<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1 to
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 3, 1997
Medicis Pharmaceutical Corporation
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 0-18443 52-1574808
(State or Other Jurisdiction of (Commission File No.) (I.R.S. Employer Identification No.)
Incorporation)
</TABLE>
4343 East Camelback Road, Suite 250, Phoenix, Arizona 85018-2700
(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (602) 808-8800
N/A
(Former name or former address, if changed since last report.)
<PAGE> 2
Item 7 of the Current Report on Form 8-K of Medicis Pharmaceutical Corporation
(the "Company" or "Registrant") filed on December 15, 1997, is hereby amended in
its entirety to read as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
(i) The following historical financial statements together with
the report of independent auditors are filed herewith:
GenDerm Corporation and Subsidiaries
Consolidated Balance Sheets as of December 31, 1995 and
1996
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996
Notes to Consolidated Financial Statements
(ii) The following unaudited historical condensed financial
statements are filed herewith:
GenDerm Corporation and Subsidiaries
Condensed Consolidated Balance Sheet as of September 30,
1997
Condensed Consolidated Statements of Operations for the
nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996
Notes to Unaudited Condensed Consolidated Financial
Statements.
<PAGE> 3
B. PRO FORMA FINANCIAL INFORMATION
The following pro forma consolidated financial statements are
filed herewith:
Medicis Pharmaceutical Corporation
Pro Forma Condensed Consolidated Balance Sheet as of September
30, 1997
Pro Forma Condensed Consolidated Statement of Operations for
the year ended June 30, 1997
Pro Forma Condensed Consolidated Statement of Operations for
the three months ended September 30, 1997
Notes to Pro Forma Condensed Consolidated Financial Statements
C. EXHIBITS
The following exhibits are furnished as required by Item 7(c):
Exhibit
Number Description
------- ---------------------------------------------
2.1* Agreement and Plan of Merger
* Previously filed
<PAGE> 4
ITEM 7.A.(i) GENDERM CORPORATION AND SUBSIDIARIES HISTORICAL FINANCIAL
STATEMENTS WITH REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of GenDerm Corporation:
We have audited the accompanying consolidated balance sheets of GENDERM
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1995
and 1996, and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 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 financial statements referred to above present fairly, in
all material respects, the financial position of GenDerm Corporation and
Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
April 15, 1997
<PAGE> 5
GENDERM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
- ------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,666 $ 789,776
Receivables-
Trade, less allowance of $200,000 in 1995 and $250,000 in 1996 for
doubtful accounts 4,940,777 5,100,222
Other 307,405 129,906
Inventories 4,453,144 2,766,913
Product samples 806,219 626,061
Deferred tax asset 393,000 670,000
Prepaid expenses 226,504 150,830
------------ ------------
Total current assets 11,140,715 10,233,708
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and equipment 2,108,409 1,593,761
Leasehold improvements 292,044 292,034
------------ ------------
2,400,453 1,885,795
Less- Accumulated depreciation and amortization (1,738,371) (1,486,879)
------------ ------------
Property and equipment, net 662,082 398,916
------------ ------------
OTHER ASSETS:
Trademark, net of accumulated amortization of $285,083 in 1995 and
$436,083 in 1996 1,219,917 1,073,917
Goodwill, net of accumulated amortization of $308,722 in 1995 and
$363,790 in 1996 1,110,523 722,455
Patent applications and other intangibles, net of accumulated
amortization of $429,562 in 1995 and $458,391 in 1996 256,591 232,920
Related-party notes receivable 822,331 901,114
Deferred tax asset 1,395,000 890,000
------------ ------------
Total other assets 4,804,362 3,820,406
------------ ------------
$ 16,607,159 $ 14,453,030
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Note payable to bank $ 6,130,000 $ 4,298,000
Current portion of long-term debt 842,713 --
Accounts payable 3,264,513 1,923,693
Accrued liabilities-
Bonus 280,000 234,600
Royalties 773,806 639,478
Restructuring 850,000 96,033
Expenses--other 1,225,147 1,755,866
------------ ------------
Total current liabilities 13,366,179 8,947,670
------------ ------------
CONTINGENCIES AND COMMITMENTS
CONVERTIBLE REDEEMABLE PREFERRED STOCK (NO PAR
VALUE, CONVERTIBLE INTO COMMON STOCK)
Series C, 181,818 shares authorized, 178,932 shares outstanding in
1995 and 1996 2,997,870 3,267,679
Series D, 69,964 shares authorized and outstanding in 1995 and 1996
16 16
------------ ------------
Total convertible redeemable preferred stock 2,997,886 3,267,695
STOCKHOLDERS' EQUITY:
Common stock, 10,876,538 in 1995 and 11,530,808 in 1996 108,765 115,308
Additional paid-in capital 6,788,442 8,370,847
Accumulated deficit (6,543,185) (6,182,866)
Cumulative translation adjustment (110,928) (65,624)
------------ ------------
Total stockholders' equity 243,094 2,237,665
------------ ------------
$ 16,607,159 $ 14,453,030
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
GENDERM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 36,141,319 $ 38,698,845 $ 38,073,400
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 3,231,350 4,230,676 5,491,755
Promotion and product samples 8,599,770 14,581,208 16,743,378
Co-promotion commission 2,026,606 -- --
Selling 5,360,682 6,177,715 3,098,496
General and administrative 7,074,528 6,168,703 5,574,357
Research and development 7,071,160 5,800,672 3,218,694
Royalties 2,103,210 2,036,868 1,848,960
Litigation -- 319,406 --
Restructuring charges -- 2,160,000 --
------------ ------------ ------------
Total operating costs and expenses 35,467,306 41,475,248 35,975,640
------------ ------------ ------------
Income (loss) from operations 674,013 (2,776,403) 2,097,760
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 50,403 95,017 79,879
Interest expense (379,732) (570,754) (454,002)
Miscellaneous, net 271,368 149,944 2,966
Expense of deferred IPO and aborted sale -- (1,018,343) (652,475)
------------ ------------ ------------
Other income (expense), net (57,961) (1,344,136) (1,023,632)
------------ ------------ ------------
Income (loss) before income taxes 616,052 (4,120,539) 1,074,128
PROVISION (BENEFIT) FOR INCOME TAXES 602,804 (382,122) 444,000
------------ ------------ ------------
NET INCOME (LOSS) $ 13,248 $ (3,738,417) $ 630,128
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 8
GENDERM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK,
$0.01 PAR VALUE,
25,000,000
AUTHORIZED
-------------------------
NUMBER OF ADDITIONAL CUMULATIVE
SHARES PAID-IN WARRANTS/ ACCUMULATED TRANSLATION
OUTSTANDING AMOUNT CAPITAL OPTIONS DEFICIT ADJUSTMENT
----------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 5,477,484 $ 54,775 $2,331,634 $ 846,563 $(2,343,393) $ (140,969)
Add (deduct)-
Net income -- -- -- -- 13,248 --
Conversion of Series A and B
preferred stock to common stock 4,696,677 46,967 3,050,453 -- -- --
Accretion of Series C preferred -- -- -- -- (227,093) --
stock
Stock options exercised 9,758 97 17,786 -- -- --
Change in translation adjustment -- -- -- -- -- 17,806
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 10,183,919 101,839 5,399,873 846,563 (2,557,238) (123,163)
Add (deduct)-
Net loss -- -- -- -- (3,738,417) --
Accretion of Series C preferred -- -- -- -- (247,530) --
stock
Stock options exercised 692,619 6,926 1,388,569 (846,563) -- --
Change in translation adjustment -- -- -- -- -- 12,235
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 10,876,538 108,765 6,788,442 -- (6,543,185) (110,928)
Add (deduct)-
Net income -- -- -- -- 630,128 --
Accretion of Series C preferred -- -- -- -- (269,809) --
stock
Issuance of common stock 600,000 6,000 1,494,000 -- -- --
Stock options exercised 54,270 543 88,405 -- -- --
Change in translation adjustment -- -- -- -- -- 45,304
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 11,530,808 $ 115,308 $8,370,847 $ -- $(6,182,866) $ (65,624)
========== =========== ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
BALANCE, DECEMBER 31, 1993 $ 748,610
Add (deduct)-
Net income 13,248
Conversion of Series A and B
preferred stock to common stock 3,097,420
Accretion of Series C preferred (227,093)
stock
Stock options exercised 17,883
Change in translation adjustment 17,806
-----------
BALANCE, DECEMBER 31, 1994 3,667,874
Add (deduct)-
Net loss (3,738,417)
Accretion of Series C preferred (247,530)
stock
Stock options exercised 548,932
Change in translation adjustment 12,235
-----------
BALANCE, DECEMBER 31, 1995 243,094
Add (deduct)-
Net income 630,128
Accretion of Series C preferred (269,809)
stock
Issuance of common stock 1,500,000
Stock options exercised 88,948
Change in translation adjustment 45,304
-----------
BALANCE, DECEMBER 31, 1996 $ 2,237,665
===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 9
GENDERM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,248 $(3,738,417) $ 630,128
Noncash expenses included in net income (loss)-
Depreciation and amortization 649,381 619,799 653,855
Loss on disposition of property and equipment -- 205,392 7,040
Deferred tax provision (benefit) 1,079,312 (590,738) 561,000
(Increase) decrease in assets affecting operating income (loss)-
Receivables 702,490 (994,534) 18,054
Inventories (614,466) (1,696,481) 1,686,231
Prepaid expenses and product samples (630,085) 1,022,586 255,832
Increase (decrease) in liabilities affecting operating income (loss)-
Accounts payable 948,286 1,131,573 (1,340,820)
Accrued liabilities (3,563,716) 645,276 (402,976)
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,415,550) (3,395,544) 2,068,344
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (603,557) (196,454) (172,990)
Proceeds from disposition of property and equipment -- 109,633 --
Purchase of trademark (1,500,000) -- --
Loans to stockholders (57,679) (76,092) (78,783)
----------- ----------- -----------
Net cash used in investing activities (2,161,236) (162,913) (251,773)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 17,883 548,932 1,588,948
Proceeds from (payments on) notes payable to bank 1,593,357 4,536,643 (1,832,000)
Principal long-term debt (payments) borrowings 835,717 (1,958,072) (842,713)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,446,957 3,127,503 (1,085,765)
----------- ----------- -----------
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH 17,806 12,235 45,304
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,112,023) (418,719) 776,110
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,544,408 432,385 13,666
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 432,385 $ 13,666 $ 789,776
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 265,942 $ 565,909 $ 507,000
Income taxes paid (refunded) 120,862 (294,426) (121,000)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 10
GENDERM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
GenDerm Corporation (the Company) is a pharmaceutical company that
develops products for the control of pain and the treatment of skin and
allergic disorders.
The Company's marketing strategy is a combination of promotion directly to
dermatologists, rheumatologists and certain pain specialists and direct
promotion to consumers.
Products are distributed principally through drug wholesalers to
pharmacies, managed care organizations and retail chains. All products
currently marketed by the Company are manufactured on a contract basis.
The Company's products are regulated by the United States Food and Drug
Administration and/or comparable governmental agencies in foreign
countries.
Sales to the Company's largest customer accounted for 20%, 18% and 13% of
net sales for the years ended December 31, 1994, 1995 and 1996,
respectively.
BASIS OF ACCOUNTING
The Company maintains its financial statements on the accrual basis of
accounting. The preparation of the financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, GenDerm Canada Inc. and Euroderma
Limited. All intercompany transactions and accounts have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
The Company defines cash and cash equivalents as checking accounts and
short-term investments having an original maturity of 90 days or less.
<PAGE> 11
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed using accelerated methods for both financial and income tax
reporting purposes over the estimated useful lives of the assets
(generally five to seven years for furniture and equipment) and the life
of the lease for leasehold improvements.
INTANGIBLE ASSETS
Patent applications represent the value assigned to the Company's property
rights in patent applications provided by the Company's founder in
exchange for an option to purchase common stock. The values are being
amortized over the remaining legal lives of the patents to which they
pertain. These patents expire at various times between 2001 and 2009. The
Company reviews the economic life of the patents on an ongoing basis with
respect to product markets and profit potential. If it becomes probable
that the economic useful life of any of the patents is less than the legal
life, that portion of the remaining patent value will be amortized over
the economic life. The Company currently expenses patent application costs
as incurred.
Goodwill includes the excess of the nonaffiliated portion of fair market
value over the net book value of assets received at the time of the
GalenPharma, Inc. (GalenPharma) acquisition (see Note 11). This amount is
being amortized over 25 years, the estimated economic life of this
intangible asset. The Company reviews the economic life of this asset on
an ongoing basis. In addition, the net operating loss carryforward benefit
from GalenPharma, when realized (see Note 8), is recognized as a reduction
of goodwill rather than a reduction of the tax provision.
In 1994, the Company purchased a trademark for $1.5 million which is being
amortized over 10 years, which the Company believes represents the
economic useful life of this asset.
INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market. Inventories consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Raw materials and work in progress $2,292,306 $1,368,738
Finished goods 2,160,838 1,398,175
---------- ----------
T o t a l $4,453,144 $2,766,913
========== ==========
</TABLE>
PRODUCT SAMPLES
Product samples represent the cost of samples for pharmaceutical products
on hand at the end of the year. Samples are valued at FIFO cost. Product
samples are not for sale or resale and are expensed upon distribution to
the Company's marketing network.
<PAGE> 12
REVENUE RECOGNITION
Product sales are recognized upon shipment to customers. At the time of
shipment, provision is made for any estimated discounts, returns, and
other deductions. The Company provides a reserve for returns, principally
damaged or expired product, at the cost of the replacement product.
RESEARCH AND DEVELOPMENT
Research and development expenses include purchased services and supplies
and in-house research and development, consisting of clinical staff
salaries, benefits and related overhead expenses. These costs are expensed
as incurred.
FOREIGN CURRENCY TRANSLATION
Non-U.S. assets and liabilities are translated into U.S. dollars using the
year-end exchange rates. Revenues and expenses are translated at a
weighted average rate, based on monthly activity throughout the year. The
effects of the translation are charged or credited to the cumulative
translation adjustment account shown on the consolidated balance sheets.
OPERATIONS BY GEOGRAPHIC SEGMENTS
Financial information by geographic area for the three years ended
December 31, 1994, 1995 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
UNITED CONSOLIDATED
STATES CANADA EUROPE TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
1994-
Net sales $ 33,657,038 $ 1,876,572 $ 607,709 $ 36,141,319
Income (loss) from operations 1,176,375 39,750 (542,112) 674,013
Identifiable assets at
December 31, 1994 $ 14,001,432 $ 1,054,129 $ 373,428 $ 15,428,989
============ =========== =========== ============
1995-
Net sales $ 35,370,650 $ 2,366,795 $ 961,400 $ 38,698,845
Income (loss) from operations (2,223,393) 82,918 (635,928) (2,776,403)
Identifiable assets at
December 31, 1995 $ 15,157,208 $ 1,089,434 $ 360,517 $ 16,607,159
============ =========== =========== ============
1996-
Net sales $ 35,006,496 $ 1,968,044 $ 1,098,860 $ 38,073,400
Income (loss) from operations 2,190,136 (222,644) 130,268 2,097,760
Identifiable assets at
December 31, 1996 $ 12,930,535 $ 738,235 $ 784,260 $ 14,453,030
============ =========== =========== ============
</TABLE>
<PAGE> 13
RECLASSIFICATIONS
Certain amounts included in the 1994 and 1995 financial statements have
been reclassified to conform with the 1996 presentation.
2. SUBSEQUENT OPERATING RESULTS (UNAUDITED)
Subsequent to year-end, the Company experienced significant operating
losses. For the three months ended March 31, 1997, the Company incurred a
pre-tax loss of approximately $1.6 million (unaudited). During April 1997,
the Company developed a plan to respond to the poor operating results and
ultimately, to return to profitability.
Additionally, the Company engaged consultants to assist in the development
and execution of its revised operating plan. This plan involves tight
controls over spending levels and daily monitoring of cash projections. In
the initial weeks of the plan, the Company tracked very close to
projections. The plan anticipates pre-tax income in each month from May to
December, totaling approximately $3.3 million for the eight-month period.
Finally, the Company was in violation of certain covenants contained in
its revolving credit agreement. The Company is negotiating with the bank
to extend the term of the facility beyond the current expiration date of
July 31, 1997. If the Company cannot agree on terms with its current
lender, management feels other available financing sources with adequate
terms could be found.
3. REDEEMABLE PREFERRED STOCK
Each share of Series C preferred stock is convertible at the option of the
holder into five shares of common stock. Each share of Series C preferred
stock has voting rights equal to the number of shares of common stock into
which the preferred stock is convertible. Unconverted shares of Series C
preferred stock are redeemable, at the holder's option, at $22 per share,
beginning February 28, 1999. If any Series C preferred stock is
outstanding on February 28, 2001, the Company is required to convert those
shares into common stock. The Series D preferred stock conversion rate
varies depending upon the value of the Company upon the occurrence of
certain events, including an initial public offering (IPO) of the
Company's common stock. The Series D redeemable preferred stock has no
voting rights, except with respect to the waiver of certain restricted
actions by the Company, as follows: the holders of at least 66-2/3% of the
preferred stock must approve certain specified transactions involving the
Company which could adversely affect the rights and privileges of the
holders of preferred stock.
<PAGE> 14
4. NONPREFERENTIAL STOCK
STOCK WARRANTS
In 1984, the Company established a plan to issue stock warrants for the
future purchase of common shares at $0.01 per share. In 1992, all of the
589,000 outstanding warrants were exercised. The exercise of the warrants
resulted in an immediate tax liability for the warrant holders. The
Company provided loans to five employees to pay such taxes (see Note 6).
In connection with the exercise of the warrants, the Company agreed to
grant options (warrant options) to certain officers to replace the shares
of common stock which each optionee must sell to repay the loans to the
Company in the future. The number of warrant options to be granted in the
future will be equal to the number of common shares that are sold to repay
the loans to the Company. The exercise price of the warrant options will
be equal to fair market value at the time the shares are sold. These
warrant options will expire 10 years from the date of the grant.
STOCK OPTIONS
In 1992, the Company adopted the 1992 Stock Option Plan (the "1992 Option
Plan"). The aggregate maximum number of shares of common stock available
for awards under the 1992 Option Plan is approximately 1.2 million.
Options granted under the 1992 Option Plan may be either incentive stock
options ("ISOs") or nonqualified stock options as the Compensation
Committee may determine. The exercise price of the options will be 90% to
110% of the fair market value of the Company's common stock at the date of
grant. The options will be exercisable over a period determined by the
Compensation Committee but not in excess of 10 years (except that the term
of any ISO granted to an optionee who is a 10% owner may not exceed five
years). The vesting of options will accelerate in the event of a change in
control.
In 1991, the Company created a director's stock option plan and authorized
the issuance of up to 110,000 shares of common stock pursuant to the plan.
This plan was approved by the Company's stockholders in February 1992.
Options to purchase shares under this plan are issued at fair market value
at the date of grant and are exercisable over a period determined by the
Compensation Committee but not in excess of 10 years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, no compensation cost has been
recognized for the stock option plans. Consistent with the provisions of
SFAS No. 123, compensation cost has been determined based on the fair
value at the grant date for awards. When considering the fair value as
determined pursuant to SFAS No. 123, the Company's net income on a pro
forma basis for the year ended December 31, 1996, would have been
approximately $501,000 and its net loss on a pro forma basis for the year
ended December 31, 1995, would have been approximately $3,778,000. The
fair value of each option grant is estimated on the date of
<PAGE> 15
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for grants during 1996 and 1995, dividend
yield of 0%; expected volatility of 0%; risk-free interest rate ranging
from 5.7% to 7.2%; and expected lives of ten years.
The account activities for the years ended December 31, 1994, 1995 and
1996, for warrants/options outstanding are as follows:
<TABLE>
<CAPTION>
WARRANTS/OPTIONS
OUTSTANDING
--------------------------
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1993 2,593,426 $0.66-$5.30
Stock options issued 113,250 5.30
Stock options exercised (9,758) 1.20-3.20
Stock options canceled (122,791) 3.20
--------- --------------
Balance at December 31, 1994 2,574,127 0.66-5.30
Stock options issued 305,000 2.50-5.30
Stock options exercised (692,619) 0.66-5.30
Stock options canceled (270,990) 1.20-5.30
--------- --------------
Balance at December 31, 1995 1,915,518 1.20-5.30
Stock options issued 82,000 2.50
Stock options exercised (54,270) 1.20-3.20
Stock options canceled (250,494) 1.20-5.30
Stock options exchanged (74,250) 5.30
--------- --------------
Balance at December 31, 1996 1,618,504 $1.20-$5.30
========= ==============
</TABLE>
STOCK RESERVED FOR ISSUANCE
At December 31, 1996, shares of the Company's common stock were reserved
for issuance as follows:
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Conversion of preferred stock 1,244,480
Exercise of stock options 1,618,504
---------
2,862,984
=========
</TABLE>
<PAGE> 16
5. DEBT
REVOLVING CREDIT FACILITY
The Company has a bank revolving credit facility which, at December 31,
1995 and 1996, permitted maximum borrowings of up to $8,000,000. Actual
available credit under this facility is based on a formula that considers
a percentage of eligible existing trade receivables and inventory and is
secured by trade receivables and inventory. The maximum amount available,
based on this formula, was $6.89 million and $6.48 million at December 31,
1995 and 1996, respectively. Borrowings under this agreement are payable
upon demand. Interest is paid monthly and accrues at the prime rate (8.25%
at December 31, 1996). The average balance outstanding during 1995 and
1996 was $5,103,000 and $5,223,000, respectively.
The Company was not in compliance with certain covenants contained in the
agreement and is currently negotiating with the bank to extend the
facility beyond the July 31, 1997, expiration date of the existing
facility.
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Promissory notes, subordinated, 9%, interest due
semiannually, principal due in annual installments
until 1996 (see Note 1) $842,713 $ --
Less- Amounts classified as current portion 842,713 --
-------- --------
Long-term debt, net $ -- $ --
======== ========
</TABLE>
6. RELATED PARTIES
The following transactions occurred between the Company and affiliates
during the years ended December 31, 1994, 1995 and 1996:
NOTES RECEIVABLE
Related-party notes receivable relate to loans to five employees to
pay their tax liability for warrants exercised. The loans bear
interest at 1% over prime and are payable in December, 1997.
LICENSING AGREEMENTS
The Company currently has exclusive licenses with certain affiliates
covering a number of the Company's marketed and development
products. These licenses require payment of royalties ranging from
3.5% to 8.0% of net sales of each product for the life
<PAGE> 17
of the patent rights. The Company incurs the cost for the
development and marketing of these products. The license agreements
can be terminated by the licensor if minimum royalty payments are
not achieved. The agreements can also be terminated at the option of
the Company upon 60 to 120 days' written notice to the licensor.
Royalty expenses to these affiliates were $2,079,000, $2,028,000 and
$1,849,000 in 1994, 1995 and 1996, respectively. These expenses
include $275,000, $250,000 and $200,000, respectively, relating to
contract minimums for products under development.
PARTNERSHIP
In January 1992, the Company entered into a license agreement with a
limited partnership which is owned pro rata by the holders of record
of the Company's equity on a fully diluted basis as of January 1,
1992. Pursuant to this license agreement, the partnership granted to
the Company an exclusive license to manufacture and sell civamide.
The license agreement provides for payments by the Company of
royalties which are determined as a percentage of annual net sales.
A higher percentage applies for sales in countries in which there is
valid patent coverage than applies in countries in which no such
coverage exists.
To date, these products are in the early stage of development and,
therefore, only contract minimums have been accrued. The Company
incurs costs for the development of products utilizing civamide.
7. OPERATING LEASES
The Company has entered into leases for office and warehouse facilities.
The leases require the Company to pay all utilities, real estate taxes and
maintenance costs.
GenDerm Canada Inc. has a five-year lease for office and warehouse
facilities expiring in April, 1997. The lease term provides for annual
rent increases and requires the Company to pay its portion of operating
expenses.
Euroderma Limited has a multiyear lease for office facilities in Surrey,
England.
The Company also leases automobiles and equipment under noncancelable
operating leases over periods of two to three years.
In January, 1996, the Company entered into a sublease for rented
facilities previously used for laboratory operations. The lease and
sublease both expire in 1998.
<PAGE> 18
Future minimum lease payments under operating leases on the office and warehouse
space and automobiles and equipment at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $523,000
1998 234,000
1999 41,000
2000 23,000
2001 22,000
--------
$843,000
========
</TABLE>
8. INCOME TAXES
Income before taxes for domestic and international operations consists of the
following for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Domestic $1,213,037 $(3,523,603) $1,349,212
International (596,985) (596,936) (275,084)
---------- ----------- ----------
Total income
before taxes $ 616,052 $(4,120,539) $1,074,128
=========== =========== ==========
</TABLE>
The provision (benefit) for income taxes consisted of the following amounts for
the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Domestic-
Federal-
Current $(476,508) $ 182,082 $(105,000)
Deferred 940,939 (515,002) 489,077
State-
Current - - (12,000)
Deferred 138,373 (75,736) 71,923
Foreign--current - 26,534 -
--------- --------- ---------
Total provision (benefit) $ 602,804 $(382,122) $ 444,000
========= ========= =========
</TABLE>
<PAGE> 19
The reconciliation of the U.S. statutory tax rate to the effective income tax
rate for the years ended December 31, 1994, 1995 and 1996, follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
United States statutory rate 34.00% (34.00%) 34.00%
State income taxes, net of federal income tax benefit
14.37 (5.00) 5.00
Effect of providing a valuation allowance against foreign
net operating losses 40.58 5.90 14.72
Effect of change in valuation allowance - 23.06 (19.48)
Other, net 8.90 .77 6.72
----- ----- -----
Effective tax rate 97.85% (9.27%) 40.96%
===== ===== =====
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
revenue and expense for tax and financial reporting purposes.
The significant cumulative temporary differences are summarized as follows at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Current-
Accruals $ 153,660 $584,837
Uniform capitalization--inventory 82,263 89,917
Reserves 525,929 784,887
Deferred costs 130,005 -
Other, net 177,169 230,398
---------- ----------
1,069,026 1,690,039
Less- Valuation allowance (676,026) (1,020,039)
---------- ----------
393,000 670,000
---------- ----------
Noncurrent-
Net operating losses-
Domestic 2,783,007 1,284,439
Foreign 1,041,614 1,148,897
Tax credits 960,480 960,480
---------- ----------
4,785,101 3,393,816
Less- Valuation allowance (3,390,101) (2,503,816)
---------- ----------
1,395,000 890,000
---------- ----------
$1,788,000 $1,560,000
========== ==========
</TABLE>
<PAGE> 20
The Company has available net operating loss and general business credit
carryforwards which are subject to limitations on their future realization due
to the application of certain federal income tax statutes related to changes in
ownership.
In 1996, the Company realized approximately $854,000 (tax effect of $333,000) in
net operating loss carryforwards acquired in the GalenPharma acquisition. These
tax benefits were recorded as a direct reduction to the goodwill recorded in
that acquisition and, accordingly, did not reduce the provision for income
taxes. Any future realization of GalenPharma net operating losses ($2,322,000 at
December 31, 1996) will further reduce goodwill to zero, prior to being
recognized as a benefit in the Company's income tax provision.
Net operating loss carryforwards and income tax carryforwards begin to expire in
1998 and are summarized as follows at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ ----------
<S> <C> <C>
Net operating loss carryforwards-
Unites States $ 7,385,915 $3,995,518
Canada 962,776 1,368,098
United Kingdom 1,708,029 1,577,791
------------ ----------
$ 10,056,720 $6,941,407
============ ==========
Income tax credit carryforwards--United
States-
General business credit $ 960,480 $ 960,480
Alternative minimum tax 76,794 76,794
------------ ----------
$ 1,037,274 $1,037,274
============ ==========
</TABLE>
The components of the provision (credit) for deferred income taxes are as
follows for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Accruals $1,209,300 $ (47,020) $ (431,177)
Net operating loss carryforwards (182,007) (1,562,621) 1,391,285
Change in valuation allowance 442,000 1,193,127 (209,272)
Deferred costs (260,009) 130,004 130,005
Uniform capitalization--inventory 39,000 15,237 (7,654)
Reserves (28,984) (388,417) (258,958)
Compensatory effect of stock options - 378,644 -
Tax credits (221,925) (190,980) -
Other, net 81,937 (118,712) (53,229)
---------- ---------- -----------
$1,079,312 $ (590,738) $ 561,000
========== ========== ===========
</TABLE>
<PAGE> 21
9. RETIREMENT PLAN
Effective January 1, 1993, the Company implemented the GenDerm 401(k)
Retirement and Savings Plan (the "Plan"). All full-time employees of the
Company at December 31, 1992, were immediately eligible to participate in
the Plan. Employees hired after December 31, 1992, are eligible to
participate after one year of service and upon reaching age 21. The Plan
provides for a Company contribution equal to 3% of salary and allows
employee salary deferral between 2% and 12% of gross earnings. In
addition, the Company contributes an amount equal to 50% of each
employee's salary deferral, up to a maximum salary deferral of 6% of each
employee's salary. Plan members are 30% vested in all Company
contributions after two years of service, 60% vested after three years of
service and 100% after four years of service. Years of service are
measured from date of hire. Plan members are 100% vested in their own
contributions at all times. Total contributions to the Plan were $299,000
in 1995 and $132,000 in 1996.
The Company does not currently have a policy to provide other
postretirement benefits.
10. CONTINGENCIES AND LITIGATION
In 1992 and 1993, the Company initiated litigation against two separate
defendants to enforce its patent and trademark rights. The litigation
initiated in 1992 has been settled. The 1993 litigation continues,
although certain issues have been settled. The defendants have dropped any
counterclaims against the Company. They have also agreed to binding
arbitration to determine infringement and damages due to the Company
should an impending re-examination of the relevant patents by the U.S.
Patent Office uphold the Company's rights pursuant to the patents. In
connection with this litigation, the Company incurred $319,406 in
litigation expense in 1995.
The Company's business is dependent on a limited number of products and
entails an inherent risk of product liability. The Company currently
maintains product liability coverage in the amount of $10 million per
year.
11. ACQUISITION
In 1991, the Company purchased all of the outstanding stock of an
affiliated entity, GalenPharma. The outstanding shares were purchased by
exchanging 178,932 shares of Series C and 69,964 shares of Series D
convertible preferred stock of the Company and issuing $2,263,500 in
subordinated long-term notes. The notes bear interest at a rate of 9% and
are subordinate to all other notes payable of the Company. The principal
is payable annually in installments in 1993 through 1996. The excess of
the Series C redemption value over the carrying value is being accreted by
periodic charges to retained earnings through February 28, 1999.
The net assets acquired from GalenPharma were recorded at the net book
value of $1,428,087 and the Series C and D preferred stock were recorded
at their estimated fair
<PAGE> 22
value as of the transaction date. The nonaffiliated portion of GalenPharma
assets (35.8%) was written up to fair market value at the time of the
acquisition based upon the consideration received. This amount,
$1,752,245, has been recorded as goodwill and is being amortized over 25
years. The difference between the fair value of stock and notes exchanged
($4,239,116), the net assets acquired ($1,428,087) and the excess of the
fair value over the net book value of the nonaffiliated portion of the
assets acquired ($1,752,245) has been recorded as a reduction in paid-in
capital ($1,058,784). The results of operations of GalenPharma have been
included in the accompanying consolidated financial statements since the
acquisition date.
12. CO-PROMOTION AGREEMENTS
During 1994, the Company, by mutual agreement with certain distributors,
terminated co-promotion commission agreements for Zostrix and Zostrix-HP
in the U.S. and Canada. The commission expense related to these
co-promotion agreements is reflected in the consolidated financial
statements for the years ended December 31, 1993 and 1994.
13. COMMITMENTS
One officer of the Company has an executive severance agreement which
provides that in the event of termination other than for cause (as
defined) or resignation for good reason following a change in control of
the Company (as defined), the officer would receive 2.99 times his annual
base salary and highest incentive compensation for one of the preceding
three years and continuation of certain benefits.
14. ISSUANCE OF COMMON STOCK
In January, 1996, the Company issued new common stock to both new and
existing stockholders. A total of 600,000 shares were issued for total
consideration of $1,500,000.
15. RESTRUCTURING
In 1995, the Company incurred $2,160,000 in restructuring charges. These
relate to two separate restructurings, one in March and one in December.
The Company incurred $900,000 in costs in the March restructuring which
included costs associated with the closing of the Company's formulation
facilities and the reorganization of its research and development group.
The Company incurred $1,260,000 of charges in December related to costs
associated with the elimination of its ethical sales force in the U.S. and
the two foreign subsidiaries, and for the reorganization of the Company's
top management. The remaining accrued liability on the balance sheet at
December 31, 1995, was $850,000. This amount relates primarily to unpaid
severance pay and lease payments on automobiles used by the sales force.
The remaining accrued liability at December 31, 1996, is $96,033, which
relates primarily to lease payments.
<PAGE> 23
ITEM 7.A.(ii) GENDERM AND SUBSIDIARIES UNAUDITED CONDENSED FINANCIAL STATEMENTS
GENDERM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 173,317
Accounts receivable, net 2,869,391
Inventories, net 2,745,426
Deferred tax assets 2,084,949
Other current assets 879,839
-----------
Total current assets 8,752,922
Property and equipment:
Furniture and equipment 1,545,653
Leasehold improvements 291,998
-----------
1,837,651
Less accumulated depreciation (1,573,487)
-----------
Net property and equipment 264,164
Net intangible assets 1,852,238
Related party notes receivable 568,509
Other noncurrent assets 87,780
-----------
$11,525,613
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,214,811
Notes payable 143,444
Accrued incentives 58,517
Accrued royalties 427,352
Income taxes payable 391,028
Other accrued liabilities 3,362,401
-----------
Total current liabilities 6,597,553
Convertible redeemable preferred stock 3,487,237
Stockholders' equity:
Common stock 115,458
Additional paid-in capital 8,390,572
Cumulative translation adjustment (95,295)
Accumulated deficit (6,969,912)
-----------
Total stockholders' equity 1,440,823
-----------
$11,525,613
===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE> 24
GENDERM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 18,360,035 $ 29,761,228
Operating costs and expenses:
Cost of product revenue 4,876,669 5,703,607
Selling, general and administrative 15,350,420 19,891,291
Research and development 554,538 2,644,810
Depreciation and amortization 325,806 169,724
------------- -------------
Operating income (loss) (2,747,398) 1,351,796
Interest income 73,706 68,694
Interest expense (181,978) (360,066)
Gain on disposition of subsidiary 1,848,899 --
Other 60,932 (4,784)
------------- -------------
Income (loss) before taxes (945,839) 1,055,640
Income tax benefit (expense) 378,336 (476,267)
------------- -------------
Net income (loss) $ (567,503) $ 579,373
============= =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE> 25
GENDERM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net income (loss) $ (567,503) $ 579,373
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 325,806 169,724
Deferred taxes (524,949) 663,000
Provision for doubtful accounts and returns 25,000 22,500
Provision for obsolete inventory 575,000 --
Gain on sale of subsidiary (1,848,899) --
Change on operating assets and liabilities:
Accounts receivable 1,973,792 (489,020)
Inventories (700,311) 1,162,526
Other current assets (102,948) (347,965)
Accounts payable 291,118 (1,443,646)
Accrued incentives (176,083) (278,835)
Accrued royalties (212,126) (42,233)
Income taxes payable 391,028 --
Other accrued liabilities 1,554,044 167,676
------------ ------------
Net cash provided by operating activities 1,002,969 163,100
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (14,000) --
Proceeds from sale of subsidiary 2,314,099 --
Increase in other noncurrent assets (87,780) --
------------ ------------
Net cash provided by investing activities 2,212,319 --
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (4,154,556) (1,666,713)
Proceeds from issuance of common stock 19,875 1,588,948
Decrease (increase) in related party notes receivable 332,605 (58,412)
------------ ------------
Net cash used in financial activities (3,802,076) (136,177)
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH (29,671) 10,966
------------ ------------
(29,671) 10,966
------------ ------------
Net increase (decrease) in cash and cash equivalents (616,459) 37,889
Cash and cash equivalents at beginning of period 789,776 13,666
------------ ------------
Cash and cash equivalents at end of period $ 173,317 $ 51,555
============ =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE> 26
GenDerm Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As of September 30, 1997 and for the nine months ended September 30, 1997 and
1996
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, all
adjustments known to management (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain
information and footnote disclosures normally included in financial statements
have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included elsewhere herein for the years ended December 31, 1996,
1995 and 1994. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
2. SALE OF FOREIGN SUBSIDIARY
During the nine months ended September 30, 1997, GenDerm Corporation and
Subsidiaries sold their wholly owned foreign subsidiary, Euroderma, to an
unrelated third party for approximately $2.3 million in cash. GenDerm recorded a
gain of approximately $1,800,000 on the sale. Included in sales during the nine
months ended September 30, 1997 were approximately $500,000 from Euroderma.
3. SUBSEQUENT EVENT
On December 3, 1997, Medicis Pharmaceutical Corporation (Medicis) acquired all
outstanding stock of GenDerm in an arm's length transaction conducted pursuant
to the terms of the Agreement and Plan of Merger dated as of November 28, 1997
(Agreement). Under the terms of the Agreement, Medicis paid an initial
$60,000,000 in cash and could pay an additional sum not to exceed $20,000,000 if
certain sales thresholds and other conditions are achieved during calendar year
1999.
<PAGE> 27
ITEM 7.B. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements of
operations for the three months ended September 30, 1997 and the year ended June
30, 1997 give effect to the acquisition of all of the outstanding stock of
GenDerm by the Registrant as if the transaction had occurred at the beginning of
each respective period rather than the actual date of December 3, 1997. The pro
forma consolidated balance sheet has been presented as if the transaction had
occurred September 30, 1997 rather than the actual date of December 3, 1997. The
pro forma information is based on the historical financial statements of GenDerm
and the Registrant giving effect to the transaction under the purchase method of
accounting and the assumptions and adjustments set forth in the accompanying
notes to the pro forma condensed consolidated financial statements.
GenDerm's most recent fiscal year-end of December 31, 1996 differs from the
Registrant's most recent fiscal year-end of June 30, 1997 by more than 93 days.
GenDerm's income statement is updated to June 30, 1997 which is within 93 days
of the Registrant's most recent fiscal year-end of June 30, 1997. This updating
is accomplished by adding subsequent unaudited interim period results of the six
months ended June 30, 1997 to the most recent fiscal year-end information of
December 31, 1996 and deducting the comparable preceding year unaudited interim
period results of the six months ended June 30, 1996.
A preliminary allocation of purchase price, using the purchase method of
accounting, has been made in the accompanying pro forma consolidated financial
information based on estimates made by management. The pro forma consolidated
financial information shown is not necessarily indicative of either the results
of operations that would have occurred had the merger taken place on December 3,
1997 or of the future operations.
Management expects additional operating cost savings to result from the
efficiencies obtained through economies of scale, which have not been reflected
in the accompanying pro forma financial statements. This includes, but is not
limited to, personnel reductions and severances or terminations of substantially
all of the former GenDerm employees upon consummation of the merger. Such
savings cannot be guaranteed for results of future operations. Plans for
integration of GenDerm's operations have been developed by management. Certain
components of the plan are currently being implemented. Management has accrued
approximately $2.6 million to account for closing facilities and severance
expenses. Ultimate finalization of management's plans may result in adjustments
to the accrual.
The pro forma consolidated financial statements presented should be read in
conjunction with the consolidated financial statements and related notes of the
Registrant and GenDerm.
<PAGE> 28
MEDICIS PHARMACEUTICAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA PRO FORMA
MEDICIS (A) GENDERM ADJUSTMENTS(A) CONSOLIDATED
----------- ------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,092,352 $ 173,317 $ (5,641,299) (B) $ 27,624,370
Short-term investments 54,358,701 -- (54,358,701) (B) --
Accounts receivable, net 7,917,904 2,869,391 -- 10,787,295
Inventories, net 4,294,268 2,745,426 -- 7,039,694
Deferred tax assets 9,423,000 2,084,949 2,700,000 (B) 14,207,949
Accrued interest income 1,098,641 -- -- 1,098,641
Other current assets 2,684,981 879,839 -- 3,564,820
------------- ------------- ------------- -------------
Total current assets 112,869,847 8,752,922 (57,300,000) 64,322,769
Property and equipment:
Furniture and equipment 860,433 1,545,653 -- 2,406,086
Leasehold improvements 170,000 291,998 -- 461,998
------------- ------------- ------------- -------------
1,030,433 1,837,651 -- 2,868,084
Less accumulated depreciation (255,226) (1,573,487) -- (1,828,713)
------------- ------------- ------------- -------------
Net property and equipment 775,207 264,164 -- 1,039,371
Net intangible assets 34,858,995 1,852,238 33,724,788 (B) 70,436,021
Other noncurrent assets 1,000,000 656,289 -- 1,656,289
------------- ------------- ------------- -------------
$ 149,504,049 $ 11,525,613 $ (23,575,212) $ 137,454,450
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,426,916 $ 2,214,811 $ -- $ 6,641,727
Notes payable 5,245 143,444 -- 148,689
Accrued incentives 1,011,281 58,517 -- 1,069,798
Accrued royalties 840,182 427,352 -- 1,267,534
Income taxes payable -- 391,028 -- 391,028
Accrued severance, exit, and lease
termination costs -- -- 2,582,045 (C) 2,582,045
Other accrued liabilities 1,320,370 3,362,401 1,924,803 (B) 6,607,574
------------- ------------- ------------- -------------
Total current liabilities 7,603,994 6,597,553 4,506,848 18,708,395
Long-term liabilities:
Notes payable 111,335 -- -- 111,335
Deferred tax liabilities -- -- 12,246,000 (B) 12,246,000
Other noncurrent liabilities 122,499 -- -- 122,499
------------- ------------- ------------- -------------
Total liabilities 7,837,828 6,597,553 16,752,848 31,188,229
Convertible redeemable preferred stock -- 3,487,237 (3,487,237) (D) --
Stockholders' equity:
Class A common stock 196,603 115,458 (115,458) (D) 196,603
Class B common stock 3,948 -- -- 3,948
Additional paid-in capital 145,248,855 8,390,572 (8,390,572) (D) 145,248,855
Translation adjustment -- (95,295) 95,295 (D) --
Accumulated deficit (3,783,185) (6,969,912) 6,969,912 (D) (39,183,185)
(35,400,000) (E)
------------- ------------- ------------- -------------
Total stockholders' equity 141,666,221 1,440,823 (36,840,823) 106,266,221
------------- ------------- ------------- -------------
$149,504,049 $ 11,525,613 $ (23,575,212) $ 137,454,450
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 29
MEDICIS PHARMACEUTICAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA PRO FORMA
MEDICIS GENDERM ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $41,158,860 $28,466,399 $ -- $69,625,259
Operating costs and expenses:
Cost of product revenue 9,361,383 6,695,064 -- 16,056,447
Selling, general and administrative 16,484,329 24,045,029 -- 40,529,358
Research and development 1,449,620 1,614,402 -- 3,064,022
Depreciation and amortization 999,113 434,408 1,312,909 (1) 2,746,430
----------- ----------- ----------- -----------
Operating income (loss) 12,864,415 (4,322,504) (1,312,909) 7,229,002
Interest income 3,814,435 90,908 (3,300,000) (2) 605,343
Interest expense (27,403) (373,517) -- (400,920)
Gain on disposition of subsidiary -- 1,848,899 -- 1,848,899
Other -- (586,806) -- (586,806)
----------- ----------- ----------- -----------
Income (loss) before taxes 16,651,447 (3,343,020) (4,612,909) 8,695,518
Income tax benefit 693,467 1,424,795 1,845,164 (3) 3,963,426
----------- ----------- ----------- -----------
Net income (loss) $17,344,914 $(1,918,225) $(2,767,745) $12,658,944
=========== =========== =========== ===========
Net income per common share and common
equivalent share $ 1.22 $ 0.89
=========== ===========
Shares used in computing net income per
common and common equivalent share
14,202,074 14,202,074
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
The above unaudited pro forma condensed consolidated statement of operations
does not reflect the $35,400,000 charge for in-process research and development
relating to the purchase of GenDerm.
<PAGE> 30
MEDICIS PHARMACEUTICAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA PRO FORMA
MEDICIS GENDERM ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 13,911,331 $ 7,536,636 $ -- $ 21,447,967
Operating costs and expenses:
Cost of product revenue 2,545,739 1,752,605 -- 4,298,344
Selling, general and administrative 5,375,610 2,806,187 -- 8,181,797
Research and development 544,121 111,136 -- 655,257
Depreciation and amortization 483,557 108,602 328,227 (1) 920,386
------------ ------------ ------------ ------------
Operating income 4,962,304 2,758,106 (328,227) 7,392,183
Interest income 1,196,642 27,798 (825,000)(2) 399,440
Interest expense (8,326) (23,461) -- (31,787)
Other -- (33,262) -- (33,262)
------------ ------------ ------------ ------------
Income before taxes 6,150,620 2,729,181 (1,153,227) 7,726,574
Income tax (expense) benefit (2,399,718) (1,198,461) 449,759 (3) (3,148,420)
------------ ------------ ------------ ------------
Net income (loss) $ 3,750,902 $ 1,530,720 $ (703,468) $ 4,578,154
============ ============ ============ ============
Net income per common share and common
equivalent share $ 0.25 $ 0.30
============ ============
Shares used in computing net income per
common and common equivalent share
15,188,838 15,188,838
============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
The above unaudited pro forma condensed consolidated statement of operations
does not reflect the $35,400,000 charge for in-process research and development
relating to the purchase of GenDerm.
<PAGE> 31
Medicis Pharmaceutical Corporation
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
The historical net sales of GenDerm, prior to its acquisition by Medicis, for
the three months ended September 30, 1997 and the twelve months ended June 30,
1997 are based upon GenDerm's sales practices which Medicis believes may have
included discounts and sales incentives to increase GenDerm's sales above
historic consumption levels. Due to these selling practices, Medicis does not
expect initially to attain similar sales levels of the GenDerm products
included in the pro forma results.
Medicis intends to fully integrate the GenDerm products acquired into its
existing sales and marketing infrastructure and philosophy. Subsequent to the
acquisition, Medicis eliminated a substantial portion of the sales, marketing,
and general and administrative functions previously performed by GenDerm which
represent a material portion of GenDerm's business. Such expenses have not been
eliminated from the pro forma results presented herein. Medicis believes that
GenDerm's historical expenses do not represent the expected level of incremental
expenses that will be incurred by Medicis.
BALANCE SHEET ADJUSTMENTS
(A) On December 3, 1997, Medicis purchased all of the outstanding Common
Stock of GenDerm, for consideration of $60,000,000 in cash plus
additional contingent amounts. The fixed purchase price was allocated
among GenDerm assets, including patents, trademarks, developed and
in-process technology and goodwill, based on an independent appraisal
obtained. The contingent portions of the purchase price will be added to
goodwill when and if paid.
<PAGE> 32
(B) In connection with the acquisition of GenDerm, the following is a breakdown
of the purchase price at December 3, 1997:
<TABLE>
<S> <C> <C>
Net assets of GenDerm $ 4,797,000
Increase in net assets for fair value adjustments:
Intangibles:
Developed technology $31,400,000
Goodwill (i) 4,269,000
Less: Intangible assets included in net assets of
GenDerm (1,813,000)
-----------
33,856,000
Deferred tax asset valuation reserve elimination 2,000,000
Additional assumed liabilities:
Accrued severance, exit, and lease termination costs
(net of tax benefit of $700,000) 1,882,000
Deferred tax liability 12,246,000
-----------
(14,128,000)
-----------
26,525,000
In-process research and development (ii) 35,400,000
-----------
$61,925,000
===========
Purchase price:
Cash $60,000,000
Acquisition costs 1,925,000
-----------
$61,925,000
===========
</TABLE>
Goodwill represents the amount of the purchase price in excess of GenDerm
identifiable assets acquired and liabilities assumed and is being
amortized over a period of 25 years. Developed technology and other
intangibles include patents and trademarks and are being amortized over
25 years.
(i) Net assets decreased approximately $131,000 during the period from
September 30, 1997 to the date of the acquisition. Such activity was
shown as a decrease to goodwill as of September 30, 1997 for purposes
of the pro forma presentation.
(ii)The amount allocated to in-process research and development was based
on a valuation of GenDerm's completed and in-process technologies.
The in-process research and development of $35,400,000 will be
charged to operations as required under generally accepted accounting
principles with the recording of the purchase price allocation.
(C) Accrued severance, exit, and lease termination costs relate to the costs
of terminating substantially all employees of GenDerm and closing the
duplicate facility located in Chicago, Illinois leased by GenDerm.
<PAGE> 33
(D) Reflects the elimination of the preferred and common stock, additional
paid-in capital, translation adjustment, and accumulated deficit of
GenDerm.
(E) Reflects the one-time charge of $35,400,000 for the portion of the
purchase price allocated to in-process research and development.
STATEMENTS OF OPERATIONS ADJUSTMENTS
(1) To reflect amortization on a straight-line basis of the additional
developed technology and goodwill resulting from the acquisition over an
estimated useful life of 25 years.
(2) To reduce interest earned on cash and investments utilized to purchase
GenDerm using an average interest rate of 5.5 percent.
(3) To compute the income tax expense on pro forma adjustments using the
Registrant's incremental effective tax rate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to Current Report on Form 8-K to
be signed on its behalf by the undersigned hereunto duly authorized.
MEDICIS PHARMACEUTICAL CORPORATION
Date: January 9, 1998 By: /s/ Jonah Shacknai
-----------------------------------
Jonah Shacknai
Chairman and Chief Executive Officer
By: /s/ Mark A. Prygocki, Sr.
-----------------------------------
Mark A. Prygocki, Sr.
Chief Financial Officer and
Treasurer
