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United States
Securities and Exchange Commission
Washington, D.C. 20549
. . . . . . . . . . . . . . . . . . . .
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996.
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____.
Commission file number 0-18443
MEDICIS PHARMACEUTICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1574808
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(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4343 East Camelback Road, Suite 250, Phoenix, AZ 85018-2700
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (602) 808-8800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.014 par value Preference Share
Purchase Rights
(Title of each Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form or any amendment
to this Form 10-K [ ].
The aggregate market value on August 5, 1996, of the voting stock held on August
5, 1996, by non-affiliates of the registrant was $225,476,449 (calculated by
excluding all shares held by executive officers, directors and holders of five
percent or more of the voting power of the registrant's Common Stock, without
conceding that such persons are "affiliates" of the Registrant for purposes of
the federal securities law).
As of August 3, 1996 there were 6,832,633 shares of Class A Common Stock $0.014
par value, 125,322 shares of Class B Common Stock $0.014 par value, and 62,660
shares of Series B Preferred Stock, $0.01 par value outstanding.
Documents incorporated by reference:
Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting of
Stockholders are incorporated herein by reference in Part III of this Form 10-K
to the extent stated herein.
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PART I
This Report contains forward-looking statements which involve risks and
uncertainties. The actual results of Medicis Pharmaceutical Corporation
(together with its wholly-owned subsidiaries, the "Company" or "Medicis") could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in this Form 10-K and the
Company's other Securities and Exchange Commission filings. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 1. BUSINESS
THE COMPANY
Medicis is the leading independent pharmaceutical company in the United
States that offers prescription and non-prescription (over-the-counter)
products exclusively to treat dermatological conditions. Emphasizing the
clinical effectiveness, quality, affordability and cosmetic elegance of its
products, the Company has achieved a leading position in the treatment of acne
and acne-related conditions using prescription pharmaceuticals, while also
offering the leading domestic over-the-counter ("OTC") fade cream product. The
Company has built its business through the successful introduction of DYNACIN
and TRIAZ products for the treatment of acne and the acquisition of the
ESOTERICA fade cream product line.
PRINCIPAL PRODUCTS AND PRODUCT LINES
Medicis currently offers products in the following areas of
dermatology: acne, hyperpigmentation, inflammatory skin diseases, dry skin and
cosmetic dermatology. The Company addresses these areas with a range of
prescription and OTC products.
Prescription Pharmaceuticals
Prescription pharmaceuticals accounted for 83.2% of the Company's net
sales in the fiscal year ended June 30, 1996 ("fiscal 1996"). Medicis currently
focuses its prescription pharmaceutical efforts primarily on treating acne and
related conditions. The Company's principal branded pharmaceuticals are as
follows:
DYNACIN is an oral, systemic antibiotic prescribed for the treatment of moderate
to severe acne vulgaris, the most common form of acne, a condition that resulted
in over 10 million visits to dermatologists in 1995. The most commonly
prescribed systemic acne treatments are tetracycline and its derivatives,
doxycycline and minocycline. Minocycline, the active ingredient in DYNACIN
products, is widely prescribed for the treatment of acne for several reasons. It
has a more convenient schedule of one or two doses per day as compared to other
forms of tetracycline, which can require up to four doses per day. Other forms
of tetracycline require ingestion on an empty stomach and often increase patient
sensitivity to sunlight, creating a greater risk of sunburn. Moreover, the other
forms of tetracycline, including doxycycline, often cause gastric irritation. In
addition, resistance to several commonly used antibiotics, including
erythromycin, clindamycin, doxycycline and tetracycline, by the primary
bacterial organism responsible for acne has been documented. Studies suggest
that bacterial resistance to erythromycin exceeds 60%, and resistance to
doxycycline and tetracycline exceeds 40%, while the bacteria showed virtually no
resistance to minocycline. Thus, although more expensive than other forms of
branded tetracycline and many times more expensive than generic tetracycline,
minocycline is documented to have clinical performance that is superior to other
forms of tetracycline, while avoiding many of its disadvantages. However,
DYNACIN's retail price is approximately 30% lower than the average reported
retail price of the other leading branded minocycline product, Minocin, while
selling at approximately 25% to 30% higher than the average reported retail
price of generic minocycline. DYNACIN is at least comparable in performance to
Minocin and is believed by the Company to enjoy certain performance
characteristics that favorably distinguish it from generic minocycline. DYNACIN
was launched in the second quarter of the fiscal year ended June 30, 1993
("fiscal 1993"). At June 30, 1996, DYNACIN products held approximately 51% of
total branded minocycline market sales and was the leading brand of branded
minocycline in the United States. There can be no assurance that DYNACIN will
not lose significant market share in the future, that it will remain a
competitive product, or that the Company will be able to compete successfully in
the acne treatment
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market through the sale of DYNACIN or any other product. The Company has
entered into a manufacturing and supply agreement with Schein Pharmaceuticals,
Inc. ("Schein") for the supply of DYNACIN products. See "-- Manufacturing."
TRIAZ is a topical therapy prescribed for the treatment of all forms and varying
degrees of acne, and is available as a gel available in two concentrations and
as a cleanser. The combined domestic sales of topically applied prescription
acne products were in excess of $400 million in 1995. The most frequently
prescribed topical acne treatments include Cleocin-T, generic topical
clindamycin, and Benzamycin. While these therapies are generally effective,
TRIAZ offers advantages over each product, including improved stability, greater
convenience of use, reduced cost and fewer side effects. Benzamycin requires
refrigeration and mixing by a pharmacist and has a relatively short shelf life
of three months. TRIAZ comes in a ready-mixed gel that does not require
refrigeration and has a two-year shelf life. In addition, TRIAZ is aesthetically
pleasing and minimizes the extreme drying and scaling of skin often caused by
competing brands. The average reported retail price of TRIAZ is less than that
of either Cleocin-T or Benzamycin. In addition, bacterial resistance has been
demonstrated with both Cleocin-T and erythromycin, an active ingredient in
Benzamycin. TRIAZ products are manufactured using the active ingredient benzoyl
peroxide in a vehicle containing glycolic acid and zinc lactate. Benzoyl
peroxide is the most efficacious agent available for clearing the bacteria that
cause acne. Glycolic acid enhances the effectiveness of benzoyl peroxide by
exfoliating the outer layer of the skin (thereby providing direct access to the
bacteria), and zinc lactate acts to reduce the appearance of inflammation and
irritation often associated with acne. TRIAZ was developed internally by the
Company's formulation scientists and introduced in the second quarter of fiscal
1996. There can be no assurance that the Company will be able to successfully
market the TRIAZ product line or that the TRIAZ product line will achieve or
retain market acceptance. The Company has a patent application and has certain
licensed patent rights covering varying aspects of TRIAZ. TRIAZ products are
manufactured to the Company's specifications on a purchase order basis by Paco
Laboratories, Inc. See "-- Manufacturing," "-- Trademarks" and "-- Patents and
Proprietary Rights."
THERAMYCIN Z is a topical therapy available as a lotion prescribed for the
treatment of acne. THERAMYCIN Z is erythromycin in a solution containing zinc
acetate, which acts to reduce the appearance of inflammation and irritation
often associated with acne. THERAMYCIN Z competes with other topical acne
treatments, including Cleocin-T, Erycette, ATS, Emgel and other topical
antibiotics. The Company has an exclusive worldwide license to market this
product from a subsidiary of IVAX Corporation ("IVAX"). The Company purchases
THERAMYCIN Z from IVAX pursuant to a manufacturing and supply agreement. See "--
Manufacturing" and "-- Certain License and Royalty Agreements."
BENZASHAVE products are shave creams marketed by the Company as topical
therapies for the treatment of pseudofolliculitis barbae ("PFB") and acne
associated with shaving. PFB, commonly called "razor bumps," is a painful
irritation aggravated by shaving. This condition affects millions of men in the
United States, particularly African Americans and others with relatively coarse
facial hair. However, medical treatment is often not sought, as many men
afflicted with PFB grow facial hair to avoid shaving, or use a variety of
nonprescription shaving products which claim to alleviate the condition. The
Company believes that BENZASHAVE products are the only prescription shaving
products available for treatment of PFB and acne associated with shaving. There
can be no assurance that the Company will be able to successfully market
BENZASHAVE products or that BENZASHAVE will achieve or maintain market
acceptance. The Company entered into an exclusive worldwide license to market
BENZASHAVE with IVAX in the fiscal year ended June 30, 1991 ("fiscal 1991"),
which includes a license of patent rights relating to the use of benzoyl
peroxide in the treatment of PFB. The Company purchases BENZASHAVE pursuant to a
manufacturing and supply agreement. See "-- Manufacturing," "-- Certain License
and Royalty Agreements," "-- Trademarks" and "-- Patents and Proprietary
Rights."
Over-The-Counter Products
OTC pharmaceutical products accounted for 16.8% of the Company's net
sales dollars in fiscal 1996. Medicis markets a variety of OTC skin care
products to treat pigmentation, dry skin and certain inflammatory skin
conditions. The Company's principal OTC products are as follows:
ESOTERICA is a line of topical creams used to treat minor skin discoloration
problems such as age spots, uneven skin tones, dark patches, blotches and
freckles. ESOTERICA is the leading line of fade creams in the United States.
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ESOTERICA product line is in five formulations, consisting of four creams
containing various concentrations of the active ingredient hydroquinone and a
body lotion. Hydroquinone is the only agent proven to reduce
hyperpigmentation and the only product legally sold in the United States for
this purpose. Other OTC products used to treat minor skin discoloration include
Porcelana and AMBI, which are sold in a variety of creams, gels and lotions.
There can be no assurance that the Company will be able to successfully market
the ESOTERICA product line or that the ESOTERICA product line will
maintain market acceptance. The Company acquired the ESOTERICA product line from
SmithKline Beecham Consumer Healthcare L.P. ("SmithKline") in fiscal 1991, and
assumed the marketing of these products in the United States and Canada. The
Company's manufacturing agreement with SmithKline for ESOTERICA expires in March
31, 1997. See "-- Manufacturing."
THERAPLEX is a line of moisturizers that are used for the treatment of dry skin
or certain inflammatory skin conditions, such as are present in psoriasis,
eczema or ichthyosis. The THERAPLEX line consists of three products, THERAPLEX
EMOLLIENT, THERAPLEX CLEARLOTION and THERAPLEX HYDROLOTION, that combine high
molecular weight hydrocarbons, the active component of petrolatum, with certain
silicones. THERAPLEX moisturizers do not contain the normally greasy, sticky and
odoriferous petrolatum components found in competitive products. Skin care
products containing the patented ingredient present in THERAPLEX moisturizers
have been marketed by other companies under other tradenames for several years
in certain European countries, and more recently in Canada. THERAPLEX
moisturizers compete with a variety of other moisturizing products, including
Eucerin, Lubriderm and Keri-Lotion, as well as other mass marketed moisturizers.
The Company acquired a license to the patent underlying the THERAPLEX product
line in 1990. There can be no assurance that the Company will be able to
successfully market the THERAPLEX product line or that the THERAPLEX product
line will achieve or retain market acceptance. The Company has various
agreements for the manufacture of the THERAPLEX product line on a purchase order
basis and is obligated to pay certain royalties on its product sales. See "--
Manufacturing" and "-- Certain License and Royalty Agreements."
PRODUCTS IN DEVELOPMENT
The Company has developed and obtained rights to certain dermatological
agents in various stages of development, and with potential applications,
ranging from line extensions to new products or reformulations of existing
products. Medicis' strategy involves the rapid evaluation and formulation of new
therapeutics by obtaining preclinical safety and efficacy data (when possible),
followed by rapid safety and efficacy testing in humans. While development
periods may vary, the Company generally selects products for development with
the objective of proceeding from formulation to product launch within a two-year
period.
Medicis directs the efforts of contract laboratory research facilities
to perform formulation and research work on active ingredients as well as direct
the third-party conduct of preclinical studies and clinical trials. All products
and technologies under development will require significant commitments of
personnel and financial resources. Several products will require extensive
clinical evaluation and premarketing clearance by the United States Food and
Drug Administrative ("FDA") and comparable agencies in other countries prior to
commercial sale. Certain of the products and technologies under development have
been licensed from third parties. The failure of the Company to meet its
obligations under one or more of these agreements could result in the
termination of the Company's rights under such agreements. In addition, the
Company regularly reevaluates its product development efforts. On the basis of
these reevaluations, the Company has in the past, and may in the future, abandon
development efforts for particular products. No assurance can be given that any
product or technology under development will result in the successful
introduction of any new product. Failure of the Company to introduce and market
new products, whether internally developed or acquired from third parties, could
have a material adverse effect on the Company's business, financial condition or
results of operation. See "--Government Regulation."
The Company's research and development costs for Company-sponsored and
unreimbursed co-sponsored pharmaceutical projects for fiscal 1996, fiscal 1995
and fiscal 1994 were $952,000, $770,000 and $1,572,000, respectively. The fiscal
1994 amount includes approximately $727,000 of research and development costs
relating to divested operations. The Company has in the past supplemented, and
may in the future supplement, its research and development efforts by entering
into additional research and development agreements with other pharmaceutical
companies in order to defray the cost of product development. There can be no
assurance that the Company will enter into research and development agreements
acceptable to the Company, or at all.
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MARKETING AND SALES
Prescription Pharmaceuticals
The Company believes its marketing and sales organization is one of the
most productive in the dermatology sector. The marketing effort is focused on
assessing and meeting the needs of dermatologists. The Company's marketing and
sales team, consisting of 30 members at August 3, 1996, regularly calls on
dermatologists. Those dermatologists who are responsible for a relatively
higher volume of prescriptions are visited more frequently. The Company has
created an incentive program based on aggressive goals in market share growth,
and believes that its highest performing sales representatives are among the
best compensated in the industry. The Company believes that its most effective
promotion is achieved by cultivating a relationship of trust and confidence with
dermatologists themselves. Medicis also uses a variety of marketing tactics to
promote its products, including sampling, journal advertising, promotional
material, specialty publications, rebate coupons, product guarantees, a
leadership position in educational conferences and exposure of its products on
the Internet.
OTC Products
The Company's OTC products are promoted to retailers and wholesalers by
manufacturers' representatives who also support a substantial number of products
of other manufacturers. The Company also markets its OTC products through trade
promotions, radio advertising, couponing and consumer awareness programs.
WAREHOUSING AND DISTRIBUTION
The Company utilizes an independent national warehousing corporation to
store and distribute its products from three central warehousing locations in
California, Kansas and Maryland. Upon the receipt of a purchase order through
electronic data input ("EDI"), phone mail or facsimile, the order is processed
into the Company's inventory systems, at which time an inventory picking sheet
is automatically placed via EDI to the most efficient warehouse location for
shipment usually within 24 hours to the customer placing the order. Upon
shipment, the warehouse sends back to the Company via EDI the necessary
information to automatically process the invoice in a timely manner.
CUSTOMERS
Medicis' customers include the nation's leading wholesale
pharmaceutical distributors, such as McKesson, Bergen Brunswig Drug Company
("Bergen Brunswig"), Cardinal Health Inc. ("Cardinal"), Foxmeyer Drug Company
("Foxmeyer"), Bindley Western Drug Company ("Bindley") and major drug chains.
During fiscal 1996, McKesson Drug Company ("McKesson"), Bergen Brunswig and
Cardinal, accounted for approximately 15.5%,12.2% and 11.8%, respectively, of
the Company's sales. For fiscal 1995, McKesson and Bergen accounted for
approximately 15.9% and 9.6%, respectively, of the Company's sales. For fiscal
1994, McKesson and Bergen Brunswig accounted for approximately 15.1% and 11.2%,
respectively, of the Company's sales. The distribution network for
pharmaceutical products has, in recent years, been subject to increasing
consolidation. As a result, a few large wholesale distributors control a
significant share of the market. In addition, the number of independent drug
stores and small chains has decreased as retail consolidation has occurred.
Further consolidation among wholesale distributors or retailers could result in
the combination or elimination of warehouses which may stimulate products
returns to the Company, cause a reduction in their inventory levels, or
otherwise result in reductions in purchases of the Company's products, any of
which could result in a material adverse impact upon the Company's business,
financial condition or results of operations.
MANUFACTURING
The Company currently contracts for all of its manufacturing needs and
is permitted to contract only with manufacturers that comply with FDA current
Good Manufacturing Practices ("cGMP") regulations and other applicable laws and
regulations. The Company typically does not enter into long-term manufacturing
contracts with third-party manufacturers. Whether or not such contracts exist,
there can be no assurance that the Company will be able to obtain adequate
supplies of such products in a timely fashion, or at all.
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The Company's DYNACIN products are manufactured by Schein in compliance
with the Company's stringent, internally developed specifications and quality
standards pursuant to a supply agreement that expires in December 1997. Under
the agreement, Schein manufactures minocycline for sale in the branded market
exclusively for the Company, but may manufacture and sell minocycline for
itself or others as a generic product. Schein currently manufactures minocycline
for the generic market under its own label. The Schein supply agreement is
subject to automatic renewal for successive two-year periods if neither party
gives timely notice of termination and may also be canceled without cause upon
12-months notice. Schein may also terminate the exclusivity portion of the
agreement if its profit margin on sales of DYNACIN products fall below a
specified level. Schein may terminate the agreement upon a material breach by
the Company, in the event that the Company becomes insolvent, or if any lawsuit
is commenced alleging a patent or a proprietary rights violation. The agreement
also provides that the Company will purchase all of its requirements for
minocycline from Schein but may purchase some of its requirements from another
manufacturer if Schein fails to meet certain cost standards or fails to provide
the Company with all of its requirements for two of four consecutive calendar
quarters. In addition, the Company may use alternative sources if Schein
terminates the Company's exclusive rights to purchase branded minocycline based
upon the Company's failure to meet the specified profit margins, as defined.
Either party may terminate the agreement in the event that one party cannot
perform under the agreement for a period of three months or longer for certain
reasons beyond its control, such as war, strike, fire, lockout or acts of God.
The Company believes that it has alternative sources of supply and that it would
be able to use these alternative sources to preserve an adequate supply of
DYNACIN. However, the inability of Schein to fulfill the Company's supply
requirements for DYNACIN, the Company's largest-selling product, could have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company's ESOTERICA line of products are manufactured by SmithKline
pursuant to a manufacturing and supply agreement which expires in March 1997.
SmithKline may terminate its agreement in the event of a material breach by the
Company upon 15-days written notice. The Company's Canadian distributor
currently utilized Contract Manufacturing Associates to manufacture its
requirements of ESOTERICA for the Canadian market. In the event the Company or
SmithKline declines to renew such manufacturing and supply agreement, the
Company may utilize Contract Manufacturing Associates for its domestic product
requirements or such other manufacturer as it determines appropriate.
The Company purchases THERAMYCIN Z and BENZASHAVE products
exclusively from IVAX, pursuant to a manufacturing agreement expiring in July
2000. In the event that IVAX is prevented from completing performance of its
obligations under the Agreement for specified reasons beyond its control, it is
excused from such performance until such time as the event preventing its
performance ceases. If IVAX is unable to supply the Company's requirements of
either product, the Company is permitted to purchase the unsatisfied
requirements from third parties. The remainder of the Company's products are
produced on a purchase order basis only, including its THERAPLEX EMOLLIENT
products, manufactured by ViFor, S.A., a Swiss manufacturing company ("ViFor");
THERAPLEX CLEARLOTION products, manufactured by Accupac, Inc.; THERAPLEX
HYDROLOTION products, manufactured by Beauty Control Cosmetics, Inc.; TRIAZ
products, manufactured by Paco Laboratories, Inc. and THERAMYCIN Z and
BENZASHAVE products, which are manufactured by IVAX.
There can be no assurance that the above manufacturers will continue to
meet the FDA's regulations or the Company's product specifications and standards
for the indicated products or that they can continue to meet product demand on a
consistent and timely basis. Schein, IVAX and ViFor are currently the sole
manufacturers of DYNACIN products, THERAMYCIN Z and BENZASHAVE products, and
THERAPLEX EMOLLIENT products, respectively. The Company believes that
alternative sources of manufacturing are available for all of its products.
Because of the FDA requirement for cGMP validation of manufacturing facilities
for particular products, validation of a new facility to serve as a replacement
source of manufacturing requires a substantial period of time. Any loss of a
manufacturer or other manufacturing difficulties could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has obtained business interruption insurance to insure against the
loss of income for up to 12 months due to the interruption of manufacturing of
the Company's three principal products due to certain causes. While the Company
believes that the policy provides substantial protection against the covered
events, there can be no assurance that the policy will cover all manufacturing
interruptions or that the amount of such insurance will be adequate to fully
protect the Company for losses associated with such interruptions.
The Company's third-party manufacturers rely on certain suppliers of
key raw materials. Certain of those materials are purchased from single sources
and others may be purchased from single sources in the future. Although the
Company has no reason to believe that it will be unable to procure adequate
supplies of such raw materials on a timely basis,
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disruptions in supplies, including delays due to the inability of the Company or
its manufacturers to procure raw materials, would have a material adverse effect
on the Company's business, financial condition and results of operations.
Any interruptions in the supply of any of the Company's products due to
shortages in raw materials, changes in manufacturing sources, regulatory changes
or other causes could delay or eliminate the Company's ability to supply such
products. In addition, the Company faces the risk that, upon expiration of the
term of any third-party manufacturing agreement, it may not be able to renew or
extend the agreement with the third-party manufacturer, to obtain an alternative
manufacturing source from other third parties or to develop internal
manufacturing capabilities on commercially viable terms, if at all. To manage
its resources effectively, the Company attempts to retain inventory levels that
are no greater than necessary to meet the currently projected needs of its
customers.
Manufacture of the Company's THERAMYCIN Z and BENZASHAVE products was
suspended in fiscal 1994 following the acquisition by IVAX of certain assets of
Syosset, the original manufacturer of those products under the agreement, in
Syosset's bankruptcy proceeding. Manufacture of the BENZASHAVE products was
subsequently resumed, and the Company resumed shipping these products during
fiscal year ended June 30, 1995 (fiscal 1995"). During the second quarter of
fiscal 1996, manufacturing of the THERAMYCIN Z product also resumed. This
suspension did not have a material adverse effect on the Company's results of
operations. However, there can be no assurance that the Company will not suffer
future supply insufficiencies or interruptions or that it will be able to obtain
adequate supplies of its products in a timely fashion, or at all. While the
Company believes that its inventory levels are generally adequate, the loss of a
manufacturer, the failure to obtain a replacement manufacturer on a timely
basis, other manufacturing problems or any interruption of supply could have a
material adverse effect on the Company's business, financial condition or
results of operations.
CERTAIN LICENSE AND ROYALTY AGREEMENTS
In July 1990, the Company entered into two separate license agreements
with IVAX, as successor to Syosset Laboratories, Inc. ("Syosset"), under which
the Company acquired a 10-year exclusive, worldwide license to market and
sublicense the products Erythromycin 2%, which Medicis markets as THERAMYCIN Z,
BENZASHAVE 5% and 10% and certain other products. IVAX also manufactures the
licensed products for the Company pursuant to a manufacturing agreement. The
licensing agreements are subject to termination by IVAX upon a material failure
of the Company to perform its obligations under the agreements for 60 days, or
upon the Company's failure to perform under the payment provisions of the
agreements for 30 days, or upon the filing of a petition in bankruptcy by or
against the Company.
In April 1989, the Company sublicensed a United States patent relating
to the THERAPLEX line of products pursuant to a modified license agreement among
the Company, Dr. Hans Rudi Seuss and H.R. Seuss, A.G. (collectively, "Seuss")
and Euromerican Trade Resources, Inc. ("Euromerican"). The Company was granted
an exclusive sublicense to market all products manufactured pursuant to the
patent in the United States, Mexico and Japan, until the patent expires in
October 1999. The agreement further grants the Company the right to otherwise
exploit the know-how embodied in the patent. The agreement requires that the
Company make annual payments of specified minimum royalties. The agreement is
subject to termination by Seuss upon Euromerican's failure to perform its
obligations under the agreement for 45 days or by Seuss or Euromerican upon the
Company's failure to perform its obligations under the agreement for 45 days or
upon the occurrence of other standard events of default. The Company has also
received a separate assignment from Dr. Gars and Dr. Suess of certain patent
rights relating to the Company's THERAPLEX HYDROLOTION products.
There can be no assurance that the Company will fulfill its obligations
under any of the foregoing agreements. The failure to satisfy the requirements
of any agreement could result in the loss of the Company's rights under the
agreements and in other related agreements which could have a material adverse
affect upon the Company's business, financial condition or results of
operations.
TRADEMARKS
The Company believes that trademark protection is significant in
establishing product recognition. The Company owns 15 federally registered
trademarks. The Company has filed United States applications for registration of
seven additional trademarks and servicemarks. United States federal
registrations for trademarks remain in force for 10 years and may be renewed
every 10 years after issuance provided the mark is still being used in commerce.
There
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can be no assurance that any such trademarks or servicemarks will afford the
Company adequate protection, or that the Company will have the financial
resources to enforce its rights under any such trademarks and servicemarks. The
inability of the Company to protect its trademarks or servicemarks from
infringement could result in injury to any goodwill which may be developed in
such trademarks or servicemarks. Moreover, the Company's inability to use one or
more of its trademarks or servicemarks because of successful third-party claims
to such marks could have a material adverse effect on the Company's business,
financial condition or results of operations.
An opposition to registration of the mark "THERAMYCIN Z" has been filed
and is currently pending in the United States Patent and Trademark Office. While
there can be no assurance as to the outcome of this matter, the Company does not
currently foresee any significant costs or loss of sales associated with the
reintroduction of THERAMYCIN Z under a different trade name.
From time to time, the Company receives communications from parties who
allege that their trademark interests may be damaged either by the Company's use
of a particular trademark or its registration of such trademark. In general, the
Company seeks to resolve such conflicts before an actual opposition to
registration or suit for infringement is filed. There can, however, be no
assurance that such oppositions will not be filed or that, if filed, they will
not have a material adverse effect upon the Company's business, financial
condition or results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company has licensed rights to products covered by certain United
States patents directed to aspects of the THERAPLEX and BENZASHAVE
compounds/formulations, and the Company has obtained patents directed to aspects
of several other compounds. The Company is also pursuing several United States
patent applications. No assurance can be given that patents will be issued with
respect to any of these applications. The Company has acquired rights under
certain patents and patent applications from third-party licensors. The Company
has also acquired from certain of its consultants and principals an assignment
of their rights to certain United States patents or patent applications. Certain
of such patents and patent applications may be subject to claims of rights by
third parties by reason of existing relationships with the party who filed such
patents or patent applications. No assurance can be given that the Company will
be able to obtain any rights under such patents or patent applications, as a
result of such conflicting claims, or that any rights which the Company may
obtain will be sufficient for the Company to market products which may be the
subject of such patents or patent applications. The Company may be required to
obtain licenses and or pay royalties to obtain the rights it acquires under such
patents or patent applications and no assurance can be given that the Company
will be able to obtain rights under such patents or patent applications on terms
acceptable to the Company, or at all.
The Company believes that its success will depend in part on its
ability to obtain and maintain patent protection for its own inventions, and to
obtain and maintain licenses for the use of patents licensed or sublicensed by
third parties. No assurance can be given that any patent issued to, or licensed
by, the Company will provide protection that has commercial significance. In
this regard, the patent position of pharmaceutical compounds is particularly
uncertain. There can be no assurance that challenges will be not be instituted
against the validity or enforceability of any patent owned by or licensed to the
Company or, if instituted, that such challenges will not be successful. The
Company only conducts complete searches to determine whether its products
infringe upon any existing patents as it deems appropriate. The cost of
litigation to uphold the validity and prevent infringement of patents can be
substantial and require a significant commitment of management time.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate the technology owned by or licensed to
the Company or design around the patented aspects of such technology. There can
be no assurance that the products and technologies the Company currently
markets, or may seek to market in the future, will not infringe patents or other
rights owned by others. In the event of an adverse outcome of any dispute with
respect to patents or other rights, the Company may be required to license
such disputed rights to or cease using such disputed rights. There can be no
assurance that a license would be on terms acceptable to the Company, or at all.
The Company believes that obtaining foreign patents may be more
difficult than obtaining domestic patents because of differences in patent laws,
and recognizes that its patent position therefore may be stronger in the United
States than in Europe. In addition, the protection provided by foreign patents
once they are obtained may be weaker than that provided by domestic patents.
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The Company relies and expects to continue to rely upon unpatented
proprietary know-how and continuing technological innovation in the development
and manufacture of many of its principal products. The Company's policy is to
require all its employees, consultants and advisors to enter into
confidentiality agreements with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or proprietary know-how in the event of any unauthorized use or
disclosure of such know-how. In addition, there can be no assurance that others
will not obtain access to or independently develop these trade secrets or
know-how.
COMPETITION
Competition is intense among manufacturers of prescription
pharmaceuticals for the treatment of dermatological diseases, such as the
DYNACIN, TRIAZ, THERAMYCIN Z, and BENZASHAVE products, and in the OTC market for
dermatological products such as the ESOTERICA and THERAPLEX product lines, as
well as other products which the Company may develop and market in the future.
Most of the Company's competitors are large, well-established pharmaceutical,
chemical, cosmetic or health care companies with considerably greater financial,
marketing, sales and technical resources than available to the Company.
Additionally, many of the Company's present and potential competitors have
research and development capabilities that may allow such competitors to develop
new or improved products that may compete with the Company's product lines. The
pharmaceutical industry is characterized by intense competition and rapid
product development and technological change. The Company's pharmaceuticals
could be rendered obsolete or made uneconomical by the development of new
pharmaceuticals to treat the conditions addressed by the Company's products,
technological advances affecting the cost of production, or marketing or pricing
actions by one or more of the Company's competitors. The Company's business,
financial condition or results of operations could be materially adversely
affected by any one or more of such developments. Each of the Company's products
is in competition for a share of the existing market with numerous products
which have become standard treatments recommended or prescribed by
dermatologists. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competition
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
DYNACIN competes with Minocin, a branded minocycline product marketed
by American Home Products Corporation ("AHP"), and generic minocycline products
marketed by Schein, BioCraft Laboratories, Inc. ("BioCraft"), and
Warner-Chilcott Laboratories, Inc. ("Warner-Chilcott"). Other oral antibiotics
utilized for the treatment of acne include erythromycin, doxycycline and
tetracycline marketed in branded and generic form by a variety of companies. The
Company believes that TRIAZ competes with Cleocin-T and a generic topical
clindamycin, manufactured by Pharmacia & Upjohn; Benzac, manufactured by
Galderma, Inc.; and Benzamycin, manufactured by Rhone-Poulenc Rorer. ESOTERICA
primarily competes with Porcelana, marketed by Dep Corp. and AMBI, marketed by
Kiwi Brands, a division of Sara Lee Corporation ("Kiwi").
Several of the Company's products compete with generic (non-branded)
pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower
cost. In some cases, insurers and other third-party payors seek to encourage the
use of generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower portion of the purchase price then would be paid or
reimbursed for a generic product, making branded products less attractive, from
a cost perspective, to buyers. The aggressive pricing activities of the
Company's generic competitors and the payment and reimbursement policies of
third-party payors could have a material adverse impact on the Company's
business, financial condition or results of operations.
GOVERNMENT REGULATION
Drug and Cosmetic Regulation
The manufacture and sale of cosmetics and drugs are subject to
regulation principally by the FDA and state and local authorities in the United
States, and by comparable agencies in certain foreign countries. The Federal
Trade Commission
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("FTC") and state and local authorities regulate the advertising of OTC drugs
and cosmetics. The Federal Food, Drug and Cosmetic Act, the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products. In general, products falling within the FDA's definition of
"new drugs" require premarketing clearance by the FDA. Products falling within
the FDA's definition of "cosmetics" or of "drugs" that are not "new drugs" and
that are generally recognized as "safe and effective" do not require
premarketing clearance.
The steps required before a pharmaceutical compound may be marketed in
the United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an Investigatory New Drug ("IND") application, which
must become effective before clinical trials may commence, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
drug, (iv) submission to the FDA of an NDA and (v) FDA approval of the NDA prior
to any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing establishment must
be registered with, and approved by, the FDA. Drug product manufacturing
establishments located in California also must be licensed by the State of
California in compliance with separate regulatory requirements.
Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a drug. The results of these
studies are submitted to the FDA as a part of an IND, which must be approved
before clinical trials in humans can begin. Typically, clinical evaluation
involves a time consuming and costly three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile, the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi- center, comparative trials
are conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical trials and
may, at its discretion, re-evaluate, alter, suspend or terminate the testing
based upon the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient.
In general, FDA approval is required before a new drug product may be
marketed in the United States. However, most OTC drugs are exempt from the FDA's
premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC
Drug Review to evaluate the safety and effectiveness of OTC drugs then in the
market. Through this process, the FDA issues monographs that set forth the
specific active ingredients, dosages, indications and labeling statements for
OTC drugs that the FDA will consider generally recognized as safe and effective
and therefore not subject to premarket approval. OTC drug products are
classified by the FDA in one or more categories: Category I products, which are
deemed "safe and effective for OTC use," Category II products, which are deemed
"not generally recognized as safe and effective for OTC use," and Category III
products, which are deemed "possibly safe and effective with studies ongoing."
For certain categories of OTC drugs not yet subject to a final monograph, the
FDA usually will not take regulatory action against such a product unless
failure to do so will pose a potential health hazard to customers. Drugs subject
to final monographs, however, are subject to various FDA regulations concerning
for example, cGMP, general and specific OTC labeling requirements (including
warning statements), prohibitions against promotion for conditions other than
those stated in the labeling, and requirement that OTC drugs contain only
suitable inactive ingredients. OTC drug manufacturing facilities are subject to
FDA inspection, and failure to comply with applicable regulatory requirements
may lead to administrative or judicially imposed penalties.
The active ingredient in DYNACIN products, minocycline, has been
approved by the FDA. The active ingredient in TRIAZ and BENZASHAVE products has
been classified as a Category III product under a tentative final FDA monograph
for over-the-counter distribution for use in treatment of labeled conditions.
The FDA has requested, and a task force of the Non-Prescription Drug
Manufacturers Association has undertaken, further studies to confirm that
benzoyl peroxide, an active ingredient in TRIAZ and BENZASHAVE products, is not
a tumor promoter when tested in conjunction with UV light exposure. TRIAZ and
BENZASHAVE products, which the Company also sells on a prescription basis, have
the same ingredients at the same dosage levels as the over-the-counter products.
In the Company's opinion, TRIAZ and BENZASHAVE products would also be considered
to be generally recognized as safe and effective for their intended uses under
the Food and Drug Act. There can be no assurance these tests will confirm the
status of benzoyl peroxide as generally recognized as safe and effective or that
adverse test results would not result
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in withdrawal of TRIAZ and BENZASHAVE from marketing. An adverse decision by the
FDA with respect to the safety of benzoyl peroxide could result in the
assertion of product liability claims against the Company and could otherwise
have a material adverse effect on the Company's business, financial condition
or results of operation.
Certain ESOTERICA products contain the active ingredient hydroquinone,
currently a Category I product. Independent expert dermatologists have formally
expressed the view that hydroquinone at a 2% concentration is generally
recognized as safe and effective for its intended use. However, in 1992, with
the concurrence of the FDA, the industry initiated dermatological metabolism and
toxicity studies to fully support hydroquinone's continued Category I status.
Notwithstanding the pendency or results of these tests, which may take up to
three years to complete, the FDA may elect to classify hydroquinone as a
Category III OTC drug. The Company, in conjunction with the Non-Prescription
Drug Manufacturers Association and other manufacturers, is responsible for 50%
of the costs associated with these studies. An adverse decision by the FDA on
the safety of hydroquinone could result in the assertions of product liability
claims against the Company. Moreover, if hydroquinone is not maintained as a
Category I or Category III drug, the Company would be required to cease
marketing ESOTERICA products containing hydroquinone, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The ESOTERICA, TRIAZ and BENZASHAVE products must meet the composition
and labeling requirements established by the FDA for products containing their
respective basic ingredients. The Company believes that compliance with those
established standards avoids the requirement for premarketing clearance of these
products. There can be no assurance that the FDA will not take a contrary
position.
The Company believes its three THERAPLEX moisturizers, as they are
promoted and intended by the Company for use, fall within the FDA's definition
of "cosmetics" and therefore do not require premarketing clearance. There can be
no assurance that the FDA will not take a contrary position in the future or
that an adverse determination by the FDA would not result in withdrawal of the
THERAPLEX moisturizers from marketing. The Company believes that such products
are subject to regulations governing product safety, use of ingredients,
labeling and promotion and methods of manufacture.
Certain Factors Affecting the Company's Products
The Company believes that certain of its products as they are promoted
and intended by the Company for use, are exempt from registration based on the
date of introduction of their active ingredients and therefore do not require
premarketing clearance. There can be no assurance that the FDA will not take a
contrary position. The Company believes that such products are subject to
regulations governing product safety, use of ingredients, advertising, labeling
and promotion and methods of manufacture.
Clinical trials and the marketing and manufacturing of pharmaceutical
products are subject to the rigorous testing and approval processes of the FDA
and foreign regulatory authorities. The process of obtaining FDA and other
required regulatory approvals is lengthy and expensive. There can be no
assurance that the Company will be able to obtain the necessary approvals to
conduct clinical trials or for the manufacturing and marketing of products, that
all necessary clearances will be granted to the Company or its licensors for
future products on a timely basis or at all or that FDA review or other actions
will not involve delays adversely affecting the marketing and sale of the
Company's products. In addition, the testing and approval process with respect
to certain new products which the Company may develop or seek to introduce is
likely to take a substantial number of years and involve the expenditure of
substantial resources. There can be no assurance that pharmaceutical products
currently in development, or those products acquired or licensed by the Company,
will be cleared for marketing by the FDA. Failure to obtain any necessary
approvals or failure to comply with applicable regulatory requirements could
have a material adverse effect on the Company's business, financial condition or
results of operations. Further, future government regulation could prevent or
delay regulatory approval of the Company's products.
There can be no assurance that any approval will be granted on a timely
basis, or at all, that the FDA will not require post-marketing testing and
surveillance to monitor the record of the product and continued compliance with
regulatory requirements; that the FDA will not require the submission of any lot
of any product for inspection and will not restrict the release of any lot that
does not comply with FDA standards; that the FDA will not otherwise order the
suspension of manufacturing, recall or seizure of products; or that the FDA will
not withdraw its marketing clearance of any product
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if compliance with regulatory standards is not maintained or if problems
concerning safety or efficacy of the product are discovered following approval.
From time to time, the FDA has issued correspondence to pharmaceutical
companies, including the Company, alleging that their advertising or promotional
practices are false, misleading or deceptive. The Company has resolved all such
complaints without any adverse findings by the FDA and without incurring
substantial expense. However, there can be no assurance that the Company will
not receive such correspondence from the FDA in the future, or that, if such
notices are received, they will not result in substantial cost, disruption or
expense (including fines and penalties), in material changes to the manner in
which the Company promotes its products, or in loss of sales of the Company's
products or other material adverse effects on the Company's business, financial
condition or results of operations.
For both currently marketed and future products, failure to comply with
the applicable regulatory requirements could, among other things, result in
fines, suspensions of regulatory approvals, product recalls, operating
restrictions, criminal prosecution, relabeling costs, delays in product
distribution, marketing and sales or seizure or cessation of manufacture of the
products and the imposition of civil or criminal sanctions. There can be no
assurance that the FDA will not change its position with regard to the safety or
effectiveness of the Company's current or future products or that the FDA will
agree with the Company's position regarding the regulatory status of its
products. In the event that the FDA takes a contrary position regarding any of
the Company's current or future products, the Company may be required to change
its labeling or formulation or possibly cease manufacture and marketing of such
products. In addition, even prior to any formal regulatory action, the Company
could decide voluntarily to cease distribution and sale, or to recall, any of
its products if concern about the safety or efficacy of any of its products were
to develop. Any such action could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company also will be subject to foreign regulatory authorities
governing clinical trials and pharmaceutical sales if it seeks to market its
products outside the United States. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time required may be longer or shorter than that required for FDA
approval. There can be no assurance that any foreign regulatory agency will
approve any product submitted for review by the Company.
THIRD-PARTY REIMBURSEMENT
The operating results of the Company will depend in part on the
availability of adequate reimbursement for the Company's products from
third-party payors, such as government entities, private health insurers and
managed care organizations. Third-party payors are increasingly seeking to
negotiate the pricing of medical services and products and to promote the use of
non-branded (generic) pharmaceuticals through payor-based reimbursement policies
designed to encourage their use. In some cases, third-party payors will pay or
reimburse a user or supplier of a prescription drug product only a portion of
the purchase price of the product. In the case of the Company's prescription
products, payment or reimbursement by third-party payors of only a portion of
the cost of such products could make such products less attractive, from a cost
perspective, to users, suppliers and prescribing physicians. There can be no
assurance that reimbursement, if available, will be adequate. Moreover, certain
of the Company's products are not of a type generally eligible for third-party
reimbursement. If adequate reimbursement levels are not provided by government
entities or other third-party payors for the Company's products, or if those
reimbursement policies increasingly favor the use of generic products, the
Company's business, financial condition and results of operations would be
materially adversely affected. In addition, managed care initiatives to control
costs have influenced primary care physicians to refer fewer patients to
dermatologists, resulting in a declining target market for the Company. Further
reductions in referrals to dermatologists could have a material adverse impact
upon the Company's business, financial condition or results of operations.
In addition, a number of legislative and regulatory proposals aimed at
changing the nation's health care system have been proposed in recent years.
While the Company cannot predict whether any such proposals will be adopted, or
the effect that any such proposal may have on its business, such proposals, if
enacted, could have a material adverse effect on the Company's business,
financial condition or results of operations.
PRODUCT LIABILITY INSURANCE
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The Company faces an inherent risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that the
Company will avoid significant product liability exposure. The Company currently
has product liability insurance in the amount of $5.0 million per claim and $5.0
million in the aggregate on a claims-made basis. Many of the Company's customers
require the Company to maintain product liability insurance coverage as a
condition to their conducting business with the Company. As the loss of such
insurance coverage could result in a loss of such customers, the Company intends
to take all reasonable steps necessary to maintain such insurance coverage,
although there can be no assurance that adequate insurance coverage will be
available in the future on commercially reasonable terms, or at all, or that
such insurance will be adequate to cover potential product liability claims, or
that the loss of insurance coverage or the assertion of a product liability
claim or claims would not materially adversely affect the Company's business,
financial condition and results of operations.
EMPLOYEES
As of August 3, 1996, the Company had 58 full-time employees. The
Company believes its relationship with its employees is good. The Company
intends to hire personnel as needed during the next 12 months.
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ITEM 2: PROPERTIES
The Company presently leases approximately 12,000 square feet of office
space for its headquarters in Phoenix, Arizona, under a Lease Agreement which
expires in May 2005. The Company believes that these facilities will be adequate
to meet its needs for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are parties to certain
actions and proceedings incident to their business. Liability in the event of
final adverse determinations in any of these matters is either covered by
insurance and/or established reserves, or, the Company believes, will not, in
the aggregate, have a material adverse effect on the business, financial
position or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of fiscal 1995.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
DIVIDEND POLICY
The Company declared a 3-for-2 stock split in the form of a 50% stock
dividend paid on August 2, 1996 to holders of record on July 22, 1996. The
Company has never declared a cash dividend. The Company intends to retain any
earnings to fund future growth and the operation of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "MDRX." The following table sets forth for the fiscal periods
indicated, the range of high and low sales prices for the Common Stock of the
Company on the Nasdaq National Market, as adjusted to reflect the 1-for-14
reverse stock split of the Company's Common Stock effected on October 23, 1995,
and as adjusted to the nearest 1/16 to reflect the 3-for-2 stock split in the
form of a 50% stock dividend paid on August 2, 1996 to holders of record as of
July 22, 1996.
HIGH LOW
-------- --------
FISCAL YEAR ENDED JUNE 30, 1994
First Quarter................. $ 8-3/16 $4-11/16
Second Quarter................ 8-3/16 3-1/2
Third Quarter................. 7-1/2 3-1/2
Fourth Quarter................ 4-3/8 2-1/16
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter................. 4-15/16 2-1/16
Second Quarter................ 5-1/4 2-15/16
Third Quarter................. 3-13/16 2-1/16
Fourth Quarter................ 3-13/16 1-3/4
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter................. 5-1/4 2-5/16
Second Quarter................ 10-9/16 4-1/2
Third Quarter................. 21-1/16 9-1/16
Fourth Quarter................ 31-1/2 15-1/2
On August 14, 1996, the last reported sale price on the Nasdaq National
Market for the Company's Common Stock was $42.75 per share. As of such date,
there were approximately 750 holders of record of Common Stock.
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
consolidated financial statements of Medicis Pharmaceutical Corporation for the
fiscal years 1996, 1995, 1994, 1993 and 1992
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YEAR ENDED JUNE 30,
------------------------------------------------------
1992 1993(1) 1994(1) 1995(2) 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 7,687 $ 11,088 $ 17,059 $ 19,132 $ 25,310
Gross profit 5,450 7,215 11,239 13,282 18,354
Operating expenses:
Selling, general and administrative 9,033 14,237(3) 8,786 10,330 10,868
Research and development expenses 823 3,841(4) 1,572 770 952
Depreciation and amortization 1,231(5) 616 653 522 559
-------- -------- -------- -------- --------
Total operating expenses 11,087 18,694 11,011 11,622 12,379
-------- -------- -------- -------- --------
Operating income (loss) (5,637) (11,479) 228 1,660 5,975
Other:
Minority share of losses of Dyad -- -- 677 -- --
Gains on disposition of Dyad -- -- -- 107 --
Net interest income (expense) (2,330) (175) (249) (94) 79
Extraordinary loss on extinguishment of debt (3,824) -- -- -- --
Income tax benefit (expense) -- -- -- (60) 1,826
Net income (loss) $(11,791) $(11,654) $ 656 $ 1,613 $ 7,880
Net income (loss) per share before extraordinary item $ (2.17) $ (2.12) $ 0.10 $ 0.24 $ 1.09
Extraordinary loss per share (1.04) -- -- -- --
Net income (loss) per share $ (3.21) $ (2.12) $ 0.10 $ 0.24 $ 1.09
======== ======== ======== ======== ========
Shares used in computing per share amount 3,668 5,507 6,303 6,593 7,242
BALANCE SHEET DATA: JUNE 30,
1992 1993(1) 1994(1) 1995 1996
-------- -------- -------- -------- --------
(in thousands)
Cash and cash equivalents $ 6,136 $ 233 $ 775 $ 953 $ 7,956
Working capital (deficiency) (3,528) (4,541) (1,978) 619 12,401
Total assets 17,709 11,993 12,726 13,850 26,313
Long-term debt 2,320 1,264 899 694 117
Stockholders' equity 10,325 2,937 5,263 7,387 19,460
- -----------
(1) Fiscal 1994 and fiscal 1993 include the operations of Dyad
Pharmaceutical Corporation ("Dyad") which were divested in fiscal 1995.
(2) Fiscal 1995 includes approximately $610,000 of charges associated with
headquarters relocation; the Company had operating income of $2,270,000
before relocation charges in fiscal 1995.
(3) The increase in selling, general and administrative, was primarily
attributable to advertising costs, most of which were due to the launch
of DYNACIN products in November 1992.
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(4) The increase in research and development costs is primarily
attributable to the inclusion of the allocation of the purchase price
of Dyad to research and development and the addition of Dyad's research
and development expenses in fiscal 1993.
(5) Fiscal 1992 depreciation and amortization included the write-off of the
remaining value of a license agreement previously capitalized.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following Management's Discussion and Analysis of Financial
Condition and Results of Operation contains forward-looking statements which
involve risk and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Medicis was founded in 1987 to develop and market prescription and
over-the-counter products to treat dermatological conditions. Innovative
Therapeutics, Inc. (the predecessor in interest of the Company) was incorporated
under the laws of the District of Columbia on July 1, 1987, subsequently changed
its name to Medicis Corporation and was merged with and into Medicis Corporation
(a corporation incorporated on July 29, 1988 under the laws of Delaware),
pursuant to an Agreement of Merger dated July 29, 1988. Medicis Corporation
subsequently changed its name to Medicis Pharmaceutical Corporation.
The Company has acquired rights to manufacture and sell certain of its
dermatological products pursuant to several license and asset purchase
agreements. The Company sells these products for use in various segments of the
dermatological market, including the acne segment, the therapeutic emollient and
moisturizer segment and the fade cream segment. The Company has achieved
increases in net sales and net income both through the acquisition of products
sold by others and the launch of new products. The Company's primary
prescription products, DYNACIN products and TRIAZ products, were launched in
fiscal 1993 and fiscal 1996, respectively, and the Company's primary OTC
products, the ESOTERICA products, were acquired in fiscal 1991. Prescription
pharmaceuticals accounted for 83.2% of fiscal 1996 net sales and net sales of
70.6% and 70.7% in fiscal 1995 and fiscal 1994, respectively. DYNACIN products
accounted for a majority of the Company's total sales in fiscal 1996 and 1995.
The Company believes that sales of DYNACIN products will continue to
constitute the majority of total net sales for the foreseeable future.
Accordingly, any factor adversely affecting the sale of DYNACIN products would
have a material adverse effect on the Company's business, financial condition
and results of operations. DYNACIN products could be rendered obsolete or
uneconomical by regulatory or competitive changes. The sale of DYNACIN products
could also be affected adversely by other factors, including manufacturing or
supply interruptions, the development of new competitive pharmaceuticals to
treat the conditions addressed by DYNACIN products, technological advances,
factors affecting the cost of production, marketing or pricing actions by one or
more of the Company's competitors, changes in the prescription writing practices
of dermatologists, changes in the reimbursement policies of third-party payors,
product liability claims or other factors. See Item 1, "-- Products in
Development," "-- Manufacturing," "-- Certain License and Royalty Agreements,"
"-- Competition" and "-- Government Regulation."
The Company's results of operation may vary from period to period due
to a variety of factors, including expenditures incurred to acquire, license and
promote pharmaceuticals, changes in prescription writing practices of
dermatologists, the Company's level of research and development, the
introduction of new products by the Company or its competitors, supply
interruptions, cost increases from third-party manufacturers, the availability
and cost of raw materials, the mix of products sold by the Company, changes in
marketing and sales expenditures, market acceptance of the Company's products,
competitive pricing pressures, seasonal fluctuations and general economic and
industry conditions that affect customer demand. In addition, the Company's
business has historically been subject to seasonal fluctuations, with lower
sales generally being experienced in the first quarter of each fiscal year. As a
result of customer buying patterns, a substantial portion of revenues has been
received in the last month of each quarter. The Company schedules its inventory
purchases to meet anticipated customer demand. As a result, relatively small
delays in the receipt of manufactured products could result in revenues being
deferred or lost. The Company's operating expenses are based on anticipated
sales levels, and a high percentage of the Company's expenses are relatively
fixed in the short-term, variations in the timing of recognition of revenue
could cause significant fluctuations from period to period and may result in
unanticipated periodic earnings shortfalls or losses. There can be no assurance
that the Company will maintain or increase revenues, maintain profitability or
avoid losses in any future period.
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The Company recognizes revenues from sales upon shipment to its
customers. At the time of sale, the Company records reserves for returns based
on estimates using historical experience. Sales are reported net of actual and
estimated product returns and net of pricing adjustments. The Company applies
royalty obligations to the cost of sales in the period the corresponding sales
are recognized.
Medicis' customers include the nation's leading wholesale
pharmaceutical distributors, such as McKesson, Bergen Brunswig, Cardinal,
Foxmeyer, Bindley and major drug chains. During fiscal 1996, McKesson, Bergen
Brunswig and Cardinal, accounted for 15.5%, 12.2% and 11.8%, respectively, of
the Company's sales. During fiscal 1995, McKesson and Bergen Brunswig accounted
for 15.9% and 9.6%, respectively, of the Company's sales. During fiscal 1994,
McKesson and Bergen Brunswig accounted for 15.1% and 11.2%, respectively, of the
Company's sales. The loss of any of these customer accounts could have a
material adverse effect upon the Company's business, financial condition or
results of operations. See Item 1, "Business -- Customers."
To enable Medicis to focus on its core marketing and sales activities,
the Company selectively out-sources certain non-marketing functions, such as
laboratory research, manufacturing and warehousing. As the Company expands its
activities in these areas, additional financial resources are expected to be
utilized in these areas. The Company typically does not enter into long-term
manufacturing contracts with third-party manufacturers. Whether or not such
contracts exist, there can be no assurance that the Company will be able to
obtain adequate supplies of such products in a timely fashion, or at all.
The Company plans to spend substantial amounts of capital to continue
the research and development of its pharmaceutical products. Actual expenditures
will depend on the Company's financial position, as well as the results of
clinical testing, delays or changes in government-required testing and approval
procedures, technological and competitive developments and strategic marketing
decisions. The Company may increase total expenditures for research and
development and expects that research and development expenditures as a
percentage of net sales will fluctuate from period to period. The Company can
give no assurance that the research and development projects will provide
technologies or products that will be patentable, commercially feasible or
acceptable to government agencies whose approval may be necessary.
The Company intends to seek additional acquisitions of product lines of
niche-market pharmaceuticals to leverage its existing distribution channels and
marketing infrastructure and to market aggressively formulations of existing
products. The success of the Company's efforts is subject to a number of risks
and uncertainties including its dependence upon key pharmaceuticals and
integration of new product acquisitions, its reliance upon third-party
manufacturers to produce certain key products, its ability to effectively manage
a changing business, uncertainties related to pharmaceutical pricing and
reimbursement and on the uncertainty of competitive forces within the
pharmaceutical industry which affect both the market for its products and the
availability of suitable product lines for acquisition which meet the Company's
acquisition criteria. The future results of operations, both annually and from
quarter to quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates. See Certain
Factors Affecting Forward Looking Statements -- Safe-Harbor Statement.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere herein. The following table sets forth certain
data as a percentage of net sales for the periods indicated.
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PERCENTAGE OF SALES
YEAR ENDED JUNE 30,
----------------------------------------------------------
1994 1995 1996
-------- -------- --------
Net sales..................................... 100.0% 100.0% 100.0%
Gross profit.................................. 65.9 69.4 72.5
Operating expenses............................ 64.6 60.8 48.9
Operating income.............................. 1.3 8.6 23.6
Net interest income (expense)................. (1.5) (0.5) 0.3
Minority share of losses of Dyad.............. 4.0 -- --
Gains on disposition of Dyad.................. -- 0.6 --
Income tax benefit (expense).................. -- (0.3) 7.2
-------- -------- --------
Net income.................................... 3.8% 8.4% 31.1%
-------- -------- --------
FISCAL 1995 AND 1996 QUARTERLY ANALYSIS
--------------------------------------------------------------------------------------------
1995 1996
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE
Net sales $ 3,690 $ 4,725 $ 5,033 $ 5,684 $ 4,574 $ 6,449 $ 7,016 $ 7,271
Gross profit 2,519 3,024 3,659 4,080 3,257 4,667 5,040 5,390
Operating expenses 2,444 2,793 3,335 3,050 2,608 3,260 3,305 3,206
Operating income 75 231 324 1,030 649 1,407 1,735 2,184
Net income $ 26 $ 308 $ 312 $ 967 $ 646 $ 1,404 $ 1,759 $ 4,071
========= ======== ======= ======= ======== ======== ======= ========
Net income per
share $ -- $ 0.05 $ 0.05 $ 0.14 $ 0.10 $ 0.21 $ 0.24 $ 0.54
========= ======== ======= ======= ======== ======== ======= ========
Years Ended June 30, 1996 and 1995
Net Sales
Net sales for fiscal 1996 increased 32.3%, or $6.2 million, to $25.3
million from $19.1 million for fiscal 1995. The Company's net sales increased in
fiscal 1996 primarily as a result of both unit and dollar sales growth
associated with an increase in market share of the existing prescription
products and the launch of a new prescription product. The Company's
prescription products accounted for 83.2% of net sales in fiscal 1996 and 70.6%
in fiscal 1995. Net sales of the Company's prescription products grew 56.0%, or
$7.6 million, to $21.1 million in 1996 from $13.5 million in fiscal 1995,
primarily due to the Company's launch of TRIAZ products in October 1995, coupled
with an increase in market penetration of DYNACIN products. The increase in
sales of prescription products in fiscal 1996 was partially offset by a decrease
in unit sales of OTC products, primarily the ESOTERICA product line. The OTC
products accounted for 16.8% of net sales in fiscal 1996 and 28.2% in fiscal
1995. The Company continues to invest a majority of its marketing funds in the
Company's prescription products.
Gross Profit
Gross profit during fiscal 1996 increased 38.2%, or $5.1 million, to
$18.4 million from $13.3 million in fiscal 1995. As a percentage of net sales,
gross margin grew to 72.5% in fiscal 1996 from 69.4% in fiscal 1995 primarily as
a result of manufacturing cost reductions for DYNACIN products and a change in
sales mix toward the Company's prescription products, which have higher gross
margins.
Selling, General and Administrative Expenses
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20
Selling, general and administrative expenses in fiscal 1996 increased
5.2%, or $0.5 million, to $10.9 million from $10.3 million in fiscal 1995,
primarily due to a 22.2%, or $1.4 million, increase in selling expenses in
fiscal 1996. This increase was primarily attributable to an increase in
personnel costs commensurate with increased sales volume, yearly salary
escalations and an increase in promotional costs attributable to the launch of
TRIAZ products. Selling, general and administrative expenses in fiscal 1995
included $0.6 million in nonrecurring expenses associated with the Company's
headquarters relocation to Phoenix, Arizona in fiscal 1995.
Research and Development Expenses
Research and development expenses in fiscal 1996 increased 23.7%, or
$0.2 million, to $1.0 million from $0.8 million in fiscal 1995 primarily due to
development efforts relating to the introduction in October 1995 of the
Company's TRIAZ products.
Depreciation and Amortization Expenses
Depreciation and amortization expenses remained materially unchanged,
at $0.6 million in fiscal 1996 and $0.5 million in fiscal 1995.
Operating Income
Operating income during fiscal 1996 increased 260.0%, or $4.3 million,
to $6.0 million from $1.7 million in fiscal 1995 and increased as a percentage
of net sales to 23.6% from 8.6% in fiscal 1995. This increase was primarily as a
result of higher sales volume, coupled with an increase in the Company's gross
profit margin and the absence of nonrecurring relocation expenses which were
incurred in fiscal 1995.
Gains on Disposition and Minority Share of Losses of Dyad
The Company had no related gains or losses in fiscal 1996. During
fiscal 1995, the Company completed the sale of all of its interest in Dyad to
Corporate Trinity. The sale of the Company's interest in Dyad resulted in a gain
of $107,000. The Company had previously consolidated Dyad's operations. As a
result of the divestiture of Dyad, the Company's and Dyad's financial statements
are no longer consolidated, subsequent to June 30, 1994. Minority share of
losses of Dyad in fiscal 1994 is based on the losses of Dyad included in
operating income.
Net Interest Income (Expense)
Interest income in fiscal 1996 increased 167.7%, or $96,000, to
$154,000 from $58,000 in fiscal 1995, primarily due to higher cash and cash
equivalent balances in fiscal 1996. Interest expense in fiscal 1996 decreased
49.9%, or $75,000, to $76,000, from $151,000 in fiscal 1995, primarily due to
the repayment of a substantial portion of the Company's debt.
Income Tax Benefit (Expense)
Income tax benefit (expense) during fiscal 1996 increased $1.9 million
to a benefit of $1.8 million from an expense of $0.1 million in fiscal 1995.
During the fourth quarter of fiscal 1996, the Company reevaluated the estimated
amount of valuation allowance required to reduce deferred tax assets in
accordance with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes" ("SFAS No. 109") to an amount the Company believed
appropriate. Accordingly, a credit to income tax benefit of $1.9 million was
reflected in the consolidated income statement. The amount of net deferred tax
assets estimated to be recoverable was based upon the Company's assessment of
the likelihood of near term operating income coupled with uncertainties with
respect to the impact of future competitive and market conditions. No such
income tax benefit was recorded in fiscal 1995.
Net Income
Net income during fiscal 1996 increased approximately 388.5%, or $6.3
million, to $7.9 million from $1.6 million in fiscal 1995. The increase was
primarily attributable to an increase in sales volume, an increase in gross
margin as a percentage of net sales and the recording of the income tax benefit
in fiscal 1996.
Years Ended June 30, 1995 and 1994
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21
Net Sales
Net sales for fiscal 1995 increased 12.2%, or $2.0 million, to $19.1
million from $17.1 million for fiscal 1994. Net sales increased in fiscal 1995
primarily as a result of unit sales growth attributable to an increase in market
share of existing prescription products. The Company's prescription products
accounted for approximately 70.6% of net sales in fiscal 1995 and 70.7% in
fiscal 1994. Net sales of prescription products grew 12.0%, or $1.4 million, to
$13.5 million in fiscal 1995 from $12.1 million in fiscal 1994, primarily due to
an increase in market penetration of DYNACIN products. Net sales of OTC products
grew 12.6%, or $0.7 million, to $5.6 million in fiscal 1995 from $4.9 million in
fiscal 1994, primarily due to the Company's increased distribution in the food
and drug class of trade and an increased number of store openings by one of the
Company's major customers.
Gross Profit
Gross profit during fiscal 1995 increased 18.2%, or $2.1 million, to
$13.3 million from $11.2 million in fiscal 1994. As a percentage of net sales,
margins grew to 69.4% in fiscal 1995 from 65.9% in fiscal 1994, primarily as a
result of manufacturing and royalty cost reductions for DYNACIN products coupled
with a mid-year price increase.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 1995 increased
17.6%, or $1.5 million, to $10.3 million from $8.8 million in fiscal 1994,
primarily due to an increase in sales bonuses and other variable personnel costs
of $0.6 million and $0.6 million of nonrecurring costs associated with the
Company's relocation to Phoenix, Arizona. The Company's decision to relocate was
made in anticipation of lower operational expenses relating especially to office
lease space, personnel costs and other operating expenses. The Company also
received incentives from the State of Arizona in the form of low-interest
financing, employee training grants and travel vouchers. In addition, selling,
general and administrative expenses increased in fiscal 1995, primarily due to
the increased sampling of DYNACIN products.
Research and Development Expenses
Research and development expenses decreased 51.0%, or $0.8 million, to
$0.8 million in fiscal 1995 from $1.6 million in fiscal 1994, primarily due to
the exclusion of research and development expenses incurred by Dyad included in
research and development expenses in fiscal 1994. The Company divested its
entire interest in Dyad during the first quarter of fiscal 1995.
Depreciation and Amortization Expenses
Depreciation and amortization expenses in fiscal 1995 decreased 20.1%,
or $0.1 million, to $0.5 million from $0.6 million in fiscal 1994, primarily as
a result of the exclusion of depreciation and amortization expenses incurred by
Dyad coupled with a decrease in the weighted average balance of property and
equipment attributable to the write-off of fully-depreciated assets in fiscal
1995 as compared to fiscal 1994. Depreciation and amortization expenses incurred
by Dyad in fiscal 1995 are not included in the Company's fiscal 1995 operating
results.
Operating Income
Operating income during fiscal 1995 increased 627.7%, or $1.5 million,
to $1.7 million from $0.2 million in fiscal 1994, and increased as a percentage
of sales to 8.6% from 1.3% in fiscal 1994. This increase was primarily a result
of higher sales volume, an increase in the Company's gross profit margin and the
exclusion of research and development expenditures associated with Dyad in
fiscal 1995.
21
22
Gains on Disposition and Minority Share of Losses of Dyad
During fiscal 1995, the Company completed the sale of all of its
interest in Dyad to Corporate Trinity, resulting in a gain of approximately
$107,000. Minority share of losses of Dyad in fiscal 1994 is based on the losses
of Dyad included in operating income.
Net Interest Income (Expense)
Interest income in fiscal 1995 increased 96.5%, or $28,000, to $58,000
from $30,000 in fiscal 1994 primarily due to higher cash and cash equivalent
balances in 1995. Interest expense in fiscal 1995 decreased 45.8%, or $128,000,
to $151,000, from $279,000 in fiscal 1994, primarily due to the repayment of a
substantial portion of the Company's debt.
Income Taxes
Income taxes for fiscal 1995 were less than the federal statutory rate
due to the utilization of net operating loss carryforwards. The Company did not
incur income tax expenses for fiscal 1994.
Net Income
Net income during fiscal 1995 increased 146.0%, or $1.0 million, to
$1.6 million from $0.6 million in fiscal 1994, primarily due to an increase in
sales volume, coupled with an increase in the Company's gross margins.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 and June 30, 1995, the Company had cash and cash
equivalents of approximately $8.0 million and $1.0 million, respectively. The
Company's working capital was $12.4 million and $0.6 million at June 30, 1996
and June 30, 1995, respectively.
In fiscal 1996, the Company financed its operations through $4.9
million cash provided by operations and $3.1 million generated from the exercise
of stock options and warrants. In fiscal 1995, the Company financed operations
through cash from operations. During fiscal 1996, the Company retired two notes
with payments aggregating $750,000. During fiscal 1995, the Company made
payments aggregating $2.0 million to reduce outstanding debt and to partially
retire a note incurred in connection with a license agreement. During fiscal
1994, the Company completed a sale of shares of its Common Stock outside of the
United States, resulting in net proceeds of approximately $1.6 million.
In May 1996, the Company obtained a $5.0 million Credit Facility from
Norwest that expires in May 1997. This Credit Facility replaced a $2.0 million
credit facility obtained from Norwest Business Credit, Inc., an affiliate of
Norwest, in August 1995. The Credit Facility is secured by substantially all of
the assets of the Company. The Company is required to comply with certain
covenants and restrictions, including covenants relating to the Company's
financial condition and results of operations. If the Company is unable or fails
to comply with the covenants and restrictions, the lender would have the right
not to make loans under the Credit Facility and to require early repayment of
any outstanding loans. The Credit Facility, as amended, is no longer subject to
a 0.5% per annum fee on the unused portion of the Credit Facility. Although the
Company has yet to draw down on the Credit Facility, the lack of availability of
loans or the requirement to make early repayment of loans or the inability of
the Company to renew the Credit Facility could have a material adverse effect on
the Company, depending on its liquidity and working capital at such time.
At June 30, 1996 and June 30, 1995, the Company had inventories of $2.1
million and $0.8 million, respectively. The increase in inventory related to
increased sales levels and the introduction of the TRIAZ product line in October
1995. Inventories also include finished goods held at manufacturers. The
Company's inventory balances are subject to the manufacturers' scheduling of
production in order to meet future demand as conveyed to the manufacturer by the
Company. Inventories at manufacturers recorded on the consolidated balance
sheets of the Company have no effect on working capital.
During the fourth quarter of 1996, the Company reevaluated the
estimated amount of valuation allowance required to reduce deferred tax assets
available in accordance with SFAS No. 109 to an amount the Company believed
appropriate. Accordingly, a deferred tax asset of $3.0 million was reflected in
the consolidated balance sheet with a corresponding credit to equity of $1.1
million for 1996 tax deductions related to stock option and warrant exercises
and
22
23
a credit to deferred tax benefit of $1.9 million in the consolidated income
statement. The Company has deferred tax assets available at June 30, 1996 of
$11.6 million, which are comprised principally of the tax effect of the
Company's $26.0 million net operating loss carryforward. Deferred tax assets
available at June 30, 1996 were reduced by an $8.6 million valuation allowance.
The amount of net deferred tax assets available that are estimated to be
recoverable was based upon the Company's assessment of the likelihood of
near-term operating income coupled with the uncertainties with respect to the
impact of future competitive and market conditions. The amount of deferred tax
asset available that ultimately will be realized will depend upon future events
which are uncertain.
In accordance with various manufacturing agreements, the Company is
required to provide manufacturers with pro forma estimated production
requirements by stock keeping units (skus) and in accordance with minimum
production runs. From time to time, the Company may not take possession of all
merchandise which has been produced by the manufacturer. The Company records its
obligation to the manufacturer at the time production is completed.
During a portion of fiscal 1995 and prior years, the Company's cash
flow from operations was insufficient to cover its operating expenses, and
the Company relied on external financings to meet its needs for operating cash
flow. As a result of increased sales beginning in the latter half of 1995
associated with the introduction of DYNACIN, the Company experienced an increase
in accounts receivable. The Company expects that its current cash and cash
equivalents, together with additional cash from operations and cash available
from its Credit Facility and the proceeds of this offering, will be sufficient
to meet its current liquidity requirements at least through the fiscal year
ending June 30, 1998. However, depending upon the Company's acquisition and
licensing activity, and results of operations there can be no assurance that
such resources will be sufficient. If they are not, the Company would need to
obtain additional financing. There is no assurance that such financing would be
on terms advantageous to the Company.
Adequate additional funds, whether from the financial markets or
from other sources, may not be available on a timely basis, on terms acceptable
to the Company, or at all. Insufficient funds may cause the Company to delay,
scale back, or abandon some or all of its product acquisition, licensing,
marketing or research and development programs or opportunities.
OTHER MATTERS
Inflation did not have a significant impact upon the results of the
Company during the fiscal 1996, 1995 or 1994.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS - SAFE HARBOR STATEMENT
This report contains forward-looking statements that involve risks and
uncertainties. the actual results of Medicis could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
discussed elsewhere in this report, as well as the following:
DEPENDENCE ON SALES OF DYNACIN PRODUCTS
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24
The Company derives a majority of its revenue from sales of DYNACIN
products. The Company believes that sales of DYNACIN products will continue to
constitute the majority of net sales for the foreseeable future. Accordingly,
any factor adversely affecting the sale of DYNACIN products would have a
material adverse effect on the Company's business, financial condition and
results of operations. DYNACIN products could be rendered obsolete or
uneconomical by regulatory or competitive changes. The sale of DYNACIN
products could also be affected adversely by other factors, including
manufacturing or supply interruptions, the development of new competitive
pharmaceuticals to treat the conditions addressed by DYNACIN products,
technological advances, factors affecting the cost of production, marketing or
pricing actions by one or more of the Company's competitors, changes in the
prescription writing practices of dermatologists, changes in the reimbursement
policies of third-party payors, product liability claims or other factors. See
Item 1, "Business -- Products in Development," "-- Manufacturing," "-- Certain
License and Royalty Agreements," "-- Competition" and "-- Government
Regulation."
UNCERTAINTY OF FUTURE FINANCIAL RESULTS; FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may vary from period to period due
to a variety of factors, including expenditures incurred to acquire, license and
promote pharmaceuticals, changes in prescription writing practices of
dermatologists, the level of research and development, the introduction of new
products by the Company or its competitors, cost increases from third-party
manufacturers, supply interruptions, the availability and cost of raw
materials, the mix of products sold by the Company, changes in marketing and
sales expenditures, market acceptance of the Company's products, competitive
pricing pressures, and general economic and industry conditions that affect
customer demand. In addition, the Company's business has historically been
subject to seasonal fluctuations, with lower sales generally being experienced
in the first quarter of each fiscal year. As a result of customer buying
patterns, a substantial portion of the Company's revenues have been in the
last month of each quarter. The Company schedules its inventory purchases to
meet anticipated customer demand. As a result, relatively small delays in the
receipt of manufactured products could result in revenues being deferred or
lost. The Company's operating expenses are based on anticipated sales levels,
and a high percentage of the Company's expenses are relatively fixed in the
short term. Consequently, variations in the timing of recognition of revenue
could cause significant fluctuations in operating results from period to
period and may result in unanticipated periodic earnings shortfalls or losses.
There can be no assurance that the Company maintain or increase revenues
profitability or avoid losses in any future period.
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The manufacture and sale of pharmaceuticals is highly competitive. Most
of the Company's competitors are large, well-established pharmaceutical,
chemical, cosmetic or health care companies with considerably greater financial,
marketing, sales and technical resources than those available to the Company.
Additionally, many of the Company's present and potential competitors have
research and development capabilities that may allow such competitors to develop
new or improved products that may compete with the Company's product lines. The
pharmaceutical industry is characterized by intense competition and rapid
product development and technological change. The Company's pharmaceuticals
could be rendered obsolete or made uneconomical by the development of new
pharmaceuticals to treat the conditions addressed by the Company's products,
technological advances affecting the cost of production, or marketing or pricing
actions by one or more of the Company's competitors. The Company's business,
financial condition or results of operations could be materially adversely
affected by any one or more of such developments.
DYNACIN competes with Minocin, a branded minocycline product marketed
by AHP, and generic minocycline products marketed by Schein, BioCraft and
Warner-Chilcott. Other oral antibiotics utilized for the treatment of acne
include erythromycin, doxycycline and tetracycline marketed in branded and
generic form by a variety of companies. The Company believes that TRIAZ competes
with Cleocin-T and a generic topical clindamycin, manufactured by Pharmacia &
Upjohn; Benzac, manufactured by Galderma, Inc.; and Benzamycin, manufactured by
Rhone-Poulenc Rorer. ESOTERICA primarily competes with Porcelana, marketed by
Dep Corp. and AMBI, marketed by Kiwi.
Several of the Company's products compete with generic (non-branded)
pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower
cost. In some cases, insurers and other third-party payors seek to encourage the
use of generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower portion of the purchase price than would be paid or
reimbursed for a generic product, making branded products less attractive, from
a cost perspective, to buyers. The aggressive pricing activities of the
Company's generic competitors and the
24
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payment and reimbursement policies of third-party payors could have a
material adverse effect on the Company's business, financial condition or
results of operations. See Item 1, "Business -- Competition."
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND ACQUISITION STRATEGY
The Company's strategy for growth is substantially dependent upon its
continued ability to acquire pharmaceuticals targeted at the dermatology market.
The Company engages in limited proprietary research and development of new
products and must rely upon the willingness of other companies to sell or
license product lines. Other companies, including those with substantially
greater financial, marketing and sales resources, compete with the Company to
acquire such products. There can be no assurance that the Company will be able
to acquire rights to additional products on acceptable terms, or at all. The
failure of the Company to acquire additional products or successful products
could have a material adverse effect on the Company's business prospects.
Further, the market conditions, distribution channels and levels and bases of
competition with respect to internally developed or acquired products may be
different than those of the Company's current products, and there can be no
assurance that the Company will be able to compete favorably and attain market
acceptance in any newly acquired product category or successfully integrate any
acquired products or business. Failure of the Company to successfully introduce
and market new products whether internally developed or acquired from third
parties, could have a material adverse effect on the Company's business
prospects.
MANAGING CHANGING BUSINESS
The Company's business strategy includes potential acquisitions of
products and businesses and introductions of new products. The Company
anticipates that the integration of new businesses or potential products, if
any, would require significant management time and attention. The Company's
ability to manage change will require it to continue to implement and improve
its operational, financial and management information systems and to motivate
and effectively manage an increasing number of employees. Failure to manage such
change effectively would materially adversely affect the Company's business,
financial condition and results of operations. See Item 7 and Item 1, "--
Business Strategy" and "-- Products in Development."
RISK OF PRODUCT RECALL; PRODUCT RETURNS
Product recalls may be issued at the discretion of the Company, the
FDA, or other government agencies having regulatory authority for product sales
and may occur due to disputed labeling claims, manufacturing issues, quality
defects or other reasons. No assurance can be given that product recalls will
not occur in the future. Any product recall could materially adversely affect
the Company's business, financial condition or results of operations. The
Company's policy is to accept for return only damages or out of date products.
There can be no assurance that the Company will not grant such exceptions in the
future. The Company maintains financial reserves for the anticipated amount of
product returns based upon historical experience. There can be no assurance that
future recalls or returns would not have a material adverse affect upon the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on certain management personnel for the
operation and development of its business. The Company has entered into an
Employment Agreement providing for full-time services with Mr. Jonah Shacknai,
the founder, Chairman and Chief Executive Officer of the Company. The current
term of the agreement of which expires on June 30, 2001, subject to automatic
renewal for periods of five years unless either party gives timely notice of an
intention not to renew the agreement. Mr. Shacknai may also terminate the
agreement prior to the end of the term. Presently, the Company carries key man
insurance on Mr. Shacknai's life in the amount of $1.0 million with the Company
as named beneficiary. Subject to the control and oversight of the Company's
Board of Directors, Mr. Shacknai exercises control over substantially all policy
making functions of the Company. In addition, the Company is dependent upon its
scientific consultants, particularly with respect to the commercial development
of discoveries and technologies as to which they have special expertise. Certain
of such consultants are employed on a full-time basis by employers other than
the Company, and some have consulting
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26
or other advisory arrangements with other entities which may conflict or compete
with their obligations to the Company. The loss of any key person, or a
reduction in the amount of time Mr. Shacknai devotes to the Company, could have
an adverse effect on the Company's business, financial condition or results of
operations.
DEPENDENCE ON LICENSES FROM OTHERS
The Company has acquired rights to manufacture, use or market certain
of its products, as well as many of its other proposed products and
technologies, pursuant to license agreements with third parties. Such agreements
contain provisions requiring the Company to use its best efforts or otherwise
exercise diligence in pursuing market development for the subject products in
order to maintain the rights granted under the agreements and may be canceled
upon the Company's failure to perform its payment obligations. There can be no
assurance that the Company will fulfill its obligations under one or more of
such agreements due to insufficient resources, lack of successful product
development, lack of product acceptance or other reasons. The failure to satisfy
the requirements of any such agreements may result in the loss of the Company's
rights under that agreement or under related agreements and have a material
adverse effect on the Company. In addition, the Company's licensing agreements
with Seuss and Euromerican for the exclusive rights to market the THERAPLEX line
of products will terminate in October 1999 with the expiration of the related
patent. See Item 1, "Business -- Manufacturing," "-- Certain License and Royalty
Agreements,""-- Trademarks" and "-- Patents and Proprietary Rights."
RISK OF DEBT COVENANT DEFAULT
The Company has a $5.0 million Credit Facility from Norwest that
expires in May 1997. The Credit Facility is secured by substantially all of the
assets of the Company. The Company is required to comply with certain covenants
and restrictions, including covenants relating to the Company's financial
condition or results of operations. If the Company is unable or fails to comply
with the covenants and restrictions, the lender would have the right not to make
loans under the Credit Facility and to require early repayment of any
outstanding loans. The lack of availability of loans or the requirement to make
early repayment of loans or the inability of the Company to renew the Credit
Facility could have a material adverse effect on the Company's business,
financial condition or results of operations. See Item 1, "Business --
Liquidity and Capital Resources."
UNCERTAINTY OF ACCESS TO CAPITAL
During a portion of fiscal 1995 and prior years, the Company's cash
flow from operations was insufficient to cover its operating expenses, and the
Company relied on external financings to meet its needs for operating cash flow.
As a result of increased sales beginning in the latter half of 1995 associated
with the introduction of DYNACIN, the Company experienced an increase in
accounts receivable. The Company expects that its current cash and cash
equivalents, together with additional cash from operations and cash available
from its Credit Facility and the proceeds of this offering, will be sufficient
to meet its current liquidity requirements at least through the fiscal year
ending June 30, 1998. However, depending upon the Company's acquisition and
licensing activity and results of operations, there can be no assurance that
such resources will be sufficient. If they are not, the Company would need to
obtain additional financing. There is no assurance that such financing would be
on terms advantageous to the Company. Adequate additional funds, whether from
the financial markets or from other sources, may not be available on a timely
basis, on terms acceptable to the Company, or at all. Insufficient funds may
cause the Company to delay, scale back, or abandon some or all of its product
acquisition, licensing, marketing or research and development programs or
opportunities.
VOLATILITY OF COMMON STOCK PRICE
The market price for the stocks of many publicly traded pharmaceutical
companies and marketers of dermatological products, including the Company, is
highly volatile. A variety of events, both concerning and unrelated to the
Company and the markets in which it participates, may have a significant
negative impact on the market price of the Common Stock. These factors include
regulatory developments in the health care field generally, the performance of
and product announcements by other pharmaceutical companies, manufacturing or
supply disruptions, product recalls, the loss of key personnel, and other
matters affecting the Company's products, acquisitions and financial
performance. Although the Common Stock trades on the Nasdaq National Market,
trading volume, size of institutional holdings and the number of marketmakers
has fluctuated and at times has been quite low. Both the price and volume of
trading has been sensitive to the number of analysts reporting on the Company
and such analysts' comments concerning the Company and the industry in which it
participates. The realization of any of the risks described in these "Certain
Factors Affecting Forward Looking Statements" could have a material and adverse
effect on the price of the Company's Common Stock.
26
27
CONTROL BY DIRECTORS AND OFFICERS
As of August 3, 1996, the Company's directors and officers beneficially
own 876,623 shares of Class A Common Stock, which have one vote per share, and
112,301 shares of Class B Common Stock, and 56,150 shares of Series B Preferred
Stock, each of which have 10 votes per share, representing approximately 16.9%
of the Company's outstanding capital stock and 32.5% of the total voting power.
Accordingly, such individuals, if they vote together, are able to exercise
substantial power in the election of directors and thereby influence the
policies of the Company.
Market Risk of Shares Eligible For Future Sales
Subject to certain specified exceptions relating to charitable gifts,
estate planning transfers and sales relating to the exercise of expiring
options, directors, executive officers and senior staff officers of the Company,
holding in the aggregate, as of August 5, 1996, 922,154 shares of Common Stock
representing 17.5% of the shares to be outstanding upon completion of the
offering, have agreed with the Underwriters not to sell or dispose of any shares
of Common Stock for a period of 90 days following commencement of this offering
without the written consent of Robertson, Stephens & Company LLC. Sales by such
officers and directors are generally subject to the provisions of Rule 144 under
the Securities Act.
The sale of a significant number of restricted securities, the exercise
of a significant number of options, or the offer or sale of a significant number
of shares of Common Stock acquired upon exercise of options at any one time
could materially adversely affect the market price of the Company's Common
Stock.
Anti-Takeover Effect of Charter Provisions, Rights Plan, Delaware Law
The Company's Certificate of Incorporation and Bylaws authorized the
Board of Directors to designate and issue, without stockholder approval,
Preferred Stock with voting, conversion and other rights and preferences that
could differentially and adversely affect the voting power or other rights of
the holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited acquisition
proposal. Moreover, the Company has granted a dividend of one Preference Stock
Purchase Right ("Rights") on each outstanding share of Class A Common Stock,
Class B Common Stock and Series B Preferred Stock. Under certain circumstances,
after a person has acquired beneficial ownership of a certain percentage of the
Common Stock, each Right will entitle the holder to purchase, at the Right's
then-current exercise price, stock of the Company or its successor at a
discount. In addition, certain provisions of Delaware law applicable to the
Company and certain provisions of the Company's Certificate of Incorporation and
Bylaws could also delay or make more difficult a merger, tender offer or proxy
contest involving the Company, including Section 203 of the Delaware Business
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
unless certain conditions are met. All of the Company's stock option plans
provide for the acceleration of vesting in the event of a change in control in
the Company and Mr. Shacknai's Employment Agreement provides for certain
payments upon a change in control, as well as an acceleration of vesting of
options previously granted to him. The possible issuance of Preferred Stock, the
rights granted to stockholders under the Rights Plan, Delaware law, provisions
of the Certificate of Incorporation and Bylaws and the Company's stock option
plans and Mr. Shacknai's Employment Agreement could each have the effect of
delaying, deferring or preventing a change in control of the Company including,
without limitation, discouraging a proxy contest, making more difficult the
acquisition of a substantial block of the Company's Common Stock or limiting the
price that investors might in the future be willing to pay for shares of the
Common Stock. Under certain circumstances, Mr. Shacknai's Employment Agreement
requires the Company to make payments that would constitute excess parachute
payments under the Internal Revenue Code of 1986, as amended. In the event that
the Company was required to make payments constituting excess parachute
payments, payments to Mr. Shacknai would not be deductible by the Company, and
Mr. Shacknai would be required to pay an excise tax.
LACK OF CASH DIVIDENDS
The Company has never paid any cash dividends on its capital stock and
does not anticipate that any cash dividends will be declared or paid in the
foreseeable future.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
27
28
The Company's financial statements and schedule at December 31, 1996
and 1995 and for each of the three years in the period ending June 30, 1996 and
the Independent Auditors' Report thereon and contained on pages F-1 through F-16
and S-1 of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCING DISCLOSURE
Not applicable.
28
29
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11: EXECUTIVE COMPENSATION
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10, 11, 12 and 13 are incorporated
by reference to the Company's definitive proxy statement for the 1996 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A.
29
30
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) Documents filed as a part of this Report.
(1) Financial Statements:
Index to Consolidated Financial Statements.............................. F-1
Report of Ernst & Young LLP, Independent Auditor......................... F-2
Consolidated balance sheets at June 30, 1996 and 1995................... F-3
Consolidated statements of income for the years ended
June 30, 1996, 1995 and 1994............................................ F-5
Consolidated statement of stockholders' equity for the years
ended June 30, 1996, 1995 and 1994...................................... F-6
Consolidated statements of cash flows for the years ended June 30, 1996,
1995 and 1994........................................................... F-7
Notes to consolidated financial statements.............................. F-8
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Account.......................... S-1
The financial statement schedule should be read in
conjunction with the consolidated financial
statements. Financial statement schedules not
included in this Annual Report on Form 10-K have been
omitted because they are not applicable or the
required information is shown in the financial
statements or notes thereto.
(3) Exhibits filed as part of this Report:
Exhibit No. Description
----------- -----------
3.1 - Certificate of Incorporation of the Company, as amended.(11)
3.3 - By-Laws of the Company.(1)
4.1 - Rights Agreement, dated as of August 17, 1995, between the Company and American
Stock Transfer & Trust Company, as Rights Agent.(11)
4.3 - Form of specimen certificate representing Class A Common Stock.(2)
30
31
10.1 - License Agreement among Euromerican Trade Resources, Inc., Dr. H.R. Suess and
H.R. Suess A.G. dated as of September 24, 1987.(3)
10.2 - Modification to License Agreement among the Company, Euromerican Trade
Resources, Inc., Dr. H.R. Suess and H.R. Suess A.G. dated as of April 6, 1989.(3)
10.3 - Letter Agreement between the Company and Euromerican Trade Resources, Inc. dated
as of April 6, 1989, relating to Modification to License Agreement among the
Company, Euromerican Trade Resources, Inc., Dr. H.R. Suess and H.R. Suess A.G.
dated as of April 6, 1989.(3)
10.8 - Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by
references to Exhibit C to the definitive Proxy Statement for the 1995 Annual Meeting
of Stockholders previously filed with the SEC, File No. 0-18443).
10.9 - Employment Agreement between the Company and Jonah Shacknai dated as of
July 24, 1996.(15)
10.10 - Medicis Pharmaceutical Corporation 1988 Stock Option Plan, as amended.(4)
10.12 - License Agreement between the Company and Dr. H.R. Suess dated March 1, 1990.(3)
10.13 - License Agreement between Syosset Laboratories, Inc. and Medicis Dermatologics,
Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5)
10.14 - Non-Exclusive License Agreement between Syosset Laboratories, Inc. and Medicis
Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5)
10.15 - Manufacturing Agreement between Syosset Laboratories, Inc. and Medicis
Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5)
10.16 - Sales Agency Agreement between Syosset Laboratories, Inc. and Medicis
Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5)
10.18 - Medicis Pharmaceutical Corporation 1990 Stock Option Plan, as amended.(4)
31
32
10.46 - Option to Purchase 2,678 Shares of Class A Common Stock of the Company, dated
December 3, 1991.(6)
10.49 - Option to Purchase Class A Common Stock granted to Stephen B. Booke.(4)
10.50 - Option to Purchase Class A Common Stock granted to Gerald Amato.(4)
10.58 - Medicis Pharmaceutical Corporation 1992 Stock Option Plan.(8)
10.59 - Supply Agreement, dated as of October 21, 1992, between Schein and the
Company.(7)
10.69 - Purchase Agreement, dated May 21, 1993, between the Company and Bindley
Western Drug Company.(9)
10.70 - Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein and the Company.(10)
10.71 - Manufacturing and Supply Agreement, dated as of March 15, 1995, between
SmithKline Beecham Consumer Healthcare, L.P. and the Company.(11)
10.72(a) - Credit and Security Agreement, dated as of August 3, 1995, between the Company and
Norwest Business Credit, Inc.(12)
10.72(b) - First Amendment to Credit and Security Agreement, dated as of May 29, 1996,
between the Company and Norwest Bank Arizona, N.A.(15)
10.73(a) - Patent Collateral Assignment and Security Agreement, dated as of August 3, 1995, by
the Company to Norwest Business Credit, Inc.(13)
10.73(b) - First Amendment to Patent Collateral Assignment and Security Agreement, dated as
of May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(15)
10.74(a) - Trademark Collateral Assignment and Security Agreement, dated as of August 3,
1995, by the Company to Norwest Business Credit, Inc.(14)
10.74(b) - First Amendment to Trademark Collateral Assignment and Security Agreement, dated as
of May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(15)
10.75 - Assignment and Assumption of Loan Documents, dated as of May 29, 1996, from
Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A.(15)
10.76 - Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A.(15)
21.1 - Subsidiaries.(15)
23.1 - Consent of Ernst & Young LLP(15).
24.1 - Power of Attorney (See page 34).
27.1 - Financial Data Schedule(15).
- ------------
(1) Incorporated by reference to the exhibit with the same number
in the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1992, File No. 0-18443, previously filed
with the Securities and Exchange Commission (the "SEC").
(2) Incorporated by reference to the exhibit with the same number
in the Registration Statement on Form S-1 of the Registrant,
File No. 33-32918, filed with the SEC on January 16, 1990.
(3) Incorporated by reference to the exhibit with the same number
in Amendment No. 1 to the Registration Statement on Form S-1
of the Company, File No. 33-32918, filed with the SEC on March
6, 1990.
(4) Incorporated by reference to the exhibit with the same number
in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992, as amended, File No. 0-18443
previously filed with the SEC.
(5) Incorporated by reference to the exhibit with the same number
in Amendment No. 2 to the Registration Statement on Form S-1
of the Company, File No. 33-34041, filed with the SEC on
August 2, 1990.
32
33
(6) Incorporated by reference to the exhibit with the same number
in Amendment No. 1 to the Registration Statement on Form S-1
of the Company, File No. 33-46913, filed with the SEC on April
29, 1992.
(7) Incorporated by reference to the exhibit with the same number
in Registration Statement on Form S-1 of the Company, File No.
33-54276, filed with the SEC on June 11, 1993.
(8) Incorporated by reference to Exhibit B to the Company's
definitive Proxy Statement for its 1992 Annual Meeting of
Stockholders, previously filed with the SEC, File No. 0-18443.
(9) Incorporated by reference to the exhibit with the same number
in Amendment No. 1 to the Registration Statement on Form S-1
of the Company, File No. 33-54276, filed with the SEC on May
25, 1993.
(10) Incorporated by reference to the exhibit with the same number
in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1993, File No. 0-18443, filed with the SEC
on October 13, 1993.
(11) Incorporated by reference to the exhibit with the same number
in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, File No. 0-18443, filed with the SEC
on September 27, 1995 ("1995 Form 10-K").
(12) Incorporated by reference to exhibit number 4.2 in the 1995
Form 10-K.
(13) Incorporated by reference to exhibit number 4.4 in the 1995
Form 10-K.
(14) Incorporated by reference to exhibit number 4.5 in the 1995
Form 10-K.
(15) Filed herewith.
(b) A Report on Form 8-K was filed with the Securities and Exchange
Commission on August 12, 1996 relating to the 3-for-2 stock split
in the form of a 50% stock dividend paid on August 2, 1996 to holders
of record on July 22, 1996.
(c) The exhibits to this Form 10-K follow the Company's Financial Statement
Schedule included in this Form 10-K.
(d) The Financial Statement Schedule to this Form 10-K appears on page S-1
of this Form 10-K.
33
34
MEDICIS PHARMACEUTICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-5
Consolidated Statement of Stockholders' Equity........................................ F-6
Consolidated Statements of Cash Flows................................................. F-7
Notes to Consolidated Financial Statements............................................ F-8
F-1
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Medicis Pharmaceutical Corporation
We have audited the accompanying consolidated balance sheets of Medicis
Pharmaceutical Corporation as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medicis Pharmaceutical Corporation at June 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Phoenix, Arizona
August 2, 1996
F-2
36
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
---------------------------
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 7,956,050 $ 953,438
Accounts receivable, less allowance:
1996: $680,000; 1995: $520,000............................. 5,210,704 4,214,424
Inventories.................................................. 2,080,014 798,956
Deferred tax assets.......................................... 3,000,000 --
Other current assets......................................... 738,911 251,086
----------- -----------
Total current assets.................................... 18,985,679 6,217,904
Property and equipment, at cost:
Furniture and equipment......................................... 336,544 201,009
Leasehold improvements.......................................... 170,000 170,000
----------- -----------
506,544 371,009
Less accumulated depreciation................................ 100,897 54,907
----------- -----------
Net property and equipment.............................. 405,647 316,102
Intangible assets, at cost:
Patents, trademarks and licenses................................ 203,326 131,554
Intangible assets related to ESOTERICA product acquisition...... 9,168,853 9,168,853
----------- -----------
9,372,179 9,300,407
Less accumulated amortization................................ 2,450,705 1,984,269
----------- -----------
Net intangible assets................................... 6,921,474 7,316,138
----------- -----------
$26,312,800 $13,850,144
=========== ===========
See accompanying notes.
F-3
37
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
-----------------------------
1996 1995
------------ ------------
LIABILITIES
Current liabilities:
Accounts payable........................................... $ 3,371,184 $ 3,227,173
Accrued officer's salaries................................. 204,750 204,750
Accrued royalties.......................................... 552,952 468,182
Notes payable.............................................. 10,000 140,000
Accrued incentives......................................... 1,184,111 631,231
Other accrued liabilities.................................. 1,262,134 927,243
-------- --------
Total current liabilities............................. 6,585,131 5,598,579
ESOTERICA products acquisition payables, net of discount of:
1995: $13,100................................................. -- 586,900
Note payable.................................................... 116,580 107,437
Other non-current liabilities................................... 151,437 170,234
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value, 4,937,340 shares authorized;
no shares issued.............................................. -- --
Series B Automatically Convertible Preferred Stock, $0.01 par
value, shares authorized, issued and outstanding: 62,660 at
June 30, 1996 and 1995........................................ 627 627
Class A Common Stock, $0.014 par value, shares authorized:
10,000,000; issued and outstanding: 1996: 6,816,318 1995:
6,498,843..................................................... 95,429 90,984
Class B Common Stock, $0.014 par value, shares authorized,
issued and outstanding: 1996 and 1995: 125,322................ 1,754 1,754
Additional paid-in capital...................................... 44,251,722 40,063,251
Accumulated deficit............................................. (24,889,880) (32,769,622)
-------- --------
Total stockholders' equity............................ 19,459,652 7,386,994
-------- --------
$ 26,312,800 $ 13,850,144
======== ========
See accompanying notes.
F-4
38
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Net sales........................................... $25,309,743 $19,131,665 $17,058,504
Operating costs and expenses:
Cost of sales..................................... 6,955,685 5,849,886 5,819,275
Selling, general and administrative (includes
relocation charges of $609,762 for the year
ended June 30, 1995)........................... 10,867,979 10,330,162 8,786,192
Research and development.......................... 951,888 769,577 1,571,769
Depreciation and amortization..................... 558,802 522,221 653,192
----------- ----------- -----------
Operating costs and expenses................... 19,334,354 17,471,846 16,830,428
----------- ----------- -----------
Operating income.................................... 5,975,389 1,659,819 228,076
Minority share of losses of Dyad.................... -- -- 677,000
Gain on disposition of Dyad......................... -- 106,640 --
Interest income..................................... 154,023 57,543 29,287
Interest expense.................................... (75,670) (150,895) (278,652)
----------- ----------- -----------
Income before taxes................................. 6,053,742 1,673,107 655,711
Income tax benefit (expense)........................ 1,826,000 (60,000) --
----------- ----------- -----------
Net income.......................................... $ 7,879,742 $ 1,613,107 $ 655,711
=========== =========== ===========
Net income per common and common equivalent share... $ 1.09 $ 0.24 $ 0.10
=========== =========== ===========
Shares used in computing net income per common and
common equivalent share........................... 7,242,162 6,593,164 6,303,453
=========== =========== ===========
See accompanying notes.
F-5
39
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES B
AUTOMATICALLY
CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------- ------------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1993.... 62,660 $627 5,591,227 $78,277 125,322 $1,754 $37,894,565 $(35,038,440) $ 2,936,783
Shares issued in
connection with
Regulation S offering... 671,902 9,407 1,637,542 1,646,949
Options issued in lieu of
payment for services
rendered................ 24,000 24,000
Net income................ 655,711 655,711
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1994.... 62,660 627 6,263,129 87,684 125,322 1,754 39,556,107 (34,382,729 ) 5,263,443
Shares issued in
connection with private
offering................ 235,714 3,300 507,144 510,444
Net income................ 1,613,107 1,613,107
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1995.... 62,660 627 6,498,843 90,984 125,322 1,754 40,063,251 (32,769,622 ) 7,386,994
Exercise of stock options
and warrants, net....... 317,475 4,445 3,101,471 3,105,916
Tax effect of stock
options exercised....... 1,067,000 1,067,000
Options issued in lieu of
payment for services
rendered................ 20,000 20,000
Net income................ 7,879,742 7,879,742
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1996.... 62,660 $627 6,816,318 $95,429 125,322 $1,754 $44,251,722 $(24,889,880) $19,459,652
====== ==== ========= ======= ======= ====== =========== ============ ===========
See accompanying notes.
F-6
40
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income........................................ $ 7,879,742 $ 1,613,107 $ 655,711
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 558,802 522,221 653,192
Non-cash interest.............................. 13,100 49,602 45,410
Other non-cash expenses........................ 20,000 -- 24,000
Deferred income tax benefit.................... (1,933,000) -- --
Allowance for doubtful accounts and returns.... 160,000 120,000 160,000
Minority share of losses of Dyad............... -- -- (677,000)
Changes in operating assets and liabilities:
Accounts receivable.......................... (1,156,280) (1,154,922) (2,380,654)
Inventories.................................. (1,281,058) (370,929) 1,457,239
Other current assets......................... (487,825) (48,013) (29,231)
Accounts payable............................. 144,011 1,282,949 (1,284,786)
Accrued officer's salaries................... -- -- (3,334)
Accrued royalties............................ 84,770 70,601 257,639
Interest payable............................. -- (250,016) (60,743)
Accrued incentives........................... 552,880 222,711 (107,774)
Other accrued liabilities.................... 334,891 (307,792) (319,787)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 4,890,033 1,749,519 (1,610,118)
INVESTING ACTIVITIES:
Purchase of property and equipment................ (181,911) (140,754) (12,029)
Payments of license agreement and ESOTERICA
products acquisition........................... -- -- (8,838)
Other, net........................................ (71,772) (7,885) (31,317)
----------- ----------- -----------
Net cash used in investing activities..... (253,683) (148,639) (52,184)
FINANCING ACTIVITIES:
Sales of common equity securities................. -- 510,444 1,646,949
Proceeds from issuance of note payable............ 9,143 107,437 --
Principal payments of debt........................ (748,797) (2,040,000) (120,000)
Proceeds from sale of equity in Dyad.............. -- -- 677,000
Proceeds from the exercise of options/warrants.... 3,105,916 -- --
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 2,366,262 (1,422,119) 2,203,949
Net increase in cash and cash equivalents......... 7,002,612 178,761 541,647
Cash and cash equivalents at beginning of year.... 953,438 774,677 233,030
----------- ----------- -----------
Cash and cash equivalents at end of year.......... $ 7,956,050 $ 953,438 $ 774,677
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................... $ 243,570 $ 351,309 $ 301,044
Taxes........................................ 132,233 79,631 79,237
See accompanying notes.
F-7
41
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY
Medicis Pharmaceutical Corporation and its wholly owned subsidiaries
("Medicis" or the "Company") is an independent pharmaceutical company in the
United States offering prescription and non-prescription (over-the-counter)
products exclusively to treat dermatological conditions. The Company has
acquired rights to manufacture and sell certain of its dermatological products
pursuant to several license and asset purchase agreements. The Company sells
these products for use in various segments of the dermatological market,
including the acne segment, the therapeutic emollient and moisturizer segment
and the fade cream segment.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Medicis and all wholly owned subsidiaries, and through June 30, 1994, the
accounts of Dyad Pharmaceutical Corporation ("Dyad") (see Note 4). The Company
has since sold its interest in Dyad and, accordingly, the accounts of Dyad have
not been consolidated subsequent to June 30, 1994. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs, including payments related to products
under development and research consulting agreements, are expensed as incurred.
INTANGIBLE ASSETS
Legal fees and other direct costs incurred in obtaining and protecting
patents and trademarks are capitalized as incurred. When patent applications are
approved or trademarks are registered, these costs are amortized over the
shorter of the useful life of the patent or trademark, or the related product on
the straight-line basis. The costs are expensed if and when it is concluded that
nonapproval is probable or, in the Company's opinion, the patent or trademark
should be abandoned. Intangible assets resulting from the ESOTERICA line of skin
care products (the "ESOTERICA products") acquisition principally consist of the
excess of the acquisition cost over the fair value of the net assets acquired
and are being amortized on a straight-line basis over twenty years. The Company
assesses the recoverability of intangible assets resulting from the ESOTERICA
products acquisition based on the gross profit of the related products over the
remaining amortization period.
CASH AND CASH EQUIVALENTS
At June 30, 1996, cash equivalents include highly liquid investments of
approximately $7,500,000 invested largely in money market accounts consisting of
government securities and high-grade commercial paper. These investments are
stated at cost which approximates fair value. The Company considers all highly
liquid investments purchased with a remaining maturity of three months or less
to be cash equivalents.
INVENTORIES
The Company utilizes third parties to manufacture and package inventories
held for sale, takes title to certain inventories once manufactured, and
warehouses such goods until packaged for final
F-8
42
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distribution and sale. Inventories consist of salable dermatological products
held at the Company's warehouses as well as at the manufacturers' facilities and
are valued at the lower of cost or market as more determined by their net
realizable value using the first-in, first-out method.
Inventories are as follows:
JUNE 30,
-----------------------
1996 1995
---------- --------
Raw materials................................................ $ 72,633 --
Work in progress............................................. 23,749 $ 37,971
Finished goods............................................... 1,983,632 760,985
---------- --------
Total inventories.......................................... $2,080,014 $798,956
========== ========
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line basis over the estimated useful lives of property and
equipment (three to five years). Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining lease term.
REVENUE RECOGNITION
The Company recognizes product revenue upon shipment to its customers. The
Company records reserves for returns based on estimates at the time of sale.
ADVERTISING
The Company expenses advertising as incurred. Advertising expenses for the
fiscal years ended June 30, 1996 ("Fiscal 1996"), June 30, 1995 ("Fiscal 1995")
and June 30, 1994 ("Fiscal 1994") were approximately $1,887,000, $1,525,000 and
$1,408,000, respectively.
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities were as follows:
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
---------- -------- -------
Property and equipment acquired under capital lease
obligations...................................... -- $170,234 --
Options/warrants issued in lieu of payment for
services rendered................................ $ 20,000 -- $24,000
Tax benefit of stock options exercised............. 1,067,000 -- --
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share have been computed by
using the weighted average number of shares outstanding and common equivalent
shares. Net income per share has been adjusted to reflect the 3-for-2 stock
split described in Note 7.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes("SFAS No. 109").
F-9
43
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates based upon future events, which could include, among other risks,
changes in the regulations governing the manner in which the Company sells its
products, changes in health care environment and the reliance on contract
manufacturing services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt reported in the consolidated balance sheets
approximate their fair value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires the revaluation of
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying value. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of the year ending June
30, 1997 ("Fiscal 1997") as required and, based on current circumstances, does
not believe the effect, if any, of adoption will be material.
In Fiscal 1997, the Company is also required to adopt Statement No. 123,
Accounting for Stock Based Compensation ("SFAS No. 123"). As permitted by SFAS
No. 123, the Company will continue to account for stock based compensation with
its employees, directors, and consultants pursuant to Accounting Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company grants stock
options for a fixed rate of shares with an exercise price equal to the fair
value of the shares at the date of grant and accordingly recognizes no
compensation expense for the stock option grants. SFAS No. 123 requires
companies which do not choose to account for the effects of stock based
compensation in the financial statements to disclose in the Company's Notes to
the Consolidated Financial Statements the pro forma effects on earnings and
earnings per share as if such accounting had occurred. The Company will adopt
SFAS No. 123 in the first quarter of Fiscal 1997.
NOTE 3. DEBT
Upon the Company's relocation to Arizona, the Company entered into a note
from the Commerce and Economic Development Commission in the amount of
approximately $131,000 bearing interest at a rate of 6.5% due in installments
through June 2, 2000. At June 30, 1996, $126,580 was outstanding on the note.
On June 3, 1996, the Company obtained a revolving line of credit facility
of up to $5 million from Norwest Bank Arizona, N.A ("Norwest"). The facility may
be drawn upon by the Company at its discretion and is collateralized by
substantially all of the assets of the Company. The outstanding balance of the
credit facility bears interest at a floating rate of 1.25% above Norwest's prime
rate per annum and expires in June 1997. The Agreement requires the Company to
comply with certain covenants, including covenants relating to the Company's
financial condition and results of operation. The Company has not drawn on this
credit facility.
F-10
44
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INVESTMENT
The consolidated financial statements for Fiscal 1994 include the accounts
and operations of Dyad, a then majority owned development stage enterprise.
Accordingly, net losses from the operations of Dyad amounting to approximately
$862,000 are included in net income in Fiscal 1994, partly offset by the
minority share in the losses of Dyad of $677,000. The sale of the Company's
interest in Dyad in Fiscal 1995 resulted in a gain of approximately $106,000. As
a result of the disposition of the Dyad Shares, the Company's and Dyad's
financial statements are not consolidated subsequent to June 30, 1994. The sale
contained provisions for possible additional consideration to the Company;
however, the amount to be received, if any, is uncertain.
NOTE 5. COMMITMENTS AND CONTINGENCIES
OCCUPANCY ARRANGEMENTS
The Company presently occupies approximately 12,150 square feet of office
space, at an average annual expense of $191,007 per annum, under a lease
agreement which expires in May 2005. The lease contains certain rent escalation
clauses and upon expiration can be renewed for a period of five years. Rent
expense was approximately $207,000, $188,000 and $314,000 for Fiscal 1996, 1995
and 1994, respectively.
RESEARCH AND DEVELOPMENT AND CONSULTING CONTRACTS
The Company has in the past and may in the future enter into agreements
with various research organizations and individuals under which the Company
acquires certain patent and marketing rights for therapeutics developed under
such agreements in exchange for providing funding for collaborative research. It
is also anticipated that, before any commercial marketing can be commenced, the
Company will be required to secure certain regulatory approvals on the
technological processes involved.
The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. In
addition, the Company has granted options to purchase shares of Class A Common
Stock which are included in the stock option plan described in Note 8. These
options vest annually over the commitment periods. At June 30, 1996, the Company
had approximately $870,000 (solely attributable to the Chairman of the Central
Research Committee of the Company) of commitments payable over the remaining
five years under an agreement, which is cancelable by either party under certain
conditions.
LICENSING, MARKETING AND MANUFACTURING AGREEMENTS
The Company has entered into licensing and marketing agreements under which
it has obtained rights to market certain existing and future pharmaceutical
products. Generally, the terms of such agreements vary, but range from 10 to 20
years from the date of the first sale of the related product or until the
expiration of the patent applicable to the product. The agreements provide for
varying royalties with certain stated minimum annual amounts, which vary by
agreement from $17,500 to, for one such agreement, $55,000. A commitment to pay
a minimum annual royalty of $160,000 commences twelve months after the United
States Food and Drug Administration grants approval to market the product
governed by the agreement. Total minimum royalties required to be paid on
products currently being sold approximate $72,500 per year.
F-11
45
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
The Company and certain of its subsidiaries are parties to other actions
and proceedings incident to their business. Liability in the event of final
adverse determinations in any of these matters is either covered by insurance
and/or established reserves, or, in the opinion of management, after
consultation with counsel, should not, in the aggregate, have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
NOTE 6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows:
JUNE 30,
---------------------------
1996 1995
----------- -----------
Deferred tax assets:
Net operating loss carryforwards........................ $10,500,000 $13,000,000
Reserves................................................ 700,000 630,000
Research and experimentation credits.................... 450,000 450,000
Alternative Minimum Tax credits......................... 70,000 --
----------- -----------
11,720,000 14,080,000
Deferred tax liabilities:
Tax over book amortization of intangible assets related
to ESOTERICA products acquisition.................... (120,000) (120,000)
----------- -----------
Net deferred tax assets available......................... 11,600,000 13,960,000
Less valuation allowance.................................. 8,600,000 13,960,000
----------- -----------
Deferred tax assets....................................... $ 3,000,000 $ --
=========== ===========
At June 30, 1996, a valuation allowance of $8,600,000 has been recorded.
The valuation allowance decreased by $5,360,000 and $540,000 during Fiscal 1996
and 1995, respectively. Of the decrease in Fiscal 1996, $1,280,000 related to
the utilization of net operating loss carryforwards due to Fiscal 1996 taxable
income, $1,067,000 as a direct credit to equity for Fiscal 1996 tax deductions
related to stock option exercises, $1,080,000 for lower estimated deferred tax
rates based on the Company's relocation, and an additional $1,933,000 with
respect to changes in estimate with respect to the deferred tax assets that are
more likely than not expected to be recovered through future income. In Fiscal
1995, the decrease was as a result of decreases in net deferred tax assets due
to the utilization of net operating loss carryforwards.
During the fourth quarter of Fiscal 1996, the Company reevaluated the
estimated amount of valuation allowance required to reduce deferred tax assets
in accordance with SFAS No. 109 to an amount management believes appropriate.
Accordingly, a credit to deferred tax benefit of $1,933,000 was reflected in the
consolidated income statement. The amount of net deferred tax assets, estimated
to be recoverable, was based upon management's assessment of the likelihood of
near-term operating income coupled with the uncertainties with respect to the
impact of future competitive and market conditions. The amount of deferred tax
assets available that will be ultimately realized will depend upon future events
which are uncertain.
At June 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $26,000,000 and research and
experimentation credits of approximately
F-12
46
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$450,000, which begin expiring in varying amounts in the years 2005 through 2010
if not previously utilized. During Fiscal 1996, the Company incurred
approximately $70,000 in Alternative Minimum Tax which is available as a future
tax credit. The Alternative Minimum Tax credits do not expire for income tax
purposes.
Components of the provision for income taxes (benefit) are as follows:
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
1996 1995
------------------- -------------------
Current
Federal....................................... $ 70,000 $35,000
State......................................... 37,000 25,000
----------- -------
107,000 60,000
Deferred
Federal....................................... (1,500,000) --
State......................................... (433,000) --
----------- -------
(1,933,000) --
----------- -------
Total................................. $(1,826,000) $60,000
=========== =======
Income tax expense (benefit) for the three years ended June 30, 1996, 1995,
and 1994 differs from the amount computed applying the federal statutory rates
due to the following:
JUNE 30,
-----------------------------
1996 1995 1994
----- ----- -----
Statutory federal income tax rate....................... 34.0% 34.0% 34.0%
State tax rate.......................................... 6.0 10.0 10.0
Utilization of net operating loss carryforwards......... (38.0) (43.2) (65.6)
Change in estimate valuation allowance.................. (32.0) -- --
Losses of Dyad not generating tax benefit............... -- -- 13.5
Other................................................... -- 2.8 8.1
----- ----- -----
Expense (benefit)....................................... (30.0%) 3.6% --
===== ===== =====
NOTE 7. STOCK TRANSACTIONS
Class A Common Stock has one vote per share and Class B Common Stock has
ten votes per share. Each share of Class B Common Stock may be converted into
one share of Class A Common Stock at the option of the holder or, in some
circumstances, may automatically be converted upon a vote of the board of
directors and the majority of the Class B Common Stockholders. The Series B
Automatically Convertible Preferred Stock ("Series B Preferred Stock") was
issued as part of the 3-for-2 stock split described in this Note and has all the
relative rights, preferences, privileges and limitations of the Company's Class
B Common Stock and has no liquidation preferences or stated dividend rates. Each
share of Series B Preferred Stock shall be automatically converted into one
share of Class B Common Stock immediately upon approval of the Company's
shareholders of an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of Class B Common Stock by a number
equal to or greater than the number of outstanding and issued shares of Series B
Preferred Stock. In addition, shares of Series B Preferred Stock are convertible
into Class A Common Stock on the same terms and conditions applicable to the
conversion of Class B Common Stock into Class A Common Stock.
F-13
47
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to a Subscription Agreement, dated as of November 17, 1994, (the
"Subscription Agreement") with Frost Nevada Limited Partnership, a Nevada
limited partnership ("Frost Nevada"), the Company issued 235,714 shares of its
Class A Common Stock, $0.014 par value to Frost Nevada for a purchase price of
$600,600. The 235,714 shares of Class A Common Stock issued by the Company were
sold to Frost Nevada as part of a two-part transaction in which Frost Nevada
purchased an aggregate of 342,856 shares of Class A Common Stock. Pursuant to a
Stock Purchase Agreement dated as of November 17, 1994, (the "Stock Purchase
Agreement") between the Chairman of the Company and Frost Nevada, Frost Nevada
purchased from the Chairman 107,142 shares of Class A Common Stock.
On August 17, 1995, the Board of Directors adopted a Preferred Stock
Purchase Rights plan and declared a dividend of one preference share purchase
right for each outstanding share of Class A Common Stock and Class B Common
Stock. Under certain circumstances, after a person has acquired beneficial
ownership of 15% of the Class A Common Stock, each Preference Stock Purchase
Right will entitle the holder to purchase, at the Right's then-current exercise
price, stock of the Company or its successor at a discount.
On August 29, 1995, the Executive Committee of the Board of Directors
declared a one-for-fourteen reverse stock split which was approved by
shareholders on October 23, 1995. As a result of the reverse stock split, the
Company's outstanding shares decreased from approximately 61.0 million to
approximately 4.3 million at that date. Per share amounts and the average number
of shares outstanding at that date were retroactively revised for all periods
presented.
Subsequent to year end, on July 22, 1996, the Board of Directors declared a
3-for-2 stock split effected in the form of a 50% stock dividend payable August
2, 1996, to common shareholders of record at the close of business on July 22,
1996. As a result of the stock split, the Company's outstanding shares increased
from approximately 4.5 million to 6.8 million. Per share amounts and the
weighted average number of shares outstanding have been retroactively revised
for all periods presented.
NOTE 8. STOCK OPTION PLANS
The Company has four Stock Option Plans ("the 1988, 1990, 1992 and 1995
Plans" or collectively, the "Plans") under which options may be granted for the
benefit of certain key employees, non-employee directors, and consultants of the
Company. The 1988, 1990, 1992 and 1995 Plans, as amended, provide originally for
the granting of a maximum of 321,429, 428,571, 535,714, and 535,714
respectively, qualified incentive stock options and non-qualified stock options,
to purchase Class A Common Stock of the Company. On July 22, 1996, the Board of
Directors authorized the granting of 201,474 shares to employees and consultants
at fair market value and has placed limitations on the number of shares
available for grant under the plans in the future. The Plans allow the Company
to designate options as qualified incentive or non-qualified on an as needed
basis.
Qualified and non-qualified stock options vest over a period determined at
the time the options are granted ranging from one to five years, except for
certain non-qualified stock options that vest immediately. In April 1996, the
Plans were amended to provide for acceleration of vesting in the event of a
change in control of the Company. The options are generally granted at the fair
market value on the date of the grant and are exercisable at prices from $1.77
to $31.83, with a weighted average of $6.93 at June 30, 1996. In September 1995,
the Company approved the repricing of certain options under the Plans to
purchase 300,726 shares of Class A Common Stock previously exercisable at a
weighted average option exercise price of $10.85 per share to an exercise price
of $4.39 per share, which was the fair market value of the Class A Common Stock
at the date of repricing. The Company
F-14
48
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has not previously repriced any of its stock options. Options for the year were
exercised at prices from $1.77 to $20.44. Information as to the options for
Fiscal 1994, 1995 and 1996 is as follows:
QUALIFIED NON-QUALIFIED TOTAL EXERCISABLE
--------- ------------- -------- -----------
Balance at June 30, 1993............. 279,676 398,052 677,728 459,312
=======
Granted.............................. 85,019 87,054 172,073
Terminated/expired................... (39,983) (4,286) (44,269)
-------- -------- --------
Balance at June 30, 1994............. 324,712 480,820 805,532 587,589
=======
Granted.............................. 188,695 326,213 514,908
Terminated/expired................... (240,381) (226,682) (467,063)
-------- -------- --------
Balance at June 30, 1995............. 273,026 580,351 853,377 524,481
=======
Granted.............................. 211,311 298,709 510,020
Exercised............................ (25,672) (117,880) (143,552)
Terminated/expired................... (131,973) (221,972) (353,945)
-------- -------- --------
Balance at June 30, 1996............. 326,692 539,208 865,900 250,455
======== ======== ======== =======
The table includes 90,716 shares of Common Stock that will be available to
certain employees relating to the stock split described in Note 7 upon
authorization of additional shares by the Company's shareholders.
During Fiscal 1996, 128,568 of non-qualified stock options not subject to
the stock option plans have been exercised by outside parties at $14.56. An
additional 47,121 non-qualified stock options not subject to the plans are
issued and outstanding to outside parties at June 30, 1996 with exercise price
ranges of $14.56 to $28.00. During Fiscal 1996, 45,355 warrants were exercised
at $4.67. At June 30, 1996, there were no outstanding warrants.
NOTE 9. SIGNIFICANT CUSTOMERS
For Fiscal 1996, three customers accounted for approximately 15.5%, 12.2%,
and 11.8% of sales. For Fiscal 1995, two customers accounted for approximately
15.9% and 9.6% of sales. For Fiscal 1994, two customers accounted for
approximately 15.1% and 11.2% of sales.
NOTE 10. FINANCIAL INSTRUMENTS -- CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company maintains cash and cash equivalents primarily with two
financial institutions that invest funds in short-term, interest bearing,
investment grade, marketable securities. The Company performs periodic
evaluations of the relative credit standing of these financial institutions.
At June 30, 1996 and 1995, five and six customers, respectively, comprised
approximately 55.2% and 48.8%, respectively, of accounts receivable. The Company
does not require collateral from its customers but performs periodic credit
evaluations of its customers' financial condition. Management does not believe
significant credit risk exists at June 30, 1996.
F-15
49
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (the "Plan") that is intended
to qualify under Section 401(k) of the Internal Revenue Code. All employees,
except those with less than three months of service and those who have not
attained the age of 21, are eligible to participate in the Contribution Plan.
Participants may contribute, through payroll deductions, up to 20% of their
basic compensation, not to exceed Internal Revenue Code limitations. Although
the Contribution Plan provides for profit sharing contributions by the Company,
the Company has not made any such contributions since its inception.
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the table below is the quarterly financial information for Fiscal 1996
and 1995. (All figures are in thousands except per share data).
FISCAL YEAR ENDED JUNE 30, 1996
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------ ----------------- -------------- -------------
Net sales.................. $4,574 $ 6,449 $7,016 $ 7,271
Gross profit............... 3,257 4,667 5,040 5,390
Net income................. 646 1,404 1,759 4,071
Net income per share....... 0.10 0.21 0.24 0.54
FISCAL YEAR ENDED JUNE 30, 1995
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1994 DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995
------------------ ----------------- -------------- -------------
Net sales.................. $3,690 $ 4,725 $5,033 $ 5,684
Gross profit............... 2,519 3,024 3,659 4,080
Net income................. 26 308 312 967
Net income per share....... -- 0.05 0.05 0.14
The quarterly net income per share data disclosed above does not agree with
the amounts reported in the Company's Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission as the amounts have been revised to
reflect the stock splits discussed in Note 7 and for certain reclassification
made to conform with fourth quarter presentation. The net income for the quarter
ended June 30, 1996 includes a fourth quarter adjustment to record deferred
income tax benefits of $1,933,000 as described in Note 6.
F-16
50
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Description beginning of year costs and expenses other accounts Deductions end of year
- --------------------------------- ----------------- ------------------ -------------- ---------- -----------
Year Ended June 30, 1996
Deducted from Asset Accounts:
Accounts Receivable:
Allowances $ 520,000 $ 50,000 $ 160,000 $ 680,000
Year Ended June 30, 1995
Deducted from Asset Accounts:
Accounts Receivable:
Allowances $ 400,000 $ 120,000 $ 520,000
Year Ended June 30, 1994
Deducted from Asset Accounts:
Accounts Receivable:
Allowances $ 240,000 $ 160,000 $ 400,000
Draft August 14, 1996 (10:53am)
S-1
51
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonah Shacknai and Mark A. Prygocki, Sr., or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant
to the Securities and Exchange Act of 1934, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 15, 1996
MEDICIS PHARMACEUTICAL CORPORATION
By: /s/ JONAH SHACKNAI
-------------------------------------
Jonah Shacknai
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------------- ----------------
/s/ JONAH SHACKNAI Chairman of the Board of Directors August 15, 1996
- ------------------------------------- and Chief Executive Officer
Jonah Shacknai (Principal Executive Officer)
/s/ MARK A. PRYGOCKI, SR. Chief Financial Officer August 15, 1996
- ------------------------------------- (Principal Financial and Accounting
Mark A. Prygocki, Sr. Officer)
/s/ JOSEPH SALVANI Director August 15, 1996
- -------------------------------------
Joseph Salvani
/s/ RICHARD L. DOBSON, M.D. Director August , 1996
- -------------------------------------
Richard L. Dobson, M.D.
/s/ MICHAEL A. PIETRANGELO Director August 15, 1996
- -------------------------------------
Michael A. Pietrangelo
Director August 15, 1996
- -------------------------------------
Philip S. Schein, M.D.
/s/ ARTHUR ALTSCHUL, JR. Director August 15, 1996
- -------------------------------------
Arthur Altschul, Jr.
/s/ LOTTIE SHACKELFORD Director August 15, 1996
- -------------------------------------
Lottie Shackelford
34
52