-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsDSail9ENg8dX0A5v0kPjI0ZfampbvrM3dZNH5KDLkOVCm9/ovULq5+3VeMHm6j d8tX4E1W6xjN/6zztt3cvA== 0000950153-98-001410.txt : 19981118 0000950153-98-001410.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950153-98-001410 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICIS PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000859368 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521574808 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14471 FILM NUMBER: 98751307 BUSINESS ADDRESS: STREET 1: 4343 EAST CAMELBACK RD STREET 2: STE 250 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 2125992000 MAIL ADDRESS: STREET 1: 4343 E CAMELBACK RD STREET 2: SUITE 250 CITY: PHOENIX STATE: AZ ZIP: 85018 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or the transition period from ___________ to ______________ Commission file number 0-18443 MEDICIS PHARMACEUTICAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 52-1574808 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4343 East Camelback Road, Suite 250 Phoenix, Arizona 85018-2700 (Address of principal executive offices) (602) 808-8800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 6, 1998 Class A Common Stock $.014 Par Value 18,522,506 Class B Common Stock $.014 Par Value 281,974 2 MEDICIS PHARMACEUTICAL CORPORATION TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- Item 1 Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 and June 30, 1998........................... 3 Condensed Consolidated Statements of Income for the Three Months Ended September 30, 1998 and 1997......... 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1998 and 1997................. 6 Notes to the Condensed Consolidated Financial Statements....... 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K.................................. 17 SIGNATURES........................................................................... 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MEDICIS PHARMACEUTICAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
September 30, June 30, 1998 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents............. $142,709,130 $147,411,127 Short-term investments................ 106,098,499 90,510,029 Accounts receivable, net.............. 18,364,701 18,899,868 Inventories, net...................... 10,376,238 9,208,384 Deferred tax assets................... 3,136,000 3,300,000 Accrued interest income............... 1,381,035 2,050,264 Other current assets.................. 4,247,132 6,750,170 ------------ ------------ Total current assets............ 286,312,735 278,129,842 ------------ ------------ Property and equipment, net............ 1,493,898 1,343,603 Intangible assets: Intangible assets related to product acquisitions.......................... 74,307,592 70,386,665 Other intangible assets............... 4,914,624 6,874,626 Less accumulated amortization...... 6,869,594 5,977,399 ------------ ------------ Net intangible assets........... 72,352,622 71,283,892 ------------ ------------ Other non-current assets............... 1,592,891 1,592,907 ------------ ------------ $361,752,146 $352,350,244 ============ ============
The accompanying notes are an integral part of this statement. 3 4 MEDICIS PHARMACEUTICAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30, 1998 1998 ------------- ------------- LIABILITIES Current liabilities: Accounts payable................................................ $ 6,229,306 $ 5,496,526 Notes payable................................................... 11,364 11,364 Accrued incentives.............................................. 728,102 1,786,392 Accrued royalties............................................... 1,407,883 1,040,993 Other accrued liabilities....................................... 7,468,322 6,838,397 ------------- ------------- Total current liabilities................................. 15,844,977 15,173,672 ------------- ------------- Long-term liabilities: Notes payable................................................... 94,556 94,556 Other non-current liabilities................................... 129,191 124,115 Deferred tax liability.......................................... 10,502,416 10,502,416 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST.................................................. 1,995,354 1,960,000 STOCKHOLDERS' EQUITY Preferred Stock, $0.01 par value; shares authorized: 5,000,000; no shares issued................. -- -- Class A Common Stock, $0.014 par value; shares authorized: 50,000,000; issued and outstanding: 18,501,195 and 18,474,256 at September 30, 1998 and at June 30, 1998, respectively.................................................... 259,017 258,640 Class B Common Stock, $0.014 par value; shares authorized: 1,000,000; issued and outstanding: 281,974 at September 30, 1998 and at June 30, 1998............................................ 3,948 3,948 Additional paid-in capital....................................... 344,607,296 344,107,350 Accumulated deficit.............................................. (11,684,609) (19,874,453) ------------- ------------- Total stockholders' equity................................ 333,185,652 324,495,485 ------------- ------------- $ 361,752,146 $ 352,350,244 ============= =============
The accompanying notes are an integral part of this statement. 4 5 MEDICIS PHARMACEUTICAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended -------------------------------- September 30, September 30, 1998 1997 ------------ ------------ Net sales $ 24,780,359 $ 13,911,331 ------------ ------------ Operating costs and expenses: Cost of product revenue................. 4,707,490 2,545,739 Selling, general and administrative..... 8,825,981 5,375,610 Research and development................ 496,852 544,121 Depreciation and amortization........... 956,415 483,557 ------------ ------------ Operating costs and expenses........... 14,986,738 8,949,027 ------------ ------------ Operating income.......................... 9,793,621 4,962,304 Interest income........................... 3,106,672 1,196,642 Interest expense.......................... (7,658) (8,326) ------------ ------------ Income before taxes....................... 12,892,635 6,150,620 Income tax expense........................ (4,803,263) (2,399,718) ------------ ------------ Net income................................ $ 8,089,372 $ 3,750,902 ============ ============ Basic net income per common share........................... $ 0.43 $ 0.26 ============ ============ Diluted net income per common shares........................... $ 0.42 $ 0.25 ============ ============ Shares used in computing basic net income per common share................. 18,772,927 14,313,347 ============ ============ Shares used in computing diluted net income per common share................. 19,393,738 15,022,119 ============ ============
The accompanying notes are an integral part of this statement. 5 6 MEDICIS PHARMACEUTICAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended ---------------------------------------- September 30, 1998 September 30, 1997 ------------------ ------------------ Net income $ 8,089,372 $ 3,750,902 Adjustments to reconcile net income to net cash provided by operating activities:.............................. Depreciation and amortization.......................................... 956,415 483,557 Minority interest...................................................... 35,354 -- Accretion of discount on investments................................... (19,090) (88,489) Deferred income tax expense............................................ 537,000 2,715,000 Provision for doubtful accounts and returns............................ (132,841) (37,000) Other non-cash expenses................................................ -- 6,000 Gain on sale of available-for-sale investments......................... 19,194 (2,775) Change in operating assets and liabilities: Inventories.......................................................... (843,234) (1,337,391) Accounts receivable.................................................. 634,379 (1,503,064) Accounts payable..................................................... 732,780 298,546 Accrued incentives................................................... (1,058,290) (659,822) Other current liabilities............................................ 996,815 (173,974) Other current assets................................................. 999,610 (965,117) ------------- ------------- Net cash provided by operating activities........................ 10,947,464 2,486,373 ------------- ------------- Cash flows from investing activities: Purchase of property and equipment...................................... (214,515) (107,082) Payment of license agreement............................................ -- (615,750) Increase in other assets................................................ (79,261) -- Purchase of available-for-sale securities............................... (45,536,905) (23,219,374) Sale of available-for-sale securities................................... 16,049,142 9,034,503 Maturity of available-for-sale securities............................... 14,100,000 11,500,000 ------------- ------------- Net cash used in investing activities............................ (15,681,539) (3,407,703) ------------- ------------- Cash flows from financing activities: Proceeds from the exercise of stock options............................. 129,603 411,174 Other non-current liabilities........................................... 2,810 (20,889) ------------- ------------- Net cash provided by financing activities........................ 132,413 390,285 ------------- ------------- Effect of foreign currency exchange rate on cash and cash equivalents........................................... (100,335) -- ------------- ------------- Net decrease in cash and cash equivalents................................. (4,701,997) (531,045) Cash and cash equivalents at beginning of period.......................... 147,411,127 33,623,397 ------------- ------------- Cash and cash equivalents at end of period................................ $ 142,709,130 $ 33,092,352 ------------- ------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,658 $ 6,453 Taxes $ 1,170,600 $ 248,074
The accompanying notes are an integral part of this statement. 6 7 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 1. ORGANIZATION AND BASIS OF PRESENTATION Medicis Pharmaceutical Corporation ("Medicis" or the "Company") is the leading independent pharmaceutical company in the United States focusing primarily on the treatment of dermatological conditions. The Company offers prescription, over-the-counter ("OTC"), and cosmetic dermatology products emphasizing the clinical effectiveness, quality, affordability and cosmetic elegance of its products. Medicis has achieved a leading position in branded products for the treatment of acne, acne-related conditions, psoriatic conditions and anti-pruritic conditions while also offering the leading OTC fade cream product line in the United States. The Company has built its business through successfully introducing prescription pharmaceuticals such as DYNACIN(R) and TRIAZ(R) products for the treatment of acne, LUSTRA(R), for the treatment of dyschromia and other discolorations of the skin, as well as the acquisition of the ESOTERICA(R) fade cream product line. In addition, Medicis acquired the rights to LIDEX(R) and SYNALAR(R) corticosteroid product lines from Syntex USA, Inc. and the entire product line from GenDerm Corporation ("GenDerm"), including ZOSTRIX(R) topical analgesics and NOVACET(R) acne rosacea treatments. The financial information is unaudited but reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company's management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Company's audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations relating thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 ("fiscal 1998"). Certain immaterial amounts on the face of the balance sheet have been reclassified to conform with the current period's presentation. 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 131 establishes a new method by which companies will report operating segment information. This method is based on the manner in which management organizes the segments within a company for making operating decisions and assessing performance. The Company is evaluating the provisions of SFAS No. 131 and, upon adoption, may report operating segments. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. 7 8 As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," ("SFAS No. 130".) SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. During the first quarter of fiscal 1999 and fiscal 1998, the amounts of unrealized gains or losses on such securities were not material. 3. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," ("SFAS No. 128"). SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS No. 128 requirements and have been computed by using the weighted average number of shares. The following table sets forth all computation of basic and diluted earnings per share:
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1998 1997 ------- ------- (in thousands, except per share data) Numerator: Net income......................... $ 8,089 $ 3,751 ------- ------- Denominator for basic earnings per common share.......... 18,773 14,313 Effect of dilutive securities: Stock options...................... 621 709 ------- ------- Denominator for diluted earnings per common share.......... 19,394 15,022 ======= ======= Basic net income per common share....................... $ 0.43 $ 0.26 ======= ======= Diluted net income per common share...................... $ 0.42 $ 0.25 ======= =======
Options to purchase 703,929 shares of common stock at prices ranging from $38.25 to $54.00 per share were outstanding at September 30, 1998 but were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the Company's common stock and, therefore, the effect would be anti-dilutive. 8 9 4. CONTINGENCIES The Company and certain of its subsidiaries, from time to time, 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, in the opinion of management and after consultation with counsel, are not anticipated, in the aggregate, to have a material adverse effect on the consolidated financial position or results of operations of the Company and its subsidiaries. 5. INVENTORIES Although the Company utilizes third parties to manufacture and package inventories held for sale, the Company takes title to certain inventories and records the associated liability once inventories are manufactured. Inventories are valued at the lower of cost or market as determined by net realizable value using the first-in, first-out method. Inventories, net of reserves, at September 30, 1998 and June 30, 1998 consist of the following:
September 30, 1998 June 30, 1998 ------------------ ------------- Raw materials................. $ 2,709,377 $ 1,086,585 Finished goods................ 7,666,861 8,121,799 ----------- ----------- Total inventories, net...... $10,376,238 $ 9,208,384 =========== ===========
6. 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." The provision for income taxes (recorded at an effective rate of 37.3% for the quarter ended September 30, 1998) reflects management's estimation of the effective tax rate expected to be applicable for the full fiscal year. This estimate is reevaluated by management each quarter based on estimated tax expenses for the year. At September 30, 1998, the Company took advantage of additional tax deductions available relating to the exercise of non-qualified stock options and disqualified dispositions of incentive stock options. Accordingly, the Company recorded a $0.4 million increase to equity with a corresponding $0.4 million reduction to taxes payable. Quarterly adjustments for the exercise of non-qualified stock options and disqualified dispositions of incentive stock options may vary as they relate to the intentions of the option holder. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto and with the Company's audited financial statements, notes to the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations relating thereto included or incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (the "1998 Form 10-K"). 9 10 This report on Form 10-Q contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time, the Company or its representatives have made or may make forward looking statements, orally or in writing. Forward looking statements involve known and unknown risks and uncertainties. The Company's actual actions or results could differ materially from those anticipated in forward looking statements as a result of certain factors including, but not limited to, those factors discussed in the documents filed by the Company with the Securities and Exchange Commission from time to time, including the prospectus dated February 6, 1998, which is set forth in the Company's Registration Statement on Form S-3 and the 1998 Form 10-K. The Company undertakes no obligation to update any forward looking statements. OVERVIEW Medicis was founded in 1987 to develop and market prescription and over-the-counter ("OTC") 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. Medicis is the leading independent pharmaceutical company in the United States focusing primarily on the treatment of dermatological conditions. The Company offers prescription, OTC, and cosmetic dermatology products, emphasizing the clinical effectiveness, quality, affordability and cosmetic elegance of its products. Medicis has achieved a leading position in branded products for the treatment of acne, acne-related conditions, psoriatic conditions, and anti-pruritic conditions, while also offering the leading OTC fade cream product line in the United States. The Company has built its business through successfully introducing prescription pharmaceuticals such as DYNACIN(R) and TRIAZ(R) products for the treatment of acne, LUSTRA(R) for dyschromia and other discolorations of the skin, as well as marketing OTC products such as the ESOTERICA(R) fade cream product line. In addition, Medicis acquired the rights to LIDEX(R) and SYNALAR(R) corticosteroid product lines in the United States and Canada from Syntex USA, Inc. and the entire product line from GenDerm Corporation ("GenDerm"), including ZOSTRIX(R) topical analgesics and NOVACET(R) acne rosacea treatments. Prescription pharmaceuticals accounted for 77.0%, 86.5% and 83.2% of net sales in the fiscal years ending June 30, 1998, June 30, 1997 ("fiscal 1997") and June 30, 1996 ("fiscal 1996"), respectively, and 68.0% in the first quarter ended September 30, 1998. Although DYNACIN(R) products accounted for a majority of the Company's total sales in fiscal 1997 and fiscal 1996, the Company believes it will no longer derive the majority of its net sales from DYNACIN(R) in the future. As a result of the GenDerm acquisition, in December 1997, OTC products have accounted for a greater percentage of the Company's total sales with minimal impact on the Company's gross profit margins. 10 11 The Company derives a majority of its revenue from sales of DYNACIN(R), LIDEX(R), TRIAZ(R), LUSTRA(R) and ZOSTRIX(R) products (the "Key Products"). The Company believes that sales of the Key Products will constitute the majority of net sales for the foreseeable future. Accordingly, any factor adversely affecting the sale of the Key Products individually or collectively would have a material adverse effect on the Company's business, financial condition and results of operations. Each of the Key Products could be rendered obsolete or uneconomical by regulatory or competitive changes. The sale of Key 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 the Key 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 prescribing practices of dermatologists, changes in the reimbursement policies of third-party payors, product liability claims or other factors. 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, expenditures and timing relating to acquisition and integration of businesses, changes in prescribing practices of dermatologists, 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, general economic and industry conditions that affect customer demand, and the Company's level of research and development activities. 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 has been in the last month of each quarter. The Company schedules its inventory purchases to meet anticipated customer demand. As a result, relatively small delays in the receipt of manufactured products by the Company 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 or profitability or avoid losses in any future period. The Company's strategy for growth is substantially dependent upon its continued ability to acquire products primarily targeted at the skin care 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 or technologies. Other companies, including those with substantially greater financial, marketing and sales resources, compete with the Company to acquire such products. There can be no assurance that the Company will be able to acquire rights to additional products on acceptable terms, or at all. The failure of the Company to acquire additional products or 11 12 successfully introduce new products could have a material adverse effect on the Company's business, financial condition and results of operations. Further, any new internally developed or acquired products may have different distribution channels, pricing resources and levels and competition than the Company's current products. Consequently, there can be no assurance that the Company will be able to compete favorably and attain market acceptance in any new product category or successfully integrate any acquired products or businesses. In addition, any such products may require the Company to significantly increase its sales force and incur commensurate expense levels in anticipation of a new product introduction. Failure of the Company to successfully introduce and market new products, whether internally developed or acquired from third parties, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has recently experienced and will continue to experience a period of significant expansion of its operations that has placed a significant strain upon its management system and resources. The Company's ability to compete effectively and to manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, hire, train and manage an increasing number of employees. The Company's failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. The Company's business strategy includes potential acquisitions of products and businesses and introductions of new products. The Company anticipates that the integration of additional new businesses or potential products, if any, would require significant expense and management time and attention. Failure to manage such change effectively would have a material adverse effect on the Company's business, financial condition and results of operations. 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 and/or discounts. 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 Drug Company ("McKesson"), Bergen Brunswig Drug Company ("Bergen Brunswig"), Cardinal Health, Inc. ("Cardinal"), and other major drug chains. In fiscal 1998, McKesson, Bergen Brunswig and Cardinal accounted for 16.9%, 13.2% and 12.6%, respectively, of the Company's sales. In fiscal 1997, McKesson, Cardinal and Bergen Brunswig accounted for 20.6%, 16.3% and 10.9%, respectively, of the Company's sales. The loss of, or deterioration in, any of these customer accounts could have a material adverse effect upon the Company's business, financial condition or results and operations. To enable Medicis to focus on its core marketing and sales activities, the Company selectively out-sources certain non-sales and non-marketing functions, such as laboratory research, manufacturing and warehousing. As the Company expands its activities in these 12 13 areas, additional financial resources are expected to be utilized. 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 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. Actual expenditures will depend on a variety of factors, including the Company's financial condition, 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. There can be no assurance that any product or technology under development will result in the successful introduction of any new product. The Year 2000 issue results from the inability of some computer programs to identify the year 2000 properly, potentially leading to errors or system failure. A company's business may be adversely affected if it, or any of its suppliers and customers or others with whom it transacts business (including its banks and governmental agencies), have not timely resolved the year 2000 issue. In response to its rapid growth, the Company selected a new management information system in fiscal 1997, which was implemented in fiscal 1998 that is expected to meet its presently anticipated needs. In selecting a system, Year 2000 compliance was one of the criteria. The Company is reviewing the areas within its business and operations which could be adversely affected by Year 2000 issues and evaluating the costs associated with modifying and testing its systems for the Year 2000. Although the Company is not yet able to estimate its incremental cost for the Year 2000 issues, within its internal information systems, based on its preliminary review to date, the Company does not believe Year 2000 issues will have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently working with critical third parties to determine the impact of Year 2000 issues on their business and operations and its collateral impact on the business and operations of the Company and to determine such third parties plans to remediate Year 2000 issues where their systems interface with the Company's systems. The assessment and necessary modification for the Year 2000 issue are estimated to be completed in late 1999. 13 14 RESULTS OF OPERATIONS The following table sets forth certain data as a percentage of net sales for the periods indicated.
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1998 1997 1996 ------ ------ ------ Net sales .................... 100.0% 100.0% 100.0% Gross profit ................. 81.0 81.7 73.1 Operating expenses ........... 41.5 46.0 51.2 Operating income ............. 39.5 35.7 21.9 Net interest income .......... 12.5 8.5 1.5 Income tax benefit (expense).. (19.4) (17.2) 26.2 ----- ----- ----- Net income ................... 32.6% 27.0% 49.6% ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 Net Sales Net sales for the three months ended September 30, 1998 (the "first quarter of fiscal 1999") increased 78.1%, or $10.9 million, to $24.8 million from $13.9 million for the three months ended September 30, 1997 (the "first quarter of fiscal 1998"). The Company's net sales increased in the first quarter of fiscal 1999 primarily as a result of the effect of sales of the GenDerm products which were acquired in December of 1997. The first quarter of fiscal 1998 did not include sales of the GenDerm products. The Company's net sales also increased as a result of both unit and dollar sales growth of the Company's prescription products including sales associated with LUSTRA(R), which was introduced by the Company in the third quarter of fiscal 1998. The Company's prescription products accounted for 68.0% of net sales in the first quarter of fiscal 1999 and 88.0% in the first quarter of fiscal 1998. The OTC and doctor-dispensed products accounted for 32.0% and 12.0% in the first quarter of fiscal 1999 and 1998 respectively. Gross Profit Gross profit during the first quarter of fiscal 1999 increased 76.6%, or $8.7 million, to $20.1 million from $11.4 million in the first quarter of fiscal 1998. As a percentage of net sales, gross profit decreased to 81.0% in the first quarter of fiscal 1999 from 81.7% in the first quarter of fiscal 1998, primarily as a result of greater OTC sales as a percentage of total net sales. OTC products have a lower gross profit percentage than the Company's prescription brands. Selling, General and Administrative Expenses Selling, general and administrative expenses in the first quarter of fiscal 1999 increased 64.2%, or $3.4 million, to $8.8 million from $5.4 million in the first quarter of fiscal 1998, primarily due to the expenses associated with the promotion and administration of the 14 15 Company's existing brands, including LUSTRA(R), and the sampling and advertising associated with the GenDerm brands. Additionally, selling, general and administrative costs also increased due to an increase in variable costs commensurate with increased sales volume, the expansion of the Company's sales force to 61 sales representatives from 47 sales representatives at fiscal year end June 30, 1998 and additional personnel costs attributable to the hiring of additional full-time equivalent employees and cost-of-living salary adjustments. Selling, general and administrative costs, as a percentage of net sales, decreased three percentage points in the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998. Research and Development Expenses Research and development expenses in the first quarter of fiscal 1999 decreased 8.7%, or $47,000, to $497,000 from $544,000 in the first quarter of fiscal 1998, primarily due to the timing of various research and development projects offset by expenses associated with the clinical support of the Company's existing products. Depreciation and Amortization Expenses Depreciation and amortization expenses in the first quarter of fiscal 1999 increased 97.8%, or $473,000, to $956,000 from $483,000 in the first quarter of fiscal 1998, primarily due to amortization of the intangible assets associated with the Company's acquisition of GenDerm in December 1997. Operating Income Operating income during the first quarter of fiscal 1999 increased 97.4%, or $4.8 million, to $9.8 million from $5.0 million in the first quarter of fiscal 1998. This increase was primarily a result of higher sales volume, coupled with a decrease of 4.5 percentage points in operating costs as a percentage of net sales. Interest Income Interest income in the first quarter of fiscal 1999 increased 159.6%, or $1.9 million, to $3.1 million from approximately $1.2 million in the first quarter of fiscal 1998, primarily due to higher cash equivalent and short-term investment balances in the first quarter of fiscal 1999, as a result of the Company's February 1998 public offering and the Company's cash flow from operations. Income Tax Expense Income tax expense during the first quarter of fiscal 1999 increased $2.4 million to an expense of $4.8 million from an expense of $2.4 million in the first quarter of fiscal 1998. The provision for income taxes recorded for the first quarter of fiscal 1999 reflects management's estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate is reevaluated by management each quarter based on forecasts of income before taxes for the year. The Company's tax provision is recorded at an effective 15 16 tax rate of 37.3% for the first quarter of fiscal 1999. The increase in income tax expense as compared to the first quarter of fiscal 1998 is due to additional pre-tax income. The decrease in the effective tax rate as compared to the first quarter of fiscal 1998 is primarily attributable to an increase in tax exempt interest income. Net Income Net income during the first quarter of fiscal 1999 increased approximately 115.7%, or approximately $4.3 million, to $8.1 million from $3.8 million from the first quarter of fiscal 1998. The increase is primarily attributable to an increase in sales volume, lower operating expenses as a percentage of sales, and interest income generated by higher cash and cash equivalent balances. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998 and June 30, 1998, the Company had cash equivalents and short-term investments of approximately $248.8 million and $237.9 million, respectively. The Company's working capital was $270.5 million and $263.0 million at September 30, 1998 and June 30, 1998, respectively. The increase in working capital is primarily attributable to the Company's cash flow from operations of approximately $10.9 million. At September 30, 1998 and June 30, 1998, the Company had inventories of $10.4 million and $9.2 million, respectively. The increase in the Company's inventory balances is primarily related to an increase in the Company's inventory held by third parties which the Company is required to record in its inventory balance and which fluctuates due to the timing of the third parties' manufacturing cycles which the Company does not control. At September 30, 1998 and June 30, 1998, the Company had current liabilities of $15.8 million and $15.2 million, respectively. The increase is primarily due to an increase in accrued royalties on the Company's products which is due to increased sales of the Company's products and timing of the royalty payments. In accordance with various manufacturing agreements, the Company is required to provide manufacturers with pro forma estimated production requirements by product 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. However, the Company records its obligation to the manufacturer at the time finished inventory is produced. Inflation did not have a significant impact upon the results of the Company during the three months ended September 30, 1998. 16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No. 27.1 Financial Data Schedule (See Note 2 to the Notes to the Condensed Consolidated Financial Statements incorporated herin for computation of Per Common Share Results.) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDICIS PHARMACEUTICAL CORPORATION Date: November 12, 1998 By: /s/ Jonah Shacknai ------------------------------- Jonah Shacknai Chairman and Chief Executive Officer Date: November 12, 1998 By: /s/ Mark A. Prygocki, Sr. ------------------------------- Mark A. Prygocki, Sr. Chief Financial Officer, Secretary and Treasurer 17 18 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27.1 Financial Data Schedule EX-27.1 2 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MEDICIS BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q. 3-MOS JUN-30-1999 SEP-30-1998 142,709,130 106,098,499 18,364,701 0 10,376,238 286,312,735 1,918,712 424,814 361,752,146 15,844,977 0 0 0 262,965 332,922,687 361,752,146 24,780,359 24,780,359 4,707,490 10,279,248 0 0 (3,099,014) 12,892,635 4,803,263 0 0 0 0 8,089,372 .43 .42
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