975
Net income (loss) per common share
Primary $.22 $(.94)
Fully diluted $.22 $(.94)
The accompanying notes are an integral part of these statements.
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
Class A common stock Class B common stock
no par value(Note A) no par value (note A) Sub-
Shares Amount Shares Amount Total
Balance at
December 31,1994 5,985,663 $ 11,179,423 881,300 $ 845,448 $12,024,871
Stock options
exercised 67,719 165,281 165,281
Warrants and
private placement
options exercised 605,495 1,425,661 1,425,661
Conversion of Class
B shares to Class A
common stock 21,390 (21,390)
Return and retirement
of Class B shares (364,467)
Investment in ITG
Laboratories, Inc. 100,000 415,625 415,625
Net loss for the year
Balance at
December 31, 1995 6,780,267 13,185,990 495,443 845,448 14,031,438
Retained Investment
earnings in ITG
Sub- (accumulated Laboratories
Total deficit) Inc. Total
Balance at
December 31, 1994 $12,024,871 $ 2,322,246 $14,347,117
Stock options
exercised 165,281 165,281
Warrants and private
placement options
exercised 1,425,661 1,425,661
Conversion of Class
B common stock to
Class A common stock - -
Return and retirement
of Class B shares - -
Investment in ITG
Laboratories, Inc. 415,625 (565,625) (150,000)
Net loss for the year (6,921,241) (6,921,241)
Balance at
December 31, 1995 14,031,438 (4,598,995) (565,625) 8,866,818
Class A common stock Class B common stock
no par value (Note A) no par value (Note A) Sub-
Shares Amount Shares Amount Total
Balance at
December 31, 1995 6,780,267 $13,185,990 495,443 $ 845,448 $14,031,438
Shares issued to
Berlex Inc.
pursuant to amend-
ment to asset pur-
chase agreement 1,000,000 1,125,000 1,125,000
Shares issued for
consulting
services 12,000 16,875 16,875
Compensation charge
for stock options
issued to
consultants 58,000 58,000
Return and retire-
ment of Class B
shares (63,891)
Disposition of
investment in ITG
Laboratories, Inc. (100,000) (415,625) (415,625)
Net loss for
the year
Balance at
December 31, 1996 7,692,267 $ 13,970,240 431,552 $ 845,448 14,815,688
Retained Investment
earnings in ITG
Sub- (accumulated Laboratories
Total deficit) Inc. Total
Balance at
December 31, 1995 $14,031,438 $(4,598,995) $ (565,625) $ 8,866,818
Shares issued to
Berlex, Inc.
pursuant to amend-
ment to asset
purchase agree-
ment 1,125,000 1,125,000
Shares issued for
consulting
services 16,875 16,875
Compensation charge
for stock options
issued to
consultants 58,000 58,000
Return and retire-
ment of Class B
shares - -
Disposition of
investment in ITG
Laboratories, Inc. (415,625) 565,625 150,000
Net income for
the year 1,598,507 1,598,507
Balance at
December 31, 1996 $14,815,688 $ (3,000,488) $ 0 $11,815,200
The accompanying notes are an integral part of this statement.
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1996 1995
Cash flows from operating activities
Net income (loss) $ 1,598,507 $(6,921,241)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Depreciation and amortization 1,855,140 1,689,987
Loss on sale of fixed assets 8,438 -
Noncash compensation charges 74,875 -
Deferred tax benefit - 482,000
Changes in operating assets and liabilities
Accounts receivable (481,280) 2,736,355
Inventory and prepaid samples and materials 1,188,380 (1,279,724)
Prepaid expenses and other 58,392 60,322
Accounts payable and accrued expenses (3,426,907) 4,370,157
Income taxes payable/refundable 1,957,532 (2,970,702)
Due to/from affiliate - 96,419
Net cash provided by (used in) operating
activities 2,833,077 (1,736,427)
Cash flows from investing activities
Investment in Doak Pharmacal Co. Inc. (7,236) (314,807)
Proceeds from disposition of common stock of
ITG Laboratories, Inc. 33,000 -
Redemption (purchase) of temporary
investments, net - 697,124
Additional investments in trademarks, patents
and other intangible assets (350,244) (250,999)
Purchase of property and equipment (22,312) (86,478)
Proceeds on sale of fixed assets 6,200 -
Net cash (used in) provided by investing
activities (340,592) 44,840
Cash flows from financing activities
Payment of shareholders' loans - (15,000)
Payment of notes payable (3,048,549) (524,383)
Proceeds from conversion of warrants and - 1,590,942
options
Net cash (used in) provided by financing
activities (3,048,549) 1,051,559
NET DECREASE IN CASH AND CASH
EQUIVALENTS (556,064) (640,028)
Cash and cash equivalents at beginning of year 556,064 1,196,092
Cash and cash equivalents at end of year $ - $ 556,064
Supplemental disclosures of cash flow
information:
Cash paid during the year for
Interest $ 224,000 $ 97,900
Income taxes 42,000 953,000
Reference is made to Notes C and D for product acquisitions in 1996
and 1995, and the payment terms for such acquisitions.
The Company issued 1,000,000 shares of its Class A common stock in
partial satisfaction of its obligation to Berlex (see Note C).
The accompanying notes are an integral part of these statements.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Bradley Pharmaceuticals, Inc. (the "Company") is a New Jersey
corporation founded in 1985. The Company's primary business
activity is the manufacturing and marketing of various
pharmaceutical and dermatological products, which have been
acquired through the purchase of trademark rights and patents.
A summary of the significant accounting policies of the Company
applied in the preparation of the accompanying consolidated
financial statements follows:
1.Principles of Consolidation
The consolidated financial statements include the accounts of
Bradley Pharmaceuticals, Inc. and its wholly-owned subsidiary,
Doak Dermatologics, Inc. ("Doak"), acquired February 1, 1994 (Note
D) and its wholly-owned foreign sales corporation, Bradley
Pharmaceuticals Overseas, Ltd., formed in February 1995, and its
wholly-owned subsidiary, Bradley Pharmaceuticals (Canada) Inc.,
formed in June 1996. All intercompany transactions have been
eliminated in consolidation.
2.Inventory
Inventory, consisting principally of finished goods, is stated at
the lower of cost or market. Cost is determined by the first-in,
first-out method.
3.Prepaid Samples and Materials
The Company capitalizes product samples and promotional
materials. These items are charged to operations in the period
in which they are distributed to customers.
4.Depreciation
Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated
service lives using the straight-line and accelerated methods
over a period of five to seven years for equipment and ten years
for leasehold improvements.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE A (continued)
5.Intangible Assets
The costs of noncompete agreements, goodwill, license agreements,
and purchased trademarks and patents are capitalized and
amortized on a straight-line basis to operations over their
estimated useful lives or statutory lives, whichever are shorter.
The estimated lives for trademarks are 10 to 40 years (with a
cost basis of approximately $13.9 million and $14.5 million at
December 31, 1996 and 1995, respectively, comprised of 15-year
life trademarks).
The estimated amortization periods for other intangible assets
are as follows: 10 to 20 years for goodwill, 10 years for
license agreements, 17 years (or the remaining life at the time
of purchase, if shorter) for patents and 3 years for noncompete
agreements.
The Company has adopted Statements of Financial Accounting
Standards No. 121, (Impairment of Long-Lived Assets to be
Disposed Of.) Accordingly, whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable, management assesses the recoverability of the asset.
Management compares the cash flows, on an undiscounted basis,
expected to be generated from the related assets to the carrying
amounts to determine whether an impairment has occurred. It is
reasonably possible that the actual cash flows that result will
be insufficient to recover the carrying amount of certain of
these intangibles. No impairment loss was required for 1996 or
1995.
6.Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid
securities having an original maturity of three months or less at
the time of purchase.
7.Certain Concentrations
The Company is potentially subject to concentrations of credit
risk, which consist principally of cash and cash equivalents and
trade accounts receivable. The cash and cash equivalent balances
at December 31, 1995 were principally held by one institution,
and are in excess of the Federal
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE A (continued)
Deposit Insurance Corporation ("FDIC") insurance limit.
Concentration of credit risk with respect to accounts receivable
is generally limited due to the Company's large, diverse customer
base. At December 31, 1996 and 1995, two and three wholesale
customers accounted for approximately 59% and 38%, respectively,
of the total accounts receivable balance.
Approximately 51% and 40% of the Company's net sales for the
years ended December 31, 1996 and 1995 were derived from sales of
its Deconamine(R) products. The Company cannot predict the date
Deconamine(R)SR status, mandated by the United States Food and Drug
Administration, ("FDA") will change from a prescription product
to an over-the-counter product. The Company, however, based upon
information obtained currently from the FDA, believes the status
will not change until sometime after April 1998. For the year
ended December 31, 1995, Deconamine(R) sales (purchased through
wholesalers) to the U.S. government and its affiliated agencies
generally under contracts accounted for approximately 25% of
gross sales; however, less than 10% of overall net sales. During
1996, certain of these contracts were terminated or renegotiated
at higher prices, and accounted for approximately 27% and 9% of
gross and net sales, respectively.
For the year ended December 31, 1996, three wholesale customers
accounted for approximately 37% (15%, 12% and 10%) of net sales.
For the year ended December 31, 1995, three wholesales customers
accounted for approximately 41% (16%, 13% and 12%) of net sales.
One company manufacturing products for the Company accounted for
approximately 16% of the Company's cost of goods sold for the
year ended December 31, 1996. Two companies manufacturing
products and two companies producing packaging products for the
Company accounted for approximately 20%, 12%, 13% and 10%,
respectively, of the Company's cost of goods sold for the year
ended December 31, 1995. Management believes it can obtain
replacement manufacturing arrangements and that a loss of any or
all of their vendors and/or manufacturers would not have a
material effect on the Company.
The Company had export sales of approximately 11% and 20% of its
net sales for the years ended December 31, 1996 and 1995,
respectively.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE A (continued)
8.Net Income Per Common Share
For the years ended December 31, 1996 and 1995, the net income
(loss) per common share was based upon weighted average number of
shares outstanding of Class A and B shares and does not include
the effect of the stock equivalents because the inclusion of such
stock equivalents would be antidilutive or not materially
dilutive.
9.Income Taxes
The Company and Doak file a consolidated Federal income tax
return.
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, ("Accounting
for Income Taxes"). This statement requires, among other things,
an asset and liability approach for financial accounting and
reporting for deferred income taxes. In addition, the deferred
tax liabilities and assets are required to be adjusted for the
effect of any future changes in the tax law or rates. Deferred
income taxes arise from temporary differences resulting in the
basis of assets and liabilities for financial reporting and
income tax purposes.
10.Accounting for Stock Options
Statement of Financial Accounting Standards No. 123, (Accounting
for Stock Based Compensation, ) issued in 1995, introduces a
method of accounting for employee stock-based compensation plans
based upon the fair value of the awards on the date they are
granted. Under this fair value based method, public companies
estimate the fair value of stock options using a pricing model,
such as the Black Scholes model, which requires inputs such as
the expected volatility of the stock price and an estimate of the
dividend yield over the option's expected life. This statement
gives entities a choice of recognizing related compensation
expense by adopting the new valuation method or to continue to
measure compensation using the intrinsic value approach under
Accounting Principles Board ("APB") Opinion No. 25. The Company
has adopted the APB No. 25 method of measurement (see Note H-2).
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE A (continued)
11.Reclassifications
Certain reclassifications have been made to the prior year
financial statements in order to conform to the current
presentation.
12.Using Estimates in Financial Statements
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company's
estimate for chargebacks and rebates represents a particularly
sensitive estimate.
13.Chargebacks and Rebates
Chargebacks and rebates are based on the difference between the
prices at which the Company sells its products (principally
DECONAMINE(R)SR) to wholesalers and the sales price ultimately paid
by the end-user (often governmental agencies and managed care
buying groups) pursuant to fixed price contracts. The Company
records an estimate of the amount either to be charged back to
the Company, or rebated to the end user, at the time of sale to
the wholesaler. Management has recorded an accrual for
chargebacks and rebates of $1,865,000 and $3,026,000 at December
31, 1996 and 1995, respectively (included in accrued expenses),
based upon factors including current contract prices, historical
chargeback rates and actual chargebacks claimed. The amount of
actual chargebacks claimed could differ (either higher or lower)
in the near term from the amounts accrued by the Company.
At September 30, 1995, the Company recorded a change in estimate
for chargebacks relating principally to government and managed
care sales of DECONAMINE(R)SR made in prior periods. The re-
estimate for chargebacks and rebates for the year ended December
31, 1995 was $1,300,000.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE B - BASIS OF PRESENTATION
The Company had a working capital deficit of $2,828,800 at December
31, 1996. The Company is obligated to pay approximately $2.9
million through January 1998 to Berlex Laboratories, Inc.
("Berlex") under a product acquisition agreement for its DECONAMINE(R)
product (Note C), which agreement was amended December 23, 1996.
$500,000 of the January 1997 through March 1997 payments
aggregating $1,200,000 have been made through March 1997, and the
due date of the March 1997 payment of $700,000 was extended to
April 15, 1997. The Company's consolidated financial statements
have been prepared on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. The matters
discussed above raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from
this uncertainty.
Management's plans for dealing with these matters include some or
all of the following:
Make the required debt service payments as cash is
available. This amount is expected to be paid from cash on
hand, cash generated by operations, private placements with
new or existing investor groups, or loans.
The Company also believes it has the ability to accelerate
sales to (and collections from) certain customers and to
sell certain foreign and domestic trademark rights to the
extent necessary (if at all) to make certain payments.
Pursue equity financing on terms that management considers
to be satisfactory.
Negotiating additional payment modifications with Berlex.
Although management considers its plans to be viable, there can be
no assurance that the Company will be successful in carrying out
these plans.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C - INTANGIBLE ASSETS
Intangible assets are summarized as follows:
1996 1995
Cost Accumulated Cost Accumulated
amortization amortization
Trademarks $16,905,140 $3,675,007 $18,195,401 $2,406,176
Patents 1,327,454 735,517 1,327,454 551,666
Licenses 124,886 46,800 124,886 34,320
Goodwill 1,248,125 318,399 1,221,366 194,688
Covenants
not to compete 162,140 160,486 162,140 128,660
$19,767,745 $4,936,209 $21,031,247 $3,315,510
Intangible assets arose principally from the Doak acquisition (Note
D) and the following transactions in 1992 through 1996.
LUBRIN(R)
In December 1992, the Company acquired certain rights, including
the trademark and patent, to the personal lubricating insert,
LUBRIN(R) INSERTS ("LUBRIN"). Concurrently with this acquisition, the
Company and UPSHER-SMITH LABORATORIES, INC. ("UPSHER-SMITH"),
entered into a three-year manufacturing contract, renewable at six-
month intervals after the initial term, to manufacture LUBRIN(R) for
the Company and agreed for seven years not to compete with the
Company with respect to the product LUBRIN(R).
Total consideration for the Company's acquisition of LUBRIN(R)
consisted of: (i) $1 million, $500,000 of which was paid at
closing, with the balance payable at a rate of 9% per annum, in 20
quarterly installments of $31,321 each, commencing on March 15,
1993; (ii) a 4% royalty on adjusted sales of LUBRIN(R) up to and
including the first $5,000,000 and 3% of adjusted sales in excess
of the first $5,000,000 through October 30, 1999; and (iii)
warrants to purchase up to 60,000 shares of the Company's Class A
common stock at a price of $4.50 per share exercisable at any time
prior to December 15, 1997. Of the total purchase price, $1
million was attributed to patents with an estimated life of seven
years.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C (continued)
TRANS-VER-SAL(R) WART PRODUCTS/GLANDOSANE
On March 30, 1993, the Company acquired from Tsumura Medical, a
division of Tsumura International, Inc., all technical, proprietary
and distribution rights to five specialized dermal patch products
currently used in the treatment of warts ("TRANS-VER-SAL(R)") and a
synthetic saliva aerosol product (GLANDOSANE(R)) used to alleviate dry
mouth caused by various treatments and illnesses.
Total consideration for the Company's acquisition of these products
consisted of: (i) $1,300,000, of which $850,000 was paid at
closing and the balance of $450,000 payable by the Company's
promissory note at 7% per annum in twenty quarterly installments of
$26,861; (ii) a 5.5% royalty on net sales of the products payable
for a period of five years or until an aggregate $600,000 of
royalty payments are made; (iii) approximately $170,000 paid for
the acquisition of inventory on hand; and (iv) warrants granted to
purchase up to 150,000 shares of the Company's Class A common stock
at $4.50 per share exercisable at any time through March 30, 1998.
Of the total purchase price, $866,250 was attributed to trademarks
with an estimated life of 20 years.
DECONAMINE(R)
On December 10, 1993 (the "Closing Date"), in accordance with the
terms and conditions set forth in the Purchase Agreement dated as
of November 10, 1993, as amended (the "Purchase Agreement"),
between Bradley Pharmaceuticals, Inc. and Berlex Laboratories, Inc.
("Berlex"), the Company acquired all technical, proprietary and
distribution rights to an allergy and decongestant remedy called
DECONAMINE(R) ("DECONAMINE(R)").
Specifically, the Company acquired: Customer receivables, net of
chargebacks and rebates from sales of DECONAMINE(R) from the close of
business on October 29, 1993 to the Closing Date; all DECONAMINE(R)
inventory existing at the Closing Date; and all intellectual
property rights, marketing materials, books and records, licenses
and permits and goodwill relating to DECONAMINE(R).
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C (continued)
Total consideration for the Company's acquisition (after giving
effect to imputed interest of approximately $1.6 million) was
originally approximately $16.4 million (the "Purchase Price") and
consisted of: (i) approximately $4.3 million, paid at closing,
from the proceeds of a private placement (Note H), with an
additional $1.7 million paid from proceeds of DECONAMINE(R) sales from
November 1, 1993 to the date of closing; (ii) $.4 million
representing the standard costs of the inventory as of the close of
business on October 29, 1993 (except for 50% of the inventory of
the raw material active ingredient) paid 30 days from the Closing
Date; (iii) the standard costs of 50% of the inventory of the raw
material active ingredient paid 60 days from closing; (iv) a
noninterest-bearing note calling for payments of $2 million during
December 1994, approximately $2.66 million each on the second,
third and fourth anniversaries of the Closing Date; and (v) $84,000
to be paid on the last day of each month beginning with January
1996, up to a maximum of $2 million if the effective date (plus
grace period for compliance, if any) announced by the FDA
publication with respect to the final "Monograph" for DECONAMINE(R)
has occurred; and the Company has, prior to or during such month,
expended funds for the purpose of preserving the prescription drug
status of DECONAMINE(R).
During the fourth quarter of 1995, the Company accrued
approximately $1,512,000 representing 18 months of payments
pursuant to item (v) above as the minimum amount it determined to
be payable prior to DECONAMINE(R) coming off prescription status.
During the first quarter of 1996, an additional $252,000 was
accrued, representing an additional three months of payments.
On January 5, 1996, the Company and Berlex amended the agreement to
provide for the following:
The $2.67 million due on December 9, 1995 was rescheduled
to provide a payment of $800,000 in February 1996 and the
remainder to be paid on June 30, 1996. All payments are
collateralized by the Company's accounts receivable and
inventory until after the June 30, 1996 payment is made.
The $84,000 monthly payments described in item (v) above
will be payable beginning in January 1, 1998.
Interest will accrue on the deferred $2.67 million
payment at prime plus 4%. Interest will accrue on the
$84,000 per month beginning February, 1996 at prime plus
2%.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C (continued)
On December 23, 1996, the Company and Berlex further amended the
agreement to provide the following:
The Company is to make payments of $250,000 each on December
23, 1996, December 31, 1996, January 30, 1997 and February 18,
1997; $700,000 is due on March 17, 1997; $1.0 million is due
on May 15, 1997; and $100,000 per month is due June 15, 1997
through January 15, 1998. $500,000 of the $1,200,000 due
Berlex for the period January 1997 through March 1997 was paid
through March 1997. A one-month extension until April 15,
1997 was granted by Berlex for the March 1997 payment.
The Company also issued to Berlex 1,000,000 Class A shares
(approximately 13% of the new public float of 7.7 million
shares) with a then market value of $1,125,000, and which the
Company is required to use its best efforts to cause to be
registered with the Securities and Exchange Commission.
The Company granted Berlex a security interest in all of
the Company's accounts receivable to secure the payments
of the first $1.7 million in payments and executed a
Confession of Judgment in the event the Company defaults
in timely making any of such $1.7 million in payments.
The difference between the carrying amount of the obligation
to Berlex and the amount of consideration to be paid under the
December 23, 1996 amendment represents a reduction in the net
purchase price of DECONAMINE(R) pursuant to the December 1996
amended agreement amounted to $2,413,000 and was recorded as a
reduction to the intangible assets.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C (continued)
ADEFLOR M(R) and PAMINE(R) Acquisitions
In February 1994, the Company acquired from The Upjohn Company
("Upjohn"), all United States manufacturing, packaging and
proprietary rights, including all trademarks, registrations,
marketing data, and customer lists of ADEFLOR M(R), a vitamin and
mineral tablet with fluoride, and PAMINE(R) tablets, methscopalamine
bromide, used in connection with the treatment of peptic ulcers.
In consideration therefor, the Company agreed to pay Upjohn
$225,000, $50,000 at closing, with the remaining $175,000 payable
in equal quarterly installments of $25,000, each commencing on June
30, 1994. In addition, the Company agreed to pay Upjohn an 8%
royalty against net sales of these products through February 1,
1996, and a 4% royalty thereafter until February 1, 2004. The
Company further agreed to purchase from Upjohn, at approximately
Upjohn's cost, all salable inventory of ADEFLOR M(R) and PAMINE(R)
existing at the closing date.
CARMOL Acquisition
In June 1994, the Company acquired from Syntex (U.S.A.) Inc.
("Syntex") all manufacturing, packaging, quality control,
stability, drug experience, file history, customer lists and
marketing rights, titles and interests, including all U.S.
trademarks to CARMOL(R) 10 and CARMOL(R) 20 (nonprescription total body
moisturizers) and CARMOL(R) HC (a prescription moisturizer containing
hydrocortisone) (the "CARMOL Products"). In consideration for this
acquisition, the Company agreed to pay Syntex $450,000, $150,000 of
which was paid at closing. The remaining $300,000 is payable in
three (3) equal annual installments of $100,000 each, commencing on
June 10, 1995. In addition, the Company agreed to pay Syntex a 3%
royalty on sales of the CARMOL Products, commencing June 10, 1997
for a period of seven years.
ITG LABORATORIES, INC. Investment
Effective June 15, 1995, the Company entered into a Stock Purchase
and Distribution Agreement with ITG Laboratories Inc. ("ITG"), a
product research company headquartered in Atherton, CA and Yavne,
Israel, whereby:
The Company purchased approximately 17% of the stock of
ITG (approximately 1,000,000 shares) for 100,000 shares
of Bradley Class A Common Stock distributed during August
1995 and $150,000.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE C (continued)
The Company was appointed exclusive U.S. distributor for
all of ITG's Omiderm(TM) products, including ITG's Synthetic
Polyurethane Wound Dressing. Omiderm(TM) is a clinically
proven, unique wound dressing line which allows
permeability of water, oxygen and aqueous medications,
while maintaining a sterile environment for healing by
preventing microbial invasion. The product sales through
December 31, 1995 are not material to the Company's
operations. The value of consideration for this
acquisition was $565,625 and is included as a reduction
of stockholders' equity on the accompanying consolidated
balance sheet.
During 1996, the Company and ITG entered into an agreement,that
resulted in an unwinding of this transaction, and the recording
of a $90,000 loss and that provided for the following:
The Company delivered the 1,000,000 shares of ITG stock
to ITG.
ITG delivered the 100,000 shares of Bradley stock and
$60,000 (payable by ITG through April 1998) to Bradley.
Bradley retained its nonexclusive U.S. distribution
rights for the Omiderm(TM) products.
ACID MANTLE(R) Acquisition
In May 1996, the Company acquired from Sandoz Pharmaceuticals Corp.
the trademark rights to the ACID MANTLE(R) skin treatment line,
including the manufacturing, marketing and distribution rights
within the United States and Puerto Rico. In consideration for
this acquisition, the Company agreed to pay Sandoz $900,000, of
which $250,000 was paid at closing. The remaining $650,000 is
payable in installments of $250,000 in May 1997 and $100,000 annually
each in May 1998 through May 2001. The Company also
purchased Sandoz's entire inventory of ACID MANTLE(R) salable
products and raw material.
The majority of the Purchase Price was attributed to trademarks
with an estimated life of 15 years.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE D - ACQUISITION OF DOAK PHARMACAL CO., INC.
On February 14, 1994, the Company acquired as of January 31, 1994,
67.7% of the shares of Doak Pharmacal Co., Inc. ("Doak"), for
approximately $929,000. Doak was a publicly traded company engaged
in the manufacture and sale of cosmetic dermatologic products and
pharmaceutical dermatologic products. The acquisition was
accounted for as a purchase. Accordingly, the results of
operations of Doak have been included in the accompanying
consolidated financial statements commencing February 1, 1994.
Goodwill resulting from this purchase totaling approximately
$640,000 is being amortized over ten years.
In January 1995, the Company consummated the merger of Doak with
the Company, pursuant to which the Company acquired substantially
all of the remaining outstanding shares of Doak (at the same $1.74
per share price as the initial acquisition) for a total of
approximately $420,000, of which approximately $335,000 was paid
through March 15, 1996 (representing the Doak shares forwarded to
the Company for redemption to date). In December 1994, the Company
acquired an additional 2.3% of the shares of Doak for approximately
$24,000. In 1995 and 1996, the Company acquired certain minor
additional shares of Doak. Such amounts paid are recorded as
additional goodwill.
NOTE E - INCOME TAXES
The provision for income tax (expense) benefit is as follows:
Year ended Year ended
December 31, December 31,
1996 1995
Current
Federal $ (950,000) $1,758,523
State (193,000) 219,501
(1,143,000) 1,978,024
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE E (continued)
Year ended Year ended
December 31, December 31,
1996 1995
Deferred
Federal $ - $ (423,000)
State - (59,000)
$ - $ (482,000)
Utilization of net operating loss
carryforwards
Federal $ 895,000 -
State 98,000 -
993,000 -
$ (150,000) $1,496,024
The following is a summary of the items giving rise to deferred tax
benefits at December 31, 1996 and 1995:
1996 1995
Current
Allowance for doubtful accounts $ 26,000 $ 123,000
Allowances on sales 286,000 49,000
Inventory reserves and capitalization 124,000 116,000
Accrued expenses 93,000 64,000
529,000 352,000
Long-term
Net operating loss carryforward 307,000 853,000
Alternative minimum tax credit 188,000 138,000
Amortization of intangibles and fixed
assets 352,000 50,000
847,000 1,041,000
Total deferred tax assets 1,376,000 1,393,000
Less valuation allowance (1,376,000) (1,393,000)
$ - $ -
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE E (continued)
A valuation allowance has been recorded at December 31, 1996 and
1995 reflecting the uncertainty of the future utilization of these
tax benefits.
The difference between the actual Federal income tax benefit
(expense) and the amount computed by applying the prevailing
statutory rate to income before income taxes is reconciled as
follows:
Year ended Year ended
December 31, December 31,
1996 1995
Tax at statutory rate (34.0)% 34.0%
State income tax (expense) benefit,
net of Federal tax effect (3.5) 1.3
Change in valuation allowance and
previously unrecorded benefits 31.5 (16.5)
Other (2.6) (1.0)
Effective tax rate (8.6)% 17.8%
The Company has a net operating loss carryforward for Federal
income tax purposes of $511,000.
Internal Revenue Code Section 382 places a limitation on the
utilization of Federal net operating loss and other credit
carryforwards when an ownership change, as defined by the tax law,
occurs. Generally, this occurs when a greater than 50 percentage
point change in ownership occurs. Accordingly, the actual
utilization of the net operating loss carryforwards and other
deferred tax assets for tax purposes may be limited annually to the
percentage (about 6%) of the fair market value of the Company at
the time of any such ownership change.
As a result of the stock ownership changes that occurred in
connection with the acquisition of Doak, the Subsidiary's net
operating loss carryforwards became subject to this limitation.
Included in the Company's $511,000 net operating loss carryforward
is $344,000 of net operating loss carryforward subject to this
limitation, of which a maximum of $71,000 can be utilized
(annually) in subsequent years and which expires in 2004. The
remaining $167,000 of net operating loss was generated in 1995 and
will be carried forward, subject to limitations, and expires in
2010.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
Installment note due 2001 (a) $ 118,989 $ 118,989
Installment note due 1996 (b) - 24,570
Installment note due 1997 (c) 118,542 226,989
Installment note due 1998 (d) 151,738 221,886
Installment note due 1997 (e) 2,879,882 8,510,761
Installment note due 1997 (f) 98,282 194,872
Capital lease obligations (g) 63,824 141,385
Installment note due 2001 (h) 520,957 -
Installment notes - other 23,319 1,231
3,975,533 9,440,683
Less: current maturities (3,444,569) (4,949,633)
$ 530,964 $ 4,491,050
(a)The note, which originated in August 1991 in connection with
the acquisition of a trademark (DUADACIN(R)), calls for interest
only, at the rate of 10% commencing August 1992, and
quarterly installments consisting of principal and interest
in the amount of $6,865 for the eight-year period commencing
November 1993. This note is collateralized by the trademark
assigned to the Company.
(b)The note payable, which originated in February 1994 in
connection with the acquisition of the trademarks (ADEFLOR M(R)
and PAMINE(R)), bears no interest, but interest has been imputed
at an annual rate of 7%. Quarterly payments of $25,000
commenced on June 30, 1994, with a final payment made in
1996.
(c)The note payable, which originated in December 1992 in
connection with the acquisition of a patent and trademark
(LUBRIN(R)), bears interest at the rate of 9% with quarterly
installments consisting of principal and interest in the
amount of $31,321. The seller of the product has been
granted a security interest in the assets acquired by the
Company.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE F (continued)
(d)The note payable, which originated in March 1993 in
connection with the acquisition of trademarks and a patent
(TRANS-VER-SAL(R)/GLANDOSANE(R)), bears interest at the rate of 7%
and is payable in 20 equal quarterly installments of $26,861.
The seller has been granted a security interest in the assets
acquired by the Company. The Company is in default of this
note for failure to make timely payments.
(e)The note payable, which originated in December 1993 in
connection with the acquisition of a trademark (DECONAMINE(R)),
is noninterest bearing. Pursuant to the renegotiated terms
(Note B), the note is payable in installments of $250,000 in
January and February 1997, $700,000 on March 17, 1997,
$1,000,000 on May 15, 1997 and $100,000 per month from June
1997 through January 1998. The January 1997 through March
1997 payments aggregating $1,200,000 have only been paid to
the extent of $500,000 and the March 1997 payment was
extended to April 15, 1997. Interest at an annual rate of 7%
was originally imputed for this note and was revised to 10.5%
in December 1996. The amount due at December 31, 1996 and
1995 is net of imputed interest of $112,000 and $1,001,000,
respectively. The seller has been granted a security
interest in the assets acquired by the Company. Berlex has
also been granted a security interest in the Company's
accounts receivable through the date of payment of the first
$1.7 million in payments, of which $500,000 was paid in
December 1996 and $500,000 was paid through March 1997.
(f)The note payable, which originated in June 1994 in connection
with the acquisition of trademarks (CARMOL), is noninterest
bearing and is payable in annual installments of $100,000
commencing June 1995. Interest at an annual rate of 7% has
been imputed for this note. The seller has been granted a
security interest in the assets acquired by the Company.
(g)The capital lease obligations consist of two computer leases
payable in monthly installments of $8,534 through June 1996
and $7,792 from July 1996 through June 1997.
(h)The note payable, which originated in May 1996 in connection
with the acquisition of trademarks (ACID MANTLE(R)) is
noninterest bearing and is payable in installments of
$250,000 in May 1997, and $100,000 each per year from May
1998 through 2001. Interest at an annual rate of 9.5% has
been imputed for this note. The seller has been granted a
security interest in the assets acquired by the Company.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE F (continued)
The annual maturities of long-term debt are summarized as follows:
Amount
Year ending December 31,
1997 $3,444,569
1998 214,756
1999 97,893
2000 107,384
2001 110,931
$3,975,533
Because of the nature of the Company's debt it is impractical to
determine its fair value.
NOTE G - RELATED PARTY TRANSACTIONS
1.Transactions With an Affiliated Company
During the years ended December 31, 1996 and 1995, the Company
received administrative support services (consisting principally
of advertising services, mailing, copying, data processing and
other office services) which were charged to operations from
Banyan Communications Group, Inc. ("Banyan"), an affiliate, in
the amount of $280,000 and $517,000, respectively. During 1996
and 1995, the Company paid Banyan $291,000 and $440,000,
respectively, for such services.
2.Transactions With Shareholders
On December 31, 1990, the Company issued a promissory note
bearing interest at 9-1/2% per annum in the amount of $123,975
for the cumulative amounts of previously issued demand loans to
Daniel Glassman, the Chairman and Chief Executive Officer. The
final $15,000 of this note was repaid in 1995.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE G (continued)
In connection with the Company's satisfaction in June 1996 of the
$1.87 million liability then owing to Berlex, the Company
borrowed $100,000 from various trusts established for the benefit
of the children of Daniel Glassman, the Chairman of the Board
and President of the Company, and Iris Glassman, Treasurer and a
Director of the Company. This loan was repaid on September 30,
1996 and included total interest of approximately $4,100 (at the rate
of 16% per annum).
NOTE H - SHAREHOLDERS' EQUITY
The Company's authorized shares of common stock are divided into
two classes, of which 26,400,000 shares are Class A common stock
and 900,000 shares are Class B common stock. The rights,
preferences and limitations of the Class A and the Class B common
stock are equal and identical in all respects, except that each
Class A share entitles the holder thereof to one vote upon any
and all matters submitted to the shareholders of the Company for
a vote, and each Class B share entitles the holder thereof to
five votes upon certain matters submitted to the shareholders of
the Company for a vote.
Both Class A common stock and Class B common stock vote together
as a single class upon any and all matters submitted to the
shareholders of the Company for a vote, provided, however, that
the holders of Class A common stock and holders of Class B common
stock vote as two separate classes to authorize any proposed
amendment to the Company's Certificate of Incorporation, which
affects the rights and preferences of such classes. So long as
there are at least 325,000 shares of Class B common stock issued
and outstanding, the holders of Class B common stock vote as a
separate class to elect a majority of the directors of the
Company (who are known as "Class B Directors"), and the holders
of Class A common stock and voting preferred stock, if any, vote
together as a single class to elect the remainder of the
directors of the Company.
The Board of Directors may divide the preferred stock into any
number of series, fix the designation and number of shares of
each such series, and determine or change the designation,
relative rights, preferences and limitations of any series of
preferred stock. The Board of Directors may increase or decrease
the number of shares initially fixed for any series, but no such
decrease shall reduce the number below the number of shares then
outstanding and shares duly reserved for issuance.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
1. Stock Repurchase Agreement
Certain shareholders of the Company, including Daniel
Glassman, Iris S. Glassman, the Treasurer and a Director of
the Company, and David Hillman, the Secretary and a Director
of the Company, who are employees of Banyan (Note G), entered
into a Buy-Sell Agreement, pursuant to which Banyan agreed,
upon the request of the shareholder or upon the termination of
employment with Banyan to purchase all the Company's stock
acquired by such shareholder prior to the date of the
Company's initial public offering, at the book value per share
thereof, calculated as of the end of the last fiscal year
preceding the redemption, plus the shareholder's share of
undistributed profits as of the end of the last fiscal year.
The repurchase obligation terminates in stages over a five-
year period, commencing on the first anniversary date of the
Company's initial public offering. During 1994, Banyan
repurchased 3,865 shares from a former Banyan employee. No
other shares have been repurchased pursuant to such agreement.
In January 1997, the Company announced a program to repurchase
up to 5% of the outstanding Class A common stock in open
market transactions over the next 24 months.
These shares will be held in Treasury by the Company to be used for
purposes deemed necessary by the Board of Directors, including
funding company matching contributions to the 401(K) Plan. During
January 1997, The Company acquired 21,500 shares at a cost of
approximately $29,000.
2. Stock Option Plan
The Board of Directors has adopted the 1990 Stock Option Plan,
reserving 1,500,000 shares of Class A common stock for
issuance. The number of shares reserved for issuance was
increased to 2,600,000 in 1996. The plan will expire on
January 31, 2000, but options may remain outstanding past this
date.
The number of shares covered by each outstanding option, and
the exercise price, must be proportionately adjusted for any
increase or decrease in the number of issued shares resulting
from a subdivision or consolidation of shares, stock split, or
the payment of a stock dividend, and are summarized as
follows:
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
The following is a summary of stock option activity under the plan:
Weighted
average
Number of exercise
options price
Balance, December 31, 1994 1,037,864 $3.23
Granted 771,127 3.49
Exercised (103,944) 2.78
Canceled (67,719) 2.88
Balance, December 31, 1995 1,637,328 3.42
Granted 265,391 1.32
Exercised
Canceled (423,354) 1.72
Balance, December 31, 1996 1,479,365 1.34
As of December 31, 1996, options outstanding for 1,177,236 shares
were exercisable at prices ranging from $.68 to $3.65, and the
weighted remaining contractual life was 4.9 years.
The following table summarizes option data as of December 31,
1996:
Number Weighted Number
outstanding average Weighted exercisable Weighted
Range of as of remaining average as of average
exercise December 31, contractual exercise December 31, exercise
prices 1996 life price 1996 price
(in thousands) (in thousands)
$.68-$1.40 625 5.6 $1.18 547 $1.17
1.41-3.65 622 4.3 1.50 419 1.51
.68-3.65 1,247 966
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
Compensation cost charged to operations, which the Company
records for options granted to nonemployees, was $58,000 and none
in the years ended December 31, 1996 and 1995, respectively.
There were 232,805 options outstanding to nonemployees at
December 31, 1996, of which 211,697 were exercisable.
The Company measures compensation in accordance with the
provisions of APB Opinion No. 25 in accounting for its stock
compensation plans. Accordingly, no compensation cost has been
recorded for options granted to employees or directors in the
years ended December 31, 1996 and 1995. The fair value of each
option granted has been estimated on the grant date using the
Black-Scholes Option Valuation Model. The following assumptions
were made in estimated fair value:
Dividend yield 0%
Risk-free interest rate 6.0%
Expected life after vesting period
Directors and officers 4 years
Others 2 years
Expected volatility - through December 1, 1995 60%
- December 31, 1996 90%
Had compensation cost been determined under SFAS No. 123, net
income (loss) and income (loss) per share would have been as
follows:
Year ended December 31,
1996 1995
Net income (loss)
As reported $1,598,507 $(6,921,241)
Pro forma for SFAS No. 123 1,206,544 (7,120,640)
Income (loss) per share
As reported $ .22 $ (.94)
Pro forma for SFAS No. 123 .17 (.97)
During 1996, the Company allowed holders of stock options to reprice
their options at then prevailing market prices.
Repriced options were included as new grants for purposes of
determining SFAS No. 123 compensation cost and the weighted
average fair value of options granted during the year. The weighted
average exercise price of repriced options was $1.46 per share.
The weighted average fair value and weighted average exercise price
of options granted in 1996 for which the exercise price equals the
market price on the grant date were $.83 and $1.42, respectively.
The weighted average fair value and weighted average exercise price
of options granted in 1996 for which the exercise price exceeded
the market price on the grant date were $.84 and $1.41, respectively.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
During the initial phase-in period of SFAS No. 123, such
compensation expense may not be representative of the future
effects of applying this statement.
In November 1993, the Company granted options to purchase an
aggregate of 447,500 shares of Class A common stock at option
prices of $2.3125-$2.5438 per share for a period of five to ten
years. The grant of these options is conditional upon a portion
(447,500 shares) of the shares being granted as options to
persons who have placed their shares in escrow should those
original escrow shares be lost due to their inability to
accomplish the release of the shares from escrow. Management
attained the required earnings level in 1994 and accordingly the
Company has obtained the release of escrow shares. These options
were therefore canceled. Certain of these escrow shares were
returned to the Company and retired (Note H-5) and the Company
has issued new options.
During 1996, the Company allowed holders of stock options to
reprice their options at then prevailing market prices.
3.Private Placement of the Company's Securities
In December 1993, the Company completed a private placement of
its securities, issuing an aggregate of 160 units at $45,000 per
unit. The net proceeds to the Company, after commissions and
expenses of $1,014,063, were $6,185,937. Each unit consists of
24,000 shares of the Company's Class A stock and 12,000 Class D
warrants. Each Class D warrant entitled the bearer to purchase
one share of Class A stock at a cost of $3 per share and expired
December 1996. In addition, the placement agent received an
option to purchase an additional 40 units through December 1998.
4.Reserved Shares
Pursuant to the initial public offering in 1991, the Company
issued a total of 1,500,000 Class A warrants and 750,000 Class B
warrants, which expired during 1996. Each Class A warrant
entitled the holder to purchase 1.3 shares of Class A common
stock and 1.3 Class B warrants for $3.386 until November 12,
1996, the fifth anniversary of such offering. Each Class B
warrant
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
entitled the holder to purchase 1.3 shares of Class A common
stock for $5.079 from the date of issuance to November 12, 1996.
The Class A warrants and Class B warrants (collectively, the
"Warrants" were subject to redemption by the Company at $.05 per
Warrant on 30 days' written notice, provided the closing price of
the Class A common stock for any 30 consecutive trading days,
ending within 15 days of the notice of redemption, averages in
excess of $6.30 with respect to the redemption of Class A
warrants and $9.45 with respect to the redemption of Class B
warrants.
The underwriter or its designees had a five-year option, which
expired in 1996, entitling the holders to purchase up to 110,094
units at $5.5178 each, as adjusted for the dilutive effect of the
private placement of the Company's securities, and have
registration rights including one registration at the Company's
expense.
The following table summarizes shares of common stock reserved
for issuance at December 31, 1996, as adjusted for the dilutive
effect of the private placement of the Company's securities:
Number
of shares
Reserved for issuable
Warrants to UPSHER-SMITH for LUBRIN(R) (expiring
December, 1997) 60,000
Warrants to Tsumura for products acquired
(expiring March, 1998) 150,000
Placement agent's options to purchase private
placement units (expiring December, 1998) 960,000
1990 Stock Option Plan 1,479,365
2,649,365
5.Escrow Shares
During fiscal 1993, certain members of the Board of Directors and
certain other parties were conditionally granted options to
purchase an aggregate of 447,500 shares of Class A common stock.
These options were canceled effective January 1, 1995, due to the
release of 450,000
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE H (continued)
shares of the Company's Class B common stock held in escrow to
such members of the Board of Directors and other persons upon the
Company achieving certain financial performance tests in fiscal
1994.
On November 2, 1995, the Company announced that 450,000 shares of
the Company's Class B common stock released from escrow to
certain members of the Board of Directors of the Company and
other persons upon achieving certain financial performance tests
in fiscal 1994 were to be voluntarily returned to the Company and
retired. The three members of the Board of Directors who
directly received escrow shares have agreed to return such shares
to the Company (418,035 of the total 450,000). The other parties
have been contacted by the Company and asked to voluntarily
return their 31,965 escrow shares. During 1995, two directors
returned 364,467 escrow shares to the Company. During 1996, the
third director returned 53,568 escrow shares and other parties
returned a total of 10,323 escrow shares.
As a result of the Company's determination to have such escrow
shares voluntarily returned to the Company and retired, the
Company has granted to such members of the Board of Directors
428,358 shares of Class A common stock at an exercise price equal
to the fair market value of the shares on the date the escrow
shares were returned to the Company.
NOTE I - COMMITMENTS & CONTINGENTCIES
1.Leases
The Company leases office facilities in Fairfield, New Jersey
from Daniel and Iris S. Glassman, directors and shareholders of
the Company, and in Westbury, New York.
The lease on the Fairfield, New Jersey facility is for a period
from August 1, 1996 to July 31, 1997 for 9,000 square feet of
office and warehouse space, with an option to renew and also
includes payments of electric, water and sewer and the allocated
portion of the real estate taxes. Rent expense, including an
allocated portion of real estate taxes, was approximately
$176,000 and $173,000 for the years ended December 31, 1996 and
1995, respectively.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE I (continued)
The term of the lease occupied by Doak in Westbury, New York is
three years expiring January 31, 1997, and contains a monthly
rental payment of approximately $4,800. This agreement was
extended to January 31, 1999 and contains a monthly rental
payment of $5,000. From May 1994 to October 1994, the lease
payments for such property were suspended pending further
investigation of the environmental matters discussed below.
Approximate aggregate minimum annual rental commitments,
including rent and real estate taxes, are as follows: $151,000
for 1996, $60,000 for 1997 and $5,000 for 1999. Total rent
expense for the years ended December 31, 1996 and 1995 was
$301,000 and $282,000, respectively.
2.Research and Development Agreement
The Company is required to file an ANDA with the FDA for its
DECONAMINE(R) SR product. The cost of developing the necessary
studies for this application is estimated to be approximately
$900,000. The Company has signed an agreement for the first
phase of these studies at a cost of approximately $100,000;
approximately $48,000 was incurred during 1995 and charged to
operations and the balance of $52,000 has been satisfied
utilizing funds previously paid for projects cancelled during
1996. The project is expected to be completed and submitted to
the FDA during 1998.
However, these research and development projects are subject to
the Company either generating sufficient cash flows from
operations or obtaining requisite financing from outside sources,
of which there can be no assurance. Therefore, the Company
cannot at this time reasonably anticipate the timing of the
expenditure of funds for these purposes.
The inability of the Company to further develop and/or file the necessary
ANDA for the DECONAMINE (R) SR would have a material adverse effect on
the Company.
3.Environmental Matters
On April 8, 1994, the Company was apprised by the New York State
Department of Environmental Conservation ("NYSDEC") that Doak's
current leased manufacturing facility located on adjoining
parcels at 62 Kinkel Street and 67 Sylvester Street, Westbury, New
York and former leased facility located at 128 Magnolia Avenue,
Westbury, New York are located in
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE I (continued)
the New Cassel Industrial Area, which has been designated by the
NYSDEC on the Registry of Inactive Hazardous Waste Sites (the
("Registry"). The real property on which Doak's current
manufacturing facility is situated is owned by and leased to the
Company by Dermkraft, Inc., an entity owned by the former
controlling shareholders and officers of Doak.
On February 7, 1995, the Company was apprised by NYSDEC that the
current manufacturing facility will be excluded from the
Registry. By letter dated April 21, 1995, the NYSDEC notified
the Company that it intended to investigate the Company's current
manufacturing facility to determine if hazardous substances had
previously been deposited on that property. By letter dated
October 24, 1995, NYSDEC notified Dermkraft, Inc. that the
Company's current manufacturing facility is included in or near
an inactive hazardous waste site described as "Kinkel and
Sylvester Streets" and that NYSDEC intends to conduct a
Preliminary Site Assessment to study the site and immediate
vicinity. The Company has been advised that NYSDEC has made a
preliminary determination to include the 62 Kinkel Street portion
of the current manufacturing facility on the Registry and that
the 67 Sylvester Street portion of the facility will not be
included, but those determinations could change before they are
finalized. Thereafter, by letter dated May 3, 1996 and addressed
to Dermkraft, Inc., the NYSDEC notified Dermkraft that the site
at 62 Kinkel Street has been listed on the Registry due to the
presence of trichloroethylene ("TCE") in soils and groundwater
due to the use of TCE by LAKA Tools and Stamping and LAKA
Industries, a former tenant from 1971 through 1984. The NYSDEC
documents refer to Doak Dermatologics as the current tenant but
do not refer to any activities of Doak Dermatologics or the
Company as a basis for the listing in the Registry. The Company
cannot at this time determine whether the cost associated with
the investigation and required remediation, if any, of the
current manufacturing facility will be material. With respect to
the former manufacturing facility on Magnolia Avenue, which
remains designated by the NYSDEC as part of the Registry,
management believes that Doak will not be obligated to contribute
to any remediation costs, if any are required.
4.Consulting Agreements
The Company entered into consulting agreements with the sellers
of Doak that provide for monthly payments of $8,333 from April
1994 through March 1997. The amounts due under such agreements
have been accrued for at December 31, 1995, as the parties have
ceased providing services.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE I (continued)
5.Legal Proceedings
The Company and Doak have been named defendants in a lawsuit filed
November 29, 1996. The complaint alleges that the Company and Doak
were negligent in their hiring and supervising an employee who in
turn allegedly assaulted the plaintiff. The complaint seeks $600,000
in compensatory and $1,000,000 in punitive damages. The Company
believes that it has meritorious defenses.
6.Trans CanaDerm Settlement
On June 5, 1996, Trans CanaDerm, Inc. ("Trans CanaDerm"), Louis
Vogel ("Vogel"), the former controlling stockholder of Trans
CanaDerm, and other former stockholders of Trans CanaDerm
(collectively, "Plaintiffs") commenced an action against the
Company and its subsidiary, Doak Dermatologics ("Doak"), in the
United States District Court for the Southern District of New
York, 96 Civ. 4175 (JFK). The complaint alleged that in 1957
Doak and Vogel entered into an agreement (the "Agreement") under
which Vogel was given the sole and exclusive right to distribute
Doak's products in Canada, which Agreement was thereafter
assigned by Vogel to Trans CanaDerm. In May 1996, Vogel and the
other Trans CanaDerm stockholders sold their stock in Trans
CanaDerm to Stiefel Canada, Inc. ("Stiefel"), a competitor of the
Company. Shortly thereafter, the Company and Doak terminated the
Agreement. The complaint alleged:(i) that the termination was wrongful,
(ii) that the Company and Doak should be equitably estopped from
terminating the Agreement. The complaint sought an injunction
restraining the Company and Doak from terminating the Agreement and
compensory and punitive damages in unspecified amounts.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES AND CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE I (continued)
On September 30, 1996, the Company and Doak entered into a
settlement agreement with the Plaintiffs. Pursuant to the
settlement, the Company received $2 million relating to the sale
of the Company's independent Canadian distributor, Trans
CanaDerm, Inc., of which the Company did not have an ownership
position, to Stiefel, a competitor of the Company, and the
Company transferred to Trans CanaDerm all of the Company's
rights, title and interest in certain Doak products in
Canada. Direct expenses related to this transaction were
$354,868.
Trans CanaDerm currently distributes several Doak products, as
well as other unrelated brands in Canada, and by virtue of the
foregoing transfer and payment, Trans CanaDerm will continue to
market the Doak product line in Canada. Trans CanaDerm also has
agreed to continue to purchase certain materials used in
connection with the manufacture of the transferred Doak products
through December 31, 1997.
7.401(k) Plan
Effective January, 1997, the Company established a defined
contribution 401(k) plan whereby the Company matches employee
contributions up to 25% of the employee's first 6% of contributions
with shares of the Company's Class A common stock.
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1995
NOTE J - FOURTH QUARTER ADJUSTMENTS
The Company recorded the following significant adjustments in the
fourth quarter of 1995:
Valuation allowance $150,000
Additional accrual for chargebacks and rebates 500,000
Recording of remaining commitment of
consulting
agreements 125,000
Write-down of certain inventory and
capitalized promotional items due
to obsolescence 200,000
Effect on pretax loss $975,000
EXHIBIT INDEX
Exhibit
Number Description of Document
11.1 Statement Regarding Computation of Per Share Income
21.1 Subsidiaries of the Registrant
EXHIBIT 11.1
BRADLEY PHARMACEUTICALS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME(LOSS)
Year Ended
December 31, 1995
Primary Fully Diluted
Net Loss $(6,921,241) $(6,921,241)
Weighted average
shares outstanding 7,348,975 7,348,975
Net loss per share $(.94) $(.94)
Year Ended
December 31,1996
Primart Fully Diluted
Net Income $ 1,598,507 $ 1,598,507
Weighted average
shares outstanding 7,175,348 7,175,348
Net Income per share $.22 $.22
EXHIBIT 21.1
Subsidiaries of the Registrant
Jurisdiction Name(s) Under Which
Name Of Subsidiary of Incorporation Subsidiary Does Business
Doak Dermatologics Co., Inc. New York Doak Dermatologics
Bradley Pharmaceuticals Bradley Pharmaceuticals
Overseas, Ltd. U.S. Virgin Islands Overseas, Ltd.
Bradley Pharmaceuticals Bradley Pharmaceuticals
(Canada) Inc. Canada (Canada) Inc.
