BRADLEY PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A – Basis of Presentation
The accompanying
unaudited interim financial statements of Bradley Pharmaceuticals, Inc. and Subsidiaries
(the “Company”, “Bradley”, “we” or “us”) have
been prepared in accordance with accounting principles generally accepted in the United
States of America and rules and regulations of the Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all of the
information and footnote disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of
the Company, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring entries) necessary to present fairly the
Company’s financial position as of June 30, 2004, and its results of operations for
the three and six months ended June 30, 2004 and 2003 and cash flows for the six months
ended June 30, 2004 and 2003.
The accounting
policies followed by the Company are set forth in Note A of the Company’s
consolidated financial statements as contained in the Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes thereto
included in the Company’s Form 10-K for the year ended December 31, 2003.
The results
reported for the three and six months ended June 30, 2004 are not necessarily indicative
of the results of operations that may be expected for a full year.
NOTE B – Stock Based Compensation
The Company’s
1990 Stock Option Plan and its 1999 Incentive and Non-Qualified Stock Option Plan are
described more fully in Note I.2 of the Company’s Form 10-K for the period ended
December 31, 2003. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board, or APB Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal or above the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net
income and net income per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation,” using the assumptions described in
Note K.
8
Three Months Ended
June 30, 2004
June 30, 2003
Net income, as reported
$
4,507,839
$
3,376,741
Deduct: Total stock-based employee
compensation expense
determined under fair value based method for all
awards,
net of related tax effects
459,113
320,086
Pro forma net income for basic
computation
$
4,048,726
$
3,056,655
Net income, as reported
$
4,507,839
$
3,376,741
Deduct: Total stock-based employee
compensation expense
determined under fair value based method
for all awards,
net of related tax effects
459,113
320,086
Add: After-tax interest expense
and other from 4% convertible
senior subordinated notes due 2013
253,723
31,967
Pro forma net income for diluted
computation
$
4,302,449
$
3,088,622
Net income per share:
Basic- as reported
$
0.29
$
0.32
Basic- pro forma
$
0.26
$
0.29
Diluted- as reported
$
0.26
$
0.29
Diluted- pro forma
$
0.23
$
0.26
9
Six Months Ended
June 30, 2004
June 30, 2003
Net income, as reported
$
10,755,721
$
6,250,821
Deduct: Total stock-based employee
compensation expense
determined under fair value based method for all
awards,
net of related tax effects
940,948
755,209
Pro forma net income for basic
computation
$
9,814,773
$
5,495,612
Net income, as reported
$
10,755,721
$
6,250,821
Deduct: Total stock-based employee
compensation expense
determined under fair value based method
for all awards,
net of related tax effects
940,948
755,209
Add: After-tax interest expense
from 4% convertible senior
subordinated notes due 2013
507,446
31,967
Pro forma net income for diluted
computation
$
10,322,219
$
5,527,579
Net income per share:
Basic- as reported
$
0.69
$
0.59
Basic- pro forma
$
0.63
$
0.52
Diluted- as reported
$
0.61
$
0.54
Diluted- pro forma
$
0.56
$
0.47
NOTE C – Net Income Per Common Share
Basic net income
per common share is determined by dividing net income by the weighted average number of
shares of common stock outstanding. Diluted net income per common share is determined by
dividing net income plus applicable after-tax interest expense and related offsets from
convertible notes by the weighted number of shares outstanding and dilutive common
equivalent shares from stock options, warrants and convertible notes. A reconciliation
of the weighted average basic common shares outstanding to weighted average diluted
common shares outstanding is as follows:
10
Three Months Ended
Six Months Ended
June 30, 2004
June 30, 2003
June 30, 2004
June 30, 2003
Basic shares
15,620,000
10,600,000
15,570,000
10,560,000
Dilution:
Stock options and warrants
950,000
1,000,000
980,000
970,000
Convertible notes
1,850,000
260,000
1,850,000
130,000
Diluted shares
18,420,000
11,860,000
18,400,000
11,660,000
Net income as reported
$ 4,507,839
$ 3,376,741
$ 10,755,721
$ 6,250,821
After-tax interest expense and
other from convertible notes
253,723
31,967
507,446
31,967
Adjusted net income
$ 4,761,562
$ 3,408,708
$ 11,263,167
$ 6,282,788
Basic income per share
$
0.29
$
0.32
$ 0.69
$
0.59
Diluted income per share
$ 0.26
$ 0.29
$ 0.61
$ 0.54
In addition to
stock options and warrants included in the above computation, options and warrants to
purchase 77,000 and 130,000 shares of common stock at prices ranging from $25.75 to
$26.68 and $24.85 to $26.68 per share were outstanding for the three and six months
ending June 30, 2004, respectively. Further, options and warrants to purchase 38,500 and
45,000 shares of common stock at prices ranging from $16.61 to $20.18 and $14.39 to
$20.18 per share were outstanding for the three and six months ending June 30, 2003,
respectively. These were not included in the computation of diluted income per share
because their exercise price was greater than the average market price of the Company’s
common stock and, therefore, the effect would be anti-dilutive.
11
Note D – Comprehensive Income
SFAS No. 130,
Reporting Comprehensive Income, requires that items defined as other comprehensive
income, such as net income and unrealized gains and losses on available-for-sale
securities, be reported separately in the financial statements. The components of
comprehensive income for the three and six months ended June 30, 2004 and 2003 are as
follows:
Three
Months Ended
Six Months
Ended
June 30, 2004
June 30, 2003
June 30, 2004
June 30, 2003
Comprehensive income:
Net income
$ 4,507,839
$ 3,376,741
$ 10,755,721
$ 6,250,821
Other comprehensive income (loss):
Net unrealized income (loss)
on
available for sale securities
(511,749)
53,200
(515,326)
104,693
Comprehensive income
$ 3,996,090
$ 3,429,941
$ 10,240,395
$ 6,355,514
Note E – Business Segment Information
The Company’s
two reportable segments are Doak Dermatologics, Inc. (dermatology and podiatry) and
Kenwood Therapeutics (gastrointestinal, respiratory, nutritional and other). Each
segment has been identified by the Company to be a distinct operating unit marketing,
promoting and distributing different pharmaceutical products to different target
physician audiences. Doak Dermatologics’ products are marketed, promoted and
distributed primarily to physicians practicing in the fields of dermatology and
podiatry, while Kenwood Therapeutics’ products are marketed, promoted and
distributed primarily to physicians practicing in the field of internal medicine.
The accounting
policies used to develop segment information correspond to those described in the
summary of significant accounting policies in the notes to the financial statements in
the Company’s Form 10-K for the year ended December 31, 2003. The reportable
segments are distinct business units operating in different market segments with no
intersegment sales. The following information about the two segments are for the three
and six months ended June 30, 2004 and 2003.
12
Three Months Ended
June 30, 2004
Three Months Ended
June 30, 2003
Six Months Ended
June 30, 2004
Six Months Ended
June 30, 2003
Net sales:
Doak Dermatologics, Inc.
$17,353,133
$12,660,332
$34,854,539
$23,536,002
Kenwood Therapeutics
5,601,735
3,689,581
13,167,483
7,729,596
$22,954,868
$16,349,913
$48,022,022
$31,265,598
Depreciation and amortization:
Doak Dermatologics, Inc.
$ 44,373
$ 64,872
$ 110,908
$ 132,406
Kenwood Therapeutics
266,505
240,213
531,571
455,404
$ 310,878
$
305,085
$ 642,479
$ 587,810
Income before income tax:
Doak Dermatologics, Inc.
$ 7,278,662
$ 5,452,680
$15,145,319
$ 9,732,265
Kenwood Therapeutics
183,177
84,061
2,661,402
515,557
$ 7,461,839
$ 5,536,741
$17,806,721
$10,247,821
Income tax expense:
Doak Dermatologics, Inc.
$ 2,881,000
$ 2,127,000
$ 5,997,000
$ 3,796,000
Kenwood Therapeutics
73,000
33,000
1,054,000
201,000
$ 2,954,000
$ 2,160,000
$ 7,051,000
$ 3,997,000
Net income:
Doak Dermatologics, Inc.
$ 4,397,662
$ 3,325,680
$ 9,148,319
$ 5,936,265
Kenwood Therapeutics
110,177
51,061
1,607,402
314,557
$ 4,507,839
$ 3,376,741
$10,755,721
$ 6,250,821
Geographic information (revenues):
Doak Dermatologics, Inc.
United States
$16,779,866
$12,434,653
$33,998,851
$23,106,569
Other countries
573,267
225,679
855,688
429,433
$17,353,133
$12,660,332
$34,854,539
$23,536,002
Kenwood Therapeutics
United States
$ 5,486,271
$ 3,628,400
$13,019,040
$ 7,660,698
Other countries
115,464
61,181
148,443
68,898
$ 5,601,735
$ 3,689,581
$13,167,483
$ 7,729,596
Net sales by category:
Dermatology and
podiatry
$17,353,133
$12,660,332
$34,854,539
$23,536,002
Gastrointestinal
3,800,999
949,863
8,699,899
2,692,544
Respiratory
1,205,764
2,062,552
3,245,633
3,767,620
Nutritional
495,100
606,680
1,040,993
1,123,832
Other
99,872
70,486
180,958
145,600
$22,954,868
$16,349,913
$48,022,022
$31,265,598
The basis of
accounting that is used by the Company to record business segments’ sales have been
recorded and allocated by each business segment’s identifiable products. 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 segment’s proportionate share of net sales.
13
Note F – Short-term Investments
The Company’s
short-term investments are intended to establish a high-quality portfolio that preserves
principal, meets liquidity needs and delivers an appropriate yield, based upon, the
Company’s investment guidelines and market conditions.
The Company
invests primarily in money market funds, short-term commercial paper, short-term
municipal bonds, treasury bills and treasury notes. The Company’s policy is to
invest primarily in high-grade investments.
The following is a
summary of available-for-sale securities for June 30, 2004:
Cost
Gross
Unrealized
Gain/(Loss)
Gross
Fair Value
Treasury notes
$
5,523,464
$
37,430
$
5,560,894
Municipal bonds
53,435,822
(569,801)
52,866,021
Total available-for-sale securities
$
58,959,286
$
(532,371)
$
58,426,915
During the three
and six months ended June 30, 2004, the Company had gross realized gain on investment of
zero and $31,376, respectively. During the three and six months ended June 30, 2003, the
Company had no gross realized gain or loss on investment securities. The net adjustment
to unrealized loss during the three and six months ended June 30, 2004 on
available-for-sale securities included in stockholders’ equity totaled a loss of
$511,749 and $515,326 and the net adjustment to unrealized income during three and six
months ended June 30, 2003 on available-for-sale securities included in stockholders’ equity
totaled a gain of $53,200 and $104,693, respectively. The Company views its
available-for-sale securities as available for current operations.
The Company’s
held-to-maturity investments represents investments with financial institutions that
have an original maturity of more than three months and a remaining maturity of less
than one year, when purchased. Securities classified as held-to-maturity, which consist
of securities that management has the ability and intent to hold to maturity, are
carried at cost.
14
The composition of
the Company’s held-to-maturity investments at June 30, 2004 is as follows:
Municipal bonds, 1.01%
maturity date July 1, 2004
$
580,054
Municipal bonds, 1.25%
maturity date November 1, 2004
449,362
Municipal bonds, 1.42%
maturity date August 1, 2004
746,192
Municipal bonds, 1.07%
maturity date August 31, 2004
475,814
Municipal bonds, 1.41%
maturity date August 31, 2004
801,121
Municipal bonds, 5.71%
maturity date September 30, 2004
2,255,579
Municipal bonds, 1.11%
maturity date January 1, 2005
1,911,373
Municipal bonds, 1.43%
maturity date January 1, 2005
1,973,655
Municipal bonds, 1.44%
maturity date January 1, 2005
2,244,123
Municipal bonds, 1.41%
maturity date February 2005
1,708,417
Total held-to-maturity investments
$
13,145,690
Note G – Accounts Receivable
The Company
extends credit on an uncollateralized basis primarily to wholesalers. Historically, the
Company has not experienced significant credit losses on its accounts. The Company’s
three largest customers accounted for an aggregate of approximately 91% of gross
accounts receivable at June 30, 2004. On June 30, 2004, Cardinal Health, Inc. owed 45%
of gross accounts receivable to the Company, McKesson Corporation owed 40% of gross
accounts receivable to the Company and Quality King, Inc. owed 5% of gross accounts
receivable to the Company.
In addition, the
Company’s four largest customers accounted for 87% and 87% of the gross sales for
the three and six months ended June 30, 2004 and 81% and 80% of gross sales for the
three and six months ended June 30, 2003, respectively. The following table presents a
summary of sales to these customers, who are wholesalers, during the six months ended
June 30, 2004 and 2003 as a percentage of the Company’s total gross sales:
15
Customer
Six Months
Ended
June 30, 2004
Six Months
Ended
June 30, 2003
AmerisourceBergen Corporation
14%
17%
Cardinal Health, Inc.
29%
23%
McKesson Corporation
28%
19%
Quality King, Inc.
16%
21%
Total
87%
80%
Accounts
receivable balances at June 30, 2004 and December 31, 2003 are as follows:
June 30,
2004
December 31,
2003
Accounts receivable:
Trade
$
13,016,644
$
5,147,220
Other
4,692
20,933
Less allowances:
Chargebacks
1,300,069
1,219,622
Returns
1,266,529
925,685
Discounts
292,050
121,910
Doubtful
accounts
310,125
290,221
Accounts receivable, net of allowances
$
9,852,563
$
2,610,715
Note H – Inventories
The Company
purchases raw materials and packaging components for some of its third party
manufacturing vendors. The Company uses these third party manufacturers to manufacture
and package finished goods held for sale, takes title to certain finished inventories
once manufactured, and warehouses such goods until final distribution and sale. Finished
goods consist of salable products that are primarily held at a third party warehouse.
Inventories are valued at the lower of cost or market using the first-in, first-out
method. The Company provides valuation reserves for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and
market conditions.
16
Inventory balances
at June 30, 2004 and December 31, 2003 are as follows:
June 30,
2004
December 31,
2003
Finished goods
$
3,037,182
$
2,225,719
Raw materials
275,027
308,494
Valuation reserve
(119,279
)
(140,523
)
Inventories, net
$
3,192,930
$
2,393,690
Note I — Accrued Expenses
Accrued expenses balances at
June 30, 2004 and December 31, 2003 are as follows:
June
30,
2004
December
31,
2003
Employee compensation
$
1,791,626
$
3,566,683
Rebate payable
12,080
184,294
Rebate liability
4,669,217
3,904,752
Other
605,444
674,469
Accrued expenses
$
7,078,367
$
8,330,198
The Company
establishes and maintains reserves for amounts payable to managed care organizations and
state Medicaid programs for the reimbursement of a portion of the retail price of
prescriptions filled that are covered by the respective plans. The amounts estimated to
be paid relating to products sold are recognized as revenue reductions and as additions
to accrued expenses at the time of sale based on the Company’s best estimate of the
expected prescription fill rate to these managed care patients using historical
experience adjusted to reflect known changes in the factors that impact such reserves.
The rebate liability principally represents the estimated claims for rebates owed to
Medicaid and managed care providers but not yet received by the Company. The rebate
payable represents actual claims for rebate amounts received from Medicaid and managed
care providers and payable by the Company.
17
Note J – Income Taxes
The provision for income taxes
reflects management’s estimate of the effective tax rate expected to
be applicable for the full fiscal year.
Deferred income
taxes are provided for the future tax consequences attributable to the differences
between the financial statement carrying amounts of assets and liabilities and their
respective tax base. Deferred tax assets are reduced by a valuation allowance when, in
the Company’s opinion, it is more likely than not that some portion of the deferred
tax assets will not be realized. On June 30, 2004 and December 31, 2003, the Company
determined that no deferred tax asset valuation allowance is necessary. The Company
believes that its projections of future taxable income makes it more likely than not
that such deferred tax assets will be realized. If the projection of future taxable
income changes in the future, the Company may be required to reduce deferred tax assets
by a valuation allowance.
Note K – Incentive and Non-Qualified Stock Option
Plan
During the six
months ended June 30, 2004, the Company granted 93,200 options at exercise prices
ranging from $21.05 to $25.75 to employees and directors, canceled 17,999 options, and
exercised 297,669 options and warrants, generating proceeds to the Company of $750,052
and a tax benefit of $266,511.
During the six
months ended June 30, 2003, the Company granted a consultant options to purchase 1,800
shares of common stock at a price of $13.90, the market value on the date of grant,
which is exercisable immediately, nonforfeitable, and will expire 3 years from its
initial exercise date. During the six months ended June 30, 2003, the Company expensed
$11,041 for these services using a Black-Scholes method to value such options.
All options issued
during the six months ended June 30, 2004 were at or above the market price on the date
of grant.
The Company
applies the fair value recognition provisions of FASB Statement No. 123, “Accounting
for Stock-Based Compensation,” using the following assumptions for grants during
the periods ending June 30, 2004 and 2003: no dividend yield; expected volatility of
60%; risk-free interest rate of 5%; and expected life of four years for directors and
officers and two years for others.
18
Note L – Related Party Transactions
Transactions With Shareholders and Officers
During January
2004, the Company issued 5,236 restricted, fully vested and nonforfeitable shares of
common stock to certain officers of the Company for being a member of a new officer
committee, which is responsible for identifying and implementing the Company’s
strategic plans. The committee was formed in the First Quarter 2004 and as a result of
the issuance of the restricted stock, the Company expensed $125,036 during the First
Quarter 2004.
The Company leases
24,000 square feet of office and warehouse space at 383 Route 46 West, Fairfield, New
Jersey, under a lease that expires on January 31, 2008, with a limited liability company
that is controlled by Daniel Glassman, the Company’s Chairman of the Board of
Directors, Chief Executive Officer and President, and Iris Glassman, an executive
officer, a member of the Company’s Board of Directors and spouse of Daniel
Glassman. At the Company’s option, the Company can extend the term of the lease for
an additional 5 years beyond expiration. The lease agreement contractually obligates the
Company to pay a 3% increase in annual lease payments per year. Rent expense, including
the Company’s proportionate share of real estate taxes, was approximately $235,000
and $231,000 for the six months ended June 30, 2004 and 2003, respectively.
Transactions With an Affiliated Company
During the six months ended
June 30, 2004 and 2003, the Company incurred expenses for administrative
support services (consisting principally of mailing, copying, financial
services, data processing and other office services) from Medimetrik Inc.
in the amount of approximately $35,000 and $33,000, respectively. Daniel
and Iris Glassman are majority owners of Medimetrik Inc., a privately held
entity that was principally engaged in the business of market research services
and ceased providing services to the Company in June 2004.
Note M – Recent Accounting Pronouncements
In December 2003, the FASB
issued FASB Interpretation No. 46(R), “Consolidation of Variable Interest
Entities” (“FIN 46(R)”). FIN 46(R) clarifies the application
of Accounting Research Bulletin 51, “Consolidated Financial Statements,”
for certain entities that do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties or in which equity investors do not have the
characteristics of a controlling financial interest (“variable interest
entities”). Variable interest entities within the scope of FIN 46(R)
will be required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity’s expected losses, receives a
majority of its expected returns, or both. FIN 46(R) applies
19
immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains
an interest after that date. It applies to the Company in the first fiscal
year or interim period ending after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company adopted FIN 46(R) in December 2003.
Adoption of FIN 46(R) did not have a material effect on the Company’s
financial position or results of operations.
In March 2004, the EITF reached
a consensus opinion on EITF 03-6, “Participating Securities and the
Two-Class Method under FASB Statement No. 128,
Earnings per Share
.”
The EITF reached several consensuses on the definition of a participating
security and when and how to apply the two-class method when an entity has
any type of participating security. EITF 03-6 is effective in periods beginning
after March 31, 2004. Adoption of EITF 03-6 did not have an effect.
In March 2004, the
Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.” This consensus clarifies the meaning of other-than-temporary
impairment and its application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities,” and investments accounted for under the cost method or the
equity method. The application of this guidance should be used to determine when an
investment is considered impaired, whether an impairment is other than temporary, and
the measurement of an impairment loss. The guidance also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance for evaluating whether an investment is
other-than-temporarily impaired is effective for evaluations made in reporting periods
beginning after June 15, 2004. The Company does not believe that the application of this
consensus will have a material impact on the results of operations or financial position.
In March 2004 the FASB issued
a proposed standard entitled “Share-Based Payment — An Amendment
of FAS Nos. 123 and 95.” The proposed rules will eliminate the disclosure-only
election under FAS 123 and require the recognition of compensation expense
for stock options and other forms of equity compensation based on the fair
value of the instruments on the date of grant. The FASB currently expects
to issue a final standard in late 2004, which is slated to be effective
for the first quarter 2005 for the Company. See Note B for the quarterly
disclosures of the pro forma dilutive impact on net income and earnings
per share of expensing stock options based on the Black-Scholes model. The
FASB’s proposal advocates using a binomial (lattice-based) option pricing
model rather than the Black-Scholes model the company currently uses to
determine grant date fair value. The Company has not yet determined what,
if any, impact using the recommended binomial model will have on the company’s
estimated net income and earnings per share dilution compared to the Black-Scholes
model.
20
On July 1, 2004,
the Emerging Issues Task Force (the “EITF”) of the FASB reached a tentative
conclusion that would require all shares that are contingently issuable under
outstanding convertible notes to be considered outstanding for its diluted earnings per
share computations, if dilutive, using the “if converted” method of accounting
from the date of issuance. Currently these shares are only included in the diluted
earnings per share computation if the common stock price has reached certain conversion
trigger prices. If approved, this EITF statement (“EITF 04-8”) would also
require retroactively restate prior periods diluted earnings per share. It is believed
likely that EITF 04-8 will be effective for periods ending after mid-October 2004. If
adopted, the Company believes EITF 04-8 will not have a material impact on the Company’s
diluted earnings per share.
Note N – Commitments & Contingencies
Dermik/Aventis Litigation
On January 29,
2003, the Company commenced legal proceedings against Dermik Laboratories and its
parent, Aventis Pharmaceuticals, a wholly owned subsidiary of Aventis Pharma AG,
alleging, among other things, the infringement by Dermik and Aventis of three patents
owned by us relating to 40% urea dermatologic compositions and therapeutic uses.
In the complaint, filed in
the United States District Court for the District of New Jersey, the Company
stated that the marketing and sale by Dermik and Aventis of the 40% urea
cream, Vanamide, which would compete with our CARMOL®40 product line, infringed
three of our patents, including a composition patent for dermatologic products
including 40% urea and two methodology patents for the therapeutic use of
urea-based products.
The Company
entered into a settlement agreement, dated as of June 30, 2004, with Dermik under which
the parties agreed to settle all legal proceedings between them involving patents owned
by the Company relating to dermatologic compositions with approximately 21% to 40% urea
and their therapeutic uses. Pursuant to the terms of this settlement agreement, the
Company entered into a distribution agreement with Dermik for the exclusive distribution
and marketing rights in selected international markets to the prescription acne and
rosacea products Benzamycin®, Klaron® and Noritate® and three additional products,
Hytone, Sulfacet R and Zetar Shampoo. The Company agreed to pay Dermik not less than
$3.2 million in aggregate acquisition fees and royalties against the Company’s net
sales of these products, of which the Company has already paid approximately $2.7
million comprised of $2.6 million in distribution rights included in intangible assets
and $120,000 in advanced royalties.
Dermik began
selling Vanamide during the Second Quarter 2003. Launch of Vanamide or any other
competing 40% urea product could have a material adverse effect on the Company’s
sales and profits attributable to CARMOL®40.
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DPT Lakewood Litigation
On February 25,
2003, the Company filed an action in the United States District Court for the District
of New Jersey against DPT Lakewood, Inc., an affiliate of DPT Laboratories Ltd. In this
lawsuit, the Company alleges, among other things, that DPT Lakewood breached a
confidentiality agreement and misappropriated the Company’s trade secrets relating
to CARMOL®40 CREAM. During 1999, the Company provided, in accordance with a
confidentiality agreement entered into for the possible manufacture of our CARMOL®40
CREAM, substantial trade secret information to a company of which the Company believes
DPT Lakewood is a successor, including processing methods and formulations essential to
the manufacture of CARMOL®40 CREAM. DPT Lakewood currently manufactures a 40% urea
cream for Dermik and Aventis. Among other things, the Company sought damages from DPT
Lakewood for misappropriation of the Company’s trade secrets. DPT Lakewood
counterclaimed against the Company seeking a declaration of invalidity and
non-infringement of the patents in question and making a claim for interference with
contract and prospective economic advantage. The patent claims and counterclaims were
recently dismissed with the consent of both parties. This dismissal led to the
successful application to have remaining state law based claims and counterclaims
dismissed without prejudice for lack of subject matter jurisdiction.
On June 3, 2004,
DPT Lakewood instituted a New Jersey state court action against the Company asserting
the common law defamation and tortious interference claims that were recently dismissed
by the federal court for lack of subject matter jurisdiction. The Company’s
response to the complaint (a motion to dismiss) was recently filed, and has not yet been
ruled upon by the Court.
On March 6, 2003,
DPT Laboratories, Ltd., filed a lawsuit against the Company alleging defamation arising
from the Company’s press release announcing commencement of the litigation against
DPT Lakewood. On July 11, 2003, the District Court for the Western District of Texas
denied the Company’s motion to dismiss. DPT Laboratories recently designated an
expert opining that it has suffered over $1 million in damages as a result of the
Company allegedly defamatory comment in a press release regarding the New Jersey patent
infringement litigation. The Company has subsequently identified an expert witness in
the case calling into serious question both the methodology and the facts upon which DPT
Laboratories’ expert based that opinion. The Company is moving forward with
additional discovery in the case in anticipation of filing a dispositive motion in the
coming months.
The Company
continues to review its strategies and alternatives with respect to the pending lawsuits
by DPT Laboratories, continues to believe that their suits are without merit and the
Company intends to vigorously defend its position.
General Litigation
The Company and
its operating subsidiaries are parties to other routine actions and proceedings
incidental to its business. There can be no assurance that an adverse
22
determination on any such action or proceeding
would not have a material adverse effect on the Company’s business, financial
condition or results of operations.
The Company
accounts for legal fees as their services are incurred.
Securities Transferred to 401(k) Plan
From 1997 through
January 2004, the Company failed to register, in compliance with applicable securities
laws, shares of the Company’s common stock transferred to participants in its
401(k) plan and the interests of those participants in that plan, which may also be
deemed securities requiring registration. The Company intends to offer a 30-day right of
rescission to those participants who received shares of its common stock in violation of
applicable securities laws during the two years preceding the date of the rescission
offer, the statute of limitations period that the Company believes may apply to claims
for rescission under applicable state laws, or possibly a longer or shorter period.
Under the rescission offer, the participants will be entitled to require the Company to
repurchase those shares at the price per share of the Company’s common stock when
the shares were transferred to the participant’s account, plus interest at a rate
to be determined.
Based upon the
Company’s preliminary investigation, the Company currently believes that
approximately 22,000 shares of its common stock were transferred to 401(k) plan
participants since January 1, 2002 in violation of applicable securities laws and, if
subject to its rescission offer, would have an aggregate repurchase price of
approximately $301,000, plus interest. The Company may also face fines or other
penalties for its violation of applicable securities laws, and may be required to offer
rescission to participants who received shares of the Company’s common stock prior
to the two-year period preceding our anticipated rescission offer.
In addition,
applicable securities laws do not expressly provide that the Company’s planned
rescission offer will terminate a participant’s right to rescind a sale of stock
that was not properly registered. Accordingly, the Company may continue to have a
contingent liability relating to the shares transferred to participants who do not
accept the rescission offer, based upon the price per share of the Company’s common
stock when the shares were transferred to the participant’s account.
Supply Agreement
On December 4,
2003, the Company contracted with a manufacturer to produce the product FLORA-Q™, a
probiotic product, for exclusive distribution within the United States, Canada and
Mexico. The initial term of the agreement is for three years and may only be terminated
if the other party commits a material breach of its obligations or has increased its
price as described below. The Company is required to purchase at least $375,000 of the
product per contract year. The manufacturer cannot change the price per manufactured
product unless the product production cost increases greater than 10 percent during any
given contract year. If the manufacturer increases the price per
23
product, the Company can terminate the
agreement without any liability to the manufacturer, within 30 days after receipt of
notice of any price increase from the manufacturer. After the initial term, the supply
agreement will be renewed for consecutive periods of one year, unless the Company or the
manufacturer gives notice to the other not less than 180 days prior to the end of the
initial term or any such renewal term. The contract year is the twelve consecutive month
period commencing from December 1st through November 30th.
International Distribution Agreement
On June 30, 2004,
the Company entered into a distribution agreement with Dermik Laboratories, a division
of Aventis Pharmaceuticals, Inc., a wholly owned subsidiary of Aventis Pharma AG, to
acquire exclusive distribution and marketing rights in selected international markets to
the prescription acne and rosacea products Benzamycin®, Klaron® and Noritate®,
and three additional products, Hytone, Sulfacet R and Zetar Shampoo. Pursuant to this
agreement, the Company will have exclusive distribution and marketing rights to these
products for eight years in Australia, Japan, the countries comprising the former Soviet
Union, Saudi Arabia, the United Arab Emirates, Kuwait and Egypt in the Middle East, and
Vietnam, Thailand and Cambodia in Southeast Asia. The Company will be responsible for
securing the necessary approvals to market these products in these countries. The
Company has agreed to pay Dermik not less than $3.2 million in aggregate acquisition
fees and royalties against the Company’s net sales of these products, of which the
Company has paid approximately $2.7 million in distribution rights included in
intangible assets and $120,000 in advanced royalties.
Bioglan Pharmaceuticals, Inc. Asset Purchase Agreement
On June 9, 2004,
the Company entered into an agreement to purchase the assets of Bioglan Pharmaceuticals
Company, a wholly-owned subsidiary of Quintiles Transnational Corp. As part of the
transaction, Bradley will acquire certain intellectual property, regulatory filings, and
other assets relating to Solaraze® (diclofenac sodium), a topical treatment
indicated for the treatment of actinic keratosis, Adoxa® (doxycycline monohydrate),
an oral antibiotic indicated for the treatment of acne, Zonalon™ (doxepin
hydrochloride), a topical treatment indicated for pruritus, Tx Systems®, a line of
advanced topical treatments used during in-office procedures, and certain other
dermatologic products. The total consideration estimated to be paid by the Company at
closing is approximately $185 million, subject to adjustment based upon Bioglan’s
working capital on the closing date and net sales for 2004 prior to the closing.
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