<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996
REGISTRATION NO. 333-10247
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDICIS PHARMACEUTICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 52-1574808
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4343 EAST CAMELBACK ROAD, SUITE 250, PHOENIX, ARIZONA 85018
(602) 808-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
JONAH SHACKNAI
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MEDICIS PHARMACEUTICAL CORPORATION
4343 EAST CAMELBACK ROAD
SUITE 250
PHOENIX, ARIZONA 85018
(602) 808-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
FRANK M. PLACENTI, ESQ. ALAN C. MENDELSON, ESQ.
JIN SUN KIM, ESQ. JULIA L. DAVIDSON, ESQ.
BROWN & BAIN, P.A. COOLEY GODWARD CASTRO HUDDLESON & TATUM
SUITE 2100 FIVE PALO ALTO SQUARE
2901 NORTH CENTRAL AVENUE 3000 EL CAMINO REAL
PHOENIX, ARIZONA 85012 PALO ALTO, CALIFORNIA 94306
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1996
MEDICIS
The Dermatology Company[sm]
1,850,000 SHARES
CLASS A COMMON STOCK
All of the 1,850,000 shares of the Class A Common Stock (unless the context
otherwise requires, "Common Stock") offered hereby are being issued and sold by
Medicis Pharmaceutical Corporation (together with its wholly owned subsidiaries,
"Medicis" or the "Company"). On August 14, the last sale price of the Company's
Common Stock, as reported on the Nasdaq National Market, was $42.75 per share.
See "Price Range of Common Stock." The Common Stock of the Company is traded on
the Nasdaq National Market under the symbol "MDRX."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(2).......................... $ $ $
=================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $300,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 277,500 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY A.G. EDWARDS & SONS, INC.
The date of this Prospectus is , 1996
<PAGE> 3
MEDICIS
The Dermatology Company[sm]
MEDICIS PRODUCTS EMPHASIZE CLINICAL EFFECTIVENESS,
QUALITY, AFFORDABILITY AND COSMETIC ELEGANCE
MEDICIS PRESCRIPTION PRODUCT LINE THE MEDICIS OTC PRODUCT LINE
FEATURES DYNACIN, A LEADING FEATURES ESOTERICA, THE
DOMESTIC BRANDED MINOCYCLINE LEADING DOMESTIC FADE CREAM
------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE ACT"). SEE
"UNDERWRITING."
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary............................................................................... 4
Risk Factors.......................................................................... 7
Use of Proceeds....................................................................... 20
Dividend Policy....................................................................... 20
Price Range of Common Stock........................................................... 21
Capitalization........................................................................ 22
Dilution.............................................................................. 23
Selected Consolidated Financial Data.................................................. 24
Management Discussion and Analysis of Financial Condition and Results of Operations... 25
Business.............................................................................. 32
Management............................................................................ 46
Principal Stockholders................................................................ 50
Description of Capital Stock.......................................................... 52
Underwriting.......................................................................... 54
Legal Matters......................................................................... 55
Experts............................................................................... 55
Available Information................................................................. 56
Information Incorporated by Reference................................................. 56
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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MEDICIS(R), MEDICIS THE DERMATOLOGY COMPANYSM, THERAMYCIN Z(TM), TRIAZ(R),
BENZASHAVE(R), DYNACIN(R), ESOTERICA(R), THERAPLEX(R) and THERAPLEX
CLEARLOTION(R) are trademarks or servicemarks used in this Prospectus which are
owned by the Company. All other trademarks and registered trademarks used in
this Prospectus are the property of their respective owners.
3
<PAGE> 5
SUMMARY
This Prospectus contains forward-looking statements which involve risks 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.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Medicis Pharmaceutical Corporation 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 line. 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.
Since inception, Medicis has focused on providing the highest-quality
customer service to dermatologists, while selectively out-sourcing non-marketing
functions, such as laboratory research, manufacturing and warehousing. The
Company intends to leverage its focused marketing and sales force by offering
additional products that address significant opportunities in the dermatalogy
market.
The dermatology market in the United States was estimated to have annual
sales of approximately $5 billion in 1995. However, due to the large number of
products offered, individual dermatological products typically have total
domestic sales of less than $50 million each. Several factors, including
industry consolidation, pricing pressure and the high cost of investment in new
pharmaceuticals, have caused major pharmaceutical companies to shift their focus
away from fragmented markets into markets that offer the potential for billion
dollar annual sales for single products or product lines. Since most
dermatological products do not have the level of sales potential sought by these
major manufacturers, specialized pharmaceutical companies such as Medicis can
identify and pursue niche markets. The Company believes that the dermatology
market offers a unique opportunity in the pharmaceutical industry because it is
highly fragmented and only approximately 3,200 dermatologists, of the
approximately 6,600 office-based dermatologists and approximately 1,500
university-based or hospital-based dermatologists in the United States, are
responsible for 80% of all prescriptions written by dermatologists.
Prescription pharmaceuticals accounted for 83.2% of the Company's sales for
the fiscal year ended June 30, 1996 and 70.6% of sales for the fiscal year ended
June 30, 1995. Medicis has focused its prescription pharmaceutical efforts
primarily on products that treat acne and acne-related conditions, which
accounted for over 10 million visits to dermatologists in 1995. The Company's
leading product, DYNACIN, introduced in November 1992, is one of the country's
leading systemic antibiotic for the treatment of acne. DYNACIN, which contains
minocycline (a tetracycline derivative), has achieved its current position as
one of the leading branded minocycline products in the United States due to its
convenient once or twice daily dosing, reduced gastric irritation and virtual
absence of bacterial resistance. The TRIAZ product line, introduced in April
1996, consists of a gel available in two concentrations, and a cleanser used for
the topical treatment of acne. TRIAZ products employ benzoyl peroxide as their
active ingredient in a vehicle containing glycolic acid (for exfoliation) and
zinc lactate (to reduce the appearance of inflammation). TRIAZ products offer
several advantages over competing treatments, including improved stability,
greater convenience of use, reduced costs and fewer side effects. The Company
offers two additional prescription products, THERAMYCIN Z, a topical lotion for
the treatment of acne, and BENZASHAVE, a topical treatment for acne and
bacterial inflammation associated with shaving, known as pseudofolliculitis
barbae ("PFB").
4
<PAGE> 6
Medicis' OTC products accounted for 16.8% of sales for the fiscal year
ended June 30, 1996 and 28.2% of sales for the fiscal year ended June 30, 1995.
Those OTC products include the ESOTERICA line of topical fade creams, the
leading domestic products used to correct minor skin discoloration problems such
as age spots, dark patches and freckles. The Company also markets a line of
THERAPLEX moisturizers to treat problems of severe dry skin and certain
inflammatory skin conditions.
The Company's offices are located at 4343 East Camelback Road, Suite 250,
Phoenix, Arizona 85018-2700 and its telephone number is (602) 808-8800.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information presented or referenced herein, the
discussion of risk factors on pages 7 to 19 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
associated with an investment in the Company include the following factors:
Dependence on Sales of DYNACIN Products; Uncertainty of Future Financial
Results, Fluctuations in Operating Results; Intense Competition, Uncertainty of
Technological Change; Dependence on New Product Introductions and Acquisition
Strategy; Uncertainty of Product Development; Managing Changing Business;
Reliance on Third-Party Manufacturers and Sole Source Suppliers; Uncertainty of
Government Regulation; Uncertainty of Trademarks, Patents and Proprietary
Rights; Uncertainties Relating to Pharmaceutical Pricing and Third-Party
Reimbursement, Health Care Reform; Potential Product Liability, Limited
Insurance Coverage; Customer Concentration, Consolidation of Distribution
Network; Risk of Product Recall, Product Returns; Management Discretion Over
Application of Proceeds; Dependence on Key Personnel; Dependence on Licenses
from Others; Risk of Debt Covenant Default; Uncertainty of Access to Capital;
Volatility of Common Stock Price; Control by Directors and Officers; Market Risk
of Shares Eligible For Future Sales; Dilution; Anti-Takeover Effect of Charter
Provisions, Rights Plan, Stock Option Vesting, Employment Agreement and Delaware
Law; and Lack of Cash Dividends. For a discussion of the risks associated with
an investment in the Company, see "Risk Factors."
THE OFFERING
Common Stock Offered by the
Company....................... 1,850,000 shares
Common Stock Outstanding After
the Offering.................... 8,870,615 shares (1)
Use of Proceeds................. For marketing expenses associated with new
product introductions, the licensing or
acquisition of formulations, technologies,
products or businesses, research and
development, expansion of marketing and sales
capabilities and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol... MDRX
- ---------------
(1) Based on shares outstanding as of August 5, 1996. Includes (i) 125,322
shares of Class B Common Stock, $0.014 par value ("Class B Common Stock"),
and (ii) 62,660 shares of Series B Automatically Convertible Preferred
Stock, $0.01 par value ("Series B Preferred Stock"), each share of which is
convertible into one share of Class A Common Stock. Excludes 994,057 shares
of Class A Common Stock issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $11.28 per share. See
"Description of Capital Stock."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
1992 1993(1) 1994(1) 1995(2) 1996
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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................... 11,087 18,694 11,011 11,622 12,379
-------- -------- ------- ------- -------
Operating income(loss)............... (5,637) (11,479) 228 1,660(2) 5,975
Net income (loss).................... $(11,791) $(11,654) $ 656 $ 1,613 $ 7,880
======== ======== ======= ======= =======
Net income(loss) per share before
extraordinary item(3).............. $ (2.17) $ (2.12) $ 0.10 $ 0.24 $ 1.09
Extraordinary loss per share(3)...... (1.04) -- -- -- --
-------- -------- ------- ------- -------
Net income(loss) per share(3)........ $ (3.21) $ (2.12) $ 0.10 $ 0.24 $ 1.09
======== ======== ======= ======= =======
Number of shares used in computing
net income (loss) per share(3)..... 3,668 5,507 6,303 6,593 7,242
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 7,956 $ 82,394
Working capital.................................................. 12,401 86,839
Total assets..................................................... 26,313 100,751
Total stockholders' equity....................................... 19,460 93,898
</TABLE>
- ---------------
(1) The fiscal year ended June 30, 1994 ("fiscal 1994") and the fiscal year
ended June 30, 1993 ("fiscal 1993") include the operations of Dyad
Pharmaceutical Corporation, which were divested by the Company in fiscal
1995.
(2) The fiscal year ended June 30, 1995 ("fiscal 1995") includes approximately
$610,000 of charges associated with headquarters relocation; the Company had
operating income of approximately $2,270,000 before relocation charges in
fiscal 1995.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the computation of per share data.
(4) Adjusted to reflect the sale of 1,850,000 shares of Common Stock by the
Company at an assumed public offering price of $42.75 per share, and the
receipt of the estimated net proceeds therefrom.
Except as otherwise specified herein, all information in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option, and (ii) has
been adjusted to give effect to 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. See
"Description of Capital Stock."
6
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks 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 in the following risk factors and elsewhere in this
Prospectus.
The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.
DEPENDENCE ON SALES OF DYNACIN PRODUCTS
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 "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 Company's 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 historically 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. 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 will maintain or increase
revenues, maintain profitability or avoid losses in any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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
7
<PAGE> 9
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
American Home Products Corporation ("AHP"), and generic minocycline products
marketed by Schein Pharmaceuticals, Inc. ("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, Inc.; Benzac,
manufactured by Galderma, Inc.; and Benzamycin, manufactured by Rhone-Poulenc
Rorer Pharmaceuticals, Inc. 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 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 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
"Business -- Competition."
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND ACQUISITION STRATEGY
The Company's strategy for growth is substantially dependent upon its
continued ability to successfully introduce new products and 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 develop or acquire rights to
additional products on acceptable terms, or at all. The failure of the Company
to acquire additional 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, financial condition or results of
operations. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF PRODUCT DEVELOPMENT
The Company has developed and obtained rights to certain dermatological
agents in various stages of development. The Company has a variety of products
under development, ranging from existing product line extensions to new products
or reformulations of existing products. All products and technologies under
development will require significant commitment of personnel and financial
resources. Several products will require extensive clinical evaluation and
premarketing clearance by the United States Food and Drug Administration ("FDA")
and comparable agencies in other countries
8
<PAGE> 10
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 thereunder. 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. The failure to introduce new products into the
market on a timely basis could have a material adverse effect on the Company's
business, financial condition or results of operation. See "Business -- Products
in Development."
The Company has in the past supplemented, and may in the future supplement,
its research and development efforts by entering into 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
additional research and development agreements acceptable to the Company, or at
all. See "Business -- Products in Development" and "-- Certain Licenses and
Royalty Agreements."
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 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Business
Strategy" and "-- Products in Development."
RELIANCE ON THIRD-PARTY MANUFACTURERS AND SOLE-SOURCE SUPPLIERS
The Company currently contracts for all of its manufacturing needs and is
required by the FDA 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.
The Company's DYNACIN products are manufactured solely 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. 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 also 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 certain
pre-specified profit margins. Either party may terminate the agreement in the
event that the other party cannot perform under the
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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 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
Beecham Consumer Healthcare, L.P. ("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 utilizes Contract
Manufacturing Associates to manufacture its requirements of ESOTERICA for the
Canadian market.
The Company purchases THERAMYCIN Z and BENZASHAVE products exclusively from
a subsidiary of IVAX Corporation ("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 solely 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. ("Beauty Control"); TRIAZ products, manufactured by Paco Laboratories, Inc.
("Paco")
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. 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'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. 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, or 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 Laboratories, Inc. ("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 1995. During the second quarter of fiscal
1996, manufacturing of the THERAMYCIN Z product also resumed. 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
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<PAGE> 12
its products in a timely fashion, or at all. The loss of a manufacturer, the
failure to obtain or validate 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.
UNCERTAINTY OF GOVERNMENT 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 ("FTC") and state and local authorities regulate the advertising of
OTC drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended
(the "Food and Drug Act"), and 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
pre-marketing 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 Investigational 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 a New Drug Application ("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.
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 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 on 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 drugs unless failure to
do so will pose a potential health hazard. Drugs subject to final monographs,
however, are subject to various FDA regulations concerning for example, cGMP,
general and specific OTC labeling require-
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ments (including warning letters), prohibitions against promotion for conditions
other than those stated in the labeling, and requirements 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. 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 in withdrawal
of TRIAZ and BENZASHAVE products 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 upon the Company's business, financial condition or results of
operations.
Four of the five 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 assertion
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.
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, labeling and
promotion, 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
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<PAGE> 14
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 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 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. 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 in other material adverse effects on the Company's
business, financial condition or results of operations.
For 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 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. See
"Business -- Government Regulation."
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UNCERTAINTY OF TRADEMARKS, PATENTS AND PROPRIETARY RIGHTS
The Company believes that trademark protection is an important factor in
establishing product recognition. The inability of the Company to protect its
trademarks from infringement could result in injury to any goodwill which may be
developed in such trademarks. Moreover, the Company's inability to use one or
more of its trademarks because of successful third-party claims 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. The
Company has been advised by the opposing party that the opposition will be
withdrawn without prejudice, allowing for the Company's trademark application to
proceed for examination. While no assurance can be given as to the Company's
ability to obtain the registration of the mark "THERAMYCIN Z", the Company does
not currently foresee any further opposition to its registration.
The Company is 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 any such
conflicting claims, or that any rights which the Company may obtain will be
sufficient for the Company to market products that 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 substantial 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 or to cease using such disputed rights. There can be no
assurance that a license would be available on terms acceptable to the Company,
or at all.
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 similar or equivalent trade
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secrets or know-how. See "Business -- Certain License and Royalty Agreements,"
"-- Trademarks," "-- Patents and Proprietary Rights" and "Management -- Key
Consultants."
UNCERTAINTIES RELATING TO PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT,
HEALTH CARE REFORM
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 for 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 would have a material adverse effect
upon the Company's business, financial condition and results of operation. 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.
POTENTIAL PRODUCT LIABILITY, LIMITED INSURANCE COVERAGE
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 $1.0 million per claim and $1.0
million in the aggregate on a claims-made basis and umbrella liability
insurance, which can also be used for product liability claims, in the amount of
$4.0 million per claim and $4.0 million in the aggregate. Many of the Company's
customers require the Company to maintain product liability insurance as a
condition to their conducting business with the Company. There can be no
assurance that insurance coverage will be available in the future on
commercially reasonable terms, or at all, that such insurance will be adequate
to cover potential product liability claims or that a 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. See "Business -- Government Regulation" and "-- Product Liability
Insurance."
CUSTOMER CONCENTRATION, CONSOLIDATION OF DISTRIBUTION NETWORK
The distribution network for pharmaceutical products has in recent years
been subject to increasing consolidation. As a result, a few very 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, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses thereby stimulating product returns to the Company.
Further consolidation or financial difficulties could also
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cause customers to reduce their inventory levels, or otherwise reduce purchases
of the Company's products which could result in a material adverse affect on the
Company's business, financial condition or results of operations.
Medicis' customers include McKesson Drug Company ("McKesson"), Bergen
Brunswig Drug Company ("Bergen Brunswig"), Cardinal Health Inc. ("Cardinal"),
Bindley Western Drug Company ("Bindley") and major drug chains. During fiscal
1996, 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 accounted for
approximately 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
"Business -- Customers."
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 damaged or out of date products. However, the
Company's customers have in the past sought, and may in the future seek,
exceptions to that policy. 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 effect upon the Company's business, financial condition and
results of operations.
MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS
Management of the Company has broad discretion to determine the application
of the net proceeds of this offering in order to address circumstances and
opportunities. As a result, the success of the Company will be affected by the
judgment of the management of the Company with respect to the application of the
net proceeds. See "Use of Proceeds."
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 of the Board and Chief Executive Officer of the Company. The current
term of the Employment Agreement 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 Employment Agreement. Mr. Shacknai may also terminate
the Employment Agreement prior to the end of the term. 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 or
other advisory arrangements with other entities which may conflict 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.
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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 could have a
material adverse effect on the Company. In addition, the Company's licensing
agreements with Dr. Hans Rudi Suess and H.R. Suess, A.G., (collectively
"Suess"), and Euromerican Trade Resources, Inc. ("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
"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 (the "Credit Facility") from
Norwest Bank Arizona, N.A. ("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, Norwest 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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
17
<PAGE> 19
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 "Risk
Factors" could have a material and adverse effect on the price of the Company's
Common Stock. See "Price Range of Common Stock."
CONTROL BY DIRECTORS AND OFFICERS
On August 5, 1996, the Company's current directors and officers
beneficially owned 695,359 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 11.87% of the Company's outstanding capital stock and
approximately 26.47% 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. See "Principal
Stockholders" and "Description of Capital Stock."
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, current directors, executive officers and senior staff officers of the
Company, holding in the aggregate, as of August 5, 1996, 740,890 shares of
Common Stock representing approximately 9.9% of the outstanding 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. See
"Underwriting."
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.
DILUTION
The market price of the Common Stock offered hereby significantly exceeds
the current tangible book value per share of the Common Stock. As a result of
these factors, purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution between the offering price and the
resulting net tangible book value per share. The book value of the Company's
assets also includes a significant value attributable to intangible assets,
substantially all of which is attributable to acquisitions of product lines and
related assets. These intangible assets are subject to amortization and will be
charged against earnings in future years. In the event that proceeds from the
offering are utilized in the acquisition of one or more additional product lines
it is likely that such proceeds will be used to acquire trademarks and other
intangible assets which will result in increased dilution to the tangible net
worth of such purchasers and increase the amount of amortization that will be
charged against earnings. See "Dilution."
18
<PAGE> 20
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, RIGHTS PLAN, STOCK OPTION VESTING,
EMPLOYMENT AGREEMENT AND DELAWARE LAW
The Company's Certificate of Incorporation and Bylaws authorize 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 of outstanding options 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,
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. See
"Description of Capital Stock," and "Management -- Employment Agreements."
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. See "Dividend Policy."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,850,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$74.4 million ($85.6 million if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price of $42.75 per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company.
The Company intends to use some of the proceeds of this offering for
marketing expenses associated with new product introductions and for the
licensing and acquisition of formulations, technologies, products or businesses
that would complement or expand the Company's business. The Company intends to
use the balance of the net proceeds of this offering to continue research and
development of its pharmaceutical products, for the expansion of its marketing
and sales capabilities and for other general corporate purposes. The Company can
give no assurance that its research and development will provide technologies or
products that will be patentable, commercially feasible or acceptable to
government agencies whose approval is necessary. In the normal course of
business, the Company evaluates the licensing or acquisition of formulations,
technologies, products or business that should complement or expand the
Company's business operations and the Company has in place several license
agreements pertaining to potential new products currently under evaluation and
development. Other than these existing license agreements, as of the date of
this Prospectus, the Company has no present agreements to acquire formulations,
technologies, products or businesses. There can be no assurance that any future
transaction will be completed or, if completed, that the Company will realize
the same level of historical sales achieved by a licensor or a seller or that
such transaction will prove successful for the Company.
While the Company presently intends to use the proceeds of this offering as
described in this section, management of the Company has broad discretion to
adjust the application and allocation of the net proceeds of this offering in
order to address circumstances and opportunities. As a result of the foregoing,
the success of the Company will be affected by the discretion and judgment of
the management of the Company with respect to the application and allocation of
the net proceeds hereof. Pending use of such proceeds, the net proceeds of this
offering will be invested by the Company in short-term, interest-bearing,
investment-grade marketable securities.
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.
20
<PAGE> 22
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.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1994
First Quarter.................................................. $ 8 3/16 $ 4 11/16
Second Quarter................................................. 8 3/ 3 1/2
Third Quarter.................................................. 7 1/2 3 1/2
Fourth Quarter................................................. 4 3/8 2 1/
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter.................................................. 4 15/ 2 1/
Second Quarter................................................. 5 1/4 2 15/
Third Quarter.................................................. 3 13/ 2 1/
Fourth Quarter................................................. 3 13/ 1 3/4
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter.................................................. 5 1/4 2 5/
Second Quarter................................................. 10 9/1 4 1/2
Third Quarter.................................................. 21 1/1 9 1/
Fourth Quarter................................................. 31 1/ 15 1/
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter (through August 14, 1996)........................ 43 24 13/1
</TABLE>
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.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, and as adjusted to reflect the receipt of the estimated net proceeds
from the sale of the 1,850,000 shares of Common Stock offered hereby at an
assumed public offering price of $42.75 per share and the application of the
estimated net proceeds therefrom:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Long-term debt (including current portion)(1)........................ $ 127 127
-------- --------
Stockholders' equity(2)..............................................
Preferred Stock, $0.01 par value; 5,000,000 shares authorized;
62,660 outstanding, actual and as adjusted(3)................... 1 1
Class A Common Stock, $0.014 par value; 10,000,000 shares
authorized; 6,816,318 shares outstanding, actual; 8,666,318
shares outstanding, as adjusted................................. 95 121
Class B Common Stock, $0.014 par value, 125,322 shares authorized;
125,322 shares outstanding, actual and as adjusted(4)........... 2 2
Additional paid-in capital......................................... 44,252 118,664
Accumulated deficit................................................ (24,890) (24,890)
-------- --------
Total stockholders' equity...................................... 19,460 93,898
-------- --------
Total capitalization....................................... $ 19,587 $ 94,025
======== ========
</TABLE>
- ---------------
(1) Consists of $126,580 due the Commerce and Economic Development Commission of
Arizona for a loan associated with the Company's relocation to Arizona.
(2) Based on shares outstanding at June 30, 1996. Does not include options
outstanding as of June 30, 1996, to purchase an aggregate of 865,900 shares
of Class A Common Stock at a weighted average exercise price of $6.93 per
share. As a result of option exercises and grants subsequent to June 30,
1996, there were outstanding as of August 5, 1996 options to purchase an
aggregate of 994,057 shares of Common Stock at a weighted average exercise
price of $11.28 per share. See "Description of Capital Stock."
(3) The Preferred Stock is issuable in classes with preferences as designated by
the Board of Directors of the Company. In connection with the stock dividend
paid on August 2, 1996, to stockholders of record on July 22, 1996, a new
class of Preferred Stock designated as Series B Automatically Convertible
Preferred Stock, consisting of 62,660 authorized and issued shares, was
created and paid to holders of the Company's Class B Common Stock. Such
shares have rights, preferences and privileges that are identical to the
Company's Class B Common Stock and are automatically convertible into shares
of Class B Common Stock upon an amendment to the Company's Certificate of
Incorporation creating a sufficient number of shares of Class B Common Stock
in order to effect such conversion. The Company plans to submit such an
amendment for approval at its 1996 Annual Meeting of Stockholders
anticipated to occur in October 1996. See "Description of Capital Stock."
(4) Each share of Class B Common Stock is convertible into one share of Class A
Common Stock.
22
<PAGE> 24
DILUTION
The net tangible book value of the Company at June 30, 1996 was $12.5
million, or $1.79 per share of Common Stock. After giving effect to the sale by
the Company of 1,850,000 shares of Common Stock in this offering at the assumed
offering price of $42.75 per share (calculated after deduction of underwriting
discount and commissions and estimated expenses associated with the offering to
be paid by the Company), the net tangible book value of the Company at June 30,
1996 would have been $87.0 million or $9.82 per share of Common Stock. This
represents an immediate increase in net tangible book value of $8.03 per share
to existing stockholders and an immediate dilution in net tangible book value of
$32.93 per share to new investors purchasing shares in this offering. The
following table illustrates the calculation of the per share dilution described
above:
<TABLE>
<S> <C> <C>
Assumed public offering price(1).................................... $42.75
Net tangible book value before offering(2)(3)..................... $1.79
Increase attributable to new investors............................ 8.03
------
-
Net tangible book value after offering(2)(3)........................ 9.82
-------
Dilution to new investors........................................... $32.93
=======
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses associated with the offering to be paid by the Company.
(2) Net tangible book value per share represents the amount of total tangible
assets less total liabilities of the Company, divided by the number of
shares of Common Stock outstanding.
(3) Based on shares outstanding as of June 30, 1996. Includes (i) 125,322 shares
of Class B Common Stock and (ii) 62,660 shares of Series B Preferred Stock,
each share of which is convertible into one share of Common Stock. Excludes
865,900 shares of Common Stock issuable upon the exercise of outstanding
stock options at a weighted average exercise price of $6.93 per share. As a
result of option exercises and grants subsequent to June 30, 1996, there
were outstanding as of August 5, 1996, options to purchase an aggregate of
994,057 shares of Common Stock at a weighted average exercise price of
$11.28 per share.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data set forth below for the years ended June
30, 1996, 1995 and 1994 and the balance sheet data at June 30, 1996 and 1995,
are derived from the consolidated financial statements of the Company that have
been audited by Ernst & Young LLP incorporated elsewhere in this Prospectus. The
statement of operations data for the years ending June 30, 1993 and 1992 and the
balance sheet data at June 30, 1994, 1993 and 1992 are derived from other
audited consolidated financial statements of the Company not appearing in this
Prospectus which have been audited by Ernst & Young LLP. The selected financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" "Consolidated
Financial Statements" and Notes thereto and other financial information included
elsewhere in this Prospectus or incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1992 1993(1) 1994(1) 1995(2) 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======= ======= =======
Number of shares used in computing net income (loss) per share........ 3,668 5,507 6,303 6,593 7,242
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
1992 1993(1) 1994(1) 1995 1996
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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
</TABLE>
- ---------------
(1) Fiscal 1993 and fiscal 1994 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 related to the launch
of DYNACIN products in November 1992.
(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.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 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, which
was incorporated in 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 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 "Business -- Products in
Development," "-- Manufacturing," "-- Certain License and Royalty Agreements,"
"-- Competition" and "-- Government Regulation."
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 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
25
<PAGE> 27
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.
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, 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
"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.
26
<PAGE> 28
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.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
FISCAL 1995 AND 1996 QUARTERLY ANALYSIS
<TABLE>
<CAPTION>
1995 1996
--------------------------------------- ---------------------------------------
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE
------ ------ ------ ------ ------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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. 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
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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
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 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 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
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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
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
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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.
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
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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 or necessary 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 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 fiscal 1996, 1995 or 1994.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks 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.
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 OTC fade cream product line. 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.
INDUSTRY BACKGROUND
The United States Pharmaceutical Market
The annual domestic market for pharmaceuticals was estimated to be in
excess of $77 billion in 1995. While this market is dominated by large,
multinational pharmaceutical companies that conduct substantial research and
development activities, it is estimated that approximately 35% of all
pharmaceutical sales are derived from several hundred individual products and
product lines, most of which are believed to generate less than $50 million of
revenues annually. Meanwhile, industry consolidation and pricing pressures from
health care cost containment initiatives have raised the threshold level of
sales necessary for any individual product to justify active domestic marketing
and promotion from a major pharmaceutical company. In addition, major
pharmaceutical companies commonly focus their marketing efforts on new
pharmaceuticals in order to accelerate recovery of their development costs.
Consequently, the marketing of many established pharmaceuticals has been
de-emphasized, and the major pharmaceutical companies have increasingly sought
to divest smaller product lines as a more immediate and effective means of
deriving revenue from products that are deemed strategically less important.
Although many of these products are no longer subject to patent protection, the
cost of establishing manufacturing may be excessive, certain raw materials may
be difficult to obtain or the market size may be too small to warrant
competition from generic drug suppliers. These prevailing influences on major
pharmaceutical companies allow specialized companies like Medicis to identify
and pursue niche market opportunities.
The United States Market for Dermatological Products
The dermatology market is subject to many of the same influences that
affect the pharmaceutical market generally. Although the dermatology market
accounted for an estimated $5 billion in annual sales in the United States, most
dermatological products have total annual domestic sales of less than $50
million each. Consequently, the Company believes that most individual
dermatological products do not generate sales that would typically interest most
major pharmaceutical companies.
The ability of niche companies to compete effectively in the dermatology
market is further enhanced by the relatively small number of physicians
responsible for the majority of dermatological prescription activity and by the
nature of dermatological diseases. Of the approximately 6,600 office-based
dermatologists and approximately 1,500 university-based or hospital-based
dermatologists in the United States, approximately 3,200 dermatologists are
responsible for 80% of all prescriptions written by dermatologists. Most
dermatological diseases are chronic or of long duration and are typically
treated with drugs over a period of years, resulting in long-term demand for
drugs proven to be clinically effective. In addition, although they are rarely
debilitating or life threatening, the readily
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apparent and sometimes disfiguring nature of dermatological conditions often
causes patients to be intensely motivated to seek and comply with drug therapy.
As many dermatological products are applied to the skin and are readily visible,
the cosmetic elegance and physical characteristics of the product are among the
important determinants of product success.
BUSINESS STRATEGY
In pursuit of its goal to become the leading provider of products for the
treatment of dermatological conditions in the United States, the Company seeks
to:
Increase Penetration in the Dermatology Market. The Company builds strong
relationships and brand loyalty with many high-profile dermatologists and
medical opinion leaders through its highly responsive customer service approach.
Dermatologists typically prefer therapies that have proven effective in clinical
practice. By offering what the Company believes are superior and cosmetically
elegant products supported by favorable results in clinical trials, Medicis is
able to differentiate its products from those of its competitors. The Company
also plans to increase its presence among dermatologists by serving as a leading
sponsor of continuing medical education programs designed for the needs of
practicing dermatologists.
Formulate, License or Acquire Innovative Products That Offer Therapeutic or
Cosmetic Advantages. Through recommendations from dermatologists and its
scientific advisors and general marketing research, Medicis seeks to develop
innovative products from existing pharmaceutical agents with proven
applicability to dermatological diseases. The Company then utilizes its
formulation expertise to optimize the delivery of such agents. In addition, the
Company will seek to strategically license or acquire existing, proven products
when they are consistent with the Company's image for efficacy, quality, cost
and cosmetic elegance.
Capitalize Upon the Company's Focused Marketing and Sales Force. To
maximize the effectiveness of its selling efforts, the Company's sales force
focuses on the approximately 3,200 dermatologists who write 80% of all
prescriptions written by dermatologists. The Company's sales force has forged
close relationships with these dermatologists and maintains a dedicated
responsiveness to their needs. The Company intends to enhance its existing
marketing and sales capabilities in order to expand and increase the penetration
of its existing products as well as market new products.
Minimize Overhead Costs Through Selectively Utilizing Third-Party
Resources. To avoid the high cost of laboratory facilities and related staffing
expenses, Medicis has established relationships with several third-party
research organizations that conduct formulation work on its behalf. In addition,
to avoid the high capital cost of manufacturing facilities and to maximize
production flexibility, the Company has entered into third-party manufacturing
contracts on a product-by-product basis.
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 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
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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 primary bacteria responsible
for acne 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 fiscal 1993. 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 market through the sale of
DYNACIN or any other product. The Company has entered into a manufacturing and
supply agreement with 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 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 which 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 IVAX. The Company purchases THERAMYCIN Z from IVAX pursuant to a
manufacturing and supply agreement. See "-- Manufacturing" and "-- Certain
License and Royalty Agreements."
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BENZASHAVE products are shave creams marketed by the Company as topical
therapies for the treatment of 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 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
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. ESOTERICA product line marketed 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 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 on 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."
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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 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.
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 5, 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
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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, Cardinal, Bindley and major
drug chains. During fiscal 1996, 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 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, or any financial
difficulties of, 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
required by the FDA to contract only with manufacturers that comply with 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.
The Company's DYNACIN products are manufactured solely 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. 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 certain
pre-specified profit margins. Either
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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
solely by ViFor; THERAPLEX CLEARLOTION products, manufactured by Accupac, Inc.;
THERAPLEX HYDROLOTION products, manufactured by Beauty Control; and TRIAZ
products, manufactured by Paco.
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. 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 sales for the Company's
three principal products which are due to the interruption of manufacturing from
certain limited causes. The coverage provided by such insurance is based on 12
months of projected gross margins for such products. 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, 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
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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 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
acquired by IVAX, as successor to Syosset, under which the Company acquired a
10-year exclusive, worldwide license to market and sublicense 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, Suess and 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 Suess upon Euromerican's failure to perform its obligations under the
agreement for 45 days or by Suess 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. Gans and Dr. Suess of certain patent rights relating to the
Company's THERAPLEX HYDROLOTION product.
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 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
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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. The
Company has been advised by the opposing party that the opposition will be
withdrawn without prejudice, allowing for the Company's trademark application to
proceed for examination. While no assurance can be given as to the Company's
ability to obtain the registration of the mark "THERAMYCIN Z", the Company does
not currently foresee any further opposition to its registration.
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 or to cease using such disputed rights. There can be no
assurance that a license would be on terms acceptable to the Company, or at all.
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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.
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
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, Inc.; Benzac, manufactured by Galderma, Inc.; and Benzamycin,
manufactured by Rhone-Poulenc Rorer Pharmaceuticals, Inc. 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 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.
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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 FTC and state and local
authorities regulate the advertising of OTC drugs and cosmetics. The Food and
Drug 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 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.
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 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, reevaluate, 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 drugs unless failure to
do so will pose a potential health hazard. Drugs subject to final monographs,
however, are subject to various FDA regulations concerning for example, cGMP,
general and specific OTC labeling requirements (including warning letters),
prohibitions against promotion for conditions other than those stated in the
labeling, and requirements 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
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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
in withdrawal of TRIAZ and BENZASHAVE products 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 upon the Company's business, financial
condition or results of operations.
Four of the five 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,
labelling 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, labelling 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
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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 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 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, in loss of sales of the Company's
products or in other material adverse effects on the Company's business,
financial condition or results of operations.
For 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,
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<PAGE> 46
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
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 $1.0 million per claim and $1.0
million in the aggregate on a claims-made basis and umbrella liability
insurance, which can also be used for product liability claims, in the amount of
$4.0 million per claim and $4.0 million in the aggregate. 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 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 5, 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.
FACILITIES
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.
CERTAIN LEGAL MATTERS
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.
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<PAGE> 47
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR STAFF OFFICERS
The following table sets forth certain information as of August 5, 1996
with respect to the current directors, executive officers and other senior staff
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jonah Shacknai(1)................ 39 Chairman of the Board, Chief Executive Officer
Mark A. Prygocki, Sr. ........... 30 Chief Financial Officer, Assistant Treasurer and
Secretary
Ralph T. Bohrer.................. 35 Vice President, Sales
Pamela J. Doyle.................. 43 Vice President, Marketing and New Product Development
Fred F. Carr..................... 49 Vice President, National Business Programs
Joseph P. Cooper................. 38 Vice President, Manufacturing and Distribution
Arthur G. Altschul, Jr.(2)....... 32 Director
Richard L. Dobson, M.D. ......... 68 Director
Michael A. Pietrangelo(1)(3)..... 54 Director
Joseph Salvani(1)(3)............. 40 Director
Philip S. Schein, M.D. .......... 57 Director
Lottie H. Shackelford(2)......... 55 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option Committee and Compensation Committee.
Jonah Shacknai is a founder of the Company and has served as Chairman of
its Board of Directors and as its Chief Executive Officer since July 1988. From
1982 to June 1988, Mr. Shacknai was a member of the Washington, D.C. law firm of
Royer, Shacknai & Mehle, specializing in business, regulatory and legislative
matters relating to pharmaceutical, cosmetic and food products. From January
1981 to October 1982, Mr. Shacknai served as counsel to the United States House
of Representatives Committee on Science and Technology. From 1977 to 1981, Mr.
Shacknai served as chief of staff of the Chairman of the Subcommittee on
Consumer Protection and Finance of the House Energy and Commerce Committee. Mr.
Shacknai currently serves as director of U. S. Bioscience, Inc., a publicly held
pharmaceutical company involved in the development and marketing of
chemotherapeutic agents, and served as a founding director of IVAX Corporation
from 1986 to 1988. In addition, Mr. Shacknai served as a member of the
Commission on the Federal Drug Approval Process and presently serves as a
trustee and a member of the Executive Committee of the National Public Radio
Foundation, a member of the National Arthritis and Muscular Skeletal and Skin
Disease Advisory Council of the National Institutes of Health and a member of
the Joint High Level Advisory Panel of the United States-Israel Science and
Technology Commission.
Mark A. Prygocki, Sr. has served as Chief Financial Officer and Assistant
Treasurer and Secretary since May 1995 and served as Controller of the Company
from October 1992 until May 1995. From July 1990 through October 1992, Mr.
Prygocki was employed by Salomon Brothers Inc, an investment banking firm, as an
Accountant in the Regulatory Reporting Division.
Ralph T. Bohrer has been Vice President, Sales of the Company since July
1994, prior to which he served as a regional sales manager for the Company from
1990 to 1994. Mr. Bohrer previously worked in various sales positions at
Schering Plough, a pharmaceutical company.
Pamela J. Doyle has been Vice President, Marketing and New Product
Development for the Company since June 1995. Prior to joining the Company, Ms.
Doyle was a senior marketing executive
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<PAGE> 48
in the pharmaceutical industry, first with the Ortho Pharmaceutical Division, a
subsidiary of Johnson & Johnson from 1977 to 1992 and with the NeoStrata
Corporation, a dermatology product supplier, from 1993 to 1995.
Fred E. Carr has been Vice President, National Business Programs of the
Company since September 1991. Prior to joining the Company, Mr. Carr was
National Field Sales Manager for ICN Pharmaceuticals, a pharmaceutical and
research chemical company, from 1987 to 1990, Director of Sales Training at
Ayerst Laboratories, a pharmaceuticals manufacturer, from 1984 to 1987, and most
recently, National Sales Manager for Stiefel Laboratories, a dermatological
pharmaceuticals manufacturer, from 1990 to 1991.
Joseph P. Cooper has been Vice President, Manufacturing and Distribution,
of the Company since February, 1996. Mr. Cooper previously was Director of
Materials Management with Schein Pharmaceutical-Steris Laboratories, a
subsidiary of Schein Pharmaceuticals, Inc., from August 1989 to February 1996.
Arthur G. Altschul, Jr. has been a director of the Company since December
1992. From December 1991 until May, 1996, Mr. Altschul was Senior Director of
Corporate Affairs for Sugen, Inc., a biotechnology company. Mr. Altschul remains
a consultant to Sugen. From September 1990 to December 1991 he was employed as a
research assistant in the equity research department of Morgan Stanley & Co.
Incorporated, an investment banking firm. Since May 1988, Mr. Altschul has been
a general partner of Altschul Investment Group L.P., a private investment
partnership. Mr. Altschul serves as a director of General American Investors,
Inc., an investment company.
Richard L. Dobson, M.D. has been a director of the Company since September
1991. He has been Professor of Dermatology at the Medical University of South
Carolina since January 1980. He is a past President of the American Board of
Dermatology and a past President of the American Academy of Dermatology. Dr.
Dobson also serves as the Editor-in-Chief of the Journal of the American Academy
of Dermatology.
Michael A. Pietrangelo has been a director of the Company since October
1990. He has served as the President of Johnson Products Company, a division of
IVAX Corporation, a pharmaceutical corporation, since July 1994. From June 1990
to March 1994, Mr. Pietrangelo was the President and Chief Executive Officer at
CLEO, Inc., a Memphis-based subsidiary of Gibson Greetings, Inc., a manufacturer
of specialized paper products. Mr. Pietrangelo is a director of Universal
Heights, Inc. a company that markets novelty and souvenir products.
Joseph Salvani has been a director of the Company since September 1989.
Since June 1990, Mr. Salvani has been President of Salvani Investments, Inc., an
investment banking firm. Mr. Salvani serves as a director of Direct Connect
International, a holding company, and Glassyl Communications, Inc., a network
integration company.
Philip S. Schein, M.D. has been a director of the Company since October
1990. Dr. Schein is the Chairman and Chief Executive Officer of U.S. Bioscience,
Inc., a pharmaceutical company, and has served in that capacity since April
1987. He has served as President of the American Society of Clinical Oncology
and has chaired the Food and Drug Administration Oncology Drugs Advisory
Committee. Dr. Schein presently serves as Adjunct Professor of Medicine and
Pharmacology at the University of Pennsylvania School of Medicine, and as a
director of Oncor, Inc., a cancer-focused molecular biology company.
Lottie H. Shackelford has been a director of the Company since July 1993.
Ms. Shackelford has been Executive Vice President of Global USA, Inc., a
government relations firm, since April 1994 and has been Vice Chair of the
Democratic National Committee since February 1989. Ms. Shackelford was Executive
Vice President of U.S. Strategies, Inc., a government relations firm, from April
1993 to April 1994. She was also Co-Director of Intergovernmental Affairs, of
the Clinton/Gore presidential transition team between November 1992 and March
1993, Deputy Campaign Manager of Clinton for President from February 1992 to
November 1992 and Executive Director, Arkansas Regional Minority Purchasing
Council from February 1982 to January 1992. In addition, Ms. Shackelford has
served in various local government positions including Mayor of Little Rock,
Arkansas. In addition, she is a
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<PAGE> 49
director of Philander Smith College, the Chapman Funds in Baltimore, Maryland
and the Overseas Private Investment Corporation.
KEY CONSULTANT
Dr. Eugene Gans, Ph.D. has been Chairman of the Company's Central Research
Committee since 1988. Dr. Gans has been appointed to several industry task
groups and advisory committees and is a member of numerous professional
societies. He has 18 United States patents either issued to him or pending.
Dr. Gans serves as a consultant to the Company pursuant to an agreement
between the Company, Dr. Gans and Hastings Associates, a company owned by Dr.
Gans. That agreement has an indefinite term and may be terminated at any time by
either the Company or Dr. Gans upon specified notice. Under the Company's
agreement with Dr. Gans, the Company sponsors and funds the development of
specified projects selected by the Company, as to which the Company owns all
intellectual property rights. Dr. Gans has rights to perform consulting work for
other companies that may result in the development of certain products,
including certain dermatology products specified in the agreement, which the
Company elects not to develop.
In December 1988, the Company entered into a royalty agreement with Lincoln
Ventures, Inc., a company owned by Dr. Gans, to compensate Dr. Gans for
development and formulation work he performed before he joined the Company on
products which the Company currently now uses and markets. Royalties paid to
Lincoln Ventures, Inc. are based on sales of the certain products, including the
THERAPLEX line of products. Lincoln Ventures, Inc. does not have the power to
prohibit the Company's marketing of such products upon termination of this
agreement.
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into an employment agreement (the
"Employment Agreement") with Jonah Shacknai, effective as of July 1, 1996, to
continue to serve as Chairman of the Board and Chief Executive Officer of the
Company. The Employment Agreement expires on June 30, 2001, and automatically
renews for successive periods of five years, unless either party gives timely
notice of an intention not to renew such agreement. Mr. Shacknai may also
terminate the Employment Agreement prior to the end of the term. Under the
Employment Agreement, Mr. Shacknai agreed that, during his employment by the
Company and for a period of one year following termination for reasons other
than a change in ownership or control of the Company, he will not engage in,
consult with or be employed by any Competing Business (as defined in the
Employment Agreement). The Employment Agreement contains customary
non-solicitation provisions and provides for the transfer to the Company of any
intellectual property relating to the business of the Company.
Under the Employment Agreement, Mr. Shacknai receives an annual base salary
of $400,000, effective July, 1996, plus certain benefits and an annual grant of
options to purchase shares of Common Stock representing a minimum specified
percentage of the fully diluted capitalization of the Company. Mr. Shacknai is
also eligible for annual cash bonuses and increases in his base compensation.
The Employment Agreement provides that, if Mr. Shacknai's employment is
terminated in connection with a change in control of the Company, the Company is
obligated to pay Mr. Shacknai a lump sum amount equal to four times the sum of
(i) his base salary at the highest rate in effect during the proceeding 12
months and (ii) the average annual bonus, if any, paid during the proceeding
three years. If Mr. Shacknai's employment is terminated without cause or by his
Resignation for Good Reason (as defined in the Employment Agreement) the Company
is obligated to pay him a lump sum equal to the sum of (i) the amount he would
have collected in salary for the unexpired term of the Employment Agreement,
were he paid at the highest salary rate in effect for the 12 months preceding
his termination and (ii) his average annual bonus, if any, paid during the
preceding three years multiplied by the number of years remaining in the
Employment Agreement. In no event, however, will Mr. Shacknai's severance
payment for termination without cause be less than twice the sum of (i) his
highest effective salary and (ii) the average annual bonus, if any, paid during
the preceeding three years, plus 1/24 of such lump sum for each full year of Mr.
Shacknai's service with the Company. If Mr. Shacknai's employment is terminated
by his death, the Employment Agreement provides that the Company will continue
to pay his salary, at the then-current rate, to his estate for 12 months. If Mr.
Shacknai is terminated pursuant to his Disability (as defined in the Employment
Agreement), the
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<PAGE> 50
Employment Agreement provides that the Company will pay him 100% of his base
salary for 12 months, and 50% of that base salary for the remainder of the term
of the Employment Agreement, but in no event for less than an additional 12
months of his base salary. Finally, the Employment Agreement provides that, if
it is not renewed by the Company for at least three years after its initial
expiration, the Company must pay Mr. Shacknai a lump sum equal to twice the sum
of (i) his annual base salary at the highest rate in effect during his last 12
months of employment with the Company and (ii) the annual average of bonus
payments, if any, paid during the preceding three years, plus 1/24 of such lump
sum for each full year of Mr. Shacknai's service with the Company. Upon the
termination of Mr. Shacknai's employment, all options previously granted to him
will automatically vest, and will remain exercisable for the full terms thereof.
After termination, Mr. Shacknai will also receive the employee benefits he was
eligible to participate in for four years unless the Employment Agreement is not
renewed, in which event Mr. Shacknai will receive such employee benefits for two
years. Under certain circumstances, the Employment Agreement may require 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
were required to make payments constituting excess parachute payments, payments
to Mr. Shacknai would not be deductible by the Company for tax purposes, and Mr.
Shacknai would be required to pay an excise tax.
In July 1996, the Company paid to Mr. Shacknai $205,000 that was due to Mr.
Shacknai and had been maintained as a liability on the Company's consolidated
balance sheet.
The Company currently has no employment agreements with other employees.
MODIFICATIONS TO STOCK OPTION PLANS
In April 1996, the Company's Board of Directors approved certain amendments
to the Medicis 1988 Stock Option Plan, the Medicis 1990 Stock Option Plan, the
Medicis 1992 Stock Option Plan and the Medicis 1995 Stock Option Plan (the
"Plans"). Those amendments provide for the acceleration of vesting of
outstanding stock options granted under the Plans upon the occurrence of certain
events defined in the Plans to constitute a change in control of the Company.
In September 1995, the Company's Compensation Committee approved the
repricing of certain outstanding options granted to all employees and full-time
consultants under the Plans pursuant to an option exchange program in accordance
with the Plans. Under the exchange program, options to purchase 300,726 shares
of the Common Stock having a weighted average option exercise price per share of
$10.85 (adjusted for subsequent stock splits and dividends) were exchanged for
options with an exercise price per share of $4.39 (adjusted for subsequent stock
splits and dividends). The revised exercise price was equal to the fair market
value of the Common Stock at the time of the repricing. The options that were
repriced included options to purchase 139,288 and 12,324 shares of Class A
Common Stock held by Messrs. Shacknai and Prygocki, respectively, which were
repriced from an average weighted option exercise price per share of $11.17 and
$9.91, respectively, to an exercise price per share of $4.39.
In August 1996, in response to certain amendments to Securities and
Exchange Commission rules governing stock options plans, the Company's
Compensation Committee determined to suspend the grant of any additional options
under the Plans and directed the executive officers of the Company to prepare
the Medicis 1996 Stock Option Plan and submit it for the approval by the
Company's stockholders at the Company's 1996 Annual Meeting of Stockholders. The
terms of such plan have yet to be determined.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Company's equity securities at August 5, 1996, and
as adjusted to reflect the sale of the shares offered hereby, by (i) all persons
known by the Company to own beneficially 5% or more of the outstanding shares of
the Company's equity securities; (ii) each current executive officer of the
Company; (iii) each current director of the Company; and (iv) all currrent
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
SHARES BENEFICIALLY OWNED CLASS A COMMON STOCK
----------------------------------- OUTSTANDING(3)
COMMON COMMON SERIES B ---------------------
NAME AND ADDRESS OF BENEFICIAL STOCK STOCK PREFERRED PRIOR TO AFTER
OWNER OR IDENTITY OF GROUP(1)(2) CLASS A CLASS B STOCK OFFERING OFFERING
- ----------------------------------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Jonah Shacknai(4).................. 526,498 112,301 56,150 9.65% 7.68%
Mark A. Prygocki, Sr.(5)........... 16,285 -- -- * *
Joseph Salvani(6).................. 59,514 -- -- * *
Michael A. Pietrangelo(7).......... 34,880 -- -- * *
Arthur G. Altschul, Jr.(8)......... 33,441 -- -- * *
Richard L. Dobson, M.D.(9)......... 9,211 -- -- * *
Lottie H. Shackelford(10).......... 8,568 -- -- * *
Philip S. Schein, M.D.(11)......... 6,962 -- -- * *
All executive officers and
directors of the Company as a
group (8 persons)(12)............ 695,359 112,301 56,150 11.87% 9.46%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Unless otherwise indicated, the address of the beneficial owner is c/o
Medicis Pharmaceutical Corporation, 4343 East Camelback Road, Suite 250,
Phoenix, Arizona 85018-2700.
(2) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Class A Common Stock subject to stock
options and warrants currently exercisable or exercisable within 60 days
are deemed to be outstanding for computing the percentage ownership of the
person holding such options and the percentage ownership of any group of
which the holder is a member, but are not deemed outstanding for computing
the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of capital stock shown beneficially owned by them.
(3) Assumes that each share of Class B Common Stock and Series B Preferred
Stock has been converted into one share of Class A Common Stock.
(4) Includes: (a) 48,826 shares of Class A Common Stock owned by a trust
established by Mr. Shacknai for the benefit of his family; (b) 182,729
shares of Class A Common Stock issuable upon exercise of stock options
within 60 days; and (c) 9,577 shares of Class A Common Stock held in an IRA
for Mr. Shacknai.
(5) Includes 16,285 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
(6) Includes 17,672 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
(7) Includes 11,780 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
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<PAGE> 52
(8) Includes (a) 10,026 shares of Class A Common Stock beneficially owned by
Altschul Investment Group L.P., of which Mr. Altschul is a general partner;
and (b) 8,568 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
(9) Includes 6,427 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days. Also includes 106 shares of Class A Common
Stock owned by Dr. Dobson's spouse, as to which shares Dr. Dobson disclaims
beneficial ownership.
(10) Includes 8,568 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
(11) Includes 6,962 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.
(12) Includes an aggregate of 258,991 shares of Class A Common Stock issuable
upon exercise of stock options within 60 days held by eight executive
officers and directors. Also see footnotes (4), (7) and (9).
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has two classes of authorized common stock: Class A Common
Stock, par value $0.014 per share, of which the Company is authorized to issue
10,000,000 shares, and Class B Common Stock, par value $0.014 per share, of
which the Company is authorized to issue 125,322 shares. As of the close of
business on August 5, 1996, 6,832,633 shares of Class A Common Stock were issued
and outstanding and held by approximately 750 holders of record. As of August 5,
1996, 125,322 shares of Class B Common Stock were issued and outstanding and
held by two holders. As of such date, an additional 994,057 shares of Class A
Common Stock were subject to outstanding options.
Except as noted below, the designations, preferences, limitations and
relative rights of the Class A Common Stock and Class B Common Stock are
substantially identical. Holders of Class A Common Stock are entitled to one
vote per share while holders of Class B Common Stock are entitled to ten votes
per share. Except as required by law, holders of Class A Common Stock and Class
B Common Stock vote together as a class on all matters with respect to which
stockholders of the Company are entitled to vote.
Holders of Class A Common Stock and Class B Common Stock have equal rights
to receive dividends and other distributions, if any, as such may be declared
from time to time by the Board of Directors; provided, that any dividend of
shares to be declared and paid to holders of Class A Common Stock must be
accompanied by an equivalent dividend to holders of Class B Common Stock. If the
Company shall in any manner subdivide, combine or reclassify the outstanding
shares of Class A Common Stock or Class B Common Stock, the outstanding shares
of the other such class shall be subdivided, combined or reclassified
proportionately in the same manner and on the same basis as the outstanding
shares of Class A Common Stock or Class B Common Stock, as the case may be, have
been subdivided, combined or reclassified.
Holders of Class A Common Stock and Class B Common Stock are not entitled
to preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share-for-share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.
PREFERRED STOCK
The Company currently has authorized 5,000,000 shares of Preferred Stock,
par value $0.01 per share, of which 62,660 shares are issued or outstanding. As
described below, two additional series of Preferred Stock have been established,
one of which remains unissued. See "-- Preference Stock Purchase Rights."
Upon liquidation, dissolution or winding up of the Company, any holders of
Preferred Stock shall be paid in full the amounts to which they may be entitled
prior to such time as the holders of Class A Common Stock and Class B Common
Stock are entitled to share in the assets of the Company on a pro-rata basis.
On July 22, 1996, the Company's Board of Directors declared a 3-for-2 stock
split in the form of a 50% dividend paid on August 2, 1996 to shareholders of
record of Common Stock on July 22, 1996. In connection with such stock dividend,
a new class of Preferred Stock designated Series B Automatically Convertible
Preferred Stock, consisting of 62,660 authorized and issued shares, was created
and paid to holders of the Company's Class B Common Stock. Such shares have
rights, preferences and privileges that are identical to the Company's Class B
Common Stock and are automatically convertible into shares of Class B Common
Stock upon an amendment to the Company's Certificate of Incorporation creating a
number of shares of Class B Common Stock which is sufficient to effect such
conversion. The Company anticipates submission of such an amendment for approval
at its 1996 Annual Meeting of Shareholders anticipated to occur in October 1996.
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<PAGE> 54
PREFERENCE STOCK PURCHASE RIGHTS
On August 17, 1995, the Board of Directors adopted a stockholder rights
plan (the "Rights Plan") by which it declared a dividend of one Preference Stock
Purchase Right (the "Rights") on each outstanding share of Class A Common Stock,
Class B Common Stock and in August 1996, Series B Preferred Stock. The
description and terms of the Rights are set forth in a Rights Agreement, dated
as of August 17, 1995, as amended (the "Rights Amendment"), between the Company
and American Stock Transfer Company, as Rights Agent. The rights are exercisable
only if a person or group acquires beneficial ownership of 15% or more of the
Class A Common Stock or announces a tender offer the consummation of which would
result in beneficial ownership by a person or group of 15% or more of the Class
A Common Stock. Each Right entitles the holder to buy one one-hundredth of a
share of a new Series A Junior Participating Preference Stock at an exercise
price of $123.00 per share, subject to adjustment (including adjustment for the
reverse stock split).
If the Company is acquired in a merger or other business combination
transaction after a person has acquired beneficial ownership of 15% or more of
the Class A Common Stock, each Right will entitle the holder to purchase, at the
Right's then-current exercise price, a number of shares of the
acquiring company's common stock having a market value of twice such price. In
addition, if a person or group acquires 50% or more of the outstanding Class A
Common Stock, each Right will entitle the holder (other than such person or
members of such group) to purchase, at the Right's then-current exercise price,
a number of shares of Class A Common Stock of such other person or group
(including the Company as successor to the acquiring company or as the surviving
corporation) having a market value of twice such price.
Following the acquisition by a person or group of beneficial ownership of
15% or more of the Class A Common Stock and prior to an acquisition of 50% or
more of the Class A Common Stock, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group), in whole or in part, at an
exchange ratio of one share of Class A Common Stock or one one-hundredth of a
share of the Series A Preference Stock (or of a share of a class or series of
the Company's preferred stock having equivalent rights, preferences and
privileges) per Right. Prior to the acquisition by a person or group of
beneficial ownership at 15% or more of the Company's Class A Common Stock, the
Rights are redeemable for $0.001 per Right at the option of the Board of
Directors.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
53
<PAGE> 55
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and A.G. Edwards & Sons, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC.........................................
A.G. Edwards & Sons, Inc. ................................................
-----------
Total........................................................... 1,850,000
===========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 277,500 shares of Common Stock at the same price per share as the
Company will receive for the 1,850,000 shares that the Underwriters have agreed
to purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above tables represents as a percentage of
the 1,850,000 shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the 1,850,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liability arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Subject to certain exceptions relating to charitable gifts, estate planning
transfers and sales relating to the exercise of expiring options, each executive
officer, director and senior staff officer of the Company has agreed with the
Representatives for a period of 90 days from the effective date of this
Prospectus (the "Lock-Up Period") not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any option to purchase any
shares of Common Stock, any options to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock now
owned or hereafter acquired directly by such holders or with respect to which
they have
54
<PAGE> 56
the power of disposition, without the prior written consent of Robertson,
Stephens & Company LLC which may, in its sole discretion and at any time or from
time to time, without notice, release all or any portion of the shares subject
to the lock-up agreements. In addition, the Company has agreed that, during the
Lock-Up Period, the Company will not, without the prior written consent of
Robertson, Stephens & Company LLC, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the issuance of Common Stock
upon the exercise of outstanding options and the Company's grant of options
under existing stock option plans.
The offering price for the Common Stock has been determined by negotiations
among the Company and the Representative of the Underwriters, based largely upon
the market price for the Common Stock as reported on the Nasdaq National Market.
The rules of the Commission prohibit the Underwriters and other members of
the selling group from making a market in the Company's Common Stock during the
period immediately preceding the commencement of sales. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an Underwriter or other member of
the selling group to continue to make a market in the Company's Common Stock
subject to the conditions, among others, that its bid not exceed the highest bid
by a market maker not connected with the offering and that its net purchases on
any one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group intend to engage in
passive market making in the Company's Common Stock during such period.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the issuance of the Common Stock being offered hereby will
be passed upon for the Company by Brown & Bain, P.A., Phoenix, Arizona. Certain
legal matters related to the offering will be passed upon for the Underwriters
by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company at June 30, 1996 and
1995 and for each of the three years in the period ended June 30, 1996,
appearing in this Prospectus and Registration Statement and appearing in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996 have been
audited by Ernst & Young, LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and incorporated herein by reference.
Such financial statements are included and incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
55
<PAGE> 57
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Exchange Act, as amended, and, in accordance therewith, files periodic reports
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Room of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional offices located at Seven World Trade Center, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained from the Public Reference Section of the
Commission at its Washington address at prescribed rates. The Common Stock is
traded on the Nasdaq National Market and such reports, proxy statements and
other information can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information filed electronically with
the Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus.
1. Annual Report on Form 10-K of the Company for the fiscal year ended
June 30, 1996.
2. The definitive Proxy Statement of the Company filed pursuant to
Section 14 of the Exchange Act in connection with the 1995 Annual Meeting
of Stockholders of the Company.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated by reference or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that the statement is
modified or superseded by any other subsequently filed document which is
incorporated or is deemed to be incorporated by reference herein. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide without
charge to each person, including any beneficial owner, to whom this Prospectus
has been delivered, on the written or oral request of such person, a copy of any
or all of the documents referred to above which have been or may be incorporated
into this Prospectus and deemed to be part hereof, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference in
such documents. These documents are available upon request from Mark A.
Prygocki, Sr., Chief Financial Officer, Medicis Pharmaceutical Corporation, 4343
East Camelback Road, Suite 250, Phoenix, Arizona 85018-2700, (602) 808-8800.
56
<PAGE> 58
MEDICIS PHARMACEUTICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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
</TABLE>
F-1
<PAGE> 59
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. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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.
ERNST & YOUNG LLP
Phoenix, Arizona
August 2, 1996
F-2
<PAGE> 60
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 61
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 62
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
------ ------ --------- ------- ------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ==== ========= ======= ======= ====== =========== ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes.
F-7
<PAGE> 65
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
<PAGE> 66
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:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
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
========== ========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
---------- -------- -------
<S> <C> <C> <C>
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 -- --
</TABLE>
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
<PAGE> 67
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
<PAGE> 68
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
<PAGE> 69
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:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
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 $ --
=========== ===========
</TABLE>
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
<PAGE> 70
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
1996 1995
------------------- -------------------
<S> <C> <C>
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
=========== =======
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
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% --
===== ===== =====
</TABLE>
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
<PAGE> 71
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
<PAGE> 72
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:
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED TOTAL EXERCISABLE
--------- ------------- -------- -----------
<S> <C> <C> <C> <C>
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
======== ======== ======== =======
</TABLE>
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
<PAGE> 73
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).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1995
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1994 DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 74
LOGO
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.......................................................... $ 29,125
Listing fee............................................................... 17,500
NASD fee.................................................................. 8,950
Blue Sky fees and expenses................................................ 5,000
Printing and engraving expenses........................................... 55,000
Legal fees and expenses................................................... 97,500
Accounting fees and expenses.............................................. 40,000
Transfer Agent and Registrar fees......................................... 2,500
Miscellaneous expenses.................................................... 44,425
-------
Total........................................................... $300,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Similar indemnity is
authorized for such persons against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
any such threatened, pending or completed action or suit if such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and provided further that (unless a court of
competent jurisdiction otherwise provides) such person shall not have been
adjudged liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145. The Company
maintains policies insuring its and its subsidiaries' officers and directors
against certain liabilities for actions taken in such capacities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act').
Article VI of the Certificate of Incorporation of the Company, as amended,
and Article VII of the Bylaws of the Company provides for indemnification of the
directors of the Company to the full extent
II-1
<PAGE> 76
permitted by law, as now in effect or later amended. Article VII of the Bylaws
also permits the indemnification to the same extent of officers, employees or
agents of the Company if, and to the extent, authorized by the Board of
Directors. In addition, the Bylaws provide for indemnification against expenses
incurred by a director to be paid by the Company at reasonable intervals in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall be ultimately determined that he is not entitled to be
indemnified by the Company. The Bylaws further provide for a contractual cause
of action on the part of directors of the Company for indemnification claims
that have not been paid by the Company.
The Company also has provided liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Company.
Article VI of the Company's Certificate of Incorporation, as amended,
limits under certain circumstances the liability of the Company's directors for
a breach of their fiduciary duty as directors. These provisions do not eliminate
the liability of a director (i) for a breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (relating to the declaration of dividends and
purchase or redemption of shares in violation of the DGCL) or (iv) for any
transaction from which the director derived an improper personal benefit.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
5.1 -- Opinion of Brown & Bain, P.A. with respect to the Common Stock being registered.
23.1 -- Consent of Brown & Bain, P.A. (contained in their opinion to be filed as Exhibit
5.1).
23.2 -- Independent Auditors' Consent of Ernst & Young LLP.
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Account
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth
II-2
<PAGE> 77
in the prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Phoenix, State of Arizona,
on August 15, 1996.
MEDICIS PHARMACEUTICAL CORPORATION
By: *
------------------------------------
Jonah Shacknai
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------- ------------------
<C> <S> <C>
* Chairman of the Board of September 24, 1996
- ---------------------------------------- Directors and Chief Executive
Jonah Shacknai Officer (Principal Executive
Officer)
/s/ MARK A. PRYGOCKI, Chief Financial Officer September 24, 1996
SR. (Principal Financial and
- ---------------------------------------- Accounting Officer)
Mark A. Prygocki, Sr.
* Director September 24, 1996
- ----------------------------------------
Joseph Salvani
* Director September 24, 1996
- ----------------------------------------
Richard L. Dobson, M.D.
* Director September 24, 1996
- ----------------------------------------
Michael A. Pietrangelo
* Director September 24, 1996
- ----------------------------------------
Philip S. Schein, M.D.
* Director September 24, 1996
- ----------------------------------------
Arthur Altschul, Jr.
* Director September 24, 1996
- ----------------------------------------
Lottie Shackelford
*By /s/
MARK A. PRYGOCKI, SR.
- ----------------------------------------
Mark A. Prygocki, Sr.
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 79
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF YEAR
- -------------------------- ----------------- ------------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1996
Deducted from Asset
Accounts:
Accounts Receivable:
Allowances........... $ 520,000 $ -- $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
======== ======== ======== ======== ========
</TABLE>
S-1
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ---- -------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement............................................
5.1 Opinion of Brown & Bain, P.A. with respect to the Common Stock being
registered................................................................
23.1 Consent of Brown & Bain, P.A. (contained in their opinion to be filed as
Exhibit 5.1)..............................................................
23.2 Independent Auditors' Consent of Ernst & Young LLP........................
24.1* Power of Attorney.........................................................
27.1* Financial Data Schedule...................................................
</TABLE>
- ------------------------
* Previously filed.
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
<PAGE> 81
Appendix-A
GRAPHICAL DESCRIPTIONS OF INSIDE FRONT COVER OF PROSPECTUS
Photo No. Description
- --------- -----------
1) A photograph depicting 16 Medicis product package of DYNACIN, TRIAZ,
BENZASHAVE, THERAPLEX, and ESOTERICA Products
2) A photograph depicting 10 product packages of DYNACIN, TRIAZ, and
BENZASHAVE Products
3) A photograph depicting eight product packages of THERAPLEX and
ESOTERICA Products
<PAGE> 1
EXHIBIT 1.1
1,850,000 SHARES(1)
MEDICIS PHARMACEUTICAL CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
September __, 1996
ROBERTSON, STEPHENS & COMPANY LLC
A.G. EDWARDS & SONS, INC.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Company"), addresses you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
1,850,000 shares of its authorized and unissued Class A Common Stock, $0.014 par
value (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 277,500
additional shares of the Company's Class A Common Stock, $0.014 par value (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of Class A Common Stock, $0.014 par value, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-3 (File No. 333-10247)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Act and has been filed with
the Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such
- --------
1 Plus an option to purchase up to 277,500 additional shares from the
Company to cover over- allotments.
1.
<PAGE> 2
abbreviated registration statements pursuant to Rule 462(b) of the Rules and
Regulations as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file such
additional amendments to such registration statement, such amended prospectuses
subject to completion and such abbreviated registration statements as may
hereafter be required by law. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "Preliminary
Prospectuses"), including all documents incorporated by reference therein, and
of any abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations have been delivered to you. The Company and the transactions
contemplated by this Agreement meet the requirements for using Form S-3 under
the Act.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the
2.
<PAGE> 3
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, the Company shall have provided to the Underwriters
a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the Prospectus and the term sheet, together, will not be materially
different from the prospectus in the Registration Statement. Any reference to
the Registration Statement or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the Act, as of the date of the Registration Statement or the
Prospectus, as the case may be, and any reference to any amendment or supplement
to the Registration Statement or the Prospectus shall be deemed to refer to and
include any documents filed after such date under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used
in this Agreement, the term "Incorporated Documents" means the documents which
at the time are incorporated by reference in the Registration Statement, the
Prospectus or any amendment or supplement thereto.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and, except for matters corrected or updated in a subsequently
filed Prospectus subject to completion or in the Prospectus included in the
Registration Statement declared effective by the Commission, each such
Preliminary Prospectus has (i) conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, (ii)
has not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. At the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) except for matters corrected or
updated in a subsequently filed Prospectus subject to completion or in the
Prospectus included in the Registration Statement declared effective by the
Commission, the Prospectus, and any amendments or supplements thereto, did not
and will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement or Prospectus, or any amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for use in the
preparation thereof.
(c) The Incorporated Documents heretofore filed, when they
were filed (or, if any amendment with respect to any such document was filed,
when such amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder; any further Incorporated Documents so filed will, when they are
filed, conform in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission thereunder; no such document
when it was filed (or, if an amendment with respect to any such document was
filed, when such amendment was filed), contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and no such further
amendment will contain any untrue statement of a material
3.
<PAGE> 4
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
(d) Each of the Company and its Material Subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation with full power and
authority (corporate and other) to own, lease and operate its properties and
conduct its business as described in the Prospectus; the Company owns all of the
outstanding capital stock of its subsidiaries free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest except for
liens described in financing agreements disclosed in the Prospectus; each of the
Company and its Material Subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Material Subsidiaries considered as one enterprise; no proceeding has
been instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
each of the Company and its Material Subsidiaries is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; neither the Company nor any of its Material
Subsidiaries is in violation of its respective charter or bylaws or in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any material bond, debenture, note or other evidence
of indebtedness, or in any material lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or instrument to
which the Company or any of its Material Subsidiaries is a party or by which it
or any of its subsidiaries or their respective properties may be bound; and
neither the Company nor any of its Material Subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its Material
Subsidiaries or over their respective properties of which it has knowledge. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than those subsidiaries listed in Exhibit 21.1
to the Company's Annual Report on Form 10-K filed with the Commission and
incorporated by reference into the Registration Statement. "Material
Subsidiaries" shall mean all of the Company's subsidiaries except Medicis
Acquisition Corporation, which has no employees, operations, assets or
liabilities.
(e) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification or contribution
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally, by
general equitable principles or by public policy; the performance of this
Agreement and the consummation of the transactions herein contemplated will not
result in a material breach or violation of any of the terms and provisions of,
or constitute a default under, (i) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its Material Subsidiaries is a party or by which it or any
of its subsidiaries or their respective properties may be bound, (ii) the
charter or bylaws of the Company or any of its Material Subsidiaries, or (iii)
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its Material Subsidiaries or over their
respective properties. No consent, approval,
4.
<PAGE> 5
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its Material Subsidiaries or over their respective properties
is required for the execution and delivery of this Agreement and the
consummation by the Company or any of its Material Subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(f) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its Material Subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its Material Subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Material Subsidiaries considered as
one enterprise or might materially and adversely affect their properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its subsidiaries of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document by the Act or the Rules and
Regulations or by the Exchange Act or the rules and regulations of the
Commission thereunder which have not been accurately described in all material
respects in the Registration Statement or Prospectus or any Incorporated
Document or filed as exhibits to the Registration Statement or any Incorporated
Document.
(g) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus and any Incorporated Document (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Firm Shares and the Option Shares to be purchased from the
Company hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable, and will be
sold free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest; and no preemptive right, co-sale right, registration
right, right of first refusal or other similar right of shareholders exists with
respect to any of the Firm Shares or Option Shares to be purchased from the
Company hereunder or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act, the Exchange Act or under state or other securities or Blue Sky laws. All
issued and outstanding shares of capital stock of each Material Subsidiary of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares and are owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto, included or
incorporated by reference
5.
<PAGE> 6
in the Prospectus, neither the Company nor any Material Subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth or incorporated by reference in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(h) Ernst & Young LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of June 30, 1996 and for each of the years in the three (3) years
ended June 30, 1996 filed with the Commission as a part of or incorporated by
reference into the Registration Statement and which are included or incorporated
by reference in the Prospectus, are independent accountants within the meaning
of the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of or incorporated by reference into the
Registration Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary financial
and statistical data included or incorporated by reference in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included or
incorporated by reference in the Registration Statement.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the financial condition, earnings, operations,
business or business prospects of the Company and its Material Subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its Material Subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
Material Subsidiaries considered as one enterprise, incurred by the Company or
its Material Subsidiaries, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company or any of its Material Subsidiaries that is material to the Company
and its Material Subsidiaries considered as one enterprise, (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of its Material Subsidiaries, or (vi) any loss or damage (whether
or not insured) to the property of the Company or any of its Material
Subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its Material
Subsidiaries considered as one enterprise.
(j) Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document and in financing agreements described
therein, (i) each of the Company and its subsidiaries has marketable title to
all properties and assets described in the Registration Statement and Prospectus
and any Incorporated Document as owned by it, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest, other than
such as would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of
6.
<PAGE> 7
the Company and its subsidiaries considered as one enterprise, (ii) the
agreements to which the Company or any of its subsidiaries is a party described
in the Registration Statement and Prospectus and any Incorporated Document are
valid agreements, enforceable by the Company and its Material Subsidiaries (as
applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles or by public policy and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus and any Incorporated Document as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally, general equitable
principles or by public policy. Except as set forth in the Registration
Statement and Prospectus and any Incorporated Document, the Company owns or
leases all such properties as are necessary to its operations as now conducted
or as proposed to be conducted.
(k) The Company and its Material Subsidiaries have timely
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes shown thereon as due and payable, and there is no tax
deficiency that has been or, to the best of the Company's knowledge, might be
asserted against the Company or any of its subsidiaries that might have a
material adverse effect on the financial condition, earnings, operations,
business or business prospects of the Company and its Material Subsidiaries
considered as one enterprise; and all tax liabilities are adequately provided
for on the books of the Company and its Material Subsidiaries.
(l) The Company and its Material Subsidiaries maintain
insurance with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its Material Subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect; neither the
Company nor any such Material Subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise.
(m) To the best of Company's knowledge, no labor disturbance
by the employees of the Company or any of its Material Subsidiaries exists or is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers that might be
expected to result in a material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise. No collective bargaining
agreement exists with any of the Company's employees and, to the best of the
Company's knowledge, no such agreement is imminent.
(n) Each of the Company and its Material Subsidiaries owns or
possesses rights deemed adequate by management to use all patents, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names and copyrights which are necessary to conduct its businesses as described
in the Registration Statement and Prospectus and any Incorporated Document; the
expiration of any patents, patent rights, trade secrets, trademarks, service
marks, trade names or copyrights would not have a material adverse effect on the
financial condition, earnings, operations, business or business
7.
<PAGE> 8
prospects of the Company and its subsidiaries considered as one enterprise;
except as described in the Prospectus, the Company has not received any notice
of, and has no knowledge of, any infringement of or conflict with asserted
rights of the Company by others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights; and, except as described in the Prospectus, the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise.
(o) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act and is listed on The Nasdaq National Market, and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(p) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each officer and director of the Company set forth in
Schedule 2(t) has agreed in writing that such person will not, for a period of
90 days from the date that the Registration Statement is declared effective by
the Commission (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts to immediate family members or trusts for their
benefit for estate planning purposes of any number of shares, provided the donee
or donees thereof agree in writing to be bound by this restriction, (ii) as a
distribution to limited
8.
<PAGE> 9
partners or stockholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, (iii) pursuant to
same-day sales of a sufficient number of shares to defray the exercise price of
options expiring during the Lock-Up Period, (iv) a bona fide gift or gifts of an
aggregate of the lesser of (i) 20% of the undersigned's Securities and (ii)
50,000 shares of Securities to any charitable trust qualified under Section 664
of the Internal Revenue Code of 1986, as amended ("IRC"), any charitable
remainder trust or any other charitable organization qualified under Section
501(c)(3) of the IRC or (v) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a complete
and accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder. The Company has provided to counsel
for the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby. During the Lockup Period (as defined in the Lockup Agreement)
the Company hereby represents and warrants that it will not release any of its
officers or directors from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Robertson, Stephens &
Company LLC
(u) Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, (i) the Company is in compliance with
all rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, except for isolated
violations that are immaterial individually and in the aggregate, (ii) the
Company has received no notice from any governmental authority or third party of
an asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus and any Incorporated
Document, (iii) to the Company's knowledge after due investigation, the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site
under applicable state or local law.
(v) The Company and each of its Material Subsidiaries maintain
a system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the
9.
<PAGE> 10
benefit of any of the officers or directors of the Company or any of the members
of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus and any Incorporated Document.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
(a) Delivery of definitive certificates for the Firm Shares to
be purchased by the Underwriters pursuant to this Section 3 shall be made
against payment of the purchase price therefor by the several Underwriters by
certified or official bank check or checks drawn in next-day funds, payable to
the order of the Company and the Company agrees not to deposit any such check in
the bank on which it is drawn, and not to take any other action with the purpose
or effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company and, in the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach, at
the offices of Brown & Bain, 2901 North Central Avenue, Phoenix, Arizona 85012
(or at such other place as may be agreed upon among the Representatives and the
Company) at 7:00 A.M., San Francisco time (a) on the third (3rd) full business
day following the first day that Shares are traded, (b) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one (1) full business day prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
(b) It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
(c) The information set forth in the last paragraph on the
front cover page (insofar as such information relates to the Underwriters), on
the inside front cover concerning stabilization and over-allotment by the
Underwriters, and under paragraph 2 under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the
10.
<PAGE> 11
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement or any Incorporated Document, and you,
on behalf of the respective Underwriters, represent and warrant to the Company
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence reasonably satisfactory to you
that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence reasonably satisfactory to you that the Prospectus and term sheet
meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and
Regulations, have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter (including printing and
underwriters' counsel expenses), such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act; and
it will file no amendment or supplement to the Registration Statement or
Prospectus or the Incorporated Documents, or, prior to the end of the period of
time in which a prospectus relating to the Shares is required to be delivered
11.
<PAGE> 12
under the Act, file any document which upon filing becomes an Incorporated
Document, which shall not previously have been submitted to you a reasonable
time prior to the proposed filing thereof or to which you shall reasonably
object in writing, subject, however, to compliance with the Act and the Rules
and Regulations, the Exchange Act and the rules and regulations of the
Commission thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, and the Incorporated Documents (three of which will
include all exhibits), all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a)(5) of the Act and
covering a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof
(so long as it maintains a class of securities registered under Section 12 of
the Act or is otherwise required to file reports under Section 13 of the
Exchange Act), the Company will furnish to its shareholders as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's shareholders, (ii)
concurrently with furnishing to its shareholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flows of the
12.
<PAGE> 13
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (iii) as soon as they are
available, copies of all reports (financial or other) mailed to shareholders,
(iv) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange or
the National Association of Securities Dealers, Inc. ("NASD"), (v) every
material press release and every material news item or article in respect of the
Company or its affairs which was generally released to shareholders or prepared
by the Company or any of its subsidiaries, and (vi) any additional information
of a public nature concerning the Company or its subsidiaries, or its business
which you may reasonably request. During such five (5) year period, if the
Company shall have active subsidiaries, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i),
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred by
the Underwriters in investigating or preparing to market or marketing the
Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, in compliance with applicable laws forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without
the prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Option Shares to be sold by the Company hereunder and
the Company's issuance of options or Common Stock under the Company's presently
authorized 1988 Stock Option Plan, 1990 Stock Option Plan, 1992 Stock Option
Plan, 1995 Stock Option Plan or the Company's 1996 Stock Option Plan to be
enacted by the Board of Directors with up to 1,000,000 shares of Company Common
Stock reserved for issuance thereunder (the "Option Plans"), provided that such
options shall be subject to the Company's standard vesting provisions as
contained in options previously granted.
(l) Except for a Registration Statement on Form S-8 covering
the Shares under the Company's 1995 Stock Option Plan, during a period of ninety
(90) days from the effective date of the
13.
<PAGE> 14
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plan or other employee benefit plan.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and the Incorporated Documents and
any amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any, the cost of all certificates
representing the Shares and transfer agents' and registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus and the
Incorporated Documents, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder, but
expressly excluding fees related to representation of the Underwriter's
generally in connection with the sale of the Shares, not to exceed $-----------.
(ii) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent
14.
<PAGE> 15
that any such interim reimbursement payment is so held to have been improper,
the Company shall promptly return such payment to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within thirty
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii) and 5(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(c) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(e) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of their respective obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or any Incorporated Document or otherwise) shall
have been complied with to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
financial condition, earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus.
15.
<PAGE> 16
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company, dated the Closing Date or such
later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company and each Significant Subsidiary (as
that term is defined in Regulation S-X of the Act) has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has
the corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in
good standing would not have a material adverse effect on the financial
condition, earnings, operations or business of the Company and its
subsidiaries considered as one enterprise. To such counsel's knowledge,
the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Medicis
Dermatologies, Inc.
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein, the issued and
outstanding shares of capital stock of the Company have been duly and
validly issued and are fully paid and nonassessable and, to such
counsel's knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right;
(v) All issued and outstanding shares of capital
stock of each Significant Subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, have not been issued in violation of
or subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right and are owned by the
Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, except for liens pursuant to
financing agreements described in the Registration Statement;
(vi) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable and, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver
to the Underwriters the Shares to be issued and sold by it hereunder;
16.
<PAGE> 17
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally, by general
equitable principles or by public policy;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(x) Except as to matters corrected or updated in a
subsequent amendment of such document, the Registration Statement and
the Prospectus, and each amendment or supplement thereto (other than
the financial statements (including supporting schedules) and financial
data derived therefrom as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations; and each of the
Incorporated Documents (other than the financial statements (including
supporting schedules) and the financial data derived therefrom as to
which such counsel need express no opinion) complied when filed
pursuant to the Exchange Act as to form in all material respects with
the requirements of the Act and the Rules and Regulations and the
Exchange Act and the applicable rules and regulations of the Commission
thereunder;
(xi) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by
such counsel and is a fair summary of such matters and conclusions; and
the forms of certificates evidencing the Common Stock filed with the
Commission comply with Delaware law;
(xii) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required to be
presented by the Act and the applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or any Incorporated Document or to
be filed as an exhibit to the Registration Statement or any
Incorporated Document which are not described or referred to therein or
filed as required;
(xiv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any of
the terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
the Company is a party or by which its properties are bound, or any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any
17.
<PAGE> 18
order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xv) No consent, approval, authorization or order of
or qualification with any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations is necessary in
connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or
such as may be required under state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the Shares
by the Underwriters (provided that no opinion need be given with
respect to consents, approvals, authorizations, orders or
qualifications of the Food and Drug Administration);
(xvi) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against the Company
or any of its subsidiaries of a character required to be disclosed in
the Registration Statement or the Prospectus or any Incorporated
Document by the Act or the Rules and Regulations or by the Exchange Act
or the applicable rules and regulations of the Commission thereunder,
other than those described therein;
(xvii) To such counsel's knowledge, neither the
Company nor any of its Material Subsidiaries is presently (a) in
material violation of its respective charter or bylaws, or (b) in
material breach of any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries, or over any of their properties
or operations; and
(xviii) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus and any Incorporated
Document, no holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date, the Registration Statement and
any amendment or supplement thereto and any Incorporated Document, when such
documents became effective or were filed with the Commission (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date, as the case may be,
the Registration Statement,
18.
<PAGE> 19
the Prospectus and any amendment or supplement thereto and any Incorporated
Document (except as aforesaid) contained any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except as to matters corrected or updated in a subsequent amendment of such
document. Such counsel shall also state that the conditions for the use of Form
S-3 set forth in the General Instructions thereto have been satisfied. In the
case of an opinion to be delivered pursuant to any purchase of the Option
Shares, such opinion shall be given as of such later date rather than the
Closing Date.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the States of
Arizona and Delaware upon opinions of local counsel, and as to questions of fact
upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Cooley Godward LLP in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably require, and the Company shall have furnished to such counsel
such documents as they may have requested for the purpose of enabling them to
pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
five (5) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the financial condition, earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from Ernst & Young LLP shall be addressed to or for the use of
the Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their audit of the consolidated balance sheet of the Company as
of June 30, 1996 and related consolidated statements of income, shareholders'
equity, and cash flows for the twelve (12) months ended June 30, 1996 and (iii)
address other matters agreed upon by Ernst & Young LLP and you. In addition, you
shall have received from Ernst & Young LLP a letter addressed to the Company and
made available to you for the use of the
19.
<PAGE> 20
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of June 30, 1996, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) Except for matters corrected or updated in a
subsequent amendment to such document, when the Registration Statement
became effective and at all times subsequent thereto up to the delivery
of such certificate: (a) the Registration Statement and the Prospectus,
and any amendments or supplements thereto and the Incorporated
Documents, when such Incorporated Documents became effective or were
filed with the Commission, contained all material information required
to be included therein by the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects conformed
to the requirements of the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be; (b) the Registration Statement, and any
amendment or supplement thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; (c) the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and (d) since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the financial
condition, earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d) any change
in the capital stock or outstanding indebtedness of the Company or any
of its subsidiaries that is material to the
20.
<PAGE> 21
Company and its subsidiaries considered as one enterprise, (e) any
dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
(h) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company in writing prior to the
date hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts to immediate
family members or trusts for their benefit for estate planning purposes of any
number of shares, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to limited partners or
stockholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, (iii) pursuant to same-day
sales of a sufficient number of shares to defray the exercise price of options
expiring during the Lock-Up Period, (iv) a bona fide gift or gifts of an
aggregate of the lesser of (i) 20% of the undersigned's Securities and (ii)
50,000 shares of Securities to any charitable trust qualified under Section 664
of the IRC, any charitable remainder trust or any other charitable organization
qualified under Section 501(c)(3) of the IRC or (v) with the prior written
consent of Robertson, Stephens & Company LLC The foregoing restriction shall
have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(i) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company as to the accuracy of the
representations and warranties of the Company herein), as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with such
number of conformed copies of such opinions, certificates, letters and documents
as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
277,500 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in
21.
<PAGE> 22
whole or in part during the period of thirty (30) days after the date on which
the Firm Shares are initially offered to the public, by giving written notice to
the Company. The number of Option Shares to be purchased by each Underwriter
upon the exercise of such option shall be the same proportion of the total
number of Option Shares to be purchased by the several Underwriters pursuant to
the exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment shall
take place at the offices of Brown & Bain, 2901 North Central Road, Phoenix,
Arizona 85012, or at such other place as may be agreed upon among the
Representatives and the Company (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date the Company
receives written notice of the exercise of such option, if such notice is
received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or
22.
<PAGE> 23
statements, the performance of any of the covenants or agreements of the Company
or the satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (except for matters corrected or updated in a subsequent
amendment to such documents if the person asserting such losses, claims, damages
or liabilities purchased Shares from such Underwriter and a copy of the
Prospectus was not sent by or given on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability), and agrees to reimburse each Underwriter for
any legal or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, such Preliminary Prospectus
or the Prospectus, or any such amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact regarding the
purchased Shares, if a copy of the Prospectus in which such untrue statement or
alleged untrue statement or omission or alleged omission was corrected had not
been sent or given to such person within the time required by the Act and the
Rules and Regulations, unless such failure is the result of noncompliance by the
Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any
23.
<PAGE> 24
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, or (iv) from any and all
losses, claims, damages and liabilities caused by any untrue statement or
alleged untrue statement of material fact contained in the Registration
Statement or the Prospectus or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, if the person asserting such losses,
claims, damages or liabilities purchased Shares from such Underwriter and a copy
of the Prospectus was not sent by or given on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability; or (v) any willful and unlawful conduct
committed by such Underwriter in connection with such Underwriter's resale or
distribution of the Shares and agrees to reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next
24.
<PAGE> 25
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel (together
with appropriate local counsel) approved by the indemnifying party representing
all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters, severally and not jointly, shall be
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company shall be responsible for the remaining portion, provided, however, that
(i) no Underwriter shall be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares purchased by
such Underwriter exceeds the amount of damages which such Underwriter has
otherwise required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter, the Company within the meaning of
the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
25.
<PAGE> 26
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this Section
10, (i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement,
26.
<PAGE> 27
or (ii) the time of the initial public offering of any of the Shares by the
Underwriters after the Registration Statement becomes effective. The time of the
initial public offering shall mean the time of the release by you, for
publication, of the first newspaper advertisement relating to the Shares, or the
time at which the Shares are first generally offered by the Underwriters to the
public by letter, telephone, telegram or telecopy, whichever shall first occur.
By giving notice as set forth in Section 12 before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or the
Company, may prevent this Agreement from becoming effective without liability of
any party to any other party, except as provided in Sections 4(j), 5 and 8
hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the financial condition, earnings,
operations, business or business prospects of the Company and its Material
Subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Medicis Pharmaceutical Corporation, 4343
East Camelback Road, Phoenix, Arizona 85018, telecopier number (602) 808-0822,
Attention:
27.
<PAGE> 28
Jonah Shacknai, Chief Executive Officer, with a copy to Brown & Bain, P.A.,
Suite 2100, 2901 North Central Avenue, Phoenix, Arizona 85012, Attention: Frank
M. Placenti, telecopier number (602) 351-8516.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company under this Agreement, you
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by Robertson, Stephens & Company LLC on behalf
of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
28.
<PAGE> 29
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
Medicis Pharmaceutical Corporation
By______________________________________
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
A.G. EDWARDS & SONS, INC.
On their behalf and on behalf of each of the several Underwriters named in
Schedule A hereto.
BY ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY, INC.
By____________________________________
Authorized Signatory
29.
<PAGE> 30
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
- -------------------------------------------------- ----------------
<S> <C>
Robertson, Stephens & Company LLC..........................
A.G. Edwards & Sons, Inc...................................
---------
Total................................................. 1,850,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF BROWN & BAIN]
September 24, 1996
Medicis Pharmaceutical Corporation
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Medicis Pharmaceutical Corporation, a
Delaware corporation (the "Company") in connection with the registration under
the Securities Act of 1933, as amended (the "Securities Act"), of the proposed
public offering by the Company of 1,850,000 shares of the Common Stock of the
Company (the "Common Stock") (212,750,000 shares if the over-allotment option
granted by the Company to the Underwriters is exercised in full). The Common
Stock are to be registered pursuant to a registration statement on Form S-3 (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission"). Capitalized terms used herein without definition shall have the
meaning set forth in the Registration Statement.
In arriving at the opinion expressed below, we have examined the
Registration Statement and such other documents, including the Certificate of
Incorporation and Bylaws of the Company, each as amended to date, as we have
deemed necessary to enable us to express the opinion set forth herein. In
addition, we have examined and relied, to the extent we deem proper, on
certificates of officers of the Company as to certain factual matters relevant
to this opinion and other written and oral representations made to us by the
officers of the Company, and on the originals or copies, certified or otherwise
identified to our satisfaction as conforming to the originals thereof, of such
other documents and corporate records of the Company and such other instruments
and certificates of public officials and other persons as we have deemed
appropriate. In our examination, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as copies, and the genuineness of all
signatures (other than that of the Company) on all documents reviewed by us.
<PAGE> 2
[LETTERHEAD OF BROWN & BAIN]
Medicis Pharmaceutical -2- September 24, 1996
Corporation
Based on the foregoing and subject to the limitations and
qualifications set forth herein, we are of the opinion that:
The Common Stock to be issued by the Company, pursuant to the terms of
the Registration Statement and an Underwriting Agreement to be entered into by
the Company and Robertson, Stephens & Company, LLC and A.G. Edwards & Sons,
Inc., as Representatives of the several Underwriters, have been duly authorized,
and upon issuance and delivery against payment therefor in accordance with the
terms of such Underwriting Agreement, will be duly and validly issued and fully
paid and nonassessable.
This opinion is limited to the present laws of the State of Delaware
and the present federal laws of the United States and to the facts as they
presently exist. We hereby consent to references to our firm under the caption
"Legal Matters" in the Registration Statement and to the use of this opinion as
an exhibit to the Registration Statement. In giving this consent, we do not
hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act, or the rules and regulations of
the Commission thereunder.
Very truly yours,
/s/ Brown & Bain, P.A.
Brown & Bain, P.A.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the inclusion of and the
incorporation by reference in Amendment No. 1 to the Registration Statement
(Registration No. 333-10247) (Form S-3) of Medicis Pharmaceutical Corporation
and in the related Prospectus for the registration of 2,127,500 shares of its
Class A common stock of our report dated August 2, 1996, with respect to the
consolidated financial statements of Medicis Pharmaceutical Corporation included
therein and incorporated by reference from its Annual Report (Form 10-K) for the
year ended June 30, 1996.
Our audits also included the financial statement schedule of Medicis
Pharmaceutical Corporation included herein. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, 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
September 24, 1996
