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, 1997
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
Commission File Number 0-18881
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): 973-882-1505
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 the preceding 12 months (or for a shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No______
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-KSB contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $15,023,762
The aggregate market value of the Class A voting stock held by
nonaffiliates of the Registrant as of
March 18, 1998 was approximately $19,171,964. 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
registrant's classes of Common Stock were as follows:
Number of shares outstanding
Title of each class as of March 18, 1998__
Class A 8,180,038
Class B 431,522
Documents incorporated by reference: None
PART I
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 "Kenwood"). 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").
On September 19, 1997 (the "Closing"), in satisfaction of all
outstanding obligations then owing to Berlex (approximately $2,500,000
in the aggregate), and in consideration of Berlex's release of its lien
covering the Company's accounts receivable, the Company (i) paid to
Berlex $1,150,000 million in cash, plus accrued interest (the "Cash
Payment"), (ii) issued to Berlex 450,000 shares of Class A Common Stock
of the Company (which, when added with the other shares of Class A
Common Stock previously issued to Berlex, at the time of issuance,
approximately 19% of the outstanding Class A Common Stock of the
Company) and (iii) agreed to issue Berlex, when permissible in
accordance with applicable state corporate law, warrants entitling
Berlex to purchase, under certain conditions, up to an additional
750,000 shares of Class A Common Stock at an exercise price of $1.25 per
share. These warrants are subject to certain anti-dilution provisions
and expire two years after issuance, subject to extension under certain
conditions.
In order to raise the funds necessary for the Company to make the
Cash Payment to Berlex, the Company, concurrently with the Closing,
entered into a $3,000,000 revolving credit facility with CIT
Group/Credit Finance, Inc. ("CIT"). Advances under this facility are
calculated pursuant to a formula which is based upon the Company's then
"eligible" accounts receivable and inventory levels. This line of
credit has an initial term of three years and is renewable for
successive periods of two years each. Interest accrues on amounts from
time to time outstanding under this facility at the rate equal to the
prime rate of interest from time to time announced by The Chase
Manhattan Bank at its prime rate of interest plus 2-1/4%. The Company's
obligations under this credit facility have been secured by the grant by
the Company to CIT of a lien upon, and the pledge of a security in,
substantially all of the Company's assets, including the Company's
accounts receivable, inventory and intangible assets (subject to prior
liens). The credit facility contains certain covenants and restrictions
concerning the Company's operations, generally, and the Company's
obligations under this facility have been personally guaranteed, to a
limited extent, by Daniel Glassman, the Company's Chairman of the Board
and Chief Executive Officer.
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 (973) 882-1505.
This document may contain forward-looking statements which reflect
management's current view of future events and operations. These
forward-looking statements are based on assumptions and external
factors, including assumptions relating to regulatory action, capital
requirements and competing products. Any changes in such assumptions
are external factors and could produce significantly different results.
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)
("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. The Company and Upsher-Smith
Laboratories Inc. ("Upsher-Smith") have since entered into a
manufacturing contract, renewable annually, whereby Upsher-Smith will
manufacture LUBRIN(r) for the Company.
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.
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 was paid in
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.
The Company did not acquire any products during Fiscal 1997.
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, 1998. 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 Rx Product for a variety of
Cream (1 oz.) dermatological conditions
CARMOL(r)-10 Deep Moisturizing Skin care
Lotion (6 oz.) and CARMOL(r)-20 Cream (3 oz.)
CARMOL(r) 40 - 40% Rx Potent tissue-softener
(Carbamide Cream)
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(tm) Wound and burn dressings in
various sizes
SULFOAM(r) Medicated Anti-dandruff Control of dandruff
Shampoo (8 oz.)
Dermatological Products Uses
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 delivery system
l6mm, 12mm, 20mm sizes) for wart removal
Nutritional Products Uses
ADEFLOR M(r) (100s) Rx Vitamins and minerals with
sodium fluoride
APATATE(r) Liquid (4 oz. and 8 oz.) B-complex supplement for
nutritional deficiencies
associated 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 nutrients in
patients with conditions such
as diabetes mellitus,
alcoholism, psychological
stress, or chronic illness
GLUTOFAC(r)-ZX Capsules (60's) Rx high-potency multivitamin
and multimineral supplement
including zinc and folic acid
I*L*X(r) Elixir (8 oz.); Iron supplement for nutritional
I*L*X(r) B12 Elixir (8 oz.); and iron deficiency anemias
I*L*X(r) B12 Sugar Free Elixir (8 oz.);
I*L*X(r) B12 Caplets (100s)
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
Internal Medicine Products Uses
NITROGLYN(r) Extended Release Nitroglycerin Rx For the prevention of
Capsules 2.5 mg.; 6.5 mg., 9.0 mg.; (100s) angina pectoris (due to
coronary artery disease)
PAMINE(r) 2.5 mg. Tablets (100s) Rx Anticholinergic/anti-
spasmatic
Respiratory Products Uses
DECONAMINE(r) SR Capsules Rx Sustained release anti-
(HCL 120 mg.) Rx (100s; 500s) histamine decongestant
DECONAMINE(r) Chewable Tablets Rx Pediatric antihistamine/
(HCL 15 mg.) Rx (100s) decongestant
DECONAMINE(r) Dye-Free Syrup Rx Liquid antihistamine/
(HCL 30 mg.) Rx (473 ml) decongestant
DECONAMINE(r) Dye-Free Tablets Rx Antihistamine/decongestant
(HCL 60 mg.) Rx (100s)
DECONAMINE(r) CX Liquid (HCL 5mg.) Rx Liquid antitussive/expec-
(473 ml) torant
DECONAMINE(r) CX Tablets (HCL 5mg.) Rx Rx Antitussive/expectorant
(100s)
DUADACIN(r) Capsules (100s; 1000s; Antipyretic/analgesic/decon-
Dispense-A-Pak [125 unit packs of 8]) gestant
IPSATOL(r) Cough Formula (4 oz.) Pediatric antitussive/expec-
torant
TYZINE(r) (tetrahydrozoline HCl) Rx 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
NEOLOID(r) Castor Oil (4 oz.) Laxative
New Beauty Patch Product
The Company, through its Doak subsidiary, launched during October
1997, an evening dermal, anti-wrinkle patch, LE PONT(r). This patch,
which has been designed to release, throughout an eight-hour period
during the night, Vitamin C, is perceived by the Company as a new
alternative anti-wrinkle product. The Company and Osmotics Corporation,
the manufacturer of the product, have entered into a distribution
agreement pursuant to which, among other things, the Company has been
granted, through December 1998, the exclusive, and thereafter, the non-
exclusive, U.S. and International distribution rights for this product
in consideration for a royalty against sales.
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"). The Company, manufactures and packages, for its
own account, its Doak product line, including FORMULA 405(r), DOAK(r)
DERMATOLOGY, CARMOL(r), ACID MANTLE(r) and TRANS-VER-SAL(r) products.
These products represented during fiscal years ended December 31, 1997
and 1996, approximately 34% and 32%, 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 nineteen
different vendors on open credit terms, which are generally payable in
30 days. One company manufacturing and packaging products for the
Company accounted for approximately 19% and 16% of the Company's cost of
goods sold for 1997 and 1996, respectively. No other vendor, packager
or manufacturer accounted for more than 10% of the Company's cost of
goods sold for 1997 or 1996. 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.
With the exception of arrangements relative to LUBRIN(r) and the
Company's new beauty patch product, LE PONT(r), 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,
developed line extensions for new products and licensed existing
technologies. 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 1,425 active accounts, of which
there are approximately 200 wholesalers, 700 retail chains and stores,
300 doctors and institutional accounts, 125 government entities and 100
managed care providers.
During 1997, three wholesale customers accounted for approximately
15%, 12% and 12%, respectively, of the Company's net sales. During
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 1997 or 1996.
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 45%, 51% and 40%,
respectively, of the Company's 1997, 1996 and 1995 net sales. The
DECONAMINE(r) product line, consequently, will have a material effect on
the Company's future operations.
Doak's TRANS-VER-SAL(r) products accounted for approximately 10%
of both the Company's 1997 and 1996 net sales. ACID MANTLE(r) accounted
for approximately 4% of net sales for both 1997 and 1996 net sales.
Doak's other products, including Formula 405(r), accounted for
approximately 10% and 18%, of the Company's 1997 and 1996 net sales.
Doak's products are all categorized below as dermatologic products.
The Company' 1997, 1996 and 1995 net sales volume percentages by
category category were as follows:
Fiscal Fiscal Fiscal
1997 1996 1995
Respiratory 50% 56% 46%
Dermatologic 40% 32% 40%
Personal Hygiene 4% 4% 3%
Nutritional 5% 6% 6%
Internal Medicine 1% 2% 5%
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, Kenwood Product Manager, Doak
Product Manager and a Customer Service Manager.
The sales department consists of a Vice President of Sales,
Regional Sales Director, four district managers, a U.S. Government
representative, 23 full time and one part time salespersons located in
Alabama, New Jersey, Georgia, California, Puerto Rico, Tennessee, Texas,
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, 1998, 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 brands (which represents 87%
of Fiscal 1997 Net Sales) as follows:
Kenwood Brands Specialty
DECONAMINE(r) General Practitioners, Allergists
Pediatricians, Ear, Nose and Throat
Specialists
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/LE PONT Dermatologists/Cosmeticians
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 26
international pharmaceutical distributors to provide for distribution
and promotion of the Company's products. Approximately 13% and 11%,
respectively, of the Company's 1997 and 1996 net sales were from
international business.
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) Finland LUBRIN(r) Saudi A*H*A LINE(r)
DECONAMINE(r) Arabia CARMOL(r)
GLUTOFAC(r) France TRANS-VER-SAL(r) FORMULA 405(r)
I*L*X(r) LE PONT(r)
KTL(r) Hong Kong A*H*A LINE(r) SULPHO-LAC
LUBRIN(r) CARMOL(r) TAR PRODUCTS
TRANS-VER-SAL(r) DOAK LINE TRANS-VER-SAL(r)
DECONAMINE(r)
Canada DOAK LINE(r) GLUTOFAC(r) Singapore A*H*A LINE(r)
FORMULA 405(r) IRCON(r) APATATE(r)
KTL(r) NITROGLYN(r) BURO-SOL(r
LUBRIN(r) LUBRIN(r)
NEOLOID(r Iceland DOAK LINE SULPHO-LAC(r)
TAR PRODUCTS TRANS-VER-SAL(r) TERSASEPTIC(r)
TERSASEPTIC(r) FORMULA 405(r) TRANS-VER-SAL(r)
TRANS-VER-SAL(r) Spain TAR DISTILLATE(r)
Israel LUBRIN(r) TRANS-VER-SAL(r)
Chile TRANS-VER-SAL(r)
Italy TRANS-VER-SAL(r)
Taiwan A*H*A LINE(r)
Cyprus A*H*A LINE Jamaica APATATE(r) FORMULA 405(r)
IPSATOL(r) I*L*X(r)
IRCON(r) IPSATOL(r) Vietnam A*H*A LINE(r)
KTL(r) IRCON(r) FORMULA 405(r)
LUBRIN(r)
TYZINE(r) Jordan A*H*A LINE(r)
CARMOL(r)
Denmark TRANS-VER-SAL(r) DOAK TAR
FORMULA 405(r)
Dominican APATATE(r) TRANS-VER-SAL(r)
Republic DUADACIN(r)
GLUTOFAC(r) Portugal TRANS-VER-SAL(r)
IRCON(r)
I*L*X(r) Puerto Rico COMPLETE BRADLEY
KTL(r) LINE
LUBRIN(r)
El Salvador A*H*A LINE(r)
THE COMPANY'S INTERNATIONAL MARKETING STATUS
EXPECT TO MARKET WITHIN A YEAR*
EXPECT TO MARKET WITHIN A YEAR* WORKING ON REGISTRATION*
Austria LUBRIN(r) Belgium TRANS-VER-SAL(r)
TRANS-VER-SAL(r)
Cyprus APATATE(r)
Bangladesh LUBRIN(r) DECONAMINE(r)
TRANS-VER-SAL(r) GLUTOFAC(r)
China NITROGLYN(r) Dominican
Republic FORMULA 405(r)
Dominican
Republic CARMOL(r) Egypt CARMOL(r)
DECONAMINE(r) DOAK LINE
TRANS-VER-SAL(r) SULPHO-LAC(r)
TRANS-VER-SAL(r)
El Salvador CARMOL(r)
TRANS-VER-SAL(r) Guatemala APATATE(r)
DECONAMINE(r)
France TRANS-VER-SAL(r) 12MM FORMULA 405(r)
IRCON(r)
Hong Kong DUADACIN(r) LUBRIN(r)
TRANS-VER-SAL(r)
Ireland TRANS-VER-SAL(r)
Israel CARMOL 10 & 20(r)
Israel TRANS-VER-SAL(r)
Malta CARMOL(r)
Italy LE PONT(r) DECONAMINE(r)
I*L*X(r)
Korea FORMULA 405(r) IPSATOL(r)
LE PONT(r) TRANS-VER-SAL(r)
Lebanon DOAK LINE(r) Panama APATATE(r)
TRANS-VER-SAL(r) DUADACIN(r)
GLUTOFAC(r)
Malaysia LUBRIN(r) IRCON(r)
TRANS-VER-SAL(r)
Russia DUADACIN(r)
Mexico CARMOL 10 & 20(r)
LE PONT(r) Turkey DECONAMINE(r)
SULPHO-LAC(r)
Yemen DECONAMINE(r)
Singapore CARMOL 10 & 20(r) DUADACIN(r)
GLUTOFAC(r)
Turkey LUBRIN(r)
TRANS-VER-SAL(r)
United Kingdom TRANS-VER-SAL(r)
Zimbabwe TRANS-VER-SAL(r)
* Although the Company anticipates that it will receive the necessary
approvals to market its products in the countries listed above, there can be no
assurance that such approvals will be received
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 better
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, which
currently has prescription status, 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. The Company anticipates that final monographs for the
Company's DECONAMINE(r) product line, thereby converting the product
line from prescription status to over-the-counter status, may be issued
by the FDA at some time in the future. The Company currently intends to
continue to market and distribute its DECONAMINE(r) line of products as
prescription products as long as it may lawfully continue to do so. The
Company is presently exploring its marketing and distribution strategy
relating to its DECONAMINE(r) product line after final monographs
covering these products are issued, and, as such, it is not currently
possible for the Company to predict how its operations and financial
condition will be affected, or whether it will have resources sufficient
to aggressively market the DECONAMINE(r) line of products, if, and when,
this product line is converted from prescription status to over-the-
counter status.
Further, the Company is required to file an Abbreviated New Drug
Application "ANDA" with the FDA its DECONAMINE(r) SR product, which is
expected to maintain the prescription status of this product beyond the
final monograph. The cost of this application is approximately
$900,000. The Company has entered into an agreement with Phoenix
International to perform clinical studies required for the issuance of
the ANDA. As of the date of this 10-K, the Company has paid
approximately $225,000 with respect to this project. The project is
being deferred until regulatory and competitive circumstances warrant
completion and submission to the FDA. 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 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
intends to pursue patents where it is logical, however, does not
currently intend to apply for patents for all of 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, 1998, the Company employed 69 full and 40 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:
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.
Richard H. Mann, D.P.M., P.A. is a doctor of podiatric medicine,
board-certified in foot and ankle surgery and microscopic laser surgery
of the foot, and a Fellow of the Academy of Ambulatory Foot Surgeons.
Dr. Mann received his B.A. from City University of New York and his DPM
from New York College of Podiatric Medicine. Dr. Mann has developed
several new products in a wide variety of medical areas.
David Parsons, M.D. is a board-certified ear, nose and throat
surgeon, and a Fellow of the American College of Surgeons. He is a
recognized as an international authority on paranasal sinus disease and
has written the authoratative textbook on sinus care. Dr. Parsons
enjoyed a 26-year Air Force career which included serving as the
Consultant to the Surgeon General for Head & Neck Surgery, Vice Chairman
of the Department of Otolarygology, Wilford Hall USAF Medical Center,
and Clinical Professor of Otolarynogology/Head & Neck Surgery at the
University of Texas-San Antonio and at the University of Colorado. Most
recently, he was Professor of Surgery and Pediatrics at the University
of Missouri-Columbia. Dr. Parsons received his M.D. degree from the
University of Texas-Houston, and is now in private practice of
Otolaryngology.
Mitchell J. Spirt, M.D. is a doctor of internal medicine currently
on faculty as Assistant Clinical Professor of Medicine at the UCLA
School of Medicine, 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. Dr. Spirt performed his
internship and residency at Mount Sinai Medical Center, New York and a
Fellow at the University of California at Los Angeles (UCLA).
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, is 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 67 Sylvester Street portion of the facility
will not be included, but those determinations could be changed 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 as
the current tenant but do not refer to any activities of Doak 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, but no
assurance can be given, that Doak will not be obligated to contribute to
any remediation costs, if any are required.
Item 2. Properties
The Company leases 14,000 square feet of office and warehouse
space at 383 Route 46 West, Fairfield, New Jersey, pursuant to a lease
expiring on July 31, 1998 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 $194,000 and
$176,000 for 1997 and 1996, 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 and rent
expense is approximately $60,000 per annum.
During 1997 and 1996, Doak leased additional warehouse space in a
separate facility in Westbury, New York at a cost (based upon square
footage utilized) of $67,500 and $55,400 per annum, respectively.
During 1997 and 1996, 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.
There are no other material legal proceedings to which the Company is a
party.
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 1997.
Item 5. Market for Common Equity and Related Stockholder Matters.
Shares of the Company's Class A Common Stock are traded on The
Nasdaq Stock Market( under the trading symbol "BPRX." No other class of
the Company's common stock is publicly traded.
The following table sets forth the high and low sales prices for
shares of the Company's Class A Common Stock on The Nasdaq Stock Market(
for the periods indicated.
High Sale Low Sale
Fiscal year ended December 31, 1997
First quarter $ 1.44 $ 0.81
Second quarter 1.47 1.03
Third quarter 1.63 1.10
Fourth quarter 2.94 1.50
Fiscal year ended December 31, 1996
First quarter $ 2.09 $ 1.09
Second quarter 1.81 1.22
Third Quarter 1.66 0.78
Fourth quarter 1.53 0.63
On March 18, 1998 the last sale price for shares of the Company's
Class A Common Stock as reported by the Nasdaq National Market was $2.34
per share. At March 18, 1998, there were approximately 250 registered
holders of record of shares of Class A Common Stock. Based on
information available to the Company, the Company believes that there
are approximately 2,700 beneficial holders of shares of Class A Common
Stock held in "street" or other nominee name 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, 1998. 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, 1998, there were outstanding 8,180,038 shares
(exclusive of 157,715 shares held in treasury) of Class A Common Stock.
This document may contain forward-looking statements which reflect
management's current view of future events and operations. These
forward-looking statements are based on assumptions and external
factors, including assumptions relating to regulatory action, capital
requirements and competing products. Any changes in such assumptions
are external factors and could produce significantly different results.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1997, the Company had working capital of $ 27,232,
an increase of $2,856,032 over the December 31, 1996 negative working
capital of $ ($ 2,828,800). The Company's working capital position for
1997 was positively affected by the final restructuring and subsequent
closing of the Berlex transaction.
During 1997, the Company effectively reduced its accounts payable
and accrued expense balances, as compared to its balance at December 31,
1996, by $1,548,611. This was accomplished principally by the Company's
utilization of its operating cash flow as well as proceeds from the CIT
line of credit to settle outstanding amounts due to vendors. The Company
was able to reduce accounts payable and accrued expenses by negotiating
settlements with certain vendors and Berlex (as it related to accrued
interest). 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 canceling unprofitable contracts and increasing prices on
others.
The Company's 1997 working capital position was further favorably
affected by the September 1997 Berlex Restructuring. At the Closing, on
September 19, 1997, in satisfaction of all outstanding obligations then
owing Berlex (approximately $2,500,000 in the aggregate), and in
consideration of Berlex's release of its lien covering the Company's
accounts receivable, the Company (i) paid to Berlex $1,150,000 in cash,
plus accrued interest (the "Cash Payment"), (ii) issued to Berlex
450,000 shares of Class A Common Stock of the Company (which, when added
with the other shares of Class A Common Stock previously issued to
Berlex, represented, at the time of issuance, approximately 19% of the
outstanding Class A Common Stock of the Company) and (iii) agreed to
issue to Berlex, when permissible in accordance with applicable state
corporate law, warrants entitling Berlex to purchase, under certain
conditions, up to an additional 750,000 shares of Class A Common Stock
at an exercise price of $1.25 per share. These warrants are subject to
certain antidulution provisions and expire two years after issuance,
subject to extension under certain conditions.
In order to raise the funds necessary for the Company to make the
Cash Payment to Berlex, the Company, concurrently with the Closing,
entered into a $3,000,000 revolving credit facility with CIT. Advances
under this facility are calculated pursuant to a formula which is based
upon the Company's then "eligible" accounts receivable and inventory
levels. This line of credit has an initial term of three years and is
renewable for successive periods of two years each. Interest accrues on
amounts from time to time outstanding under this facility at the rate
equal to the prime rate of interest from time to time announced by The
Chase Manhattan Bank as its prime rate of interest plus 2-1/4%. The
Company's obligations under this credit facility have been secured by
the grant by the Company to CIT of a lien upon, and the pledge of a
security in, substantially all of the Company's assets, including the
Company's accounts receivable, inventory and intangible assets (subject
to prior liens). The credit facility contains certain covenants and
restrictions concerning the Company's operations, generally, and the
Company's obligations under this facility have been personally
guaranteed, to a limited extent, by Daniel Glassman, the Company's
Chairman of the Board and Chief Executive Officer.
Accounts Receivable decreased by approximately $1,000,000 over the 1996
amounts due to more timely receipt and processing of chargebacks. The accrual
for chargebacks and rebates decreased by approximately $400,000 reflecting
the above improvement in the receipt and processing of chargebacks, $357,000
in monetary concessions and the release of $229,000 of previously recorded
reserves for chargebacks and rebates.
It is not currently possible for the Company to predict how its
operations and financial condition will be affected if the DECONAMINE
product line is converted from prescription status to over-the-counter
status (see "Item 1 - Government Regulation").
Further, the Company is required to file an Abbreviated New Drug
Application "ANDA" with the FDA for its DECONAMINE(r) SR product, which
is expected to maintain the prescription status of this product beyond
the final monograph. The cost of this application is approximately
$900,000. The Company has entered into an agreement with Phoenix
International to perform clinical studies required for the issuance of
the ANDA. As of the date of this 10-K, the Company has paid
approximately $225,000 with respect to this project. The project is
being deferred until regulatory and competitive circumstances warrant
completion and submission to the FDA. 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.
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 expensed $28,600 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, 1998,
the Company has repurchased 157,715 shares of Class A Common Stock at a
total cost of $254,200. 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.
Based upon a review of its computer operations, the Company has
determined that its costs related to the Year 2000 problem will be
insignificant. The Company has no internally developed software that it
utilizes for its operations, but uses software which is compatible with
the Year 2000. The Company expects to upgrade its system in late 1998
or early 1999 and will receive that upgrade in the normal course of
business. However, to the extend that vendors and customer or other
third parties with whom the Company transmits data electronically are
not Year 2000 compliant, there can be no assurance that any resulting
problems will not have a material adverse effect on the Company.
This document may contain forward-looking statements which reflect
management's current views of future events and operations. These
forward looking statements are based on assumptions and external
factors, including assumptions relating to regulatory action, capital
requirements and competing products. Any changes in such assumptions
are external factors and could produce significantly different results.
Seasonality
Net sales of DECONAMINE product line accounted for approximately
45%, 51% and 40%, respectively, of the Company's 1997, 1996 and 1995 net
sales. Consequently, revenues from 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 in an effort to smooth the seasonality of these sales.
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
Net Sales for 1997 were $15,024,000, representing an increase of
$2,225,000, or approximately 18% from 1996. The increase in net sales
for Fiscal 1997 is primarily due to (i) an increase in the net average
selling prices (after trade price adjustments) of DECONAMINE and (ii)
strong growth from DOAK's products.
DECONAMINE unit sales during 1997 decreased by approximately $0.8
million, or 6%, 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 effect of which the
Company has, and will continue to, recognize in future periods.
Chargebacks and rebates, principally relating to DECONAMINE SR and
CARMOL, were $5.5 million for 1997 versus $6.5 million for 1996.
The Company's analysis of the trend in actual chargebacks and
rebates resulted in a decrease in the percentage used to adjust gross
sales to net sales for the second quarter of 1997, resulting in
increased net sales and net income of $45,000. Additionally, during the
second quarter of 1997, the Company released approximately $229,000 of
the previously established chargeback and rebate reserves, resulting in
an increase to net sales and net income. During 1997 and 1996, the
Company received monetary concessions of approximately $357,000 and
$275,000, respectively from managed care vendors receiving rebates.
Chargebacks and rebates are based on the difference between prices at
which the Company sells its products (principally DECONAMINE 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.
Cost of Sales for 1997 were $ 4,193,000, compared to 1996 cost of sales
which were $3,311,000, representing an increase of $882,000, or
approximately 27%. This increase was primarily due to a change in the
Company's sales product mix, including stronger growth at the DOAK
subsidiary which maintains a higher Cost of Sales versus KENWOOD. The
Company's gross profit margin for 1997 was 72% as compared to 74% during
Fiscal 1996, due to the change in product mix towards more Doak
products.
Selling, General and Administrative Expenses were $ 8,085,000 for 1997,
representing an increase of $ 1,137,000, or 16%. This increase was
primarily the result of increased sales activities, including the
addition of sales representatives as well as increased sampling and
promotion. In 1996, the Company received monetary concessions of
approximately $125,000 from its vendors and suppliers 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 1997 were $ 1,489,000,
representing a decrease of 20%, as compared to 1996. This decrease was
principally due to the restructuring of the Berlex transaction as well
as the re-estimating of the DECONAMINE amortization period.
Other Income for 1996 was $1,645,000, representing the settlement of a
lawsuit involving the Company's Canadian distributor.
Interest Expense - Net for 1997 decreased by $ 259,000, or 46% from the
corresponding period in 1996 due to renegotiating outstanding debt with Berlex.
Income Taxes - The income tax expense reflects the benefit derived from
previously reserved deferred tax assets, principally net operation loss
carryforwards. Income tax expense in 1997 was $58,000, or 6% of income before
taxes versus $150,000 in 1996, or 9% of income before taxes.
Net Income for 1997 was $ 906,000, representing a decrease of $ 692,000 from
net income of $1,599,000 during 1996. This decrease was principally a result
of the impact of the Company's recognizing the aforementioned legal settlement
involving the Company's Canadian distributor, net of expenses, of $1,645,000.
Net Income Per Common Share for 1997 was $0.11 per common share, representing a
decrease for Fiscal 1997 of $0.11, as compared with net income for 1996 of
$0.22 per common share.
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
Item 9. Directors and Executive Officers
The directors and executive officers of the Company are as
follows:
Age Position(s)
Daniel Glassman 55 Chairman of the Board, President
and Chief Executive Officer
Iris S. Glassman 55 Treasurer and Director
David H. Hillman 57 Secretary and Director
Dr. Philip McGinn 71 Director
Alan G. Wolin, Ph.D. 65 Director
Robert Dubin 50 Vice President, Sales
Gene L. Goldberg 60 Senior Vice President-Marketing
& Business Planning
Maurice Woosley 57 President, Bradley International
Daniel Glassman is the founder of the Company and has served as
its Chief Executive Officer since the Company's inception in January
1985. Mr. Glassman has also served as the Company's Chairman of the
Board since January 1985. Mr. Glassman has also served as President of
the Company since February 1991. Mr. Glassman, a registered pharmacist,
is also Chairman of the Board of Banyan Communications Group, Inc., a
communications company controlled by Mr. Glassman ("Banyan"). Banyan
encompasses two marketing research organizations (Danis Research and
Hospital Research Associates) and an advertising agency (Daniel Glassman
Advertising). Mr. Glassman has operated these companies for more than
the last eighteen years. Mr. Glassman was previously Vice President for
Client Services for Medicus Communications, Inc., where he directed
marketing programs for pharmaceutical companies such as Procter &
Gamble, Rorer, Schering-Plough Corporation, and Merrill-Dow, Inc. Mr.
Glassman is the husband of Iris Glassman, the Treasurer and a director
of the Company. Mr. Glassman is also Chairman of the Board, President
and Chief Executive Officer of Doak, Bradley Pharmaceuticals (Canada),
Inc. and Bradley Pharmaceuticals, Overseas, Ltd., Inc., each a
subsidiary of the Company.
Iris S. Glassman has served as Treasurer of the Company since its
inception in 1985. Mrs. Glassman has also served as a director of the
Company from January 1985. Mrs. Glassman is the wife of Daniel Glassman
and has fifteen years of diversified administrative and financial
management experience, including serving in the capacity of Secretary of
Banyan.
David H. Hillman has served as Secretary of the Company since 1985
and as a director of the Company from January 1990. For more than the
past five years, Mr. Hillman has also served as a director of Banyan and
since 1990, as President of Banyan's Health Care Division and Treasurer
of Banyan. Mr. Hillman, a registered pharmacist, has also served as
President of Hospital Research Associates, a division of Banyan engaged
in the business of conducting market research for the pharmaceutical
industry since 1983. Mr. Hillman has over sixteen years of market
research, sales and marketing experience, including product group
manager for Lederle Laboratories.
Dr. Philip McGinn has served as a director of the Company since
December 1996. Since 1984, Dr. McGinn has also served as President of
Worldwide Marketing and Translation Services, Inc., a New Jersey based
company providing consulting services in new product and company
acquisitions, marketing, market analysis, promotional planning, sales
training, management development and business, educational and
translation services. Dr. McGinn also served as Associate Dean, School
of Health Professions, Long Island University from 1990 to 1996.
Alan G. Wolin, Ph. D., has served as a director of the Company
since May 12, 1997. Since 1988, Dr. Wolin has served as an independent
consultant to various companies in the food, drug and cosmetic
industries. Between 1962 and 1987, Dr. Wolin served M&M/Mars, the
world's largest candy company, in various capacities, including Director
of Consumer Quality Assurance and Quality Coordination. In his capacity
as Director of Consumer Quality Assurance and Quality Coordination, Dr.
Wolin was responsible for ensuring consumer quality and public health
issues relating to M&M/Mars' products.
Robert Dubin, R.Ph. has served as Vice President, Sales and
Contract Administration since 1997. Prior experience as a manufacturer
of food products for a major U.S. food distributor. Previously held
Consultant Pharmacist position for a major group of nursing homes in the
Chicago area; also owner/operator of 15 pharmacies and health clinics.
Gene L. Goldberg has served as Senior Vice President - Marketing
and Business Planning of the Company since January 1, 1997 Formerly
Executive Vice President of Daniel Glassman Advertising and Vice
President and Account Supervisor for William Douglas McAdams. Also
garnered experience as Senior Product Manager for USV Pharmaceutical
Corporation, division of Revlon Healthcare Group; Project Director in
Market Research at McAdams, Geigy Pharmaceutical Company and Lea-Mendota
Research Group.
Maurice Woosley has served as President of the Company's
international division and Vice President since January 1997. From May
1996 to December 1996, Mr. Woosley served as Vice President of the
Company's international division. From November 1994 to April 1996, Mr.
Woosley served as Worldwide Marketing Director of Datascope, Inc., a New
Jersey based medical device manufacturer. From September 1990 to
October 1994, Mr. Woosley served as Global Marketing Director for Davis
& Geck, a New Jersey based medical product manufacturer.
Directors of the Company are scheduled to hold office until the
next Annual Meeting of Stockholders of the Company and until their
respective successors shall have been duly elected and qualified.
Significant Employees
Gene Carpenter has served as Regional Sales Director of the
Company since January 1994. From May 1988 through December 1993, Mr.
Carpenter served as National Sales Manager of Poly Pharmaceuticals,
Inc., a Mississippi based pharmaceutical company. Prior thereto, Mr.
Carpenter served as Regional Sales Manager of Savage Laboratories, Inc.,
Houston, Texas.
Robert Corbo has served as Vice President Quality Assurance since
1997 and as Quality Assurance/Control Director of the Company since
March 1993. From 1989 to 1993, Mr. Corbo served as Quality
Assurance/Control manager for Par Pharmaceuticals, a New York based
generic pharmaceutical manufacturer.
Glenn Wilson has served as plant supervisor at the Company's Doak
Dermatologics, Inc. subsidiary since April 1994. From 1990 to 1994, Mr.
Wilson served as production manager for Gemini Pharmaceuticals, a New
York based pharmaceutical company.
Section 16(a) Beneficial Ownership Reporting Compliance
Daniel Glassman, the Company's President, Chairman of the Board
and Chief Executive Officer, may be deemed to have failed to file a Form
4 in May 1995 disclosing a Pledge of 254,311 Class B shares then owned
by Daniel Glassman to secure obligations of Daniel Glassman to an
unaffiliated thrid party lender and its ramnifications (while the Pledge
resulted in shares of Class B Common Stock being converted into shares
of Class A Common Stock, it did not result in any increase or decrease
in the total number of shares of capital stock outstanding). Each
subsequently filed Form 4 by Mr. Glassman (Form 4's were filed in each
month from May 1995 through December 1995, in January, April, June,
July, August, October, November, December 1996 and in January, February
and March 1997 failed to take into account or give effect to the
Pledge. Mr. Glassman has advised the Company that he will amend each
Form 4 filings since the Pledge to appropriately disclose and give
effect to the Pledge.
To the Company's knowledge, none of the Company's other directors,
executive officers or beneficial owners of 10% or more of any class of
equity securities of the Company registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
failed to file, on a timely basis, any reports required by Section 16(a)
of the Exchange Act during Fiscal 1997.
Item 10. Executive Compensation
Summary Compensation Table
The following table shows all the cash compensation paid by the
Company, as well as certain other compensation paid or accrued during
the fiscal years ended December 31, 1997, 1996 and 1995, to Daniel
Glassman, the Company's President and Chief Executive Officer, Robert
Dubin, Vice President of Sales, Gene L. Goldberg, Senior Vice President
of Marketing and Business Planning and Maurice Woosley, President,
Bradley International. No other executive officer of the Company earned
total annual salary and bonus for Fiscal 1997 in all capacities in which
such person served the Company in excess of $100,000. There were no
restricted stock awards, long-term incentive plan payouts or other
compensation paid during Fiscal 1997 to the executive officers named in
the following table except as set forth below:
Annual Compensation Long-Term
Compensation
Awards
Name and Principal Position Year Salary Bonus Securities Underlying
Options(1)
Daniel Glassman 1997 $128,900 -0- -0-
President and 1996 $122,500 -0- 404,500(2)
Chief Executive 1995 $ 75,200 -0- 359,589(3)
Officer
Robert Dubin 1997 $100,600 -0- -0-
Vice President of Sales 1996 $70,600 $20,000 7,500
and Contract Admini- 1995 $50,900 -0- 7,500
stration
Gene L. Goldberg 1997 $129,400 -0- -0-
Senior Vice President 1996 N/A N/A N/A
Marketing and Business 1995 N/A N/A N/A
Planning
Maurice Woosley 1997 $114,500 -0- -0-
President, Bradley 1996 $68,800 -0- 18,000
International 1995 N/A N/A N/A
(1) All of these options are exercisable into shares of Class A Common
Stock.
(2) Of these shares, 31,500 shares underlie options granted on
December 5, 1996 to replace a like number of options previously granted
to Mr. Glassman which expired by their terms. These options are
exercisable at any time prior to December 4, 2001 at an exercise price
of $0.825 per share, 110% of the fair market value for shares of Class A
Common Stock on the date of grant. The remaining 373,000 shares
underlie options which were repriced by the Company on April 18, 1996.
These repriced options vest at various times through 1998 and are
exercisable at various times through 2000 at an exercise price of
approximately $1.44 per share, 110% of the fair market value for shares
of Class A Common Stock on the date of repricing. See "Report on
Repricing of Options" below.
(3) Of these shares, 341,589 shares underlie options granted on
December 5, 1995. These options are exercisable at any time prior to
December 4, 2000 at an exercise price of $1.16875 per share, 110% of the
fair market value for shares of Class A Common Stock on the date of
grant. These options were granted by agreement with the Company in
consideration for Mr. Glassman's agreement to retire 341,589 shares of
Class B Common Stock previously distributed to him. The remaining
18,000 shares underlie options granted on September 12, 1995, which
options expire during 2000 and vest in equal, one third increments in
1996, 1997 and 1998. The exercise price for these 18,000 options was
originally $3.7125 per share, approximately 110% of the fair market
value for shares of Class A Common Stock on the original date of grant.
These 18,000 options comprise a portion of the 373,000 options owned by
Mr. Glassman which were repriced by the Company on April 18, 1996. See
"Report on Repricing of Options" below.
Option Grants in 1997
The following table sets forth information concerning outstanding
options to purchase shares of the Company's Class A Common Stock granted
during 1997 by the Company to Alan Wolin, a director during 1997.
Neither options to purchase shares of Class B Common Stock nor stock
appreciation rights were granted by the Company during 1997. The
exercise prices for all options reported below are not less than 100% of
the per share market prices for Class A Common Stock on their dates of
grant.
Individual Grants
% of Total Options
Number of Securities Granted To Exercise or
Underlying Options Employees Base Expiration
Name Granted in Fiscal 1996(1) Price ($/Sh) Date
Alan Wolin 15,000 22.06% 1.25 05/11/07
Aggregated Option Exercises in Fiscal 1997 and
Fiscal Year-End Option Values
The following table presents the value, on an aggregate basis, as
of December 31, 1997, of outstanding stock options held by the executive
officers of the Company listed in the Summary Compensation Table above.
No stock options were exercised by the executive officers listed below
during Fiscal 1997.
Value of Unexercised
Number of Securities Underlying In-The-Money
Unexercised Options at Options
Fiscal Year-End at Fiscal Year-End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Daniel Glassman 721,089 6,000 $521,208 $3,337
____________________
(1) Based on the closing sale price of $2.000 per share of Class A
Common Stock on December 31, 1997, as reported by NASDAQ.
Employment Contracts and
Termination of Employment and Change-in-Control Arrangements
The Company does not have any employment contracts or termination
of employment or change-in-control arrangements with any of its
executive officers.
Compensation of Directors
Directors who are not officers or employees of the Company receive
a director's fee of $600 for each meeting of the Board of Directors, or
a committee thereof, attended by such director, plus out-of-pocket
costs. Directors who are also officers or employees of the Company
receive no additional compensation for their services as directors.
On December 5, 1996, concurrently with Dr. Philip McGinn's
appointment as a director of the Company, Dr. McGinn was granted options
to purchase up to 15,000 shares of Class A Common Stock of the Company.
These options vest in three equal and annual installments commencing on
December 5, 1997 and expire on December 4, 2006. These options are
exercisable at $0.6875 per share (the fair market value per share of
Class A Common Stock as of the date of grant).
On January 5, 1996, Mr. David Hillman was granted options to
purchase up to 53,568 shares of Class A Common Stock of the Company at
an exercise price of $1.1875 per share (the fair market value per share
of Class A Common Stock as of the date of grant). These options vested
immediately and expire January 4, 2006. These options were granted by
agreement with the Company in consideration for Mr. Hillman's agreement
to retire 53,568 shares of Class B Common Stock previously owned by him.
On August 29, 1997, Alan G. Wolin, Ph.D., was granted options to
purchase up to 15,000 shares of Class A Common Stock of the Company at
an exercise price of $1.25 per share (the fair market value per share of
Class A Common Stock as of the date of grant). These options vest in
three equal and annual installments commencing on May 12, 1998 and
expire on May 11, 2007.
Report on Repricing of Options
The following table sets forth certain information regarding
options that were repriced by the executive officers of the Company
listed in the Summary Compensation Table above and the directors of the
Company in 1996.
Weighted Average Weighted Average
Number of Exercise Price Price
Optionee Options Repriced Before Repricing After Repricing
Daniel Glassman 373,000 $3.72 $1.44
Iris S. Glassman 145,192 $3.41 $1.31
David Hillman 28,750 $3.17 $1.54
Alan G. Wolin 2,300 $3.09 $1.69
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information as of December
31, 1997, regarding the ownership of the Company's Class A and Class B
Common Stock by (i) each director of the Company, (ii) the executive
officers of the Company named in the Summary Compensation Table set
forth elsewhere in this document, (iii) each beneficial owner of more
than five percent of the Class A and Class B Common Stock of the Company
known by management and (iv) all directors and executive officers of the
Company, as a group, and the percentage of outstanding shares of Class A
and Class B Common Stock beneficially held by them on that date.
Since each share of Class B Common Stock may be converted at any
time by the holder into one share of Class A Common Stock, the
beneficial ownership rules promulgated under the Securities Exchange Act
of 1934, as amended, require that all shares of Class A Common Stock
issuable upon the conversion of Class B Common Stock by any stockholder
be included in determining the number of shares and percentage of Class
A Common Stock held by such stockholder.
Amount and Nature
of Beneficial Owner(1)(2) Percent of Class(2)
Name of Address of Class A Class B Class A Class B
Beneficial Owner
Daniel Glassman 1,098,142(3) 316,736(4) 12.76% 73.39%
383 Route 46 West
Fairfield, NJ
Iris S. Glassman 231,373(5) 37,283(6) 2.69% 8.64%
383 Route 46 West
Fairfield, NJ
David H. Hillman 117,433(7) 43,610 1.36% 10.11%
383 Route 46 West
Fairfield, NJ
Philip McGinn, Jr. 6,528(8) -0- * -
383 Route 46 West
Fairfield, NJ
Alan G. Wolin 65,730(9) -0- * -
383 Route 46 West
Fairfield, NJ
Robert S. Dubin 7,500(11) -0- * -
383 Route 46 West
Fairfield, NJ
Gene L. Goldberg 54,722(10) 10,192 * 2.36%
383 Route 46 West
Fairfield, NJ
Maurice Woosley 7,752(12) -0- * -
383 Route 46 West
Fairfield, NJ
Berlex Laboratories,Inc. 1,450,000 -0- 16.85% -
110 East Hanover Avenue
Cedar Knolls, NJ
All executive officers 1,589,180 407,821(4)(6) 18.47% 94.50%
and Directors as a group (3)(4)(5)
(6 Persons) (6)(7)(8)
(9)(10)(11)
(12)
* Represents less than one percent
(1) Unless otherwise indicated, the stockholders identified in this
table have sole voting and investment power with respect to the shares
beneficially owned by them.
(2) Each named person and all executive officers and directors, as a
group, are deemed to be the beneficial owners of securities that may be
acquired within 60 days through the exercise of options, warrants or
exchange or conversion rights. Accordingly, the number of shares and
percentage set forth opposite each stockholder's name under the columns
"Class A Common Stock" includes shares of Class A Common Stock issuable
upon exercise of presently exercisable warrants and stock options and
shares of Class A Common Stock issuable upon conversion of shares of
Class B Common Stock. The shares of Class A Common Stock so issuable
upon such exercise, exchange or conversion by any such stockholder are
not included in calculating the number of shares or percentage of Class
A Common Stock beneficially owned by any other stockholder.
(3) Includes 316,736 shares issuable upon conversion of a like number
of shares of Class B Common Stock. Of these shares, 54,117 shares are
owned indirectly by Mr. Glassman through affiliates and 721,089 shares
underlie presently exercisable options owned by Mr. Glassman. Mr.
Glassman's affiliates have disclaimed beneficial ownership over all of
these shares. Mr. Glassman disclaims beneficial ownership over shares
and options owned by his wife, Iris S. Glassman.
(4) Includes 26,098 shares owned indirectly by Mr. Glassman through
affiliates. Mr. Glassman's affiliates have disclaimed beneficial
ownership over these shares. Does not include 16,403 shares
beneficially owned by Iris S. Glassman, Mr. Glassman's wife.
(5) Includes 37,283 shares issuable upon conversion of a like number
of shares of Class B Common Stock, 6,800 shares owned indirectly by Mrs.
Glassman through affiliates, 25,220 shares owned indirectly by Mrs.
Glassman as trustee for her children's trusts and 162,070 shares
underlying presently exercisable options. Mrs. Glassman disclaims
beneficial ownership over all shares beneficially owned by her husband,
Daniel Glassman.
(6) Includes 20,880 shares owned indirectly by Mrs. Glassman as
trustee for the Bradley Glassman 1995 Trust. Mrs. Glassman disclaims
beneficial ownership over all shares of Class B Common Stock
beneficially owned by her husband, Daniel Glassman.
(7) Includes 43,610 shares issuable upon conversion of a like number
of shares of Class B Common Stock, 1,780 shares owned indirectly by Mr.
Hillman through an affiliate and 65,568 shares underlying presently
exercisable options. Mr. Hillman's affiliate has disclaimed beneficial
ownership over shares owned by it.
(8) Includes 5,000 shares underlying presently exercisable options.
(9) Includes 2,300 shares underlying presently exercisable options.
(10) Includes 10,192 shares issuable upon conversion of a like number of
shares of Class B Common Stock. Of these shares 44,446 shares underlie
presently exercisable options.
(11) Includes 7,500 shares underlying presently exercisable options.
(12) Includes 6,000 shares underlying presently exercisable options.
Item 12. Certain Relationships and Related Transactions
During Fiscal 1997, the Company received administrative support
services (consisting principally of advertising services, mailing,
copying, data processing and other office service) which were charged to
operations from Banyan, an affiliated company amounting to $135,000.
In connection with the Company's satisfaction in June 1996 of the
$1.86 million current liability then owning to Berlex, the Company
borrowed $100,000 from various trusts established for the benefit of the
children of Mr. Glassman and Iris S. Glassman, Mr. Glassman's wife and
Treasurer and a Director of the Company. This $100,000 loan was repaid
on September 30, 1996 together with accrued interest at the rate of 16%
per annum (approximately $4,100).
The Company rents its Fairfield, New Jersey operating facility
from Daniel Glassman and Iris S. Glassman pursuant to a lease expiring
on July 31, 1998. This lease is renewable, at the option of the
Company, for an additional one year term. Rent expense, including an
allocated portion of real estate taxes, was approximately $194,000 and
$176,000, respectively, for Fiscal 1997 and Fiscal 1996.
During Fiscal 1996 and Fiscal 1995, Daniel Glassman, the Company's
President and Chief Executive Officer also served as Chief Executive
Officer of Banyan. As such, Mr. Glassman allocated a portion of his
working time to the business of each of the Company and Banyan (Mr.
Glassman estimates that less than 5% of his time is spent on Banyan
business). During Fiscal 1996 and Fiscal 1995, Mr. Glassman received
compensation from the Company and Banyan.
Item 13. Exhibits, List and Reports on Form 8-K
(a) During the fourth quarter of 1997, the Company filed no current
reports on Form 8-K with respect to the items and financial statements
listed below:
(b) Exhibits
Exhibit
Number Description of Document
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996)
3.2 By-laws of the Registrant, as amended (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996)
4.1 Placement Agent's Unit Purchase Option (Incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993)
10.1 1990 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996
10.2 Form of 11% Subordinated Note dated June 14, 1990
(Incorporated by reference to exhibit 10.6 to the Company's Registration
Statement on Form S-1, Registration No. 33-36120)
10.3 Asset Purchase Agreement between the Company and Hoechst
Roussel Pharmaceuticals Incorporated (Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-1,
Registration No. 33-36120)
10.4 Asset Purchase Agreement dated December 15, 1992 between the
Company, Upsher Smith and Kenneth Evenstad (Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K for an event
dated December 15, 1992)
10.5 Manufacturing Agreement dated December 15, 1992 between the
Company, Upsher Smith and Kenneth Evenstad (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K for an event
dated December 15, 1992)
10.6 Asset Purchase Agreement dated March 30, 1993 between the
Company and Tsumura Medical Inc. (Incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992)
10.7 Trademark Security Agreement dated March 30, 1993 between
the Company and Tsumura International Inc. (Incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.8 Purchase Agreement dated November 10, 1993 between Berlex
and the Company, as amended by Amendments Numbers One and Two thereto,
dated November 19, 1993 and December 9, 1993, respectively (Incorporated
by reference to Exhibits 10.1 through 10.3 to the Company's Current
Report on Form 8-K for an event dated December 10, 1993)
10.9 Trademark Security Agreement dated December 9, 1993 between
Berlex and the Company (Incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K for an event dated December 10,
1993)
10.10 Supply and Distribution Agreement dated December 9, 1993
between Berlex and the Company (Incorporated by reference to Exhibit
10.5 to the Company's Current Report on Form 8-K for an event dated
December 10, 1993)
10.11 Stock Purchase Agreement dated as of January 31, 1994 among
the Company, Doak and the Krafchuks (Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K for an event
dated February 14, 1994)
10.12 Form of Plan of Merger dated as of January 31, 1994 between
Doak and the Company (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K for an event dated February 14,
1994)
10.13 Consulting Agreement dated as of January 31, 1994 between
the Company and Dr. Krafchuk (Incorporated by references to Exhibit 10.3
to the Company's Current Report on form 8-K for an event dated February
14, 1994)
10.14 Consulting Agreement dated as of January 31, 1994 between
the Company and Mrs. Krafchuk (Incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K for an event dated February
14, 1994)
10.15 Lease Modification Agreement dated as of February 1994
between Dermkraft, Inc, and Doak (Incorporated by reference to Exhibit
10.6 to the Company's Current Report on Form 8-K for an event dated
February 14, 1994)
10.16 Purchase and Assignment Agreement between Upjohn and the
Company. (Incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993)
10.17 Amendment No. 4 dated January 6, 1996 to the Asset Purchase
Agreement dated November 10, 1993 between Berlex Laboratories, Inc. and
the Company (Incorporated by reference to Exhibit 10.1 to the Company's
current Report on Form 8-K for an event dated January 5, 1996)
10.18 Security Agreement, dated as of January 5, 1995, between the
Company and Berlex Laboratories, Inc. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K for an event
dated January 5, 1996)
10.19 Amendment to Trademark Security Agreement, dated as of
January 5, 1995, between the Company and Berlex Laboratories, Inc.
(Incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K for an event dated January 5, 1996)
10.20 Settlement Agreement, dated as of September 30, 1996, among
the Company, Stiefel Canada, Inc., Trans CanaDern, Inc. and Louis Vogel
et. al. (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K for an event dated September 30, 1996)
10.21 Amendment No. 5 dated as of December 23, 1996, to Asset
Purchase Agreement between the Company and Berlex (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
for an event dated December 23, 1996).
10.22 Security Agreement and subsidiary Security Agreement, dated
as of December 23, 1996, among Doak Dermatologics, Inc. and Berlex
(Incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K for an event dated December 23, 1996).
10.23 Confession of Judgement from the Company and Doak
Dermatologics, Inc. with respect to the March 1997 payment (Incorporated
by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
for an event dated December 23, 1996).
10.24 Amendment No. 6 to Asset Purchase Agreement, dated as of
September 19, 1997, between the Company and Berlex
10.25 Warrant to Purchase up to 750,000 Shares of Class A Common
Stock of the Company issued to Berlex
10.26 Loan and Security Agreement, dated as of September 19, 1997,
among CIT, the Company, Doak, Bradley Pharmaceuticals (Canada), Inc. and
Bradley Pharmaceuticals Overseas, Ltd.
10.27 Assignment, Security Agreement and Mortgage - Trademarks and
Patents, dated as of September 19, 1997, between the Company and CIT
10.28 Assignment, Security Agreement and Mortgage - Trademarks,
dated as of September 19, 1997, between Doak and CIT
10.29 Guaranty dated September 19, 1997 of Daniel Glassman Issued
to CIT
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996)
23.2 Consent of Grant Thornton LLP
24.1 Power of Attorney (see page II-5)
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 PHARMACEUTICALS, 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 18, 1998 /s/Daniel Glassman Chairman of the Board
Daniel Glassman) President and Chief
Financial Officer
(Principal Executive Officer)
March 18, 1998 /s/Iris Glassman Treasurer and Director
(Iris Glassman)
March 18, 1998 /s/David H. Hillman Secretary and Director
(David H. Hillman)
March 18, 1998 /s/Alan Wolin Director
(Dr. Alan Wolin)
March 18, 1998 /s/Philip McGinn Director
(Dr. Philip McGinn)
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 513,971 $ -
Accounts receivable - net of allowance for
doubtful accounts of $61,000 in 1997 and
$71,000 in 1996 1,748,856 2,736,037
Inventory 977,344 1,057,985
Prepaid samples and materials 1,517,813 1,681,199
Prepaid expenses and other 12,629 52,984
------------ ------------
Total current assets 4,770,613 5,528,205
PROPERTY AND EQUIPMENT - AT COST, less
accumulated depreciation of $1,050,000 in 1997
and $900,000 in 1996 277,805 343,428
INTANGIBLE ASSETS, NET 13,044,147 14,831,536
OTHER ASSETS 89,317 -
------------ ------------
$ 18,181,882 $ 20,703,169
The accompanying notes are an integral part of these statements.
F-3
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES
Current maturities of long-term debt $ 169,143 $ 3,444,569
Accounts payable and accrued expenses 3,170,549 4,719,160
Revolving credit line 1,269,757 -
Income taxes payable 133,932 193,276
------------- ------------
Total current liabilities 4,743,381 8,357,005
LONG-TERM DEBT, less current maturities 264,406 530,964
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 8,174,295 in 1997
and 7,692,267 shares in 1996 14,653,927 13,970,240
Common, Class B, no par value, authorized,
900,000 shares; issued and outstanding,
431,552 shares in 1997 and 1996 845,448 845,448
Treasury stock - Class A Common Stock - at cost
(146,008 shares in 1997) (231,198) -
Accumulated deficit (2,094,082) (3,000,488)
------------ -----------
13,174,095 11,815,200
----------- -----------
$ 18,181,882 $ 20,703,169
=========== ==========
The accompanying notes are an integral part of these statements.
F-4
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1997 1996
Net $ 15,023,762 $ 12,769,266
Sales
Cost of 4,192,743 3,311,313
Sales
------------- -------------
10,831,019 9,457,953
Selling, general and administrative expenses 8,084,668 6,947,871
Depreciation and amortization 1,488,794 1,855,141
Other income - litigation settlement,
net of expenses (1,645,132)
Interest expense - net 292,651 551,566
------------- -------------
9,866,113 7,709,446
------------- -------------
Income before income taxes 964,906 1,748,507
Income tax expense 58,500 150,000
------------- -------------
NET INCOME $ 906,406 $ 1,598,507
============= =============
Net income per common share - basic and diluted $ 0.11 $ 0.22
============= =============
The accompanying notes are an integral part of these statements.
F-5
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
Class A common stock, Class B common stock,
no par value no par value
Shares Amount Shares Amount
Balance at December 31, 1995 6,780,267 $ 13,185,990 495,443 $ 845,448
Shares issued to Berlex Inc.
pursuant to amendment to asset
purchase agreement 1,000,000 1,125,000
Shares issued for consulting
services 12,000 16,875
Compensation charge for stock
options issued to consultants 58,000
Return and retirement of Class B
shares (63,891) -
Disposition of investment in ITG
Laboratories, Inc. (100,000) (415,625)
Net Income for the Year
----------- ----------- -------- --------
Balance at December 31, 1996 7,692,267 13,970,240 431,552 845,448
Stock options exercised 31,500 40,010
Other - 56,274
Shares issued to Berlex, Inc.
pursuant to amendment to asset
purchase agreement 450,000 586,215
Shares issued for consulting
services 528 1,188
Purchase of treasury stock, net
Net income for the year --------- ---------- ------- -------
Balance at December 31, 1997 8,174,295 $ 14,653,927 431,552 845,448
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
Retained Investment
Treasury Earnings in ITG
Stock (accumulated Laboratories
Amount deficit) Inc. Total
Balance at 12/31/95 $ - $(4,598,995) $ (565,625) $ 8,866,818
Shares issued to Berlex
Inc. pursuant to asset
purchase agreement 1,125,000
Shares issued for
consulting services 16,875
Compensation charge
for stock options issued
to consultants 58,000
Return and retirement of
Class B shares -
Disposition of investment
in ITG Laboratories, Inc 565,625 150,000
Net Income for the year 1,598,507 1,598,507
----------- ----------- ----------- ------------
Balance at 12/31/96 - (3,000,488) - 11,815,200
Stock options exercised 40,010
Other 56,274
Shares issued to Berlex,
Inc. pursuant to amendment
to asset purchase agree-
ment 586,215
Shares issued for
consulting services 1,188
Purchase of treasury stock,
net (231,198) (231,198)
Net income for the year 906,406 906,406
----------- ----------- ----------- -----------
Balance at 12/31/1997 $ (231,198) $(2,094,082) $ - $ 13,174,095
=========== =========== =========== ============
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1997 1996
Cash flows from operating activities
Net income $ 906,406 $ 1,598,507
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 1,488,794 1,855,141
(Gain) loss on sale of fixed assets (534) 8,437
Noncash compensation charges 1,188 74,875
Changes in operating assets
and liabilities
Accounts receivable 987,181 (481,280)
Inventory and prepaid samples
and materials 244,027 1,188,380
Income taxes payable/refundable (59,344) 1,957,532
Prepaid expenses and other 40,354 58,392
Accounts payable and accrued
expenses (1,726,024) (3,426,907)
----------- -----------
Net cash provided by operating
activities 1,881,868 2,833,077
Cash flows from investing activities
Investment in Doak Pharmacal Co., Inc. (5,852) (7,236)
Additional investments in trademarks,
patents and other intangible assets (117,250) (350,244)
Proceeds from disposition of common
stock of ITG Laboratories, Inc. 13,500 33,000
Purchase of property and equipment (85,282) (22,312)
Proceeds from sale of fixed assets 800 6,200
----------- ----------
Net cash used in investing activities (194,084) (340,592)
----------- ----------
Cash flows from financing activities
Payment of notes payable (2,252,382) (3,048,549)
Borrowings from revolving credit
line, net 1,269,757 -
Proceeds from exercise of stock options 40,010 -
Purchase of treasury stock, net (231,198) -
---------- ----------
Net cash used in financing activities (1,173,813) (3,048,549)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 513,971 (556,064)
Cash and cash equivalents at
beginning of year - 556,064
---------- -----------
Cash and cash equivalents at end of year $ 513,971 $ -
========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 156,000 $ 224,000
Income taxes 105,000 42,000
See Note B for discussion of non-cash transactions for the Note Payable
reduction relating to Berlex in 1997 and 1996.
The accompanying notes are an integral part of these
statements.
F-7
F-1
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, 1997
and 1996 F-3
Consolidated Statements of Income for the
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8 - F-28
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,
1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations, and their consolidated
shareholders' equity and their consolidated cash flows for each
of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Parsippany, New Jersey
March 18, 1998
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
C) 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.
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 (See Note B
for discussion of a change in estimate).
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 Statement 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 recorded for 1997 or
1996.
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, 1997 were principally held by one institution,
and are in excess of the Federal 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. However, at December 31,
1997 and 1996, two wholesale customers accounted for
approximately 44% and 59%, respectively, of the total accounts
receivable balance.
Approximately 45% and 51% of the Company's net sales for the
years ended December 31, 1997 and 1996 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 in the foreseeable future.
For the year ended December 31, 1997, three wholesale customers
accounted for approximately 39% (15%, 12% and 12%) of net sales.
For the year ended December 31, 1996, three wholesale customers
accounted for approximately 37% (15%, 12% and 10%) of net sales.
One company manufacturing products for the Company accounted for
approximately 19% and 16% of the Company's cost of goods sold for
the years ended December 31, 1997 and 1996. 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 13% and 11% of its
net sales for the years ended December 31, 1997 and 1996,
respectively.
8.Net Income Per Common Share
The Company computes income per share in accordance with
Statement of Financial Accounting Standards No. 128 Earnings
per Share (SFAS 128) which specifies the compilation,
presentation and disclosure requirements for income per share
for entities with publicly held common stock or potential
common stock. The requirements of this statement are effective
for interim and annual periods ending after December 15, 1997.
All prior years were restated in accordance with SFAS 128.
Basic net income per common share is determined by dividing the
net income by the weighted average number of shares of common
stock outstanding. Diluted net income per common share is
determined by dividing the net income by the weighted number of
shares outstanding and dilutive common equivalent shares from
stock options and warrants.
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," introduced 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 G-2).
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, rebates and the determination of useful
lives of intangibles represent particularly sensitive estimates.
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 $1,150,000 and $1,565,000 at December
31, 1997 and 1996, 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.
The Company's analysis of the trend in actual chargebacks and
rebates resulted in a decrease in the percentage used to adjust
gross sales to net sales for the second quarter of 1997,
resulting in increased net sales and net income of $45,000.
Additionally, during the second quarter of 1997, the Company
released approximately $229,000 of the previously established
chargeback and rebate reserves, resulting in an increase to net
sales and net income. During 1997 and 1996, the Company received
monetary concessions of approximately $357,000 and $275,000,
respectively from managed care vendors receiving rebates.
14. New Accounting Standards
The Financial Accounting Standards Board released Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130), governing the reporting and display of
comprehensive income and its components, and Statement of
Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No.
131), requiring that all public businesses report financial and
descriptive information about their reportable operating
segments. The Company will implement SFAS 130 and SFAS 131 as
required in 1998. The impact of adopting SFAS No. 130 is not
expected to be material to the consolidated financial statements.
Management is currently evaluating the effect of SFAS No. 131 on
the consolidated financial statement disclosures.
NOTE B - INTANGIBLE ASSETS
Intangible assets are summarized as follows:
1997 1996
Accumulated Accumulated
Cost Amortization Cost Amortization
Trademarks $ 16,324,790 $4,564,412 $16,905,140 $3,675,007
Patents 1,327,454 919,080 1,327,454 735,517
Licenses 124,886 59,280 124,886 46,800
Goodwill 1,253,975 444,186 1,284,125 318,399
Covenants not to compete 162,140 162,140 162,140 160,486
$19,193,245 $6,149,098 $19,767,745 $4,936,209
Intangible assets arose principally from the Doak acquisition
(Note C) and the following transactions in 1992 through 1997.
1. LUBRIN(r)
In December 1992, the Company acquired certain rights, including
the trademark and patent, to the personal lubricating insert,
LUBRIN(r) INSERTS ("LUBRIN(r)") and agreed for seven years not to
compete with the Company with respect to the product LUBRIN"r". The
Company and UPSHER-SMITH LABORATORIES, INC. ("UPSHER-SMITH"),
have since entered into a manufacturing contract, renewable
annually, to manufacture LUBRIN(r) for the Company.
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 which expired
on December 15, 1997. Of the total purchase price, $1 million
was attributed to patents with an estimated life of seven years.
2. TRANS-VER-SAL(r) Wart Products/GLANDOSANE(r)
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 ofinventory 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.
3. 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).
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 G-3), with an
additional $1.7 million paid from proceeds of DECONAMINE(r) sales
from November 1, 1993 to the date of closing; (ii) $0.4 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 non-interest-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 were
collateralized by the Company's accounts receivable and inventory
until after the June 30, 1996 payment was made.
The $84,000 monthly payments described in item (v) above
became payable beginning in January 1, 1998.
Interest accrued on the deferred $2.67 million payment at
prime plus 4%. Interest accrued on the $84,000 per month
beginning February, 1996 at prime plus 2%.
On December 23, 1996, the Company and Berlex further amended the
agreement to provide the following:
The Company was to make payments of $250,000 each on December 23,
1996, December 31, 1996, January 30, 1997 and February 18, 1997;
$700,000 was due on March 17, 1997; $1.0 million was due on May
15, 1997; and $100,000 per month was 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, which the Company caused
to be registered with the Securities and Exchange Commission.
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 of the intangible assets.
On September 19, 1997 (the "Closing"), the Company consummated
the negotiated settlement of all of its outstanding obligations
to Berlex by amending the purchase agreement. Immediately prior
to the Closing, the Company was indebted to Berlex in the
approximate aggregate amount of $2.5 million.
At the Closing, in satisfaction of all outstanding obligations
owing to Berlex, and in consideration of Berlex's release of its
lien covering the Company's accounts receivable, the Company (i)
paid to Berlex $1.15 million in cash, plus accrued interest (the
"Cash Payment"), (ii) issued to Berlex 450,000 shares of Class A
Common Stock (which, when added with the other shares of Class A
Common Stock previously issued to Berlex represented, at the time
of issuance, approximately 19% of the outstanding Class A Common
Stock of the Company) and (iii) agreed to issue to Berlex, when
permissible in accordance with applicable state corporate law,
warrants entitling Berlex to purchase, under certain conditions,
up to an additional 750,000 shares of Class A Common Stock with
an exercise price of $1.25 per share. These warrants are subject
to certain anti-dilution provisions and expire two years after
issuance, but may be extended under certain conditions.
The difference between the carrying amount of the obligation to
Berlex and the total consideration specified by the September 19,
1997 amendment amounted to $572,000 and was recorded as a
reduction in the net purchase price of DECONAMINE(r), and will be
recorded as a reduction to the intangible assets.
In conjunction with the final amendment to the purchase
agreement, the Company revised its estimate of the useful life of
DECONAMINE(r). Based on various changes in circumstances, the
Company determined that a useful life of 25 years (21 years from
the date of the final amendment) is appropriate. This change in
estimate resulted in a reduction of amortization expense of
approximately $100,000 for the quarter and year ended December
31, 1997.
4. 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 therefore, 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. In 1996, the Company and Upjohn entered into
an agreement whereby the Company paid Upjohn $25,000 in lieu of
royalty payments accruing on or after December 31, 1996. 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.
5. CARMOL(r) 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.
6. 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, which was distributed during August 1995,
and $150,000.
The Company was appointed exclusive U.S. distributor for all of
ITG's Omiderm products, including ITG's Synthetic Polyurethane
Wound Dressing. Omiderm 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 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 products.
7. ACID MANTLE(r) Acquisition
In May 1996, the Company acquired from Sandoz Pharmaceuticals
Corp. ("Sandoz") 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 per year from 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.
NOTE C - ACQUISITION OF DOAK PHARMACAL CO., INC.
In 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. 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). Subsequently, the Company
acquired certain minor additional shares of Doak which are
recorded as additional goodwill.
NOTE D - INCOME TAXES
The provision for income tax expense (benefit) is as follows:
Year ended Year ended
December 31, December 31,
1997 1996
Current
Federal $ 395,000 $ 950,000
State 76,500 193,000
---------- -----------
$ 471,500 $ 1,143,000
Utilization of net operating loss
carryforwards
Federal (378,000) ( 895,000)
State (35,000) (98,000)
----------- ----------
(413,000) (993,000)
----------- ----------
$ 58,500 $ 150,000
=========== ==========
The following is a summary of the items giving rise to deferred
tax benefits at December 31, 1997 and 1996.
1997 1996
Current
Allowance for doubtful accounts $ 23,000 $ 26,000
Allowance on sales 226,000 286,000
Inventory reserves and 100,000 124,000
capitalization
Accrued expenses -0- 93,000
349,000 529,000
Long-term
Net operating loss carryforward 191,000 307,000
Alternative minimum tax credit 181,000 188,000
Amortization of intangibles and 340,000 352,000
fixed assets
712,000 847,000
Total deferred tax assets 1,061,000 1,376,000
Less valuation allowance (1,061,000) (1,376,000)
$ ----------- $ ---------
- --
A valuation allowance has been recorded at December 31, 1997 and
1996 reflecting the uncertainty of the future utilization of
these tax benefits.
The difference between the actual Federal income tax 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 December
31,1997 31,1996
Tax at statutory rate 34.0% 34.0%
State income tax expense,
net of Federal tax effect 2.8 3.5
Change in valuation
allowance and previously
unrecorded benefits (32.6) (31.5)
Other 1.9 2.6
Effective tax rate 6.1 % 8.6 %
The Company has a net operating loss carryforward for Federal
income tax purposes of $ 215,000, which will expire in 2010.
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.
NOTE E -REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
In order to raise the funds necessary for the Company to make the
Cash Payment to Berlex (See Note B), the Company entered into a
$3 million revolving credit facility with The CIT Group/Credit
Finance Inc. ("CIT"). Advances under this facility are
calculated pursuant to a formula which is based upon the
Company's then "eligible" accounts receivable and inventory
levels. This line of credit has an initial term of three years
and is renewable for successive periods of two years each. The
credit facility requires an annual facility fee and is subject to
an unused credit line percentage fee. Interest accrues on
amounts outstanding under this facility at the rate equal to the
prime rate of interest from time to time announced by The Chase
Manhattan Bank as its prime rate of interest plus 2 1/4%. The
Company's obligations under this credit facility have been
collateralized by the grant by the Company to CIT of a lien upon,
and the pledge of a security in, all of the Company's inventory,
accounts receivable, intangible assets (subject to prior lien)
and other assets. The credit facility contains certain covenants
and restrictions and a limited personal guaranty by Daniel
Glassman, the Company's Chairman and Chief Executive Officer.
Long-term debt consists of the following:
1997 1996
Installment note due 2001 (a) $85,001 $ 118,989
Installment note due 1997 (b) - 118,542
Installment note due 1998 (c) 26,399 151,738
Installment note due 1997 (d) - 2,879,882
Installment note due 1997 (e) - 98,282
Installment note due 2001 (f) 320,448 520,957
Other installment notes and capital 1,701 87,143
lease obligations
------- ---------
433,549 3,975,533
Less: current maturities (169,143) (3,444,569)
$ 264,406 $ 530,964
(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
December 1992 and was repaid in 1997 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.
(c) 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.
(d) The note payable, which originated in December 1993 in
connection with the acquisition of a trademark
(DECONAMINE(r)), was non-interest-bearing. Pursuant to the
renegotiated terms (Note B), the note was satisfied in full
in 1997.
(e) The note payable, which originated in June 1994 and
was repaid in 1997,in connection with the acquisition of
trademarks (CARMOL(r)), was non-interest-bearing and was payable in
annual installments of $100,000 commencing June 1995. Interest
at an annual rate of 7% was imputed for this note.
(f) The note payable, which originated in May 1996 in connection
with the acquisition of trademarks (ACID MANTLE(r)) is non interest
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.
The annual maturities of long term debt is $103,000 due in 1999,
$113,000 due in 2000 and $48,000 due in 2001. Because of the
nature of the Company's debt, it is impractical to determine its
fair value.
NOTE F - RELATED PARTY TRANSACTION
During the years ended December 31, 1997 and 1996, 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 $135,000 and $280,000, respectively. At December
31, 1997, the Company owed Banyan $2,897.
NOTE G -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.
1. Stock Repurchase Plan
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 1997, the
Company acquired 146,008 shares at a cost of $ 231,198, net.
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 (see Note G-6). 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:
Weighted
Average
Number of Exercise
Options price
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
Granted 68,000 1.25
Exercised (31,500) 1.39
Canceled (174,740) 1.51
Balance, December 31, 1997 1,341,125 $1.32
As of December 31, 1997, options outstanding for $1,243,000
shares were exercisable at prices ranging from $.68 to $3.65, and
the weighted remaining contractual life was 4.9 years. 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. Compensation
cost charged to operations, which the Company records for options
granted to nonemployees, was none and $58,000 in the years ended
December 31, 1997 and 1996, respectively. There were 131,645
options outstanding to nonemployees at December 31, 1997, of
which 128,145 were exercisable. There were 232,805 options
outstanding to nonemployees at December 31, 1996, of which
211,697 were exercisable.
The following table summarizes option data as of December 31,
1997:
Number Weighted Weighted Number Weighted
Outstanding average average Exercisable Average
Range of as of remaining exercise as of Exercise
exercise December 31, contractual price December 31, Price
prices 1997 life 1977
(in (in
thousands) thousands)
$ .68 - 1.40 691 5.5 $1.19 613 $1.18
1.41 - 3.65 518 3.0 1.49 498 1.50
--- ---
1,209 1,111
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997 AND 1996
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, 1997 and 1996. 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, 60%
1995
December 2, 1995 - through December 31, 1997 90%
Had compensation cost been determined under SFAS No. 123, net
income and net income per share would have been as follows:
Year ended December 31,
1997 1996
Net income
As reported $ 906,406 $1,598,507
Pro forma for SFAS No. 123 783,702 1,206,544
adjustment
Net Income per share
As reported $ .11 $ .22
Pro forma for SFAS No. 123 .09 .17
adjustment
The weighted average fair value of options granted during 1997
and 1996 was $ .69 and $ .83, respectively.
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.
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. For the year ended December 31,
1997, the exercise price of all options equalled the market price
on the grant date.
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 was 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 the escrow shares. These
options were therefore canceled. Certain of these escrow shares
were subsequently returned to the Company and retired (Note G-5)
and the Company has issued new options.
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.
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
The following table summarizes shares of common stock reserved
for issuance at December 31, 1997, as adjusted for the dilutive
effect of the private placement of the Company's securities:
Number
of shares
Reserved for issuable
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 1,341,125
2,451,125
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 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
options to purchase 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.
6. Reissuance of Class B Shares
On June 2, 1997, the Board of Directors of the Company authorized
the issuance of 254,311 shares of Class B common stock (the "New
Class B Stock") to Daniel Glassman. The New Class B Stock was
issued to Daniel Glassman in consideration for, among other
things, Daniel Glassman's delivery to the Company, for
cancellation, of 254,311 shares of Class A common stock of the
Company. The issuance of the New Class B Stock to Daniel
Glassman was the result of the Board of Directors' decision to
restore management status quo following the Board's recently
learning that Daniel Glassman had pledged (the "Pledge"), in
April 1995, 254,311 shares of Class B common stock then owned by
Daniel Glassman (the "Pledged Shares") to secure certain
obligations of Daniel Glassman to an unaffiliated third-party
lender. Daniel Glassman has delivered to the Company a letter in
which he states that the Pledge was an inadvertent error on his
part and that had he been aware of the potential ramifications of
the Pledge, he would have pledged other collateral to secure the
obligations in question.
Pursuant to the Company's Certificate of Incorporation, as
amended (the "Charter"), the Pledged Shares automatically
converted into shares of Class A common stock upon the Pledge by
Daniel Glassman. Consequently, the number of outstanding shares
of Class B common stock following the Pledge was reduced from
431,552 shares to 177,241 shares. Pursuant to the Charter,
holders of the Company's Class B common stock are entitled to
elect a majority of the Company's directors so long as there are
at least 325,000 shares of Class B common stock issued and
outstanding; otherwise, all holders of Class A and Class B common
stock, voting as a single class, are entitled to elect all of the
Company's directors. During November 1995, and pursuant to
matters unrelated to the Pledge, an aggregate of 428,358 other
shares of Class B common stock were returned to, and retired by,
the Company (see Note G-5). As a result thereof, the number of
outstanding shares of Class B common stock fell below the
aforementioned 325,000 share threshold. In light of the
Company's being unaware of the Pledge, holders of the Company's
Class A and Class B common stock, voting as separate classes,
elected two directors and three directors, respectively, at the
Company's Annual Stockholders' Meeting held in May 1996 (the
"1996 Annual Meeting"), rather than voting together as a single
class to elect all of the Company's directors. Accordingly, since
the 1996 Annual Meeting, only the two directors of the Company
elected by the holders of the Class A common stock (the "Class A
Directors") have been duly and validly elected. Prior to June 3,
1997, the Company's By-Laws stated that the Company shall have
three directors. Since their election by stockholders at the
1996 Annual Meetings, the two Class A Directors, each of whom was
an independent director, voted in favor of all matters approved
by the Board of Directors. Prior to the authorization of the
issuance of the New Class B Stock to Daniel Glassman, the Class A
Directors appointed David Hillman, Secretary of the Company, as
the third director of the Company.
Since the issuance of the New Class B Stock to Daniel Glassman
caused the number of issued and outstanding shares of Class B
common stock to increase to 431,552 shares (above the 325,000
share threshold set forth in the Company's Charter), the holders
of Class B common stock became entitled to elect a majority
(consisting of three) of the Company's directors. Following the
issuance to Daniel Glassman of the New Class B Stock, the
directors of the Company amended the Company's By-Laws to provide
that the Board of Directors shall be comprised of five persons
and the holders of the outstanding Class B common stock, acting
separately as a class in accordance with the Company's Charter,
elected, by majority written consent in lieu of a meeting, Daniel
Glassman and Iris Glassman as directors of the Company and David
Hillman was designated as a director by the holders of the Class
B common stock.
At a Special Meeting of Stockholders held in August 1996, it was
reported that an amendment (the "Option Plan Amendment") to the
Company's 1990 Stock Option Plan, as amended (the "Plan"), had
been approved by stockholders increasing, from 1,500,000 shares
to 2,600,000 shares, the number of shares of Class A common stock
authorized for issuance under the Plan. Given the ramifications
of the Pledge, and, in particular, that the 254,311 Class B
shares voted in favor of the Option Plan Amendment by Daniel
Glassman were counted as 1,271,555 votes (giving effect to the
5:1 voting power attributable to Class B shares) but should have
been counted as only 254,311 shares of Class A common stock
voting in favor of the Option Plan Amendment, there was an
insufficient number of shares of common stock of the Company
voting to approve the Option Plan Amendment. Accordingly, the
Board of Directors has determined to treat the Option Plan
Amendment as having been rejected by the Company's stockholders.
Options under the Plan to acquire an aggregate of 140,000 shares
of Class A common stock granted by the Company in reliance upon
the Option
Plan Amendment having been approved by stockholders have been
returned voluntarily to the Company by the relevant optionees for
cancellation. As a consequence of believing, in good faith, that
the Option Plan Amendment had been approved by stockholders,
between August 15, 1996 and December 31, 1996, there were
outstanding options to acquire under the Plan in excess of
1,500,000 shares of Class A common stock. As a result of options
to acquire an aggregate of 423,354 shares of Class A common stock
under the Plan being canceled during 1996 due to optionees
leaving the employ of the Company, there are outstanding, as of
December 31, 1997, options to acquire an aggregate of 1,489,845
shares of Class A common stock under the Plan. At a Special
Meeting of Stockholders held in August 1997, an amendment to the
Company's 1990 Stock Option Plan, as amended, was approved by
stockholders increasing, from 1,500,000 shares to 2,600,000
shares, the number of shares of Class A Common Stock authorized
for issuance under the Plan.
NOTE H - COMMITMENTS AND CONTINGENCIES
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, 1997 to July 31, 1998 for 14,120 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
$194,000 and $176,000 for the years ended December 31, 1997 and
1996, respectively.
The term of the lease occupied by Doak in Westbury, New York is
through 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: $173,000
for 1998 and $5,000 for 1999. Total rent expense for the years
ended December 31, 1997 and 1996 was $312,000 and $301,000,
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 completed the first phase of these studies
at a cost of approximately $150,000. The Company has entered the
second phase of these studies at a cost of $150,000 of which
$75,000 has already been charged to operations as of the date of
this document. Following the completion of the second phase, the
project will be deferred until the regulatory and competitive
environment warrants completion.
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
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 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.
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 tortiously interfered
with the contract between the former stockholders and Stiefel,
and (iii) that the Company and Doak should be equitably stopped
from terminating the Agreement. The complaint sought an
injunction restraining the Company and Doak from terminating the
Agreement and compensatory and punitive damages in unspecified
amounts.
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. Defined Contribution 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.
Contributions of $28,600 were charged to expenses for the year
ended December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Balance Sheet, Cash Flow and Statement of Operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 513,971
<SECURITIES> 0
<RECEIVABLES> 1,748,856
<ALLOWANCES> 61,000
<INVENTORY> 977,344
<CURRENT-ASSETS> 4,770,613
<PP&E> 1,326,537
<DEPRECIATION> 1,048,732
<TOTAL-ASSETS> 18,181,882
<CURRENT-LIABILITIES> 4,743,381
<BONDS> 264,406
0
0
<COMMON> 15,499,375
<OTHER-SE> (2,094,082)
<TOTAL-LIABILITY-AND-EQUITY> 18,181,882
<SALES> 15,023,762
<TOTAL-REVENUES> 15,023,762
<CGS> 4,192,743
<TOTAL-COSTS> 4,192,743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 292,651
<INCOME-PRETAX> 964,906
<INCOME-TAX> 58,500
<INCOME-CONTINUING> 906,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 906,406
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
