AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 2000
REGISTRATION NO. 333-50182
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OMP, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 2834 95-4658730
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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310 GOLDEN SHORE
LONG BEACH, CA 90802
(562) 628-1007
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
PHILLIP J. ROSE, R.PH.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OMP, INC.
310 GOLDEN SHORE
LONG BEACH, CA 90802
(562) 628-1007
(Name, address, including zip code, and telephone number, including area code,
of agent for services)
------------------------------
COPIES TO:
TOD B. LINSTROTH, ESQ. MARC M. ROSSELL, ESQ.
GREGORY J. LYNCH, ESQ. SHEARMAN & STERLING
MICHAEL BEST & FRIEDRICH LLP 555 CALIFORNIA STREET
P.O. BOX 1806 SAN FRANCISCO, CALIFORNIA 94104
MADISON, WISCONSIN 53701-1806 (415) 616-1100
(608) 257-3501
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1)(2) FEE(3)
Common Stock, $0.001 par value..... 5,175,000 $16.00 $82,800,000 $21,750
(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Includes $19,800 which was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED , 2001
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
4,500,000 SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
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This is an initial public offering of common stock of OMP, Inc.
We expect that the price to the public in the offering will be between $14.00
and $16.00 per share. The market price of the shares after the offering may be
higher or lower than the offering price.
We have applied to include our common stock on the Nasdaq National Market under
the symbol "OMPI."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
PER SHARE TOTAL
--------- ----------
Price to the public......................................... $ $
Underwriting discount.......................................
Proceeds to OMP.............................................
We have granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 675,000 additional shares
from us within 30 days following the date of this prospectus to cover
over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
THOMAS WEISEL PARTNERS LLC
The date of this prospectus is , 2001
SKIN HEALTH AND RESTORATION PRODUCTS
BY OMP, INC.
[GRAPHIC]
ObagiNu-Dermis a
comprehensive system of 20
prescription drugs and
over-the-counter products
for fine lines, wrinkles and
hyperpigmentation.
Cffectives is a highly
stable vitamin
C
non-prescription serum; for
fine lines, wrinkles and
hyperpigmentation.
[GRAPHIC]
[GRAPHIC]
Cymetraisa micronized,
freeze dried injectable
human tissue matrix for
replacement of lost or
damaged tissue.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 26
Management.................................................. 40
Principal Stockholders...................................... 49
Related Party Transactions.................................. 51
Description of Capital Stock................................ 53
Shares Eligible for Future Sale............................. 56
U.S. Federal Tax Considerations for Non-U.S. Holders........ 58
Underwriting................................................ 61
Legal Matters............................................... 64
Experts..................................................... 64
Where You Can Find More Information......................... 64
Financial Statements........................................ F-1
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN THE SHARES.
OMP, INC.
We are a leading specialty pharmaceutical company that develops, markets and
sells products for physician-mediated skin health and restoration. We believe we
sell the most comprehensive line of skin health and restoration products for
dermatologists and plastic surgeons to dispense and to use for office-based
procedures. We currently sell our products to over 2,500 skin care physicians in
the United States through our direct sales force as well as in 29 countries
outside the United States, primarily through distributors.
Our revenues were approximately $31.8 million for the 12 months ended September
30, 2000, which represents growth of 51% over the prior 12 month period. During
2000, we added four new product lines, Cffectives, OMP Tretinoin, Kinaderm and
Cymetra, and doubled the size of our direct sales force to 54 persons. We plan
to use part of the proceeds of this offering to further expand our sales and
marketing efforts, and to add more products through internal development,
acquisitions or in-licensing. We believe our performance will be driven in part
by demographic factors such as the general aging of the U.S. population, as well
as efforts among dermatologists and plastic surgeons to generate revenues from
cosmetic procedures and products that are not subject to third party
reimbursement restrictions. This is evidenced by the number of
physician-mediated skin health and restoration office procedures, which has
increased from approximately 1,200,000 in 1997 to approximately 2,900,000 in
1999. Despite our growth and the favorable trends in the physician-mediated skin
health and restoration market, this market is highly competitive, and we have
experienced losses in the past and we may experience losses in the future.
Skin health is impacted by a variety of factors, including genetics, natural
aging, sun damage, discoloration of the skin and diseases such as acne. Many of
these factors, such as sun damage and discoloration of the skin affect everyone
to a varying degree, although some skin types are more susceptible to certain
skin conditions. Skin conditions are treated with prescription drugs,
over-the-counter drugs and cosmetic skin care products, as well as office-based
procedures such as chemical-based skin peels. However, many traditional products
and procedures have limitations. For example, many products and procedures are
designed to mask individual skin symptoms rather than treat the underlying
causes of the skin damage. As a result, patients may see temporary improvements,
but long-term fundamental skin renewal often does not occur. In addition, most
traditional products and procedures are not part of a comprehensive program
designed to treat the specific needs of the individual patient, resulting in
inadequate outcomes for those seeking improvements in skin health or
restoration.
OUR PRODUCTS
We believe that skin health is best addressed through a physician-mediated skin
treatment program designed to treat the medical conditions underlying skin
damage. We market a comprehensive portfolio of products that enable physicians
to treat a wide range of skin problems, including sun damage, discoloration,
acne and soft tissue deficits, such as wrinkles. We offer products for in-office
dispensing by skin care physicians as well as products for use by physicians in
performing in-office procedures. Our products and procedures have been designed
to complement each other in the treatment of skin damage, enabling physicians to
tailor a treatment program to the specific needs of each patient.
We currently sell four product lines to physicians for in-office dispensing.
- OBAGI NU-DERM. Obagi Nu-Derm is a unique product system utilizing the
leading prescription drugs for treating sun damage and discoloration of the
skin. The system is
1
comprised of prescription and over-the-counter drugs and specially
formulated adjunctive cosmetic products. The Obagi Nu-Derm product line has
historically accounted for a significant majority of our revenue.
- CFFECTIVES. The Cffectives line of proprietary non-prescription products,
which consists of highly stable vitamin C solutions, is used to reduce the
appearance of fine lines, wrinkles, and sun damage caused by ultraviolet
radiation and other environmental influences.
- OMP TRETINOIN. OMP Tretinoin creams, used in the United States with our acne
care products for the topical treatment of acne, are the only FDA-approved
generic forms of Retin-A directly available to physicians for dispensing.
- KINADERM. Kinaderm, a kinetin-based product that we market in Asia, is used
to improve the appearance of wrinkles and fine lines, discoloration of the
skin and skin roughness.
We also sell two products used by skin care physicians for in-office procedures.
- CYMETRA. Cymetra, a micronized, freeze-dried injectable human tissue matrix,
is used in a nonsurgical procedure to replace facial tissue lost due to
damage or age.
- OBAGI BLUE PEEL. Obagi Blue Peel is a patented acid delivery system for
chemical peel procedures used to smooth the skin surface, improve skin tone
and color, diminish wrinkles and shrink pore sizes. Obagi Blue Peel provides
for an even application and slows penetration of solution into the skin
allowing physicians to accurately monitor the peel, and thus reducing the
risk of complications.
OUR STRATEGY
Our objective is to become the leading specialty pharmaceutical company
dedicated to providing skin health products for physician-mediated skin health
and restoration. Key elements of our strategy include:
- INCREASE THE MARKET PENETRATION OF OUR SKIN HEALTH AND RESTORATION PRODUCTS.
We are expanding our U.S. sales and marketing efforts to dermatologists and
plastic surgeons in order to further increase the penetration of our
existing product lines and to launch new products.
- OBTAIN NEW AND INNOVATIVE PRODUCTS THROUGH IN-LICENSING AND STRATEGIC
COLLABORATIONS. We intend to continue accessing new and complementary
products through in-licensing, joint ventures and collaborations.
- PURSUE STRATEGIC ACQUISITIONS. We intend to pursue strategic acquisitions to
complement our internal development and in-licensing efforts.
- EXPAND OUR INTERNATIONAL PRESENCE. We intend to continue expanding our
international presence by entering into strategic relationships and adding
staff in key locations such as Hong Kong, China, Switzerland, Italy, Greece,
Columbia and Chile, where we believe there are significant opportunities for
our products.
- ENHANCE AND EXPAND OUR EXISTING PRODUCTS. We intend to continue leveraging
our existing in-house drug and cosmetic formulation expertise to enhance and
expand our existing product lines.
GENERAL INFORMATION
OMP Acquisition Corporation was formed in California in October 1997 to purchase
substantially all of the assets and to assume the accounts payable and related
operating liabilities of WorldWide Product Distribution, Inc. and subsequently
changed its name to Obagi Medical Products, Inc. in December 1997. We
incorporated as OMP, Inc. in Delaware in November, 2000 and merged Obagi Medical
Products, Inc. into OMP, Inc. in January, 2001. When used in this prospectus,
"OMP, Inc.," "we," "us" and "the company" refer to OMP, Inc., Obagi Medical
Products, Inc. or OMP Acquisition Corporation, as applicable. Our principal
executive offices are located at 310 Golden Shore, Long Beach, California 90802
and our telephone number is (562) 628-1007. The website for the Obagi Nu-Derm
product line is WWW.OBAGI.COM. Information contained in our website is not part
of this prospectus. OMP, Inc., Obagi, Nu-Derm, Obagi Nu-Derm, Protocols, Obagi
Protocols, Obagi Blue Peel, Cffectives, Obagi-C, Kinaderm, Interlace-C, OMP
Tretinoin, Clear, Blender, Sunfader, Exfoderm, Action, Comfort Gel and Tolereen
are our trademarks. All other trademarks used in this prospectus are the
property of their respective owners.
2
THE OFFERING
Common stock offered......................... 4,500,000 shares
Common stock to be outstanding after the
offering................................... 18,942,750 shares
Use of proceeds.............................. To redeem approximately $19.2 million of
preferred stock, including accrued dividends;
to increase our sales and marketing efforts;
to fund potential acquisitions; to invest in
strategic collaborations; and to fund working
capital and other general corporate purposes.
Proposed Nasdaq National Market symbol....... OMPI
In the table above, the number of shares of common stock to be outstanding after
the offering is based on the number of shares outstanding as of September 30,
2000. This number excludes 1,082,700 shares of common stock issuable upon
exercise of outstanding options as of September 30, 2000, at a weighted average
exercise price of $1.50 per share.
Unless otherwise indicated, information in this prospectus assumes:
- Obagi Medical Products, Inc. has merged into OMP, Inc. prior to the closing
of the offering
- no exercise of the over-allotment option granted to the underwriters
3
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
THE FOLLOWING SUMMARIZES OUR CONSOLIDATED FINANCIAL DATA. AFTER FORMING OMP,
INC. ON OCTOBER 8, 1997, WE COMPLETED THE ACQUISITION OF WORLDWIDE PRODUCT
DISTRIBUTION, INC. ON DECEMBER 2, 1997.
WORLDWIDE
PRODUCT OMP, INC.
DISTRIBUTION, INC. ------------------------------------------------------------
------------------ ONE MONTH YEAR ENDED NINE MONTHS ENDED
ELEVEN ENDED DECEMBER 31, SEPTEMBER 30,
MONTHS ENDED DECEMBER 31, ------------------- ---------------------
DECEMBER 1, 1997 1997 1998 1999 1999 2000
------------------ -------------- -------- -------- ---------- --------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues..................... $10,397 $ 1,109 $17,017 $23,076 $16,256 $24,983
Cost of sales................ 2,693 256 3,448 4,189 3,108 5,243
------- ------- ------- ------- ------- -------
Gross profit................. 7,704 853 13,569 18,887 13,148 19,740
Operating expenses:
Selling, general and
administrative........... 6,926 851 12,605 14,419 10,041 18,094
Depreciation and
amortization............. 39 89 1,173 1,484 1,038 1,401
------- ------- ------- ------- ------- -------
Total operating expenses..... 6,965 940 13,778 15,903 11,079 19,495
------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 739 (87) (209) 2,984 2,069 245
Interest expense, net........ (1) 35 380 354 263 675
Provision (benefit) for
income taxes............... 36 1 1 (775) (634) 9
------- ------- ------- ------- ------- -------
Net income (loss)............ $ 704 (123) (590) 3,405 2,440 (439)
=======
Redeemable preferred stock
dividends.................. 132 1,634 1,631 1,225 1,207
------- ------- ------- ------- -------
Net income (loss) applicable
to common stockholders..... $ (255) $(2,224) $ 1,774 $ 1,215 $(1,646)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic...................... $ (0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
======= ======= ======= ======= =======
Diluted.................... $ (0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
======= ======= ======= ======= =======
Weighted average shares
outstanding:
Basic...................... 4,973 14,601 14,584 14,646 14,438
======= ======= ======= ======= =======
Diluted.................... 4,973 14,601 14,849 14,847 14,438
======= ======= ======= ======= =======
SEPTEMBER 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 293 $42,584
Working capital............................................. 1,506 43,797
Total assets................................................ 30,524 72,815
Notes payable and capital lease obligations, less current
portion................................................... 3,931 3,931
Redeemable preferred stock.................................. 19,177 --
Total stockholders' equity (deficit)........................ (1,417) 60,052
The as adjusted balance sheet data above reflects the sale of the
4,500,000 shares of common stock in this offering at an assumed initial public
offering price of $15.00 per share, less the underwriting discount and estimated
offering expenses, and the application of the estimated net proceeds from this
offering as described under "Use of Proceeds."
4
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE SHARES.
WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING CO-PROMOTION, CO-MARKETING,
DISTRIBUTION AND LICENSE AGREEMENTS THAT ALLOW US TO MARKET AND DISTRIBUTE SOME
OF OUR PRODUCTS.
We have entered into co-promotion, co-marketing, distribution or license
agreements for Cymetra, a human tissue product, OMP Tretinoin, a vitamin A
derivative, Kinaderm, a kinetin-based cream and lotion and the Cffectives and
Obagi-C vitamin C products. These agreements expire between 2003 and 2009 and do
not provide for automatic renewal. We cannot assure you that we will be able to
maintain our existing licenses on commercially reasonable terms, or at all. Our
co-promotion, co-marketing, distribution or license agreements typically subject
us to various minimum sales requirements, sublicensing and other obligations. If
we fail to comply with these requirements, we could lose all or a portion of our
rights under an agreement, such as exclusivity in a specified market. A loss of
a significant co-promotion, co-marketing, distribution or license agreement
could materially reduce our revenue and limit our growth potential.
WE CURRENTLY DEPEND ON THE OBAGI NU-DERM SYSTEM FOR A SUBSTANTIAL PORTION OF OUR
SALES AND SIGNIFICANT DECLINES IN SALES OF OBAGI NU-DERM COULD RESULT IN OUR
BEING UNPROFITABLE OR LESS PROFITABLE.
The Obagi Nu-Derm product line and related products accounted for approximately
99% of our total revenues for the year ended December 31, 1999 and 87% of our
total revenues for the nine months ended September 30, 2000. Any factor that
adversely affects the sale of products in the Obagi Nu-Derm system could
significantly decrease our sales and profits.
ANY FAILURE TO OBTAIN APPLICABLE U.S. AND FOREIGN REGULATORY APPROVALS OR TO
COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE U.S. AND FOREIGN COUNTRIES
WILL LIMIT OUR ABILITY TO MARKET AND SELL OUR PRODUCTS.
All of our products are subject to continued and comprehensive rules and
regulations promulgated by the U.S. Food and Drug Administration, or FDA, and by
state and foreign regulators. These laws require, among other things:
- manufacturing facilities in compliance with applicable regulations,
including adherence to current Good Manufacturing and Laboratory Practices
during production and storage
- control of research and testing of products, even after approval
- control of marketing activities, including advertising and labeling
If we fail to comply with applicable regulatory approval requirements as set
forth in this risk factor or the next three risk factors, a regulatory agency
may:
- send us warning letters
- impose fines and other civil penalties on us
- suspend our regulatory approvals, refuse to approve pending applications or
supplements to approved applications filed by us
- require us to recall products
- require us to notify physicians of labeling changes or product related
problems
- impose restrictions on our operations
- criminally prosecute us
If any of the above occur, our business, financial condition and results of
operations could suffer.
Many foreign countries in which our products are marketed have regulatory bodies
and requirements similar to those of the FDA. Furthermore, some countries do not
permit physicians to dispense products. Our failure to obtain necessary foreign
government approvals or to successfully comply with foreign regulations could
prevent us from selling our products outside of the United States.
In addition, we must comply with laws and regulations, such as pharmacy laws, in
the states
5
in which we operate. Any change in these laws that prohibit or restrict
physicians from dispensing products could result in us losing sales.
Furthermore, we may be required to incur significant costs in complying with
state laws and regulations.
We believe we are currently in compliance with government regulations applicable
to our products. For the nine months ended September 30, 2000 and the year ended
December 31, 1999, we spent approximately $259,000 and $176,000, respectively,
to monitor regulatory compliance of our products.
IF WE FAIL TO COMPLY WITH APPLICABLE MARKETING REGULATIONS, WE COULD BE REQUIRED
TO WITHDRAW OUR PRODUCTS FROM THE MARKET OR TO CEASE OUR MARKETING ACTIVITIES.
Before marketing any prescription drug, the FDA must provide its premarketing
approval of the product. All products that are considered cosmetics or
over-the-counter drugs that are not new drugs and which are generally recognized
as safe and effective for use by the FDA, do not require the FDA's premarketing
approval. We believe that some of our products, including Cffectives and
Obagi-C, as they are promoted and intended for use, are exempt from treatment as
new drugs and are not subject to premarketing approval by the FDA. The FDA,
however, could take a contrary position, and we could be required to seek FDA
approval of these products and the marketing of these products. We cannot assure
you that these products will not be subject to regulation in the future. We
could also be required to withdraw these products from the market.
All of our promotional materials and advertisements are subject to comprehensive
rules and regulations promulgated by the U.S. Federal Trade Commission, or FTC.
The FTC has authority to regulate the advertising of non-prescription drugs and
cosmetics, as well as general authority to prevent unfair or deceptive trade
practices. We cannot assure you that our promotional materials and
advertisements meet or will in the future continue to meet FTC rules and
regulations.
IF THE MANUFACTURERS OF OUR PRODUCTS FAIL TO COMPLY WITH APPLICABLE FDA
REGULATIONS, WE MAY NOT BE ABLE TO SELL SUCH PRODUCTS OR BE REQUIRED TO OBTAIN
ALTERNATIVE SOURCES OF SUPPLY.
The manufacture and sale of the Obagi Nu-Derm products, the Cymetra product line
and the OMP Tretinoin creams are subject to continuing FDA review. Manufacturers
of our products subject to regulation must continue to comply with the FDA's
current Good Manufacturing Practices, commonly known as cGMP, and foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation practices and procedures. In complying with cGMP and foreign
regulatory requirements, our third party manufacturers will be obligated to
expend time, money and effort in production, recordkeeping and quality control
to assure that our products meet applicable specifications and other
requirements. If our third-party contract manufacturers fail to comply with
these requirements, we would be subject to possible regulatory action and may be
limited in the jurisdictions in which we are permitted to sell our products.
The manufacturing facilities of our contract manufacturers are subject to
ongoing periodic inspection by the FDA, including unannounced inspections.
Although we currently utilize only FDA compliant manufacturers, we cannot assure
you that our third-party contract manufacturers will continue to meet all
applicable FDA regulations in the future. If any of our manufacturers fail to
maintain compliance with FDA regulatory requirements, we could be forced to seek
other manufacturers for our products, a process which could take time and be
expensive.
IF THE FDA ELECTS TO REGULATE CYMETRA AS A MEDICAL DEVICE, THE COSTS OF
DEVELOPING, MANUFACTURING AND MARKETING CYMETRA COULD BE INCREASED.
Cymetra, a micronized freeze-dried human tissue matrix, is advertised and
promoted for use in the correction of soft tissue deficits, such as acne or
other depressed scars, and to restore tissue loss from disease. LifeCell
Corporation, the supplier of Cymetra, has represented that Cymetra meets the
regulatory definition of transplanted human tissue. LifeCell has also
represented that Cymetra has not been manipulated in such a way that would
require regulation as a medical device. As a result, LifeCell has not sought a
determination
6
from the FDA as to whether Cymetra is a medical device. There is a risk that the
FDA could determine that Cymetra should be regulated as a medical device. If so,
the FDA could require us to:
- cease marketing and recall Cymetra already sold
- seek FDA approval for Cymetra
The process of obtaining FDA approval may be expensive, lengthy and
unpredictable. We anticipate that it could take from one to three years to
obtain such approval. We do not know if such approval could be obtained in a
timely fashion, or at all, or if the FDA would require extensive supporting
clinical data. In addition, the FDA also could seek to impose enforcement
sanctions for marketing Cymetra without FDA approval.
OUR RELIANCE ON CONTRACT MANUFACTURERS COULD ADVERSELY AFFECT OUR ABILITY TO
SUPPLY SUFFICIENT QUANTITIES AND DESIRED QUALITIES OF OUR PRODUCTS TO OUR
CUSTOMERS.
We do not manufacture any of our products. We rely on third-party contract
manufacturers to provide us with an adequate and reliable supply of our products
on a timely basis. Although we are currently looking for alternative suppliers,
except for the cosmetic components of our Obagi Nu-Derm line, we do not have
alternative sources of supply for our prescription Obagi Nu-Derm and Obagi Blue
Peel products. Our collaboration agreements limit us from obtaining alternative
sources of supply for our Cymetra, OMP Tretinoin, Kinaderm and vitamin C
products. Any loss of a manufacturer or any difficulties that could arise in the
manufacturing process, such as problems with capacity allocation, labor
relations, production quality or other aspects of the manufacturing process
could significantly affect our inventories. If any facility or equipment of our
manufacturers is damaged or destroyed, they may not be able to quickly or
inexpensively replace it. We cannot assure you that supply interruptions will
not occur or that our inventory will always be adequate. In the event any of our
suppliers are unable to fulfill our requirements for any reason, our business,
financial condition and results of operations would suffer.
OUR RELIANCE ON CONTRACT MANUFACTURERS COULD NEGATIVELY IMPACT OUR GROSS
MARGINS.
Our costs for manufacturing our products are established pursuant to purchase
orders. Because of the short-term nature of these arrangements, our expenses for
manufacturing are not fixed and could change from contract to contract and, in
some cases, price changes are permitted during the term of the contracts. If the
cost of production increases, our gross margins could be negatively impacted.
THE LOSS IN BUSINESS FROM OUR MAJOR INTERNATIONAL DISTRIBUTOR COULD REDUCE OUR
SALES AND PROFITABILITY.
One of our international distributors, Planet International, Inc., accounted for
approximately 8.4% and 12.2% of our total revenues for the year ended
December 31, 1999 and the nine months ended September 30, 2000, respectively. We
have no written agreement with Planet International, Inc., and it could
terminate our distribution relationship at any time. Although we historically
have not had a material distributor terminate its relationship with us, a
significant loss of business from Planet International, Inc. could require us to
find alternative distributors or distribution channels, as well as materially
reduce our revenue.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND ANY FAILURE TO MEET
FINANCIAL EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS COULD RESULT IN A
DECLINE IN OUR COMMON STOCK PRICE.
Our operating results have fluctuated in the past and we expect they will
fluctuate in the future. For example, we had a net loss of $1,646,000 for the
nine months ended September 30, 2000, compared to a net income of $1,215,000 for
the nine months ended September 30, 1999. The views held by security analysts
and investors regarding fluctuations in our financial results could cause our
common stock price to decline. Some of the factors that could cause our
operating results to fluctuate include:
- changes in the amount we spend to promote our products
- changes in the amounts we spend to develop, acquire or license new product
lines
7
- changes in regulatory classifications of our products
- changes in physician or patient acceptance of the use of physician-mediated
products
- changes in treatment practices of physicians who currently prescribe our
products
- delays between our expenditures to acquire new product lines or businesses
and the generation of revenues from those acquired products or businesses
- demand for and market acceptance of our products
- the development of new competitive products by others
- the timing, release and competitiveness of our products
- increases in the cost of raw materials used to manufacture our products
- the mix of products that we sell during any time period
- our responses to price competition
- securities class action or other litigation
- adverse changes in the level of economic activity in the United States and
other major regions in which we do business
If revenue declines in a period, our earnings will decline because many of our
expenses are relatively fixed in the short term. In particular, our selling,
general and administrative expenses do not fluctuate with variations in revenue
in a period.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MANAGE RECENT AND FUTURE GROWTH.
We recently experienced a period of rapid growth from both the expansion of our
sales and marketing force and the rights we have acquired to market and sell
products. For example, in the past twelve months, we have doubled the size of
our direct sales force and added four new product lines. This growth has placed
significant demands on our human and financial resources. We must continue to
improve our operational, financial and management information controls and
systems and effectively motivate, train and manage our employees to properly
manage this growth. Even if these steps are taken, we cannot be sure that our
potential future acquisitions of companies or rights to market and sell products
will be assimilated successfully into our business operations. If we do not
manage this growth effectively, maintain the quality of our products despite the
demands on our resources and retain key personnel, our business could be
negatively impacted.
OUR GROWTH MAY SUFFER IF WE DO NOT DEVELOP OR ACQUIRE RIGHTS TO NEW PRODUCTS AND
INTEGRATE THEM SUCCESSFULLY.
We depend on acquiring rights to products from others as our primary source for
new products. Risks in acquiring new products include the availability of new
products that we find attractive and that are complementary to our business and
the costs of acquiring or obtaining a license for these products. We often face
significant competition from other pharmaceutical companies in acquiring rights
to products, which makes it more difficult to find attractive products on
acceptable terms.
When we acquire or develop new products and product lines, we must be able to
integrate those products and product lines into our systems for marketing, sales
and distribution. If these products or product lines are not integrated
successfully, the potential for growth is limited. The new products we acquire
or develop could have channels of distribution, competition, price limitations
or marketing acceptance that are different from those of our current products.
As a result, we do not know whether we will be able to compete effectively and
obtain market acceptance in any new product categories. After acquiring or
developing a new product, we may need to significantly increase our sales force
and incur additional marketing, distribution and other operational expenses.
These additional expenses could negatively affect our gross margins and
operating results. In addition, many of these expenses could be incurred prior
to the actual distribution of new products. Because of this timing, if the new
products are not accepted by the market or if they are not competitive with
similar products distributed by others, the ultimate success of the acquisition
or development could be substantially diminished.
8
OUR GROWTH MAY SUFFER IF AN ECONOMIC DOWNTURN IN ANY OF OUR MAJOR MARKETS
INHIBITS PEOPLE FROM SPENDING THEIR DISPOSABLE INCOME ON SKIN HEALTH AND
RESTORATION PRODUCTS.
Our growth depends significantly on continued economic growth in the markets
where we sell our products. Because many treatments which use our products are
considered cosmetic in nature, they are typically paid directly to the physician
by the patient out of disposable income and are not subject to reimbursement by
third-party payors such as health insurance organizations. As a result, an
economic downturn in any of our major markets, such as the United States,
Europe, Japan and the Pacific Rim could have an adverse impact on our ability to
sell, or to maintain the price levels of, our products. Currently, the United
States and Japan are experiencing economic slowdowns.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND WE FACE INTENSE
COMPETITION FROM COMPANIES THAT HAVE SIGNIFICANTLY GREATER RESOURCES, AND THIS
COMPETITION COULD PREVENT US FROM MAINTAINING PROFITABILITY.
The market for skin health and restoration products is highly competitive and we
expect the intensity of competition to increase in the future as this market
grows. We also expect to encounter increased competition as we enter new markets
and as we attempt to penetrate existing markets with new products. Our principal
competitors are large, well-established companies in the fields of
pharmaceuticals, medical devices, cosmetics and health care. Our direct
competitors include the following:
- Allergan, Inc., which sells MD Forte alpha hydroxy acid skin creams and a
neuroblockade agent for injection
- Biomedic Clinical Care, which sells alpha hydroxy acid skin creams
- ICN Pharmaceuticals, Inc., which sells GlyDerm alpha hydroxy acid skin
creams and various hydroquinone creams
- Inamed Corporation, which sells Zyderm and Zyplast injectable collagen
implants
- Jan Marini Skin Research, Inc., which sells alpha hydroxy acid skin creams
- Various Johnson & Johnson divisions, which sell Retin-A tretinoin creams,
gels and solutions and alpha hydroxy acid skin creams
- Physician's Choice of Arizona, which sells Physician's Choice alpha hydroxy
acid skin creams
- SkinCeuticals, Inc., which sells Skin C and Primacy vitamin C products
Our indirect competitors consist of large cosmetic and consumer skin care
product manufacturers, including Estee Lauder, Helen Curtis Industries, Inc.,
L'Oreal S.A., Matrix Essentials, Inc., Maybelline, Inc., Procter & Gamble
Company, Revlon and Unilever N.V., all of which sell over-the-counter cosmetic
products.
OUR BUSINESS IS SUBJECT TO ECONOMIC, POLITICAL, REGULATORY AND OTHER RISKS
ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
Since we sell our products worldwide, our business is subject to risks
associated with conducting business internationally. Revenues originating
outside the United States, based upon the location of the end user, represented
approximately 25% and 26% of our total revenues in the year ended December 31,
1999 and the nine months ended September 30, 2000, respectively. We anticipate
that revenue from international operations will continue to represent a
substantial portion of our total revenue. In addition, a number of our suppliers
are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:
- difficulties in compliance with foreign laws and regulations
- changes in foreign regulations and customs
- changes in foreign currency exchange rates and currency controls
- changes in a specific country's or region's political or economic
environment
- limited protection of intellectual property rights in some countries
- trade protection measures, import or export licensing requirements or other
restrictive actions by the U.S. or foreign governments
- potentially negative consequences from changes in tax laws
- difficulties associated with staffing and managing foreign operations
- longer accounts receivable cycles in some countries
- differing labor regulations
9
IF WE ARE UNABLE TO EFFECTIVELY SECURE AND PROTECT OUR TRADEMARKS, COPYRIGHTS,
PATENTS AND OTHER INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO PREVENT THIRD
PARTIES FROM USING OUR INTELLECTUAL PROPERTY, WHICH COULD IMPAIR OUR ABILITY TO
COMPETE EFFECTIVELY IN OUR MARKETS.
We believe that the protection of our trademarks and service marks, especially
those related to our core products, such as Obagi, Obagi Nu-Derm, Obagi Blue
Peel, Cffectives, Kinaderm, OMP Tretinoin, Protocols, Obagi-C and Interlace-C,
is an important factor in product recognition and in maintaining or increasing
our market share. If we do not adequately protect our rights in our various
trademarks and service marks from infringement, any goodwill which has been
developed in those marks could be lost or impaired. If the marks we use are
found to infringe upon the trademark or service mark of another company, we
could be forced to quit using those marks and, as a result, we could lose any
goodwill that has been developed in those marks and could be liable for damages
caused by any infringement.
We own four U.S. patents, all of which expire between 2006 and 2011. In
addition, we own one foreign patent application. These patents and patent
application may be subject to claims of rights by third parties. If there are
conflicting claims to the same patent or patent application, we may not prevail
and, even if we do have some rights in a patent or patent application, those
rights may not be sufficient for the marketing and distribution of products
covered by the patent or patent application.
If any of the patents or patent applications in which we have an interest are
challenged as to their validity or enforceability, our business may suffer
potentially significant harm. The cost of responding to these challenges and the
inherent costs to defend the validity of our patents, including the prosecution
of infringements and the related litigation, could be substantial. Such
litigation also could require a substantial commitment of management's time.
We require all of our employees, consultants and advisors to enter into
confidentiality agreements prohibiting them from taking our proprietary
information. Nevertheless, these agreements may not provide meaningful
protection of our trade secrets and proprietary know-how if they are used or
disclosed. Despite all of the precautions we may take, people who are not
parties to confidentiality agreements may obtain access to our trade secrets or
know-how. In addition, others may independently develop similar or equivalent
trade secrets or know-how.
WE DO NOT HAVE LONG-TERM EMPLOYMENT AGREEMENTS WITH OUR SENIOR EXECUTIVES AND IF
ANY OF THEM LEAVE AND WORK FOR A COMPETITOR, OUR BUSINESS COULD SUFFER.
We are dependent on our senior executives because they have significant
expertise in the physician office-based skin care market, maintain important
relationships with key physicians and have been instrumental in establishing and
executing our business plan. We currently have employment agreements with our
senior executives that may be terminated by either us or the executive within
the next six months. Although these agreements contain noncompetition covenants,
we cannot be certain that they will be enforceable. If any of our senior
executives leave and work for a competitor, our business could suffer.
IF WE BECOME SUBJECT TO A PRODUCT LIABILITY CLAIM, WE MAY NOT HAVE ADEQUATE
INSURANCE COVERAGE AND THE CLAIM COULD ADVERSELY AFFECT OUR BUSINESS OR THE
REPUTATION OR MARKETABILITY OF OUR PRODUCTS.
The development, sale and use of our products expose us to the risk of damages
from product liability claims. For example, in the past, patients have alleged
that our products, such as the acid added to the Obagi Blue Peel, have caused
harm. Any losses that we may suffer from future liability claims and the effect
that any product liability litigation may have upon the reputation and
marketability of our products could adversely affect our business, financial
condition and results of operations. Any product liability claims could require
us to spend significant time and money in litigation and may subject us to
significant damages. We currently maintain product liability insurance for
coverage of our
10
products up to $15,000,000 in the aggregate. However, our current insurance
coverage might not be sufficient to cover damages or claims. Furthermore, we may
not be able to obtain or maintain insurance in the future at satisfactory rates
or in adequate amounts to protect us against any product liability claims.
YOUR INTERESTS AS HOLDERS OF OUR COMMON STOCK MAY CONFLICT WITH THOSE OF OUR
CONTROLLING STOCKHOLDER.
As of the date of this prospectus, Stonington Capital Appreciation 1994 Fund,
L.P., or Stonington, beneficially owned 62.6% of the outstanding shares of our
voting capital stock and, after the offering, will continue to own approximately
47.8%, in each case, without giving effect to the conversion of outstanding
options and to the exercise of the underwriters' over-allotment options. As a
result, Stonington has and will continue to have control over the outcome of
matters requiring stockholder approval, including the power to:
- elect all of our directors and the directors of our subsidiaries
- amend our certificate or incorporation or by-laws
- approve or prevent mergers, consolidations or the sale of all or
substantially all of our assets or our subsidiaries' assets or other
purchases of our common stock that could give holders of our common stock
the opportunity to realize a premium over the then-prevailing market price
of their shares of common stock
Stonington will therefore be able to prevent or cause a change of control of the
company. Currently, two of our directors, Robert F. End and Bradley J. Hoecker
serve on Stonington's management committee. Stonington's control over us and our
subsidiaries, and its ability to prevent or cause a change in control relating
to the company, may delay or prevent a change in control of the company, which
could adversely affect the market price of the common stock.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AND OUR
RIGHT TO ISSUE PREFERRED STOCK, MAY DISCOURAGE A THIRD PARTY FROM MAKING A
TAKEOVER OFFER THAT COULD BE BENEFICIAL TO US AND OUR STOCKHOLDERS.
Our certificate of incorporation and bylaws contain provisions which could delay
or prevent an attempt by a third party to replace members of our board of
directors or our management. Our certificate of incorporation allows our board
of directors to issue shares of preferred stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the stockholders. Our board of directors consists of three classes,
with the directors in each class serving a three-year term. As a result, it may
be difficult for a third party to acquire control of our board of directors.
Our bylaws do not permit our stockholders to call a special meeting of
stockholders. The bylaws also require that stockholders give advance notice to
our secretary of any nominations for director or other business to be brought by
stockholders at any stockholders' meeting. These provisions may delay or prevent
changes of control or management.
Further, we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. Under this law, if anyone becomes an
"interested stockholder" in the company, we may not enter a "business
combination" with that person for three years without special approval.
These provisions could discourage a third party from making a take-over offer
and could delay or prevent a change of control.
OUR SHARE PRICE MAY DECLINE DUE TO THE LARGE NUMBER OF SHARES ELIGIBLE FOR
FUTURE SALE.
All of our existing stockholders have entered into lock-up agreements with the
underwriters that restrict them from disposing of all or any portion of their
shares for 180 days after the date of the prospectus without the prior written
consent of CIBC World Markets Corp. However, CIBC World Markets Corp. may
release all or any portion of these shares from the restrictions in the lock-up
agreements. The release of any lock-up will be considered on a case-by-case
basis. Factors in deciding whether to release shares may include the length of
time before the
11
lock-up expires, the number of share involved, the reason for the requested
release, market conditions, the trading price of our common stock, historical
trading volumes of our common stock and whether the person requesting release is
an officer, director or affiliate of OMP, Inc. Sales of substantial amounts of
our common stock after the offering, or the possibility of such sales, could
adversely affect the market price of our common stock and impede our ability to
raise capital through the issuance of equity securities.
After this offering we will have 18,942,750 outstanding shares of common stock,
and we will have reserved 1,082,700 shares of our common stock for issuance
pursuant to stock option plans, of which 246,636 shares will be subject to
vested options. After the offering, 4,542,750 shares of common stock will be
freely tradable without restriction or further registration under the federal
securities laws. The remaining 14,400,000 shares of outstanding common stock,
representing approximately [76.0%] of our outstanding common stock upon
completion of the offering, will be available for future sale subject to
restrictions on the timing, manner and volume of sales imposed by the Securities
Act of 1933, or otherwise generally, upon expiration of the lock-up agreements
described above.
We intend to file a registration statement on Form S-8 to register approximately
1,350,000 shares of our common stock that are reserved for issuance under our
existing stock option plans, that are not so registered. Once registered, these
shares will be freely tradable without restriction or further registration under
the federal securities laws, unless purchased by one of our affiliates.
WE HAVE BROAD DISCRETION OVER THE PROCEEDS WE WILL RECEIVE IN THIS OFFERING AND
WE MAY INVEST OR SPEND THE PROCEEDS IN WAYS WITH WHICH YOU MAY NOT AGREE OR IN
WAYS THAT MAY NOT YIELD A FAVORABLE RETURN.
We will retain a significant amount of discretion over the application of the
net proceeds we will receive in this offering, as well as over the timing of
expenditures. A large portion of the proceeds is allocated for working capital
and other general corporate purposes and we have not determined how we will use
these proceeds. The failure of our management to use such funds effectively
could result in significant losses. You should read "Use of Proceeds" for more
information on our intended application of the net proceeds from this offering.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
COMMON STOCK IF YOU PURCHASE COMMON STOCK IN THE OFFERING.
We expect the initial public offering price to be substantially higher than the
net tangible book value per share of the common stock. At an assumed initial
public offering price of $15.00, which is the midpoint of the initial public
offering price range set forth on the cover of this prospectus, you will pay a
price per share that substantially exceeds our tangible assets after subtracting
our liabilities. Furthermore, investors in this offering will have contributed
94.4% of our total equity funds, but will own 23.8% of our outstanding shares.
You may incur additional dilution if we issue additional shares of common stock
or if the holders of outstanding options or warrants on our common stock
exercise those options or warrants.
12
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
based on our current expectations, assumptions, estimates and projections about
us and our industry. These forward-looking statements include statements about
our plans, objectives, expectations and intentions and other statements
contained in this prospectus that are not historical facts. You can find these
statements under "Prospectus Summary, " "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus.
We typically identify forward-looking statements by using terms such as "may,"
"will," "should," "could," "would," "expect," "intend," "plan," "anticipate,"
"believe," "seek," "estimate," "predict," "potential," "continue" and similar
words, although we express some forward-looking statements differently. You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
- failure to successfully market and sell our products
- failure to develop, acquire or in-license new products
- competition
- changes in industry practice and regulatory enviroment for our products
- general economic conditions
- failure to satisfy performance obligations
- failure to consummate and integrate acquisitions
You should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements. These forward-looking statements speak only as of the date of this
prospectus and we caution potential investors not to place undue reliance on
these statements.
13
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common stock we
are offering would be approximately $61.5 million. If the underwriters exercise
in full their option to purchase an additional 675,000 shares, the net proceeds
from the offering will be approximately $70.9 million. "Net proceeds" are what
we expect to receive after paying the underwriting discounts and other expenses
of the offering. For the purpose of estimating the net proceeds, we are assuming
an initial public offering price of $15.00.
We intend to use the proceeds of this offering for:
- redeeming approximately $19.2 million of our redeemable preferred stock,
including accrued dividends
- increasing our sales and marketing efforts
- possible acquisitions of businesses and technologies
- investments in joint ventures and strategic collaborations
- working capital and other general corporate purposes
At September 30, 2000, we had $19.2 million in outstanding redeemable preferred
stock, including accrued but unpaid dividends. We intend to use a portion of the
proceeds raised in this offering to redeem all of the preferred stock.
Other than redemption of our preferred stock, we have not determined the amount
of net proceeds to be used for each of these purposes. Accordingly, we will have
broad discretion to use the proceeds as we see fit. Pending these uses, we
intend to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We anticipate that we will retain earnings to support operations and to finance
the expansion of our business. Therefore we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Our future dividend
policy will depend on our earnings, capital requirements, financial condition,
the requirements of any financing agreements to which we may be a party and on
other factors considered relevant by our board of directors.
14
CAPITALIZATION
The following table shows as of September 30, 2000:
- our actual capitalization
- our as adjusted capitalization reflecting:
- the completion of the offering at an initial public offering price of
$15.00 per share, net of estimated underwriting discounts and commissions
- the redemption of 146,200 shares of redeemable preferred stock and accrued
dividends on this preferred stock
SEPTEMBER 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Short-term debt:
Notes payable and capital lease obligation, current....... $ 2,300 $ 2,300
Line of credit............................................ 1,498 1,498
------- -------
Total short-term debt................................... 3,798 3,798
------- -------
Total long-term debt........................................ 3,931 3,931
Redeemable preferred stock.................................. 19,177 --
Shareholders' equity (deficit)
Common stock, par value $0.001 per share, 100,000,000
shares authorized; 14,442,750 shares issued and
outstanding, actual; 18,942,750 shares issued and
outstanding, as adjusted................................ 14 19
Additional paid-in capital................................ 1,313 62,777
Retained earnings (deficit)............................... (1,079) (1,079)
------- -------
Deferred stock compensation............................... (1,679) (1,679)
Accumulated other comprehensive income.................... 14 14
------- -------
Total stockholders' equity (deficit).................... (1,417) 60,052
------- -------
Total capitalization.................................. $21,691 $67,781
======= =======
This table does not include 1,082,700 shares of common stock issuable upon
exercise of options outstanding as of September 30, 2000, at a weighted average
exercise price of $1.50 per share.
15
DILUTION
Our net tangible book value as of September 30, 2000 was approximately $(17.1
million), or approximately $(1.18) per share of common stock. "Net tangible book
value per share" is the amount of total tangible assets less total liabilities
and redeemable preferred stock, divided by the number of shares of common stock
outstanding at that date. After giving effect to adjustments related to the
offering, our pro forma net tangible book value as of September 30, 2000 would
have been $44.4 million or $2.34 per share. The adjustments made to determine
pro forma net tangible book value per share are the following:
- the sale of 4,500,000 shares of common stock in this offering at an assumed
initial public offering price of $15.00 per share and after deducting the
estimated underwriting discounts and other offering expenses
- the redemption of approximately $19.2 million of our redeemable preferred
stock, including accrued dividends.
The following table illustrates the pro forma increase in net tangible book
value of $ per share and the dilution to new investors:
Assumed initial public offering price per share............. $ 15.00
--------
Net tangible book value per share as of September 30,
2000...................................................... $ (1.18)
--------
Increase in net tangible book value per share attributable
to new investors........................................ 3.52
--------
Pro forma net tangible book value per share as of
September 30, 2000 after giving effect to this offering... 2.34
--------
Dilution per share to new investors in the offering....... $ 12.66
========
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the initial public offering price will be $15.00 per share.
TOTAL GROSS
SHARES PURCHASED CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
Existing stockholders.................... 14,442,750 76.2% $ 4,011,875 5.6% $ 0.28
New investors............................ 4,500,000 23.8 67,500,000 94.4 $15.00
---------- ----- ----------- ----- ------
Total.................................. 18,942,750 100.0% $71,511,875 100.0%
========== ===== =========== =====
In the discussion and tables above, we assume no exercise of the underwriters'
over-allotment and no exercise of stock options outstanding as of September 30,
2000. As of September 30, 2000, there were options outstanding to purchase a
total of 1,082,700 shares of common stock at a weighted average exercise price
of $1.50 per share. To the extent outstanding options are exercised and the
underlying shares are issued, there will be further dilution to new investors.
16
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical financial data. You should read carefully
the financial statements included in this prospectus, including the notes to the
consolidated financial statements. The selected data in this section is not
intended to replace the consolidated financial statements. We derived the
balance sheet data as of December 31, 1997, 1998 and 1999 and the statement of
operations data for the years ended December 31, 1998 and 1999, for the one
month ended December 31, 1997 and the eleven months ended December 1, 1997 from
our or our predecessor company's audited consolidated financial statements. The
statements have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included elsewhere in this prospectus. The balance sheet
data as of December 31, 1996 and the statement of operations data for the year
ended December 31, 1996 were derived from WorldWide Product Distribution, Inc.'s
audited financial statements, which are not included in this prospectus. The
balance sheet data as of December 31, 1995 and the statement of operations data
for the year ended December 31, 1995 were derived from the unaudited
consolidated financial statements of WorldWide Product Distribution, Inc. which
are not included in this prospectus. The balance sheet data as of September 30,
2000 and the statement of operations data for the nine months ended
September 30, 1999 and September 30, 2000 were derived from our unaudited
consolidated financial statements and, in the opinion of management, reflect and
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of such results. The results of operations for the nine
months ended September 30, 2000 are not necessarily indicative of results to be
expected for any future period.
WORLDWIDE PRODUCT
DISTRIBUTION, INC. OMP, INC.
-------------------------------------- ---------------------------------------------------------
NINE MONTHS
YEAR ENDED ELEVEN ONE MONTH YEAR ENDED ENDED
DECEMBER 31, MONTHS ENDED ENDED DECEMBER 31, SEPTEMBER 30,
---------------------- DECEMBER 1, DECEMBER 31, ------------------- -------------------
1995 1996 1997 1997 1998 1999 1999 2000
----------- -------- ------------- ------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues..................... $4,954 $7,621 $10,397 $1,109 $17,017 $23,076 $16,256 $24,983
Cost of sales................ 714 1,952 2,693 256 3,448 4,189 3,108 5,243
------ ------ ------- ------ ------- ------- ------- -------
Gross profit................. 4,240 5,669 7,704 853 13,569 18,887 13,148 19,740
Operating expenses:
Selling, general and
administrative........... 2,605 3,802 6,926 851 12,605 14,419 10,041 18,094
Depreciation and
amortization............. 23 39 89 1,173 1,484 1,038 1,401
------ ------ ------- ------ ------- ------- ------- -------
Total operating expenses..... 2,605 3,825 6,965 940 13,778 15,903 11,079 19,495
------ ------ ------- ------ ------- ------- ------- -------
Income (loss) from
operations................. 1,635 1,844 739 (87) (209) 2,984 2,069 245
Interest expense, net........ (30) (8) (1) 35 380 354 263 675
------ ------ ------- ------ ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes............... 1,665 1,852 740 (122) (589) 2,630 1,806 (430)
Provision (benefit) for
income taxes............... 29 36 1 1 (775) (634) 9
------ ------ ------- ------ ------- ------- ------- -------
Net income (loss)............ $1,665 $1,823 $ 704 (123) (590) 3,405 2,440 (439)
====== ====== =======
Redeemable preferred stock
dividends.................. 132 1,634 1,631 1,225 1,207
------ ------- ------- ------- -------
Net income (loss) applicable
to common stockholders..... $ (255) $(2,224) $ 1,774 $ 1,215 $(1,646)
====== ======= ======= ======= =======
Net income (loss) per share:
Basic...................... $(0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
====== ======= ======= ======= =======
Diluted.................... $(0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
====== ======= ======= ======= =======
Weighted average shares
outstanding:
Basic...................... 4,973 14,601 14,584 14,646 14,438
====== ======= ======= ======= =======
Diluted.................... 4,973 14,601 14,849 14,847 14,438
====== ======= ======= ======= =======
- ---------------------------
WORLDWIDE PRODUCT
DISTRIBUTION, INC. OMP, INC.
---------------------- -----------------------------------------------
DECEMBER 31, DECEMBER 31,
---------------------- ------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
----------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 411 $ 400 $2,814 $ 1,276 $ 650 $ 293
Working capital........................................ 1,500 984 2,302 1,107 132 1,506
Total assets........................................... 1,608 2,116 21,258 20,843 25,449 30,524
Notes payable and capital lease obligations, less
current portion...................................... 4,033 2,823 2,449 3,931
Redeemable preferred stock............................. 14,620 16,666 17,970 19,177
Stockholders' equity (deficit)......................... 1,502 1,031 (192) (2,221) (594) (1,417)
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH THE CONSOLIDATED FINANCIAL
STATEMENTS, ACCOMPANYING NOTES AND THE OTHER FINANCIAL INFORMATION INCLUDED IN
THIS PROSPECTUS.
OVERVIEW
We are a leading specialty pharmaceutical company that develops, markets and
sells products for physician-mediated skin health and restoration. We currently
sell our six core product lines primarily to office-based dermatologists and
plastic surgeons in the United States through our 54-person direct sales force
and in 29 countries outside the United States, primarily through distributors.
We were formed by an affiliate of Stonington Capital Appreciation 1994 Fund,
L.P. in October 1997 to purchase substantially all of the assets, properties and
rights used in the operation of the business of WorldWide Product Distribution,
Inc. We purchased substantially all of the assets and assumed the accounts
payable and related operating liabilities of WorldWide Product Distribution,
Inc. effective December 2, 1997. In 1997, there were eleven months of operations
under WorldWide Product Distribution, Inc. and one month of operation following
the acquisition.
The purchase price for this acquisition, consisted of a $17 million cash payment
and a note payable of $3 million, subject to a final price determination. We
also paid transaction costs of $2.1 million. We accounted for this transaction
in accordance with APB 16, "Business Combinations," and EITF 88-16, "Basis in
Leveraged Buyout Transactions." Goodwill and other intangibles of $15.8 million
are being amortized straight-line over a range of four to twenty years. The cash
portion of the purchase price was financed in part through the issuance of
$14.6 million of our redeemable preferred stock, with cumulative quarterly
dividends accruing at 11% per annum, which will be redeemed with a portion of
the proceeds of the offering.
The primary product line we acquired from WorldWide Product Distribution, Inc.
was the Obagi Nu-Derm line, which accounted for substantially all of our product
revenue through 1999. Beginning in the fourth quarter of 1999, we began
expanding our product offerings. In the fourth quarter of 1999, we acquired the
international rights to market Kinaderm and we launched this product in
May 2000. In the first quarter of 2000, we acquired the rights to market
Cffectives, OMP Tretinoin and Cymetra and launched these products to the
domestic market in June 2000. In March 2000, we doubled our direct sales force
to 54 people in order to market our expanded product line to a larger percentage
of the target physician market. Additionally, we invested in advertising and
promotion costs for the launch of the new product lines in the second and third
quarters of 2000. These expenses have preceded the anticipated growth in
revenues attributable to our new products.
We are primarily focused on the development and marketing of our products. Third
party vendors manufacture all of the products we sell. Cost of sales primarily
includes product cost from our manufacturers, as well as royalty and freight
costs.
Selling, general and administrative expenses include marketing and advertising
expenses as well as research and development expenses and compensation expense
related to stock options.
Interest expense, net is comprised of interest related to our term loans,
revolving line of credit and shared appreciation agreement with Imperial Bank,
interest on subordinated notes and capitalized lease payments, offset by
interest income on cash balances.
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain consolidated
statement of operations data reflected as a percentage of revenues:
WORLDWIDE OMP, INC.
PRODUCT -----------------------------------------------------------------------
DISTRIBUTION, INC. NINE MONTHS
------------------ YEAR ENDED ENDED
ELEVEN MONTHS ONE MONTH DECEMBER 31, SEPTEMBER 30,
ENDED ENDED ---------------------- ----------------------
DECEMBER 1, 1997 DECEMBER 31, 1997 1998 1999 1999 2000
------------------ ------------------ -------- -------- -------- --------
(UNAUDITED)
Revenues........................ 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0%
Cost of sales................... 25.9 23.1 20.3 18.1 19.1 21.0
----- ----- ----- ----- ----- -----
Gross profit.................. 74.1 76.9 79.7 81.9 80.9 79.0
Selling, general and
administrative expenses....... 66.6 76.7 74.0 62.6 61.8 72.4
Depreciation and amortization... 0.4 8.0 6.9 6.4 6.4 5.6
----- ----- ----- ----- ----- -----
Income (loss) from
operations.................. 7.1 (7.8) (1.2) 12.9 12.7 1.0
Interest expense, net........... -- 3.2 2.2 1.5 1.6 2.7
----- ----- ----- ----- ----- -----
Income (loss) before provision
for income taxes............ 7.1 (11.0) (3.4) 11.4 11.1 (1.7)
Income tax provision
(benefit)..................... 0.3 0.1 0.0 (3.4) (3.9) 0.1
----- ----- ----- ----- ----- -----
Net income (loss)............... 6.8% (11.1)% (3.4)% 14.8% 15.0% (1.8)%
===== ===== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Our revenues increased $8.7 million, or 53%, to $25.0 million in the
first nine months of 2000 from $16.3 million in the same period of 1999.
Increased sales of the Nu-Derm line, particularly for international sales,
accounted for approximately $5.5 million of the increase. Sales prices per unit
for the Nu-Derm line were generally constant from 1999 to 2000, with volume and
mix changes within the product line accounting for most of the increase. The
Kinaderm line was launched to foreign customers in May 2000. Additionally, the
Cffectives, OMP Tretinoin and Cymetra lines were all launched in June 2000. The
introduction of these new lines accounted for $3.2 million of the total increase
of $8.7 million. Sales of the Nu-Derm line and the new product lines accounted
for 87% and 13% of revenues in the first nine months of 2000, respectively.
COST OF SALES. Cost of sales increased $2.1 million, or 68%, to $5.2 million in
the first nine months of 2000 from $3.1 million in the same period of 1999. As a
percentage of revenue, cost of sales increased to 21% in the first nine months
of 2000 from 19% in the same period in 1999. This increase was primarily due to
the increase in revenues from the launch of the relatively lower margin
Kinaderm, Cffectives and OMP Tretinoin product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense increased $8.1 million, or 80%, to $18.1 million in the first nine
months of 2000 from $10.0 million in the same period of 1999. Of the
$18.1 million in selling, general and administrative expense in the first nine
months of 2000, $7.6 million was selling expense, $4.3 million was marketing
expense, $651,000 was research and development expense and $5.5 million was
general and administrative expense. Of the total $10.0 million in selling,
general and administrative expense in the first nine months of 1999,
$4.3 million was selling expense, $1.4 million was marketing expense, $748,000
was research and development expense and $3.6 million was general and
administrative expense.
19
Selling expense increased $3.3 million, or 77.3%, to $7.6 million in the first
nine months of 2000 from $4.3 million in the first nine months of 1999. Selling
expense is primarily composed of domestic field sales personnel and supervision.
In April 2000, we doubled the size of our direct sales force to 54 persons to
support the increased demand for Nu-Derm products as well as the domestic launch
of the Cymetra, vitamin C and tretinoin product lines in June 2000. These
additional direct sales sales personnel were sourced through a contract sales
organization and are employees of the contract sales organization.
Marketing expense increased $2.9 million, or 206%, to $4.3 million in the first
nine months of 2000 from $1.4 million in the first nine months of 1999, due
primarily to the advertising and promotion costs associated with the launch of
the Cymetra, vitamin C and tretinoin product lines in June 2000.
Research and development expense declined $97,000, or 12.9%, to $651,000 in the
first nine months of 2000 from $748,000 in the first nine months of 1999.
Research and development expense is primarily composed of staff expense for
development of and testing for internally developed products largely for the
Nu-Derm product line. The decline in research and development expense
represented normal fluctuations in the timing of testing expenses for new
products within the Nu-Derm product line.
General and administrative expense increased $1.9 million, or 53.4%, to $5.5
million in the first nine months of 2000 from $3.6 million in the first nine
months of 1999. This increase was due primarily to increased office and
operations staff expense, rents for a new distribution center in Torrance,
California, a new retail location in Cupertino, California and an office in
Paris, as well as travel, depreciation, and management fees. These management
fees were incurred to affiliates of our stockholders in the amounts of $675,239
and $501,435 for the nine months ended September 30, 2000 and September 30,
1999, respectively. Our obligation to pay these management fees terminates upon
the closing of this offering.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$363,000, or 35%, to $1.4 million in the first nine months of 2000 from
$1.0 million in the same period of 1999. This increase was primarily due to the
amortization of intangibles related to the acquisition of marketing rights
between June 1, 1999 and March 31, 2000, including certain Asian and European
distribution rights for Nu-Derm, and rights to market Kinaderm and Cymetra.
INTEREST EXPENSE, NET. Interest expense, net increased by $412,000, or 157%, to
$675,000 in the first nine months of 2000 from $263,000 in the same period of
1999. This increase was due primarily to the increase in March 2000 in total
debt outstanding to Imperial Bank, costs associated with the shared appreciation
agreement with Imperial Bank, and the subordinated note issued to Maron Nu-Tech
in connection with the acquisition of certain Asian distribution rights for
Nu-Derm in June 1999.
PROVISION (BENEFIT) FOR INCOME TAXES. Income tax expense (benefit) totaled
$8,000 and ($634,000) for the first nine months of 2000 and the first nine
months of 1999, respectively. The income before provision for income taxes was
$431,000 in the first nine months of 2000 and $1.8 million in the first nine
months of 1999. As a result of the acquisition of the assets of WorldWide
Product Distribution, Inc. in 1997, the purchase price assigned to goodwill
differed for financial reporting and tax purposes by $3.8 million, resulting in
a deferred tax asset, which was fully offset by a valuation allowance in 1997
and 1998. The deferred tax asset valuation allowance was reversed in 1999
resulting in the income tax benefit. The primary component of the reversal
related to the goodwill difference.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased $6.1 million, or 36%, to $23.1 million in 1999 from
$17.0 million in 1998. Domestic revenue increased $4.1 million, or 31%, to
$17.3 million in 1999 from $13.2 million in 1998 on the strength of increased
sales of Nu-Derm products to dermatologists and plastic surgeons in the United
States. There was a price increase on domestic Nu-Derm products of approximately
12% effective September 1998 and the balance of the revenue increase from 1998
to 1999 represented
20
volume increases. International revenues increased $2.0 million, or 53%, to
$5.8 million in 1999 from $3.8 million in 1998. This increase was primarily due
to increased sales to Asian distributors following the acquisitions of
distribution rights to Nu-Derm in June 1999. Other factors that contributed to
the increase in international revenues in 1999 were the September 1999 startup
of a European subsidiary for direct sales to end consumers in France and the
Benelux countries, as well as the acquisition as of October 1, 1999 of our
German subsidiary for direct sales to physicians in Germany. International
revenues as a percentage of total sales increased to 25% in 1999 from 22% in
1998.
COST OF SALES. Cost of sales increased $0.8 million, or 24%, to $4.2 million in
1999 from $3.4 million in 1998. Cost of sales declined to 18% of revenue in 1999
from 20% of revenue in 1998 due primarily to an improved product mix, as well as
a price increase for our products which became effective on September 1, 1998.
There were no significant cost changes for individual products in the Nu-Derm
line in 1999 relative to 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense increased by $1.8 million, or 14.4%, to $14.4 million in 1999 from $12.6
million in 1998. Of the $14.4 million selling, general and administrative
expense in 1999, $6.1 million was selling expense, $2.3 million was marketing
expense, $0.9 million was research and development expense and $5.1 million was
general and administrative expense. Of the total $12.6 million selling, general
and administrative expense in 1998, $5.1 million was selling expense, $1.9
million was marketing expense, $1.2 million was research and development expense
and $4.4 million was general and administrative expense.
Selling expense increased $1.0 million, or 19.6%, to $6.1 million in 1999 from
$5.1 million in 1998. This increase was due primarily to increased staff
expense, revised and upgraded sales promotional literature and increased
consulting expenses for the Nu-Derm product line. Additionally, there was
incremental selling expenses for the startup in mid-1999 for our French
subsidiary.
Marketing expense increased $0.4 million, or 21.1%, to $2.3 million in 1999 from
$1.9 million in 1998. This increase was due primarily to additional staff
expense for product managers, the establishment of a website, consulting expense
for international markets, staff expense for a skin care center and redesigned
product packaging for the Nu-Derm line.
Research and development expense decreased $217,000, or 18.1%, to a level of
$944,000 in 1999 from $1.2 million in 1998. This decrease was due primarily to a
reduction in the level of clinical testing expense for the Nu-Derm product line.
General and administrative expense increased $0.7 million, or 15.9%, to $5.1
million in 1999 from $4.4 million in 1998. The increase was primarily due to
increased costs associated with the establishment of a European subsidiary,
additional operations and support personnel in the United States and personnel
acquisition costs including search fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.3 million, or 25%, to $1.5 million in 1999 from $1.2 million in 1998. The
primary reason for the increase was the acquisitions of the rights to
proprietary formulations for a line of skin care products in 1998 for
$0.3 million, as well as the acquisitions of the distribution rights to market
the Nu-Derm line to certain geographical areas in Asia, Germany, Austria and
Switzerland for a total of $2.1 million in 1999. These distribution rights and
rights to proprietary formulations are being amortized on the straight-line
method over their useful lives, which range from 3 to 10 years.
INTEREST EXPENSE, NET. Interest expense, net declined $27,000, or 7%, to
$354,000 in 1999 from $381,000 in 1998. Net interest expense declined primarily
as a result of lower subordinated note balances during 1999 due to scheduled
repayments.
PROVISION (BENEFIT) FOR INCOME TAXES. Income tax expense (benefit) totaled
($774,000) in 1999 and $1,000 in 1998. The income before provision for income
taxes increased to $2.6 million in 1999 from a pre-tax
21
loss of $590,000 in 1998. The net total income tax expense (benefit) for 1999
was ($774,000), of which current tax expense was $734,000 and the deferred tax
(benefit) was ($1.5 million).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE ONE MONTH PERIOD ENDING
DECEMBER 31, 1997 AND THE ELEVEN MONTH PERIOD ENDING DECEMBER 1, 1997
The following two paragraphs compare the revenues and cost of sales of OMP, Inc.
for 1998 to the pro forma combined revenues and cost of sales of OMP, Inc. for
the period from December 2, 1997 to December 31, 1997 and of WorldWide Product
Distribution, Inc. for the period from January 1, 1997 to December 1, 1997. OMP,
Inc. was formed on October 8, 1997; however, operations commenced on
December 2, 1997.
PRO FORMA COMBINED REVENUES. Revenues increased $5.5 million, or 48%, to
$17.0 million in 1998 from $11.5 million for the pro forma combined twelve
months ending December 31, 1997. This increase was primarily due to increased
sales of Nu-Derm products and, to a lesser extent, to a sales price increase on
the Nu-Derm products.
PRO FORMA COMBINED COST OF SALES. Cost of sales increased $500,000, or 17%, to
$3.4 million in 1998 from $2.9 million for the pro forma combined twelve months
ending December 31, 1997. Cost of sales as a percentage of revenue declined to
20% in 1998 from 26% in pro forma combined 1997. The improvement in costs as a
percentage of revenue in 1998 from pro forma combined 1997 was due primarily to
ongoing cost reduction programs in all phases of procurement, as well as the
increase in sales prices referred to above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense totaled $12.6 million in 1998. Of the total $12.6 million in selling,
general and administrative expense in 1998, $5.1 million was selling expense,
$1.9 million was marketing expense, $1.2 million was research and development
expense and $4.4 million was general and administrative expense.
Selling expense totaled $5.1 million in 1998. Selling expense totaled 30.0% of
revenue in 1998, compared to 13.0% and 32.6% for the one month ending
December 31 and the eleven months ending December 1, 1997, respectively. There
was an increase in total dollars spent in 1998 due primarily to increased staff
expense to support the net revenue increase as well as revised and upgraded
sales promotional literature, however the percentage of selling expense to net
revenue was consistent for the two years.
Marketing expense totaled $1.9 million from $0.3 million in 1998. Marketing
expense totaled 11.2% of revenue in 1998, compared to 25.0% and 0% for the one
month ending December 31 and the eleven months ending December 1, 1997,
respectively. Additional staff was hired to market and promote the Nu-Derm line
in 1998, and expenses were increased to support new product launches within the
Nu-Derm line, including trade advertising, a shared cooperative advertising
program with physicians, and significant increases for product brochures and
other marketing support materials. There were no significant programs in 1997.
Research and development expense totaled $1.2 million in 1998. Research and
development expense totaled 6.8% of revenue in 1998, compared to 12.8% and 0%
for the one month ending December 31 and the eleven months ending December 1,
1997, respectively. The primary increase related to the costs of a new contract
for our medical officer, a related party which totaled $500,000 in 1998, up from
$41,000 for the one month period ending December 31, 1997. Other significant
increases were for clinical testing of the upgraded products.
General and administrative expense totaled $4.4 million in 1998. General and
administrative expense totaled 26.1% of revenue in 1998, compared to 26.1% and
34.0% for the one month ending December 31 and the eleven months ending
December 1, 1997, respectively. As a percent of revenue, general and
administrative expense declined due to the increase in the revenue from 1997 to
1998
22
exceeding the increase in the level of administrative and general expense. The
primary increases in 1998 were for the settlement costs of an employee legal
action ($394,000), for the costs of a management services agreement with a
related party ($368,000), and for a royalty agreement with a related party
($230,000). Both the management services agreement and the royalty agreement
were initiated in connection with the acquisition of the assets of WorldWide
Product Distribution, Inc. The management services agreement and the royalty
agreement terminate concurrent with an initial public offering, and there are
not anticipated to be any comparable replacement agreements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization totaled
$1.2 million in 1998. Depreciation and amortization totaled 6.9% of revenue in
1998, compared to 8.0% and 0.4% for the one month ending December 31 and the
eleven months ending December 1, 1997, respectively. The primary component of
the 1998 total is the amortization of goodwill of $1.1 million associated with
the purchase of substantially all of the assets and the accounts payable and
related operating liabilities of WorldWide Product Distribution, Inc. as of
December 2, 1997. We accounted for this transaction under the purchase method of
accounting. Goodwill totaled $15.8 million and is being amortized over a life of
fifteen years on the straight-line method. 1997 included amortization for the
month of December only.
INTEREST EXPENSE, NET. Interest expense, net totaled $381,000 in 1998. Interest
expense totaled 2.2% of revenue in 1998, compared to 3.2% and 0% for the one
month ending December 31 and the eleven months ending December 1, 1997,
respectively. There was no significant outstanding interest bearing debt under
WorldWide Product Distribution, Inc. during the eleven months ended
November 31, 1997. The primary increase in interest expense to 1998 from the
prior periods is due to the interest on term loans to Imperial Bank and interest
on the subordinated note to a related party incurred in connection with the
WorldWide Product Distribution, Inc. acquisition as of December 2, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. Income tax expense totaled $1,000 in 1998.
Interest expense totaled 0% of revenue in 1998, compared to 0.1% and 0.4% for
the one month ending December 31 and the eleven months ending December 1, 1997,
respectively. Income taxes for 1998 and the one month period ending December
represented only state minimum income taxes, as there was a net loss before
provision for income taxes. For the eleven month period ending December 1, 1997,
WorldWide Product Distribution, Inc. elected to be taxed under Subchapter S of
the Internal Revenue Code. Accordingly, all taxable earnings of WorldWide
Product Distribution, Inc. were taxed at the individual owner level and
WorldWide Product Distribution, Inc. incurred no federal income tax liability.
During this period, WorldWide Product Distribution, Inc. paid state taxes on
behalf of the owners.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations from capital contributions by
our stockholders, borrowings from term loans, subordinated notes and lines of
credit and cash flow from operations. As of September 30, 2000, we had working
capital of $1.5 million, including a net cash balance of $293,000. As of
December 31, 1999, we had working capital of $132,000, including a net cash
balance of $650,000. The primary change in working capital from December 31,
1999 to September 30, 2000 was a result of an increase of $4.1 million in
accounts receivable.
We had unused availability of approximately $3.4 million at September 30, 2000
and $2.0 million at each of December 31, 1999 and December 31, 1998 under our
lines of credit with Imperial Bank. The outstanding principal balance under our
line of credit was $1.5 million at September 30, 2000 and zero at each of
December 31, 1999 and December 31, 1998.
Net cash used in operating activities was $2.0 million in the first nine months
of 2000, resulting primarily from an increase in accounts receivable of
$4.1 million and an increase in inventory of $452,000. Net cash provided by
operating activities was $1.3 million in 1999 and $112,000 in 1998. Net cash
provided by operating activities in 1999 resulted primarily from net income and
non-cash amortization of intangible assets, offset partially by a non-cash
benefit (increase) in deferred income
23
taxes and an increase in accounts receivable. Net cash provided by operating
activities in 1998 resulted primarily from non-cash amortization of intangible
assets and an increase in accrued liabilities, partially offset by a net loss
and an increase in long term prepaid consulting costs.
Net cash used in investing activities totaled $1.8 million in the first nine
months of 2000 primarily for additions to property, plant and equipment for a
new distribution center and computer equipment, for an investment in a joint
venture and for purchased intangibles primarily for new product lines. Net cash
used in investing activities was $749,000 in 1999, and $1.0 million in 1998. Net
cash used in investing activities in 1999 was the result of investments in
product distribution rights, partially offset by the subsequent receipt of
$500,000 in 1999 from the purchase price adjustment related to the acquisition
of WorldWide Product Distribution, Inc. Net cash used in investing activities in
1998 was primarily a result of investment in computer equipment, furniture and
fixtures.
Net cash provided by financing activities was $3.4 million in the first nine
months of 2000, consisting of a new Term Loan C of $3.0 million and a net draw
on the revolving line of credit of $1.5 million, partially offset by
$1.1 million from the repayment of term loans and subordinated notes. Net cash
used in financing activities was $1.2 million in 1999 and $627,000 in 1998. Net
cash used in financing activities in 1999 was due to scheduled principal
payments on the term loans due to Imperial Bank and on the subordinated note to
a related party, plus the repurchase of common and preferred stock from an
officer, partially offset by a new Term Loan B of $750,000. Net cash used in
financing activities in 1998 was due to scheduled principal payments on term
loans due to Imperial Bank and on the subordinated note to a related party,
partially offset by proceeds received from the issuance of common and preferred
stock to an officer.
Effective March 22, 2000, we entered into an amended credit agreement with
Imperial Bank. Under this agreement, an additional Term Loan C of $3.0 million
was added to the two existing Term Loans A and B and the revolving line of
credit was increased to $7.0 million. The amount available under our line of
credit is based upon levels of eligible accounts receivable and inventory and,
as of September 30, 2000, $3.4 million was unused and available under our line
of credit. Borrowings under Term Loan A bear interest at our election at a rate
of the prime lending rate plus a 0.75% margin or at LIBOR plus a 2.75% margin.
Borrowings under Term Loan B bear interest at our election at a rate of the
prime lending rate plus a 0.5% margin or at LIBOR plus a 2.75% margin.
All borrowings under Term Loan C must be made under the prime rate option until
December 31, 2000. After December 31, 2000, borrowings under Term Loan C bear
interest at our election at the prime lending rate plus a variable margin scale
or at LIBOR plus a variable margin scale. The prime lending rate margin scale
ranges from 1.0% to 3.5% and is fixed at 3.5% through December 31, 2000. The
LIBOR margin scale ranges from 3.25% to 3.75%. Borrowings under the revolving
line of credit bear interest at our election at the prime lending rate plus a
variable margin scale or at LIBOR plus a variable margin scale. Both the prime
rate and LIBOR margin scales are based on the leverage ratio of indebtedness to
earnings before interest, taxes, depreciation and amortization, or EBITDA. The
prime rate margin scale ranges from 0% to 1.0% and the LIBOR margin scale ranges
from 2.25% to 3.25%. The prime lending rate was 9.5% at September 30, 2000 and
8.5% at December 31, 1999.
Term Loans A, B and C mature on November 29, 2002. The revolving line of credit
terminates on May 31, 2001. As a condition to the term loans and the revolving
line of credit, we granted the bank a first priority security interest in
substantially all of our assets. The credit agreement contains covenant
provisions including, but not limited to, meeting tests of assets, financial
leverage, net income and sales. The credit agreements also restrict our ability
to engage in certain transactions without the prior written consent of Imperial
Bank, including but not limited to, permitting Stonington to own less than a
controlling interest, making dividends or repurchasing stock and making
investments or capital expenditures in excess of certain limits. As of
September 30, 2000, we were in compliance with all covenants of the credit and
loan agreements.
24
In consideration for Imperial Bank entering into the credit agreement in
March 2000, we also entered into a shared appreciation agreement that expires
December 31, 2001. The shared appreciation agreement provides for payment of a
shared appreciation amount to Imperial Bank triggered either by the expiration
date or by an acceleration event, which includes an initial public offering or a
change of control. If the appreciation amount is triggered by the expiration
date, then the appreciation amount is based on a formula that measures the
increase in EBITDA less specified indebtedness, with a minimum of $200,000 and a
maximum of $350,000. If the appreciation amount is triggered by an acceleration
event, then the payment is $200,000 from January 1, 2000 to August 31, 2000,
$275,000 from September 1, 2000 to April 30, 2001 and $350,000 from May 1, 2001
to December 31, 2001.
As of September 30, 2000, there were 146,200 outstanding shares of redeemable
preferred stock. Holders of shares of preferred stock are entitled to cumulative
quarterly dividends at a rate of 11% per annum. As of September 30, 2000, no
dividends had been paid. There was a total of $4.6 million and $3.4 million of
cumulative accrued dividends payable as of September 30, 2000 and December 31,
1999, respectively.
We believe that the net proceeds from this offering, together with our existing
credit line and expected cash flow from operations will be sufficient to fund
our current operations for the next 12 months. Thereafter, we may require
additional sources of funds to continue to support our business. Such funds, if
needed, may not be available or may not be available on terms acceptable to us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk related to borrowings under our term loans and line of
credit with Imperial Bank, as well as with a subordinated note payable to Maron
Nu-Tech because the interest rates are variable. As of September 30, 2000, we
had outstanding $5.3 million under the term loans, $1.5 million under the line
of credit and $600,000 under the subordinated note payable to Maron Nu-Tech.
Since inception, over 98% of our revenues are denominated in U.S. dollars.
Consequently, if the value of the U.S. dollar increases relative to a particular
foreign currency, our products could become relatively more expensive in such
currency. Additionally, we have subsidiaries with net assets in certain foreign
countries. Fluctuations in the value of the foreign currencies relative to the
U.S. dollar may make these net assets worth less after translation to U.S.
dollars. To date, we have not entered into any derivative instruments to manage
risks related to interest rates or foreign currency exchange rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition," which outlines
the basic criteria that must be met to recognize revenue and provide guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. SAB 101 is effective for
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We
have adopted SAB 101 for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of APB 25. This interpretation clarifies:
- the definition of an employee for purposes of applying APB 25
- the criteria for determining whether a plan qualifies as a noncompensatory
plan
- the accounting consequences of various modifications to the terms of a
previously fixed stock option or award
- the accounting for an exchange of stock compensation awards in a business
combination
This interpretation became effective as of July 1, 2000. The adoption of FIN 44
did not have a material impact on our unaudited consolidated financial
statements.
25
BUSINESS
OVERVIEW
We are a leading specialty pharmaceutical company that develops, markets and
sells products for physician-mediated skin health and restoration. We believe we
sell the most comprehensive line of skin health and restoration products and
procedures for the office-based practices of dermatologists and plastic
surgeons. We believe that skin health and restoration are best addressed through
physician-mediated skin treatment programs designed to treat the medical
conditions underlying the skin damage. We market a portfolio of products that
enable physicians to treat a wide range of skin problems, including photodamage,
which is also referred to as sun damage, hyperpigmentation, which is also
referred to as discoloration of the skin, acne and soft tissue deficits, such as
wrinkles. We currently sell our six core product lines to over 2,500 skin care
physicians in the United States through our 54-person direct sale force and in
29 countries outside the United States primarily through distributors. Our
revenues were approximately $31.8 million for the twelve months ended
September 30, 2000.
BACKGROUND
SKIN AND SKIN HEALTH
Skin is the outermost covering of the body that protects the body's internal
organs from the environment and helps to define a person's appearance. Skin, the
largest organ in the body, consists primarily of two layers, the epidermis, a
thin outer layer, and the dermis, a relatively thick inner layer. The epidermis
is comprised of specialized cells such as keratinocytes and melanocytes.
Keratinocytes are formed deep in the epidermis and travel to the skin's surface
and are exfoliated, or shed off, as they die in a maturation cycle which
normally takes approximately six weeks. Buildup of excess keratinocytes can
result in rough, thick or dry skin. Melanocytes produce melanin, the pigment
that determines skin color and protects the body from ultraviolet radiation. The
dermis is comprised largely of connective tissue fibers made of collagen and
elastin. Collagen is a tough, fibrous protein that helps give skin its strength
and resiliency. Elastin, an elastic fiber, helps maintain healthy skin tension
and gives skin its stretchable quality.
The health and appearance of a person's skin is impacted by a variety of
factors, including genetics, natural aging, photodamage, hyperpigmentation and
diseases such as acne. Many of these factors, such as photodamage and
hyperpigmentation, affect everyone to a varying degree, although some skin types
are more susceptible to certain skin conditions. For example, people with darker
skin tones are at a greater risk of hyperpigmentation problems while people with
lighter skin tones are more prone to photodamage. Natural aging also impacts
skin health and appearance. As people age, a slowdown in the keratinocyte
maturation cycle occurs, leading to the buildup of a rough layer of dead cells
on the surface of the skin. In the dermis of aging skin, the amount of collagen
often decreases, resulting in the fibers becoming less organized and the dermis
becoming thinner. As a result, aging can contribute to skin becoming rough, lax
or wrinkled. The skin can also be harmed by exposure to the sun and other
environmental elements, such as pollution, wind and cold temperatures. Sun
exposure may cause melanocytes in the epidermis to function improperly,
resulting in a wide variety of hyperpigmentation conditions such as melasma,
freckles and age spots. In the dermis, sun exposure may cause the collagen
bundles and the elastin fibers to become abnormally structured, resulting in the
skin taking on a thick and leathery appearance. If left untreated, skin damage
caused by sun exposure can also result in skin cancer. Hormonal changes in the
body, such as those resulting from pregnancy and the use of oral contraceptives,
can also cause irregularities in the skin's appearance. While most of these
conditions and diseases are not debilitating or life threatening, they are
readily apparent, sometimes disfiguring and usually chronic. As a result, people
are often highly motivated to seek and comply with treatment programs for these
conditions.
26
SKIN HEALTH AND RESTORATION MARKET
In the United States, skin health and restoration is managed primarily by
dermatologists and plastic surgeons. There are approximately 9,500
dermatologists and 5,700 plastic surgeons in the United States whose practice
includes skin health and restoration. Skin conditions are typically treated with
products such as prescription drugs, over-the-counter drugs and cosmetics, as
well as office-based procedures such as chemical-based skin peels. In recent
years, physicians have taken on an increasingly active role in the management of
skin restoration. For example, the number of skin health and restoration
physician-mediated office procedures has increased from approximately 1,200,000
in 1997 to approximately 2,900,000 in 1999, which represents a compound annual
growth rate of 55%. This growth reflects both the increased use of existing
in-office procedures and the introduction of new procedures such as laser skin
resurfacing, laser hair removal and microdermabrasion, a procedure where the
surface layer of the skin is physically removed. We believe that the growth also
represents efforts of skin care physicians to broaden their practices and
sources of revenue to include more cosmetically-based products and procedures.
We believe that third-party reimbursement policies have limited patient access
to dermatologists and imposed limits on the level of reimbursement for physician
procedures, which have resulted in a loss of revenue to physicians. Physicians
have tried to compensate for this lost revenue by focusing on cosmetic
procedures which are typically elective and paid for directly by the patients
and not subject to the reimbursement restrictions imposed by third-party payors.
Furthermore, the aggregate number of physician-mediated cosmetic procedures,
including non-skin based procedures such as facelifts, hair transplants and
breast augmentations, have grown significantly in recent years, resulting in
increased office visits and opportunities for the sale of physician-mediated
skin health and restoration products.
We believe that the skin health and restoration market will continue to
experience strong growth as a result of several factors, including the
development of new products and procedures for a wider range of cosmetic
treatments and the gradual aging of the U.S. population. Older segments of the
population tend to control large amounts of disposable income and are highly
motivated to improve their personal appearance. In addition, although the
typical patient seeking treatment for a cosmetic skin condition has been a
Caucasian female, non-Caucasians and males have begun to comprise an increasing
proportion of the patient population.
Outside of the United States, the physician-mediated skin health and restoration
market is different in each country due to cultural differences and regulatory
variations. For example, in Japan it is not customary for physicians to dispense
products, and in France physicians are prohibited from dispensing products. In
these markets, skin health and restoration products are typically
non-prescription and are dispensed through mass market suppliers such as
pharmacies. We believe that growth in major international markets will also be
driven by an aging population with increasing levels of disposable income.
LIMITATIONS OF TRADITIONAL PRODUCTS AND PROCEDURES
Many skin care products and procedures are available through physicians and
retail channels. Most of these products and procedures are designed to mask
individual skin symptoms rather than treat the underlying causes. As a result,
retail customers and patients may see temporary improvements but long-term skin
restoration often does not occur. Most traditional products and procedures are
not part of a comprehensive program designed to treat the specific needs of the
individual patient. Problems may occur when different and potentially
non-complementary products and procedures are used as part of a skin treatment
program. For example, a lack of compatibility among products or inadequate skin
preparations for a treatment program may cause adverse reactions or decrease the
efficacy of the products. In addition, many over-the-counter skin health
products and procedures lack the potency to provide significant improvements in
skin care and restoration. Furthermore, many competing physician-dispensed
products have limited market appeal because they are suitable only for certain
types of skin.
27
THE OMP SOLUTION
We believe that skin health and restoration are best addressed through a
physician-mediated skin treatment program designed to treat the medical
conditions underlying skin damage, rather than simply address the symptoms. Our
products enable skin care physicians to effectively treat skin damage at the
cellular level, where the damage has occurred. Our products are dispensed and
used only under the supervision of a skin care physician. We believe a
physician-mediated treatment program improves the ability to properly diagnose
an individual's specific skin problem as well as design a treatment program.
We market a portfolio of products that enable physicians to treat a wide range
of skin problems, including photodamage, hyperpigmentation, acne and soft tissue
deficits such as wrinkles. We offer products for physician office-based
dispensing, such as prescription and over-the-counter drugs and cosmetic skin
care products. We also sell products used by physicians for in-office
procedures, such as chemical peels and a human tissue product used for tissue
augmentation. Many of our products incorporate widely-used, clinically active
ingredients such as hyrdoquinone and tretinoin.
Our wide range of proprietary products and procedures enable skin care
physicians to tailor a treatment program to the needs of each patient. Our
products and procedures have each been designed and selected to complement each
other in the treatment of skin damage. For example, in the treatment of a
patient with acne scars and photoaging, we offer a selection of products that
enable a physician to create a program to treat the patient from start to
finish. First, Obagi Nu-Derm products can be utilized to initially prepare the
patient's skin for treatment. Then, a physician can resurface the patient's skin
with the Obagi Blue Peel. Next, Cymetra can be used to treat the remaining
scars. Finally, the Obagi Nu-Derm and Cffectives products can be used to treat
and help maintain the skin post-procedurally. In each step of the continuum of
treatment, we offer products that can be administered specifically for the
requirements of each patient. We believe that our comprehensive portfolio of
products, combined with our emphasis on treating the medical conditions which
contribute to skin damage, is unique in the physician-mediated skin health and
restoration market.
OUR STRATEGY
Our objective is to become the leading specialty pharmaceutical company
dedicated to providing skin health products for physician-mediated skin health
and restoration. Key elements of our strategy include:
- INCREASE THE MARKET PENETRATION OF OUR SKIN HEALTH AND RESTORATION PRODUCTS.
We believe our skin health focused sales and marketing efforts will enable
us to increase the penetration of our existing products as well as market
our new products. We are expanding our U.S. sales and marketing efforts to
dermatologists and plastic surgeons, having doubled the number of field
sales representatives and managers in early 2000. Our marketing efforts are
aimed at helping physicians and staff understand how our solutions can
generate new sources of revenue. To assist physicians in marketing their
practices, we have developed seminars, presentations and programs designed
to enable physicians to explain the benefits of our products and services to
their patients. We also intend to increase direct-to-consumer advertising,
which we believe will help generate new customers for our physician
partners.
- OBTAIN NEW AND INNOVATIVE PRODUCTS THROUGH IN-LICENSING AND STRATEGIC
COLLABORATIONS. We intend to continue accessing new and complementary
products through in-licensing, joint ventures and strategic collaborations.
For example, we recently entered into a license and supply agreement with
Vivier Pharma, Inc. for the sale of its vitamin C products to physicians in
the United States and in 29 other countries. We also recently entered into a
distribution agreement with Geneva Pharmaceuticals, Inc., a subsidiary of
Novartis Pharmaceuticals Corporation, to market and sell tretinoin products,
which are used to treat acne, directly to physicians in the United States.
These
28
collaborations enable us to offer a comprehensive line of products to
physicians for skin health and restoration.
- PURSUE STRATEGIC ACQUISITIONS. In addition to our internal development and
in-licensing efforts, we intend to pursue strategic acquisitions. We believe
that our substantial expertise in the selling, marketing and development of
skin health and restoration products postions us well to attract, evaluate
and secure future opportunities.
- EXPAND OUR INTERNATIONAL PRESENCE. We intend to continue expanding our
international presence by entering into strategic relationships and adding
staff in key locations such as Asia, Europe and South America. We believe
that there is potential for significant sales growth of our products in
international markets. For example, in Asia, where there is a cultural
emphasis on overall skin health and appearance, we believe our products are
particularly well suited for skin types found in the region. To further
position ourselves to take advantage of this opportunity, we recently
entered into a joint venture with Rohto Pharmaceutical Co., Ltd. to market
and sell our kinetin-based cream and lotion and other products in Japan.
- ENHANCE AND EXPAND OUR EXISTING PRODUCTS. We intend to leverage our existing
in-house drug and cosmetic formulation expertise to enhance and expand our
existing product lines. By reviewing current scientific data and consumer
demand information, we attempt to anticipate and meet market demands for
modifications and extensions of our current product offerings. For example,
we recently reformulated Obagi Nu-Derm eye cream to incorporate vitamin K
and Obagi Nu-Derm sunblock, an over-the-counter drug, to increase its sun
protection factor.
OUR PRODUCTS
We believe we have assembled the most comprehensive portfolio of products for
physician-mediated skin health and restoration. We currently sell six core
product lines to physicians to address their needs for both in-office product
dispensing and in-office procedures.
PRODUCT LINE DESCRIPTION PRIMARY INDICATION GEOGRAPHIC RIGHTS LAUNCH DATE
- ---------------------- ---------------------- ---------------------- ---------------------- -----------
DISPENSED IN-OFFICE
- ------------------------------------------------------------------------------------------------------------
Obagi Nu-Derm Comprehensive system Fine lines, wrinkles Worldwide 1994
of 20 prescription and hyperpigmentation
drugs and
over-the-counter
products
Cffectives Highly stable vitamin Fine lines, wrinkles U.S. physician- June 2000
C serum; and hyperpigmentation dispensed market and
non-prescription all distribution
channels in 29 other
countries
OMP Tretinoin 0.1%, 0.05% and 0.025% Acne U.S. physician- June 2000
tretinoin based creams dispensed market
Kinaderm 0.05% kinetin based Fine lines, wrinkles Mass market channels May 2000
cream and lotion and hyperpigmentation in major Asian
countries
USED FOR IN-OFFICE PROCEDURES
- ------------------------------------------------------------------------------------------------------------
Cymetra Micronized, freeze- Replacement for lost Worldwide office-based June 2000
dried injectable human or damaged tissue dermatologist and
tissue matrix plastic surgeon
markets
Obagi Blue Peel Acid delivery system Fine lines, wrinkles Worldwide 1996
for chemical peels and hyperpigmentation
29
PRODUCTS DISPENSED IN-OFFICE
OBAGI NU-DERM. The Obagi Nu-Derm system consists of twenty prescription and
over-the-counter drugs and adjunctive cosmetic skin care products to treat
photodamage and skin conditions resulting from hormonal changes, such as those
associated with pregnancy and the use of oral contraceptives. The Obagi Nu-Derm
cosmetic skin care products include cleansers, exfoliating creams and
moisturizers. Three Obagi Nu-Derm products contain the drug hydroquinone in a 4%
prescription concentration, which acts as a bleaching agent that is designed to
correct skin pigmentation problems by limiting the production of new melanin in
the epidermis. The Obagi Nu-Derm system is used in conjunction with tretinoin,
prescribed as a 0.05% emollient cream, which has been shown in clinical trials
to be effective for treating sun damage, wrinkling, hyperpigmentation and facial
roughness. Tretinoin directly affects the rate of cell division, stimulates the
formulation of new, healthy collagen and helps to repair elastin in the dermis.
The use of tretinoin contributes to firmer, yet more flexible skin. The use of
these prescription drugs distinguishes Obagi Nu-Derm from competitive systems
that use less effective cosmeceuticals such as non-prescription alpha hydroxy
acids. Obagi Protocols, sold internationally, is a slightly adjusted formula of
Obagi Nu-Derm, modified for the requirements of local market regulations.
CFFECTIVES. The Cffectives line of proprietary, non-prescription products
consists of vitamin C serums used to reduce the appearance of damage to the skin
caused by ultraviolet radiation and other environmental influences. Vitamin C
acts as a potent antioxidant that stimulates the formation of collagen and
elastin. This action aids and improves the appearance of fine lines and
hyperpigmentation, and increases the elasticity and firmness of skin. Cffectives
contains the most therapeutic topical form of vitamin C, L-ascorbic acid.
Cffectives is highly stable, overcoming the instability of L-ascorbic acid,
which otherwise oxidizes rapidly turning from clear to yellow to brown, and
losing its effectivness. Cffectives is a clear product with a shelf life of two
years, which we believe is the most stable L-ascorbic acid available. In
addition, the product has been shown in a study at the University of California,
Irvine to penetrate all levels of skin better than its leading competitor. The
Cffectives line consists of a 5% serum for the area around the eyes and a 10%
serum for the face, neck and chest. Outside of the United States, Cffectives is
sold as Obagi-C and Interlace-C.
OMP TRETINOIN. The OMP Tretinoin creams and related adjunctive acne care
products are used for the topical treatment of acne in the United States.
Tretinoin, the active ingredient in the prescription acne drug Retin-A, is a
vitamin A derivative and has been the primary prescription acne therapy for
approximately 25 years. Topical tretinoin increases the growth rate of skin
cells, disrupting the onset of acne. We believe that the OMP Tretinoin creams
are the only FDA-approved generic form of Retin-A directly available to
physicians for dispensing. The OMP Tretinoin cream line is available in
concentrations of 0.1%, 0.05% and 0.025%. Our adjunctive acne care line consists
of four medicated and non-medicated products designed to aid patient comfort and
compliance.
KINADERM. Kinaderm is used to improve the appearance of fine lines and wrinkles,
hyperpigmentation and skin roughness. We have the exclusive right to market and
sell Kinaderm to the mass market in major Asian countries. Kinaderm contains
0.05% kinetin, a protein that is naturally found in plants. Kinetin has been
found in studies to delay a range of cellular changes that are often associated
with the appearance of aging. In a 48-week clinical study conducted at the
University of California, Irvine that was completed in 1999, all of the 96
patients with photodamage who used kinetin showed improvement in the appearance
of fine lines and wrinkles. The Kinaderm line consists of cream and lotion
formulations that are applied to the face, neck and other sun damaged skin.
PRODUCTS USED FOR IN-OFFICE PROCEDURES
CYMETRA. Cymetra is a micronized, freeze-dried injectable form of AlloDerm,
LifeCell Corporation's human tissue replacement product. Cymetra is human skin
tissue that is put through a patented process to remove the epidermal and dermal
cells, eliminating the chance for disease transmission or rejection,
30
while preserving the matrix and proteins necessary for a patient's own soft
tissue to repopulate. This tissue is then injected below the patient's dermal
skin layer, allowing the patient's own cells to grow into the damaged area.
Cymetra is used in a nonsurgical procedure to replace tissue in the lips,
nasolabial folds or in acne scars where the patient's own tissue has been lost
through damage or age. We have the exclusive worldwide rights to market Cymetra
to dermatologists and office-based plastic surgeons, except that LifeCell may
sell to its then existing customers as of the date of the agreement.
OBAGI BLUE PEEL. Obagi Blue Peel is a patented acid delivery system for chemical
peel procedures used to smooth the surface of skin, improve skin tone and color,
diminish wrinkles and shrink pore sizes. Chemical peels are an in-office
procedure performed either by a physician or a member of a physician's staff,
depending on the skin depth of the peel. During the procedure, acidic solutions
applied to the face remove the thin surface layers of aged and damaged skin.
After removal, the body will naturally replace the removed skin layers with new
skin cells. Conventional chemical peel techniques are often marked by difficulty
in gauging the depth of the peel, limiting their usefulness. The Obagi Blue Peel
provides for an even application and slows the penetration of the solution into
the skin, allowing physicians to more accurately monitor the peel. This produces
a more uniform and consistent application, which reduces the risk of
complications. We believe that the Obagi Blue Peel is especially effective as a
complementary treatment to the Obagi Nu-Derm system.
PRODUCTS IN DEVELOPMENT
We intend to continue to provide dermatologists and plastic surgeons with new
and innovative products through our own internal development efforts and
collaborations. Our internal product development is comprised of the following
three initiatives:
- UPDATE AND ENHANCE EXISTING PRODUCTS. We routinely direct efforts to update
and enhance our existing product lines to incorporate features and benefits
that we feel will improve the utility and desirability of our products. For
example, we recently reformulated Obagi Nu-Derm eye cream to incorporate
vitamin K and Obagi Nu-Derm sunblock to increase its sun protection factor.
In addition, we recently modified the Obagi Nu-Derm product line to simplify
its regimen and reduce potential irritation. We are currently evaluating the
potential benefits of reformulating several other products to better meet
consumer and physician demands.
- CLINICAL STUDIES IN SUPPORT OF OUR PRODUCTS. Our research and development
staff is designing and coordinating clinical studies to support the
application of our existing product lines in new markets and to enhance our
current marketing efforts. We are currently working with leading research
institutions such as Johns Hopkins University and Mt. Sinai Hospital in New
York on five studies on the effectiveness of both our existing products and
potential new products. For example, through Johns Hopkins University, we
are studying the potential for improvements in skin structure using an Obagi
Nu-Derm/Obagi Blue Peel regimen over six months. In addition, through Mt.
Sinai Hospital, we have initiated a study to demonstrate the safety and
efficacy of an Obagi Nu-Derm/Obagi Blue Peel regimen in people with darker
skin pigmentation. We believe evidence from our clinical studies may
validate the performance of our existing products and provide a platform for
the development of new products and product applications.
- DEVELOP NEW PRODUCT LINES. We routinely investigate expanding our current
product offerings in order to leverage our approach of addressing skin
health at the cellular level. For example, we are currently developing a
non-prescription skin care line to be distributed by the physicians' staff
specialists. In addition, we are investigating the use of our formulation
expertise to develop separate full body and self-tanning lines, among
others.
We also work closely with the research and development departments of our
corporate partners to provide guidance on enhancements to products we now market
and to develop new products, leveraging the skills and experiences of each
partner. For example, we are working with Vivier Pharma,
31
our licensor for the Cffectives product line, on two novel vitamin C products
for the treatment of photodamage, which we expect to introduce in 2001.
SALES AND MARKETING
DOMESTIC. In the United States, we focus our sales and marketing efforts
primarily toward dermatologists and plastic surgeons using our direct sales
force. As of September 30, 2000, we had 76 sales, marketing and education
specialists, including 54 dedicated sales representatives and managers. In
March 2000, we doubled our sales force by adding 24 sales representatives
through a contract with Professional Detailing, Inc., or PDI, one of the largest
contract sales organizations to the pharmaceutical industry. These sales
representatives are full-time and exclusive to us, and we anticipate that many
of them will become full-time OMP employees in the next twelve months. We have
fully integrated the PDI representatives with our existing representatives into
one national sales organization. All of our representatives, whether they be our
employees or PDI's employees, have comparable salary structure, bonus structure
and benefits. We believe that the increased sales representation will enable us
to effectively target the approximately 10,000 dermatologists and plastic
surgeons in the United States with the greatest market potential for our
products. We believe that our current ratio of sales personnel to physicians is
comparable to that of the pharmaceutical industry overall and provides
sufficient reach and frequency of calls to our physician customer base.
We have six regional education managers who train physicians and their staff on
the use of our products, seven customer service representatives who provide
technical and other support for our products and nine sales and marketing
executives and support staff who coordinate activities and provide support for
our marketing efforts.
Our marketing efforts have a dual focus. First, we market directly to physicians
in an attempt to both create treatment awareness and encourage the use of our
products by both new and existing physician clients. To support this effort, we
use medical journal advertising, direct mail, sales aids, video, CD and slide
demonstrations, physician-to-physician speaker presentations, trade shows,
reminder items, educational and training support and telemarketing. Second, we
attempt to create and then build upon a partnership-type relationship with our
physician clients by marketing our products to their patients through their
medical practices. To support this effort, we provide patient education booklets
and videos, funding for cooperative advertising, training and direct assistance
in patient seminars and other programs, continuous product education and direct
to consumer advertising and public relations programs for patient referrals.
INTERNATIONAL. In 29 countries outside of the United States, we sell our
products using a variety of distributors, subsidiaries, direct sales
representatives to physicians and through alternative distribution channels. The
sale of skin health and restoration products through physician offices is not as
widely accepted internationally as it is in the United States. While we work to
develop the physician distribution channel, we intend to continue utilizing
other currently available channels. For example, in Asia, our most developed
international market, we currently utilize multi-level marketing in Taiwan,
while in Japan, we have formed a joint venture with Rohto Pharmaceuticals to
sell our products to the mass market as well as directly to physicians. In South
America, we market our products through physician training centers. In Europe,
customs and regulations require us to generate demand by encouraging physicians
to recommend our products from pharmacy outlets. In each of these 29 countries,
we provide promotional materials that are customized by local management to
respond to the information, promotion and regulatory needs of the specific
country's markets.
MANUFACTURING
We rely on third-party manufacturers for the manufacturing of all of our
products. We enter into purchase orders with third parties for the manufacturing
of the Obagi Nu-Derm and Obagi Blue Peel
32
product lines. These purchase orders may be terminated at any time either by us
or the contract manufacturer. We use only FDA compliant manufacturers who
specialize in the manufacture of prescription and over-the-counter
pharmaceutical and cosmetic products. These parties manufacture products
pursuant to our specifications. All of these manufacturers are required by law
and by our manufacturing standards to comply with cGMP. We prequalify and
continually monitor our manufacturers for quality and compliance. We require
documentation of compliance and quality from those manufacturers that we act as
representative for in connection with the promotion and sale of their products.
Except for the cosmetic components of the Obagi Nu-Derm line, all of our
manufacturers and suppliers are the sole source of our products. We intend to
seek out secondary sources of contract manufacturing for the Obagi Nu-Derm and
Obagi Blue Peel components to cover our production needs and to maintain a
competitive pricing environment. In addition, we have entered into various
supply, distribution, co-marketing and related agreements with strategic
partners to supply us with the OMP Tretinoin, Cffectives, Cymetra and Kinaderm
products. Our collaborators are solely responsible for the manufacturing of
their products.
COLLABORATIONS
To date, we have entered into five material strategic collaborations.
SENETEK PLC FOR KINADERM. In November 1999, we obtained an exclusive license
from Senetek plc to sell Kinaderm to the mass market in major countries in Asia,
including China, the Philippines and Japan. The term of the agreement is ten
years. Under the agreement, we are to pay a percentage of Senetek's actual
direct net costs for the product and a royalty fee of a percentage of net sales,
which decreases as the quantity of the product sold increases. Unless we launch
marketing efforts in China and South Korea prior to November 2001, we will lose
our license in these countries. Under the agreement, we agree to purchase
minimum quantities of the product. We are required to spend a percentage of net
sales in each country for which we have a license on a marketing and promotion
budget. Senetek has the right to terminate the exclusivity of the licenses and
rights granted to us if we fail to meet our minimum purchase requirements.
Either party may terminate the agreement for failure of the other party to
comply with a material provision of the contract and failure to cure within
30 days, or for any breach and failure to cure within 60 days.
LIFECELL CORPORATION FOR CYMETRA. In February 2000, we obtained the exclusive
right from LifeCell Corporation to market Cymetra to office-based dermatologists
and plastic surgeons throughout most of the world, except that LifeCell reserves
the right to continue selling to its current customers, which include
hospital-based plastic surgeons and approximately 400 office-based
dermatologists and plastic surgeons. Under the agreement, we are to act as a
sales representative on behalf of LifeCell, so that revenues accrue to LifeCell
and accounts receivable are those of LifeCell. We are to be paid a co-marketing
fee on the sales, increasing as unit volumes increase. The term of the agreement
is five years, and we have the option to renew for another five year term if we
meet or exceed the sales expectations set forth in the agreement. Under the
agreement, we agree to sell minimum quantities of the product and to pay
LifeCell the difference if we fail to achieve the minimum sales level. The
agreement may be terminated by either party for failure of the other party to
comply with a material provision of the contract and failure to cure within
30 days.
GENEVA PHARMACEUTICALS, INC. FOR OMP TRETINOIN. In February 2000, we obtained a
non-exclusive right from Geneva, a subsidiary of Novartis Pharmaceuticals
Corporation, to market tretinoin cream products to the physician-dispensed
market in the United States. Under the terms of the agreement, Geneva agrees to
supply all of our requirements for the tretinoin cream. Geneva is allowed to
change the price of the product due to changes in market conditions and is
obligated to negotiate in good faith a lower price if the FDA allows another
manufacturer to produce a competitive product and the manufacturer does so at a
lower price. The agreement has a term of three years and may be renewed
33
upon mutual agreement of the parties but may be terminated by either party on
90 days notice for any reason.
VIVIER PHARMA, INC. FOR CFFECTIVES. In March 2000, we obtained the exclusive
right from Vivier to distribute L-ascorbic acid serum products through the
physician-dispensed distribution channel in the United States and through all
distribution channels in 29 countries outside the United States, including
Western Europe, Australia, South America, the Middle East and the Pacific Rim of
Asia, including China, the Philippines, and Japan. These products are marketed
under the brand names Cffectives, Obagi-C and Interlace-C. Under the agreement,
Vivier agrees to supply all of our requirements for the products, based on our
forecasts. The price is set by schedule, to be adjusted annually by the Canadian
consumer price index, and reduced by volume discounts. The term of the agreement
is five years and may be renewed upon mutual agreement of the parties. Under the
agreement, we agree to purchase minimum quantities of the products for each year
of the contract or we will forfeit our exclusive license. The agreement may be
terminated by either party for failure of the other party to comply with a
material provision of the contract and failure to cure within 45 days.
ROHTO PHARMACEUTICAL CO., LTD. - JOINT VENTURE PARTNER FOR JAPAN. In February
2000, we entered into an agreement with Rohto Pharmaceutical, a publicly traded
Japanese company, for the purpose of forming a joint venture company in Japan to
market and sell our kinetin and vitamin C products in Japan. The joint venture
company, which is known as Obagi-Rohto Medical Products, KK, is owned equally by
us and Rohto Pharmaceutical and we and Rohto Pharmaceutical have equal
representation on the joint venture company's board of directors. We intend to
use the joint venture company to market and sell our kinetin and our vitamin C
products through Rohto Pharmaceutical to the mass market in Japan. We also
expect the joint venture company to develop an independent direct sales force
that will sell our other products, which have been specifically formulated to
comply with Japanese law and custom, through Japanese dermatologists, plastic
surgeons and other physicians engaged in the practice of skin health and
restoration. Our joint venture company has initiated the process to gain
regulatory approval of our products in Japan. We anticipate that our joint
venture will have its first product sales during the first half of 2001.
DISTRIBUTION AGREEMENTS
To date, we have entered into the following material distribution arrangements.
PLANET INTERNATIONAL INC. We have an oral distribution agreement with Planet
International Inc. pursuant to which Planet International distributes the Obagi
Nu-Derm products to Taiwan. Planet International orders products from us via
purchase orders at such price and on such terms as are negotiated between Planet
International and us. Our arrangement with Planet International may be
terminated at any time by either party.
CELLOGIQUE CORPORATION FOR OBAGI NU-DERM PRODUCTS IN THE MIDDLE EAST. In
May 1994, we granted Cellogique Corporation, or Cellogique, the exclusive right
to distribute certain Obagi Nu-Derm products solely in Syria, Egypt, Lebanon,
Jordan, Saudi Arabia, United Arab Emirates, Bahrain, Kuwait, Iraq, Oman, Yemen,
Libya, Tunisia, Morocco, Turkey, Cypress and Israel. Under the agreement,
Cellogique must purchase a minimum dollar amount of products from us on a
quarterly basis at prices set forth in our agreement. Cellogique's minimum
purchase requirement may be increased by us every two years. Cellogique has
agreed that they will not buy Obagi Nu-Derm products from any other distributor
or manufacturer, and that they will maintain a working relationship, sub-
contractual or employment, with a licensed physician trained in the use of our
products. We have agreed to provide Cellogique with as many products as
reasonable ordered by Cellogique consistent with our ability to stock the
products in a timely manner. The initial term of the agreement was thirty
months, and automatically renews every two years, unless terminated by either
party for failure of the other party to comply with a material provision of the
agreement.
34
INTELLECTUAL PROPERTY
We believe that the protection of our brand names, products, processes and
know-how is important to the success of our business. We have pursued an
aggressive trademark registration policy as a means to achieve brand recognition
and product differentiation in the market. We own various U.S. and foreign
trademark registrations and applications and common law marks. We are also the
owner of four U.S. patents and one foreign patent application. The principal
U.S. patent entitled "Skin Peel Maintenance Composition and Method" was issued
in 1998. This patent describes the performance of a skin peel using a
composition having a visualizing agent, a surfactant and an acid or an acid
equivalent dispersed in a carrier liquid and forms the basis for our proprietary
dermatological product, Obagi Blue Peel. The foreign patent application, filed
in France in 1998, relates to a cosmetic agent for rejuvenating the skin. This
application is still pending and has not yet been allowed by the French Patent
Office.
We have acquired rights to market, distribute, sell and, in some cases, make
products pursuant to license agreements with third parties. Such agreements
contain provisions which require us to meet requirements under these agreements,
such as payment or royalty obligations, in order to maintain the rights granted
under the agreements. We have been granted an exclusive license to various U.S.
and foreign patents pursuant to our exclusive license of Cymetra from LifeCell,
tretinoin cream from Geneva, Kinaderm from Senetek and vitamin C from Vivier.
COMPETITION
The market for skin health and restoration is highly competitive with many
established manufacturers, suppliers and distributors engaged in all phases of
the business. We believe that we face strong competition and that we compete
primarily based upon:
- the uniqueness of our products
- our product performance and features, including ease of use
- our product quality and reliability of performance
- our breadth of product lines
- our sales and marketing capabilities
- our education and technical support for our products
- our methods of distribution
- the timing of introduction of our products relative to competing products
We face and will continue to face intense competition. A number of our
competitors have greater research and development capabilities and greater
financial resources than we do. These competitors may have developed, or could
in the future develop, new technologies that compete with our products or render
our products obsolete. We are also likely to encounter increased competition as
we enter new markets and as we attempt to penetrate existing markets. Some of
our competitors have in the past and may in the future compete by lowering
prices on their products. We may respond by lowering our prices, exiting the
market or competing by investing in the development of new, improved products.
35
Our direct competitors include Allergan Inc., Biomedic Clinical Care,
Coherent, Inc., ICN Pharmaceuticals, Inc., Inamed Corporation, Jan Marini Skin
Research, Inc., various Johnson & Johnson divisions, Physician's Choice of
Arizona and SkinCeuticals, Inc. Our indirect competitors consist of large
cosmetic and consumer skin care product manufacturers, including Estee Lauder,
Helen Curtis Industries, Inc., L'Oreal S.A., Matrix Essentials, Inc,
Maybelline, Inc., Procter & Gamble Company, Revlon and Unilever N.V.
GOVERNMENT REGULATION
DRUG, DEVICE AND COSMETIC REGULATION
Drug, medical device and cosmetic products are subject to U.S. Food and Drug
Administration, or FDA, regulations and other state, local and foreign
regulations. The U.S. Federal Trade Commission, or FTC, and state authorities
regulate the advertising of over-the-counter, drugs and cosmetics, as well as
general authority to prevent unfair or deceptive trade practices. The FDA
regulates the advertisements of prescription drug products. The Food, Drug and
Cosmetic Act, subsequent rule makings, as well as other federal and state
statutes and regulations govern the testing, manufacture, safety, efficacy,
labeling, storage, recordkeeping, approval, advertising and promotion of our
products.
Products classified as new drugs require premarket review and approval by the
FDA. Products within the FDA's definition of cosmetics or over-the-counter drugs
that are not new drugs and that are generally recognized as safe and effective
do not require premarket review and approval from the FDA.
Most over-the-counter drugs are exempt from the FDA's premarket review and
approval requirement. Over-the-counter products are regulated under the
over-the-counter Monograph system. This FDA over-the-counter regulatory process
includes the issuance of rulemaking for therapeutic product categories that
provide guidance on ingredients, their quantities, indications and label claim
statements as well as required warnings.
The FDA classifies over-the-counter ingredients in three categories:
- Category I ingredients are those which have been deemed safe and effective
for over-the-counter use and not misbranded
- Category II ingredients which have been deemed not generally recognized as
safe and effective or misbranded for over-the-counter use
- Category III ingredients which are possibly safe and effective but available
data are insufficient
If there is no potential safety hazard to the public, the FDA permits drugs to
be marketed that are not yet subject to a final over-the-counter monograph.
Over-the-counter drugs are required to comply with FDA regulations for cGMP,
general and specific over-the-counter labeling requirements, promotion only for
conditions stated in the labeling and containing only suitable inactive
ingredients. Manufacturing facilities producing over-the-counter drug products
are subject to FDA inspection and compliance with designated cGMPs.
The active ingredients in our drug products are subject to regulation. Some
products in our Nu-Derm line contain the active ingredient hydroquinone,
currently classified as a Category I ingredient at 2% strength. If the FDA at
any point reclassifies hydroquinone, we could be required to cease marketing of
these products or seek approval through the new drug premarket review and
approval process.
The Obagi Nu-Derm and Obagi Protocols over-the-counter products must meet the
composition and labeling requirements established by the FDA for products
containing their respective active ingredients. We believe that compliance with
those established standards does not require premarket review and approval of
these products prior to marketing due to their over-the-counter Monograph
36
status. However, we cannot assure you that the FDA will not, at some point in
the future, take a contrary position.
The active ingredient in Tolereen, hydrocortisone, the active ingredient in
Bacitracin, bacitracin zinc and the active ingredients in Sunblock, titanium
dioxide and zinc oxide, are currently classified by the FDA as Category I
ingredients.
The Obagi Nu-Derm Clear, Blender and Sunfader hydroquinone products are marketed
under the FDA compliance policy entitled Prescription Drugs Marketed Without
Abbreviated New Drug Application, or ANDA. These hydroquinone products must be
administered under the supervision of a physician but are not subject to prior
FDA approval when formulated and labeled in accordance with guidelines for
prescriber information under direction of a physician.
We believe that most of the products in the Obagi Nu-Derm, Obagi Protocols and
other miscellaneous product lines, as labeled and intended for use, fall within
the FDA definition of cosmetics and therefore do not require premarket review
and approval. However, we cannot assure you that the FDA will not take a
contrary position. We acknowledge that these products are subject to regulations
governing product safety, use and quantity of ingredients, labeling and
promotion and methods of manufacture.
OMP Tretinoin, with tretinoin as the active ingredient, is a prescription drug
product marketed under an approved ANDA, reviewed and approved by the FDA and
licensed for distribution from Geneva Pharmaceuticals, Inc.
HUMAN TISSUE REGULATION
The FDA generally permits transplanted human tissue to be commercially
distributed without obtaining prior FDA approval of the product. In contrast,
products regulated as medical devices usually require such approval. In 1996,
the FDA determined that AlloDerm used for the repair or replacement of damaged
or inadequate integumental tissue, or tissue that lines or covers the body and
its compartments or cavities, would be regulated as transplanted human tissue.
On that basis, LifeCell Corporation began commercial distribution of AlloDerm
for the treatment of burns, periodontal surgery and plastic reconstructive
surgery procedures, without prior FDA approval.
In its decision with respect to the regulation of AlloDerm, the FDA stated that
the regulatory status of any different uses, including use as a void filler for
soft tissue or for cosmetic augmentation procedures would need to be determined
on a case-by-case basis. Cymetra, a micronized form of AlloDerm, is advertised
and promoted for use in the correction of soft tissue deficits, such as acne or
other depressed scars, and to restore tissue loss from disease. LifeCell has
represented that Cymetra is a form of AlloDerm that is used for the repair or
replacement of damaged or inadequate integumental tissue and that it meets the
regulatory definition of transplanted human tissue. LifeCell has also
represented that Cymetra has not been manipulated in such a way that would
require regulation as a medical device. As a result, LifeCell has not sought a
determination from the FDA as to whether Cymetra is a medical device. There is a
risk that the FDA could determine that AlloDerm or Cymetra should be regulated
as a medical device. If so, the FDA could require us to:
- cease marketing and recall Cymetra already sold
- seek FDA approval for Cymetra
The process of obtaining FDA approval may be expensive, lengthy and
unpredictable. We anticipate that it could take from one to three years to
obtain such approval. We do not know if such approval could be obtained in a
timely fashion, or at all, or if the FDA would require extensive supporting
clinical data. In addition, the FDA also could seek to impose enforcement
sanctions for marketing Cymetra without FDA approval.
37
CERTAIN FACTORS AFFECTING OUR PRODUCTS
We believe that certain of our products are exempt from premarket review and
approval based upon the date of introduction of their active ingredients,
over-the-counter Monograph status or cosmetic classification. We cannot assure
you that the FDA will not take a contrary position at some time in the future.
We acknowledge that such products are subject to regulations governing product
safety, use of ingredients, method of manufacture, labeling and promotion.
Manufacturing and clinical trials of pharmaceutical products are subject to
rigorous testing and approval processes of the FDA and foreign regulatory
authorities. The procedure of gaining FDA and other regulatory approvals is
often lengthy and expensive. We cannot assure you that we will be able to obtain
the necessary approvals to market future products on a timely basis, if at all,
or that regulatory review will not cause delays in the marketing and sale of our
products. Testing and approval with respect to any new products we might develop
or seek to introduce is likely to take a number of years and involve large
expenditures of resources. There can be no assurance that products acquired or
licensed by us will be approved for marketing by the FDA or international
regulatory authorities.
Failure to comply with applicable regulatory requirements for currently marketed
or future products could result in relabeling costs, delays in product
production or distribution or recalls. We cannot assure you that the FDA will
not change its position on the regulatory status or classification of our
products. If such a reclassification occurred, we could be required to
reformulate the product, cease distribution of the product or file a new drug
application for review and approval that could require extensive preclinical and
clinical test data. Furthermore, the FTC may issue cease and desist orders
against deceptive or unsubstantiated advertisements and, in some instances, may
seek consumer redress such as refunds, monetary penalties, injunctions or
disgorgement of profits, as well as civil penalties for violations of its
orders.
We are also subject to foreign regulatory requirements for those products that
we seek to register for sale outside of the United States. Regulatory approval
must be obtained prior to commencing sale of drug products in foreign countries.
The approval process in foreign countries varies from country to country. The
time to gain approval may be longer or shorter than obtaining approval in the
United States as the classification of the product may be different in foreign
countries than in the United States. There is no assurance of foreign regulatory
approval of our products.
EMPLOYEES
As of September 30, 2000, we had 111 employees worldwide, 108 of which were
located in the United States. Of our U.S. employees, 54 were in sales, 6 were in
training, 7 were in customer service and 9 were sales and marketing executives
and support staff. Of our 111 employees, 26 are on a contract basis from
Professional Detailing, Inc., one of the largest contract sales organizations to
the pharmaceutical industry. Our employees are all non-unionized, and we believe
our relations with our employees are good.
FACILITIES
As of September 30, 2000, we leased the following facilities:
FACILITY LOCATION SQUARE FEET
- -------- -------- -----------
Headquarters Long Beach, CA 16,000
Distribution Center Torrance, CA 15,000
We believe our facilities are adequate for their intended use and are sufficient
for our current level of operations.
38
All domestic and international activity is initiated and coordinated from our
Long Beach headquarters. Our research and development effort is based at our
Long Beach headquarters, where administrative and laboratory space is dedicated
to this effort. The laboratory has the ability to develop and analyze small
batch quantities of products under investigation for potential marketing. Our
training center is also located at our Long Beach headquarters. Additionally,
our cGMP compliance training for distribution personnel and sales training for
customer service representatives is provided in Long Beach. The lease for our
headquarters expires in May 2003.
Customer orders are received at the customer service center at our Long Beach
headquarters. Orders are then immediately transmitted via our virtual private
network to our distribution center located in Torrance, California. Our
custom-built distribution center is strategically located for quick, convenient
and reliable distribution with access to all major carriers in Southern
California. The distribution center is equipped with modern refrigeration and
climate control capabilities and was designed and built to meet our short and
long range plans for business expansion. We began distribution from the center
in March 2000. The lease for our distribution center expires in December 2004.
LEGAL MATTERS
We are not currently a party to any material legal proceedings.
39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information about our executive officers and
directors as of the date of this prospectus.
NAME AGE POSITION(S)
---- --- -----------
Phillip J. Rose, R.Ph............... 48 President, Chief Executive Officer
and Director
J. David Bruner..................... 54 Vice President of Marketing and
Sales
Candace C. Crawford................. 45 Vice President, Chief Financial
Officer, Secretary and Treasurer
Cheri Jones......................... 54 Vice President of Regulatory Affairs
and Quality Assurance
Vartan Libaridian, Ph.D............. 51 Vice President of Development
Joseph W. Sortais................... 58 Vice President of Operations and
Administration
Peter P. Tong (2)................... 59 Chairman of the Board of Directors
John A. Bartholdson (1)............. 30 Director
James R. Butler..................... 59 Director
Robert F. End (2)................... 45 Director
Bradley J. Hoecker (1)(2)........... 38 Director
Leroy Keith, Ph.D................... 61 Director
Zein E. Obagi, M.D.................. 57 Executive Medical Director and
Director
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
PHILLIP J. ROSE, R.PH. has served as our President and Chief Executive Officer
since June 1999 and joined our board in June 2000. From 1997 to 1999, Mr. Rose
served as the Vice President-General Manager of North American Operations of ICN
Pharmaceuticals, Inc. From 1994 to 1997, he held positions as Vice President
Marketing and Managed Care of Duramed Pharmaceuticals, Inc., and from 1991 to
1994 he was Vice President Sales and Marketing of Fujisawa USA. Mr. Rose
received his B.S. in Pharmacy from the Albany College of Pharmacy at Union
University.
J. DAVID BRUNER has served as our Vice President of Marketing and Sales since
August 1999. From February 1999 to July 1999, Mr. Bruner served as Director of
Professional Marketing for the Neutrogena Division of Johnson & Johnson. From
1991 to 1999, Mr. Bruner served as the Director of Dermatology Marketing at ICN
Pharmaceuticals, Inc. Mr. Bruner received his B.S. in Business Administration
from the University of Minnesota and his M.B.A. from Pepperdine University.
CANDACE C. CRAWFORD has served as our Vice President, Chief Financial Officer,
Secretary and Treasurer since November 2000. From 1999 to November 2000,
Ms. Crawford served as Executive Vice President and Chief Financial Officer of
Resort Theaters of America, a regional operator of movie theaters. From 1998 to
1999, she served as Chief Financial Officer of Virgin Entertainment Group, a
retail operator of music megastores. Previously, she served as Senior Vice
President and Chief Financial Officer of Metropolitan Theatres Corporation, a
privately held motion picture exhibitor. Ms. Crawford received her B.S. in
Business Administration from the University of Southern California.
40
CHERI JONES has served as our Vice President, Regulatory Affairs and Quality
Assurance since 1999. From 1992 to 1999, Ms. Jones served as Director, Global
Regulatory Affairs for ICN Pharmaceuticals, Inc. She also serves as Program
Director and Instructor for the American Institute of Health Sciences and on the
board of directors for the Regulatory Affairs Professional Society. Ms. Jones
received her B.S. in Health Care Administration from St. Joseph's College and
her M.S. in Pharmaceutical Marketing from St. John's University, School of
Pharmacy. Ms. Jones is Regulatory Affairs Certified.
VARTAN LIBARIDIAN, PH.D., has served as our Vice President of Development since
January 1998. In 1995, Dr. Libaridian founded Cosmoceutical Research Center and
served as its President until 1997. From 1992 to 1995, he served as Vice
President of Research and Development for Thibiant International. From 1982 to
1991, Dr. Libaridian served as Technical Director, Skin Care--Domestic &
International for Neutrogena Corporation. Dr. Libaridian graduated as a
pharmacist from Chatenay-Malabry in France and earned his Ph.D. in Dermo
Pharmaceutical Technology from Chatenay Malabry, School of Pharmacy.
JOSEPH W. SORTAIS has served as our Vice President of Operations and
Administration since November 2000. From March 1999 to November 2000
Mr. Sortais served as our Vice President and Chief Financial Officer. From 1994
to 1999, Mr. Sortais served as Senior Vice President and Chief Financial Officer
of Outsourcing Services Group, Inc., an international cosmetics manufacturer.
Mr. Sortais received both his B.S. in Business Administration and his M.B.A. in
Finance from the University of California, Berkeley.
PETER P. TONG has served on our board of directors as Chairman since 1997.
Mr. Tong has been a Management Partner of Stonington Partners, Inc., or
Stonington Partners, a private investment firm, since December 1999 and is also
the President of Mandarin Partners, LLC, an investment partnership. From
January 1996 to May 1996, Mr. Tong served as the co-President of Marquette
Medical Systems, Inc., a manufacturer of medical equipment. From May 1991 to
1996, he served as President, Chairman and Chief Executive Officer of E for M
Corporation. Mr. Tong is a Director of Packard BioScience Company and is also on
the board of directors of several privately held companies. Mr. Tong received
his B.S. in Electrical Engineering from Kansas State University and his M.S. in
Electrical Engineering from the University of Wisconsin.
JOHN A. BARTHOLDSON has served on our board of directors since June 2000. He has
been a Principal of Stonington Partners, Inc. since August 1999, having served
as an Associate since June 1997. From 1992 to 1994, Mr. Bartholdson worked for
Merrill Lynch Capital Partners, Inc., or MLCP, a private investment firm that is
a wholly-owned subsidiary of Merrill Lynch & Co., Inc. From 1994 to 1995 he
worked for Stonington Partners as an Analyst. Mr. Bartholdson is a director of
several privately held companies. Mr. Bartholdson received his A.B. from Duke
University and his M.B.A. from Stanford Graduate School of Business.
JAMES R. BUTLER has served on our board of directors since January 2001. Mr.
Butler has been Group Vice President, International, of ALZA Corporation, a
pharmaceutical company providing drug delivery technologies, since 2000. From
1993 to 1999, Mr. Butler served as Senior Vice President of Sales & Marketing of
ALZA Corporation. From 1970 to 1993, Mr. Butler held a number of management
positions with GLAXO, Inc., an international pharmaceutical company, including
Vice President, and General Manager of the Corporate Division, from 1992 to
1993. Mr. Butler received his B.S. in Business Administration from the
University of Florida.
ROBERT F. END has served on our board of directors since December 1997. He is a
Partner and director of Stonington Partners, a position that he has held since
1993 and is a Partner and director of Stonington Partners, Inc. II, or
Stonington II, a position he has held since 1994. He has also been a director of
MLCP since 1993 and a consultant to MLCP since 1994. He was a Partner from 1993
to 1994 and Vice President of MLCP from 1989 to 1993. Mr. End was also a
Managing Director of the
41
Investment Banking Division of Merrill Lynch, Pierce, Fenner, & Smith
Incorporated, or MLPF&S, from 1993 to July 1994 and a Director of the Investment
Banking Division of MLPF&S from 1990 to 1993. Mr. End currently serves as a
director of Goss Holdings, Inc., Packard BioScience Company and United Artists
Theatre Circuit Inc. and is also on the board of directors of several privately
held companies. Mr. End received his A.B. from Dartmouth College and his M.B.A.
from the Amos Tuck School of Business Administration.
BRADLEY J. HOECKER has served on our board of directors since 1999. He has been
a Partner and director of Stonington Partners since November 1997, having served
as a Principal of Stonington Partners since its formation in 1993. He has also
been a Partner and a director of Stonington II since November 1997. Since 1994,
Mr. Hoecker has worked as a consultant for MLCP. He was a Principal of MLCP from
1993 to 1994 and an Associate of MLCP from 1989 to 1993. Mr. Hoecker was also an
Associate of the Investment Banking Division of MLPF&S from 1989 to 1994. From
1984 to 1987, Mr. Hoecker was employed by Bankers Trust Company. Mr. Hoecker
currently serves as a director of Packard BioScience Company and Merisel, Inc.
and is also on the board of directors of several privately held corporations.
Mr. Hoecker received his B.B.A. from Southern Methodist University and his M.M.
from the Kellogg Graduate School of Management.
LEROY KEITH, PH.D., has served on our board of directors since January 2001. Dr.
Keith is past Chairman of Carson Products Company, a publicly-held company that
makes personal hair care products. Dr. Keith served as Chairman and CEO of
Carson Products Company from 1995 to 1998. Dr. Keith has also served as
President of Morehouse College, Vice President for Policy and Planning at the
University of Maryland, and Chancellor of the Massachusetts Board of Higher
Education. Dr. Keith currently is a Director of Value America and several
privately held companies. Dr. Keith received his Bachelors Degree from Morehouse
College, and Masters Degree and Doctorate Degree from Indiana University.
ZEIN E. OBAGI, M.D., has served on our board of directors since 1997.
Previously, Dr. Obagi was a co-founder of WorldWide Product Distribution, Inc.,
our predecessor company. Dr. Obagi received his M.D. from Damascus Medical
School in 1972 and emigrated to the United States, where he interned in general
medicine and completed a 2-year anatomic pathology residency. He then joined the
U.S. Navy, where he did his residency in dermatology and served for six years.
BOARD COMPOSITION
We currently have seven authorized directors. Effective upon the closing of this
offering, the terms of office of the directors will be divided into three
classes:
- Class I, whose term will expire at the annual meeting of stockholders to be
held in 2001
- Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002
- Class III, whose term will expire at the annual meeting of stockholders to
be held in 2003
Class I directors are Messrs. Tong, Obagi and Butler. Class II directors are
Messrs. Rose and Bartholdson. Class III directors are Messrs. End, Hoecker and
Keith. At each annual meeting of stockholders after the initial classification
or special meeting in lieu thereof, the successors to directors whose terms will
then expire will be elected to serve from the time of election and qualification
until the third annual meeting following election or special meeting held in
lieu thereof and until their successors are duly elected and qualified. In
addition, the board of directors will be authorized to change the authorized
number of directors and to fill vacant directorships. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one third of the directors. Accordingly, even if a stockholder
brings a successful proxy contest, the stockholder could only elect a minority
of our board
42
at our one annual meeting. Thus, the classification of the board of directors
may have the effect of delaying or preventing changes in control or management
of our company.
COMMITTEES OF THE BOARD OF DIRECTORS
In July 1999, our board of directors established an audit committee and a
compensation committee. The audit committee, consisting of Messrs. Butler, End
and Keith, makes recommendations to the board of directors regarding the
selection of independent auditors, reviews the scope of audit and other services
by our independent auditors, reviews the accounting principles and auditing
practices and procedures to be used for our financial statements and reviews the
results of those audits. The compensation committee, consisting of
Messrs. Butler, Keith and Tong, makes recommendations to the board of directors
regarding the administration of our stock plans and the compensation of officers
and directors.
DIRECTOR COMPENSATION
We reimburse our directors for expenses incurred in connection with attending
board and committee meetings We also pay our directors who are not employees of
OMP or affiliated with Stonington a directors' fee of $12,000 per year and a
meeting fee of $700 for each meeting of the board of directors and $300 for each
committee meeting. Our board of directors has the discretion to grant options
under our 2000 Stock Option/Stock Issuance Plan to new non-employee directors,
the amount of which is determined by our board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of our board of directors is
currently, or has at any time since our formation been, one of our officers or
employees. During our year ended December 31, 1999, none of our executive
officers served as a member of the board of directors or compensation committee
of any entity that has one or more officers serving as a member of our board of
directors or compensation committee.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Under our bylaws and Delaware law, we are obligated to indemnify our directors
and officers against liabilities and expenses.
Our certificate of incorporation and bylaws limit or eliminate the personal
liability of our directors for monetary damages for breach of the directors'
fiduciary duty of care. The duty of care generally requires that, when acting on
behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Consequently,
our directors or officers will not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as a
director, except for:
- any breach of the director's duty of loyalty to us or our stockholders
- acts or omissions that are not in good faith, that involve intentional
misconduct or are a knowing violation of law
- unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions
- any transaction from which the director derived an improper personal benefit
These provisions are permitted under Delaware law.
Our certificate of incorporation also provides that we will indemnify, to the
fullest extent permitted by law, any person made or threatened to be made a
party to any action or proceeding by reason of the
43
fact that he or she is or was one of our directors or officers or serves or
served at any other enterprise as a director, officer or employee at our
request.
Our bylaws provide that we will, to the maximum extent and in the manner
permitted by Delaware law, indemnify each of the following persons against
expenses, including attorneys' fees, judgments, fines, settlements and other
amounts incurred in connection with any proceeding arising by reason of the fact
that he or she is or was our agent:
- one of our current or past directors or officers
- a current or past director or officer of another enterprise who served at
our request
- a current or past director or officer of a corporation that was our
predecessor corporation or of another enterprise at the request of a
predecessor corporation
We are also able under our bylaws to enter into indemnification agreements with
our directors and officers and to purchase insurance on behalf of any person we
are required or permitted to indemnify. We have directors' and officers'
insurance providing indemnification for certain liabilities for our directors,
officers and certain employees. We believe that these indemnification provisions
are necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against directors and officers, even though
a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement and damage awards against
our directors and officers under these indemnification provisions.
There is no pending or threatened litigation or proceeding involving one of our
directors or officers for which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
44
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to or earned by our
Chief Executive Officer and our executive officers whose total salary and
bonuses exceeded $100,000 during the year ended December 31, 1999 and who were
serving as our executive officers as of December 31, 1999.
LONG-TERM
COMPENSATION AWARDS
--------------------------
COMPENSATION SHARES ALL
YEAR ENDED ------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY BONUS OPTIONS COMPENSATION
--------------------------- ------------ -------- -------- ---------- -------------
Phillip J. Rose, R.Ph., ........ 1999 $131,640 $29,167 288,000 $18,192(1)
President and Chief Executive
Officer
Joseph W. Sortais .............. 1999 106,356 -- 90,000 --
Vice President of Operations
and Administration
Vartan Libaridian, Ph.D. ....... 1999 127,984 -- -- 900(2)
Vice President of Development 1998 98,000 -- 90,000 --
- ---------------------
(1) Represents auto allowance of $5,600 and reimbursement of relocation expenses
of $12,592.
(2) Represents 401(k) matching contributions.
1999 OPTION GRANTS
The following table sets forth information regarding options granted to each of
the officers listed in the Summary Compensation Table during 1999.
The information regarding stock options granted to named executive officers as a
percentage of total options granted to employees in the fiscal year, as
disclosed in the table, is based upon options to purchase an aggregate of
643,680 shares of common stock that were granted to all employees and
consultants as a group, including the named executive officers, in the fiscal
year ended December 31, 1999. Generally, we grant options at an exercise price
equal to the fair market value of the underlying common stock on the date of
grant, as determined by our board of directors. Once we become a publicly-held
company, the fair market value of our stock will equal trading market price.
The 5% and 10% assumed annual rates of compounded stock appreciation are
mandated by the rules of the Securities and Exchange Commission based on the
deemed value of the common stock used by us for accounting purposes and do not
represent our estimate or projection of our future stock prices.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM
OPTIONS TO EMPLOYEES EXERCISE OR EXPIRATION -----------------------
NAME GRANTED IN 1999 BASE PRICE DATE 5% 10%
- ---- ---------- ---------------- ----------- ---------- ---------- ----------
Phillip J. Rose, R.
Ph..................... 288,000 44.7% $ 0.995 6/3/2009 $180,216 $456,703
Joseph W. Sortais........ 90,000 14.0 0.556 3/8/2009 31,470 79,751
Vartan Libaridian,
Ph.D................... -- -- -- -- -- --
45
1999 OPTION VALUES
The following table sets forth information concerning option values for the
fiscal year ended December 31, 1999 with respect to each of the named executive
officers. None of the named executive officers exercised any options in the year
ended December 31, 1999. The value of unexercised in-the-money options was
calculated by determining the difference between $15.00, the assumed initial
public offering price and the exercise price of the option, multiplied by the
number of shares underlying the option.
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Phillip J. Rose, R.Ph.......................... -- 288,000 -- $4,320,000
Joseph W. Sortais.............................. -- 90,000 -- 1,350,000
Vartan Libaridian, Ph.D........................ 22,500 67,500 $337,500 1,012,500
EMPLOYMENT AGREEMENTS
PHILLIP J. ROSE, R.PH. We have entered into an employment agreement dated as of
May 14, 1999 with Phillip J. Rose, R.Ph., our President and Chief Executive
Officer, for a period of two years which commenced in June, 1999, and which is
automatically renewed for successive one-year periods subject to certain
termination provisions. The agreement also provides for an annual base salary of
$250,000 and makes him eligible for an annual bonus based on the achievement of
financial benchmarks established by our board of directors. The agreement
further specifies that for the calendar year 1999 only, Mr. Rose was guaranteed
to receive a minimum bonus of $4,166 for each month employed by us. The
agreement also grants Mr. Rose stock options to purchase 288,000 shares of our
common stock. The agreement further provides him with three weeks' paid vacation
per year, health, dental and all other benefits provided to our most senior
employees, including participation in our 401(k) plan. In the event we terminate
his employment without cause, Mr. Rose will receive as his severance any bonus
still owing from the previous year, plus his base salary for the remaining
balance of the period ending May 30, 2001. In the event of voluntary termination
of employment, death, mental or physical disability or termination for cause,
all compensation and benefits cease immediately and he will receive no severance
benefits except for any bonus still owing from the previous year.
J. DAVID BRUNER We have entered into an employment agreement with J. David
Bruner, our Vice President of Marketing and Sales, effective August 2, 1999. The
agreement provides for an annual salary of $185,000 subject to annual
cost-of-living increases or such greater increase as we may approve. The
agreement also makes him eligible to purchase 54,000 stock options of our common
stock. The agreement further makes him eligible for vacation, 401(k) plan
participation and all other benefits we provide to our senior employees. The
agreement further entitles him to an annual bonus based on the achievement of
financial benchmarks established by our board of directors. Employment is
subject to termination by either party with or without cause, at any time, for
whatever reason without advance notice. In the event employment is voluntarily
terminated, or if Mr. Bruner dies, becomes physically or mentally disabled, or
if we terminate his employment for cause, all compensation and benefits cease
immediately.
CANDACE C. CRAWFORD We have entered into an employment agreement with Candace C.
Crawford, our Vice President and Chief Financial Officer, effective
November 15, 2000. The agreement provides for an annual salary of $180,000,
subject to annual cost-of-living increases or such greater increase as we may
approve. The agreement also makes her eligible to purchase 90,000 stock options
for our common stock as well as an annual bonus of 30% of her base salary as
adjusted for performance in accordance
46
with benchmarks set by us. The agreement also makes her eligible for vacation,
holiday, medical and dental benefits, 401(k) plan participation and all other
benefits that we provide to our senior employees. The agreement further provides
that employment may be terminated by either party with or without cause, at any
time, for any reason whatsoever with 30 days prior notice. In the event of
voluntary termination of employment, death, physical or mental disability, or if
we terminate employment for cause, all compensation and benefits cease
immediately and she will receive no severance benefits. If we terminate her
employment in the first year of the agreement without cause or she terminates
her employment for good reason, as defined in the agreement, she will receive as
severance six months of her base salary and benefits.
CHERI JONES We have entered into an employment agreement with Cheri Jones, M.S.,
R.A.C., our Vice President of Regulatory Affairs and Quality Assurance,
commencing July 1, 1999. The agreement provides for an annual salary of $145,000
subject to annual cost-of-living increases or as a greater increase as we may
approve. The agreement also makes her eligible to receive 18,000 stock options
as well as an annual bonus based on the achievement of financial benchmarks
established by our board of directors. The agreement also makes her eligible for
certain benefits, including vacation, holiday pay, medical and dental benefits
and all other benefits we provide to our senior employees. The agreement further
provides that employment is at will and that either party may terminate
employment without advance notice. In the event of termination without cause
after the first 90 days during the first year of employment, she will receive
her base salary for three months as her severance. In the event of voluntary
termination of employment, death, physical or mental disability, or termination
of employment for cause, Ms. Jones is entitled to no severance benefits.
VARTAN LIBARIDIAN, PH.D. We have entered into an employment agreement with
Vartan Libaridian, Ph.D., our Vice President of Development, for a period of one
year commencing on January 1, 1998 and automatically renewed for successive
one-year terms. The agreement provides for an annual salary of $127,000 subject
to annual cost-of-living increases or such greater increases as we may approve.
The agreement also makes him eligible for an annual bonus of 25% of his base
salary, as adjusted for performance based on the achievement of financial
benchmarks established by our board of directors. The agreement also makes him
eligible for vacation and sick leave according to our standard policy for
employees having at least three years' seniority as well as all other benefits
that we provide to our most senior employees, including health and dental
coverage and participation in our 401(k) plan. The agreement further provides
that employment may be terminated by either party with or without cause, at any
time, for any reason whatsoever without advance notice. In the event of
termination of employment without cause, he will receive as a sole severance his
base salary for six months. In the event of voluntary termination of employment,
death, physical or mental disability or termination for cause, all compensation
and benefits will cease immediately and he will receive no severance benefits or
any other special payments.
ZEIN E. OBAGI, M.D. We have entered into an employment agreement with Zein E.
Obagi, M.D., or Dr. Obagi, our Executive Medical Officer, for a period of five
years commencing on December 2, 1997. The term of the agreement automatically
renews for successive one-year periods subject to certain termination
provisions. The agreement provides for an annual salary of $500,000, which is
increased annually to reflect increases in the consumer price index or such
greater increase as determined by our board of directors. The agreement also
makes available to Dr. Obagi employee benefits offered to other similarly
situated employees. In the event we terminate Dr. Obagi's employment before the
expiration of the initial term for any reason other than for cause, death or
permanent disability, Dr. Obagi shall be entitled to receive as a severance
payment an amount equal to the salary that he would have received for the
remainder of the initial term of the agreement.
JOSEPH W. SORTAIS We have entered into an employment agreement with Joseph W.
Sortais, our Vice President of Operations and Administration, effective
March 1, 1999. The agreement provides for an annual salary of $150,000, subject
to annual cost-of-living increases or such greater increase as we may
47
approve. The agreement further entitles him to an annual bonus of 40% of his
base salary as adjusted for performance in accordance with financial benchmarks
set by us. The agreement also makes him eligible for vacation, holiday, medical
and dental benefits, 401(k) plan participation and all other benefits that we
provide to our senior employees. The agreement further provides that employment
may be terminated by either party with or without cause, at any time, for any
reason whatsoever without advance notice. In the event of termination of
employment without cause, he will receive as a sole severance his base salary
for six months. In the event of voluntary termination of employment, death,
physical or mental disability, or if we terminate employment for cause, all
compensation and benefits cease immediately and he will receive no severance
benefits.
EMPLOYEE BENEFIT PLANS
1997 STOCK OPTION/STOCK ISSUANCE PLAN
The 1997 Stock Option/Stock Issuance Plan, or the 1997 Plan, provides for the
grant of options to purchase common stock to employees, consultants and
directors. The 1997 Plan includes incentive stock options, or ISOs, and
nonqualified stock options, or NSOs. The maximum number of shares of common
stock that may be issued over the term of the 1997 Plan shall not exceed 900,000
shares of our common stock. The board of directors serves as the 1997 Plan
administrator and determines the terms of options granted and the price of the
options.
Under the option grant program, the exercise price per share for ISOs shall be
no less than 100% of the fair market value per share on the grant date. The
exercise price per share for NSOs shall be no less than 85% of the fair market
value per share on the grant date. For ISOs and NSOs, the exercise price per
share shall be no less than 110% of the fair market value per share on the grant
date for an individual who, at the time of grant, owns stock representing more
than 10% of the total combined voting power of all classes of our stock. The
right to exercise ISOs and NSOs vests at a rate in accordance with the
individual stock option agreements. Options expire within a period of not more
than ten years from the grant date. ISOs granted to an employee, who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of our stock, expire within a period of not more than five
years from the grant date.
2000 STOCK OPTION/STOCK ISSUANCE PLAN
The 2000 Stock Option/Stock Issuance Plan, or the 2000 Plan, provides for the
grant of options to purchase common stock to employees, consultants and
directors. The 2000 Plan includes ISOs and NSOs. The maximum number of shares of
common stock which may be issued over the term of the 2000 Plan shall not exceed
450,000 shares of our common stock. The board of directors serves as the 2000
Plan administrator, and determines the terms of options granted and the price of
the options.
Under the option grant program, the exercise price per share for ISOs shall be
no less than 100% of the fair market value per share on the grant date. The
exercise price per share for NSOs shall be no less than 85% of the fair market
value per share on the grant date. For ISOs and NSOs, the exercise price per
share shall be no less than 110% of the fair market value per share on the grant
date for an individual who, at the time of grant, owns stock representing more
than 10% of the total combined voting power of all classes of our stock. The
right to exercise ISOs and NSOs vests at a rate in accordance with the
individual stock option agreements. Options expire within a period of not more
than ten years from the grant date. ISOs granted to an employee, who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of our stock, expire within a period of not more than five
years from the grant date.
401(k) PLAN
In 1999, we established an employee savings and retirement plan and a 401(k)
defined contribution retirement plan, covering substantially all full-time
employees. We match 25% of employee contributions up to 6% of employee
compensation. We also may make discretionary contributions as set forth in the
401(k) plan, in an amount determined by our board of directors, subject to
statutory limits. We contributed $26,084 to the plan during the fiscal year
ended December 31, 1999.
48
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of September 30, 2000 for:
- each person, or group of affiliated persons, known by us to own beneficially
more than five percent of our common stock
- each of our directors
- each of the individuals listed in the "Summary Compensation Table" above
- all of our directors and officers as a group
Beneficial ownership is determined according to the rules of the Securities and
Exchange Commission and generally means that a person has beneficial ownership
of a security if he or she possesses sole or shared voting or investment power
over that security, and includes options that are currently exercisable or
exercisable within 60 days. Each director, officer or 5% or more stockholder, as
the case may be, has furnished us with information with respect to beneficial
ownership. Except as otherwise indicated, we believe that the beneficial owners
of the common stock listed below, based on the information each of them has
given to us, have sole investment and voting power with respect to their shares,
except where community property laws may apply.
This table lists applicable percentage ownership based on 14,442,750 shares of
common stock outstanding as of September 30, 2000 and also lists applicable
percentage ownership based on 18,942,750 shares of common stock outstanding
after completion of the offering. Options to purchase shares of our common stock
that are exercisable within 60 days of September 30, 2000, are deemed to be
beneficially owned by the persons holding these options for the purpose of
computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership
percentage. Shares underlying options that are deemed beneficially owned are
listed in this table separately in the column labeled "Shares Subject to
Options." These shares are included in the number of shares listed in the column
labeled "Total Number."
Unless otherwise indicated, the address of such person listed in the table is
c/o OMP, Inc., 310 Golden Shore, 1st Floor, Long Beach, California 90802.
SHARES BENEFICIALLY OWNED
---------------------------------------------------------
PERCENT PERCENT
SHARES SUBJECT TO BEFORE AFTER
NAME BENEFICIAL OWNER TOTAL NUMBER OPTIONS OFFERING OFFERING
- --------------------- ------------ ----------------- -------- --------
Stonington Capital Appreciation 1994 Fund,
L.P. (1)..................................... 9,044,742 -- 62.6% 47.8%
767 Fifth Avenue
New York, New York 10153
Zein and Samar Obagi Family Trust.............. 3,600,000 -- 24.9% 19.0%
Peter P. Tong (2)(3) .......................... 1,119,135 -- 7.7% 5.9%
685 Spring Street
PMB 210
Friday Harbor, Washington 98250
Phillip J. Rose R. Ph.......................... -- 57,600 * *
J. David Bruner................................ -- 10,800 * *
Candace C. Crawford............................ -- -- * *
Cheri Jones.................................... -- 3,600 * *
49
SHARES BENEFICIALLY OWNED
---------------------------------------------------------
PERCENT PERCENT
SHARES SUBJECT TO BEFORE AFTER
NAME BENEFICIAL OWNER TOTAL NUMBER OPTIONS OFFERING OFFERING
- --------------------- ------------ ----------------- -------- --------
Vartan Libaridian, Ph.D........................ -- 45,000 * *
Joseph W. Sortais.............................. -- 22,500 * *
John A. Bartholdson............................ -- * *
Robert F. End (3).............................. -- * *
Bradley J. Hoecker (3)......................... -- * *
Zein E. Obagi, M.D. (4)........................ 3,600,000 24.9% 19.0%
All officers and directors as a group 4,719,135 139,500 33.3% 25.7%
(11 persons) (2)(3)..........................
- ---------------------
* Represents beneficial ownership of less than 1%.
(1) Stonington Capital Appreciation 1994 Fund, L.P., or the Stonington Fund, is
the record holder of 9,044,742 shares of common stock. The Stonington Fund
is a Delaware limited partnership whose limited partners consist of certain
institutional investors, formed to invest in corporate acquisitions
organized by Stonington Partners, Inc. Stonington Partners, L.P., a Delaware
limited partnership, is the general partner in the Stonington Fund with a 1%
economic interest. Except for such economic interest, Stonington Partners,
L.P. disclaims beneficial ownership of the shares set forth above.
Stonington Partners, Inc. II is the general partner of, with a 1% interest
in, Stonington Partners, L.P. Except for such economic interests, Stonington
Partners, Inc. II disclaims beneficial ownership of the shares set forth
above.
Pursuant to a management agreement with the Stonington Fund, Stonington
Partners, Inc. has full discretionary authority with respect to the
investments of the Stonington Fund, including the authority to make and
dispose of such investments. Furthermore, Stonington Partners, Inc. has a 1%
economic interest in Stonington Partners, L.P. Stonington Partners, Inc.
disclaims beneficial ownership of the shares set forth above. Messrs. End
and Hoecker, together with James J. Burke, Albert J. Fitzgibbons III,
Shyam H. Gidumal, Alexis P. Michas and Scott M. Shaw, serve on the board of
directors of Stonington Partners, Inc., which has voting and dispositive
authority for Stonington Partners, Inc. The address for each of the entities
listed in this footnote, as well as Stonington management included in the
table above, is c/o Stonington Partners, Inc., 767 Fifth Avenue, New York,
NY 10153.
(2) Includes 309,180 shares beneficially owned by Tong Family Limited
Partnership, of which Peter Tong as a Trustee, holds voting and investment
authority.
(3) Excludes shares held by the Stonington Fund of which Mr. End and
Mr. Hoecker may be deemed to be beneficial owners as a result of their
ownership of Stonington Partners, L.P. Mr. End and Mr. Hoecker disclaim
beneficial ownership in these shares.
(4) Includes 3,600,000 shares beneficially owned by the Zein and Samar Obagi
Family Trust, of which Dr. Obagi as a Trustee, holds sole voting and
investment authority.
50
RELATED PARTY TRANSACTIONS
INVESTORS' RIGHTS AGREEMENT
We have entered into an agreement with Stonington Capital Appreciation 1994
Fund, L.P., Zein and Samar Obagi Family Trust, Peter P. Tong and two other
stockholders pursuant to which such stockholders will have registration rights
with respect to their shares of common stock following this offering. Please see
"Description of Capital Stock--Registration Rights" for a description of the
terms of this agreement.
OTHER RELATED PARTY TRANSACTIONS
In connection with the acquisition of the net assets of WorldWide Product
Distribution, Inc., we entered into an agreement with one of our directors and
beneficial shareholders, Dr. Zein E. Obagi, who was a shareholder of WorldWide
Product Distribution, Inc. Pursuant to the agreement, we are obligated to pay an
annual royalty to Dr. Obagi on sales of non-prescription products that were in
development at the time of the acquisition. The royalty is calculated as the sum
of $200,000 plus 5% of our net sales of such products, in the aggregate not to
exceed $500,000 annually. In 1999, we made payments to Dr. Obagi pursuant to
this agreement in the amount of $183,337. Our obligation to pay such royalties
to Dr. Obagi terminates upon the closing of this offering. In addition,
according to this agreement, we have other commitments, one of which is to spend
at least $500,000 a year on research and development. Another commitment is to
provide Dr. Obagi with the maximum discount that we provide to independent third
party customers. Upon the closing of this offering, our commitment to spend at
least $500,000 a year on research and development terminates and Dr. Obagi will
only be entitled to the maximum discount that we provide independent third party
customers purchasing our products in the same volumes.
On March 16, 2000, we entered into a Stock Purchase Agreement with Dr. Obagi
with respect to the 50% of the outstanding shares of capital stock of
Derma-Tech. In consideration for such shares, we paid Dr. Obagi $107,298 in cash
and agreed to pay Dr. Obagi $500,000 in cash proceeds received from Derma-Tech
and another of our subsidiaries after reimbursement of our capital investment in
Derma-Tech and such subsidiary.
On December 2, 1997, we entered into an option and transfer agreement with
Dr. Obagi. During July 1998, under the terms of the agreement, we purchased
Dr. Obagi's 49% equity interest in Obagi Skin Health Products Vertrieb, GmbH, or
Vertrieb, for $129,328 plus the first $500,000 of cash distributions, if any,
received from Vertrieb. In 1999, we purchased the remaining 51% ownership
interest in Vertrieb. The aggregate purchase price of $613,758 for Vertrieb
includes $129,328 paid in 1998, $203,000 paid in 1999 and $114,898 paid in the
first nine months of 2000, with $166,532 still owing as of September 30, 2000.
Dr. Obagi is a 74% shareholder in Cellogique Corporation, or Cellogique, our
Middle Eastern distributor. Our agreement with Cellogique automatically renews
for two-year periods after the initial thirty-month term. This agreement
obligates Cellogique to make minimum purchases from us.
Mandarin Management Partners, Inc., or MMPI, an affiliate of Stonington Capital
Appreciation 1994 Fund, L.P., provides management consulting and business
advisory services to us pursuant to a Management Services Agreement dated
December 2, 1997. Under the terms of the agreement, we pay on a monthly basis a
management services fee to MMPI, calculated as 2% of adjusted gross sales, as
defined in the agreement. In 1999, we made payments to MMPI pursuant to this
agreement in the amount of $496,000. Our obligation to pay such fees to MMPI
terminates upon the closing of this offering.
51
Our agreement with MMPI provides for the reimbursement to MMPI by us for the
cost of management, operating, legal, information support and other services
provided to us by MMPI. At various times throughout the period from formation of
OMP, Inc. to the present, employees of MMPI have served us in the capacity of
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
Director of Corporate Affairs, and Manager of Information Technology, while such
positions were vacant. Payments made to MMPI for such services in 1999 were
$700,000. Currently all of these positions are filled with full-time employees
and MMPI provides assistance to us at the request of management on an as-needed
basis.
Stonington Capital Appreciation 1994 Fund, L.P. owns 99,840 shares of our
preferred stock, par value $0.001 per share, Dr. Zein E. Obagi owns 40,000
shares of our preferred stock, par value $0.001 per share and Peter P. Tong owns
3,040 shares of our preferred stock, par value $0.001 per share. Holders of
shares of preferred stock are entitled to cumulative quarterly dividends at a
rate of 11% per annum of the original issue price. As of September 30, 2000, no
dividends had been paid. In addition, the terms of the preferred stock provide
that we shall redeem the preferred stock upon the closing of this offering. We
intend to use a portion of the proceeds raised in this offering to redeem all of
the preferred stock and pay accrued dividends. Based on the balance of preferred
stock and accrued dividends at September 30, 2000, payments to Stonington
Capital Appreciation 1994 Fund, L.P., Dr. Zein E. Obagi and Peter P. Tong would
be $13,095,181, $5,247,983 and $398,731, respectively.
Mandarin Partners LLC, an affiliate of Stonington Capital Appreciation 1994
Fund, L.P., is guarantor of our lease with Gateway Pacific Properties, Inc. for
our distribution center in Torrance, California. We believe that the guarantee
of our lease for the distribution center by Mandarin Partners LLC is beneficial
to us.
We have subleased a portion of our distribution center to United States
Manufacturing Company an affiliate of Mandarin Partners LLC. The sublease
commenced on January 1, 2000 and terminates on December 31, 2004. The monthly
sublease payments to us range from $5,696, in the first year of the sublease, to
$6,664, in the last year of the sublease. We believe that our sublease to United
States Manufacturing Company is on terms no less favorable to us than those that
would be available to us in an arm's-length transaction with a third party.
52
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, our authorized capital stock will consist of
100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share. Immediately after the
offering, based on shares outstanding as of September 30, 2000, we estimated
there will be approximately 18,942,750 shares of common stock issued and
outstanding and no shares of preferred stock issued and outstanding. Assuming
that there are no additional option grants after September 30, 2000, a total of
1,082,700 shares of our common stock will be issuable upon exercise of stock
options.
COMMON STOCK
As of September 30, 2000, 14,442,750 shares of our common stock were
outstanding, which were held of record by three shareholders. In addition,
1,082,700 shares of our common stock were reserved and available for issuance
pursuant to our employee benefit plans.
The holders of our common stock are entitled to receive ratably, from funds
legally available for the payment thereof, dividends when and as declared by
resolution of the board of directors, subject to any preferential dividend
rights that may be granted to holders of any preferred stock authorized and
issued by the board of directors. Traditionally, we have not declared or paid
dividends and we do not intend to do so for the foreseeable future. In the event
of liquidation, each share of common stock is entitled to share pro rata in any
distribution of our assets after payment or providing for the payment of
liabilities and any liquidation preference of any issued and outstanding
preferred stock and any preferred stock authorized and issued by the board of
directors. Each holder of common stock is entitled to one vote for each share of
common stock held of record on the applicable record date on all matters
submitted to a vote of shareholders, including the election of directors.
Holders of common stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities, and there are no
conversion rights or redemption rights or sinking fund provisions with respect
to common stock. All outstanding shares of common stock are duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without further action by the
stockholders, to issue, from time to time, preferred stock in one or more series
and to fix the number of shares, designations, preferences and powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights of the holders of common stock and
may have the effect of delaying, deferring or preventing a change in control of
OMP. We have no present plans to issue additional shares of preferred stock.
REGISTRATION RIGHTS
After the completion of this offering, the holders of 14,400,000 shares of
common stock held by purchasers will be entitled to rights to register these
shares under the Securities Act of 1933. Under the terms of the Investors'
Rights Agreement, whenever we propose to file a registration statement under the
Securities Act, Stonington Capital Appreciation 1994 Fund, L.P., Zein and Samar
Obagi Family
53
Trust, Peter P. Tong and two other stockholders, as the holders of registrable
securities under the Investors' Rights Agreement, are entitled to notice of the
registration and have the right, subject to limitations that the underwriters
may impose on the number of shares included in the registration, to include
their registrable shares in the registration. This requirement terminates if
such stockholder is not deemed an affiliate of us under the Securities Act and
owns less than 2% of our outstanding stock.
Additionally, beginning six months following the closing of our initial public
offering, the holders of a majority of the outstanding registrable securities
have the right to require us to file up to three effective registration
statements on Form S-1 or S-2 with a written request for registration from the
holders of at least 50% of the outstanding registrable securities. We may,
however, defer the requested registration of shares up to 120 days if our board
of directors determines that a registration at the requested time would be
seriously detrimental to us and our stockholders. This requirement terminates
upon the fifth anniversary of this offering. In addition, subject to certain
limitations, the holders of registrable securities have the right to require us
to file an unlimited number of registration statements on Form S-3 with a
written request for registration. We may, however, defer the requested
registration of shares up to 60 days if our board of directors, which is
currently controlled by stockholders who have registration rights, determines
that a registration at the requested time would be seriously detrimental to us
and our stockholders. We have agreed to pay expenses of the holders of
registrable securities.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER
PROVISIONS
DELAWARE LAW. In general, Section 203 of the Delaware General Corporation Law
prohibits a publicly held Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder
- upon consummation of the transaction that resulted in the stockholders
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange offer
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation
- in general, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation
54
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% of more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
CHARTER PROVISIONS. Our certificate of incorporation and bylaws include the
following provisions that will become effective upon the closing of this
offering and that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management:
- that special meetings of the holders may be called only by the chairman of
the board of directors, the chief executive officer or our board of
directors pursuant to a resolution adopted by a majority of the total number
of authorized directors
- that our board of directors can issue up to 10,000,000 shares of preferred
stock, as described under "Preferred Stock" above
- that advance notice must be given regarding the nomination of candidates for
election as directors and the presentation of stockholder proposals
- that our board of directors is divided into three classes, with the
directors in each class serving a three-year term
TRANSFER AGENT AND REGISTRAR
Firstar Trust Services has been appointed as transfer agent and registrar for
our common stock.
NATIONAL MARKET LISTING
We have applied for listing of our common stock on the Nasdaq National Market
under the symbol "OMPI".
55
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of our common stock including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect prevailing market prices for our common stock and could impair our
ability to raise capital through sale of our equity securities.
Upon completion of this offering, we will have 18,942,750 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options. Of these shares, the shares to be sold in
this offering will be freely tradable in the public market without restriction
under the Securities Act, unless the shares are held by our "affiliates", as
that term is defined in Rule 144 under the Securities Act. Almost all of the
remaining shares of common stock outstanding upon completion of this offering
may be sold in the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, as summarized below.
RULE 144. In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares not to exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of our common stock during the four calendar weeks
preceding the filing of a Form 144 with respect to the sale. Sales under
Rule 144 are also subject to manner of sale and notice requirements, as well as
to the availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have been an affiliate of OMP, Inc. at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell the shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
LOCK-UP AGREEMENTS. Our executive officers and directors and all of our
stockholders, including holders of vested options, have agreed with the
underwriters not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any of our common stock for a period of 180 days from
the date of this prospectus. A total of 14,400,000 outstanding shares of common
stock and 873,900 shares underlying options are subject to these lock-up
agreements. CIBC World Markets Corp. may in its sole discretion, at any time
without notice, consent to the release of all or any portion of the shares
subject to lock-up agreements. CIBC World Markets Corp. has no current plans to
release any shares subject to these lock-up agreements. We have agreed not to
sell or otherwise dispose of any shares of common stock during the 180-day
period following the date of this prospectus, except that we may issue and grant
options to purchase shares of common stock under our 1997 and 2000 Stock
Option/Stock Issuance Plans.
REGISTRATION RIGHTS. Following this offering, some of our stockholders will have
registration rights. Please see "Description of Capital Stock--Registration
Rights."
STOCK OPTION PLANS. As of September 30, 2000, we have outstanding options to
purchase 1,082,700 shares of common stock. Shares issued upon exercise of
options granted by us prior to the date of this prospectus will be available for
sale in the public market under Rule 701 of the Securities Act, following
expiration of the lock-up periods described above. Rule 701 permits resale of
these shares in reliance upon Rule 144 but without compliance with various
restrictions, including the holding period requirement, imposed under Rule 144.
56
In addition, we intend to file, after the effective date of this offering, a
registration statement on Form S-8 to register approximately 1,350,000 shares of
common stock reserved for issuance under our stock option and stock purchase
plans. The registration statement will become effective automatically upon
filing. Shares issued under our stock option plan, after the filing of the
registration statement, may be sold in the open market following expiration of
the lock-up periods described above, subject, in the case of some holders, to
the Rule 144 limitations applicable to affiliates and vesting restrictions
imposed by us.
57
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
This section summarizes certain U.S. federal income and estate tax consequences
of the ownership and disposition of our common stock by a non-U.S. holder. You
are a non-U.S. holder if you are, for U.S. federal income tax purposes:
- a non-resident alien individual;
- a foreign corporation; and
- an estate or trust that in either case is not subject to U.S. federal income
tax on a net income basis on income or gain from common stock.
This section does not consider the specific facts and circumstances that may be
relevant to a particular non-U.S. holder and does not describe special tax rules
that could apply to a non-U.S. holder who was previously a U.S. resident or
citizen. This section does not address the treatment of a non-U.S. holder under
the laws of any state, local or foreign taxing jurisdiction. This section is
based on the tax laws of the United States, including the Internal Revenue Code
of 1986, as amended, existing and proposed regulations and administrative and
judicial interpretations, all as currently in effect. These laws are subject to
change, possibly on a retroactive basis.
You should consult a tax advisor regarding the U.S. federal tax consequences of
acquiring holding and disposing of our common stock in your particular
circumstances as well as any tax consequences that may arise under the laws of
any state, local or foreign taxing jurisdiction.
DIVIDENDS
Except as described below, if you are a non-U.S. holder of our common stock,
dividends paid to you are subject to withholding of U.S. federal income tax at a
30% rate or at a lower rate if you are eligible for the benefits of an income
tax treaty that provides for a lower rate. Under currently effective U.S.
Treasury regulations, for purposes of determining if dividends are subject to
the 30% withholding tax, dividends paid to an address in a foreign country are
presumed to be paid to a resident of that country, unless the person making the
payment has knowledge to the contrary. Under current interpretations of U.S.
Treasury regulations, this presumption also applies for purposes of determining
whether a lower withholding rate applies under an income tax treaty.
Under U.S. Treasury regulations that will generally apply to dividends paid
after December 31, 2000, you must satisfy certification requirements in order to
claim the benefit of a lower treaty rate. Additionally, if you are a partner in
a foreign partnership, you, in addition to the foreign partnership, must satisfy
the certification requirements and the partnership must provide information as
well. The Internal Revenue Service will apply a look-through rule in the case of
tiered partnerships.
If you are eligible for a reduced rate of U.S. withholding tax under a tax
treaty, you may obtain a refund of any amount withheld in excess of that rate by
filing a refund claim with the U.S. Internal Revenue Service.
If the dividends are "effectively connected" with your conduct of a trade or
business within the United States, and, if required by a tax treaty, the
dividends are attributable to a permanent establishment that you maintain in the
United States, then the dividends generally are not subject to withholding tax.
Instead, "effectively connected" dividends are taxed at rates applicable to U.S.
citizens, resident aliens and domestic U.S. corporations.
If you are a corporate non-U.S. holder, "effectively connected" dividends that
you receive may be subject to an additional "branch profits tax" at a 30% rate
or at a lower rate if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.
58
GAIN ON DISPOSITION OF OUR COMMON STOCK
If you are a non-U.S. holder, you generally will not be subject to U.S. federal
income tax on gain that you recognize on a disposition of our common stock
unless:
- the gain is "effectively connected" with your conduct of a trade or business
in the United States. and the gain is attributable to a permanent
establishment that you maintain in the United States, if that is required by
an applicable income tax treaty as a condition for subjecting you to U.S.
taxation on a net income basis
- you are an individual, you hold the common stock as a capital asset, and you
are present in the United States for 183 or more days in the taxable year of
the sale and certain other conditions exist
- we are or have been a U.S. real property holding corporation for federal
income tax purposes and you held, directly or indirectly, at any time during
the five-year period ending on the date of disposition, more than 5% of our
common stock and you are not eligible for any treaty exemption
If you are a corporate non-U.S. holder, "effectively connected" gains that you
recognize may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
We have not been, are not and do not anticipate becoming a U.S. real property
holding corporation for U.S. federal income tax purposes.
FEDERAL ESTATE TAXES
Common stock held by an individual who is a non-U.S. holder at the time of death
will be included in the holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In certain circumstances, dividends paid with respect to our common stock and
gross proceeds from the disposition of our common stock could be subject to
information reporting and backup withholding tax at a rate of 31%. Under
currently applicable law, if you are a non-U.S. holder, dividends paid to you at
an address outside the United States will not be subject to U.S. information
reporting requirements or backup withholding tax. Beginning with respect to
payments made after December 31, 2000, a non-U.S. holder will be entitled to
such exemption only if the non-U.S. holder provides a Form W-8BEN, satisfies
certain documentary evidence requirements for establishing that it is a non-U.S.
holder, or otherwise establishes an exemption.
If you sell your common stock outside of the United States through a non-U.S.
office of a non-U.S. broker, and the sales proceeds are paid to you outside the
United States, then U.S. backup withholding and information reporting
requirements generally will not apply to that payment. However, U.S. information
reporting, but not backup withholding, will apply to a payment of sales
proceeds, even if that payment is made outside the United States, if you sell
your common stock through a non-U.S. office of a broker that:
- is a U.S. holder
- derives 50% or more of its gross income for certain periods from the conduct
of a trade or business in the United States.
- is a "controlled foreign corporation" as to the United States.
59
- with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
-- one or more of its partners are U.S. persons, as defined in the U.S.
Treasury regulations, who in the aggregate hold more than 50% of the
income or capital interests in the partnership
-- the foreign partnership is engaged in a U.S. trade or business
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of our common stock to or
through a U.S. office of a broker, the payment is subject to both U.S. backup
withholding and information reporting unless you certify, under penalties of
perjury, that you are a non-U.S. holder or you otherwise establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the U.S. Internal Revenue Service.
Prospective purchasers are urged to consult their own advisors with respect to
the particular U.S. Federal income and estate tax consequences to them of the
ownership and disposition of our common stock, as well as the tax and the
possible effects of changes in tax laws.
60
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp. and Thomas Weisel Partners LLC are acting as
representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specific number of shares but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
CIBC World Markets Corp.....................................
Thomas Weisel Partners LLC..................................
---------
Total.......................................................
=========
The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated, depending on the circumstances.
The shares should be ready for delivery on or about , 2001 against
payment in immediately available funds. The representatives have advised us that
the underwriters propose to offer the shares directly to the public at the
initial public offering price that appears on the cover page of this prospectus.
In addition, the representatives may offer some of the shares to other
securities dealers at such price less a concession of $ per share. The
underwriters may also allow, and such dealers may reallow, a concession not in
excess of $ per share to other dealers. After the shares are released for
sale to the public, the representatives may change the offering price and other
selling terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 675,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the estimated
underwriting discount. If this option is exercised in full, the total price to
the public will be $ , and the total proceeds to us will be $ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
The underwriting fee is equal to the public offering price per share of common
stock less the amount paid by the underwriters to us per share of common stock.
The underwriting fee is currently expected to be approximately of the
initial public offering price. We have agreed to pay the underwriters the
following fees, assuming either no exercise or full exercise by the underwriters
of the underwriters' over-allotment option:
TOTAL FEES
---------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
Fees paid by OMP............................. $ $ $
61
In addition, we estimate that our share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$ .
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors, and substantially all of our stockholders
and holders of options and warrants to purchase our stock, have agreed not to
offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock owned by
these persons prior to this offering or common stock issuable upon exercise of
options or warrants held by these persons for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part
without the prior written consent of CIBC World Markets Corp. This consent may
be given at any time without public notice. We have entered into a similar
agreement with the representatives of the underwriters, except that we may grant
options and issue shares under our existing stock option plans without such
consent. There are no agreements between the representatives and any of our
stockholders or affiliates releasing them from these lock-up agreements prior to
the expiration of the lock-up period described above.
The representatives of the underwriters have advised us that the underwriters do
not expect sales to any account over which they exercise discretionary authority
to exceed 5% of the shares offered by this prospectus.
There is no established trading market for the shares. The offering price for
the shares will be determined by us and the representatives based on the
following factors:
- prevailing market and general economic conditions
- our financial information
- our history and prospects
- OMP and the industry in which we compete
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues
- the present stage of our development and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to ours
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions--The representatives may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- Over-allotment and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. A short sales position may
involve either "covered" short sales or "naked" short sales. Covered short
sales are sales made for an amount not greater than the underwriters'
over-allotment option to purchase additional shares in the offering
described above. The underwriters may close out any covered short position
by either exercising their over-allotment option or purchasing shares in the
open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the
price of shares available for purchase in the
62
open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of
the over-allotment option. The underwriters will have to close out any naked
short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. If a short position is created in connection with the offering,
the representatives may engage in syndicate covering transactions by
purchasing shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the over-allotment
option.
- Penalty bids--If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who
sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
At our request, the underwriters have reserved for sale, at the initial public
offering price, up to shares for our employees, family members of
employees, customers and other third parties. The number of shares of our common
stock available for sale to the general public will be reduced to the extent
these reserved shares are purchased. Any reserved shares that are not purchased
by these persons will be offered by the underwriters to the general public on
the same basis as the other shares in this offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters, was
organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 153
completed transactions, and has acted as a syndicate member in an additional 135
public offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
pursuant to the underwriting agreement entered into in connection with this
offering.
63
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Michael Best & Friedrich LLP, Madison, Wisconsin. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Shearman & Sterling, San Francisco, California.
EXPERTS
The consolidated financial statements of OMP, Inc. and its subsidiaries as of
December 31, 1998 and 1999, and for the period from inception, October 8, 1997,
through December 31, 1997 and each of the two years in the period ended
December 31, 1999 included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of WorldWide Product Distribution, Inc. for the period
from January 1, 1997 through December 1, 1997 included in this prospectus has
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement, including exhibits and schedule
filed therewith, at the Securities and Exchange Commission's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of these materials from the Public
References Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as OMP, Inc., that file
electronically with the Securities and Exchange Commission.
64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OMP, INC. PAGE
- --------- --------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998, 1999
and September 30, 2000 (unaudited)........................ F-3
Consolidated Statements of Operations for the period from
inception, October 8, 1997 through December 31, 1997, the
years ended December 31, 1998 and 1999 and the nine month
periods ended September 30, 1999 and 2000 (unaudited)..... F-4
Consolidated Statements of Stockholders' Deficit for the
period from inception, October 8, 1997, through
December 31, 1997, the years ended December 31, 1998 and
1999 and the nine month period ended September 30, 2000
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the period from
inception, October 8, 1997, through December 31, 1997, the
years ended December 31, 1998 and 1999 and the nine month
periods ended September 30, 1999 and 2000 (unaudited)..... F-6
Notes to Consolidated Financial Statements.................. F-7
WORLDWIDE PRODUCT DISTRIBUTION, INC.
Report of Independent Accountants........................... F-33
Statement of Operations for the period from January 1, 1997
through December 1, 1997.................................. F-34
Statement of Cash Flows for the period from January 1, 1997
through December 1, 1997.................................. F-35
Notes to Financial Statements............................... F-36
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of OMP, Inc.
The reincorporation and stock split as described in Note 20 to the consolidated
financial statements have not been consummated at December 27, 2000. When they
have been consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
OMP, Inc., formerly Obagi Medical Products, Inc., and its subsidiaries (the
"Company") at December 31, 1998 and 1999, and the results of their operations
and their cash flows for the period from inception, October 8, 1997, through
December 31, 1997 and for each of the two years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion."
Los Angeles, California
February 11, 2000
F-2
OMP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,276,077 $ 650,049 $ 293,183
Accounts receivable (net of allowance for doubtful
accounts of $118,283, $88,573 and $119,939 as of
December 31, 1998 and 1999 and September 30, 2000,
respectively)........................................... 1,523,276 2,699,747 6,816,420
Receivable due from WWP................................... 500,000 -- --
Receivable due from related parties (Note 13)............. 303,000 354,000 460,555
Inventories............................................... 676,533 947,299 1,399,410
Prepaid expenses and other current assets................. 403,077 667,071 1,119,127
Income taxes receivable................................... -- 438,526 250,000
----------- ----------- -----------
Total current assets.................................. 4,681,963 5,756,692 10,338,695
Property and equipment, net................................. 846,350 1,154,875 1,342,293
Intangible assets, net...................................... 14,626,133 15,717,936 15,680,010
Other assets................................................ 688,663 1,469,140 1,668,164
Deferred income taxes....................................... -- 1,350,760 1,494,666
----------- ----------- -----------
Total assets.......................................... $20,843,109 $25,449,403 $30,523,828
=========== =========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 820,061 $ 1,009,062 $ 1,947,316
Notes payable and capital lease obligation, current....... 1,295,989 1,883,490 2,300,157
Line of credit............................................ -- -- 1,497,731
Accrued and other current liabilities..................... 1,331,676 2,496,171 2,805,134
Amounts due to related parties (Note 13).................. 127,685 235,996 282,275
----------- ----------- -----------
Total current liabilities............................. 3,575,411 5,624,719 8,832,613
Notes payable and capital lease obligation, less current
portion................................................... 2,822,884 2,448,768 3,930,785
----------- ----------- -----------
Total liabilities..................................... 6,398,295 8,073,487 12,763,398
----------- ----------- -----------
Redeemable preferred stock, $.001 par value; 1,000,000
shares authorized, 149,000, 146,200 and 146,200 shares
issued and outstanding at December 31, 1998 and 1999 and
September 30, 2000, respectively, stated at redemption
value..................................................... 16,666,202 17,970,100 19,177,352
----------- ----------- -----------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value; 100,000,000 shares
authorized, 14,652,000, 14,400,000 and 14,442,750 shares
issued and outstanding at December 31, 1998 and 1999 and
September 30, 2000, respectively........................ 14,652 14,400 14,443
Additional paid-in capital................................ -- -- 1,312,976
Retained deficit.......................................... (2,236,040) (640,353) (1,079,235)
Deferred stock compensation............................... -- -- (1,678,642)
Accumulated other comprehensive income.................... -- 31,769 13,536
----------- ----------- -----------
Total stockholders' deficit........................... (2,221,388) (594,184) (1,416,922)
----------- ----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' deficit............................... $20,843,109 $25,449,403 $30,523,828
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
OMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM INCEPTION,
OCTOBER 8, 1997 FOR THE YEAR ENDED NINE MONTH PERIOD ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1997 1998 1999 1999 2000
---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues (Note 13)................................ $1,109,367 $17,016,936 $23,075,509 $16,256,377 $24,982,803
Cost of sales (Note 13)........................... 256,286 3,447,481 4,188,018 3,108,007 5,242,583
---------- ----------- ----------- ----------- -----------
Gross profit.................................... 853,081 13,569,455 18,887,491 13,148,370 19,740,220
Selling, general and administrative expenses...... 851,686 12,604,721 14,419,801 10,040,834 18,093,976
Depreciation and amortization..................... 88,807 1,173,370 1,483,855 1,038,488 1,401,561
---------- ----------- ----------- ----------- -----------
Income (loss) from operations................... (87,412) (208,636) 2,983,835 2,069,048 244,683
Interest income................................... 4,336 73,856 69,485 53,576 28,656
Interest expense.................................. (39,397) (454,855) (422,992) (316,676) (703,998)
---------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes.................................. (122,473) (589,635) 2,630,328 1,805,948 (430,659)
Provision (benefit) for income taxes.............. 800 800 (774,248) (634,120) 8,223
---------- ----------- ----------- ----------- -----------
Net income (loss)............................... (123,273) (590,435) 3,404,576 2,440,068 (438,882)
Redeemable preferred stock dividends.............. 132,181 1,634,021 1,630,731 1,225,376 1,207,252
---------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders.................................... $ (255,454) $(2,224,456) $ 1,773,845 $ 1,214,692 $(1,646,134)
========== =========== =========== =========== ===========
Net income (loss) per common share:
Basic........................................... $ (0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
========== =========== =========== =========== ===========
Diluted......................................... $ (0.05) $ (0.15) $ 0.12 $ 0.08 $ (0.11)
========== =========== =========== =========== ===========
Weighted average common shares outstanding:
Basic........................................... 4,972,607 14,600,910 14,584,340 14,646,462 14,437,896
========== =========== =========== =========== ===========
Diluted......................................... 4,972,607 14,600,910 14,849,374 14,846,753 14,437,896
========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OMP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER
------------------------ PAID-IN STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME TOTAL
----------- ---------- ----------- ------------ ----------- ------------- -----------
Issuance of common shares to
founders.................... 1,800 $ 2 $ 498 $ -- $ -- $ -- $ 500
Issuance of common shares..... 14,398,200 14,398 3,985,102 3,999,500
Predecessor carryover basis
adjustment.................. (3,936,478) (3,936,478)
Net loss...................... (123,273) (123,273)
Preferred stock dividends
accrued..................... (49,122) (83,059) (132,181)
----------- ---------- ----------- ----------- ----------- ---------- -----------
Balances as of December 31,
1997........................ 14,400,000 14,400 (206,332) (191,932)
Purchase price adjustment
(Note 3).................... 125,000 125,000
Net loss...................... (590,435) (590,435)
Issuance of common shares..... 252,000 252 69,748 70,000
Preferred stock dividends
accrued..................... (194,748) (1,439,273) (1,634,021)
----------- ---------- ----------- ----------- ----------- ---------- -----------
Balances as of December 31,
1998........................ 14,652,000 14,652 (2,236,040) (2,221,388)
Comprehensive loss:
Translation adjustment, net
of tax effect............. 31,769 31,769
Net income.................. 3,404,576 3,404,576
-----------
Total comprehensive income.... 3,436,345
Repurchase of common shares... (252,000) (252) (209,748) (210,000)
Compensation related to stock
options granted to
non-employees............... 31,590 31,590
Preferred stock dividends
accrued..................... (31,590) (1,599,141) (1,630,731)
----------- ---------- ----------- ----------- ----------- ---------- -----------
Balances as of December 31,
1999........................ 14,400,000 14,400 (640,353) 31,769 (594,184)
Comprehensive loss:
Translation adjustment, net
of tax effect
(unaudited)............... (18,233) (18,233)
Net loss (unaudited)........ (438,882) (438,882)
-----------
Total comprehensive loss
(unaudited)................. (457,115)
Issuance of common shares
(unaudited)................. 42,750 43 11,832 11,875
Deferred stock compensation
(unaudited)................. 1,790,050 (1,790,050)
Amortization of deferred stock
compensation (unaudited).... 111,408 111,408
Compensation related to stock
options granted to
non-employees (unaudited)... 718,346 718,346
Preferred stock dividends
accrued (unaudited)......... (1,207,252) (1,207,252)
----------- ---------- ----------- ----------- ----------- ---------- -----------
Balances as of September 30,
2000 (unaudited)............ 14,442,750 $ 14,443 $ 1,312,976 $(1,678,642) $(1,079,235) $ 13,536 $(1,416,922)
=========== ========== =========== =========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
OMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
FROM INCEPTION,
OCTOBER 8, 1997 NINE MONTH PERIOD ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1997 1998 1999 1999 2000
---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)................................ $ (123,273) $ (590,435) $ 3,404,576 $ 2,440,068 $ (438,882)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization.................... 88,807 1,173,370 1,483,855 1,038,488 1,401,562
Deferred income taxes............................ (1,508,321) (1,498,500) (492,187)
Compensation related to stock options............ 31,590 829,754
Gain on sale of assets........................... (5,817)
Changes in operating assets and liabilities:
Accounts receivable............................ (83,531) (185,643) (1,055,422) (974,803) (4,134,906)
Receivable due from related parties............ 27,644 (192,698) (51,000) 166,186 (106,555)
Income tax receivable.......................... (438,526) 188,526
Inventories.................................... (45,091) (387,818) (270,766) (288,649) (452,111)
Prepaid expenses and other current assets...... (342,604) 262,043 112,725 (130,643) (103,775)
Other assets................................... (229,171) (542,916) (459,805) (208,145) 7,380
Accounts payable............................... 329,347 (180,796) 189,001 76,628 938,254
Accrued and other current liabilities.......... 173,998 690,051 (200,171) 602,252 308,963
Amounts due to related parties................. 72,392 108,311 29,746 46,279
------------ ----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities................................. (203,874) 111,733 1,346,047 1,252,628 (2,007,698)
------------ ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of WWP, net of cash acquired............ (17,564,445) (155,228) 500,000 500,000
Purchase of property and equipment............... (1,785) (748,686) (171,799) (108,757) (457,259)
Purchase of intangible assets.................... (129,328) (1,076,828) (871,927) (1,093,795)
Investment in equity investments................. (206,404)
Proceeds from sale of property and equipment..... 10,000
------------ ----------- ----------- ----------- -----------
Net cash used in investing activities........ (17,566,230) (1,023,242) (748,627) (480,684) (1,757,458)
------------ ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred
stock.......................................... 14,620,000 280,000
Proceeds from issuance of common stock........... 3,999,500 70,000 11,875
Repurchase of redeemable preferred stock......... (280,000) (280,000)
Repurchase of common stock....................... (210,000) (210,000)
Net proceeds from line of credit................. 1,497,731
Proceeds from issuance of term loans............. 3,000,000 750,000 206,250 3,000,000
Principal payments on term loans................. (300,000) (740,625) (743,750)
Payment of loan origination fee.................. (35,203)
Principal payments on related party note
payable........................................ (1,000,000) (666,666) (666,667) (333,334) (333,333)
Payment of preferred stock dividend.............. (46,833) (46,833)
Principal payments on capital lease
obligations.................................... (9,941) (29,323) (21,703) (24,233)
------------ ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................. 20,584,297 (626,607) (1,223,448) (685,620) 3,408,290
Net increase (decrease) in cash and cash
equivalents................................ 2,814,193 (1,538,116) (626,028) 86,324 (356,866)
Cash and cash equivalents at beginning of period... -- 2,814,193 1,276,077 1,276,077 650,049
------------ ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period......... $ 2,814,193 $ 1,276,077 $ 650,049 $ 1,362,401 $ 293,183
============ =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
OMP, Inc., formerly Obagi Medical Products, Inc., was incorporated under the
laws of the state of California on October 8, 1997 and was reincorporated in
Delaware on , 2001. Upon reincorporation, Obagi Medical Products,
Inc. changed its name to OMP, Inc. (the "Company"). On December 2, 1997, the
Company acquired substantially all the assets and assumed certain liabilities of
WorldWide Product Distribution, Inc. ("WWP") (see Note 3). The Company is a
specialty pharmaceutical company that develops, markets and sells products for
physician-mediated skin health and restoration.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of OMP, Inc. and its
wholly-owned subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity method of accounting was used for the Company's 49% ownership
interest in Obagi Skin Health Products Vertrieb, GmbH ("Vertrieb") for the year
ended December 31, 1998. The carrying value of this investment was $129,328 at
December 31, 1998. The Company's share of Vertrieb's net income from the date
acquired through December 31, 1998 was nominal. In order to acquire distribution
rights for certain territories in Europe, in 1999, the Company purchased the
remaining 51% ownership interest in Vertrieb for $484,430 and then followed the
consolidation method of accounting (see Note 13). Vertrieb is a distributor of
skin health care products.
INTERIM FINANCIAL INFORMATION--UNAUDITED
The financial information for the nine month periods ended September 30, 1999
and 2000 is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the operating results
and cash flows for those periods. Results of the September 30, 2000 period are
not necessarily indicative of the results for the entire year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash and cash equivalents approximates market value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided for using the
straight-line method over the assets' estimated useful lives of 3-5 years for
furniture and fixtures, 3 years for computer and office equipment, and equipment
under capital lease. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the term of
the lease, whichever is shorter.
F-7
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs, which do not extend the asset lives, are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is included in operations.
INTANGIBLE ASSETS
Purchased intangibles consist of trademarks, goodwill, distribution rights and
other intangibles which include patents, covenants not-to-compete, customer
lists, and proprietary formulations. Purchased intangible assets are amortized
using the straight-line method over the following lives: trademarks (15 years);
goodwill (20 years); distribution rights (3 to 10 years); other intangible
assets (3 to 16 years).
PREPAID ROYALTY
Prepaid royalty, which is included in other assets (see Note 7) in the
accompanying consolidated balance sheets, represents prepayments made to an
independent licensor under a license agreement. Such prepayment is not
refundable but is recoupable against future royalties.
Prepaid royalties are amortized at the contractual royalty rate based on actual
net product sales. Management evaluates the future realization of prepaid
royalties periodically and charges to expense any amounts that management deems
unlikely to be amortized at the contractual royalty rate through product sales.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," long-lived tangible and intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates potential impairment by comparing the carrying amount of the
assets with the estimated undiscounted future cash flows associated with them.
Should the review indicate that an asset is not recoverable, the Company's
carrying value of the asset would be reduced by the estimated shortfall in
future discounted cash flows. Based on available information, management
believes no such impairment exists.
FAIR VALUES OF LONG-TERM DEBT
The fair values of the Company's long-term debt, excluding the capital lease
obligation, have been estimated based on current rates offered to the Company
for debt of the same remaining maturities. The carrying amounts of such long
term debt approximate their fair values.
INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns.
F-8
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statements and the tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. This method also requires the recognition
of future tax benefits such as net operating loss and tax credit carryforwards,
to the extent that realization of such benefits is more likely to occur than
not. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the year in
deferred tax assets and liabilities.
REVENUE RECOGNITION
The Company's customers are physicians and distributors. The Company recognizes
revenues upon the shipment of its products to the customer provided that the
Company has received a purchase order, the price is fixed, collection of the
resulting receivable is probable, product returns are reasonably estimable and
there are no remaining obligations. The terms of all product sales are FOB
shipping point. The Company's products are not subject to any customer
acceptance process. The Company provides for future returns based on historical
experience at the time revenue is recognized.
ADVERTISING AND PROMOTION COSTS
All advertising and promotion costs are expensed as incurred. Advertising costs
incurred for the period from inception, October 8, 1997, through December 31,
1997, for the years ended December 31, 1998 and 1999 and the nine month periods
ended September 30, 1999 and 2000 were approximately $120,000, $510,000,
$524,000, $353,000 (unaudited) and $1,916,000 (unaudited), respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States are measured
using the local currency as the functional currency. Assets and liabilities of
these subsidiaries are translated at the rates of exchange at the balance sheet
date. The resultant translation adjustments are recorded as a separate component
of stockholders' deficit. Revenue and expense items are translated at average
monthly rates of exchange.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expense for the period from inception, October 8, 1997, through
December 31, 1997 and for the years ended December 31, 1998 and 1999 and the
nine month periods ended September 30, 1999 and 2000 were approximately
$142,000, $1,161,000, $944,000, $748,000 (unaudited) and $651,000 (unaudited),
respectively.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require companies to record stock-based employee compensation plans at fair
value. The Company has elected to continue accounting for stock-based employee
compensation plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
F-9
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Employees" ("APB 25"). The Company has adopted the disclosure-only provisions of
SFAS 123. Additionally, in accordance with SFAS 123 and EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with, Selling Goods or Services," the Company
measures stock-based non-employee compensation at fair value.
Under SFAS 123 stock-based compensation expense related to stock options granted
to consultants is recognized as the stock options are earned. The fair value of
the stock options granted is calculated at each reporting date using the
Black-Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of the Company's common stock
fluctuates.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
Net income (loss) applicable to common stockholders is net income (loss)
decreased (increased) by cumulative but undeclared and unpaid dividends accreted
to the carrying amount of redeemable preferred stock during the respective
periods presented.
PER SHARE INFORMATION
The Company follows SFAS No. 128, "Earnings Per Share," which establishes
standards for the computation, presentation and disclosure requirements for
basic and diluted earnings per share for entities with publicly held common
shares and potential common shares. Under SFAS No. 128, basic earnings per share
is computed by dividing net income available to common stockholders by the
weighted average number of shares outstanding. In computing diluted earnings per
share, the weighted average number of shares outstanding is adjusted to reflect
the effect of potentially dilutive securities.
All share and per share amounts have been adjusted to give retroactive effect to
the 1.8 for 1.0 stock split (see Note 20) for all periods presented.
COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income," which established standards for the reporting
and display of comprehensive income. The Company adopted SFAS No. 130 effective
January 1, 1998. SFAS No. 130 does not affect current principles of measurement
of revenues and expenses and, accordingly, the adoption of SFAS No. 130 had no
effect on the Company's results of operations or financial position. Other
comprehensive income consists of foreign currency translation adjustments. For
the period from inception October 8, 1997, through December 31, 1997 and the
year ended December 31, 1998, net loss equaled total comprehensive loss.
SEGMENT REPORTING
In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which supercedes substantially all the
reporting requirements previously required under SFAS No. 14, "Financial
Reporting for Business Segments of an Enterprise," and establishes standards for
the way the Company reports information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, the determination of
segments to be reported in the financial statements is to be consistent
F-10
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
with the manner in which management organizes and evaluates the internal
organization to make operating decisions and assess performance. The adoption of
this statement did not have an impact upon the Company's operating results or
financial position, as this statement's provisions affect only the disclosure of
certain segment information in the notes to consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which outlines
the basic criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. SAB 101 is effective for
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company has adopted SAB 101 for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of APB 25. This interpretation clarifies:
- the definition of an employee for purposes of applying APB 25;
- the criteria for determining whether a plan qualifies as a noncompensatory
plan;
- the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
This interpretation became effective as of July 1, 2000. The adoption of FIN 44
did not have a material impact on the Company's unaudited consolidated financial
statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform with the current period presentation.
3. WWP ACQUISITION:
On December 2, 1997, the Company acquired substantially all assets, properties,
and rights used in the operation of the business of WWP and assumed certain
liabilities. As consideration for this acquisition, the purchase price paid
consisted of $17,000,000 in cash and a note payable of $3,000,000 (see Note 8)
plus transaction costs, subject to a final price determination. The Company has
accounted for this
F-11
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. WWP ACQUISITION: (CONTINUED)
transaction in accordance with APB 16, "Business Combinations," and EITF 88-16,
"Basis in Leveraged Buyout Transactions," under the purchase method of
accounting.
The purchase price exceeded the fair value of WWP's net tangible assets by
$15,984,470, which was capitalized as goodwill and other intangibles. The assets
and liabilities attributed to the former stockholder of WWP, who retained a 25%
interest in the Company, subsequent to the acquisition, were recorded at the
predecessor basis in accordance with generally accepted accounting principles.
The new basis of reporting for these acquired net assets using fair market
values at the date of the acquisition was reduced by $3,936,478 to reflect the
carryover basis of the former stockholder of WWP. This predecessor carryover
basis adjustment has been reflected as a reduction of stockholders' equity.
On March 15, 1999, the Company and WWP settled an ongoing dispute over the final
purchase price determination (see Note 18). A $500,000 receivable has been
recorded on the Company's December 31, 1998 consolidated balance sheet and a
corresponding adjustment was made to goodwill ($375,000) and the predecessor
carryover basis adjustment ($125,000). The agreed-upon purchase price adjustment
resulted in a $500,000 cash payment to the Company from WWP on March 15, 1999.
The Company incurred additional transaction costs of approximately $155,000
relating to the resolution of the purchase price adjustment and has recorded
such costs as an increase to goodwill during the year ended December 31, 1998.
4. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- --------------
(UNAUDITED)
Work in process............................. $213,862 $488,833 $ 357,615
Finished goods.............................. 462,671 458,466 1,041,795
-------- -------- ----------
$676,533 $947,299 $1,399,410
======== ======== ==========
F-12
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
1998 1999
--------- ----------
Furniture and fixtures................................ $ 340,044 $ 374,194
Computer equipment.................................... 214,252 317,370
Lab and office equipment.............................. 63,451 90,872
Leasehold improvements................................ 250,578 261,654
Capital lease (office equipment)...................... 95,480 95,480
Construction in progress.............................. 385,137
--------- ----------
963,805 1,524,707
Less accumulated depreciation and amortization...... (117,455) (369,832)
--------- ----------
$ 846,350 $1,154,875
========= ==========
Depreciation expense for the period from inception, October 8, 1997, through
December 31, 1997 and for the years ended December 31, 1998 and 1999 was $6,389,
$117,223, and $248,411, respectively. At December 31, 1998 and 1999, accumulated
depreciation for fixed assets under capital lease was $10,609 and $42,436,
respectively.
6. INTANGIBLE ASSETS:
Intangible assets consist of the following:
DECEMBER 31
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- --------------
(UNAUDITED)
Trademarks............................ $ 7,245,000 $ 7,245,000 $ 7,245,000
Goodwill.............................. 6,407,698 6,407,698 6,407,698
Distribution rights................... 2,055,320 3,149,115
Other intangible assets............... 2,112,000 2,383,927 2,383,927
----------- ----------- -----------
15,764,698 18,091,945 19,185,740
Less accumulated amortization......... (1,138,565) (2,374,009) (3,505,730)
----------- ----------- -----------
$14,626,133 $15,717,936 $15,680,010
=========== =========== ===========
7. OTHER ASSETS:
The major components are:
DECEMBER 31,
--------------------- SEPTEMBER 30,
1998 1999 2000
-------- ---------- -------------
(UNAUDITED)
Prepaid consulting........................ $479,170 229,170 $ 41,670
Prepaid royalty........................... 1,150,000 1,150,000
Equity investments........................ 206,404
Deposits and other........................ 209,493 89,970 270,090
-------- ---------- ----------
Total..................................... $688,663 $1,469,140 $1,668,164
======== ========== ==========
F-13
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LINE OF CREDIT, AND NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
Notes payable and capital lease obligation consist of the following:
SEPTEMBER 30,
1998 1999 2000
----------- ----------- --------------
(UNAUDITED)
Term loan A collateralized by personal property assets,
bearing interest at the lender's prime rate plus .75%
(8.75%, 9.25% and 10.25% at December 31, 1998, 1999,
and September 30, 2000 (unaudited), respectively) or
at the LIBOR rate plus 2.75% (9.73% at September 30,
2000 (unaudited)), principal and interest payable
quarterly through maturity on November 29, 2002...... $ 2,700,000 $ 2,100,000 $ 1,750,000
Term loan B collateralized by personal property assets,
bearing interest at the lender's prime rate plus .5%
(9% and 10% at December 31, 1999 and September 30,
2000 (unaudited), respectively) or at the LIBOR rate
plus 2.75%, principal and interest payable quarterly
through maturity on November 29, 2002................ 609,375 515,625
Term loan C collateralized by personal property assets,
bearing interest at the lender's prime rate plus a
margin scale (1.0% to 3.5%) (13% at September 30,
2000 (unaudited)) or at the LIBOR rate plus a margin
scale (3.25% to 3.75%), principal and interest
payable quarterly through maturity on November 29,
2002................................................. 3,000,000
Note payable to stockholder, original face amount of
$3,000,000, collateralized by accounts receivable,
equipment, inventories and rights with respect to the
"Obagi" trademarks and patents, subordinate to term
loans payable, bearing interest of 10%, principal and
interest payable semiannually through maturity on
December 1, 2000..................................... 1,333,334 666,667 333,334
Note payable to Maron Nu-Tech, original face amount of
$900,000, subordinate to bank notes payable, bearing
interest at the prime rate (8.5% and 9.5% at
December 31, 1999 and September 30, 2000
(unaudited), respectively) with a $300,000 principal
payment with related interest due June 7, 2000 and
remaining principal and interest payable annually
through maturity on September 7, 2002................ 900,000 600,000
Capital lease obligation with interest rate of 10.5%,
due in monthly installments of $3,076 through
August 1, 2001....................................... 85,539 56,216 31,983
----------- ----------- -----------
4,118,873 4,332,258 6,230,942
Less current maturities.......................... (1,295,989) (1,883,490) (2,300,157)
----------- ----------- -----------
$ 2,822,884 $ 2,448,768 $ 3,930,785
=========== =========== ===========
F-14
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LINE OF CREDIT, AND NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
Future scheduled principal payments on notes payable and capital lease
obligation for each of the years ending December 31 are as follows:
2000........................................................ $1,883,490
2001........................................................ 1,214,393
2002........................................................ 1,234,375
----------
$4,332,258
==========
The Company has a credit facility with a commercial bank that provides for a
line of credit and two term loans. The line of credit has a borrowing capacity
up to $2,000,000, bears interest at the bank's prime lending rate, or at LIBOR
plus 2.25%, and matures on May 26, 2000, unless renewed. The weighted average
interest rate on the outstanding borrowings under the line of credit was at 9.5%
(unaudited) at September 30, 2000. Borrowings under the credit facility are
collateralized by all of the personal property assets of the Company. No amounts
were outstanding on the line of credit at December 31, 1998 and 1999 and
$1,497,731 (unaudited) was outstanding on the line of credit, as amended (see
Note 20), at September 30, 2000.
The credit facility agreement contains certain financial and restrictive
covenants. These covenants include, but are not limited to, a restriction on the
amount of dividends that may be distributed to shareholders, and maintaining
defined levels of tangible net worth, a leverage ratio of indebtedness to
earnings, a coverage ratio of net income to current debt and a quick asset
ratio. As of December 31, 1999, the Company is in compliance with all covenants
of the credit facility agreement. Refer to Note 20 regarding the subsequent
amendment of this credit facility agreement.
9. REDEEMABLE PREFERRED STOCK:
At December 31, 1998 and 1999, redeemable preferred stock consists of Series A
and B, $.001 par value; 146,200 and 42,800 shares authorized, respectively.
Series A and Series B preferred stock is nonvoting and the holder is entitled to
cumulative dividends at a rate of 11% of the original issue price per share per
annum at the end of each calendar quarter beginning March 31, 1998. To the
extent any such dividends are not paid in the three years following January 1,
1998, such dividends must be paid on January 1, 2001.
F-15
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE PREFERRED STOCK: (CONTINUED)
Information relating to the redeemable preferred stock for the period from
inception, October 8, 1997 through December 31, 1997, the years ended
December 31, 1998 and 1999, and the unaudited period ending September 30, 2000
is as follows:
SHARES AMOUNT
-------------------- ------------------------
SERIES A SERIES B TOTAL SERIES A SERIES B TOTAL
-------- --------- -------- ----------- ---------- -----------
Issuance of preferred shares... 106,200 40,000 146,200 $10,620,000 $4,000,000 $14,620,000
Accrued preferred stock
dividends.................... 96,017 36,164 132,181
------- ------ ------- ----------- ---------- -----------
Balance, December 31, 1997..... 106,200 40,000 146,200 10,716,017 4,036,164 14,752,181
Issuance of preferred shares... 2,800 2,800 280,000 280,000
Accrued preferred stock
dividends.................... 1,168,201 465,820 1,634,021
------- ------ ------- ----------- ---------- -----------
Balance, December 31, 1998..... 106,200 42,800 149,000 11,884,218 4,781,984 16,666,202
Repurchase of preferred
shares....................... (2,800) (2,800) (280,000) (280,000)
Accrued preferred stock
dividends.................... 1,168,200 462,531 1,630,731
Preferred stock dividend
paid......................... (46,833) (46,833)
------- ------ ------- ----------- ---------- -----------
Balance, December 31, 1999..... 106,200 40,000 146,200 13,052,418 4,917,682 17,970,100
Accrued preferred stock
dividends (unaudited)........ 876,950 330,302 1,207,252
------- ------ ------- ----------- ---------- -----------
Balance, September 30, 2000
(unaudited).................. 106,200 40,000 146,200 $13,929,368 $5,247,984 $19,177,352
======= ====== ======= =========== ========== ===========
Shares of Series A and Series B preferred stock redeemed by the Company upon the
earlier of: (a) the close of the Company's sale of its common stock in a public
offering, (b) the liquidation, dissolution or winding up of the Company,
(c) the acquisition of the Company by another entity under certain terms,
(d) January 1, 2001 in the event all accrued dividends on the respective series
of preferred stock have not been paid, or (e) in the event any time after
January 1, 2001 any two accrued quarterly dividends on the respective series
preferred stock remain unpaid. In addition, in the event any shares of Series A
preferred stock are not eligible to be redeemed pursuant to clause (a) above,
Series A preferred stock must be redeemed on the third anniversary of the close
of the Company's sale of its common stock in a public offering. The shares of
Series A and Series B preferred stock must be redeemed at a sum equal to $100
per share plus all unpaid dividends on such shares.
In the event of liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of Series A and Series B preferred stock
are entitled to receive an amount equal to the sum of $100 for each outstanding
share of Series A or Series B preferred stock and an amount equal to unpaid
dividends on such shares. Series A preferred stock is senior in right of
liquidation to Series B preferred stock.
F-16
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE PREFERRED STOCK: (CONTINUED)
Each share of Series B preferred stock which has not been redeemed will be
automatically converted into one share of Series A preferred stock upon the
earlier of: (a) the close of the Company's sale of its common stock in a public
offering, (b) the liquidation, dissolution or winding up of the Company,
(c) the acquisition of the Company by another entity under certain terms,
(d) the fifth business day following the redemption of all shares of Series A
issued and outstanding immediately prior to such conversion, or (e) the
attainment by the Company of at least 20% compounded annual growth in net
revenues from the date of closing of the Company's acquisition of WWP over a
period of no less than three years after such date.
At December 31, 1999, 40,000 shares of the Company's Series A preferred stock is
reserved for issuance upon the conversion of the Series B preferred stock.
Series B preferred stock is subordinate to Series A preferred stock with respect
to all rights and preferences.
Refer to Note 20 regarding the subsequent amendment of the Company's Articles of
Incorporation and the conversion of Series B preferred stock into Series A
preferred stock.
10. INCOME TAXES:
The current and deferred provision (benefit) for federal and state income taxes
consists of the following:
FOR THE PERIOD
FROM INCEPTION,
OCTOBER 8, 1997
THROUGH FOR THE YEARS
DECEMBER 31, ENDED DECEMBER 31,
--------------- ----------------------
1997 1998 1999
--------------- -------- -----------
Current:
Federal................................................... $ 661,000
State..................................................... $800 $800 73,073
---- ---- -----------
800 800 734,073
---- ---- -----------
Deferred:
Federal................................................... (1,252,874)
State..................................................... (255,447)
---- ---- -----------
-- -- (1,508,321)
---- ---- -----------
$800 $800 $ (774,248)
==== ==== ===========
F-17
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences which give rise to the net deferred tax
benefit consist of:
FOR THE PERIOD
FROM INCEPTION,
OCTOBER 8, 1997
THROUGH FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
--------------- -----------------------
1997 1998 1999
--------------- --------- -----------
Property and equipment................................. $ (348) $ 14,570 $ (17,039)
Financial statement reserves........................... 15,090 (259,376) 156,921
Net operating loss carryforwards....................... (67,888) (84,163) 152,051
Tax credit carryforwards............................... (2,708) (84,492) 63,292
State taxes............................................ (272) 64,112
Goodwill basis adjustment.............................. 2,735 106,642 174,120
Valuation allowance reversal........................... (2,070,101)
Unicap adjustment...................................... (13,190)
Other.................................................. (18,487)
-------- --------- -----------
(53,391) (306,819) (1,508,321)
Valuation allowance.................................... 53,391 306,819
-------- --------- -----------
Net deferred tax benefit............................... $ -- $ -- $(1,508,321)
======== ========= ===========
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
FOR THE PERIOD
FROM INCEPTION,
OCTOBER 8, 1997 FOR THE YEARS
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
--------------- -------------------
1997 1998 1999
--------------- -------- --------
Statutory regular federal income tax rate................... (34.0)% (34.0)% 34.0%
Nondeductible expense....................................... 1.4 4.1 0.8
State income tax, net of federal benefit.................... 0.4 0.1 (3.7)
Foreign losses with no tax benefit.......................... (5.6)
Research and experimentation credits........................ (2.2) (8.7) (1.5)
Change in valuation allowance............................... 35.1 38.6 (49.9)
Foreign sales corporation benefit........................... (3.5)
------ ------ ------
0.7% 0.1% (29.4)%
====== ====== ======
F-18
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES: (CONTINUED)
The significant components of the net deferred tax assets and liabilities at
December 31 are as follows:
1998 1999
----------- ----------
Deferred tax assets and liabilities:
Property and equipment.................................... $ (14,222) $ 2,817
Financial statement reserves.............................. 267,790 110,869
Net operating loss carryforwards.......................... 152,051
Tax credit carryforwards.................................. 87,200 23,908
State taxes............................................... 272 (63,840)
Goodwill basis differences................................ 1,577,010 1,402,890
Unicap adjustment......................................... 13,190
Cumulative translation adjustment......................... (30,842)
Other..................................................... 18,487
----------- ----------
2,070,101 1,477,479
Valuation allowance......................................... (2,070,101)
----------- ----------
Net deferred tax asset...................................... $ -- $1,477,479
=========== ==========
As of December 31, 1998 and 1999, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $87,000 and
$24,000, respectively. The federal research and experimentation credits begin to
expire in 2013.
During 1998 as a result of the acquisition of WWP (see Note 3), the purchase
price assigned to goodwill and other intangibles differed between financial
reporting and tax purposes by $3,811,478 resulting in a deferred tax asset.
11. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
The Company's cash deposits are placed in high-credit quality financial
institutions. At times, deposits in those financial institutions may be in
excess of federally insured limits. At December 31, 1998 and 1999, cash on
deposit was in excess of the federally insured limit of $100,000 by
approximately $1,429,000 and $513,000, respectively.
Concentrations of credit risk, with respect to trade receivables, are limited
due to the large number of customers comprising the Company's customer base and
their dispersion across different geographic regions. The Company performs
ongoing credit evaluations of customers and generally does not require
collateral. As of December 31, 1998 and 1999 and as of September 30, 2000, the
Company had accounts receivable from two customers which represented
approximately 18%, 16% and 32% (unaudited), respectively, of the net accounts
receivable balance.
12. ROYALTY AGREEMENTS:
The Company has a Products Supply and License Agreement (the "Agreement") with
Mikuda Company ("Mikuda"), the owner of the Complex 272 formula. Pursuant to the
Agreement, the Company has an exclusive license to use Complex 272 in skin care
products. The Agreement provides that the Company's license is granted in
perpetuity unless terminated by a breach of the provisions of the Agreement or
by mutual consent of the parties. The Agreement requires the Company to pay
F-19
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. ROYALTY AGREEMENTS: (CONTINUED)
Mikuda a royalty based upon the Company's gross sales revenue for products which
utilize Complex 272. The royalty rate is 4% of annual sales up to $12 million
with the rate decreasing at higher annual sales levels. For the period from
inception, October 8, 1997, through December 31, 1997 and for the years ended
December 31, 1998 and 1999 and the nine month periods ended September 30, 1999
and 2000, such royalties totaled approximately $48,000, $680,000, $791,000,
$653,000 (unaudited) and $290,000 (unaudited), respectively, and are recorded as
a component of cost of sales.
All of the Company's products are marketed under the name "Obagi". The Company
has a trademark and trade name license agreement with Dr. Obagi, an
employee/shareholder of the Company, to use the trademarks and trade names
"Obagi" in connection with the Company's sale of skin care products. In
accordance with the agreement, Dr. Obagi is to receive an annual royalty in an
amount equal to $200,000 plus 5% of the net sales of the non-prescription
product lines, payable monthly. The royalty for any year is not to exceed
$500,000 and terminates upon the completion of an initial public offering. In
addition, according to the agreement, the company must spend at least $500,000 a
year on research and development and must provide Dr. Obagi with the maximum
discount the company provides to independent third-party customers. Upon
completion of an initial public offering, the Company's commitment to spend at
least $500,000 a year on research and development terminates and Dr. Obagi will
only be entitled to the maximum discount the company provides independent third
party customers purchasing the Company's products in the same volumes. For the
period from inception, October 8, 1997, through December 31, 1997 and for the
years ended December 31, 1998 and 1999, such royalties totaled approximately
$17,000, $230,000 and $215,000, respectively. As of December 31, 1998 and 1999,
the Company owed royalties and accrued interest to Dr. Obagi in the amount of
$41,818 and $67,419, respectively. Such amounts are included in amounts due to
related parties in the accompanying consolidated balance sheets.
13. RELATED-PARTY TRANSACTIONS:
On December 2, 1997, the Company entered into an option and transfer agreement
with one of its shareholders. During July 1998, under the terms of this
agreement, the Company purchased the shareholder's 49% equity interest in
Vertrieb for $129,328 plus the first $500,000 of cash distributions, if any,
received from Vertrieb. During the year ended December 31, 1998, Vertrieb
purchased products aggregating approximately $120,000 from the Company. In 1999,
the Company purchased the remaining 51% ownership interest in Vertrieb. The
Company accounted for this transaction under the purchase method of accounting.
The purchase price of $613,758 includes the original $129,328 paid in 1998,
$203,000 paid in 1999, and the obligation to pay to the seller the remaining
$281,430. The purchase price exceeded the fair value of Vertrieb's net tangible
assets by $555,320, which has been capitalized as distribution rights, is
included in intangible assets, and is being amortized over 10 years using the
straight-line method. The results of operations and financial position of
Vertrieb since the 1999 acquisition date have been consolidated into the
Company's financial statements. Pro forma presentation of the Company's results
of operations, as if the acquisition had occurred as of January 1, 1998, have
not been presented due to immateriality (e.g. historical net income or loss per
share as presented would not change).
During January 1999, under the terms of the option and transfer agreement, the
Company purchased the shareholder's rights to a formula used in a line of body
care products for $271,927 which has been capitalized as an intangible asset and
is being amortized over three years using the straight-line method.
F-20
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED-PARTY TRANSACTIONS: (CONTINUED)
In addition, according to this agreement, the Company has various commitments,
one of which is that the Company must incur minimum levels of research and
development expenditures on an annual basis.
One of the Company's stockholders, Dr. Obagi, purchases products from the
Company and receives a 25% discount on all of his product purchases. Dr. Obagi
is also a 74% beneficial stockholder in Cellogique, the Company's Middle Eastern
distributor. According to a Product Distribution Agreement, which is renewable
every 2 years after the first 30 months, Cellogique is required to purchase
certain minimum amounts of products on a quarterly basis from the Company.
Total sales made to Dr. Obagi and Cellogique and the related cost of sales are
included in the Company's consolidated statements of operations and are as
follows:
FOR THE PERIOD FOR THE NINE
FROM INCEPTION, FOR THE YEAR ENDED MONTHS ENDED
OCTOBER 8, 1997 DECEMBER 31, SEPTEMBER 30,
THROUGH ------------------- ---------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- -------- -------- -------- ----------
(UNAUDITED)
Sales, net of discounts............ $36,000 $968,000 $988,000 $583,026 $1,125,826
======= ======== ======== ======== ==========
Cost of sales...................... $ 6,468 $197,285 $188,381 $ 97,709 $ 380,061
======= ======== ======== ======== ==========
Combined amounts due from Dr. Obagi and Cellogique for product purchases are
reflected in "Receivable due from related parties" in the accompanying
consolidated balance sheets as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Due from Dr. Obagi...................................... $ 93,000 $100,000
Due from Cellogique..................................... 210,000 254,000
-------- --------
$303,000 $354,000
======== ========
At December 31, 1998 and 1999, the Company has a note payable in the amount of
$1,333,334 and $666,667, respectively, due to Dr. Obagi. This note payable was
issued as partial consideration for the purchase of WWP and is reflected in
notes payable in the accompanying consolidated balance sheets (see Note 8). The
Company also has a royalty agreement and an employment agreement with this
stockholder (see Notes 12 and 14, respectively).
The Company has entered into a management agreement with an affiliate. In
accordance with the agreement, the affiliate shall provide management consulting
and business advisory services in exchange for a monthly fee equal to 2% of the
Company's adjusted gross sales each month. This management agreement will
terminate upon the earlier of the affiliate no longer having an investment in
the Company or the Company's completion of a public offering of its common
stock. For the period from inception, October 8, 1997, through December 31, 1997
and for the years ended December 31, 1998 and 1999, management fees under this
agreement totaled approximately $22,000, $368,000 and $496,000, respectively. In
addition to the management fee, the affiliate charges the Company for management
and operating services and for legal and information technology support
services. These
F-21
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED-PARTY TRANSACTIONS: (CONTINUED)
charges totaled approximately zero, $510,000 and $700,000 for the period from
inception, October 8, 1997, through December 31, 1997, and for the years ended
December 31, 1998 and 1999, respectively.
Amounts payable to Dr. Obagi for royalties and interest, and to an affiliate for
management fees and other services are reflected in the accompanying
consolidated balance sheets as "Amounts due to related parties" as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Due to Dr. Obagi........................................ $ 41,818 $ 67,419
Management fees and other............................... 85,867 168,577
-------- --------
$127,685 $235,996
======== ========
14. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
At December 31, 1999, the Company had operating leases for administrative,
retail and warehouse/ assembly facilities. Under the terms of one lease, the
Company has an option to extend the term of the lease for another 5 years until
February 2008 and is obligated for certain additional expenses such as taxes,
utilities and building maintenance. Additionally, the Company leases certain
office equipment under a capital lease arrangement.
Future minimum rental commitments under operating and capital leases for each of
the years ending December 31 are as follows:
CAPITAL OPERATING
LEASE LEASES
-------- ----------
2000........................................................ $ 36,909 $ 769,577
2001........................................................ 24,606 799,580
2002........................................................ 820,754
2003........................................................ 649,890
2004........................................................ 594,007
-------- ----------
Net minimum lease payments................................ 61,515 $3,633,808
==========
Less, amount representing interest.......................... 5,299
--------
Present value of net lease payments....................... 56,216
Less, current portion....................................... 29,323
--------
$ 26,893
========
Rent expense for the period from inception, October 8, 1997, through
December 31, 1997 and for the years ended December 31, 1998 and 1999 was
approximately $5,000, $186,000 and $289,000, respectively.
F-22
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
One of the Company's stockholders is a guarantor of the Company's lease for its
distribution center in Torrance, California and the corporate offices in Long
Beach, California.
EMPLOYEE AGREEMENTS
The Company entered into an employment agreement for a five-year period,
commencing on December 2, 1997, with Dr. Obagi which provides for a salary of
$500,000 per annum subject to annual cost of living increases, based on the
Consumer Price Index, plus other benefits. The term of the agreement
automatically renews for successive one-year periods subject to certain
termination provisions. If this agreement is terminated by the Company without
cause, the Company's severance liability is a lump-sum payment equal to the
balance of the base salary he would have received for the remainder of the
initial term of the agreement.
The Company entered into an employment agreement for a three-year period,
commencing March 1, 1998, with an officer of the Company. In March 1998, the
Company issued 252,000 shares of the Company's common stock for $70,000 in cash
and 2,800 shares of the Company's Series B redeemable preferred stock for
$280,000 in cash to this officer. In November 1998, this officer's employment
was terminated. In September 1999, the Company entered into a release and
settlement agreement with this officer. Per the settlement agreement, the
Company paid the former officer $1,087,500 in cash; $490,000 relating to the
buyback of 2,800 shares of Series B redeemable preferred stock and 252,000
shares of common stock ($280,000 and $210,000, respectively), $393,750 relating
to a consulting fee, $46,833 relating to dividends on Series B redeemable
preferred stock and $156,917 as a final settlement.
The Company entered into an employment agreement for a two-year period,
commencing June 3, 1999, with an employee/officer. The term of the agreement
automatically renews for successive one-year periods subject to certain
termination provisions. This employment agreement provides for a salary of
$250,000 per annum, plus other benefits, including, but not limited to, a
calendar year 1999 guaranteed bonus and annual bonuses based on the achievement
of certain financial benchmarks in subsequent years. If this agreement is
terminated by the Company without cause, the Company's severance liability is
the balance of the base salary owed for the remainder of the term of employment
as of the date of such termination, payable semi-monthly, and any bonus still
owing from the previous year. If the employment is terminated with cause, all
compensation and benefits will cease immediately and no severance payment will
be made except for any bonus still owing from the previous year. At
December 31, 1999 this employee owed the Company $50,000. This note receivable
related to an advance for a down payment on a new residence in conjunction with
his relocation under the terms of the employment agreement. The note bore
approximately a 10% interest rate and was paid in full on February 4, 2000.
The Company has employment agreements with certain other key members of
management. These agreements provide the employees with a specified severance
amount depending on whether the employee is terminated with or without good
cause as defined in the agreement.
LITIGATION
Certain claims and lawsuits arising in the ordinary course of business have been
filed or are pending against the Company. In the opinion of management, all such
matters, if disposed of unfavorably,
F-23
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
would not have a material adverse effect on the Company's financial position,
cash flows or results of operations.
15. STOCK OPTIONS:
The 1997 Stock Option/Stock Issuance Plan (the "Plan") provides for the grant of
options to purchase common stock to employees, consultants and directors. The
Plan includes incentive stock options ("ISOs") and nonqualified stock options
("NSOs"). The maximum number of shares of common stock which may be issued over
the term of the Plan shall not exceed 900,000 shares of the Company's common
stock.
Under the option grant program, the exercise price per share for ISOs shall be
no less than 100% of the fair market value per share as determined by the Board
of Directors on the grant date. The exercise price per share for NSOs shall be
no less than 85% of the fair market value per share as determined by the Board
of Directors on the grant date. For ISOs and NSOs, the exercise price per share
shall be no less than 110% of the fair market value per share as determined by
the Board of Directors on the grant date for an individual who, at the time of
grant, owns stock representing more than 10% of the total combined voting power
of all classes of stock of the Company. The right to exercise ISOs and NSOs
vests at a rate in accordance with the individual stock option agreements.
Options expire within a period of not more than ten years from the grant date.
ISOs granted to an employee, who at the time of grant owns stock representing
more than 10% of the total combined voting power of all classes of stock of the
Company, expire within a period of not more than five years from the grant date.
At December 31, 1998 and 1999, the Company has reserved 900,000 shares of common
stock, to satisfy the requirements of the Plan.
F-24
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTIONS: (CONTINUED)
A summary of the option activity under the Plan is as follows:
SHARES UNDER OPTION WEIGHTED AVERAGE
------------------------ EXERCISE PRICE
INCENTIVE NONQUALIFIED TOTAL PER SHARE
--------- ------------ --------- ----------------
Activity from inception
Granted.................................... 180,000 180,000 $0.28
--------- ---------
Outstanding at December 31, 1997............. 180,000 180,000 0.28
Granted.................................... 1,035,000 1,035,000 0.31
Cancelled.................................. 918,000 918,000 0.29
--------- ---------
Outstanding at December 31, 1998............. 297,000 297,000 0.54
Granted, at fair market value.............. 373,680 373,680 0.56
Granted, above fair market value........... 144,000 144,000 1.43
Granted, below fair market value........... -- 126,000 126,000 0.28
Cancelled.................................. 92,250 92,250 0.41
--------- ------- ---------
Outstanding at December 31, 1999............. 722,430 126,000 848,430 $0.61
========= ======= ========= =====
Exercisable at December 31, 1998............. 58,500 -- 58,500 $0.28
========= ======= ========= =====
Exercisable at December 31, 1999............. 114,750 61,200 175,950 $0.29
========= ======= ========= =====
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------- -------------------------------------
NUMBER OF SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF SHARES
RANGE OF EXERCISE OUTSTANDING AT PER SHARE REMAINING LIFE EXERCISABLE AT WEIGHTED AVERAGE
PRICE PER SHARE DECEMBER 31, 1999 EXERCISE PRICE (YEARS) DECEMBER 31, 1999 EXERCISE PRICE
- ----------------- ------------------ ---------------- ---------------- ------------------ ----------------
$.28 to $.56......... 704,430 $0.44 9.05 175,950 $0.29
$.77 to $2.26........ 144,000 $1.43 9.42
------- -------
848,430 $0.61 9.11 175,950 $0.29
======= =======
The per share estimated weighted average fair value for options granted during
the period from inception October 8, 1997, through December 1, 1997 and the year
ended December 31, 1998 was $0.07 and $0.09, respectively. The per share
estimated weighted average fair value for options granted during the year ended
December 31, 1999 at fair market value, above fair market value, and below fair
market value was $0.13, $0.00, and $0.48, respectively.
During the year ended December 31, 1999, the Company issued 126,000 options to
non-employees and recognized compensation cost of $31,590. For the nine month
period ended September 30, 2000, the compensation cost related to these options
was $718,346 (unaudited). The fair value of each option grant to non-employees
was estimated at December 31, 1999 using the Black-Scholes model. This value is
the current stock price less the present value, using a risk-free rate of
return, of the exercise price for a stock that does not pay dividends. The
assumptions used are as follows: the risk-free interest rate is 6%; the
volatility is 67%; the expected life of the option is the term to expiration,
ten years; and the common stock will pay no dividends. The unearned compensation
cost of the options issued to non-employees at December 31, 1999 and at
September 30, 2000 was $28,813 and $440,379 (unaudited), respectively.
UNAUDITED UPDATED INFORMATION
During the nine month period ended September 30, 2000, the Company granted
275,220 options to employees at per share exercise prices ranging from $1.08 to
$8.33. These grants resulted in deferred stock compensation of $1,790,050.
F-25
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTIONS: (CONTINUED)
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no related compensation cost has been recognized for stock options
granted to employees under SFAS No. 123. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method promulgated by SFAS No. 123,
the Company's net income (loss) would have decreased (increased) to the pro
forma amount below:
FOR THE PERIOD
FROM INCEPTION FOR THE YEARS ENDED
OCTOBER 8, 1997 DECEMBER 31,
THROUGH -------------------------
DECEMBER 31, 1997 1998 1999
------------------ ----------- -----------
Net income (loss):
As reported...................................... $ (255,454) $(2,224,456) $ 1,773,845
Pro forma........................................ (255,921) (2,231,244) 1,763,669
Basic income (loss) per share:
As reported...................................... $ (0.05) $ (0.15) $ 0.12
Pro forma........................................ (0.05) (0.15) 0.12
Diluted income (loss) per share:
As reported...................................... $ (0.05) $ (0.15) $ 0.12
Pro forma........................................ (0.05) (0.15) 0.12
Weighted average common shares outstanding:
Basic............................................ 4,972,607 14,600,910 14,584,340
Diluted.......................................... 4,972,607 14,600,910 14,849,374
For purposes of computing the pro forma amounts, the fair value of each option
grant was estimated on the date of grant using the minimum value method. This
value is the current stock price less the present value, using a risk-free rate
of return, of the exercise price for a stock that does not pay dividends. The
assumptions used are as follows: the risk-free interest rate was between 5.31%
and 6.28%; the expected life of the option is the term to expiration, generally
five years; and the common stock will pay no dividends.
F-26
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted income
(loss) per common share:
FOR THE PERIOD
FROM INCEPTION, FOR THE YEAR ENDED NINE MONTH PERIOD ENDED
OCTOBER 8, 1997 DECEMBER 31, SEPTEMBER 30,
THROUGH ------------------------- -------------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------ ----------- ----------- ----------- -----------
(UNAUDITED)
NUMERATOR:
Net income (loss)........ $(123,273) $ (590,435) $ 3,404,576 $ 2,440,068 $ (438,882)
Accrued dividends on
redeemable preferred
stock.................. (132,181) (1,634,021) (1,630,731) (1,225,376) (1,207,252)
--------- ----------- ----------- ----------- -----------
Numerator for basic and
diluted income (loss)
per common share....... $(255,454) $(2,224,456) $ 1,773,845 $ 1,214,692 $(1,646,134)
========= =========== =========== =========== ===========
DENOMINATOR:
Denominator for basic
income (loss) per
share--weighted average
shares................. 4,972,607 14,600,910 14,584,340 14,646,462 14,437,896
Effect of dilutive
securities:
Employee stock options... -- -- 265,034 200,291 --
--------- ----------- ----------- ----------- -----------
Denominator for dilutive
income (loss) per
share.................. 4,972,607 14,600,910 14,849,374 14,846,753 14,437,896
========= =========== =========== =========== ===========
Options to purchase 180,000 shares of common stock at $0.28 per share were
outstanding during the period from inception October 8, 1997, through
December 31, 1997 but were not included in the computation of diluted earnings
per share because the options' exercise price was equal to the average market
price of common shares and therefore there was no dilutive effect. The diluted
share base for the year ended December 31, 1998 and the nine-month period ended
September 30, 2000 excludes incremental shares of 236,988 and 852,266,
respectively, related to stock options. These shares are excluded due to their
anti-dilutive effect as a result of the Company's net loss applicable to common
stockholders during the year ended 1998 and nine-month period ended
September 30, 2000.
17. SEGMENT INFORMATION:
The Company operates in a single operating segment and develops, markets and
sells products for physician-mediated skin health and restoration. The Company
distributes its products through physicians in the United States and through
distributors in 29 foreign countries. The Company's current product offerings
qualify for aggregation under SFAS No. 131 as its products are all designed for
skin health and restoration, are manufactured and distributed in the same
manner, have similar gross margins and are sold to the same customer base.
F-27
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION: (CONTINUED)
The following geographic area data includes net sales based on ultimate product
shipment destination through direct customer sales or through distributor sales.
FOR THE PERIOD
FROM INCEPTION FOR THE YEAR ENDED NINE MONTH PERIOD ENDED
OCTOBER 8, 1997 DECEMBER 31, SEPTEMBER 30,
THROUGH ------------------------- -------------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------ ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues:
United States........... $ 693,944 $13,237,223 $17,286,451 $12,401,404 $18,421,434
Asia.................... 355,688 1,932,243 3,843,838 2,519,574 4,993,348
Europe.................. 26,062 257,870 429,580 231,010 625,114
South America........... 11,265 163,882 241,525 207,011 217,317
Other................... 22,408 1,425,718 1,274,115 897,378 725,590
---------- ----------- ----------- ----------- -----------
$1,109,367 $17,016,936 $23,075,509 $16,256,377 $24,982,803
========== =========== =========== =========== ===========
For the period from inception, October 8, 1997, through December 31, 1997 and
for the years ended December 31, 1998 and 1999 and the nine month periods ended
September 30, 1999 and 2000, sales to one customer accounted for approximately
32%, 10%, 7%, 12% (unaudited) and 12% (unaudited) respectively, of the Company's
net revenues.
18. SUPPLEMENTAL CASH FLOW INFORMATION:
FOR THE PERIOD
FROM INCEPTION FOR THE YEAR ENDED NINE MONTH PERIOD ENDED
OCTOBER 8, 1997 DECEMBER 31, SEPTEMBER 30,
THROUGH --------------------- -----------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------ -------- ---------- --------- -----------
Cash paid:
Interest....................... $16,439 $459,970 $ 355,174 $261,578 $ 507,128
======= ======== ========== ======== ==========
Income taxes................... $ -- $ 59,300 $1,104,369 $581,750 $ 279,001
======= ======== ========== ======== ==========
NONCASH TRANSACTIONS:
In October 1997, the Company issued 1,800 shares of its common stock valued at
$500 to founding shareholders as payment for services provided in connection
with the formation of the Company.
During the period from inception, October 8, 1997, through December 31, 1997 and
for the years ended December 31, 1998 and 1999 and the nine month periods ending
September 30, 1999 and 2000, the Company accrued $132,181, $1,634,021,
$1,630,731, $1,225,376 (unaudited) and $1,207,253 (unaudited), respectively, for
dividends on its preferred stock.
During 1998, the Company entered into a capital lease for certain office
equipment, included in property and equipment, and recorded the related capital
lease obligation of $95,480.
On March 15, 1999, the Company and WWP settled an ongoing dispute over the
purchase price adjustment. This resulted in the recording of a receivable due
from WWP of $500,000, a decrease of
F-28
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CASH FLOW INFORMATION: (CONTINUED)
$375,000 to the purchased intangibles and a decrease of $125,000 to the
predecessor carryover basis adjustment at December 31, 1998 (see Note 3).
During June 1999, the Company repurchased distribution rights for certain
territories in Asia from Maron Nu-Tech. The purchase price consisted of $600,000
in cash and a note payable for $900,000 (see Note 8).
During December 1999, the Company incurred and capitalized approximately
$385,000 in construction in progress costs, which is recorded in accrued
liabilities at December 31, 1999.
19. 401(k) PLAN:
On February 1, 1999, the Company established an employee savings and retirement
plan and a 401(k) defined contribution retirement plan, covering substantially
all full-time employees. The Company matches 25% of employee contributions up to
6% of employee compensation. The Company may also make, at the discretion of the
Board of Directors, additional contributions subject to statutory limits. The
Company contributed approximately $26,000 for the year ended December 31, 1999.
Administrative expenses paid on behalf of the plan were nominal for the year
ended December 31, 1999.
20. SUBSEQUENT EVENTS (UNAUDITED):
REINCORPORATION AND STOCK SPLIT
On November 13, 2000, the Board of Directors authorized the reincorporation of
the Company in the State of Delaware, under the name OMP, Inc., which is
expected to be completed prior to the initial public offering becoming
effective. In connection with the reincorporation, the Company will effect a 1.8
for 1.0 stock split of all outstanding common stock and common stock options.
All share and per share amounts have been adjusted to give retroactive effect to
the stock split for all periods presented.
REGISTRATION RIGHTS
The Company has entered into an agreement with two of its stockholders granting
the stockholders the right to register their shares, subject to certain
limitations, whenever the Company proposes to file a registration statement
under the Securities Act of 1933. Additionally, the two stockholders have the
right to require the Company to file up to three effective registration
statements on Form S-1 or S-2 and an unlimited number of registration statements
on Form S-3. The right to file up to three effective registration statements on
Form S-1 or S-2 terminates upon the fifth anniversary of an initial public
offering. The Company has agreed to pay the expenses of the two stockholders.
SIGNIFICANT AGREEMENTS
In February 2000, the Company and Rohto Pharmaceutical Co., a Japanese
corporation, entered into a Joint Venture Agreement to form a Japanese company
called Obagi-Rohto Medical Products KK ("ORMP"). The new company will import,
market, distribute, and sell skin care products in Japan. Pursuant to the terms
of the Joint Venture Agreement, the Company contributed 20,000,000 Yen
($192,901) in exchange for a 50% ownership interest in ORMP, which is accounted
for under the equity method of accounting.
F-29
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
In February 2000, the Company and LifeCell Corporation entered into a license
marketing and distribution agreement whereby the Company purchased the exclusive
rights for co-promotion of Cymetra-TM- for $1,000,000. Pursuant to the terms of
the licensed marketing and distribution agreement, the Company paid LifeCell
Corporation $400,000 in February 2000 and $600,000 in September 2000.
In June 1999, the Company purchased product distribution rights from Maron
Nu-Tech for certain Asian countries. During February 2000, under the terms of
this agreement, the Company purchased the Obagi Family Trust's 50% equity
interest in Derma-Tech, Inc. for $107,298. The purchase price exceeded the fair
value of Derma-Tech, Inc.'s net tangible assets by $93,795, which has been
capitalized as distribution rights, is included in intangible assets, and is
being amortized over 10 years using the straight-line method. The Company
accounted for this transaction using the equity method of accounting.
In February 2000, the Company and Geneva Pharmaceuticals, Inc., a subsidiary of
Novartis Pharmaceuticals Corporation, entered into a non-exclusive supply and
marketing agreement to market tretinoin cream products to the
physician-dispensed market in the United States. Under the terms of the
agreement, Geneva will supply the Company all of its requirements for the
tretinoin cream. The agreement has a term of three years, but may be terminated
by either party on 90 days notice for any reason.
In March 2000, the Company and Vivier Pharma Inc. entered into an exclusive
supply and distribution agreement whereby the Company obtained the exclusive
right to distribute L-ascorbic acid serum products through the
physician-dispensed distribution channel in the United States and through all
distribution channels in 29 foreign countries. Under the terms of the agreement,
Vivier will supply the Company all of its requirements for the ascorbic acid
serum products and the Company will purchase minimum quantities of the products
for each year of the agreement. The agreement has a five-year term.
In December 2000, the Company entered into an agreement with Maron Nu-Tech and
Kenneth Kim, an owner of Maron Nu-Tech. Under this agreement, the Company
purchased the following assets from Kenneth Kim and Maron Nu-Tech: (a) the
remaining 50% ownership of Derma Tech, Inc. not previously owned by the Company;
(b) all ownership interest owned by Kenneth Kim of Obagi Singapore; (c) all
distribution rights owned by Kenneth Kim or Maron Nu-Tech to distribute products
of the Company, including rights to sub-distribute to the countries of
Singapore, Korea, Malaysia and Indonesia.
LINE OF CREDIT
In March 2000, the Company amended its credit facility agreement. In accordance
with the amended credit facility agreement, the borrowing capacity of the line
of credit was increased to $7,000,000, bearing interest at the bank's prime
lending rate plus a variable margin scale or at the LIBOR rate plus a variable
margin scale, and maturing on May 31, 2001. The prime rate margin scale and the
LIBOR rate margin scale are determined based on the leverage ratio of
indebtedness to earnings before interest, taxes, depreciation and amortization.
The prime rate margin scale ranges from 0% to 1.0% and the LIBOR rate margin
scale ranges from 2.25% to 3.25%. Under the terms of the amended credit facility
agreement, the line of credit borrowing capacity is based upon the levels of
eligible accounts receivable and inventory.
F-30
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
The amended credit facility agreement also provides for a third term loan ("Term
Loan C") in the amount of $3,000,000, bearing interest at the bank's prime
lending rate plus a variable margin scale, or at the LIBOR rate plus a variable
margin scale, with principal and interest payable quarterly through maturity on
November 29, 2002. The prime rate margin scale and the LIBOR rate margin scale
are determined based on the leverage ratio of indebtedness to earnings before
interest, taxes, depreciation and amortization. The prime rate margin scale
ranges from 1.0% to 3.5% and the LIBOR rate margin scale ranges from 3.25% to
3.75%. Borrowings are collateralized by all of the personal property assets of
the Company. There was $3,000,000 outstanding on Term Loan C at September 30,
2000 at an interest rate of 13%.
The amended credit facility agreement contains certain financial and restrictive
covenants. These convenants include, but are not limited to, a restriction on
the amount of dividends that may be distributed to shareholders, and maintaining
defined levels of tangible net worth, a leverage ratio of indebtedness to
earnings, a coverage ratio of net income to current debt and a quick asset
ratio. As of September 30, 2000, the Company is in compliance with all covenants
of the amended credit facility agreement.
In consideration for the amended line of credit, the Company entered into a
Shared Appreciation Agreement with the lending bank whereby the Company must pay
to the bank between $200,000 and $350,000 based on the expiration date or an
acceleration event, as specified by the agreement. The expiration date of the
Shared Appreciation Agreement is December 31, 2001 and the amount due is based
on a formula that measures the increase in EBITDA less specified indebtedness.
For the nine months ended September 30, 2000, the Company recorded $180,000 in
interest expense related to the Shared Appreciation Agreement.
PREFERRED STOCK
In November 2000, the Board of Directors approved an amendment to the Company's
Articles of Incorporation (the "Amendment"). This amendment eliminated the
requirement to pay the accrued dividends on Series A and B redeemable preferred
stock by January 1, 2001. The amendment also eliminated the mandatory redemption
of Series A and Series B preferred stock in the case of unpaid dividends and the
third anniversary of the close of the Company's sale of its common stock in a
public offering.
Upon reincorporation of the Company as described above, Series B preferred stock
will be converted into Series A on a one to one basis.
STOCK OPTIONS
In November 2000, the Company adopted the 2000 Stock Option/Stock Issuance Plan
(the "2000 Plan"). The terms of the 2000 Plan are consistent with those of the
1997 Stock Option/Stock Issuance Plan, except that the maximum number of shares
of common stock which may be issued over the terms of the 2000 Plan shall not
exceed 450,000 shares of the Company's common stock. In addition, the maximum
number of shares of common stock issued to any person under the 2000 Plan in any
calendar year shall not exceed 180,000 shares.
F-31
OMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
SUBLEASE OF DISTRIBUTION CENTER
On January 1, 2000, the Company subleased a portion of their distribution center
to United States Manufacturing Company ("USMC"), an affiliate of a related party
of the Company. The monthly sublease, which terminates on December 31, 2004,
includes yearly payments which range from approximately $68,000, in the first
year of the sublease, to $80,000, in the last year of the sublease.
F-32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
of WorldWide Product Distribution, Inc.
In our opinion, the accompanying statements of operations and of cash flows of
WorldWide Product Distribution, Inc., present fairly, in all material respects,
the results of its operations and its cash flows for the period from January 1,
1997 through December 1, 1997 in conformity with accounting principles generally
accepted in the United States of America. 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 audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
Los Angeles, California
February 25, 1998
F-33
WORLDWIDE PRODUCT DISTRIBUTION, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 1, 1997
Revenues.................................................... $10,396,516
Cost of sales............................................... 2,692,523
-----------
Gross profit.............................................. 7,703,993
Selling general and administrative expenses................. 6,926,199
Depreciation and amortization............................... 38,955
-----------
Income from operations.................................... 738,839
Interest income............................................. 5,362
Interest expense............................................ (3,522)
-----------
Income before provision for income taxes.................. 740,679
Provision for income taxes.................................. 36,406
-----------
Net income................................................ $ 704,273
===========
The accompanying notes are an integral part of these financial statements.
F-34
WORLDWIDE PRODUCT DISTRIBUTION, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 1, 1997
Cash flows from operating activities:
Net income................................................ $ 704,273
Depreciation and amortization............................. 38,955
Changes in operating assets and liabilities:
Accounts receivable....................................... (178,090)
Inventories............................................... 221,773
Prepaids and other assets................................. (86,646)
Accounts payable.......................................... 87,171
Accrued liabilities....................................... 1,588,361
-----------
Net cash provided by operating activities............... 2,375,797
-----------
Cash flows from investing activities:
Purchases of property and equipment....................... (311,914)
-----------
Net cash used in investing activities................... (311,914)
-----------
Cash flows from financing activities:
Distributions paid to shareholder......................... (1,940,002)
Taxes paid on behalf of shareholder....................... (11,254)
-----------
Net cash used in financing activities................... (1,951,256)
-----------
Net increase in cash.................................... 112,627
Cash at beginning of period................................. 400,472
-----------
Cash at end of period....................................... $ 513,099
===========
Supplemental disclosure of cash flow information:
Income taxes paid......................................... $ 22,488
===========
The accompanying notes are an integral part of these financial statements.
F-35
WORLDWIDE PRODUCT DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
WorldWide Product Distribution, Inc. ("WWP") was incorporated under the laws of
the state of California on July 18, 1989. WWP is primarily engaged in the
marketing of skin care products, which are generally sold by prescription. WWP
sells its products to physicians in the United States and to authorized sales
distributors in foreign countries.
2. SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Revenues from product sales are recognized when title passes upon shipment to
the customer and collectibility is probable.
ADVERTISING AND PROMOTION COSTS
All advertising and promotion costs are expensed as incurred. Advertising costs
for the period from January 1, 1997 through December 1, 1997 were approximately
$1,400,000.
DEPRECIATION
Property and equipment are depreciated using the straight-line method over the
assets' estimated useful lives, generally three years. Maintenance, repairs and
minor renewals are charged to operations as incurred. Upon sale or other
disposition of assets, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss, if any, would be reflected in
the statement of operations. Depreciation expense for the period from
January 1, 1997 through December 1, 1997 was approximately $39,000.
INCOME TAXES
WWP has elected to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, all taxable earnings of WWP are taxed at the individual owner level
and WWP incurs no federal income tax liability.
Also under this election, the California corporate income tax rate is reduced to
1.5%, and WWP's income after this tax is reported at the individual owner level
for state income tax purposes.
SEGMENT REPORTING
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," superceded substantially all
the reporting requirements previously required under SFAS No. 14, "Financial
Reporting for Business Segments of an Enterprise," and established standards for
the way a company reports information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, the determination of
segments to be reported in the financial statements is to be consistent with the
manner in which management organizes and evaluates the internal organization to
make operating decisions and assess performance. The adoption of this statement
did not have an impact upon WWP's operating results as this statement's
provisions affect only the disclosure of certain segment information in the
notes to the financial statements (see note 9).
F-36
WORLDWIDE PRODUCT DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. SALE AND LIQUIDATION OF WWP:
The shareholder of WWP agreed to sell substantially all the assets and certain
liabilities of WWP effective December 2, 1997 to OMP Acquisition Corporation
("OMP Inc.") pursuant to the terms of the Asset Purchase Agreement dated
October 14, 1997, in exchange for $17,000,000 in cash and a promissory note
payable in the amount of $3,000,000 plus transaction costs, subject to a final
price determination (see Note 9).
4. RISK CONCENTRATIONS:
Concentrations of credit risk, with respect to sales are limited due to the
large number of customers comprising WWP's customer base and their dispersion
across different geographic regions. WWP performs ongoing credit evaluations of
customers and generally does not require collateral.
WWP buys substantially all of its products from one supplier. Management
believes that WWP could obtain an alternate supplier should the current supplier
fail to provide the products. One of the owners of WWP is a 10% shareholder in
the supplier.
5. ROYALTY AGREEMENT:
WWP has a Products Supply and License Agreement (the "Agreement") with Mikuda
Company ("Mikuda"), the owner of the Complex 272 formula. Mikuda is 100% owned
by one of WWP's owners. Pursuant to the Agreement, WWP has an exclusive license
to use Complex 272 in skin care products. The Agreement provides that WWP's
license is granted in perpetuity unless terminated by a breach of the provisions
of the Agreement or by mutual consent of the parties. The Agreement requires WWP
to pay Mikuda a royalty based upon WWP's gross sales revenue for products which
utilize Complex 272.
Effective October 1, 1996, the Agreement was amended and the royalty rate was
reduced to 4% of annual sales up to $12 million with the rate decreasing at
higher annual sales levels. During 1997, royalties totaled approximately
$457,000 and are recorded as a component of cost of sales. WWP also paid, and
included in cost of sales, approximately $226,000 in 1997 to purchase its supply
of Complex 272 from Mikuda.
6. RELATED-PARTY TRANSACTIONS:
All of WWP's products are marketed under the name "Obagi". WWP has a trademark
and trade name license agreement with Dr. Obagi, one of WWP's owners, to use the
trademarks and trade names "Obagi" and "Obagi Nu-Derm" in connection with WWP's
sale of skin care products. WWP does not pay Dr. Obagi any fees for the use of
the trademarks and trade names.
F-37
WORLDWIDE PRODUCT DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS: (CONTINUED)
Two of WWP's beneficial owners purchase products from WWP and receive a 63%
discount on all of their product purchases. During 1997, the two owners
purchased products aggregating approximately $59,000 and $276,000, net of
related discounts, from WWP.
One of WWP's beneficial owners is a 35% shareholder in Cellogique, WWP's Middle
Eastern distributor. According to a Product Distribution Agreement, which is
renewable every 2 years after the first 30 months, Cellogique is required to
purchase, on a quarterly basis from WWP, a minimum of $50,000 worth of products
through August 1998 and $135,000 worth of products thereafter until the
agreement is terminated. During 1997, Cellogique purchased products aggregating
approximately $531,000 from WWP.
As discussed in Note 4, WWP purchased substantially all of its products from a
supplier which is 10% owned by one of WWP's beneficial owners. For the period
from January 1, 1997 through December 1, 1997, total purchases from the supplier
aggregated approximately $1,413,000.
During the period from January 1, 1997 through December 1, 1997, WWP paid state
taxes on behalf of the owners in the amount of approximately $11,000.
7. COMMITMENTS AND CONTINGENCIES:
WWP leased office space on a month-to-month basis. Total rent expense for the
period from January 1, 1997 through December 1, 1997, was approximately $57,000.
8. SEGMENT INFORMATION:
WWP operates in a single operating segment and is engaged in the development,
distribution and marketing of skin care products, which are generally sold by
prescription. WWP distributes its products through physicians in the United
States and through authorized sales distributors in over 30 foreign countries.
WWP's homogenous products are complementary and are marketed together.
The following geographic area data includes net sales based on ultimate product
shipment destination through direct customer sales or through distributor sales
for the period January 1, 1997 through December 1, 1997:
Revenues
United States............................................... $ 6,943,906
Asia........................................................ 2,526,537
Europe...................................................... 137,521
South America............................................... 63,415
Other....................................................... 725,137
-----------
$10,396,516
===========
No single customer accounted for more than 10% of revenues for the period
January 1, 1997 through December 1, 1997.
9. SUBSEQUENT EVENT (UNAUDITED):
On March 15, 1999, WWP and OMP, Inc. settled an ongoing dispute over the final
purchase price determination. The agreed-upon purchase price adjustment resulted
in a $500,000 cash payment to OMP, Inc. on March 15, 1999.
F-38
THE OBAGI NU-DERM SYSTEM
A COMPLETE PROTOCOL FOR SKIN HEALTH RESTORATION
PREPARE
GENTLE CLEANSER Cleans and soothes DELICATE AND NORMAL
SKIN
[GRAPHIC]
FOAMING GEL Deep cleaning FOR NORMAL AND OILY SKIN
TONER Restores skin's natural pH level FOR ALL SKIN TYPES
CORRECT
CLEAN-TM- [hydroquinone USP 4%] Skin bleaching/correcting
cream
[GRAPHIC]
EXFODERM-REGISTERED TRADEMARK- Exfoliates DRY, THIN, OR
SENSITIVE SKIN
EXFODERM-REGISTERED TRADEMARK- FORTE Exfoliates THICK,
OILY, OR TOUGH SKIN
STIMULATE
BLENDER-TM- [hydroquinone USP
4%]
[GRAPHIC]
Lightening/blending cream to even color tone
FOLLOWED BY INDIVIDUALLY PRESCRIBED RETINOIN CREAM
PROTECT
SUNFADER-TM- [hydroquinone USP 4% octylmethoxyomnamate
USP
7.5%
oxybenzone USP 5.5%]
[GRAPHIC]
SPF 15 sunscreen with lightener FOR
HYPERPIGMENTATION
SUNBLOCK[titaniumdioxide USP 9% zincoxide USP 6%]
SPF 24 broad sun protection FOR ALL SKIN TYPES
EYE CREAM Soothes delicate skin FOR ALL SKIN TYPES
CONTROL
TOLEREEN-TM- [hydrocortisone USP 0.5%] Antipuritic
lotion
[GRAPHIC]
ACTION-TM- Moisturizing lotion for temporary relief of
dryness
BACITRACIN bacitracinzinc USP 500 units per gram Topical
antibiotic
- --------------------------------------------------------------------------------
[LOGO]
4,500,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 2001
CIBC WORLD MARKETS
THOMAS WEISEL PARTNERS LLC
- ----------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSEPCTUS OR ANY SALE OF THESE SECURITIES.
UNTIL , 2000 ( 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by OMP, Inc. in connection with the distribution of the
securities being registered are as set forth in the following table:
Securities and Exchange Commission Fee...................... $ 21,750
NASD Filing Fee............................................. $ 8,780
Nasdaq National Market Listing Fee.......................... 1,000
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Printing and Engraving Expenses............................. *
Blue Sky Fees and Expenses.................................. *
Registrar and Transfer Agent Fees and Expenses.............. *
Miscellaneous............................................... *
Total............................................... $ *
- ---------------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers provisions, expanding the scope of indemnification
beyond that specifically provided by the current law.
The registrant's Certificate of Incorporation provides for the indemnification
of directors to the fullest extent permissible under Delaware law.
The registrant's Bylaws provides for the indemnification of officers, directors
and third parties acting on behalf of the registrant if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of the registrant, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The registrant has entered into indemnification agreements with its directors,
in addition to indemnification provided for in the registrant's Bylaws, and
intends to enter into indemnification agreements with any new directors in the
future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the underwriters of the registrant and its executive officers and directors, and
by the registrant of the underwriters for some liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in the
Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 30, 1997, OMP, Inc. has issued unregistered securities as
follows:
(1) On October 9, 1997, we sold 1,800 shares of our common stock to Mandarin
Partners LLC at a price of $0.28 per share for a total price of $500. The
issuance described under this Item 15(1) is deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involved in a public offering.
(2) On December 1, 1997, we sold the following unregistered securities:
(a) 10,798,200 shares of our common stock to Mandarin Partners LLC at a price of
$0.28 per share for a total price of $2,999,500;
II-1
(b) 3,600,000 shares of our common stock to the Zein and Samar Obagi Family
Trust at a price of $0.28 per share for a total price of $1,000,000;
(c) 106,200 shares of our Series A preferred stock to Mandarin Partners LLC at a
price of $100.00 per share for a total price of $10,620,000; and (d) 40,000
shares of our Series B preferred stock to the Zein and Samar Obagi Family Trust
at a price of $100 per share for a total price of $4,000,0000. The issuances
described under this Item are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involved in a public offering.
(3) On March 19, 1998, we sold the following unregistered securities:
(a) 252,000 shares of our common stock to Raulee Marcus at a price of $0.28 per
share for a total price of $70,000; and (b) 2,800 shares of our Series B
preferred stock to Raulee Marcus at a price of $100 per share for a total price
of $280,000. On September 24, 1999, we redeemed and cancelled all such common
stock issued to Raulee Marcus for a price of $210,000, and all such Series B
preferred stock issued to Raulee Marcus for a price of $280,000. The issuances
described under this Item are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involved in a public offering.
(4) On February 29, 2000, we sold 42,750 shares of our common stock to James
Krulisky at a price of $0.28 per share for a total price of $11,875. The
issuance described under this Item is deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involved in a public offering.
(5) From December 2, 1997 to November 15, 2000, OMP, Inc. issued options to
approximately employees and directors to purchase a total of 2,225,700 shares
of common stock at a weighted average exercise price of $1.33. No consideration
was paid to OMP, Inc. by any recipient of any of the foregoing options for the
grant of any such options. With respect to all grants of options, exemption from
registration was unnecessary in that the transactions did not involve a "sale"
of securities as that term is used in Section 2(a)(3) of the Securities Act.
OMP, Inc. did not retain underwriters in connection with the issuance of any of
OMP, Inc.'s currently outstanding securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT EXHIBIT TITLE
- ------- ------------------------------------------------------------
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen Stock Certificate.
4.2+ Investors' Rights Agreement by and among the Company,
Mandarin Partners LLC and Zein and Samar Obagi Family Trust,
dated as of December 2, 1997.
4.3 First Amendment to Investors' Rights Agreement by and among
the Company, Mandarin Partners LLC and Zein and Samar Obagi
Family Trust, dated as of November 15, 2000.
4.4* Second Amendment to Investors' Rights Agreement by and among
the Company and its Investors named therein, dated as of
, 2000.
5.1* Form of Opinion of Michael Best & Friedrich LLP.
II-2
EXHIBIT EXHIBIT TITLE
- ------- ------------------------------------------------------------
10.1+ Amended and Restated Credit Agreement by and between the
Company and Imperial Bank, dated as of March 22, 2000.
10.2+ Shared Appreciation Agreement by and between the Company and
Imperial Bank, dated as of March 22, 2000.
10.3+ 1997 Stock Option/Stock Issuance Plan.
10.4+ 2000 Stock Option/Stock Issuance Plan.
10.5+ Lease Agreement between the Company and John Hancock Mutual
Life Insurance Company, dated as of March 5, 1998.
10.6+ Lease Agreement between the Company and Gateway Pacific
Properties, Inc., dated as of November 18, 1999.
10.7**+ Amended and Restated License and Supply Agreement between
the Company and Senetek plc, dated as of November 3, 1999.
10.8**+ AlloDerm Co-Promotion Agreement between the Company and
LifeCell Corporation, dated as of February 9, 2000.
10.9**+ First Amendment to Alloderm Co-Promotion Agreement between
the Company and LifeCell Corporation, dated as of
September 1, 2000.
10.10**+ License and Supply Agreement between the Company and Geneva
Pharmaceuticals, Inc., dated as of February 15, 2000.
10.11**+ License and Supply Agreement between the Company and Vivier
Pharma Inc., dated as of March 31, 2000.
10.12** Joint Venture Agreement between the Company and Rohto
Pharmaceutical Co., Ltd., dated as of February 4, 2000.
10.13+ Employment Agreement by and between the Company and Phillip
J. Rose.
10.14+ Employment Agreement by and between the Company and David
Bruner.
10.15+ Employment Agreement by and between the Company and Candace
C. Crawford.
10.16+ Employment Agreement by and between the Company and Cheri
Jones.
10.17+ Employment Agreement by and between the Company and
Dr. Vartan Libaridian.
10.18+ Employment Agreement by and between the Company and
Dr. Zein E. Obagi.
10.19+ Employment Agreement by and between the Company and Joseph
W. Sortais.
10.20+ Amendment to Employment Agreement by and between the Company
and Joseph W. Sortais.
10.21** Product Distribution Agreement between the Company and
Cellogique Corporation, dated as of May 21, 1994.
10.22** Master Separation Agreement among the Company, Kenneth Kim
and Maron Nu-Tech, Inc., dated as of December 6, 2000, as
amended.
21.1+ Subsidiaries of the Company.
II-3
EXHIBIT EXHIBIT TITLE
- ------- ------------------------------------------------------------
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Michael Best & Friedrich LLP (included in
Exhibit 5.1).
24.1+ Power of Attorney (included on signature page).
27.1+ Financial Data Schedule.
- ---------------------
* To be provided by amendment.
** Material has been omitted pursuant to a request for confidential treatment
and such material has been filed separately with the SEC.
+ Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
Schedule II - Valuation and Qualifying Accounts.
All other schedules are omitted because they are not required, are not
applicable, or the information is included in our financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(4) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Long Beach, State of
California, on December 27, 2000.
OMP, INC.
By /s/ PHILLIP J. ROSE
------------------------------------------
Phillip J. Rose
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ PHILLIP J. ROSE President and Chief Executive
-------------------------------------- Officer and Director (Principal December 27, 2000
Phillip J. Rose Executive Officer)
Vice President and Chief
* Financial Officer (Principal
-------------------------------------- Financial and Accounting December 27, 2000
Candace C. Crawford Officer)
*
-------------------------------------- Director December 27, 2000
John A. Bartholdson
*
-------------------------------------- Director December 27, 2000
Robert F. End
*
-------------------------------------- Director December 27, 2000
Bradley J. Hoecker
*
-------------------------------------- Director December 27, 2000
Dr. Zein E. Obagi
*
-------------------------------------- Director December 27, 2000
Peter P. Tong
*By: /s/ PHILLIP J. ROSE
---------------------------------
Phillip J. Rose
ATTORNEY-IN-FACT
II-5
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of OMP, Inc.
The reincorporation as described in Note 20 to the consolidated financial
statements has not been consummated at December 27, 2000. When it has been
consummated, we will be in a position to furnish the following report:
Our audits of the consolidated financial statements of OMP, Inc., formerly Obagi
Medical Products, Inc., referred to in our report dated February 11, 2000
appearing in this registration statement on Form S-1 also included an audit of
the financial statement schedule listed in Item (16)(b) of this Form S-1. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
Los Angeles, California
February 11, 2000
S-1
OMP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEGINNING CHARGES TO COST
BALANCE AND EXPENSES DEDUCTIONS(1) ENDING BALANCE
-------------- --------------- ------------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1999..... $ 118,283 $ (29,447) $ (263) $ 88,573
Year ended December 31, 1998..... $ 110,404 $ 83,729 $ (75,850) $ 118,283
Period from October 8, 1997 (date
of inception) to December 31,
1997........................... $ 129,686 $ $ (19,282) $ 110,404
INVENTORY VALUATION ALLOWANCE:
Year ended December 31, 1999..... $ 113,059 $ 141,350 $ (70,696) $ 183,713
Year ended December 31, 1998..... $ 113,059 $ $ $ 113,059
Period from October 8, 1997 (date
of inception) to December 31,
1997........................... $ 15,657 $ 97,402 $ $ 113,059
DEFERRED INCOME TAX VALUATION
ALLOWANCE:
Year ended December 31, 1999..... $2,070,101 $ $(2,070,101) $
Year ended December 31, 1998..... $1,763,282 $ 306,819 $ $2,070,101
Period from October 8, 1997 (date
of inception) to December 31,
1997........................... $ $1,763,282 $ $1,763,282
(1) Deductions include the write-off of uncollectible amounts with respect to
trade accounts receivable, write-off of damaged inventory, and revaluation
of the tax valuation allowance.
S-2
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholder
of WorldWide Product Distribution, Inc.
Our audit of the statements of operations and of cash flows of WorldWide Product
Distribution, Inc. referred to in our report dated February 25, 1998 appearing
in this registration statement on Form S-1 also included an audit of the
financial statement schedule listed in Item (16)(b) of this Form S-1. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related statements of operations and of cash flows.
Los Angeles, California
February 25, 1998
S-3
WORLDWIDE PRODUCT DISTRIBUTION, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEGINNING CHARGES TO COST
BALANCE AND EXPENSES DEDUCTIONS (1) ENDING BALANCE
-------------- --------------- -------------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Period from January 1, 1997 to
December 1, 1997.............. $ 271,000 $ 4,522 $ (145,836) $ 129,686
INVENTORY VALUATION ALLOWANCE:
Period from January 1, 1997 to
December 1, 1997.............. $ 15,657 $ 226,444 $ (226,444) $ 15,657
(1) Deductions include the write-off of uncollectible amounts with respect to
trade accounts receivable.
S-4
OBAGI MEDICAL PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT TITLE
- ------- ------------------------------------------------------------
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen Stock Certificate.
4.2+ Investors' Rights Agreement by and among the Company,
Mandarin Partners LLC and Zein and Samar Obagi Family Trust,
dated as of December 2, 1997.
4.3 First Amendment to Investors' Rights Agreement by and among
the Company, Mandarin Partners LLC and Zein and Samar Obagi
Family Trust, dated as of November 15, 2000.
4.4* Second Amendment to Investors' Rights Agreement by and among
the Company and the Investors named therein, dated as of
, 2000.
5.1* Form of Opinion of Michael Best & Friedrich LLP.
10.1+ Amended and Restated Credit Agreement by and between the
Company and Imperial Bank, dated as of March 22, 2000.
10.2+ Shared Appreciation Agreement by and between the Company and
Imperial Bank, dated as of March 22, 2000.
10.3+ 1997 Stock Option/Stock Issuance Plan.
10.4+ 2000 Stock Option/Stock Issuance Plan.
10.5+ Lease Agreement between the Company and John Hancock Mutual
Life Insurance Company, dated as of March 5, 1998.
10.6+ Lease Agreement between the Company and Gateway Pacific
Properties, Inc., dated as of November 18, 1999.
10.7**+ Amended and Restated License and Supply Agreement between
the Company and Senetek plc, dated as of November 3, 1999.
10.8**+ AlloDerm Co-Promotion Agreement between the Company and
LifeCell Corporation, dated as of February 9, 2000.
10.9**+ First Amendment to Alloderm Co-Promotion Agreement between
the Company and LifeCell Corporation, dated as of
September 1, 2000.
10.10**+ License and Supply Agreement between the Company and Geneva
Pharmaceuticals, Inc., dated as of February 15, 2000.
10.11**+ License and Supply Agreement between the Company and Vivier
Pharma Inc., dated as of March 31, 2000.
10.12** Joint Venture Agreement between the Company and Rohto
Pharmaceutical Co., Ltd., dated as of February 4, 2000.
10.13+ Employment Agreement by and between the Company and Phillip
J. Rose.
10.14+ Employment Agreement by and between the Company and David
Bruner.
10.15+ Employment Agreement by and between the Company and Candace
C. Crawford.
10.16+ Employment Agreement by and between the Company and Cheri
Jones.
EXHIBIT EXHIBIT TITLE
- ------- ------------------------------------------------------------
10.17+ Employment Agreement by and between the Company and
Dr. Vartan Libaridian.
10.18+ Employment Agreement by and between the Company and
Dr. Zein E. Obagi.
10.19+ Employment Agreement by and between the Company and Joseph
W. Sortais.
10.20+ Amendment to Employment Agreement by and between the Company
and Joseph W. Sortais.
10.21** Product Distribution Agreement between the Company and
Cellogique Corporation, dated as of May 21, 1994.
10.22** Master Separation Agreement among the Company, Kenneth Kim
and Maron Nu-Tech, Inc., dated as of December 6, 2000.
21.1+ Subsidiaries of the Company.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Michael Best & Friedrich LLP (included in
Exhibit 5.1).
24.1+ Power of Attorney (included on signature page).
27.1+ Financial Data Schedule.
- ---------------------
* To be provided by amendment.
** Material has been omitted pursuant to a request for confidential treatment
and such material has been filed separately with the SEC.
+ Previously filed.