U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18881
-------
BRADLEY PHARMACEUTICALS, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-2581418
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
383 Route 46 W., Fairfield, NJ
------------------------------
(Address of principal executive offices)
(973) 882-1505
--------------
N/A
---
(Former name, former address and former fiscal year, if changed since last re-
port)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such 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
---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of Each Class Number of Shares Outstanding
of Common Stock as of October 30, 1998
------------------- ----------------------------
Class A, No Par Value 8,188,281
Class B, No Par Value 431,552
Transitional Small Business Disclosure Format (check one):
YES NO X
---
BRADLEY PHARMACEUTICALS, INC.
INDEX TO FORM 10 - QSB
September 30, 1998
Page
Number
Part I - Financial Information
Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -
September 30, 1998 3
Condensed Consolidated Statements of
Operations - three and nine months ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows - nine months ended September 30, 1998
and 1997 5
Condensed Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis 8
Part II - Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEET
September 30, 1998
(UNAUDITED)
ASSETS
Current assets
- --------------
Cash and cash equivalents $ 460,495
Accounts receivable - net 2,731,889
Finished goods inventory 1,241,321
Prepaid samples and materials 1,396,360
Prepaid expenses and other 140,893
---------
Total current assets 5,970,958
Property and equipment - net 365,049
Intangibles - net 12,341,013
Other assets 83,955
----------
Total Assets $ 18,760,975
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 116,951
Revolving credit line 1,171,381
Accounts payable and accrued expenses 3,995,000
Accrued income taxes 34,753
---------
Total current liabilities 5,318,093
Long-term debt, less current maturities 215,901
Commitments & contingencies
Stockholders' equity
Preferred stock, $.01 par value;
authorized, 2,000,000 shares; issued, none -
Common, Class A, $.01 par value, authorized
26,400,000; issued 8,188,281 shares at
September 30, 1998 14,750,238
Common, Class B, $.01 par value, authorized
900,000 shares, issued and outstanding,
431,552 shares at September 30, 1998 845,448
Treasury Stock, Class A, at cost (195,738 shares at
September 30, 1998) (392,167)
Accumulated deficit (1,976,538)
-----------
13,226,981
----------
Total Liabilities & Stockholders' Equity $ 18,760,975
==========
See Notes to Condensed Consolidated Financial Statements
3
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Net sales $ 2,463,228 3,454,575 10,392,630 10,828,545
Cost of sales 882,061 1,035,072 3,216,464 2,842,448
---------- ---------- ----------- -----------
1,581,167 2,419,503 7,176,166 7,986,097
---------- ---------- ----------- -----------
Selling, general and
administrative expenses 2,023,555 1,743,089 6,072,006 5,754,899
Depreciation and amortization 265,612 385,110 803,759 1,191,174
Interest expense - net 31,187 72,304 114,857 254,904
---------- ---------- ----------- -----------
2,320,354 2,200,503 6,990,622 7,200,977
Income (loss) before
income taxes (739,187) 219,000 185,544 785,120
Income tax provision (benefit) (274,000) 10,000 68,000 233,750
---------- --------- --------- ---------
Net income (loss) $ (465,187) $ 209,000 $ 117,544 $ 551,370
========== ========== =========== ===========
Net income (loss)
per common share
Basic $ (0.06) 0.03 0.01 0.07
========== ========== =========== ===========
Diluted $ (0.06) 0.03 0.01 0.07
========== ========== =========== ===========
Weighted average number
of common shares
Basic 8,420,000 8,240,000 8,430,000 8,280,000
========== ========== ========== ==========
Diluted 8,420,000 8,300,000 9,160,000 8,300,000
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements
4
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 117,544 $ 551,370
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation & amortization 803,759 1,191,174
Noncash compensation and consulting services 84,923 -
Changes in operating assets and liabilities
Accounts receivable (983,033) 855,728
Inventory and prepaid samples and materials (142,524) 445,199
Income taxes payable (99,179) -
Prepaid expenses and other (122,902) (101,047)
Accounts payable and accrued expenses 824,459 (1,510,534)
--------- -----------
Net cash provided by operating activities 483,047 1,431,890
--------- -----------
Cash flows from investing activities:
Investments in trademarks, patents and
other intangible assets (27,665) (85,148)
Purchase of property & equipment - net (225,204) (78,826)
Proceeds from sale of fixed assets 65,000 -
--------- --------
Net cash used in investing activities (187,869) (163,974)
Cash flows from financing activities:
Payment of notes payable (100,697) (1,834,971)
Revolving credit line, net (98,376) 904,342
Proceeds from exercise of stock options 11,388 -
Purchase of treasury shares (160,969) (112,284)
--------- ---------
Net cash used in financing activities (348,654) (1,042,913)
--------- -----------
Increase (decrease) in cash and cash equivalents (53,476) 225,003
Cash and cash equivalents at beginning of period 513,971 -
--------- -----------
Cash and cash equivalents at end of period $ 460,495 $ 225,003
========= ===========
(Continued)
5
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 102,000 $ 121,047
======== ========
Income taxes $ 167,000 $ 74,000
======== ========
See Notes to Condensed Consolidated Financial Statements
6
BRADLEY PHARMACEUTICALS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - Summary of Accounting Policies
The unaudited interim financial statements of Bradley Pharmaceuticals,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles of complete financial statements.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring entries)
necessary to present fairly the financial position as of September 30, 1998 and
the results of operations for the three and nine month periods ended September
30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998
and 1997, respectively.
The accounting policies followed by the Company are set forth in Note A of
the Company's financial statements as contained in the Form 10-KSB for the year
ended December 31, 1997 filed with the Securities and Exchange Commission.
The Form 10-KSB contains additional data and information with respect to long-
term debt, intangible assets, stock agreements, stock option plans, private
placement of securities and reserved shares, escrow shares, chargebacks and
rebates, related party transactions, income taxes, commitments, economic
dependency and other items and is incorporated by reference.
The results reported for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results of operations
which may be expected for a full year.
BRADLEY PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 or external factors could produce
significantly different results.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1998, the Company had working capital of $653,000 an
increase of $626,000 over the December 31, 1997 working capital of $27,000.
Improvement in the Company's working capital position at September 30, 1998
was primarily due to operating profit and positive cash flow from operations
during the nine months ended September 30, 1998.
Working capital as of September 30, 1998 included a decrease of $53,000 in
cash and cash equivalents due to financing and investing activities. Additional
ly, current liabilities increased $575,000 from balances at December 31, 1997
as accounts payable and accrued expenses increased. The increase in accounts
payable and accrued expenses was primarily due to management's effort to
allocate cash available for the initial payment of the BRONTEX(R) acquisition
totaling $614,000. For the nine month period ended September 30, 1998,
accounts receivable increased $983,000 from December 31, 1997 due to a greater
percentage of the Third Quarter sales occurring in September 1998 which was
prompted by an offering of slight discounts to some customers during that
month. This event, which also occurred in September 1997, may have the effect
of reducing revenue in the Fourth Quarter 1998 and may have reduced revenue in
the Fourth Quarter 1997. Inventories increased $264,000 and prepaid
samples/materials decreased $121,000 from levels existing at December 31, 1997,
reflecting the normal seasonality of the Company's Third Quarter operations.
Additionally, prepaid expenses and other increased $128,000 primarily due to
the Company's prepayment of consulting services for the implementation of the
EVA(R) financial management system.
The United States Food and Drug Administration (the "FDA") is currently
reviewing cough and cold products for its Over-the-Counter ("OTC") monograph,
and could designate the formula that is in DECONAMINE(R) as an OTC formulation.
It is not currently possible for the Company to predict how its operations and
financial condition will be affected if the DECONAMINE(R) product line is con-
verted from prescription status to over-the-counter status.
Further, the Company is required to file and 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-QSB, the Company has paid approximately $350,000 with respect to this pro-
ject. The project is being deferred until regulatory and competitive circum-
stances warrant completion and submission to the FDA. Completion of the re-
search 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 could have
material adverse effect on the Company's business.
The Company, during January 1997, began a program to repurchase in the
open market transactions over the next twenty-four months, up to 5% of its
outstanding Class A Common Stock. As of October 30, 1998, the Company has
repurchased 264,000 shares of Class A Common Stock at a total cost of $416,000.
These shares are held by the Company as treasury shares to be used for
purposes deemed necessary by the Company's Board of Directors, including
funding the Company's 401(k) Retirement Plan matching contribution.
Based upon a review of its computer operations, the Company has
determined that its costs related to the Year 2000 problem will be approximately
$85,000. The Company has no internally developed software that it utilizes for
its operations, but uses packaged software which is compatible with Year 2000.
Currently, the Company has entered into an agreement with JBA International to
provide software and consulting services required for the existing packaged
software to be compatible with Year 2000. As of the date of this 10-QSB, the
Company has paid approximately $51,000 with respect to the Year 2000 problem.
The Company expects to complete its upgrade for all packaged software in late
1998 or early 1999. However, to the extent that vendors and customers or other
third parties with whom the Company does business are not Year 2000 compliant,
there can be no assurance that any resulting problems will not have a material
adverse effect on the Company. The Company is currently reviewing all major
vendors, customers, and other third parties for any potential Year 2000 pro-
blems. Any foreseen problems related from the Year 2000 review will be addressed
accordingly.
RESULTS OF OPERATIONS
Chargebacks and rebates are the difference between prices at which the
Company sells its products (principally DECONAMINE(R) SR) to wholesalers and
the sales price ultimately paid by the end-user (often governmental agencies and
managed care buying groups) pursuant to fixed price contracts. The Company
records an estimate of the amount either to be charged-back to the Company or
rebated to the end-user at the time of sale to the wholesaler.
NET SALES (net of all adjustments to sales) for the three and nine months
ended September 30, 1998 were $2,463,000 and $10,393,000, respectively,
representing a decrease of $991,000 for the three months, and a decrease of
$436,000 for the nine months ended September 30, 1998 as compared to the 1997
equivalent periods. The net sales decrease for the three months ending
September 30,1998 is principally due to decreases in DECONAMINE(R), CARMOL(R),
and TRANS-VER-SAL(R) in the Third Quarter 1998 versus Third Quarter 1997. The
net sales decrease for nine month period primarily reflects a decrease in net
sales for the Kenwood Laboratories products of $963,000, principally due to a
larger deduction in chargeback reserves in the nine month ending September 30,
1997 versus the nine month ending September 30, 1998 and lower than expected
net sales for DECONAMINE(R). The Company's analysis of the trend in actual
gross sales to net sales for the Third Quarter of 1997, resulted in a decrease
in the percentage used to adjust gross sales to net sales. This decrease in the
percentage reflected improvement in processing chargebacks and rebates as well
as less reliance on managed care sales. Any future reductions of this per-
centage will reflect continuing and future analysis of this trend. There can be
no assurance that this trend will continue. Additionally, the net sales de-
crease for the nine month ending September 30, 1998 versus the same period last
year was offset by increases of Doak Dermatologics products, especially
CARMOL(R), ACID MANTLE(R), and new product sales of LEPONT(R) BEAUTY ENHANCER.
COST OF SALES for the three and nine months ended September 30, 1998
were $882,000 and $3,216,000, respectively, representing a decrease from the
comparable three months ended and an increase from the nine months ended of
$153,000 and $374,000. The Company's gross profit margin for the three and
nine months ended September 30, 1998 were 64% and 69%, respectively, as
compared to 70% and 74% during the three and nine months ended September
30, 1997. This reflects a change in the mix of the Company's sales towards Doak
products which traditionally carry a lower gross profit percentage than Kenwood
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $2,024,000
and $6,072,000, respectively, for the three and nine months ended September 30,
1998, representing an increase of $280,000 (16%) and $317,000 (6%) over the
three and nine months ended September 30, 1997. The increases in selling,
general and administrative expenses continue to reflect increased investment in
the Company's sales and marketing areas, with resulting increases in employee
benefits, payroll taxes, promotional, and advertising expenses. The Company,
however, continues to implement steps designed to reduce expenses and
maintain cost controls.
DEPRECIATION and AMORTIZATION EXPENSES for the three and nine
months ended September 30, 1998 were $266,000 and $804,000, respectively,
representing a decrease of $119,000 and $387,000 as compared to the three and
nine months ended September 30, 1997. This decrease was principally due to the
restructuring of the Berlex transaction as well as the change of estimate for
the DECONAMINE(R) amortization period.
INTEREST EXPENSE - NET for the three and nine months ended September
30, 1998 decreased by $41,000 and $140,000 as compared to the three and nine
months ended September 30, 1997. This decrease was principally due to
renegotiating and payment of the outstanding debt due to Berlex and repayment
of other debt (As discussed in detail in Form 10-KSB for the year ended
December 31, 1997).
NET INCOME (LOSS) for the three and nine months ended September 30,
1998 was $(465,000) and $118,000, respectively, representing an decrease of
$674,000 for the three months ended September 30, 1998 as compared to the
comparable period during 1997, and a decrease of $434,000 for the nine months
ended September 30, 1998 versus the comparable period during 1997. The
decrease was principally due to a decrease in net sales and increase in selling,
general, and administrative expenses for the three and nine months ended
September 30, 1998. The decrease in income tax is due to a lower pretax income,
offset in part by a increase in the effective income tax rate from approximately
30% in the nine month ended September 30, 1997 to approximately 37% in the
nine month ended September 30, 1998. The increase in the income tax rate is due
to the benefit derived in 1997 from a reversal of a deferred tax asset which had
previously been fully reserved.
NET INCOME (LOSS) PER COMMON SHARE for the three months ended
September 30, 1998 on a basic and diluted basis was ($.06) versus $.03 earnings
for three months versus the same period last year. Net income per common
share for the nine months ended September 30, 1998 on a basic and diluted basis
was $.01 per common share, representing a $.06 decrease over a comparable
period in 1997.
Basic per share information is computed based on the weighted average
common shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or
conversion of stock options and warrants (less the shares that may be
repurchased with the funds received from their exercise).
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations pursuant to SFAS No. 128,
"Earnings Per Share."
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Description
Basic Shares 8,420,000 8,240,000 8,430,000 8,280,000
Dilution: Stock Options
and Warrants - 60,000 730,000 20,000
Diluted Shares 8,420,000 8,300,000 9,160,000 8,300,000
Income(Loss) available
to common shareholders (465,187) 209,000 117,544 551,370
Basic earnings per share (0.06) 0.03 0.01 0.07
Diluted earnings per share (0.06) 0.03 0.01 0.07
Item 1. Legal Proceedings
The Company is a party to various legal proceedings from time to time
incidental to the conduct of its business, none of which are material to the
business or financial condition of the Company, except as may be disclosed in
this or prior reports.
Item 5. Other Information
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, and former manufacturing facility located at
128 Magnolia Avenue, Westbury, New York, are located in the New Cassel
Industrial Area, which had been designated by the NYSDEC on the Registry of
Inactive Hazardous Waste Sites (the "Registry"). The real property on which
Doak's current manufacturing facility is situated is owned by and leased to the
Company by Dermkraft, Inc. an entity owned by the former controlling share-
holders 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 pro-
perty. 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.
Thereafter, by letter dated May 3, 1996 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 cur-
rent manufacturing facility will be material. With respect to the former manu-
facturing facility on Magnolia Avenue, which remains designated by the NYSDEC
as part of the Registry, management believes that Doak will not be obligated to
contribute to any remediation costs, if any are required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On October 1, 1998, the Company entered into an agreement with Proctor &
Gamble Pharmaceuticals, Inc. (P&G) to acquire the right to the Brontex(R)
Products, consisting of two prescription upper respiratory drugs ("Brontex(R)
Products"). The acquisition closed as of October 1, 1998. The purchase price
was $1,842,000 which was paid $614,000 cash at the closing and a Promissory Note
in the amount of $1,228,000 payable sixteen months after closing. P&G will
manufacture the Brontex(R) Products for the Company under a separate supply
agreement.
The Brontex(R) Products, which represent an extension of the Company's
existing line of prescription pharmaceuticals, will be promoted primarily
through the distribution of samples to the same respiratory physician special-
ist currently targeted by the Company's existing national pharmaceutical sales
force. The Company does not expect future selling, general and administrative
expenses, exclusive of the sample costs and amortization of the acquired rights
to the Brontex(R) Products, to be impacted significantly from the selling of the
Brontex(R) Products.
SIGNATURES
In accordance with the requirement of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BRADLEY PHARMACEUTICALS, INC.
(REGISTRANT)
Date: November 12, 1998 /s/ Daniel Glassman
--------------------------------
Daniel Glassman
Chairman of The Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1998 /s/ R. Brent Lenczycki, CPA
--------------------------------
R. Brent Lenczycki, CPA
Manager of Finance
(Principal Financial and
Accounting Manager)
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 460,495
<SECURITIES> 0
<RECEIVABLES> 2,805,974
<ALLOWANCES> 74,085
<INVENTORY> 1,241,321
<CURRENT-ASSETS> 5,970,958
<PP&E> 1,487,829
<DEPRECIATION> 1,122,780
<TOTAL-ASSETS> 18,760,975
<CURRENT-LIABILITIES> 5,318,093
<BONDS> 215,901
0
0
<COMMON> 15,595,686
<OTHER-SE> (2,368,705)
<TOTAL-LIABILITY-AND-EQUITY> 18,760,975
<SALES> 10,392,630
<TOTAL-REVENUES> 10,392,630
<CGS> 3,216,464
<TOTAL-COSTS> 3,216,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,857
<INCOME-PRETAX> 185,544
<INCOME-TAX> 68,000
<INCOME-CONTINUING> 117,544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,544
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
