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 June 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 report)
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 August 2, 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
June 30, 1998
Page
Number
Part I - Financial Information
Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -
June 30, 1998 3
Condensed Consolidated Statements of
Operations - three and six months ended
June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows - six months ended June 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
June 30, 1998
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 39,287
Accounts receivable - net 3,373,941
Finished goods inventory 920,394
Prepaid samples and materials 1,304,802
Prepaid expenses and other 157,744
Total current assets 5,796,168
Property and equipment - net 364,967
Intangibles - net 12,576,857
Other assets 90,447
Total Assets $ 18,828,439
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 106,451
Revolving credit line 706,672
Accounts payable and accrued expenses 3,844,154
Accrued income taxes 311,553
Total current liabilities 4,968,830
Long-term debt, less current maturities 226,401
Commitments & contingencies
Stockholders' equity
Preferred stock, no par value;
authorized, 2,000,000 shares; issued, none -
Common, Class A, no par value, authorized
26,400,000; issued 8,188,281 shares at
June 30, 1998 14,673,848
Common, Class B, no par value, authorized
900,000 shares, issued and outstanding,
431,552 shares at June 30, 1998 845,448
Treasury Stock, Class A, at cost (197,045
shares at June 30, 1998) (374,737)
Accumulated deficit (1,511,351)
13,633,208
Total Liabilities & Stockholders' Equity $ 18,828,439
See Notes to Condensed Consolidated Financial Statements
3
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net sales $ 3,688,121 $ 3,702,321 $ 7,929,402 $ 7,373,970
Cost of sales 1,019,606 952,859 2,334,403 1,807,376
2,668,515 2,749,462 5,594,999 5,566,594
Selling, general and
administrative expense 2,078,124 2,065,661 4,048,451 4,011,810
Depreciation & amortization 264,713 400,376 538,147 806,064
Interest expense - net 41,503 70,738 83,670 182,600
2,384,340 2,536,775 4,670,268 5,000,474
Income before
income taxes 284,175 212,687 924,731 566,120
Income tax provision 105,000 82,750 342,000 223,750
Net income $ 179,175 $ 129,937 $ 582,731 $ 342,370
Net income
per common share
Basic $ 0.02 $ 0.02 $ 0.07 $ 0.04
Diluted $ 0.02 $ 0.02 $ 0.06 $ 0.04
Weighted average number
of common shares
Basic 8,420,000 8,090,000 8,440,000 8,100,000
Diluted 9,420,000 8,110,000 9,350,000 8,150,000
See Notes to Condensed Consolidated Financial Statements
4
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 582,731 $ 342,370
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation & amortization 538,147 806,064
Noncash compensation charges 8,533 -
Changes in operating assets and liabilities
Accounts receivable (1,625,085) 761,405
Inventory and prepaid samples
and materials 269,961 380,342
Income taxes payable 177,621 108,165
Prepaid expenses and other (146,245) (124,233)
Accounts payable and accrued expens 673,605 (817,638)
Net cash provided by operating activities 479,268 1,456,475
Cash flows from investing activities:
Additional investments in trademarks, patents and
other intangible assets (22,342) (58,262)
Purchase of property & equipment - net (135,677) (18,223)
Net cash used in investing activities (158,019) (76,485)
Cash flows from financing activities:
Payment of notes payable (100,697) (650,671)
Revolving credit line, net (563,085) -
Proceeds from exercise of stock options 11,388 -
Purchase of treasury shares (143,539) (78,416)
Net cash used in financing activities (795,933) (729,087)
Increase in cash and cash equivalents (474,684) 650,903
Cash and cash equivalents at beginning of period 513,971 -
Cash and cash equivalents at end of period $ 39,287 $ 650,903
(Continued)
5
BRADLEY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 78,000 $ 66,000
Income taxes $ 164,000 $ 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,
except for the reduction of chargeback and rebate reserves included in Manage-
ment's Discussion and Analysis) necessary to present fairly the financial
position as of June 30, 1998 and the results of operations for the three and
six month periods ended June 30, 1998 and 1997 and cash flows for the six months
ended June 30, 1998 and 1997, respectively. Further, the significant concentra-
tions contained therein relatively reflect the concentrations for the six months
ended Jume 30, 1998 and 1997.
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 six month periods ended June 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 June 30, 1998, the Company had working capital of $827,000 an
increase of $800,000 over the December 31, 1997 working capital of $27,000.
Improvement in the Company's working capital position at June 30, 1998 was
primarily due to operating profit and positive cash flow from operations during
the six months ended June 30, 1998 and the Company's reversal during the six
months ended June 30, 1998 of $309,000 of reserves previously recorded for
chargebacks, rebates, and others.
Working capital as of June 30, 1998 included a decrease of $475,000 in
cash and cash equivalents due to primarily financing activities. Additionally,
current liabilities increased $225,000 from balances at December 31, 1997 as
accounts payable and accrued expenses slightly increased. For the six month
period ended June 30, 1998, accounts receivable increased $1,625,000 from
December 31, 1997 due to increased wholesaler inventory stocking which was
prompted by the offering of slight discounts to major customers during June
1998. This event, which also occurred in June 1997, may have the effect of
reducing revenue in the Third Quarter 1998 and may have reduced revenue in the
Third Quarter 1997. While inventories decreased $57,000 and prepaid samples/
materials decreased $214,000 from levels existing at December 31, 1997, reflec-
ting the normal seasonality of the Company's second quarter operations.
Additionally, prepaid expenses and other increased $145,000 due to primarily
the Company's prepayment of advertising expenses for LePont(R) Beauty Enhancer.
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 $300,000 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
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 anti-
cipate 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 July 23, 1998, the Company has
repurchased 195,000 shares of Class A Common Stock at a total cost of
$340,000. 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 insignifi-
cant. The Company has no internally developed software that it utilizes for its
operations, but uses packaged software which is compatible with 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 extent
that vendors and customers 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.
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 six months
ended June 30, 1998 were $3,688,000 and $7,929,000, respectively,
representing a decrease of $14,000 for the three months, and an increase of
$555,000 for the six months ended June 30, 1998. The net sales decrease for the
three months ending June 30, 1998 is principally due to a larger change in
chargeback reserves in the Second Quarter 1997 versus Second Quarter 1998.
The net sales increase for six month period primarily reflects increases in the
sales of the Doak Dermatologics products of $728,000 (25%), principally due to
sales of LePont(R) Beauty Enhancer introduced in the Fourth Quarter 1997.
Sales of the Company's Kenwood products decreased slightly (5%), or $206,000,
due to a larger reduction in reserves in 1997 versus 1998. 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 1998, resulting in increased net sales and profits of $235,000. The decrease
in the percentage used to adjust gross sales to net sales reflects improvements
in processing chargebacks and rebates as well as less reliance on managed care
sales. Any future reductions of this percentage will reflect continuing and
future analysis of this trend. There can be no assurance that this trend will
continue.
COST OF SALES for the three and six months ended June 30, 1998 were
$1,020,000 and $2,334,000, respectively, representing an increase from the three
and six months ended June 30, 1997 of $67,000 and $527,000. The Company's
gross profit margin for the three and six months ended June 30, 1998 was 72%
and 71%, respectively, as compared to 74% and 75% during the three and six
months ended June 30, 1997. This reflects a change in the mix of the Company's
sales with greater sales of Doak products which traditionally carry a lower
gross profit percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $2,078,000
and $4,048,000, respectively, for the three and six months ended June 30, 1998,
representing an increase of $12,000 (1%) and $37,000 (1%) over the three and
six months ended June 30, 1997. This increase reflects, primarily, savings in
general and administrative and offset by increased investment in other areas of
sales and marketing, and a decrease in research and development costs. The
Company has and will continue to institute cost saving programs during 1998.
DEPRECIATION and AMORTIZATION EXPENSES for the three and six
months ended June 30, 1998 were $265,000 and $538,000, respectively,
representing a decrease of $136,000 and $268,000 as compared to the three and
six months ended June 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 six months ended June 30,
1998 decreased by $29,000 and $99,000 as compared to the three and six
months ended June 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 for the three and six months ended June 30, 1998 was
$179,000 and $583,000, respectively, representing an increase of $49,000 (38%)
for the three months ended June 30, 1998 as compared to the comparable period
during 1997, and an increase of $240,000 (70%) for the six months ended June
30, 1998 as compared to the comparable period during 1997. The increase was
principally due to an increase in net sales for the six months ended June 30,
1998 and a decrease in depreciation and amortization and interest expense. The
increase in income tax is due to a higher pretax income, offset in part by a
decrease in the effective income tax rate from approximately 40% in the six
month ended June 30, 1997 to approximately 37% in the six month ended June 30,
1998 due to the benefit derived from deferred tax assets which had previously
been fully reserved.
NET INCOME PER COMMON SHARE for the three months ended June 30,
1998 on a basic and diluted basis was $.02 versus the same $.02 earnings for
three months versus last year. Net income per common share for the six months
ended June 30, 1998 on a diluted basis was $.06 per common share, representing
a $.02 increase over a comparable period in 1997. Net income per basic common
share was $.07, representing a $.03 increase over a comparable period in 1997.
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 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 sub-
stances 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.
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
ground water 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
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: August 5, 1998 /s/ Daniel Glassman
---------------------------
Daniel Glassman
Chairman of The Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 1998 /s/ R. Brent Lenczycki, CPA
---------------------------
R. Brent Lenczycki, CPA
Manager of Finance
(Principal Financial and
Accounting Manager)
7
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> June-30-1998
<CASH> 39,287
<SECURITIES> 0
<RECEIVABLES> 3,404,242
<ALLOWANCES> 30,301
<INVENTORY> 1,462,546
<CURRENT-ASSETS> 5,796,168
<PP&E> 1,463,301
<DEPRECIATION> 1,098,334
<TOTAL-ASSETS> 18,828,439
<CURRENT-LIABILITIES> 4,968,830
<LT DEBT> 226,401
0
0
<COMMON> 15,144,559
<OTHER-SE> (1,511,351)
<TOTAL-LIABILITY-AND-EQUITY> 18,828,439
<SALES> 7,929,402
TOTAL-REVENUES> 7,929,402
<CGS> 2,334,403
<TOTAL-COSTS> 2,334,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,670
<INCOME-PRETAX> 924,731
<INCOME-TAX> 342,000
<INCOME-CONTINUING> 582,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 582,731
<EPS-BASIC> .07
<EPS-DILUTED> .06
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