SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year December 31, 1998
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
Commission File Number 0-18881
BRADLEY PHARMACEUTICALS, INC.
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(Name of small business issuer in its charter)
DELAWARE 22-2581418
(State or other jurisdiction of (I.R.S. Employer
inccorporation or organization) Identification Number)
383 Route 46 West, 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, $.01 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: $15,850,000
The aggregate market value of the Class A voting stock held by nonaffiliates
of the Registrant as of March 9, 1999 was approximately $10,760,000. This amount
does not include any value for the Class B Common Stock, for which there is no
established United States public trading market.
As of March 9, 1999, 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 9, 1999
------------------- ----------------------------
Class A 8,193,551
Class B 431,522
Documents incorporated by reference: None
PART I
Item 1 Business
General
The Company
Bradley Pharmaceuticals, Inc. (the "Company") 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, respira-
tory, personal hygiene and internal medicine brands (marketed by the Company's
Kenwood Laboratories division ("Kenwood"). All of the Company's product lines
are manufactured and supplied by independent contractors under the Company's
quality control standards and marketed primarily to wholesalers. The whole-
salers, in turn, distribute the Company's products to retail outlets and health-
care 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 that 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 environ-
ment 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, the
ability to obtain appropriate 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 owed 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 success-
ive 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
(announced by The Chase Manhattan Bank) 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 and subsequently reincorporated in Delaware in July 1998. 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 that 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 dif-
ferent results.
Material Product Acquisitions
The Company commenced operations in January 1985 and through October 1998
acquired more than 16 product lines from many leading pharmaceutical companies.
During this time, the Company acquired products from Schering-Plough
Corporation, Hoechst Marion Roussel Pharmaceuticals, Inc., American Home
Products Corporation, Upsher-Smith Laboratories, Inc., and Procter & Gamble
Pharmaceuticals, Inc.
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. 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 Pharmacia & Upjohn Company
("Upjohn") all U.S. manufacturing, packaging and proprietary rights, including
all trademarks and registrations to 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(R) 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.
In October 1998, the Company acquired from Procter & Gamble Pharmaceuticals
("P&GP") the U.S. manufacturing, packaging and proprietary rights, including
all trademarks and registrations to BRONTEX(R), a potent cough reliever. In
consideration, the Company agreed to pay P&GP up to $1,800,000, of which
$600,000 was paid during October 1998. The remaining balance of $1,200,000
is due in February 2000.
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 con-
sideration paid by the Company for Doak was approximately $1.4 million.
Products
The following is a list of major products, by therapeutic category that are
marketed and distributed by the Company as of March 9, 1999. All of the
Company's products are available over-the-counter, with the exception
of BRONTEX(R), DECONAMINE(R), PAMINE(R), CARMOL(R) HC, CARMOL(R) 40, TYZINE(R),
and GLUTOFAC(R) ZX, each of which is a prescription pharmaceutical.
Dermatological Products Uses
ACID MANTLE(R) Skin acidifier
CARMOL(R) 10/20/40/HC Rx and OTC urea-based family of pro-
ducts for a variety of dermatological
conditions
FORMULA 405(R)/A.H.A /LE PONT(R) Variety of topical products for the
skin, hair and nails
TRANS-VER-SAL(R) Wart Remover Kit Unique dermal patch delivery system for
(l6mm, 12mm, 20mm sizes) wart removal
Nutritional Products Uses
GLUTOFAC(R)/ZX Rx and OTC vitamin/mineral supplements
for conditions such as diabetes
mellitus, alcoholism, psychological
stress, or chronic illness
Internal Medicine Products Uses
PAMINE (R) 2.5 mg. Tablets (100's) Rx Anticholinergic/antispasmodic
Respiratory Products Uses
BRONTEX(R) Rx Antitussive/Expectorant
(Tablets/Syrup)
DECONAMINE(R) FAMILY Rx Antihistamine/decongestant
(SR/Chewable Tablets/Syrup/Tablets/CX)
TYZINE(R) (tetrahydrozoline HCl) Rx Nasal decongestant
(Solution/ Nasal Drops)
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 generally purchases its products from approximately 20 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 16% and 19% of the Company's cost of goods sold for 1998 and 1997,
respectively. No other vendor, packager or manufacturer accounted for more than
10% of the Company's cost of goods sold for 1998 or 1997. The Company currently
has no manufacturing facilities of its own and, accordingly, is dependent upon
maintaining its existing relationship with its vendors or establishing new
vendors to supply inventory. There can be no assurance that the Company would
be able to replace its current vendors without any disruption to operations.
With the exception of arrangements relative to LUBRIN(R) and the Company's
beauty patch product, LE PONT(TM), the Company does not have any licensing,
manufacturing or other supply agreements with its manufacturers or suppliers.
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
1,400 active accounts, of which there are approximately 200 wholesalers,
750 retail chains and stores, 350 doctors and institutional accounts, 30
government entities and 60 managed care providers.
During 1998, three wholesale customers accounted for approximately 20%, 13%
and 10% respectively, of the Company's net sales. During 1997, three whole-
sale 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 1998 or 1997. 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 37%, 45%, 51% and 40%, respectively,
of the Company's 1998, 1997, 1996 and 1995 net sales. The DECONAMINE(R)
product line, consequently, will have a material effect on the Company's future
operations. The Company's newly acquired BRONTEX(R) product line (categorized
below as respiratory products) accounted for 7% of 1998 net sales.
Doak's CARMOL(R) product line accounted for approximately 15% and 12% of the
Company's 1998 and 1997 net sales. The TRANS-VER-SAL(R) and ACID MANTLE(R)
product lines accounted for approximately 8% and 10% and 6% and 4%, respect-
ively, of the Company's 1998 and 1997 net sales. Doak's other products,
including Formula 405(R), accounted for approximately 9% and 10%, of the
Company's 1998 and 1997 net sales. All of Doak's products are categorized
below as dermatologic products.
The Company's 1998, 1997, 1996 and 1995 net sales volume percentages by
category were as follows:
1998 1997 1996 1995 1998 1997 1996 1995
------------------- -------------------
Respiratory 49% 50% 56% 46% Nutritional 6% 5% 6% 6%
Dermatologic 40% 40% 32% 40% Internal Med. 2% 1% 2% 5%
Personal Hygiene 3% 4% 4% 3%
Sales of the Company's DECONAMINE(R) and BRONTEX(R) product lines and other
cough/cold/flu products are primarily concentrated in the fall and winter
months. 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 to
smooth the seasonality of these sales.
The Company's principal marketing strategy is to furnish samples, via the
Company's total field force amounting to more than 75 people, of the Company's
products and related literature to physicians to encourage them to recommend the
Company's products to their patients.
The Company has made a strategic decision to concentrate selling and marketing
resources on ten principal brands (which represented 92% and 87% of 1998 and
1997 Net Sales, respectively) as follows:
Kenwood Brands Specialty
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BRONTEX(R) General Practitioners,
DECONAMINE(R) Allergists, Pediatricians,
TYZINE(R) Otolaryngologists
ENTsol(R) " "
PAMINE(R) Gastroenterologists
Internal Medicine
GLUTOFAC(R)/GLUTOFAC(R)-ZX General Practitioners
Doak Brands Specialty
- ----------- ---------
CARMOL(R) Dermatologists
TRANS-VER-SAL(R) Podiatrists
ACID MANTLE(R) " "
FORMULA 405(R)/A.H.A/LE PONT(TM) Dermatologists/Cosmeticians
To facilitate sales of the Company's products internationally (including
Puerto Rico), the Company has entered into agreements with 27 international
pharmaceutical distributors to provide for distribution and promotion of the
Company's products. Approximately 11%, 13% and 11%, respectively, of the
Company's 1998, 1997 and 1996 net sales were from international business.
The Company continues to seek out new distributors and is currently in process
of obtaining market approvals in at least 10 new country markets. Although the
Company anticipates that it will receive the necessary approvals to market its
products in these countries, there can be no assurance that such approvals will
be received.
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 A.H.A LINE Finland LUBRIN Mexico A.H.A LINE
CARMOL(R) DOAK(R) TAR
DECONAMINE(R) France TRANS-VER-SAL(R FORMULA 405(R)
GLUTOFAC(R) LE PONT(TM)
I.L.X(R) B12 Hong Kong A.H.A LINE LUBRIN(R)
IPSATOL(R) CARMOL(R) TERSASEPTIC(R)
KTL(R) DUADACIN(R) TRANS-VER-SAL(R)
LUBRIN(R) DOAK(R) TAR
NEOLOID(R) DECONAMINE(R) Portugal TRANS-VER-SAL(R)
TRANS-VER-SAL(R) FORMULA 405(R)
GLUTOFAC(R) Puerto COMPLETE BRADLEY
Canada ENTsol(TM) LUBRIN(R) Rico LINE
LUBRIN(R) NITROGLYN(R) Saudi A.H.A LINE
NEOLOID(R) TERSASEPTIC(R) Arabia CARMOL(R)
TRANS-VER-SAL(R) TRANS-VER-SAL(R) DOAK(R) TAR
FORMULA 405(R)
Chile TRANS-VER-SAL(R)Iceland DOAK(R) TAR LE PONT(TM)
FORMULA 405(R) SULFOAM(R)
Cyprus A.H.A. LINE LUBRIN(R) SULPHO-LAC(R)
IPSATOL(R) TRANS-VER-SAL(R) TERSASEPTIC(R)
IRCON(R) TRANS-VER-SAL(R)
KTL(R) Israel LUBRIN(R)
LUBRIN(R) SingaporeA.H.A LINE
TYZINE(R) Italy TRANS-VER-SAL(R) APATATE(R)
BURO-SOL(R)
Denmark TRANS-VER-SAL(R)Jamaica APATATE(R) LUBRIN(R)
I.L.X(R) B12 SULPHO-LAC(R)
Dominican APATATE(R) IPSATOL(R) TERSASEPTIC(R)
Republic DUADACIN(R) IRCON(R) TRANS-VER-SAL(R)
GLUTOFAC(R)
IRCON(R) Jordan A.H.A LINE Spain TAR DISTILLATE
I.L.X(R) B12 CARMOL(R) TRANS-VER-SAL(R)
KTL(R) DOAK(R) TAR
FORMULA 405(R) Taiwan A.H.A LINE
LE PONT(TM) FORMULA 405(R)
El Salvador A.H.A LINE SULPHO-LAC(R) LE PONT(TM)
CARMOL(R) TRANS-VER-SAL(R) LUBRIN(R)
TRANS-VER-SAL(R)
Greece LE PONT(TM)
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 intro-
duced. 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 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 market-
place 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 possibly 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 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-KSB, the
Company has paid approximately $350,000 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 Agree-
ment, 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. 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 pharma-
ceutical 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 trade-
marks owned by the Company infringe on any trademarks owned or used by others.
Human Resources
As of March 9, 1999, the Company employed 67 full and 37 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 develop-
ment. 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.
Lewis H. Kaminester, M.D., F.A.A.D., F.A.C.P., dermatologist practicing in
North Palm Beach for the past 23 years. Dr. Kaminester graduated Franklin and
Marshall College with Honors in Biology and as member of Phi Beta Kappa. He
graduated from University of Pennsylvania School of Medicine, where he was
also a dermatology resident. He is on the clinical staff at University of
Miami School of Medicine, Department of Dermatology and Dermatological Surgery.
Richard H. Mann, D.P.M. is a doctor of podiatric medicine. He is board-certified
in foot and ankle surgery, microscopic laser surgery of the foot and is a
Fellow of the Academy of Ambulatory Foot Surgeons and American College of Foot
Surgeons. Dr. Mann received his B.A. from Queens College of the City University
of New York and his D.P.M. from the New York College of Podiatric Medicine.
Dr. Mann has developed several new pharmaceutical 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 recognized as an inter-
national authority on paranasal sinus disease and has written an authoritative
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 Otolaryngology, Wilford Hall USAF
Medical Center, and Clinical Professor of Otolaryngology/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.
Alan R. Shalita, M.D. is a board certified dermatologist and currently
Professor and Chairman of the State University of New York Health Science
Center at Brooklyn. Dr. Shalita received his B.S. from University of Brussels,
Belgium and M.D. from Bowman Gray School of Medicine. Dr. Shalita is also
licensed in New Jersey, North Carolina, California and Florida.
Keyoumars Soltani, M.D. is currently Professor of Dermatology in the Department
of Medicine at the University of Chicago. Dr. Soltani completed his residency
at Temple University Skin & Cancer Hospital of Philadelphia. Dr. Soltani is a
member of numerous scientific professional societies. He is the author/co-author
of over 200 publications, especially in the fields of immunodermatology,
cutaneous manifestations of systemic diseases and dermatopharmacology.
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 reason-
able expenses should he provide services to the Company.
Environmental Matters
From time to time in the ordinary course of business of its former Doak
manufacturing site in Westbury, New York, the Company is subject to claims or
threatened claims relating to environmental matters. The Company believes that
none of such claims or threatened claims made through the date of this 10-KSB,
either individually or in the aggregate, will have a material adverse affect on
the Company's business, financial conditions or results from operations.
Item 2. Properties
The Company leases 14,100 square feet of office and warehouse space at 383 Route
46 West, Fairfield, New Jersey, pursuant to a lease expiring on February 1,
2003 with Daniel Glassman, the Company's Chairman and President, and his wife
Iris Glassman, Treasurer of the Company. Rent expense, including the Company's
proportionate share of real estate taxes, was approximately $228,000 and
$194,000 1998 and 1997, respectively. For a more comprehensive description,
please see Item. 12 of this Report.
During 1998 and 1997, Doak rented its former 11,000 square foot manufacturing
facility, owned by the former principal stockholders of Doak, and an
independent satellite warehouse in Westbury, NY for rent expense totaling
$39,000 and $67,500, respectively. In conjunction with the closing of Doak's
factory, the Company did not renew this lease as of February 1999 for its
manufacturing facility and vacated its independent warehouse in June 1998.
During 1998 and 1997, the Company rented 760 square feet of office space in
Chicago, Illinois at cost of $18,000 and $12,000, respectively, per annum.
During 1999, the Company entered into a two year lease, with a one year renewal
at the Company's option, for warehouse space at 33 Route 46 West, Fairfield,
New Jersey primarily for the storage of promotional items and pharmaceutical
samples. Rent expense, which includes common area maintenance and real estate
taxes, will be approximately $59,500 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 is involved in legal proceedings of various types in the ordinary
course of business. While any such litigation to which the Company is a party
contains an element of uncertainty, management presently believes that the
outcome of each such proceeding or claim which is pending or known to be
threatened, or all of them combined, will not have a material adverse effect
on the Company's consolidated financial position.
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 1998.
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(TM) 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(TM) for the periods
indicated.
High Sale Low Sale
--------- --------
Fiscal year ended December 31, 1998
First quarter $ 2.69 $ 1.53
Second quarter 4.44 1.69
Third quarter 2.34 0.94
Fourth quarter 1.41 1.00
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
On March 9, 1999 the last sale price for shares of the Company's Class A Common
Stock as reported by the Nasdaq National Market was $1.31 per share. At
March 9, 1999, 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 2,900 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 organ-
ization 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 out-
standing at March 9, 1999. 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 9, 1999, there were outstanding 8,193,551 (exclusive of 556,020 shares
held in treasury) of Class A Common Stock.
This document may contain forward-looking statements that 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, 1998, the Company had working capital of $871,000 an increase
of $844,000 over the December 31, 1997 working capital of $27,000. Improvement
in the Company's working capital position at December 31, 1998 was primarily
due to operating profit and positive cash flow from operations during the
twelve months ended December 31, 1998.
Working capital as of December 31, 1998 included an increase of $904,000 in
cash and cash equivalents due to financing and investing activities. Addition-
ally, current liabilities increased $2,704,000 from balances at December 31,
1997 as accounts payable, accrued expenses and borrowings under the revolving
credit line increased. The increase in accounts payable was primarily due to
management's effort to fund the cash requirement for the BRONTEX(R) acquisition
through operations. The increase in accrued expenses was primarily due to an
increase in reserves for charges against sales for new product sales of
BRONTEX(R). December 31, 1998, accounts receivable increased $2,466,000 from
December 31, 1997 due to a greater percentage of the Fourth Quarter 1998 sales
occurring in December 1998 which, in part, was prompted by an announced price
increase effective in December 1998. This event may have the effect of re-
ducing revenues in the First Quarter 1999. Additionally, accounts receivable
increased due to slower than usual cash collections from large chain stores.
Inventories increased $529,000 and prepaid samples/materials decreased $373,000
from levels existing at December 31, 1997. Inventory increased due to an
increase in finished goods inventory of cough/cold products, particularly the
new product BRONTEX(R), in the Fourth Quarter 1998 versus 1997. Prepaid samples
and materials decreased primarily due to increased distribution of promotional
material by the sales force in the Fourth Quarter 1998 versus 1997.
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
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-KSB, the
Company has paid approximately $350,000 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 may have
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 $23,500 and $28,600 during 1998 and 1997,
respectively, based upon current participants in the plan.
In January 1997, the Company announced a program to repurchase up to 400,000
shares of the outstanding Class A common stock in open market transactions
over the next 24 months. In January 1999, the Company announced the completion
of the repurchase program of 400,000 shares and additionally announced another
program of repurchasing an additional 600,000 shares of the outstanding Class
A common stock in open market transactions resulting in a cumulative repurchase
of 12% over the next 36 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
1998 and 1997, the Company acquired 257,400 shares at a cost of $369,783 and
162,500 shares at a cost of $253,345, respectively. As of March 9, 1999, the
Company's total amount of shares purchased, excluding subsequent distributions,
amounted to approximately 623,000 shares at a cost of $857,000.
Market Risk
The Company's major market risk is primarily due to competitive products,
generic competition and government regulation. Please see above captioned
information for a more thorough review of these three topics.
The Company's major interest exposure is due to its asset-based financing
agreement with CIT Group/Finance, of which its accrues interest on outstanding
revolver loans at 2.25% above prime rate.
Stock prices of emerging growth pharmaceutical and micro-cap companies, such as
Bradley Pharmaceuticals, Inc., are subject to significant fluctuations. The
stock price may be affected by a variety of factors that could cause the price
of the Company's Common Stock to fluctuate, perhaps, substantially, including:
announcements of developments related to the Company's business; quarterly
fluctuations in the Company's actual or anticipated operating results; general
conditions in the pharmaceutical and health care industries; new products
or product enhancements by the Company or its competitors; developments in
patents or other intellectual property rights and litigation; and developments
in the Company's relationships with its customers and suppliers. In addition,
in recent years the stock market in general and the market for shares for small
capitalization and emerging growth pharmaceutical companies in particular, have
experienced extreme price fluctuations which may or may not been related to
the operating performance of affected companies. Any such fluctuations in the
future could adversely affect the market price of the Company's Common Stock.
There can be no assurance that the market price of the Common Stock of the
Company will not decline.
Year 2000 Disclosure
The Company is aware of the issues associated with the programming code in
many existing computer systems and devices with embedded technology as the
millenium approaches. The "Year 2000" problem concerns the inability of
information and technology-based operating systems to properly recognize and
process date-sensitive information beyond December 31, 1999. The Year 2000
problem is potentially pervasive; virtually every computer operation or
business system that utilizes embedded computer technology may be affected in
some way by the rollover of the two-digit year value to 00. The risk is that
computer systems will not properly recognize date sensitive information when
the year changes to 2000, which can result in system failures or mis-
calculations, resulting in a serious threat of business disruption.
In response to the potential impact of the Year 2000 issue on the Company's
business and operations, the Company has purchased and converted its own
in-house system. In the process, the Company determined that the new systems
and hardware were substantially Year 2000 compliant. Certain other software
is being corrected or reprogrammed for Year 2000 compliance. As such,
Management believes the Year 2000 issues with respect to its internal systems
can be mitigated without a significant potential effect on the Company's
financial position or operations.
In addition, to ensure external Year 2000 readiness, the Company has made
written inquiries concerning the Year 2000 readiness of all of its vendors,
suppliers, customer and others with whom the Company has significant business
relationships. Responses have been received from many of those contacted,
although some of the responses have been inconclusive with respect to Year 2000
compliance. As a result, follow up inquiries are planned for any critically
dependent third parties not responding. A further assessment of the potential
impact of the Year 2000 issue on the Company's business and operations will be
made as this information is received and evaluated. The Company is not
currently aware of any third party issues that would cause a significant
disruption of its business or operations. If the follow-up assessment of any
significant third party responses indicates that they will not be Year 2000
compliant, it may be necessary to develop contingency plans to minimize the
negative impact on the Company.
The Company's goal is to have all internal systems Year 2000 compliant, and
third party assessments completed no later than June 30, 1999. This should
allow sufficient time to validate the system modifications and complete any
additional contingency planning for third parties that may not be Year 2000
compliant. However, given the complexity of the Year 2000 issue, there can be
no assurance that the Company will be able to address these problems without
costs and uncertainties that might affect future financial results or cause
reported financial information not to be necessarily indicative of future
operating results or future financial condition.
To date, the Company has not finalized its contingency plans for possible Year
2000 issues. After the completion of the assessment and review of the results
of monitoring the compliance efforts and status of third parties, the Company
will finalize such contingency plans based on its assessment of outside risks.
The Company anticipates that final contingency plans, as necessary, will be
in place by September 30, 1999. The total costs incurred to date in the
assessment, evaluation and remediation of the Year 2000 compliance matters have
been nominal and management estimates that total future third party, software
and equipment costs, based upon information developed to date, will be less
than $100,000.
This document may contain forward-looking statements that 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(R) product line accounted for approximately 37%, 45%,
51% and 40%, respectively, of the Company's 1998, 1997, 1996 and 1995 net sales.
Consequently, revenue from these products as well as the newly acquired
BRONTEX(R) potent cough reliever product line (7% of 1998 the Company's net
sales) 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 1998 were $15,853,000, representing an increase of $830,000 or
approximately 6% from 1997. The increase in net sales for 1998 is primarily
due to an increase of sales of CARMOL(R) and ACID MANTLE(R) as well as
additional contribution from newly acquired BRONTEX(R), offset by a 13% decrease
in net sales of DECONAMINE(R).
DECONAMINE(R) unit sales during 1998 decreased by approximately $1.0 million,
or 8%, because of weaker than expected cough/cold season coupled with a very
competitive marketplace, including advancement of generic competitors.
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 and
ultimately a reduction of the reserve for the second quarter of 1998 and 1997,
resulted in increased net sales and net income of $235,000 and $274,000,
respectively. Additionally, during the fourth quarter 1998, the Company's
analysis of the trend in actual chargebacks and rebates resulted in an
additional reduction of the reserve in amount of $398,000. During 1998 and 1997,
the Company received monetary concessions of approximately $44,000 and $357,000
from managed care vendors receiving rebates, respectfully.
Chargebacks and rebates are based on the difference between prices at which the
Company sells its products (principally DECONAMINE(R) SR) to wholesalers and the
sales price ultimately paid by the end-user (often governmental agencies and
managed care buying groups) pursuant to fixed price contracts. The Company
records an estimate of the amount either to be charged-back to the Company or
rebated to the end-user at the time of sale to the wholesaler. Chargebacks and
rebates, principally relating to DECONAMINE(R) SR and CARMOL(R), were $5.0
million for 1998 versus $5.5 million for 1997.
Cost of Sales for 1998 were $4,596,000, an increase of $403,000 compared to
1997 cost of sales of $4,193,000. This increase of 10% 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 1998 was 71% compared to 72%, as a result of
increased volume of Doak products which was offset by the contribution of newly
acquired BRONTEX(R).
Selling, General and Administrative Expenses were $8,961,000 for 1998, repre-
senting an increase of $877,000, 11%. This increase was primarily the result
of increased sales activities, including the addition of sales representatives
as well as increased sampling and promotion.
Depreciation and Amortization Expenses for 1998 were $1,105,000, representing
a decrease of 26%, as compared to 1997. This decrease was principally due to
the 1997 restructuring of the DECONAMINE(R) purchase price as well as the re-
estimating of the DECONAMINE(R) amortization period, partly offset by increased
amortization on the newly acquired BRONTEX(R) trademarks.
Interest Expense, Net for 1998 decreased by $98,000, or 33% from the corres-
ponding period in 1997 due to lower interest payments to CIT versus the
interest previously owed to Berlex for outstanding debt.
Other Income for 1998 was $48,000, representing an increase of $43,000 from
other income of $5,000 during 1997. The increase is due to gain or fixed assets
sold during 1998.
Income Taxes, Income tax expense in 1998 was $120,000, or 12%, compared to 1997
expense of $58,000, or 6% of income. The effective income tax rate is less than
the statutory rate principally due to the utilization of net operating losses
carry forward which were previously reserved deferred tax assets.
Net Income for 1998 was $919,000, representing an increase of $13,000 from net
income of $906,000 during 1997.
Net Income Per Common Share for 1998 was $0.10 per common share on a diluted
basis, representing a decrease of $.01 from 1997, primarily due to a larger
amount of diluted shares outstanding. Net income per basic common share for
1998 and 1997 was $0.11.
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 56 Chairman of the Board,
President and Chief
Executive Officer
Iris S. Glassmam 56 Treasurer and Director
David H. Hillman 58 Secretary and Director
Philip W. McGinn 73 Director
Seymour I. Schlager 49 Director
Alan G. Wolin 66 Director
Robert Dubin 51 Vice President, Sales and
Contract Administration
Gene L. Goldberg 61 Sr. Vice President,
Marketing & Business
Planning
Maurice Woosley 58 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 founded 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 Merrell-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, the wife of Mr. Daniel Glassman, has also served as a
director of the Company from January 1985. Mrs. Glassman has approximately
20 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
group product manager for Lederle Laboratories.
Philip W. McGinn, Jr., M.D. 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.
Seymour I. Schlager, M.D., J.D. has served as a director of the Company since
July 1998. From 1989 to 1991, Dr. Schlager served as Venture Head of the
AIDS/Antiviral Pharmaceutical product development group of Abbott Laboratories.
In 1997, Dr. Schlager received a Juris Doctorate, cum laude, from William
Howard Taft University School of Law complimenting his M.D. from the University
of Miami School of Medicine. Currently, Dr. Schlager is Worldwide Medical
Director for the Becton Dickinson Medical and Advanced Drug Delivery businesses.
Alan G. Wolin, Ph.D., has served as a director of the Company since May 1997.
Since 1988, Dr. Wolin has served as an independent consultant to various
companies in the food, drug and cosmetic industries. Prior to 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 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.
R. Brent Lenczycki, C.P.A. has served as Manager of Finance and Purchasing
since March 1998. Prior experience includes public accounting for Arthur
Andersen LLP and internal audit for Harrah's Hotel Casino. In 1996,
Mr. Lenczycki received a Masters of Business Administration from Tulane
University.
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 years ended December
31, 1998, 1997 and 1996, 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 1998 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 1998 to the executive officers named in the following table except as
set forth below:
Long-Term
Compensatiom
Annual Compensation Awards
-------------------- ------------
Name and Principal Position Year Salary Bonus Securities Underlying
- --------------------------- ---- ------ ----- ---------------------
Options(1)
----------
Daniel Glassman 1998 $164,800 -0- 55,000(3)
President and 1997 $128,900 -0- -0-
Chief Executive Officer 1996 $122,500 -0- 404,500(2)
Robert Dubin 1998 $115,400 -0- 6,000
Vice President of Sales 1997 $100,600 -0- -0-
and Contract Administration 1996 $ 70,600 $20,000 7,500
Gene L. Goldberg 1998 $135,400 -0- -0-
Senior Vice President 1997 $129,400 -0- -0-
Marketing and Business 1996 N/A N/A N/A
Planning
Maurice Woosley 1998 $120,900 -0- -0-
President, Bradley 1997 $114,500 -0- -0-
International 1996 $ 68,800 -0- 18,000
(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 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
the grant.
(3) Of these shares, 25,000 underlie options granted on January 27, 1998 to
replace a like number of options previously granted to Mr. Glassman which
expired by their terms. These options are exercisable after January 27,
1999, 2000, 2001 for 8,333, 8,333 and 8,333 shares, respectively, at an
exercise price of $1.99 per share, 110% of the fair market value for shares
of Class A Common Stock on the date of the grant. These options will
expire on January 26, 2003. The remaining 30,000 shares underlie options
granted on June 9, 1998 to replace like number of options previously granted
to Mr. Glassman which expired by their terms. These options are exercisable
anytime prior to June 8, 2003 at an exercise price of $2.07 per share,
110% of the fair market value for shares of Class A Common Stock on the date
of grant.
Option Grants in 1998
The following table sets forth information concerning outstanding options to
purchase shares of the Company's Class A Common Stock granted by the Company
to Directors and Officers during 1998. Neither options to purchase shares of
Class B Common Stock nor stock appreciation rights were granted by the Company
during 1998. The exercise prices for all options reported below are not less
than 100% of the per share market prices for Class A Common Stock on their dates
of grant.
Individual Grants
% of Total Options
Number of Securities Granted To Exercise or
Underlying Options Employees Base Expiration
Name Granted in 1998(1) Price($/Sh) Date
- ----------------- ------------------- ------------------ ----------- ----------
Robert Dubin 6,000 8.71% 2.13 06/10/08
Daniel Glassman 25,000 22.33% 1.99 01/26/03
30,000 26.80% 2.07 06/08/03
David H. Hillman 9,750 8.71% 1.99 01/26/03
7,000 6.25% 1.99 01/26/08
Seymour I. Schlager 15,000 13.40% 2.19 07/12/08
Aggregated Option Exercises in 1998
And Year-End Option Values
The following table presents the value, on an aggregate basis, as of December
31, 1998, 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 1998.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End at Year-End(1)
---------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- ------------- ----------- -------------
Daniel Glassman 721,089 25,000 $425,220 -0-
(1) Based on the closing sale price of $1.188 per share of Class A Common Stock
on December 31, 1998, 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 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.
On January 26, 1998, Mr. David Hillman was granted options to purchase up to
16,750 shares of Class A Common Stock of the Company at an exercise price of
$1.99 per share, 110% of the fair market value for shares. These options vest
in three annual installments of 5,583, 5,583, and 5,584, with 9,750 expiring
January 26, 2003 and the remaining 7,000 expiring January 26, 2008. These
options were granted by agreement with the Company in consideration for Mr.
Hillman's previous options which expired by their terms.
On July 12, 1998, Seymour Schlager, M.D., J.D., was granted options to purchase
up to 15,000 shares of Class A Common Stock of the Company at an exercise price
of $2.19 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 install-
ments commencing on July 12, 1999 and expire on July 11, 2008.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of December 31, 1998,
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 & Address of Class A Class B Class A Class B
Beneficial Owner Common Stock Common Stock Common Stock Common Stock
- ------------------- ------------ ------------ ------------ ------------
Daniel Glassman 1,106,044(3) 316,736(4) 13.51% 73.39%
383 Route 46 West
Fairfield, NJ
Iris S. Glassman 252,373(5) 37,283(6) 3.08% 8.64%
383 Route 46 West
Fairfield, NJ
David H. Hillman 117,433(7) 43,610 1.43% 10.11%
383 Route 46 West
Fairfield, NJ
Philip McGinn, Jr. 14,337(8) -0- * -
383 Route 46 West
Fairfield, NJ
Alan G. Wolin 74,730(9) -0- * -
383 Route 46 West
Fairfield, NJ
Seymour Schlager -0- -0- - -
383 Route 46 West
Fairfield, NJ
Robert Dubin 13,500(11) -0- * -
383 Route 46 West
Fairfield, NJ
Gene L. Goldberg 59,872(10) 10,192 * 2.36%
383 Route 46 West
Fairfield, NJ
Maurice Woosley 15,889(12) -0- * -
383 Route 46 West
Fairfield, NJ
Berlex Laboratories, Inc. 1,450,000 -0- 17.71% -
340 Changebridge Road
Montville, NJ 07045
All executive officers 1,654,178 407,821(4)(6) 20.20% 94.50%
and Directors as a (3)(4)(5)(6)
group (9 persons) (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 stock-
holder.
(3) Includes 316,736 shares issuable upon conversion of a like number of shares
of Class B Common Stock. Of these shares, 62,019 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, 40,220 shares owned indirectly by Mrs. Glassman as
trustee for her children's trusts and 168,070 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 7,300 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 48,446 shares underlie presently
exercisable options.
(11) 1,000 shares are owned indirectly as trustee for Mr. Dubin's children.
Includes 12,500 shares underlying presently exercisable options.
(12) Includes 12,000 shares underlying presently exercisable options.
Item 12. Certain Relationships and Related Transactions
During 1998 and 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 $184,800 and $135,000, respectively.
The Company leases 14,100 square feet of office and warehouse space at 383 Route
46 West, Fairfield, New Jersey, pursuant to a lease expiring on January 31, 2003
with Daniel Glassman, the Company's Chairman and President, and his wife Iris
Glassman, Treasurer of the Company. This lease is renewable at the Company's
option for two consecutive five year terms. Rent expense, including the
Company's proportionate share of real estate taxes, was approximately $228,000
and $194,000 1998 and 1997, respectively.
Item 13. Exhibits, List 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 specialist 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
BRONTEX(R) Products, to be impacted significantly from the selling of the
BRONTEX(R) Products.
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Certificate of Incorporation of the Company, as amended (Incorporated
by reference from the Company's Proxy Statement for the 1998 Annual
Meeting)
3.2 By-laws of the Registrant, as amended (Incorporated by reference from
the Company's Proxy Statement for the 1998 Annual Meeting)
4.1 Placement Agent's Unit Purchase Option (Incorporated by reference from
the Company's Proxy Statement for the 1998 Annual Meeting)
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 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 CanaDerm, 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 9, 1999 /s/Daniel Glassman Chairman of the Board
----------------------- President and Chief
(Daniel Glassman) Financial Officer
March 9, 1999 /s/Iris S. Glassman Treasurer and Director
-----------------------
(Iris S. Glassman)
March 9, 1999 /s/David H. Hillman Secretary and Director
-----------------------
(David H. Hillman)
March 9, 1999 /s/Philip W. McGinn, Jr. Director
-----------------------
(Dr. Philip W. McGinn, Jr.)
March 9, 1999 /s/Seymour I. Schlager Director
-----------------------
(Dr. Seymour I. Schlager)
March 9, 1999 /s/Alan G. Wolin Director
-----------------------
(Dr. Alan Wolin)
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, 1998
and 1997 F-3
Consolidated Statements of Income for the Years
Ended December 31, 1998 and 1997 F-5
Consolidated Statement of Shareholders' Equity
for the Years Ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-24
F-1
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1998. 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, 1998 and 1997, and
the consolidated results of their operations, and their consolidated share-
holders' equity and their consolidated cash flows for each of the two years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Parsippany, New Jersey
March 9, 1999
F-2
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 1,417,746 $ 513,971
Accounts receivable - net of allowance
for doubtful accounts of $411,000 in
1998, $61,000 in 1997 4,215,303 1,748,856
Inventory 1,506,731 977,344
Prepaid samples and materials 1,144,912 1,517,813
Prepaid expenses and other 33,252 12,629
------------ ------------
Total current assets 8,317,944 4,770,613
PROPERTY AND EQUIPMENT-AT COST, less
accumulated depreciation of $1,001,000
in 1998, $1,050,000 in 1997 357,010 277,805
INTANGIBLE ASSETS, NET 13,778,878 13,044,147
OTHER ASSETS 110,429 89,317
------------ ------------
$ 22,564,261 $ 18,181,882
============ ============
The accompanying notes are an integral part of these statements.
F-3
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
CURRENT LIABILITIES
Current maturities of long-term debt $ 170,531 $ 169,143
Revolving credit line 2,395,703 1,269,757
Accounts payable 1,842,297 655,302
Accrued expenses 2,953,944 2,515,247
Income taxes payable 84,532 133,932
------------ ------------
Total current liabilities 7,447,007 4,743,381
LONG-TERM DEBT, less current maturities 1,245,851 264,406
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Preferred stock, $.01 par value; authorized
2,000,000 shares; issued-none - -
Common, Class A, $.01 par value, authorized,
26,400,000 shares; issued 8,189,315 in
1998, 8,174,295 shares in 1997 14,761,947 14,653,927
Common, Class B, $.01 par value, authorized,
900,000 shares; issued and outstanding,
431,552 shares in 1998 and 1997 845,448 845,448
Treasury stock-Class A Common stock-at cost
(373,933 shares in 1998 and 146,008 in
1997) (560,883) (231,198)
Accumulated deficit (1,175,109) (2,094,082)
----------- -----------
13,871,403 13,174,095
----------- -----------
$ 22,564,261 $ 18,181,882
========== ==========
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,
1998 1997
Net sales $ 15,853,002 $ 15,023,762
Cost of sales 4,595,582 4,192,743
------------ ------------
11,257,420 10,831,019
------------ ------------
Selling, general and administrative
expenses 8,961,198 8,084,668
Depreciation and amortization 1,104,753 1,488,794
Interest expense-net 200,180 297,709
Other income (47,684) (5,058)
------------ ------------
10,218,447 9,866,113
------------ ------------
Income before income taxes 1,038,973 964,906
Income tax expense 120,000 58,500
------------ ------------
NET INCOME $ 918,973 $ 906,406
============ ============
Net income per common share
Basic $ 0.11 $ 0.11
============ ============
Diluted $ 0.10 $ 0.11
============ ============
Weighted average number
of common shares
Basic 8,410,000 8,200,000
============ ============
Diluted 8,950,000 8,460,000
============ ============
The accompanying notes are an integral part of these statements.
F-5
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Class A common stock, Class B common stock
$.01 par value $.01 par value
--------------------- --------------------
Shares Amount Shares Amount
-------- --------- -------- --------
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
---------- ----------- --------- ---------
Balance at December 31, 1997 8,174,295 14,653,927 431,552 845,448
Stock options exercised 10,000 11,388
Shares issued for consulting
services 5,020 9,798
Compensation Charge for stock
options issued to consultants 86,834
---------- ----------- --------- ---------
Balance at December 31, 1998 8,189,315 $14,761,947 431,552 $ 845,448
Retained
Treasury earnings
Stock (accumulated
Amount deficit) Total
------------- ------------- -------------
Balance at December 31, 1996 $ - $ (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 agreement 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 December 31, 1997 (231,198) (2,094,082) 13,174,095
Stock options exercised 11,388
Shares issued for consulting
services 9,798
Compensation charge for stock
options issued to consultants 86,834
Purchase of treasury stock, net (329,685) (329,685)
Net income for the year 918,973 918,973
------------ ------------- -----------
Balance at December 31, 1998 $ (560,883) $ (1,175,109) $13,871,403
============ ============= ===========
The accompanying notes are an integral part of these statements.
F-6
Bradley Pharmaceuticals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1998 1997
Cash flows from operating activities
Net Income $ 918,973 $ 906,406
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 1,104,753 1,488,794
Allowance for bad debts 350,000 (10,000)
Gain on sale of fixed assets (38,610) (534)
Noncash compensation charges 96,632 1,188
Changes in operating assets and
liabilities
Accounts receivable (2,816,447) 997,181
Inventory and prepaid samples
and materials (156,486) 244,027
Income taxes payable (49,400) (59,344)
Prepaid expenses and other (41,735) 40,354
Accounts payable 1,186,995 (1,280,137)
Accrued expenses 438,697 (446,067)
----------- -----------
Net cash provided by operating activities 993,372 1,881,868
----------- -----------
Cash flows from investing activities
Investments in trademarks, patents and
other intangible assets (646,994) (123,102)
Proceeds from disposition of common stock
of ITG Laboratories, Inc. - 13,500
Purchase of property and equipment (242,955) (85,282)
Proceeds from sale of fixed assets 93,400 800
----------- -----------
Net cash used in investing activities (796,549) (194,084)
----------- -----------
Cash flows from financing activities
Payment of notes payable (100,697) (2,252,382)
Borrowings from revolving credit line, net 1,125,946 1,269,757
Proceeds from exercise of stock options 11,388 40,010
Purchase of treasury stock, net (329,685) (231,198)
----------- -----------
Net cash provided by (used in)financing
activities 706,952 (1,173,813)
----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 903,775 513,971
Cash and cash equivalents at beginning of
year 513,971 -
----------- -----------
Cash and cash equivalents at end of year $ 1,417,746 $ 513,971
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 152,000 $ 156,000
Income taxes 169,000 105,000
The Company financed a portion of the purchase of BRONTEX(R) (See Note B-6)
The accompanying notes are an integral part of these statements.
F-7
Bradley Pharmaceuticals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Bradley Pharmaceuticals, Inc. (the "Company") is a Delaware corporation founded
in 1985. The Company's primary business activity is the 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"), and its wholly-owned foreign sales corporation, Bradley
Pharmaceuticals Overseas, Ltd., and its wholly-owned subsidiary, Bradley
Pharmaceuticals (Canada) Inc. 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-2 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 1998 or 1997.
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. Risks, Uncertainties and Certain Concentrations
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on key personnel, government regulation, competition,
reliance on certain customers and vendors, absence of redundant facilities,
credit risk, and risks associated with the Year 2000.
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, 1998 and 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, 1998 and 1997, two
wholesale customers accounted for approximately 33% and 44%, respectively, of
the total accounts receivable balance.
Approximately 37% and 45% of the Company's net sales for the years ended
December 31, 1998 and 1997 were derived from sales of its Kenwood's
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 from the FDA, believes the
status will not change in the foreseeable future.
For the year ended December 31, 1998, three wholesale customers accounted for
approximately 43% (20%, 13% and 10%) of net sales. For the year ended December
31, 1997, three wholesale customers accounted for approximately 39% (15%, 12%
and 12%) of net sales.
One company manufacturing products for the Company accounted for approximately
16% and 19% of the Company's cost of goods sold for the years ended December 31,
1998 and 1997. The Company currently has no manufacturing facilities of its
own and, accordingly, is dependent upon maintaining its existing relationship
with its vendors or establishing new vendors to supply inventory. There can be
no assurance that the Company would be able to replace its current vendors with-
out any disruption to operations.
The Company had export sales of approximately 12% and 13% of its net sales for
the years ended December 31, 1998 and 1997, 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 instruments which are
potentially 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. A reconciliation of the weighted average
basic common shares outstanding to weighted average diluted common shares out-
standing follows:
As of December 31, 1998 As of December 31, 1997
----------------------- -----------------------
Basic Shares 8,410,000 8,200,000
Dilution: Stock options and
warrants 540,000 260,000
--------- ---------
Diluted shares 8,950,000 8,460,000
Income available to common
shares $ 918,973 $ 906,406
========= =========
Basic earnings per share $.11 $.11
Diluted earnings per share $.10 $.11
9 Income Taxes
The Company and Doak file a consolidated Federal income tax return.
Deferred income taxes are provided for all temporary differences and operating
loss carryforwards. Temporary differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion of all of the deferred tax assets will not be
realized.
10. Reclassifications
Certain reclassifications have been made to the prior year financial statements
in order to conform to the current presentation.
11. 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.
12. 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 $2,020,000 and $1,320,000
at December 31, 1998 and 1997, 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 and
ultimately a reduction of the reserve for the second quarter of 1998 and 1997,
resulted in increased net sales and net income of $235,000 and $274,000,
respectively. Additionally, during the fourth quarter 1998, the Company's
analysis of the trend in actual chargebacks and rebates resulted in an
additional reduction of the reserve in amount of $398,000. During 1998 and 1997,
the Company received monetary concessions of approximately $44,000 and $357,000
from managed care vendors receiving rebates, respectfully.
13. Advertising
The Company expenses advertising costs as incurred. Total advertising costs
charged to expense amounted to approximately $1,520,000 and $1,274,000 for the
years ended December 31, 1998 and 1997, respectively.
14. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management has
prepared these financial statements in accordance with SFAS 131.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designed
as part of a hedge transaction and, if it is, the type of hedge transaction.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its consolidated financial statements because the Company
does not currently hold any derivative instruments.
NOTE B - INTANGIBLE ASSETS
Intangible assets are summarized as follows:
December 31, December 31,
1998 1997
----------- -----------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ --- ------------
Trademarks........... $18,053,654 $5,249,199 $16,324,790 $4,564,412
Patents.............. 1,327,454 1,091,364 1,327,454 919,080
Licenses............. 124,886 71,760 124,886 59,280
Goodwill............. 1,255,637 570,430 1,253,975 444,186
Covenants not to
compete............. 162,140 162,140 162,140 162,140
---------- --------- ---------- ---------
$20,923,771 $7,144,893 $19,193,245 $6,149,098
========== ========= ========== =========
Intangible assets arose principally from the Doak acquisition (Note C) and the
following significant transactions in 1993 through 1998.
1. TRANS-VER-SAL(R) Wart Products
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)").
Total consideration for the Company's acquisition of the products consisted of:
(i) $1,300,000, of which $850,000 was paid at closing and the balance of
$450,000 payable by the Company's promissory note at 7% per annum in twenty
quarterly installments of $26,861; (ii) a 5.5% royalty on net sales of the
products payable for a period of five years or until an aggregate $600,000 of
royalty payments are made; (iii) approximately $170,000 paid for the acquisition
of inventory on hand; and (iv) warrants granted to purchase up to 150,000 shares
of the Company's Class A common stock at $4.50 per share exercisable at any
time through March 30, 1998. Of the total purchase price, $866,250 was
attributed to trademarks with an estimated life of 20 years.
2. 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, 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 1996, the purchase agreement was amended twice. 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 was recorded as a reduction to the intangible assets.
The total amount of consideration issued for the DECONAMINE(R) acquisition is
as follows: (1) Cash paid in 1993- $6,000,000; 1994- $2,000,000;
1996- $2,660,000; and 1997- $1,650,000 (2) Class A common stock issued in
1996- 1,000,000 shares; and 1997- 450,000 shares (3) Warrants issued in
1997- 750,000 warrants.
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.
3. 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 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
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 PAMINE(R) existing at the closing date.
4. 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 was payable in three (3) equal annual instal-
lments 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.
5. 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) saleable products and raw material.
6. BRONTEX(R) Acquisition
In October 1998, the Company acquired from Procter & Gamble Pharmaceuticals,
Inc. ("P&G") all technical information, know-how, formulae, processes, clinical
studies, trade secrets, confidential and/or proprietary information, documents
and/ or materials, customer lists, technology, formulations, specifications,
stability protocols and product impurity data, testing data and analytical
methods and other information relating to an antitussive/ expectorant remedy
called BRONTEX(R) ("BRONTEX(R)"). In consideration for this acquisition, the
Company agreed to pay P&G $1,842,000, of which $614,000 was paid at closing.
The remaining $1,228,000 is payable in February 2000.
The majority of the Purchase Price was attributed to trademarks with an
estimated life of 20 years.
NOTE C - ACQUISITION OF DOAK PHARMACAL CO., INC.
In 1994, the Company acquired 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 out-
standing shares of Doak (at the same $1.74 per share price as the initial
acquisition) for a total of approximately $420,000.
NOTE D - INCOME TAXES
The provision for income tax expense (benefit) is as follows:
Year ended Year ended
December 31,1998 December 31,1997
---------------- ----------------
Current
Federal $ 173,000 $ 395,000
State 50,000 76,500
-------- --------
223,000 471,500
Utilization of net operating
loss carryforwards, and
other
Federal (103,000) (378,000)
State - (35,000)
-------- --------
(103,000) (413,000)
-------- --------
$ 120,000 $ 58,500
======== ========
The following is a summary of the items giving rise to deferred tax benefits
at December 31, 1998 and 1997.
1998 1997
---- ----
Current
Allowance for doubtful accounts $ 147,000 $ 23,000
Allowance on sales 168,000 226,000
Inventory reserves and
capitalization 73,000 100,000
Accrued expenses 58,000 -0-
-------- --------
446,000 349,000
-------- --------
Long-term
Net operating loss carry-
forward -0- 191,000
Alternative minimum tax credit -0- 181,000
Amortization of intangibles
and fixed assets 177,000 340,000
-------- --------
177,000 712,000
-------- --------
Total deferred tax assets 623,000 1,061,000
Less valuation allowance (623,000) (1,061,000)
-------- ---------
$-------- $---------
======== =========
A valuation allowance has been recorded at December 31, 1998 and 1997 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 31, 1998 December 31, 1997
----------------- -----------------
Tax at statutory rate 34.0% 34.0%
State income tax expense, net of
Federal tax effect 3.2 2.8
Change in valuation allowance and
previously unrecorded benefits (33.2) (32.6)
Other 7.6 1.9
------ ------
Effective tax rate 11.6% 6.1%
====== ======
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 interest
(announced by The Chase Manhattan Bank) 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:
December 31, December 31,
----------- -----------
1998 1997
---- ----
Installment note due 2001(a) $ 80,261 $ 85,001
Installment note due 2001(b) 250,890 320,448
Promissory Note due 2000(c) 1,083,530 -0-
Other installment notes 1,701 28,100
--------- --------
1,416,382 433,549
Less: current maturities (170,531) (169,143)
--------- --------
$ 1,245,851 $ 264,406
========= ========
(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 May 1996 in connection with the
acquisition of trademarks (ACID MANTLE(R)) is noninterest bearing and is
payable in installments of $250,000 in May 1997, and $100,000 each per
year from May 1998 through 2001. Interest at an annual rate of 9.5% has
been imputed for this note. The seller has been granted a security
interest in the assets acquired by the Company.
(c) The note payable, which originated in October 1998 in connection with the
acquisition of trademark (BRONTEX(R)) is noninterest bearing and is
payable in February 2000 in an amount of $1,228,000. Interest at an
annual rate of 10% was imputed for this note. This note is collateralized
by the trademark assigned to the Company.
The annual maturities of long term debt is $1,197,000 due in 2000, $48,000 due
in 2001 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, 1998 and 1997, 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 $184,800 and $135,000, respectively.
The Company leases office facilities in Fairfield, New Jersey from Daniel and
Iris S. Glassman, directors and shareholders of the Company. The lease is for
the period from February 1, 1998 to January 31, 2003 for 14,100 square feet of
office and warehouse space. The rent expense, including an allocated portion
of real estate taxes, was approximately $228,000 and $194,000 for the years
ended December 31, 1998 and 1997, respectively.
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 out-
standing and shares duly reserved for issuance.
1. Stock Repurchase Plan
In January 1997, the Company announced a program to repurchase up to 400,000
shares of the outstanding Class A common stock in open market transactions
over the next 24 months. In January 1999, the Company announced the completion
of the repurchase program of 400,000 shares and additionally announced another
program of repurchasing an additional 600,000 shares of the outstanding Class
A common stock in open market transactions or a cumulative repurchase of 12%
over the next 36 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 1998 and
1997, the Company acquired 257,400 shares at a cost of $369,783 and 162,500
shares at a cost of $253,345, respectively. As of March 9, 1999, the Company's
total amount of shares purchased, excluding subsequent distributions, amounted
to approximately 623,000 shares.
2. Stock Option Plan
Under the 1990 Stock Option Plan, 2,600,000 shares of Class A common stock are
reserved for issuance. This 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, 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
--------- -----
Granted 111,950 2.05
Exercised (10,000) 1.14
Canceled (144,130) 1.45
----------
Balance, December 31, 1998 1,298,945 $ 1.43
========== =====
As of December 31, 1998, options outstanding for 1,188,495 shares were
exercisable at prices ranging from $.68 to $3.65, and the weighted remaining
contractual life was 3.6 years. 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. Compensation cost
charged to operations, which the Company records for options granted to non-
employees, was $10,444 and none in the years ended December 31, 1998 and 1997,
respectively. There were 108,952 options outstanding to nonemployees at
December 31, 1998, of which 99,852 were exercisable. There were 131,645 options
outstanding to nonemployees at December 31, 1997, of which 128,145 were
exercisable.
The following table summarizes option data as of December 31, 1998:
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
------- ----------- ------------ --------- ------------ ---------
(in thousands) (in thousands)
$ .68-$1.40 714 4.1 1.18 685 1.18
1.41- 3.65 585 3.0 1.73 503 1.68
--- ---
1,299 1,188
===== =====
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, 1998 and 1997. The fair value of
each option granted has been estimated on the grant date using the Black-
Scholes Option Valuation Model. The following assumptions were made in
estimated fair value:
Dividend yield 0%
Risk-free interest rate 6.0%
Expected life after vesting period
Directors and officers 4 years
Others 2 years
Expected volatility - through December 1, 1995 60%
December 2, 1995 - through December 31, 1998 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,
1998 1997
---- ----
Net income
As reported $ 918,973 $ 906,406
Pro Forma for SFAS No.123
adjustment 828,965 783,702
Net income per share
As reported
Basic $.11 $.11
Diluted .10 .11
Pro forma for SFAS No.123
adjustment
Basic $.10 $.10
Diluted .09 .09
The weighted average fair value of options granted during 1998 and 1997 was
$ 2.06 and $ .69, respectively. For the years ended December 31, 1998 and 1997,
the exercise price of all options equaled the market price on the grant date.
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. Reserved Shares
The following table summarizes shares of common stock reserved for issuance at
December 31, 1998, as adjusted for the dilutive effect of the private placement
of the Company's securities:
Number
of shares
Reserved for issuable
------------ ---------
Warrants to Stern Stewart for consulting services(expiring
October 1,2001) 70,000
Warrants to NetWorld Capital,Inc. for consulting services
(expiring July 9,2008) 8,500
Warrants to Berlex Laboratories, Inc. as per final
settlement agreement(Note B-2)(expiring September 19,2001) 750,000
1990 Stock Option Plan 1,298,945
---------
2,127,445
=========
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, and in Chicago, Illinois.
The lease on the Fairfield, New Jersey facility is for a period from February
1, 1998 to January 31, 2003 for 14,100 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 $228,000
and $194,000 for the years ended December 31, 1998 and 1997, respectively.
During 1998 and 1997, Doak rented a former 11,000 square foot manufacturing
facility, owned by the former principal stockholders of Doak, and an independent
satellite warehouse in Westbury, NY for rent expense totaling $39,000 and
$67,500, respectively. In conjunction with the closing of Doak's factory, the
Company did not renew this lease as of February 1999 for its manufacturing lease
and vacated its independent warehouse in June 1998.
During 1998 and 1997, the Company rented 760 square feet of office space in
Chicago, Illinois at cost of $18,000 and $12,000, respectively, per annum.
During 1999, the Company entered into a two year lease, with a one year renewal
at the Company's option for warehouse space in Fairfield, New Jersey, primarily
for the storage of promotional items and pharmaceutical samples. Rent expense,
which includes common area maintenance and real estate taxes, will be appro-
ximately $59,000 per annum.
Approximate aggregate minimum annual rental commitments, including rent and
real estate taxes, are as follows: $291,000 for 1999, $279,000 for 2000,
$233,000 for 2001, $229,000 for 2002, and $19,000 for 2003. Total rent
expense for the years ended December 31, 1998 and 1997 was $331,000 and
$312,000, respectively.
2. Environmental Matters
From time to time in the ordinary course of business of its former Doak
manufacturing site in Westbury, New York, the Company is subject to claims
or threatened claims relating to environmental matters. The Company believes
that none of such claims or threatened claims made through the date of this
10-KSB, either individually or in the aggregate, will have a material adverse
affect on the Company's business, financial conditions or results from
operations.
3. Legal Proceedings
The Company is involved in legal proceedings of various types in the ordinary
course of business. While any such litigation to which the Company is a party
contains an element of uncertainty, management presently believes that the
outcome of each such proceeding or claim which is pending or known to be
threatened, or all of them combined, will not have a material adverse effect on
the Company's consolidated financial position.
4. 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 $23,500 and $28,600 were charged to expenses for
the year ended December 31, 1998 and 1997, respectively.
NOTE I - BUSINESS SEGEMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Pursuant to SFAS No. 131,
the Company's two reportable segments are Kenwood Laboratories (nutritional,
respiratory, personal hygiene and internal medicine brands) and Doak
Dermatologics, Inc. (dermatological brands).
The accounting policies used to develop segment information correspond to those
described in the summary of significant accounting policies. Segment profit
or loss is based on profit or loss from operations before income taxes and
cumulative effect of changes in accounting principles. The reportable segments
are distinct business units operating in different industries. The following
information about the two segments is for the year ended December 31, 1998 and
1997.
1998 1997
---- ----
Net sales:
Kenwood Laboratories $ 9,505,958 $ 9,060,211
Doak Dermatologics, Inc. 6,347,044 5,963,551
---------- ----------
$15,853,002 $15,023,762
========== ==========
Interest expense, net:
Kenwood Laboratories $ 170,582 $ 271,372
Doak Dermatologics, Inc. 29,598 26,337
---------- ----------
$ 200,180 $ 297,709
========== ==========
Depreciation and amortizatiom:
Kenwood Laboratories $ 858,739 $ 1,212,143
Doak Dermatologics, Inc. 246,014 276,651
---------- ----------
$ 1,104,753 $ 1,488,794
========== ==========
Net income (loss):
Kenwood Laboratories $ 1,037,664 $ 936,802
Doak Dermatologics, Inc. (118,691) (30,396)
---------- ----------
$ 918,973 $ 906,406
========== ==========
Segment assets:
Kenwood Laboratories $19,190,431 $14,532,430
Doak Dermatologics, Inc. 3,373,830 3,649,452
---------- ----------
$22,564,261 $18,181,882
========== ==========
Expenditure for segment
assets:
Kenwood Laboratories $ 1,885,497 $ 110,785
Doak Dermatologics, Inc. 87,982 97,599
---------- ----------
$ 1,973,479 $ 208,384
========== ==========
Geographic information
(revenues):
Kenwood Laboratories
United States $ 8,866,129 $ 8,708,251
Other countries 639,829 351,960
---------- ----------
$ 9,505,958 $ 9,060,211
========== ==========
Doak Dermatologics, Inc.
United States $ 5,177,608 $ 4,415,357
Other countries 1,169,436 $ 1,548,194
---------- ----------
$ 6,347,044 $ 5,963,551
========== ==========
The basis of accounting that is used by the Company to allocate expenses that
relate to both segments are based upon the proportionate quarterly net sales
of each segment. Accordingly, the allocation percentage used can differ
between quarters and years depending on the segments proportionate net sales
over total net sales.
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]
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 1,417,746
[SECURITIES] 0
[RECEIVABLES] 4,626,303
[ALLOWANCES] 411,000
[INVENTORY] 1,506,731
[CURRENT-ASSETS] 8,317,944
[PP&E] 1,358,010
[DEPRECIATION] 1,001,000
[TOTAL-ASSETS] 22,564,261
[CURRENT-LIABILITIES] 7,447,007
<LT DEBT> 1,245,851
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 15,607,395
[OTHER-SE] (1,735,992)
[TOTAL-LIABILITY-AND-EQUITY] 22,564,261
[SALES] 15,853,002
TOTAL-REVENUES> 15,853,002
[CGS] 4,595,582
[TOTAL-COSTS] 4,595,582
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 200,180
[INCOME-PRETAX] 1,038,973
[INCOME-TAX] 120,000
[INCOME-CONTINUING] 918,973
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 918,973
<EPS-BASIC> .11
[EPS-DILUTED] .10
</TABLE>
